<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-34113
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STATER BROS. HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5411 33-0350671
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
21700 BARTON ROAD
COLTON, CALIFORNIA 92324
(909) 783-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JACK H. BROWN
STATER BROS. HOLDINGS INC.
21700 BARTON ROAD
COLTON, CALIFORNIA 92324
(909) 783-5000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
With a copy to:
ANDREW E. BOGEN, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 229-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9% Senior Subordinated
Notes Due 2004......... $100,000,000 100% $100,000,000 $30,303.03
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(a)
<TABLE>
<CAPTION>
ITEM IN FORM S-4 CAPTION IN PROSPECTUS
---------------- ---------------------
<S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Facing Page; Outside Front Cover Page
of Prospectus.
2. Inside Front and Outside Back
Cover Pages of Prospectus........ Inside Front and Outside Back Cover
Pages of Prospectus; Table of
Contents; Available Information.
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information...................... Risk Factors; The Company; Business;
Selected Consolidated Financial Data.
4. Terms of the Transaction.......... Prospectus Summary; Risk Factors; The
Offer; The Company; Business;
Description of the New Notes; Certain
Federal Tax Consequences
5. Pro Forma Financial Information... Not applicable.
6. Material Contracts with the
Company Being Acquired........... Not applicable.
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters..................... Not applicable.
8. Interests of Named Experts and
Counsel.......................... Not applicable.
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................. Not applicable.
10. Information with Respect to S-3
Registrants...................... Not applicable.
11. Incorporation of Certain
Information by Reference......... Not applicable.
12. Information with Respect to S-2 or
S-3 Registrants.................. Not applicable.
13. Incorporation of Certain
Information by Reference......... Not applicable.
14. Information with Respect to
Registrants Other than S-3 or S-2
Registrants...................... Prospectus Summary; The Company;
Capitalization; Selected Consolidated
Financial Data; Business;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Management; Certain
Relationships and Related
Transactions; Security Ownership of
Certain Beneficial Owners and
Management.
15. Information with Respect to S-3
Companies........................ Not applicable.
16. Information with Respect to S-2 or
S-3 Companies.................... Not applicable.
17. Information with Respect to
Companies Other Than S-3 or S-2
Companies........................ Not applicable.
18. Information if Proxies, Consents
or Authorizations are to be
Solicited........................ Not applicable.
19. Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange
Offer............................ Management; Certain Relationships and
Related Transactions; Security
Ownership of Certain Beneficial
Owners and Management.
</TABLE>
<PAGE>
STATER BROS. HOLDINGS INC.
LOGO OFFER FOR ALL OUTSTANDING
PRIVATELY PLACED 9% SENIOR SUBORDINATED NOTES DUE 2004
IN EXCHANGE FOR
9% SENIOR SUBORDINATED NOTES DUE 2004
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON NOVEMBER 17, 1997, UNLESS EXTENDED.
Stater Bros. Holdings Inc. (the "Company"), a Delaware corporation, hereby
offers (the "Offer"), upon the terms and subject to the conditions set forth
herein and in the related Letter of Transmittal, to exchange up to $100
million aggregate principal amount of 9% Senior Subordinated Notes Due 2004
(the "New Notes") of the Company for a like amount of privately placed 9%
Senior Subordinated Notes Due 2004 (the "Old Notes") from the holders (the
"Holders") thereof.
The New Notes are being offered hereunder in order to satisfy the
obligations of the Company under a Registration Rights Agreement dated as of
July 24, 1997 (the "Registration Rights Agreement") between the Company and
BancAmerica Securities, Inc. (the "Initial Purchaser"). The Offer is designed
to provide to Holders an opportunity to acquire New Notes which, unlike the
Old Notes, are expected to be freely transferable at all times, subject to
state "blue sky" law restrictions; provided that the Holder is not an
"affiliate" of the Company within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), and represents that the New Notes are being
acquired in the ordinary course of such Holder's business and the Holder is
not engaged in, and does not intend to engage in, a distribution of the New
Notes. With the exception of the freely transferable nature of the New Notes,
the New Notes are substantially identical to the Old Notes. See "The Offer--
Purpose of the Offer."
The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 5:00 P.M., New York time, on November 17, 1997, unless extended
(the "Expiration Date"). Tenders of Old Notes made pursuant to the Offer may
not be withdrawn. The Company will pay the expenses of the Offer.
The New Notes are general unsecured obligations of the Company, subordinated
in right of payment to the Company's $165,000,000 11% Senior Notes due 2001
(the "11% Senior Notes") and all other present and future Senior Indebtedness
(as defined) of the Company, including the Company's obligations under the
Revolving Credit Facility (as defined) and effectively subordinated to all
Indebtedness (as defined) and other obligations of the Subsidiaries. As of
June 29, 1997, after giving effect to the issuance of the Old Notes and the
application of the net proceeds therefrom, the aggregate amount of outstanding
Indebtedness (excluding trade and construction payables) of the Company and
its Subsidiaries was $272.2 million, of which approximately $165.0 million
constituted Senior Indebtedness and $7.2 million constituted Indebtedness of
the Subsidiaries. See "Description of the 11% Senior Notes."
The New Notes will bear interest from and including the date of issuance of
the Old Notes. Accordingly, Holders who receive New Notes in exchange for Old
Notes will forego accrued but unpaid interest on their exchanged Old Notes for
the period from and including the date of issuance of the Old Notes to the
date of exchange, but will be entitled to such interest under the New Notes.
See "Description of the New Notes."
The Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Offer is subject to certain
customary conditions. See "The Offer." Old Notes may be tendered only in
integral multiples of $1,000.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF NEW NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
The date of this Prospectus is October 17, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the New Notes offered
hereby (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an Exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description thereof, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits and schedules thereto may be inspected
without charge and copied at prescribed rates at the Public Reference Section
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at 7 World Trade Center, Suite 1300,
New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661.
The Company is required under the terms of the indenture governing the New
Notes and the Old Notes (the "Indenture") to file with the Commission and
furnish, without cost, to the Holders of New Notes and Old Notes the annual,
quarterly and other reports that the Company would be required to file with
the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), if the Company had
equity securities registered under the Exchange Act. Such information includes
annual reports containing consolidated financial statements and notes thereto,
together with an opinion thereon expressed by an independent public accounting
firm, management's discussion and analysis of financial condition and results
of operations, as well as quarterly reports containing unaudited consolidated
financial statements for the first three quarters of each calendar year. The
Company is also required to make such reports available to prospective
purchasers of the New Notes and the Old Notes, and to securities analysts and
broker-dealers upon their request. In addition, the Company has agreed to
furnish to holders of the Old Notes and prospective purchasers of the Old
Notes designated by the Initial Purchaser, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act,
with respect to the Old Notes, until such time as the Company has either
exchanged the Old Notes for the New Notes or has registered the Old Notes for
resale under the Securities Act pursuant to a shelf registration statement and
such shelf registration statement has remained effective for a period of two
years.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
STATER BROS. HOLDINGS INC., 21700 BARTON ROAD, COLTON, CALIFORNIA 92324,
TELEPHONE NUMBER (909) 783-5000, ATTN: DENNIS BEAL. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 8, 1997.
----------------
2
<PAGE>
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Offer in exchange for Old Notes may be offered for
resale, resold, and otherwise transferred by a holder thereof (other than, (i)
a broker-dealer who purchases such New Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the New Notes in its ordinary course of
business and is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of the New Notes and
provided, further that a broker-dealer who holds Old Notes that were acquired
for its own account as a result of market-making or other trading activities
may be deemed to be an "underwriter" within the meaning of the Securities Act
and must, therefore, deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of the New Notes received by the
broker-dealer in the Offer. If any other Holder is deemed to be an
"underwriter" within the meaning of the Securities Act or acquires New Notes
in the Offer for the purpose of distributing or participating in a
distribution of the New Notes, such holder must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
a secondary resale transaction, unless an exemption from registration is
otherwise available. Eligible Holders wishing to accept the Offer must
represent to the Company, as required by the Registration Rights Agreement,
that such conditions have been and will be met. See "The Offer--Purpose of the
Offer" and "The Offer--Resales of New Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Offer (a "Participating Broker") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker in connection with any resale of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days from the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating Broker
for use in connection with any such resale. In addition, until January 14,
1998 (90 days from the date of this Prospectus), all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by any Participating Broker may be sold
from time to time in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the New Notes or
a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers
of any such New Notes. Any Participating Broker that resells New Notes that
were received by it for its own account pursuant to the Offer and any broker
or dealer that participates in a distribution of such New Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of New Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal (defined below) states that by
acknowledging that it will deliver, and by delivering, a prospectus as
required, a Participating Broker will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Offer (which shall not include the expenses of any holder in
connection with resales of the New Notes). The Company has agreed to indemnify
holders of the New Notes, including any Participating Broker, against certain
liabilities, including liabilities under the Securities Act.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and Selected Consolidated Financial Data and consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus (this "Prospectus"). As used herein, the "Company" or "Stater Bros."
refers to Stater Bros. Holdings Inc. and its wholly owned subsidiaries, Stater
Bros. Markets and Stater Bros. Development, Inc., unless the context otherwise
indicates.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this
Prospectus (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties
that could significantly affect results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. In addition to the risks and uncertainties
discussed elsewhere herein, these risks and uncertainties include, but are not
limited to, those relating to domestic economic conditions, seasonal and
weather fluctuations, expansion and other activities of competitors, changes in
federal or state laws and the administration of such laws and the general
condition of the economy and its effect on the securities markets.
THE COMPANY
Stater Bros., founded in 1936, is a leading Southern California supermarket
chain, operating 110 stores located principally in the Inland Empire, one of
the fastest growing areas in the United States. The Company is recognized as a
low price leader in the Inland Empire and its supermarkets offer a high level
of customer service, a broad selection of brand-name merchandise, and quality
meats and produce. Stater Bros. supermarkets also offer specialty service
departments which include full service meat departments, bakeries and
delicatessens. Stater Bros., with sales of more than $1.7 billion for the
fiscal year ended September 29, 1996, is the largest supermarket chain in its
primary market area.
Approximately 80% of the Company's stores are located in the Inland Empire
region of Southern California. The Inland Empire is comprised primarily of
Riverside and San Bernardino counties, and also includes portions of Orange,
Kern and Los Angeles counties. Riverside and San Bernardino counties encompass
more than 29,000 square miles. Since 1980, this region has been one of the
fastest growing areas in the country. Between 1990 and 1996, the Riverside/San
Bernardino area increased in population by approximately 13%, reaching a
combined population of approximately three million people in 1996.
The Company believes that its 60 years of continuous operations in the Inland
Empire, its commitment to maintain "everyday low prices" and the involvement of
many members of its management in the communities it serves have contributed
significantly to the Company's leading market position. In order to increase
revenues and earnings, the Company has adopted an operating strategy to (i)
continue to maintain its "everyday low price" philosophy, (ii) offer its
customers quality products and breadth of selection combined with a high level
of customer service, and (iii) enhance margins through a variety of
merchandising strategies and cost control measures.
The Company has an experienced management team led by Jack H. Brown, its
Chairman, President and Chief Executive Officer, who has 45 years of experience
in the supermarket industry and has occupied his current position since 1981.
The five members of the Company's senior management team have an average of 38
years of experience in the supermarket industry and an average of 18 years with
Stater Bros.
Stater Bros. Holdings Inc. was incorporated under the laws of Delaware in May
1989. The principal executive offices of the Company are located at 21700
Barton Road, Colton, California 92324, and its telephone number is (909) 783-
5000.
4
<PAGE>
On July 24, 1997, in a private placement transaction, the Company issued and
sold $100,000,000 principal amount of the Old Notes. The Company is making the
Offer to satisfy its obligations under the Registration Rights Agreement, which
requires the Company to use its best efforts to effect the Offer. The Company
will not receive any additional proceeds from the offering of the New Notes.
SIGNIFICANT RECENT DEVELOPMENTS
In March 1994, the Company completed a recapitalization transaction (the
"1994 Recapitalization") which transferred effective voting control of the
Company to La Cadena Investments, a California general partnership ("La
Cadena"), reclassified the Company's outstanding equity, provided for certain
cash payments and distributions to Craig Corporation, a Delaware corporation
("Craig"), previously a common shareholder of the Company and the holder of
Series B Preferred Stock (as defined below), and provided the Company with an
option to acquire Craig's remaining equity interests in the Company. The 1994
Recapitalization was funded through an offering of $165.0 million of the 11%
Senior Notes which are listed and trade on the American Stock Exchange.
Since the 1994 Recapitalization, the Company has significantly improved its
financial performance. Sales have increased from $1.526 billion in fiscal year
1993 to $1.705 billion in fiscal year 1996, a compound annual growth rate of
approximately 3.8%; EBITDA has increased from $30.3 million in fiscal year 1993
to $60.0 million in fiscal year 1996, a compound annual growth rate of
approximately 25.5%; EBITDA as a percentage of sales has increased from 1.99%
in fiscal year 1993 to 3.52% in fiscal year 1996; and operating profit has
increased from $19.9 million in fiscal year 1993 to $47.3 million in fiscal
year 1996, a compound annual growth rate of approximately 33.5%.
On July 24, 1997, concurrently with the sale of the Old Notes, the Company
gave notice of exercise of its option to redeem all outstanding shares of the
Company's Series B Preferred Stock to Reading Australia PTY Limited
("Reading"), a majority owned indirect subsidiary of Craig. On July 31, 1997,
the Company also gave notice to terminate a five-year consulting agreement with
Craig (the "Consulting Agreement") that was entered into in connection with the
1994 Recapitalization. Annual fees payable to Craig under the Consulting
Agreement were $1.5 million per year.
Pursuant to an agreement dated September 16, 1997, final payment was made to
Reading for the redemption of all outstanding shares of the Company's Series B
Preferred Stock, and a payment in the sum of $615,000 was made to Reading
Entertainment, Inc. for its agreement not to compete with the Company in the
retail grocery business for a period of one year. In addition, the Company
entered into a termination agreement also dated September 16, 1997 pursuant to
which the Consulting Agreement was terminated effective August 23, 1997. The
Company made the final payment in the sum of $94,520.57 for consulting services
rendered between August 1, 1997 and August 23, 1997.
The Company received on July 24, 1997 the net proceeds from the sale of the
Old Notes in the total sum of $97.1 million. The Company used or will use such
net proceeds as follows: (i) $69.4 million to redeem all outstanding shares of
its Series B Preferred Stock; (ii) approximately $4.6 million to pay accrued
and unpaid dividends on the Series B Preferred Stock to Reading; (iii) $2.0
million to pay a financial advisory fee to La Cadena; (iv) $5.7 million to pay
related fees and expenses; and (v) $15.4 million for general corporate
purposes, including capital expenditures. On August 4, 1997, the Company
deposited approximately $74.0 million into an Escrow account for the benefit of
Reading Australia PTY Limited, the amounts required to redeem the Series B
Preferred Stock and to pay accrued and unpaid dividends up to and including
August 4, 1997.
The Company and another Southern California supermarket company, Hughes
Markets, Inc. ("Hughes"), a subsidiary of Quality Food Centers, Inc., each owns
a 50% interest in Santee Dairies, Inc. ("Santee Inc.") which
5
<PAGE>
operates one of the largest dairy plants in California and provides fluid milk
products to the Company, Hughes, and other customers in Southern California.
Both Stater and Hughes contributed their equity interests in Santee Dairies,
Inc. to Santee Dairies, LLC ("Santee LLC") on July 30, 1997. As used herein,
"Santee" refers to Santee LLC and Santee Inc., unless the context otherwise
indicates. Santee is currently in the process of constructing a new dairy plant
in the City of Industry, California, which is expected to be operational in
March 1998. The Company and Hughes have each entered into a requirements
contract with Santee by which they will agree to purchase specified minimum
amounts of fluid milk from Santee at prices and on terms sufficient to cover
Santee's costs and to enable Santee to comply with debt service and fixed
charge coverage ratios applicable to it under the terms of the $80 million note
issuance of Santee for the purpose of the construction of a new dairy plant in
the City of Industry, California (the "Santee Financing").
The Company completed the solicitation of consents to amendments to the
indenture (the "Consent Solicitation") which governs the 11% Senior Notes (as
amended through the amendment under the Consent Solicitation, the "Senior Note
Indenture"). The covenants in the Senior Note Indenture were amended to permit
the sale and issuance of the Old Notes and to conform to the covenants in the
Old Notes, except as described herein. See "Description of the 11% Senior
Notes."
The Company anticipates that the issuance of the Old Notes, the redemption of
the Series B Preferred Stock and the adoption of the amendments to the Senior
Note Indenture will provide it with several benefits, including the following:
(i) the redemption of the Series B Preferred Stock with a portion of the
proceeds of the Old Notes will provide a lower stated rate and the
deductibility of interest expense for tax purposes, (ii) the termination of the
Craig Consulting Agreement initially will save the Company $1.5 million per
year, (iii) the issuance of the Old Notes will provide the Company with
additional capital for growth, and (iv) certain amendments to the Senior Note
Indenture pertaining to Santee will provide the Company with greater
flexibility to enhance and protect its investment in Santee. The transactions
described above provided approximately $15.4 million in additional cash to the
Company, and the Company believes that the changes in (i) and (ii) will
initially increase the Company's after-tax cash flow by approximately $3.4
million per year.
6
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $100,000,000 aggregate principal amount of
9% Senior Subordinated Notes Due 2004 (the "New
Notes").
The Offer................... The New Notes are being offered in exchange for a
like principal amount of the Company's privately
placed 9% Senior Subordinated Notes Due 2004 (the
"Old Notes"). Old Notes may be exchanged only in
integral multiples of $1,000. The issuance of the
New Notes is intended to satisfy the obligations
of the Company under the terms of the
Registration Rights Agreement. The New Notes will
be substantially identical to the Old Notes
except that the New Notes will be registered
under the Securities Act.
Tenders; Expiration; Date; The Offer shall expire at 5:00 P.M. New York City
Withdrawal.................. time on November 17, 1997 or such later date to
which it is extended by the Company (the
"Expiration Date"). Old Notes tendered pursuant
to the Offer and the Letter of Transmittal
delivered herewith may not be withdrawn.
Accrued Interest on the New
Notes....................... The New Notes will bear interest from and
including the date of issuance of the Old Notes.
Accordingly, holders who receive New Notes in
exchange for Old Notes will forego accrued but
unpaid interest on their exchanged Old Notes for
the period from and including the date of
issuance of the Old Notes to the date of
exchange, but will be entitled to such interest
under the New Notes.
Conditions of the Exchange
Offer....................... The Offer is subject to certain customary
conditions, any or all of which may be waived by
the Company. See "The Offer-- Conditions to the
Offer."
Procedures for Tendering
Old Notes................... Each Holder wishing to accept the Offer must
complete and sign the Letter of Transmittal, in
accordance with the instructions contained
therein and submit the Letter of Transmittal to
the Exchange Agent identified below. See "The
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
and Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date, must
tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Offer-- Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes...... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Offer prior to 5:00 P.M., New York City time, on
the Expiration Date. The New Notes issued
pursuant to the Offer will be delivered promptly
following the Expiration Date. See "The Offer--
Acceptance of Old Notes for Exchange; Delivery of
New Notes."
Certain Federal Income Tax
Consequences............... Exchanges of Old Notes for New Notes pursuant to
the Offer should be treated as a modification of
the Old Notes that does not constitute a material
change in their terms for Federal income tax
purposes.
7
<PAGE>
Accordingly, the Holder would not recognize any
gain or loss, and his basis in the New Note would
be the same as his basis in the Old Note. This is
based upon the opinion of counsel. The Offer will
result in no federal income tax consequences to a
nonexchanging holder. See "Certain Federal Income
Tax Consequences."
Rights of Dissenting
Noteholders................. Holders of Old Notes do not have any appraisal or
dissenters' rights under the Delaware Corporation
Law in connection with the Offer.
Federal and State
Regulatory Requirements.... Other than compliance with state securities or
"blue sky" laws, there are no federal or state
regulatory requirements that must be met prior to
the consummation of the transaction.
Exchange Agent.............. First Trust of New York, c/o First Trust National
Association, Bondholder Services; telephone 1-
800-934-6802. See "The Offer--Exchange Agent."
RISK FACTORS
Prospective purchasers of New Notes offered hereby should consider the
information set forth under "Risk Factors," as well as the other information
set forth in this Prospectus.
TERMS OF THE NEW NOTES
Comparison with Old Notes... It is expected that the New Notes will be freely
transferable under the Securities Act by Holders
who are not affiliates of the Company, who
acquire the New Notes in the ordinary course of
business and who are not engaged in a
distribution of the New Notes, subject to any
restrictions on transfer imposed by state "blue
sky" laws and those described in "The Offer--
Resales of New Notes." The Holders of Old Notes
currently are entitled to certain registration
rights pursuant to the Registration Rights
Agreement. Consummation of the Offer will satisfy
the Company's obligations thereunder, and Holders
of Old Notes who do not exchange their Old Notes
for New Notes will no longer be entitled to any
registration rights and will not be able to
reoffer, resell or otherwise dispose of their Old
Notes, unless they are subsequently registered
under the Securities Act, which the Company will
have no obligation to do, or unless an exemption
from the registration requirements of the
Securities Act is available. See "The Offer --
Purpose of the Offer." The New Notes otherwise
will be substantially identical in all respects
to the Old Notes.
Holders of New Notes and Old Notes, together,
will have the voting and other rights described
herein.
Maturity Date............... July 1, 2004
Interest Rate............... 9% per annum
Interest Payment Dates...... January 1 and July 1, commencing January 1, 1998.
Change of Control........... In the event of a Change of Control (as defined),
the Company will be required, subject to certain
conditions, to make an offer to
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purchase all of the outstanding New Notes at a
purchase price equal to 101% of the aggregate
principal amount of the New Notes plus accrued
and unpaid interest thereon to the date of
purchase. The Company's ability to repurchase the
New Notes upon a Change of Control would likely
require additional financing and may be
restricted by future agreements regarding
Indebtedness (as defined) See "Description of the
New Notes--Change of Control."
Form of New Notes........... Except as provided below, the New Notes will be
in the form of a global note (the "Global Note"),
which will be deposited with, or on behalf of,
The Depository Trust Company, as depositary (the
"Depositary"), and registered in its name or in
the name of Cede & Co., the nominee of the
Depositary. Beneficial interests in the Global
Note representing the New Notes will be shown on,
and transfers thereof will be effected only
through, records maintained by the Depositary and
its participants. Notwithstanding the foregoing,
any purchaser that is not a "Qualified
Institutional Buyer" under Rule 144A under the
Securities Act, will receive the New Notes in
certificated form and will not be able to trade
such securities through the Depositary until the
New Notes are resold to a Qualified Institutional
Buyer. After the initial issuance of the Global
Note, New Notes in certificated form will be
issued in exchange for the Global Note as set
forth in the Indenture. See "Description of New
Notes--Form of New Notes."
Subordination............... The New Notes will be general unsecured
obligations of the Company, subordinated in right
of payment to the 11% Senior Notes and all other
present and future Senior Indebtedness of the
Company including the Company's obligations under
the Revolving Credit Facility and are effectively
subordinated to all Indebtedness and other
obligations of the Subsidiaries. As of June 29,
1997, after giving effect to the issuance and
sale of the Old Notes and the application of the
net proceeds therefrom, the aggregate amount of
outstanding Indebtedness (excluding trade and
construction payables) of the Company and its
Subsidiaries was $272.2 million, of which
approximately $165.0 million constituted Senior
Indebtedness and $7.2 million constituted
Indebtedness of the Subsidiaries. The Company has
no Indebtedness outstanding to which the New
Notes are senior, and the Company has no plans to
issue any such Indebtedness.
Certain Covenants........... The indenture pursuant to which the New Notes
will be issued (the "Indenture") will, among
other things, limit the ability of the Company
and its Subsidiaries other than Unrestricted
Subsidiaries to: incur additional indebtedness;
make certain restricted payments; make certain
investments; grant liens on assets; sell assets;
enter into transactions with Related Persons;
issue Capital Stock of Subsidiaries; and merge,
consolidate or transfer substantially all of
their assets.
For more complete information regarding the New
Notes, see "Description of the New Notes."
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RISK FACTORS
Prospective investors should consider, in addition to the information
contained in this Prospectus, including the Company's consolidated financial
statements and notes thereto, the following risk factors before making an
investment in the Notes.
LEVERAGE AND DEBT SERVICE
As a result of the redemption of the Series B Preferred Stock and the
issuance and sale of the Old Notes, the Company and its Subsidiaries are
highly leveraged. On a pro forma basis, giving effect to such transactions,
the Company would have had total indebtedness of $272.2 million and
stockholders' deficit of approximately $36.7 million as of June 29, 1997. The
indentures governing the Notes and the 11% Senior Notes as well as the
revolving credit facilities of the Company or any Subsidiary (or any
replacement facilities) (the "Revolving Credit Facility"), will contain
financial and other covenants that restrict, among other things, the ability
of the Company and its Subsidiaries to incur additional indebtedness, create
liens upon assets, pay dividends on or repurchase shares of capital stock, and
make certain loans, investments or guarantees. Such leverage and restrictions
may limit the Company's ability to respond to changing business and economic
conditions and to finance its future operations or capital needs, including
the Company's ability to achieve its plans to remodel and expand existing
supermarkets and open new supermarkets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of the New Notes."
Required payments of principal and interest on the Company's long-term debt
are expected to be financed from cash flow from operations and debt
financings. The Company's future performance and ability to generate
sufficient cash to meet its obligations are subject to prevailing economic
conditions, competition and other factors, some of which are beyond the
control of the Company. There can be no assurance that cash flow from
operations will be sufficient to enable the Company to service its debt and
meet its other obligations.
GEOGRAPHIC CONCENTRATION AND THE INLAND EMPIRE ECONOMY
The Company's supermarkets are located principally in the Inland Empire of
Southern California. As a result of this geographic concentration, the
Company's growth and operations depend upon economic conditions in the Inland
Empire. Any adverse change in the local economy could have a material adverse
effect on the Company.
CHANGE OF CONTROL OFFERS
Upon a Change of Control (as defined), the Company is required under the
Indenture to make a Change of Control Offer (as defined) to purchase the Old
Notes and the New Notes (collectively, the "Notes") at a price equal to 101%
of the principal balance thereof, plus accrued and unpaid interest thereon, if
any. The 11% Senior Notes contain the same change of control provision as the
Old Notes. In the event that the Company were required to purchase outstanding
Notes and the 11% Senior Notes pursuant to a Change of Control Offer, the
Company would need to seek third-party financing to the extent it does not
have available funds to meet its purchase obligations. There can be no
assurance that the Company would be able to obtain such financing or, if
obtained, that it would be on favorable terms. See "Description of the New
Notes--Change of Control."
HOLDING COMPANY STRUCTURE; POTENTIAL CHANGE OF CONTROL OF SUBSIDIARY
The Company's ability to make required principal and interest payments with
respect to the Company's Indebtedness, including the Notes, depends upon the
earnings of its principal operating subsidiary, Stater Bros. Markets, and the
Company's ability to receive funds from Stater Bros. Markets through dividends
and other payments. Legal restrictions on the payment of dividends may impair
the ability of Stater Bros. Markets to make
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funds available to the Company for payments upon the Notes. In addition, the
Revolving Credit Facility of Stater Bros. Markets contains covenants
restricting its ability to pay dividends and make advances to the Company.
Stater Bros. Markets is not obligated or required to pay any amounts due
pursuant to the Notes or to make funds available therefor in the form of
dividends or advances to the Company. The Notes are effectively subordinated
to all existing and future liabilities and the outstanding shares of preferred
stock, if any, of Stater Bros. Markets and the Company's other Subsidiaries.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
In 1983, in connection with the guaranty of certain Stater Bros. Markets
leases by a corporation that was later acquired by Texas Eastern Corporation
("Texas Eastern"), Stater Bros. Markets issued certain shares of its $11.00
Cumulative Preferred Stock ("Markets Preferred Stock"), ten shares of which
are still outstanding and held by Texas Eastern. In the event of a violation
of certain provisions of the Markets Preferred Stock, subject to the terms and
provisions of the Markets Preferred Stock, the holder(s) of such preferred
stock would have the right to elect all the directors of Stater Bros. Markets.
Those provisions, among other things, prohibit Stater Bros. Markets from (i)
merging with any person; (ii) breaching in any material respect any of its
obligations under any indebtedness for borrowed money; (iii) breaching in any
material respect any of its obligations under certain contracts or leases;
(iv) selling or encumbering all or substantially all of the property and
assets of the corporation; or (v) guaranteeing or becoming liable with respect
to certain indebtedness; in each case without the consent of the holder of the
Markets Preferred Stock, which consent may not be withheld unreasonably.
CERTAIN INSOLVENCY CONSIDERATIONS
Under applicable provisions of federal bankruptcy law and comparable
provisions of state fraudulent transfer law, if at the time the Company
incurred the Old Notes, the Company (a) (i) was insolvent or rendered
insolvent by reason of such incurrence, or (ii) was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, or (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature or (iv) was a defendant in
an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment the judgment is
unsatisfied), and (b) received less than reasonably equivalent value or fair
consideration, then a court in a lawsuit by an unpaid creditor or
representative of creditors of the Company, such as a bankruptcy trustee or
the Company as a debtor-in-possession, could avoid the Company's obligations
under the Old Notes and/or the New Notes and direct the return to the Company
or to a fund for the benefit of its creditors of any payments of principal,
premium (if any), and interest made thereunder. Courts have held that certain
payments to stockholders from the proceeds of a debt financing do not
constitute reasonably equivalent value or fair consideration to the Company.
Moreover, regardless of the factors identified in the foregoing clauses (i)
through (iv), such court could avoid such obligations and direct such
repayment if it were to find that the obligations under the Old Notes and/or
the New Notes were incurred with an intent to hinder, delay, or defraud the
Company's creditors.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company would be considered insolvent if
the sum of its debts, including contingent liabilities, were greater than the
fair saleable value of all of its assets at a fair valuation or if the present
fair saleable value of its assets were less than the amount that would be
required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature.
The Company believes that none of the factors identified in clauses (i)
through (iv) above were present when the Old Notes were issued. Based upon the
foregoing and upon its own analysis of all relevant facts, the Company
believes that the Notes would not be subject to avoidance under fraudulent
transfer laws. There can be no assurance, however, that a court would reach
the same conclusion.
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, store condition and store location. The
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number and type of competitors vary by location and include local, regional
and national grocery retailers as well as convenience stores, specialty food
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. The Company monitors competitive activity
and 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. The Company's cash flow from operations could be adversely
affected by certain product mix and pricing changes made in response to
competition from existing or new competitors. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the efforts
and experience of its senior management team led by its Chairman, President
and Chief Executive Officer, Jack H. Brown and certain key managers. The loss
of the services of Mr. Brown and key managers could have a material adverse
effect on the Company's cash flow from operations. Jack H. Brown has a
majority interest in and is the managing general partner of La Cadena
Investments, a general partnership which will be the Company's sole
stockholder upon redemption of the Series B Preferred Stock.
RISKS RELATED TO SANTEE
In connection with the construction by Santee of its new facility in the
City of Industry, the Company and Hughes each have entered into a requirements
contract (the "Product Purchase Agreement") with Santee. The Company's Product
Purchase Agreement requires the Company to purchase, and Santee to supply,
minimum requirements of products to be produced by the new dairy. The unit
price for products sold to the Company under the Product Purchase Agreement
reflects Santee's costs (both direct and indirect) of producing such products,
and is established at levels sufficient to enable Santee to comply with debt
service and fixed charge coverage ratios applicable to it under the Santee
Financing. The prices payable by the Company for milk and other fluid products
under the Company's Product Purchase Agreement are anticipated to be below the
prices which could otherwise be obtained for similar products. However, each
of Hughes and the Company is required to pay increased prices to the extent
necessary to reflect Santee's actual costs of production and maintain Santee's
debt service coverage ratio and fixed charge coverage ratio at or above levels
specified under the terms of the Santee Financing. Accordingly, prices payable
by the Company will be affected by Santee's success in recovering fixed costs
and overhead through sales to third parties unaffiliated with the Company or
Hughes, as well as Santee's ability to operate in accordance with projected
results of operations. As a result, there can be no assurance that the prices
paid by the Company to Santee will not increase, perhaps substantially, which
could have a material adverse effect on the Company.
The obligations of Santee under the Santee Financing are secured by, among
other things, all of the equity interests in Santee Inc., the rights of Santee
with respect to each Product Purchase Agreement, certain additional personal
property of Santee Inc., and substantially all of the real property relating
to the new dairy. The Santee Financing contains customary events of default,
in addition to events of default triggered by the acceleration of debt of
Hughes or certain Hughes affiliates, acceleration of debt of the Company, and
a default under certain provisions of the Product Purchase Agreements. Any
such default could result in increased prices for products and/or in the
acceleration of Santee's payment obligations under the Santee Financing and
the loss of the Company's investment in Santee. As a result, the availability
and price of fluid milk products to the Company, and the value of the
Company's investment in Santee, could be adversely affected by events
involving Hughes or its affiliates, over which the Company has no control.
There can be no assurance that the new dairy ultimately will be completed on
a timely basis or for the amount currently budgeted, that Santee will not
experience delays or difficulties in the completion of construction or the
commencement of operations at the new dairy or that the new dairy will perform
in accordance with expectations. Any such failure to so complete or perform
could materially adversely affect the Company. In
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addition, the Company and Hughes have covenanted to cause the completion of
the new dairy, as well as to provide additional funds to Santee to the extent
necessary to complete the new dairy; provided, however, that the Company's
obligations described in this sentence are subject in all respects to the
terms of the Senior Note Indenture. Also, the Company may need to make capital
investments in Santee generally to protect its investment. The Company may
need to seek third-party financing to the extent it does not have available
funds for such capital contributions and investments. There can be no
assurance, however, that the Company would be able to obtain such financing or
that, if available, it would be available on favorable terms. Additionally,
the Company is not permitted to make such investments in Santee under the
terms of the Bank Credit Agreement, unless such Agreement is amended.
Santee will be restricted by the terms of the Santee Financing from making
dividend payments on its capital stock which restriction could materially
adversely impact the Company's access to such investment amounts once made.
LABOR RELATIONS
Substantially all of the Company's employees are represented by either the
United Food & Commercial Workers International Union or International
Brotherhood of Teamsters. The Company's unionized employees are covered by
several collective bargaining agreements. Of the Company's major collective
bargaining agreements, the United Food & Commercial Workers International
Union contract, which covers the largest number of employees, was recently
renewed and expires in October 1999. The Company's collective bargaining
agreement with the International Brotherhood of Teamsters was renewed in
September 1994 and expires in September 1998. Management believes it has good
relations with its employees. While the Company believes that relations with
its employees are good, a prolonged labor dispute could have a material
adverse effect on the Company's cash flow from operations. Twelve employees
recently filed a lawsuit against the Company alleging racial discrimination in
the Company's employment practices. See "Business--Legal Proceedings."
SUBORDINATION
The Company conducts substantially all of its operations through its wholly
owned subsidiaries, Stater Bros. Markets and Stater Bros. Development, Inc.
The Company is dependent on the earnings and cash flow of its Subsidiaries to
meet its debt obligations, including its obligations with respect to the 11%
Senior Notes and the Notes. Because the assets of the Company's Subsidiaries
constitute all of the operating assets of the Company, and because the
Subsidiaries do not guaranty the payment of principal and interest on the
Notes, the Holders of the Notes will have no direct claim to the assets of the
Company's Subsidiaries, and, as a result, all existing and future obligations
(including debt, taxes, trade and construction payables) of the Company's
Subsidiaries must be paid in full before amounts, if any, would become
available for distribution to the Holders. As of June 29, 1997, after giving
effect to the issuance and sale of the Old Notes and application of the net
proceeds therefrom, the aggregate amount of outstanding Indebtedness
(excluding trade and construction payables) of the Company and its
Subsidiaries was $272.2 million, of which approximately $165.0 million
constituted Senior Indebtedness and $7.2 million constituted Indebtedness of
the Subsidiaries.
The Notes are subordinated to all existing and future Senior Indebtedness of
the Company. Except for limitations on the aggregate amount of consolidated
indebtedness that the Company may incur, the Indenture does not limit the
ability of the Company to incur additional Senior Indebtedness or transfer
assets to or among its Subsidiaries (other than Unrestricted Subsidiaries). In
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to make payments on the Old Notes
and/or the New Notes only after all Senior Indebtedness of the Company has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on the Old Notes and/or the New Notes. Under certain
circumstances, holders of the Senior Indebtedness of the Company may block
payments on the Old Notes and/or the New Notes. In addition, in the event of
any distribution or payment of the assets of the Company in any
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foreclosure, dissolution, winding-up, liquidation or reorganization, holders
of Senior Indebtedness will have a prior claim to the assets of the Company
and to the assets of its Subsidiaries which constitute their collateral, if
any.
In the event of a Change of Control, each Holder of the Old Notes and/or the
New Notes will have the right to require the Company to repurchase such
Holder's Senior Subordinated Notes at 101%, plus accrued interest. Such right
is subordinated to the rights of the holders of Senior Indebtedness and,
effectively, all indebtedness of the Company's Subsidiaries. These
requirements and subordination of the Notes will limit the ability of the
Company to repurchase the Notes. The Senior Note Indenture has change of
control provisions substantially similar to the Indenture's provisions. See
"Description of the New Notes--Change of Control."
ABSENCE OF ESTABLISHED PUBLIC MARKET
Although the Old Notes and the New Notes are eligible for trading in the
PORTAL market, and the New Notes are approved for listing on the American
Stock Exchange (subject to official notice of issuance), there currently is no
established trading market for the New Notes, and the Company has taken no
steps and does not intend to take steps to facilitate any public trading
market for the New Notes. Therefore, there can be no assurance that an active
public market for the New Notes will develop or, if developed, will continue
to exist. If a public trading market develops for the New Notes, future
trading prices of the New Notes will depend on many factors, including, among
other things, prevailing interest rates, the Company's results of operations
and the market for similar securities. Depending upon such factors, the New
Notes may trade at a discount from their principal amount.
FEDERAL INCOME TAX CONSESQUENCES
The exchange of Old Notes for New Notes pursuant to the Offer may be treated
as a taxable exchange for federal income tax purposes, possibly resulting in
the recognition of gain or additional interest income by the holder of such
notes or a change in the timing or character of income of the holder of such
notes. See "Certain Federal Income Tax Consequences."
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THE OFFER
PURPOSE OF THE OFFER
The Offer is designed to provide Holders of Old Notes with an opportunity to
acquire New Notes which, unlike the Old Notes, will be freely tradable at all
times, subject to any restrictions on transfer imposed by state "blue sky"
laws; provided that the Holder is not an affiliate of the Company within the
meaning of the Securities Act and represents that the New Notes are being
acquired in the ordinary course of such Holder's business and the Holder is
not engaged in, and does not intend to engage in, a distribution of the New
Notes. The outstanding Old Notes in the aggregate principal amount of $100
million were originally issued and sold on July 24, 1997 in order to provide
financing for, among other things, the redemption of the Series B Preferred
Stock, for the payment of accrued and unpaid dividends on the Series B
Preferred Stock to Reading Australia PTY Limited and a financial advisory fee
to La Cadena Investments and for working capital and general corporate
purposes. The original sale to the Initial Purchaser was not registered under
the Securities Act in reliance upon the exemption provided by Section 4(2) of
the Securities Act and the concurrent resale of the Old Notes to investors was
not registered under the Securities Act in reliance upon the exemption
provided by Rule 144A promulgated under the Securities Act. The Old Notes may
not be reoffered, resold, or transferred other than pursuant to a registration
statement filed pursuant to the Securities Act or unless an exemption from the
registration requirements of the Securities Act is available. Pursuant to Rule
144 promulgated under the Securities Act, Old Notes may generally be resold
commencing two years after the date of original issuance, in any amount and
otherwise without restriction by a Holder who is not, and has not been for the
preceding three months, an affiliate of the Company. The Old Notes are
eligible for trading in the Private Offerings, Resales and Trading through
Automated Linkages Market ("PORTAL"), and may be resold to certain Qualified
Institutional Buyers pursuant to Rule 144A promulgated under the Securities
Act. Certain other exemptions may also be available under other provisions of
the federal securities laws and the resale of the Old Notes.
In connection with the original sale of the Old Notes, the Company entered
into the Registration Rights Agreement, pursuant to which it agreed to file
with the Commission a registration statement covering the exchange by the
Company of New Notes for the Old Notes in a transaction designed to provide
Holders with identical New Notes that, with certain limitations, will be
freely tradable. The Registration Rights Agreement provides that the Company
must use its best efforts to file within 30 days and cause the filing to
become effective within 120 days of the date of the filing of a registration
statement with respect to the New Notes. In addition, under certain
circumstances the Company may be required to file a shelf registration
statement covering the Old Notes and to use its best efforts to cause such
registration statement to be declared effective. In the event that the Offer
is not filed by the 30th calendar day or is not declared effective by the
120th calendar day following the date of the filing of the registration
statement or in the event the Offer is not consummated within 30 days after
the registration statement with respect to the New Notes is declared effective
or the shelf registration, if required, is not declared effective prior to the
120th calendar day following the original issue of the Old Notes or if the
registration statement ceases to be effective at any time prior to the
consummation of the Offer, the interest rate borne by the Old Notes shall be
increased by one-half of one percent per annum following such 30-day or 120-
day period, as applicable. Such interest rate will be reduced to the original
rate upon satisfaction of the Company's obligations with respect to the Offer
or the shelf registration statement, as applicable.
The staff of the Commission has issued certain interpretive letters that
concluded, in circumstances similar to those contemplated by the Offer, that
new debt securities issued in a registered exchange for outstanding debt
securities, which new securities are intended to be substantially identical to
the securities for which they are exchanged, may be offered for resale, resold
and otherwise transferred by the holders thereof (other than any holder that
is an affiliate of the issuer or a broker-dealer) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the new securities are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of the new securities. See "The Offer--Resales
of New Notes." The Company has not requested or obtained an interpretive
letter from the Commission staff with respect to this Offer, and the Company
and the Holders are not entitled to rely on interpretive advice provided by
the staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Offer is being conducted in a manner
intended to
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<PAGE>
be consistent with the facts and conditions represented in such letters. If
any Holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Offer, such
Holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. In addition, each broker-dealer that receives New Notes for its
own account in exchange for the Old Notes, where such Old Notes were acquired
by such broker-dealers as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." By
delivering the Letter of Transmittal, a Holder tendering Old Notes for
exchange will represent and warrant to the Company that the Holder is
acquiring the New Notes in the ordinary course of its business and that the
Holder is not engaged in, and does not intend to engage in, a distribution of
the New Notes. ANY HOLDER USING THE OFFER TO PARTICIPATE IN A DISTRIBUTION OF
THE NEW NOTES TO BE ACQUIRED IN THE OFFER MUST COMPLY WITH THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH
A SECONDARY RESALE TRANSACTION. HOLDERS WHO DO NOT EXCHANGE THEIR OLD NOTES
PURSUANT TO THIS OFFER WILL CONTINUE TO HOLD OLD NOTES THAT ARE SUBJECT TO
RESTRICTIONS ON TRANSFER.
It is expected that the New Notes will be freely transferable by the Holders
thereof, subject to the limitations described in the immediately preceding
paragraph and in "The Offer--Resales of New Notes." Sales of New Notes
acquired in the Offer by Holders who are "affiliates" of the Company within
the meaning of the Securities Act will be subject to certain limitations on
resale under Rule 144A of the Securities Act. Such persons will only be
entitled to sell New Notes in compliance with the volume limitations set forth
in Rule 144A, and sales of New Notes by affiliates will be subject to certain
Rule 144A requirements as to the manner of sale, notice and the availability
of current public information regarding the Company. The foregoing is a
summary only of Rule 144A as it may apply to affiliates of the Company. Any
such persons must consult their own legal counsel for advice as to any
restrictions that might apply to the resale of their New Notes.
The New Notes otherwise will be identical in all respects (including
interest rate, maturity, security and restrictive covenants) to the Old Notes
for which they may be exchanged pursuant to this Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth herein and in the
accompanying Letter of Transmittal, the Company will exchange $1,000 principal
amount of New Notes for each $1,000 principal amount of its outstanding Old
Notes. New Notes will be issued only in integral multiples of $1,000 to each
tendering Holder of Old Notes whose Old Notes are accepted in the Offer.
The New Notes will bear interest from and including July 24, 1997.
Accordingly, Holders who receive New Notes in exchange for Old Notes will
forego accrued but unpaid interest on their exchanged Old Notes for the period
from and including July 24, 1997 to the date of exchange, but will be entitled
to such interest under the New Notes.
As of July 25, 1997, $100,000,000 aggregate principal amount of Old Notes
was outstanding. This Prospectus and the Letter of Transmittal are being sent
to all registered Holders. Tendering Holders will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant
to the Offer. The Company will pay all charges and expenses, other than
certain transfer taxes which may be imposed, in connection with the Offer. See
"The Offer--Payment of Expenses" below.
EXPIRATION DATE; EXTENSIONS; TERMINATION
The Offer will expire at 5:00 P.M., New York City time, on November 17, 1997
(the "Expiration Date"), subject to extension by the Company by notice to the
Exchange Agent as herein provided. The Company reserves
16
<PAGE>
the right to extend the Offer at its discretion, in which event the term
"Expiration Date" shall mean the time and date on which the Offer as so
extended shall expire. The Company shall notify the Exchange Agent of any
extension by oral or written notice and shall mail to the registered holders
of Old Notes an announcement thereof, each prior to 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company reserves the right to extend or terminate the Offer and not
accept for exchange any Old Notes if any of the events set forth below under
"The Offer--Conditions to the Offer" occur and are not waived by the Company,
by giving oral or written notice of such delay or termination to the Exchange
Agent. See "The Offer--Conditions to the Offer." The rights reserved by the
Company in this paragraph are in addition to the Company's rights set forth
below under the caption "The Offer--Conditions to the Offer."
PROCEDURES FOR TENDERING
The acceptance by Holders of the Offer pursuant to one of the procedures set
forth below will constitute an agreement between such Holder and the Company
in accordance with the terms and subject to the conditions set forth herein
and in the Letter of Transmittal.
To be tendered effectively, the Old Notes, together with the properly
completed Letter of Transmittal (or facsimile thereof), executed by the
registered Holder thereof, and any other documents required by the Letter of
Transmittal, must be received by the Exchange Agent at the address set forth
below prior to 5:00 P.M., New York City time, on the Expiration Date. LETTERS
OF TRANSMITTAL AND OLD NOTES SHOULD NOT BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal must be guaranteed unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered Holder of Old
Notes who has not completed the box entitled "Special Issuance and Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of any firm
that is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. (the "NASD") or a
commercial bank or trust company having an office in the United States (and
"Eligible Institution"). In the event that signatures on a Letter of
Transmittal are required to be guaranteed, such guarantee must be by an
Eligible Institution.
The method of delivery of Old Notes and other documents to the Exchange
Agent is at the election and risk of the Holder, but if delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent before the Expiration
Date.
If the Letter of Transmittal is signed by a person other than a registered
Holder of any Old Note tendered therewith, such Old Note must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the registered Holder or Holders appear on the Old Note(s).
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes will be resolved by the Company,
whose determination will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or the
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation
of the terms and conditions of the Offer (including the instructions in the
Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as
the Company shall determine. Neither the Company nor the Exchange Agent shall
be under any duty to give notification of defects
17
<PAGE>
in such tenders or shall incur liabilities for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
The Company's acceptance for payment of Old Notes tendered pursuant to the
Offer will constitute a binding agreement between the tendering person and the
Company upon the terms and subject to the conditions of the Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five (5) New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
(5) New York Stock Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
CONDITIONS TO THE OFFER
Notwithstanding any other provisions of the Offer, or any extension of the
Offer, the Company will not be required to issue New Notes in respect of any
properly tendered Old Notes not previously accepted, and may terminate the
Offer by oral or written notice to the Exchange Agent and the Holders, or, at
its option, modify or otherwise amend the Offer, if any material change occurs
that is likely to affect the Offer, including, but not limited to, the
following:
(a) there shall be instituted or threatened any action or proceeding before
any court or governmental agency challenging the Offer or otherwise
directly or indirectly relating to the Offer or otherwise affecting the
Company;
(b) there shall occur any development in any pending action or proceeding
that, in the sole judgment of the Company, would or might (i) have an
adverse effect on the business of the Company, (ii) prohibit, restrict or
delay consummation of the Offer, or (iii) impair the contemplated benefits
of the Offer;
(c) any statute, rule or regulation shall have been proposed or enacted, or
any action shall have been taken by any governmental authority which, in
the sole judgment of the Company, would or might (i) have an adverse effect
on the business of the Company, (ii) prohibit, restrict or delay
consummation of the Offer, or (iii) impair the contemplated benefits of the
Offer; or
18
<PAGE>
(d) there exists, in the sole judgment of the Company, any actual or
threatened legal impediment (including a default or prospective default
under an agreement, indenture or other instrument or obligation to which
the Company is a party or by which it is bound) to the consummation of the
transactions contemplated by the Offer.
The Company expressly reserves the right to terminate the Offer and not
accept for exchange any Old Notes upon the occurrence of any of the foregoing
conditions. In addition, the Company may amend the Offer at any time prior to
5:00 P.M., New York City time, on the Expiration Date if any of the conditions
set forth above occur. Moreover, regardless of whether any of such conditions
has occurred, the Company may amend the Offer in any manner which, in its good
faith judgment, is advantageous to the Holders.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its sole discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
If the Offer is terminated by the Company because (a) after conferring with
its counsel, the Company determines that the Commission is unlikely to declare
such Offer effective or (b) in good faith and in the exercise of its best
judgment with advice from counsel, the Company determines that (i) the
interests of the Holders would be adversely affected by the consummation of
the Offer, (ii) the New Notes would not be tradable without material
restrictions under the Securities Act or applicable Blue Sky or state
securities laws, (iii) BancAmerica Securities, Inc. so reasonably requests or
(iv) the offer is commenced and not consummated within 180 days after July 24,
1997 then the Company shall not be obligated under the Registration Rights
Agreement to consummate the Offer. If the Offer is terminated, the Company
will be required, pursuant to the Registration Rights Agreement, to file with
the Commission, and obtain the effectiveness of, a shelf registration
statement pursuant to which the Old Notes may be resold by Holders under the
Securities Act. If such shelf registration statement is not declared effective
by the Commission within 120 days of the original issuance of the Old Notes
then the Company will be obligated to pay to Holders the additional interest
described above under "The Offer--Purpose of the Offer".
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon the terms and subject to the conditions of the Offer, the Company will
accept all Old Notes validly tendered prior to 5:00 P.M., New York City time,
on the Expiration Date. The Company will deliver New Notes in exchange for Old
Notes promptly following the Expiration Date.
For purposes of the Offer, the Company shall be deemed to have accepted
validly tendered Old Notes when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering Holders for the purpose of receiving the New Notes.
Under no circumstances will interest be paid by the Company or the Exchange
Agent by reason of any delay in making such payment or delivery.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, at the Company's
expense, to the tendering Holder thereof as promptly as practicable after the
expiration or termination of the Offer.
WITHDRAWAL RIGHTS
Tenders of Old Notes made pursuant to the Offer are irrevocable and may not
be withdrawn.
19
<PAGE>
EXCHANGE AGENT
First Trust of New York has been appointed as Exchange Agent for the Offer.
All correspondence in connection with the Offer and the Letter of Transmittal
should be addressed to the Exchange Agent as follows:
<TABLE>
<CAPTION>
BY REGISTERED, CERTIFIED OR
OVERNIGHT MAIL: BY HAND: BY FIRST CLASS MAIL: BY FACSIMILE:
- --------------------------- -------- -------------------- -------------
<S> <C> <C> <C>
c/o First Trust National Association c/o First Trust National Association c/o First Trust National Association (612) 244-1537
180 East Fifth Street 180 East Fifth Street P. O. Box 64485 BY TELEPHONE:
St. Paul, MN 55101 St. Paul, MN 55101 St. Paul, MN 55164-9549 --------------
Attn: Specialized Finance Attn: Bond Drop Window 1-800-934-6802
Bond Holder
Services
</TABLE>
Requests for additional copies of the Prospectus or the Letter of Transmittal
should be directed to the Exchange Agent or the Company.
PAYMENT OF EXPENSES
The Company will not make any payments to brokers, dealers or others for
soliciting acceptances of the Offer. The Company, however, will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay the cash expenses to be incurred in
connection with the Offer, which are estimated in the aggregate to be
approximately $175,000.
The Company has not retained any dealer-manager or similar agent in
connection with the Offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the Offer.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount, as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Offer will be capitalized for
accounting purposes.
RESALES OF NEW NOTES
With respect to resales of New Notes, based on certain interpretive letters
issued by the staff of the Commission to third parties, the Company believes
that a holder of New Notes (other than (i) a broker-dealer who purchases such
New Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person who is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) who exchanged Old Notes for New Notes in the ordinary course of business
and who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of the Securities Act, provided that a broker-dealer who holds Old
Notes that were acquired for its own account as a result of market making or
other trading activities may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus meeting
the requirements of the Securities Act. If any other holder is deemed to be an
"underwriter" within the meaning of the Securities Act or acquires New Notes in
the Offer for the purpose of distributing or participating in a distribution of
the New Notes, such holder must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. The Company has agreed that for a period of 180 days from the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
20
<PAGE>
CAPITALIZATION
The table below sets forth the consolidated capitalization of the Company
(i) at June 29, 1997 and (ii) as adjusted to give effect to the issuance of
the Old Notes and the application of the net proceeds therefrom.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and the related notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 29, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash...................................................... $ 39,830 $ 55,230
======== ========
Long-Term Debt:
Capitalized Lease Obligations........................... $ 6,042 $ 6,042
11% Senior Notes due 2001............................... 165,000 165,000
Senior Subordinated Notes due 2004...................... -- 100,000
-------- --------
Total Long-Term Debt.................................. 171,042 271,042
Preferred Stock:
10.5% Cumulative Series B Preferred Stock............... 69,365 --
Stockholders' Equity (Deficit):
Class A Common Stock.................................... 1 1
Additional Paid-in Capital.............................. 12,715 12,715
Retained (Deficit)...................................... (34,773) (49,423)
Less Option to acquire Stock............................ (14,650) --
-------- --------
Total Stockholders' Deficit........................... (36,707) (36,707)
-------- --------
Total Capitalization.................................. $203,700 $234,335
======== ========
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following information is qualified in its entirety by the consolidated
financial statements of the Company. The following table sets forth selected
consolidated financial data and other information of the Company. The
"Statement of Earnings Data" and "Balance Sheet Data" (i) as of and for the 52
weeks ended September 27, 1992 and September 26, 1993 are derived from the
audited consolidated financial statements not included in this Prospectus,
(ii) as of and for the 52 weeks ended September 25, 1994 and September 24,
1995 and as of and for the 53 weeks ended September 29, 1996 are derived from
the audited consolidated financial statements of the Company contained
elsewhere in this Prospectus and (iii) as of and for the 39 weeks ended June
23, 1996 and June 29, 1997 are derived from the unaudited consolidated
financial statements of the Company contained elsewhere in this Prospectus.
The unaudited consolidated financial statements include all normal recurring
adjustments, management considers necessary for a fair presentation of the
consolidated financial data. The schedules of "Other Operating Data" and
"Store Data" are unaudited. The following selected consolidated financial data
should be read in conjunction with the Company's consolidated financial
statements and schedules and accompanying notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
---------------------------------------------------------- ----------------------
SEPT. 27, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29, JUNE 23, JUNE 29,
1992(1) 1993 1994 1995 1996(2) 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <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 $1,244,312 $1,292,267
Cost of goods sold...... 1,201,067 1,195,399 1,199,794 1,227,355 1,315,726 959,246 997,032
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 338,691 330,603 339,923 352,540 389,606 285,066 295,235
Operating expenses:
Selling, general and
administrative
expenses.............. 302,547 300,826 297,474 308,332 328,242 239,252 248,683
Depreciation and
amortization.......... 9,230 9,910 11,656 11,756 12,583 9,220 9,858
Consulting fees(3)..... 4,400 -- 830 1,500 1,525 1,125 1,125
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 316,177 310,736 309,960 321,588 342,350 249,597 259,666
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit........ 22,514 19,867 29,963 30,952 47,256 35,469 35,569
Interest income......... 354 171 384 952 1,929 1,309 1,733
Interest expense........ (9,901) (10,292) (15,501) (20,076) (20,258) (14,943) (14,871)
Equity in earnings
(loss) from
unconsolidated
affiliate.............. 296 107 (592) (980) (1,624) (935) (1,123)
Other income (loss)--
net.................... 100 265 391 97 (172) (187) 96
---------- ---------- ---------- ---------- ---------- ---------- ----------
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 20,713 21,404
Income taxes............ 5,616 4,426 5,856 4,218 11,120 8,390 8,777
---------- ---------- ---------- ---------- ---------- ---------- ----------
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 12,323 12,627
Extraordinary
(charge)(4)............ (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 12,323 12,627
Preferred dividends..... 553 323 327 -- 4,111 2,155 5,448
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income available to
common stockholders.... $ 5,724 $ 5,369 $ 798 $ 6,727 $ 11,900 $ 10,168 $ 7,179
========== ========== ========== ========== ========== ========== ==========
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 $ 126.75 $ 143.58
Earnings per common
share.................. $ 57.24 $ 53.69 $ 7.98 $ 67.27 $ 165.28 $ 126.75 $ 143.58
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
------------------------------------------------------------- ------------------
SEPT. 27, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29, JUNE 23, JUNE 29,
1992(1) 1993 1994 1995 1996(2) 1996 1997
---------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGES AND STORE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD):
Working capital......... $ 25,947 $ 21,596 $ 41,422 $ 45,014 $ 63,473 $ 69,960 $ 72,761
Total assets............ 262,887 264,484 306,489 314,082 338,294 328,546 330,443
Long-term notes and
mortgages payable...... 89,750 87,576 165,000 165,000 165,000 165,000 165,000
Long-term capitalized
lease obligations...... 11,893 10,456 9,187 8,099 6,917 7,293 6,042
Other long-term
liabilities............ 13,014 15,736 15,765 13,772 12,858 15,600 13,467
Series A Preferred
Stock.................. 1,600 3,600 -- -- -- -- --
Series B Preferred
Stock.................. -- -- -- -- 69,365 69,365 69,365
Common stockholders'
equity................. 35,333 40,702 6,851 13,578 (43,887) (45,619) (36,707)
Dividends declared per
share:
Common Stock........... -- -- $ 400 -- -- -- --
Class A Common Stock... -- -- -- -- -- -- --
10.5% Series B
Preferred Stock....... -- -- -- -- $ 5.93 $ 3.11 $ 7.85
OTHER OPERATING DATA:
Sales increases
(decreases):
Total stores........... 1.7% (0.9%) 0.9% 2.6% 7.9% 5.7% 3.9%
Same stores (comparable
52 weeks)............. (2.0%) (1.9%) (0.7%) 1.2% 6.3% 6.1% 3.9%
EBITDA(6)............... $ 32,494 $ 30,320 $ 41,802 $ 42,777 $ 59,972 $ 44,876 $ 46,133
Capital expenditures.... $ 24,964 $ 17,178 $ 19,409 $ 13,178 $ 22,415 $ 13,658 $ 14,329
Gross profit as
percentage of sales.... 22.00% 21.66% 22.08% 22.31% 22.85% 22.91% 22.85%
Selling, general and
administrative
expenses as a
percentage of sales.... 19.65% 19.71% 19.32% 19.52% 19.25% 19.23% 19.24%
EBITDA as a percentage
of sales............... 2.11% 1.99% 2.71% 2.71% 3.52% 3.61% 3.57%
Ratio of earnings to
fixed charges(7)....... 1.47x 1.36x 1.47x 1.36x 1.53x 1.62x 1.38x
Ratio of earnings to
fixed charges as
adjusted(8)............ -- -- -- -- 1.46x -- 1.48x
STORE DATA:
Number of stores (at end
of period)............. 107 109 111 110 110 110 110
Average sales per store
(000s)................. $ 14,458 $ 14,130 $ 13,997 $ 14,298 $ 15,503 $ 11,312 $ 11,748
Average store size:
Total sq. ft........... 28,079 28,309 28,617 28,717 28,809 28,809 28,809
Selling sq. ft......... 20,323 20,484 20,708 20,773 20,845 20,845 20,845
Total sq. ft (at end of
period) (000s)......... 3,004 3,086 3,177 3,159 3,169 3,169 3,169
Total selling sq. ft.
(at end of fiscal year)
(000s)................. 2,175 2,233 2,299 2,285 2,293 2,293 2,293
Sales per average total
sq. ft................. $ 518 $ 501 $ 492 $ 499 $ 538 $ 393 $ 408
Sales per average
selling sq. ft......... $ 715 $ 692 $ 680 $ 689 $ 744 $ 543 $ 564
</TABLE>
- --------
(1) Certain amounts have been reclassified to conform to the current period
financial statement presentation.
(2) 53 week fiscal year.
(3) Consulting fees were paid pursuant to consulting agreements with La Cadena
and Craig in 1992 and Craig since 1994.
(4) Extraordinary charges in 1992 and 1994 represent the after-tax charge from
the early retirement of debt.
(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 principles.
(6) EBITDA represents income before income taxes, extraordinary charge and
cumulative effect of a change in accounting for income taxes, plus
interest expense, depreciation and amortization. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an alternative to cash flow or as a measure of liquidity or
as an alternative to net earnings as indicative of operating performance.
EBITDA is included herein because management believes that certain
investors find it a useful tool for measuring the Company's ability to
service its debt.
(7) 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 the
undistributed loss or earnings 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 expenses as deemed by management to be
representative of the interest factor in the particular case.
(8) As adjusted to give pro forma effect to the issuance of the Senior
Subordinated Notes and the use of proceeds therefrom. See "Use of
Proceeds."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and
the thirty-nine weeks ended June 23, 1996 and June 29, 1997. Comparisons
between the 1994, 1995 and 1996 fiscal years are difficult due to the 1994
Recapitalization the Company entered into in March 1994 and the additional
week in the 1996 fiscal year.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 39 WEEKS ENDED
----------------------------- -----------------
SEPT. 25, SEPT. 24, SEPT. 29, JUNE 23, JUNE 29,
1994 1995 1996 1996 1997
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales......................... 100.00% 100.00% 100.00% 100.00% 100.00%
Gross profit.................. 22.08 22.31 22.85 22.91 22.85
Operating expenses:
Selling, general and
administrative expenses.... 19.32 19.52 19.25 19.23 19.24
Depreciation and
amortization............... .76 .74 .74 .74 .76
Consulting fees............. .05 .09 .09 .09 .09
Operating profit.............. 1.95 1.96 2.77 2.85 2.76
Interest income............... .03 .06 .11 .11 .13
Interest expense.............. (1.01) (1.27) (1.19) (1.20) (1.15)
Equity in earnings (loss) from
unconsolidated affiliate..... (.04) (.06) (.10) (.08) (.09)
Other income (loss)--net...... .02 -- -- (.02) .01
Income before income taxes,
cumulative effect of a change
in accounting for income
taxes and extraordinary loss. .95 .69 1.59 1.66 1.66
Net income.................... .07 .43 .94 .99 .98
</TABLE>
39 WEEKS ENDED JUNE 23, 1996 AND JUNE 29, 1997
Total sales for the 39 weeks ended June 29, 1997 increased 3.9% and amounted
to $1,292.3 million compared to $1,244.3 million for the comparable period in
1996. Same store sales increased 3.9% for the 39 week period. The Company
operated 110 supermarkets at June 29, 1997 and at June 23, 1996. The increase
in sales in the 39 week period of 1997 compared to the comparable period of
1996 is due to many factors, including favorable customer response to the
Company's 60th Anniversary Marketing Program, slight improvements in the
Southern California economy and favorable customer response to the Company's
1996 merchandising expansion and upgrading program. This included expanded
product offerings in the deli, bakery, frozen foods and dairy departments and
the continuing introduction of fresh cut flowers and prepackaged vegetables
into 83 of the Company's 110 supermarkets.
For the 39 week period of 1997, gross profits increased to $295.2 million or
22.85% of sales compared to $285.1 million or 22.91% of sales for the
comparable period of the prior year. The decrease in gross profits, as a
percent of sales, for the year-to-date period reflects the Company's
commitment to retain its existing customer base and to attract new customers
as the Southern California economy continues to improve and experiences
increases in population in the Company's primary trading areas, through its
marketing strategy of Every Day Low Prices.
For the 39 week period of 1997, selling, general and administrative expenses
amounted to $248.7 million or 19.24% of sales compared to $239.3 million or
19.23% of sales for the comparable period of the prior year. The increase in
selling, general and administrative expenses in the 39 week period of 1997
when compared to the comparable period of 1996 is partially due to the
incremental costs and expenses incurred to operate at the higher level of
sales. In addition, selling, general and administrative expenses in the 39
week period of 1997 included
24
<PAGE>
increases in rent expenses, net of reduction in depreciation expenses,
aggregating approximately $1.2 million as the result of the sale and leaseback
of five supermarkets in January 1996 and an additional four supermarkets in
October 1996. Selling, general and administrative expenses in the 39 week
period of 1996 were also affected by a suspension of employer contributions
(such trust was overfunded), aggregating $3.8 million, to a collective
bargaining benefits trust in the 39 week period of fiscal 1996.
In conjunction with the 1994 Recapitalization, the Company entered into a
five-year consulting and covenant not to compete agreement (the "Consulting
Agreement") with Craig Corporation ("Craig"). The Consulting Agreement
provided for a prepayment of $5.0 million, which is amortized to expense over
the five-year term of the covenant not to compete. Amortization of the prepaid
covenant not to compete amounted to $750,000 for the thirty-nine weeks ended
June 29, 1997 and June 23, 1996 and is included in depreciation and
amortization expense.
The Consulting Agreement also provided for annual consulting payments of
$1.5 million, paid quarterly in arrears. Consulting fees paid or accrued to
the benefit of Craig amounted to $1,125,000, for the thirty-nine weeks ended
June 29, 1997 and June 23, 1996, respectively. On July 31, 1997, the Company
gave notice to terminate the five-year Consulting Agreement with Craig.
Depreciation and amortization expenses amounted to $9.9 million for the 39
week period ended June 29, 1997 compared to $9.2 million for the comparable
period of the prior year as the result of capital expenditures completed after
the 39 week period of 1996. Depreciation and amortization include amortization
of a prepaid five-year covenant not to compete between the Company and Craig
which became effective as of March 8, 1994.
Operating profits increased to $35.6 million or 2.76% of sales for the 39
week period of 1997, from $35.5 million or 2.85% of sales for the comparable
period of the prior year.
Interest income and interest expense were at similar levels in the 39 week
periods of both years and included amortization of $885,000, from fees and
expenses incurred in connection with the 1994 Recapitalization. The equity in
net loss from unconsolidated affiliate in the two 39 week periods resulted
from increased rental costs related to a short term extension by Santee of its
lease for its existing facility, and increased depreciation by Santee to
reflect the anticipated salvage value of plant and equipment upon termination
of the lease.
Income before income taxes amounted to $21.4 million and $20.7 million
respectively, in the 39 week periods of 1997 and 1996. Net income for the 39
week periods of 1997 and 1996, amounted to $12.6 million and $12.3 million,
respectively.
FISCAL YEARS ENDED SEPTEMBER 25, 1994, SEPTEMBER 24, 1995 AND SEPTEMBER 29,
1996
Total sales amounted to $1.705 billion in 1996, compared to $1.580 billion
in 1995 and $1.540 billion in 1994. Same-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 same-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.
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 percentage 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. In fiscal 1996, selling,
general and administrative expenses amounted to $328.2 million or 19.25% of
sales compared to $308.3 million or 19.52% of sales for fiscal 1995 and $297.5
million or 19.32% of
25
<PAGE>
sales for fiscal 1994. During 1996, the increase in the absolute amount of
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 percentage of sales, selling,
general and administrative expenses decreased, primarily due to efficiencies
in supermarket payroll expenses and the leverage effect increased 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 1994 Recapitalization 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. Consulting fees consisted of fees
paid under the Consulting Agreement, which will be terminated upon redemption
of the Series B Preferred Stock.
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 1994 Recapitalization.
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 $20.3 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 1994 Recapitalization. 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 of
$1.2 million in 1996 and 1995 and $721,000 in 1994 incurred in connection with
the 1994 Recapitalization.
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, $6.7 million and $8.8 million, 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 $372,000 from the cumulative effect of a change in
accounting for income taxes.
In connection with the 1994 Recapitalization, the Company entered into a
series of transactions that included the sale of the 11% Senior Notes, 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 provided by operations and through borrowings from short-term revolving
credit facilities. The Company's short-term bank credit
26
<PAGE>
agreement dated as of March 8, 1994 (as amended, the "Bank Credit Agreement")
consists of a revolving credit facility for working capital purposes of $15.0
million, all of which was available at June 29, 1997, and a $25.0 million
standby letter of credit facility, of which $15.5 million was available at
June 29, 1997, maintained pursuant to its worker's compensation and general
liability self-insurance requirements. The Bank Credit Agreement expires on
June 1, 1998. The Company expects to replace its Bank Credit Agreement with a
three year facility with terms and conditions comparable to or better than the
existing Bank Credit Agreement. There can be no assurances that the Company
will be able to replace such facility or, if it is able to do so, whether it
will receive favorable terms. The Company had no short term borrowings at the
end of fiscal years 1996, 1995, 1994 or at June 23, 1996 and June 29, 1997.
The average short term borrowings outstanding during fiscal years 1995 and
1994 was approximately $129,000 and $5.4 million, respectively. Weighted
average interest rates were 9.7% and 4.4% during fiscal years 1995 and 1994,
respectively. During 1996 and for the 39 weeks ended June 29, 1997, the
Company did not incur any short-term borrowings. Borrowings under the Bank
Credit Agreement are general unsecured obligations of Stater Bros. Markets and
are guaranteed by Stater Bros. Development, Inc. It was a condition to the
sale and issuance of the Old Notes that the Company received a necessary
consent of the lender and the Company did receive such consent.
Working capital and current ratios, respectively, amounted to $63.5 million
and 1.50:1 at fiscal year end 1996, $45.0 million and 1.40:1 at fiscal year
end 1995, $41.4 million and 1.38:1 at fiscal year end 1994, $72.8 million and
1.64:1 at June 29, 1997 and $70.0 million and 1.60:1 at June 23, 1996.
The net cash provided by operating activities for the 39 weeks ended June
29, 1997, amounted to $3.7 million and included reductions in accounts payable
and the deferred tax benefits arising from the October 1996 sale and leaseback
transaction. As of September 29, 1996, the Company had increased its inventory
and related accounts payable in anticipation of the implementation of the
Company's 60th Anniversary Marketing Program in the first quarter of fiscal
1997. Accordingly, as of June 29, 1997, the Company's investment in
inventories and related accounts payable are reflected at more traditional
balances. The increase in the deferred tax benefit of $2.1 million was due
primarily to the timing difference between tax and book requirements for
recognizing the gain and resulting tax liability from the October 1996 sale
and leaseback transaction. 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 1994 Recapitalization
resulting 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 required under the Consulting Agreement.
Net cash used by investing activities for the 39 weeks ended June 29, 1997,
amounted to $2.8 million compared to $5.0 million of net cash provided by
investing activities for the comparable period in fiscal 1996. The difference
in net cash provided by investing activities between the comparable periods is
due to the Company's capital expenditures during such periods, net of proceeds
from asset dispositions and additional investment in Santee Dairies. Capital
expenditures for the thirty-nine week periods amounted to $14.3 million in
1997 compared to $13.7 million in 1996.
During the 39 weeks ended June 29, 1997, the Company remodeled nine
supermarkets. Capital expenditures for fiscal 1997 were financed from cash
provided by the October 1996 sale and leaseback transaction. Capital
expenditures for fiscal 1997 are estimated to be approximately $25.0 million
and will include expenditures incurred to construct two new supermarkets which
are estimated to open in early fiscal 1998.
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, due on
27
<PAGE>
the four supermarkets, net of reductions in depreciation expense, operating
expenses for the 52-week 1997 fiscal year will increase by approximately $1.1
million.
In November 1996 and for approximately $200,000, the Company increased its
ownership in Santee to 50%. Additionally, during the first quarter of fiscal
1997, the Company acquired approximately $4.8 million worth of preferred stock
of Santee. The Company converted such preferred stock of Santee to common
stock of Santee. Hughes retained a 50% ownership in Santee and acquired a like
amount of the preferred stock of Santee and converted such preferred stock to
common stock of Santee. Mr. Jack H. Brown, Chairman of the Board and Chief
Executive Officer of Stater Bros. Markets also serves as Chairman of the Board
and Chief Executive Officer of Santee Inc. Santee will, for the foreseeable
future, provide the Company's supermarkets with a supply of high quality fluid
milk and other dairy products.
Net cash used by 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 by 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. Capital expenditures for 1996 included costs
incurred to construct a replacement supermarket, to complete eight major
remodels and eight minor remodels and to acquire store equipment to support
the 1996 merchandising expansion and upgrade program. Capital expenditures in
fiscal 1995 included costs incurred to complete eight supermarket minor
remodels, to acquire and install technology and equipment required to
implement the Stater Express choice of payment system and to complete a
supermarket major remodel and expansion. Capital expenditures for 1994
included costs incurred to construct three supermarkets and to complete four
supermarket minor remodels. 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.
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 paid
on the five supermarkets, net of reductions in depreciation expense, operating
expenses increased by approximately $900,000 in fiscal 1996.
During fiscal 1994, and in conjunction with the 1994 Recapitalization, the
Company paid Craig $4.0 million in the form of common stock held by the
Company for investment purposes in accordance with the terms of a certain
Standstill Agreement between the Company and Craig.
Net cash used by financing activities amounted to $6.3 million and $3.0
million for the 39 weeks in 1997 and 1996, respectively, and consisted of
payments on the Company's capitalized lease obligations and the accretion or
payment of dividends on the Company's Series B Preferred Stock. Such preferred
stock dividends are due quarterly and the requirement to make such dividend
payments on the Company's preferred stock commenced in March 1996.
At the request of the holder of the Series B Preferred Stock the Company has
deferred dividend payments on the Preferred Stock until approximately August
4, 1997. Accordingly, the Company deferred dividend payments on the Series B
Preferred Stock and as of June 29, 1997, $3.8 million has been accrued and
remains unpaid. On July 24, 1997, the Company gave notice of exercise of its
option to redeem all outstanding shares of the Company's Series B Preferred
Stock held by Reading Australia PTY Limited, a majority owned indirect
subsidiary of Craig.
28
<PAGE>
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 fiscal years 1996 and 1995 reduced amounts due under
capitalized lease obligations by $1.1 million and $1.2 million, respectively.
Additionally, dividends paid or accrued for the Series B Preferred Stock
amounted to $4.1 million in 1996.
In March 1994, the Company completed the 1994 Recapitalization which
included proceeds from the sale of $165.0 million of 11% Senior Notes. 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.
The Company is subject to certain covenants associated with the 11% Senior
Notes and covenants included in the Bank Credit Agreement. As of June 29,
1997, the Company was in compliance with all such covenants. However, there
can be no assurance that the Company will be able to achieve the expected
operating results or implement the capital expenditure strategy upon which
future compliance with such covenants is based.
The Company believes that cash flow from operations and proceeds from
borrowings, including lease financings, and funds available under the Bank
Credit Agreement will be adequate to meet the Company's currently identifiable
capital requirements.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1995, with the United Food
and Commercial Workers Union. The Company's collective bargaining agreement
with the International Brotherhood of Teamsters was renewed for four years in
September 1994. Management believes it has good relations with its employees.
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 adopted at the beginning of fiscal year 1997. Management believes that
the adoption of SFAS 121 will not have a material adverse effect on the
Company's financial position or its results of operations for fiscal 1997.
INFLATION
The Company's performance has been moderately 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.
29
<PAGE>
BUSINESS
GENERAL
Stater Bros., founded in 1936, is a leading Southern California supermarket
chain, operating 110 supermarkets located principally in the Inland Empire,
one of the fastest growing areas in the United States. The Company is
recognized as a low price leader in the Inland Empire and its supermarkets
offer a high level of customer service, broad selection of brand-name
merchandise, and quality meats and produce. Stater Bros. supermarkets also
offer specialty service departments which include full service meat
departments, bakeries, and delicatessens. Stater Bros., with sales of more
than $1.7 billion for the fiscal year ended September 29, 1996, is the largest
supermarket chain in its primary market area.
THE INLAND EMPIRE
Approximately 80% of the Company's stores are located in the Inland Empire
region of Southern California. The Inland Empire is comprised primarily of
Riverside and San Bernardino counties, and also includes portions of Orange,
Kern and Los Angeles counties. Riverside and San Bernardino counties encompass
more than 29,000 square miles. Since 1980, this region has been one of the
fastest growing areas in California in terms of new growth. Between 1990 and
1996, the Riverside/San Bernardino area increased in population by
approximately 13%, reaching a combined population of approximately 3 million
people in 1996. Several factors have contributed to the significant growth of
this area, including affordability of new housing and availability of land.
The average new housing prices in 1996 for San Bernardino and Riverside
counties were approximately $160,000 and $162,000, respectively, compared to
$256,000 and $260,000 in Los Angeles and Orange counties, respectively. As of
1996, the average income was approximately $30,300 in the Inland Empire
compared to $32,100 in Orange County. Management believes that its "every day
low price" ("EDLP") marketing strategy is optimally suited for the Inland
Empire demographics.
BUSINESS STRATEGY
The Company believes that 60 years of continuous service in the Inland
Empire, its commitment to everyday low prices and the involvement of members
of its management in community activities have contributed significantly to
Stater Bros.' leading market position. Management has developed an operating
strategy which it believes will foster continued growth in revenues and
earnings and help maintain market share in the Inland Empire. Specifically,
the strategy includes the following:
Everyday Low Prices. The Company uses the EDLP format, combined with an
aggressive advertising program, as an integral part of its strategy to provide
the best overall supermarket value in its market area. The Company from time
to time supplements its everyday low pricing with system-wide temporary price
reductions on selected food and non-food merchandise. The Company's
information systems and distribution network give management the flexibility
to respond to market conditions by rapidly adjusting its prices.
Quality and Breadth of Selection. 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. Stater Bros. carries an average of 35,000
items in each of its supermarkets and places particular emphasis on the
freshness and quality of its meat and produce, which management believes
contributes significantly to attracting customers to its supermarkets. The
Company is able to maintain consistently fresh and high quality meat and
produce because this merchandise is received and distributed through its
central distribution facility where the quality and freshness of the
merchandise are carefully controlled. Each supermarket features a full-service
meat department, where custom-cut meats, as well as prepackaged retail
selections of meat, are available. The Company's close proximity to the
Southern California produce growers and its strong relationships with produce
distributors help to ensure a reliable supply of high quality produce.
30
<PAGE>
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. Store efficiencies are increased by employing
technological advances, such as computerized scanning check-out equipment in
each location and on-line communications between the Company's supermarkets
and the mainframe computer which is located in the main office. 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.
Centralized Warehousing and Distribution Operations. Management believes
that its centralized warehousing and distribution operations give the Company
a competitive advantage. The Company's centralized distribution facility is
located an average distance of approximately 30 miles from its supermarkets.
Most stores can be reached without using the most congested portions of the
Southern California freeway system. With a distribution facility located in
the Inland Empire, management believes that Stater Bros. has a shorter average
haul, in time and distance, than any of its major competitors.
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 30,000
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.
The following table summarizes selected information and statistics relating
to the Company's 110 supermarkets as of June 29, 1997:
<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>
31
<PAGE>
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 June 29, 1997. 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 50% 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.
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 39 WEEKS ENDED
--------------------------------------------------------- ----------------------
SEPT. 27, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29, JUNE 23, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales (000s)............ $1,539,758 $1,526,002 $1,539,717 $1,579,895 $1,705,332 $1,244,312 $1,292,267
Number of supermarkets:
Opened................ 4 2 3 -- 1 1 --
Replaced/closed....... (3) -- (1) (1) (1) (1) --
Total at end of year.. 107 109 111 110 110 110 110
Minor Remodel......... 10 10 4 8 8 6 9
Major
Remodel/Expansion.... -- -- -- 1 8 6 --
</TABLE>
The Company has started construction on two supermarkets which are expected
to open in fiscal 1998, both of which are located in the Company's primary
market area. Beyond 1998, the Company plans to open approximately three 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
1,017,000 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
32
<PAGE>
are processed through the Company's warehouse and distribution facilities. The
Company's centralized distribution facility is managed by a Group Senior Vice
President with over 40 years of experience in the supermarket industry.
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 31% of which were leased by the
Company. The Company also operates a repair terminal at the Colton
distribution facility.
OPERATIONS
The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 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.
Purchasing and Marketing. The Company uses the 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.
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.
Advertising and Promotion. The Company promotes sales through advertising in
local and regional newspapers, on television and radio, and through direct
mail programs and printed circulars. The geographic concentration of its
supermarkets allows the Company to reach its target consumers through a
variety of media in its primary market region. The Company believes it is the
largest supermarket chain print advertiser in local newspapers and circulars
in the Inland Empire. Stater Bros. advertising features high-demand and name
brand products at competitive prices and avoids the use of promotional
activities such as games, gimmicks or double coupons. The Company actively
promotes its EDLP strategy in its advertising and operations, and virtually
all buying discounts, promotion and slotting allowances it receives are passed
on to its customers through lower prices.
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<PAGE>
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 trademark for the name "Stater Express."
SANTEE DAIRIES, INC.
The Company and Hughes have jointly owned Santee since 1986; currently each
owns a 50% interest. Santee operates one of the largest dairy plants in
California and provides fluid milk products to the Company, Hughes, and other
customers in Southern California. Santee processes, packages and distributes
whole milk, low-fat and non-fat milk, as well as orange juice, fruit drinks
and certain cultured milk products under the Knudsen, Foremost and certain
store brand names. Santee is the exclusive licensee of the Knudsen trademark
from Kraft Foods, Inc. for fluid milk, juices and certain cultured milk
products in the Southern California market. In addition, Santee is the
exclusive licensee for Foremost Farms USA, Cooperative of the Foremost
trademark for fluid milk in Southern California. Santee also processes,
packages and distributes Hershey chocolate milk under license. In calendar
1996, Santee processed approximately 73 million gallons of fluid products,
including 54 million gallons of fluid milk. Total revenues for Santee in 1996
were $194.2 million, of which approximately 27% were from sales to the Company
and approximately 11% were from sales to Hughes. Santee also sells to
unaffiliated grocery supermarkets, independent food distributors, military
bases and food service providers in Southern California.
Santee's existing dairy plant was built in 1914 at its current location. Due
to the age of the plant, Santee has been required to make significant
expenditures for repairs and maintenance over the past several years. Despite
these investments, operating costs have continued to rise. In order to provide
a consistent source of milk to accommodate expected expansion, and in order to
contain costs, Santee is currently in the process of constructing a new dairy
plant in the City of Industry, California. The new facility, which is expected
to be operational by March 1998, will increase Santee's capacity to process
milk from approximately 250,000 to 350,000 gallons per day, with the ability
to expand capacity to approximately 500,000 gallons per day. The Company
expects that the new facility, when fully operational, will also lower
Santee's costs of producing fluid milk and other products. However, as with
any major construction and capital expenditure project, the realization of
these anticipated benefits is subject to a number of risks and uncertainties
and there can be no assurance that these benefits will be realized.
Construction costs of the new dairy are estimated to be approximately $101.5
million, including production equipment and capitalized interest and other
costs. However, there can be no assurance that the cost of the new dairy will
not exceed this amount. To provide the funds necessary to finance the
construction, Santee issued $80 million of senior secured notes (the "Santee
Notes") in a private placement.
Jack H. Brown also serves as Chairman and Chief Executive Officer of Santee.
STATER BROS. DEVELOPMENT, INC.
Stater Bros. Development, Inc. ("SBD") is a wholly owned subsidiary of
Stater Bros. Holdings Inc. and is primarily engaged in various aspects of
construction of the Company's supermarkets. SBD also provides
34
<PAGE>
management and/or maintenance services to certain shopping centers in which a
Stater Bros. supermarket is a tenant. SBD maintains the Company's 110
supermarkets and the common areas of 67 associated shopping centers in which
some of the Company's supermarkets are located, and acts as property manager
for 17 of such shopping centers. SBD and its predecessors have acted as
general contractor for major and minor remodels of existing stores and the
construction of new stores for more than 23 years. By employing SBD as a
general contractor, Stater Bros. can control the quality, scheduling and cost
of major construction projects. The Company believes that SBD generally can
efficiently complete major and minor remodels in a timely manner. SBD
typically completes construction of a new store in approximately 22 to 24
weeks from commencement of construction to store opening and a typical minor
remodel takes SBD approximately 17 days to complete.
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 June 29, 1997.
<TABLE>
<CAPTION>
SQUARE
FACILITY FEET
-------- ---------
<S> <C>
Grocery......................................................... 416,000
Forward buy grocery............................................. 237,000
Produce/deli.................................................... 118,000
Meat/frozen..................................................... 116,000
Health and beauty aids.......................................... 35,000
Bakery.......................................................... 21,000
Support and office.............................................. 74,000
---------
Total......................................................... 1,017,000
=========
</TABLE>
As of June 29, 1997, 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. 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.
See "Business--Store Profile and Locations."
EMPLOYEES
The Company has approximately 9,000 employees, approximately 500 of whom are
management and administrative employees and approximately 8,500 of whom are
hourly employees. Approximately 70% of the Company's employees work part-time.
Substantially all of the Company's hourly employees are members of either the
United Food & Commercial Workers International Union ("Retail Clerks and
Meatcutters") or the International Brotherhood of Teamsters ("Teamsters")
labor unions and are represented by several different collective bargaining
agreements. The Company's collective bargaining agreements with the Retail
Clerks and Meatcutters, 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 September
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
35
<PAGE>
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.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are routine in nature and incidental
to the operation of the business of the Company and its subsidiaries. The
Company believes that the outcome of the proceedings to which the Company is
currently a party will not have a material adverse effect upon its 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 in the Inland Empire
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 operations or its consolidated
financial position.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case
of (Ufondu, et al. v. Stater Bros. Markets, et al.) filed in the Superior
Court of the State of California for the County of San Bernardino. The
complaint filed by twelve employees seeks unspecified damages alleging racial
discrimination in the Company's employment practices. The Company believes the
complaint is without merit and intends to vigorously defend the case. There
can be no assurances, however, as to the outcome of this case.
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies that regulate the
distribution and sale of alcoholic beverages, tobacco products, milk and other
agricultural products and other food items and also regulate trade practices,
building standards, labor, health, safety and environmental matters.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
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................ 58 Chairman of the Board, Director, President and
Chief Executive Officer
H. Harrison Lightfoot........ 59 Group Senior Vice President--Retail Operations
A. Gayle Paden............... 60 Group Senior Vice President--Distribution
Donald I. Baker.............. 56 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 over 45 years. Mr. Brown has a majority
interest and is the managing general partner of La Cadena.
H. Harrison Lightfoot has been Group Senior Vice President-Retail Operations
of the Company since June 1986. Mr. Lightfoot has served the Company for 43
years in various capacities, including store manager, buyer, general
supervisor and Vice President. Mr. Lightfoot is a general partner in La
Cadena.
A. Gayle Paden joined the Company in 1986 as Group Senior Vice President-
Administration and since July 1996 has been Group Senior Vice President--
Distribution. 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.
Donald I. Baker joined the Company in November 1983 and has been Group
Senior Vice President-Administration since July 1996. He has served the
Company in various capacities prior to his present position. 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 served in various
financial positions with American Stores Company 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 that
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 February
1997, Mr. Varner has been a partner in the law firm of Varner, Saleson &
Dobler LLP. From 1967 to February 1997, Mr. Varner was a partner with the law
firm of
37
<PAGE>
Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner specializes in business
and corporate matters. Mr. Varner and the law firm of Varner, Saleson & Dobler
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 Australia PTY Limited 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 President of Field and Associates since 1989.
From 1984 to 1989, Mr. Field has served in various positions, including
Chairman of the Board, President and Chief Executive Officer, for McKesson
Corporation. 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, Maxicare and Haelan Health Corp.
38
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 29, 1997, 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) named executive officers, and (d) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
CLASS A PERCENTAGE SERIES B PERCENTAGE OF
COMMON STOCK OF CLASS A PREFERRED STOCK SERIES B
NAME AND ADDRESS OF BENEFICIALLY COMMON STOCK BENEFICIALLY PREFERRED STOCK
BENEFICIAL OWNER OWNED OUTSTANDING OWNED OUTSTANDING
------------------- ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
La Cadena Investments
(1).................... 50,000 100% -- --
Reading Australia PTY
Limited (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 Australia PTY Limited
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 the Series B Preferred Stock owned
of record by Reading Australia PTY Limited. The address of Reading
Australia PTY Limited 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 Australia PTY Limited.
(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.
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Bruce D. Varner and the law firm of Varner, Saleson & Dobler, 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 Varner,
Saleson & Dobler 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.
Prior to March 24, 1994, the Company's common stock was owned equally by La
Cadena and Craig. In March 1994, the Company completed the 1994
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 and provided the Company with an
option to acquire Craig's remaining equity in the Company. The 1994
Recapitalization was funded through the offering of the 11% Senior Notes. The
following paragraphs describe the 1994 Recapitalization.
The Company amended its Certificate of Incorporation to provide for two
classes of common stock designated "Common Stock" and "Class A Common Stock,"
and two series of preferred stock designated "Series A Preferred Stock" and
"Series B Preferred Stock." The then existing shares of outstanding common
stock were classified as Common Stock, and holders of such stock were afforded
the right to exchange all such shares into a like number of shares of Class A
Common Stock. La Cadena exchanged its shares of Common Stock for shares of
Class A Common Stock and Craig initially retained its shares of Common Stock
(subject to the Company's right to convert such shares of Common Stock into
shares of Series B Preferred Stock, and subject to the Company's option to
acquire such shares of Common Stock, as described below). For a period of five
years following the 1994 Recapitalization, each share of Class A Common Stock
was entitled to 1.1 votes while each share of Common Stock was entitled to one
vote, thereby giving La Cadena approximately 52% and Craig approximately 48%
of the total voting power of the Company.
The Board of Directors of the Company declared a dividend of $400 per share
on the Common Stock, payable to holders of record at the close of business on
the day following the closing of the 1994 Recapitalization. As a result of the
amendment of the Company's Certificate of Incorporation and the exchange by La
Cadena of its shares of Common Stock for Class A Common Stock, the aggregate
amount of the dividend on the Common Stock amounted to $20.0 million, and the
entire dividend was paid to Craig.
Pursuant to the Option Agreement dated as of September 3, 1993 between the
Company and Craig, as amended (the "Option Agreement"), the Company was given
the right, at its option, for a period of two years from the 1994
Recapitalization, to convert the Common Stock into 693,650 shares of Series B
Preferred Stock. The Company exercised the option effective March 8, 1996.
The Series B Preferred Stock provided for dividends at the rate of 10.5% per
annum through September 2002, increasing to 12% per annum beginning October
2002 and by 100 basis points per year thereafter to a maximum rate of 15% per
annum.
The Option Agreement provided the Company an option to purchase all shares
of the Series B Preferred Stock held by Craig for a purchase price, in cash,
of $69.4 million, plus accrued and unpaid dividends. The Company paid Craig
$14.7 million in consideration of the grant of the option, which amount was
not credited toward the exercise price of the option.
On July 24, 1997, the Company gave notice of exercise of option to redeem
all outstanding shares of the Series B Preferred Stock to Reading. The Company
used a portion of the net proceeds from the issuance and sale of the Old Notes
to redeem the outstanding Series B Preferred Stock.
40
<PAGE>
Under the Option Agreement, holders of the Series B Preferred Stock were
entitled to certain registration rights. In addition, the Option Agreement
provided holders of the Series B Preferred Stock with 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.
The Company entered into a prepaid five year covenant not to compete and a
consulting agreement with Craig, pursuant to which the Company paid Craig $5.0
million at the closing of the 1994 Recapitalization. Additionally, the Company
had been paying an annual consulting fee of $1.5 million. The covenant not to
compete and consulting arrangements with Craig were unique, based upon the
confidential information available to Craig and its experience with, and
relationship to the Company. Accordingly, the Company had no basis to
determine whether comparable services could be obtained from unaffiliated
third parties on similar or more favorable terms. On July 31, 1997, the
Company gave notice to Craig to terminate the Consulting Agreement which
became effective July 31, 1997.
Pursuant to the Option Agreement, at the 1994 Recapitalization closing, the
Company purchased from Craig 72,000 shares of the Company's Series A Preferred
Stock, held by Craig, for a total purchase price of $1.8 million plus accrued
and unpaid dividends of approximately $306,000, and paid approximately $79,000
to Craig as payment of all unpaid interest owing to Craig on a shareholder
note. In addition, the Company purchased from La Cadena 72,000 shares of the
Company's Series A Preferred Stock, held by La Cadena, for a total purchase
price of $1.8 million, plus accrued and unpaid dividends of approximately
$306,000, and paid approximately $79,000 to La Cadena as payment of all unpaid
interest owing to La Cadena on a stockholder note. In September 1993, the
Company issued 40,000 shares of the Company's Series A Preferred Stock to each
of Craig and La Cadena in payment of all principal owing on such notes.
Pursuant to the Second Amended and Restated Stock Agreement dated as of
January 12, 1994 (the "Craig Stock Agreement"), among the Company, Craig, La
Cadena and James J. Cotter, in consideration for a standstill agreement by
Craig, the Company transferred to Craig 311,404 shares of Craig's common stock
owned by the Company at such time following the 1994 Recapitalization, as the
Company determined it was legally entitled to do so under applicable
California law governing distributions to shareholders. Such agreement
resulted in a pre-tax charge to earnings of $4.0 million in the second quarter
of fiscal 1994.
Pursuant to the Amendment to the Agreement of Stockholders of Stater Bros.
Holdings Inc. dated as of September 3, 1993, the Agreement of Stockholders of
Stater Bros. Holdings Inc. dated as of May 10, 1989 among the Company, La
Cadena, Craig and an affiliate of Craig (as amended, the "Stockholders
Agreement") was amended effective as of the 1994 Recapitalization closing to
provide that, among other things: (a) the Stockholders Agreement may be
terminated by any party upon exercise by the Company of its right to convert
the Common Stock into the Series B Preferred Stock as described above, and (b)
certain rights of the stockholders to purchase shares of Common Stock owned by
other stockholders would be suspended until after the expiration of the
Company's right to convert the Common Stock into the Series B Preferred Stock.
Under the Stockholders Agreement, the Company and the holders of the Class A
Common Stock and Common Stock were granted certain rights of first refusal
with respect to transfers of such stock. The Stockholders Agreement was
terminated effective October 15, 1996.
In connection with the 1994 Recapitalization, the Company utilized
approximately $88.9 million of the net proceeds from the 1994 offering to
redeem its 9.8% Senior Notes due 2001, including an estimated $13.4 million
(pre-tax) for a redemption premium associated with the early retirement of
such notes (including accrued interest thereon). In addition, the Company
utilized approximately $12.2 million of the net proceeds of the 1994 offering
to repay certain notes payable secured by real property, and approximately
$9.0 million of the net proceeds of the 1994 offering to repay outstanding
balances owing under the Company's existing capital expenditures credit
facility.
In June 1997, in connection with the Consent Solicitation, the Company
retained La Cadena to provide financial advisory services for a fee of $2.0
million.
41
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DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under an indenture dated July 24, 1997 (the
"Indenture") between the Company and First Trust of New York, National
Association as trustee (the "Trustee"), a copy of which may be obtained from
the Initial Purchaser or the Company upon request. The terms of the New Notes
will include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended, as in
effect on the date of the Indenture (the "TIA"). The New Notes will be subject
to all such terms, and holders of the New Notes ("Holders") are referred to
the Indenture and the TIA for a statement of such terms. The following is a
summary of important terms of the New Notes and the Indenture. For more
complete information regarding the New Notes and the Indenture, reference is
made to the form of the New Notes and the Indenture, copies of which have been
filed as exhibits to the Registration Statement which this Prospectus is a
part and which are incorporated by reference herein. The definitions of
certain capitalized terms used in the following summary are set forth under
"Certain Definitions" below.
GENERAL
The New Notes will be general unsecured obligations of the Company, will
mature on July 1, 2004 (the "Maturity Date"), and will be limited to an
aggregate principal amount of $100.0 million. The New Notes will be issued in
denominations of $1,000 and integral multiples thereof in fully registered
form. The New Notes are exchangeable and transfers thereof will be registrable
without charge therefor, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge in connection
therewith.
The New Notes will accrue interest at the rate per annum shown on the cover
page of this Prospectus from the Issue Date or from the most recent interest
payment date to which interest has been paid or duly provided for, and accrued
and unpaid interest will be payable semi-annually on July 1 and January 1 of
each year beginning January 1, 1998. Interest will be paid to the Person in
whose name the New Note is registered at the close of business on the June 15
or December 15 immediately preceding the relevant interest payment date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months and the actual number of days elapsed.
Initially, the Trustee will act as paying agent and registrar of the New
Notes. The Company may change any paying agent and registrar without notice to
Holders.
When issued, the New Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of
the trading market for the New Notes. See "Risk Factors--Absence of
Established Public Market."
OPTIONAL REDEMPTION
The New Notes will not be redeemable prior to July 1, 2000. Thereafter, the
New Notes will be redeemable, at the option of the Company, in whole or in
part, at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning July 1 of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000........................................................... 104.50%
2001........................................................... 103.00%
2002........................................................... 101.50%
2003........................................................... 100.00%
</TABLE>
In addition, up to $35.0 million aggregate principal amount of the New Notes
will be redeemable at any time on or prior to July 1, 2000 at the option of
the Company from the net proceeds to the Company of one or more Equity
Offerings at a redemption price equal to 109% of the principal amount thereof,
together with
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accrued and unpaid interest, if any, to the redemption date, provided that not
less than $65.0 million aggregate principal amount of the New Notes remains
outstanding immediately after the occurrence of such redemption.
If less than all of the New Notes are to be redeemed, the Trustee shall
select the New Notes or portions thereof to be redeemed pro rata, by lot or by
any other method the Trustee shall deem fair and reasonable; provided,
however, that the New Notes will not be redeemed in amounts less than the
minimum authorized denomination of $1,000. Notice of redemption will be mailed
by first class mail not less than 30 days nor more than 60 days prior to the
scheduled redemption date to each holder of a New Note to be redeemed at its
registered address. On and after the registration date, interest will cease to
accrue on the New Notes or portions thereof called for redemption.
SUBORDINATION
The New Notes are subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all existing and future Senior
Indebtedness. Except with respect to limitations on the aggregate amount of
consolidated Indebtedness that the Company may incur, the Indenture does not
limit the ability of the Company to incur additional Senior Indebtedness or
restrict the ability of the Company to transfer assets to and among its
Subsidiaries (other than Unrestricted Subsidiaries). In the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to make payments on the New Notes only after all
Senior Indebtedness has been paid in full and there may not be sufficient
assets remaining to pay amounts due on the New Notes.
Under certain circumstances, as described below, holders of Senior
Indebtedness may block payments on the New Notes. In addition, all of the
Company's operating assets are owned by Subsidiaries of the Company. Any
claims of the Holders against the assets of Subsidiaries would effectively be
subordinated to all existing and future indebtedness and other liabilities
(including trade and construction payables) of such Subsidiaries.
Upon any payment or distribution of cash, securities or other property to
creditors of the Company in a liquidation (total or partial), reorganization
or dissolution of the Company, whether voluntary or involuntary, or in a
bankruptcy, reorganization, insolvency, receivership, assignment for the
benefit of creditors, marshalling of assets of similar proceeding, the payment
of the principal of, interest on, or other distribution with respect to, the
New Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness. In the
event that (i) any Designated Senior Indebtedness is not paid when due or (ii)
any other default on Designated Senior Indebtedness occurs and in the case of
this clause (ii) the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms, no direct or indirect payment may be
made under the New Notes unless, in either case, (x) such default has been
cured or waived and any such acceleration has been rescinded or (y) such
Designated Senior Indebtedness has been paid in full. In addition, during the
continuance of any other event of default with respect to Designated Senior
Indebtedness that permits acceleration of the maturity thereof, no direct or
indirect payment may be made under the New Notes for a period of 180 days (the
"Payment Blockage Period") commencing on the earlier of (i) the date the
Trustee receives written notice of such default from a representative with
respect to, or the holders of a majority in principal amount of, any issue of
Designated Senior Indebtedness or (ii) if such event of default results from
the acceleration of the New Notes, the date of such acceleration. Not more
than one Payment Blockage Period may be commenced with respect to the New
Notes during any period of 360 consecutive days. In no event will a Payment
Blockage Period extend beyond 179 days from the date the payment upon or in
respect of the New Notes was due, and there must be 180 days in any 360-day
period in which no Payment Blockage Period is in effect as to the Company. For
all purposes of the paragraph, no default or event of default which existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness initiating such Payment
Blockage Period shall be, or be made, the basis for the commencement of a
subsequent Payment Blockage Period by the representative or requisite holders
of such Designated Senior Indebtedness whether or not within a period of 360
consecutive days unless such default or event of default shall have been cured
or waived for a period of not less than 90 consecutive days. The failure to
make a payment pursuant to the New Notes because of the restrictions described
in this paragraph shall not be construed as
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preventing the occurrence of a Default and such restrictions shall not have
any effect on the right to accelerate the maturity of the New Notes.
As of June 29, 1997, after giving effect to the issuance and sale of the Old
Notes and the application of the net proceeds therefrom, the aggregate amount
of outstanding Indebtedness (excluding trade and construction payables) of the
Company and its Subsidiaries was $272.2 million, of which approximately $165.0
million constituted Senior Indebtedness and $7.2 million constituted
Indebtedness of the Subsidiaries. The Company has no indebtedness outstanding
to which the New Notes are senior, and the Company has no plans to issue any
such Indebtedness.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the date of each such occurrence
being the "Change of Control Date"), the Company will promptly notify the
Trustee and the Holders in writing of such occurrence and will make an offer
to purchase (the "Change of Control Offer"), on a business day (the "Change of
Control Payment Date") not later than 45 days following the date notification
of the Change of Control is first given, all New Notes then outstanding at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to such Change of Control Payment Date
(subject to the right of Holders of record on the relevant Interest Record
Date to receive interest due on the relevant Interest Payment Date). Notice of
a Change of Control will be mailed by the Company to the Holders not more than
30 days after any Change of Control Date. The Change of Control Offer is
required to remain open for not less than 30 days, nor more than 45 days, and
until the close of business on any such Change of Control Payment Date.
Failure to make a Change of Control Offer as required will constitute an Event
of Default under the Indenture.
The 11% Senior Notes contain the same change of control provision as the New
Notes. As of June 29, 1997, after giving effect to the sale of the New Notes
offered hereby and application of the net proceeds therefrom, the Company
would not have had sufficient funds available to purchase all the outstanding
New Notes or the 11% Senior Notes pursuant to a Change of Control Offer. In
the event that the Company is required to purchase outstanding New Notes or
the 11% Senior Notes pursuant to a Change of Control Offer, the Company would
need to seek third-party financing to the extent it does not have available
funds to meet its purchase obligations. There can be no assurance that the
Company would be able to obtain such financing. Although after the sale of the
New Notes offered hereby and the application of the net proceeds therefrom,
the Company will not be subject to any other agreement regarding Indebtedness
that expressly prohibits the purchase of the New Notes pursuant to a Change of
Control Offer, it is possible that the Company may enter into an agreement in
the future that would prohibit such purchase.
If a Change of Control Offer is made, the Company will comply with all
tender offer rules under state and federal securities laws, including, but not
limited to, Section 14(e) under the Exchange Act and Rule 14e-1 thereunder, to
the extent applicable to such offer.
FORM OF NEW NOTES
Upon issuance, except as provided below, the New Notes will be represented
by a Global Note. The Global Note representing the New Notes will be deposited
with, or on behalf of, the Depositary and registered in the name of Cede & Co.
as nominee of the Depositary. If (i) the Depositary is at any time unwilling
or unable to continue as Depositary and a successor depositary is not
appointed by the Company within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of New
Notes in certificated form under the Indenture, then upon surrender of the
Global Note, New Notes in such form will be issued to each such person that
the Depositary and its nominee identify as a beneficial owner of the related
New Notes. In addition, subject to certain conditions, any person having a
beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for New Notes in certificated form. Upon any
such issuance, the Trustee is required to register such New Notes in the name
of, and cause the same to be delivered to, such person or persons (or the
nominee of any thereof) in fully registered form. To the extent New Notes in
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definitive form are issued, such New Notes will be issued in denominations of
$1,000 and integral multiples thereof.
Upon the issuance of the Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the New Notes represented by the Global Note to the accounts of
institutions that have accounts with the Depositary ("Participants").
Ownership of beneficial interests in the Global Note will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained
by the Depositary with respect to Participants' interests or by Participants
or by persons that hold through Participants with respect to beneficial
owners' interests. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
ownership limits and such laws may impair the ability to transfer beneficial
interests in the Global Note.
Principal and interest payments on New Notes registered in the name of the
Depositary or its nominee will be made to the Depositary or its nominee, as
the case may be, as the registered owner of the Global Note representing such
New Notes. The Company expects that the Depositary, upon receipt of any
payment of principal or interest in respect of the Global Note, will
immediately credit Participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of the Depositary. The Company also
expects that payments by Participants to owners of beneficial interests in the
Global Note held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such Participants. None of the Company, the
Trustee, any paying agent or any registrar for the New Notes will have the
responsibility or liability for any aspect of the records relating to, or
payment made on account of, beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The initial Depositary with respect to the New Notes will be The Depository
Trust Company, New York, New York ("DTC"). DTC has advised the Company that it
is a limited-purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of its Participants and to facilitate the
clearance and settlement of transactions among its Participants in such
securities through electronic book-entry changes in accounts of the
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC's Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations,
some of whom (and/or their representatives) own DTC. Access to DTC's book-
entry system is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants
may beneficially own securities held by DTC only through Participants.
So long as the Depositary, or its nominee, is the holder of the Global Note,
the Depositary or its nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by the Global Note for all
purposes under the Indenture and the Global Note. Except as set forth above,
owners of beneficial interests in the Global Note will not be entitled to have
New Notes represented by the Global Note registered in their names, will not
receive or be entitled to receive physical delivery of New Notes or the Global
Note and will not be considered the owners or holders thereof under the
Indenture or the Global Note. Accordingly, each person owning a beneficial
interest in the Global Note must rely on the procedures of the Depositary and,
if such person is not a Participant, on the procedures of the Participant
through which such person directly or indirectly owns its interest, to
exercise any rights of a holder under the Indenture or the Global Note.
DTC has informed the Company that under existing DTC policies and industry
practices, if the Company requests any action of holders of the New Notes, or
if any owner of a beneficial interest in the Global Note desires to give any
notice or take any action that a holder is entitled to give or take under the
Indenture or the
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Global Note, DTC would authorize and cooperate with each Participant to whose
account any portion of the New Notes represented by the Global Note is
credited on DTC's books and records to give such notice or take such notice.
Any person owning a beneficial interest in the Global Note who is not a
Participant must rely on any contractual arrangements such person has
directly, or indirectly through the person's immediate financial intermediary,
with a Participant to give such notice or take such action.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness
The Company will not, and will not permit any of its Subsidiaries (other
than any Unrestricted Subsidiary), directly or indirectly, to incur any
Indebtedness, provided that if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence
of such Indebtedness, the Company may incur Indebtedness if, on the date of
the incurrence of such Indebtedness after giving pro forma effect to the
incurrence of such Indebtedness, the Consolidated Fixed Charge Coverage Ratio
of the Company is at least 2.0 to 1.
The foregoing limitations shall not apply to: (i) Indebtedness under a
revolving credit facility or any replacement facility thereof, provided that
Indebtedness under such credit facility or any replacement facility, including
unused commitments, shall not at any time exceed $50.0 million in aggregate
outstanding principal amount; (ii) Indebtedness of the Company and its
Subsidiaries existing on the Issue Date; (iii) Indebtedness of the Company
represented by the 11% Senior Notes and the Notes; (iv) Indebtedness of the
Company and its Subsidiaries incurred in exchange for or the net proceeds of
which are used to extend, refinance, renew, replace, substitute or refund
("Refinance") Indebtedness referred to in clauses (i), (ii) and (iii) above
and (ix) below (the "Refinancing Indebtedness") plus any penalties, fees or
premiums incurred in connection therewith, provided that (A) the principal
amount of such Refinancing Indebtedness shall not exceed the principal amount
of the Indebtedness (including unused commitments) so Refinanced (the
"Existing Debt") as of the date of the proposed incurrence of the Refinancing
Indebtedness, (B) such Refinancing Indebtedness shall have an Average Life
equal to or greater than the Average Life of the Existing Debt, (C) if the
Existing Debt (including the Notes) being Refinanced is pari passu with or
subordinated to the Notes then such Refinancing Indebtedness shall be pari
passu with or at least as subordinated to, as the case may be, the Notes, (D)
the Refinancing Indebtedness has a stated maturity date no earlier than the
Existing Debt as of the date of such proposed Refinancing, and (E) if the
Existing Debt is Indebtedness solely of the Company, such Refinancing
Indebtedness will only be permitted if it is Indebtedness solely of the
Company; (v) Permitted Construction Indebtedness incurred after March 8, 1994
not to exceed $10.0 million in the aggregate at any time outstanding and
designated as Permitted Construction Indebtedness subject to this clause (v)
in an Officer's Certificate delivered to the Trustee; (vi) Indebtedness of the
Company to a Wholly Owned Subsidiary of the Company or by a Wholly Owned
Subsidiary of the Company to the Company or between Wholly Owned Subsidiaries
of the Company; (vii) Indebtedness under Interest Rate Protection Agreements
entered into in the ordinary course of business; (viii) Indebtedness arising
from agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from guarantees of letters of credit, surety bonds or
performance bonds securing any obligations of the Company pursuant to such
agreements, incurred or assumed in connection with the disposition of any
business, assets or Subsidiary of the Company, other than guarantees or
similar credit support by the Company of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary for the
purpose of financing such acquisition, provided that the maximum aggregate
liability in respect of all such Indebtedness described in this clause shall
not exceed the net proceeds actually received in connection with any such
disposition; (ix) Indebtedness to secure workers' compensation and other
insurance coverages, not to exceed the minimum amount required by the
Company's insurance carriers or applicable regulatory agencies and (x)
Indebtedness to La Cadena incurred by the Company in connection with a
Qualified La Cadena Investment; provided, however, that the repayment of
principal with respect to, and the payment of interest with respect to,
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any such Qualified La Cadena Investment constituting Indebtedness shall be
subject to the limitation on "Restricted Payments and Investments."
Limitation on Restricted Payments and Investments
The Company will not, and will not permit or cause any of the Subsidiaries
(other than any Unrestricted Subsidiary), directly or indirectly, to make any
Restricted Payment or Investment after the Issue Date unless, at the time of
such proposed Restricted Payment or Investment, and on a pro forma basis
immediately after giving effect thereto:
(A) no Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; and
(B) the aggregate amount expended for all Restricted Payments and
Investments, without duplication, subsequent to June 30, 1997 would not
exceed the sum of:
(1) 50% of the aggregate Consolidated Net Income of the Company (or
if such Consolidated Net Income is a loss, minus 100% of such loss)
earned on a cumulative basis during the period beginning on June 30,
1997 and ending on the last date of the Company's fiscal quarter
immediately preceding such proposed Restricted Payment or Investment;
plus
(2) 100% of the aggregate Net Equity Proceeds received by the Company
from any Person (other than a Subsidiary) from the issuance and sale
subsequent to June 30, 1997 of Qualified Capital Stock (excluding (x)
any Qualified Capital Stock paid as a dividend on any Capital Stock of
the Company or of any Subsidiary or as interest on any Indebtedness of
the Company or of any Subsidiary, (y) the issuance of Qualified Capital
Stock upon the conversion of, or in exchange for, any Capital Stock of
the Company or of any Subsidiary and (z) any Qualified Capital Stock of
the Company with respect to which the purchase price thereof has been
financed directly or indirectly using funds (i) borrowed from the
Company or any Subsidiary, unless and until and to the extent such
borrowing is repaid, or (ii) contributed, extended, guaranteed or
advanced by the Company or any Subsidiary (including, without
limitation, in respect of any employee stock ownership or benefit
plan)); plus
(3) $5.0 million; and
(C) the Company shall be able to incur (assuming a market rate of
interest with respect thereto) at least $1.00 of additional Indebtedness
under the first paragraph of "Limitation on Indebtedness" above.
The foregoing provisions of this covenant will not prevent (a) payment of
any dividend within 60 days after the date of its declaration if at such date
of declaration the payment of such dividend would comply with the provisions
set forth above provided that such dividend will be deemed to have been paid
as of its date of declaration for the purposes of this covenant, (b) if no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof, the purchase, redemption, retirement or
acquisition of any shares of Capital Stock of the Company or of any Subsidiary
or any Indebtedness of the Company that is pari passu with or subordinated to
the Notes solely with or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary or by a Subsidiary to one of its
subsidiaries) of shares of Qualified Capital Stock of the Company or of a
Subsidiary and neither such purchase, redemption, retirement or acquisition
nor the proceeds of any such sale will be included in any computation made
under clause (B)(2) above, (c) payments pursuant to usual and customary
indemnification arrangements for directors and officers of the Company, any
Subsidiary, Santee LLC or Santee (d) payment to Craig of up to $69,365,000
plus accrued and unpaid dividends from the proceeds of the sale of the Old
Notes to repurchase the outstanding Series B Preferred Stock, (e) the making
of Permitted Investments, (f) the making of Investments in any Subsidiary
(other than an Unrestricted Subsidiary) (including any Person who becomes a
Subsidiary as a result of any Investment, other than an Unrestricted
Subsidiary) by the Company or by any other Subsidiary, provided that any
Indebtedness evidencing such Investment is not subordinated to any
Indebtedness or other obligation of such Subsidiary, (g) the making of
Investments in the Company by any Subsidiary, provided that any Indebtedness
evidencing such Investment is
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subordinated and junior to the Notes, (h) the making of Investments of the
type described in clauses (i) through (iii) of the second paragraph under
"Limitation on Sale of Assets", (i) the making of Investments in any Person,
provided that the consideration paid by the Company or a Subsidiary for such
Investment consists solely of Qualified Capital Stock, (j) payment to Texas
Eastern of dividends on the Markets Preferred Stock as in effect on the Issue
Date, (k) the making of Investments in Santee LLC of up to $25.0 million, (l)
the making of Investments in Santee LLC for the purpose of purchasing
additional limited liability company interests in Santee LLC with the proceeds
of a Qualified La Cadena Investment, (m) the payment to La Cadena of an amount
equal to the lesser of the amount of (i) the sum of (X) any Qualified
La Cadena Investment, plus (Y) an amount equal to a commercially reasonable
rate of interest on such Qualified La Cadena Investment to the extent that the
net proceeds received by Stater Bros. Markets from the sale or disposition of
that portion of Stater Bros. Markets' interest in Santee LLC which was
acquired with the proceeds from such Qualified La Cadena Investment exceeds
the original amount of the Qualified La Cadena Investment; and (ii) net
proceeds received by Stater Bros. Markets from the sale or disposition of that
portion of Stater Bros. Markets' interest in Santee LLC which was acquired
with the proceeds from such Qualified La Cadena Investment, and (n) the
payment of a financial advisory fee of up to $2.0 million to La Cadena
substantially contemporaneously with the effective date of the 1997 amendments
to the Senior Note Indenture; provided that in each such case of clauses (f)
through (j) above, no Default or Event of Default has occurred and is
continuing or would result therefrom. The amounts expended or received, as
applicable, pursuant to clause (a) will be included, and clauses (b) through
(n) will be excluded, in computing the amounts available for Restricted
Payments and Investments for purposes of the immediately preceding paragraph.
For purposes of this covenant a distribution to holders of the Company's
Capital Stock of (i) shares of Capital Stock of any Subsidiary or (ii) other
assets of the Company, without, in either case, the receipt of equivalent
consideration therefor shall be deemed to be the equivalent of a cash dividend
equal to the excess of the Fair Market Value of the shares or other assets
being so distributed at the time of such distribution over the consideration,
if any, received therefor.
Limitation on Sale of Assets
The Company will not, and will not permit any of its Subsidiaries (other
than any Unrestricted Subsidiary) to, consummate any Asset Sale (other than a
Qualified Santee LLC Interest Sale) unless (a) such Asset Sale is for at least
Fair Market Value and (b) at least 85% of the consideration therefrom received
by the Company or such Subsidiary is in the form of cash, provided that any
non-cash consideration that becomes Net Cash Proceeds will thereafter be
subject to the provisions of the next paragraph, provided, further, that any
sale by Stater Bros. Markets of its interest in Santee LLC pursuant to the
terms of the limited liability company agreement governing Santee LLC shall
not be deemed to be an Asset Sale for purposes of this covenant.
Upon the date of consummation of any Asset Sale which, taken individually or
together with all Asset Sales since the Issue Date, results in the receipt of
Net Cash Proceeds in excess of $5.0 million, such Net Cash Proceeds and all
Net Cash Proceeds from all Asset Sales consummated concurrently therewith or
consummated thereafter (such first consummation date and each such date
thereafter a "Consummation Date") shall be applied by the Company within 18
months of the relevant Consummation Date (or, in the event of a Qualified
Santee LLC Interest Sale, within 24 months of the relevant Consummation Date)
at its election to either: (i) investments in assets or businesses in the same
line of business as the Company or such Subsidiary; (ii) the repayment of any
Indebtedness that is secured by or incurred to construct such assets; (iii)
the repayment of Senior Indebtedness; or (iv) a combination of payment and
investment permitted by the foregoing clauses (i), (ii) and (iii). On the
earlier of the day after the 18 month period following a Consummation Date
(or, in the event of a Qualified Santee LLC Interest Sale, the day after the
24 month period following a Consummation Date) or such date as the Board of
Directors of the Company or of such Subsidiary determines (as evidenced by a
resolution of the Board of Directors) not to apply the Net Cash Proceeds
relating to such Consummation Date as set forth in clauses (i), (ii) and (iii)
of the preceding sentence (each, an "Asset Sale Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which has not been applied on or before
such Asset Sale Offer Trigger Date as
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permitted in clauses (i), (ii) and (iii) of the preceding sentence (each an
"Asset Sale Offer Amount") shall be applied by the Company or such Subsidiary
to make an offer to purchase (the "Asset Sale Offer") on a date (the "Asset
Sale Offer Payment Date") not less than 30 nor more than 60 days following the
applicable Asset Sale Offer Trigger Date, from all Holders on a pro rata
basis, that amount of Notes equal to the Asset Sale Offer Amount at a price
equal to 100% of the aggregate principal amount of the Notes to be
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
repurchase. Notwithstanding the foregoing, if an Asset Sale Offer Amount is
less than $5.0 million the application of the Net Cash Proceeds constituting
such Asset Sale Offer Amount to an Asset Sale Offer may be deferred until such
time as such Asset Sale Offer Amount plus the aggregate amount of all Asset
Sale Offer Amounts arising subsequent to the Asset Sale Offer Trigger Date
relating to such initial Asset Sale Offer Amount from all Asset Sales by the
Company and its Subsidiaries aggregate at least $5.0 million at which time the
Company or said Subsidiary shall apply all Net Cash Proceeds constituting all
Asset Sale Offer Amounts that have been so deferred to make an Asset Sale
Offer (the first date the aggregate of all such deferred Asset Sale Offer
Amounts is equal to $5.0 million or more shall be deemed to be an "Asset Sale
Offer Trigger Date"). Pending application pursuant to an Asset Sale Offer, the
Company shall invest such Asset Sale Offer Amounts in Permitted Investments.
Each Asset Sale Offer will be mailed to the record Holders as shown on the
register of Holders within 10 days following the Asset Sale Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures
reasonably determined by the Company. Upon receiving notice of the Asset Sale
Offer, Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. Tenders by Holders will be revocable
until 4 P.M., New York City time, on the Business Day immediately preceding
the Asset Sale Offer Payment Date. To the extent Holders properly tender the
New Notes in an amount exceeding the Asset Sale Offer Amount, the New Notes of
tendering Holders will be repurchased on a pro rata basis (based on amounts
tendered). An Asset Sale Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law. For purposes of this
covenant, the Company will not act as paying agent.
If an offer is made to repurchase the Notes pursuant to an Asset Sale Offer,
the Company will and will cause its Subsidiaries to comply with all tender
offer rules, including but not limited to, Section 14(e) under the Exchange
Act and Rule 14e-1 thereunder, to the extent applicable to such offer.
Limitation on Liens
The Company will not, and will not permit any of its Subsidiaries (other
than any Unrestricted Subsidiary) to, create, incur, assume or suffer to exist
any Liens securing Indebtedness, except for (a) any Liens which may be granted
to secure the Notes; (b) Liens securing Senior Indebtedness or Indebtedness
that is incurred pursuant to clause (i) of the second paragraph of "Limitation
on Indebtedness"; (c) Liens securing Indebtedness that is incurred in
accordance with the Indenture and that is pari passu with the Notes; provided
that the Notes are secured on an equal and ratable basis to such Liens;
(d) Liens securing Indebtedness incurred in accordance with the Indenture and
that is subordinated to the Notes; provided that the Notes are secured by
Liens ranking prior to such Liens; (e) Liens in respect of Refinancing
Indebtedness; provided that the terms of such Liens in respect of such
Refinancing Indebtedness are not less favorable to the Holders than terms of
the Liens securing the Existing Debt being Refinanced and do not extend to or
cover any property or assets of the Company or of any of the Subsidiaries not
securing such Existing Debt; (f) Liens in respect of Acquired Indebtedness
permitted to be incurred in accordance with the Indenture; provided that such
Liens in respect of such Acquired Indebtedness do not extend to or cover any
property or assets of the Company or any Subsidiary other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or such Subsidiary;
(g) Liens securing Indebtedness of the Company or a Subsidiary, which
Indebtedness shall not exceed $15.0 million; and (h) Permitted Liens.
Limitation on Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Subsidiaries (other
than any Unrestricted Subsidiary), directly or indirectly, to create or suffer
to exist or allow to become effective any encumbrance or restriction of
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any kind (i) on the ability of any Subsidiary (other than any Unrestricted
Subsidiary) to (a) pay dividends, in cash or otherwise, or make other payments
or distributions on its Capital Stock or any other equity interest or
participation in, or measured by, its profits, owned by the Company or any
Subsidiary or any of their respective subsidiaries, or make payments on any
Indebtedness owed to the Company or any Subsidiary or any of their respective
subsidiaries, (b) make loans or advances to the Company or any of its
Subsidiaries, (c) transfer any of their respective property to the Company or
any of its Subsidiaries or (ii) on the ability of the Company or any of its
Subsidiaries (other than any Unrestricted Subsidiary) to receive or retain any
such (x) dividends, payments or distributions, (y) loans or advances or (z)
transfer of property (any such restriction being referred to herein as a
"Payment Restriction"), except for such encumbrances or restrictions existing
under or by reason of (A) agreements in effect as of the Issue Date, (B)
applicable laws, (C) the Indenture or the Senior Note Indenture, (D) customary
provisions restricting subletting or assignment of any lease governing a
leasehold interest of the Company or any of the Subsidiaries, (E) Acquired
Indebtedness incurred in accordance with the Indenture, provided that such
encumbrance or restriction in respect of such Acquired Indebtedness is not
applicable to any Person, or the property of any Person, other than the
Person, or the property of the Person, so acquired whether or not such
Acquired Indebtedness was incurred in connection with or anticipation of such
acquisition, (F) the Revolving Credit Facility or (G) any agreement effecting
a renewal, refunding, refinancing or extension of Indebtedness referred to in
clause (A), (E) or (F) above, provided that the provisions contained in such
renewal, refunding, refinancing or extension relating to such encumbrance or
restriction are no more restrictive in any material respect than the
provisions contained in the agreement that is the subject thereof.
Limitation on Issuance and Sale of Capital Stock of Subsidiaries
The Company will not permit any Subsidiary (other than any Unrestricted
Subsidiary) to issue any shares of its Capital Stock to any Person other than
the Company or one or more of its Wholly Owned Subsidiaries (other than any
Unrestricted Subsidiary) nor will the Company permit any Person (other than
the Company or one or more of its Wholly Owned Subsidiaries) (other than any
Unrestricted Subsidiary) to own or hold any such Capital Stock, other than the
Markets Preferred Stock held by Texas Eastern Corporation as of the Issue
Date. The Company will not and will not permit any Subsidiary (other than any
Unrestricted Subsidiary) to transfer, sell or otherwise dispose of any Capital
Stock of any Subsidiary to any Person (other than to the Company or a Wholly
Owned Subsidiary that is not an Unrestricted Subsidiary) unless (i) such
transfer, sale or other disposition is of all the Capital Stock of such
Subsidiary owned by the Company or any Subsidiary and (ii) the Net Cash
Proceeds from such transfer, sale or other disposition are applied in
accordance with "Limitation on Sale of Assets."
Limitation on Transactions with Related Persons
The Company will not, nor will it permit any of its Subsidiaries (other than
any Unrestricted Subsidiary) to (a) sell, lease, transfer or otherwise dispose
of any of its property to, (b) purchase any property from, (c) make any
Investment in, or (d) enter into or amend any contract, agreement or
understanding with or for the benefit of, a Related Person of the Company or
any Subsidiary (other than the Company or any such Subsidiary (other than any
Unrestricted Subsidiary) in which no Related Person (other than the Company or
a Wholly Owned Subsidiary (other than any Unrestricted Subsidiary) of the
Company) owns, directly or indirectly, an equity interest) (each a "Related
Person Transaction"), other than Related Person Transactions that are on terms
(which terms are in writing) that are fair and reasonable to the Company or
the Subsidiary and that are no less favorable to the Company or such
Subsidiary than those that could be obtained in a comparable arm's length
transaction by the Company or such Subsidiary from an unrelated party as
determined reasonably and in good faith by the Board of Directors of the
Company; provided that if the Company or any Subsidiary enters into a Related
Person Transaction or series of Related Person Transactions involving or
having an aggregate value of more than $1.0 million such Related Person
Transaction shall, prior to the consummation thereof, have been approved by a
majority of the independent directors of the Company. The foregoing
restrictions shall not apply to (a) any transactions between Wholly Owned
Subsidiaries (other than any Unrestricted Subsidiaries) of the Company, or
between the Company and any Wholly Owned Subsidiary (other than any
Unrestricted Subsidiary) of the
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Company, if such transaction is not otherwise prohibited by the terms of the
Indenture, (b) any payments or purchases permitted by the "Limitation on
Restricted Payments and Investments" covenant, (c) any reasonable and
customary regular fees to directors of the Company, (d) any transactions
contemplated by the Santee Documents; provided that such transactions are not
otherwise prohibited by the Indenture and (e) payment of a financial advisory
fee of up to $2.0 million to La Cadena substantially contemporaneously with
the effective date of the 1997 amendments to the Senior Note Indenture.
Restriction on Layering Debt
The Company will not incur any Indebtedness that is subordinate or junior in
right of payment to Senior Indebtedness and senior in any respect in right of
payment to the Notes.
REPORTS
So long as any Note is outstanding, the Company will file with the
Commission and, within 15 days after such reports were due to be filed with
the Commission or would be due to be filed with the Commission if the Company
then had securities registered under the Exchange Act, file with the Trustee
and mail or cause the Trustee to mail to the Holders at their addresses as set
forth in the register of the New Notes, copies of the annual reports and of
the information, documents and other reports which the Company is required to
file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
or that the Company would be required to file with the Commission if the
Company then had a class of securities registered under the Exchange Act. In
addition, the Company shall cause its annual report to stockholders and any
quarterly or other financial reports furnished to its stockholders generally
to be filed with the Trustee and mailed, no later than the date such materials
are mailed or made available to the Company's stockholders, to the Holders at
their addresses as set forth in the register of New Notes.
MERGER, CONSOLIDATION, ETC.
The Company will not, in a single transaction or series of related
transactions, consolidate or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets
to, any Person or adopt a Plan of Liquidation unless: (i) either (1) the
Company shall be the surviving or continuing corporation or (2) the Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or the Person that acquires by conveyance, transfer or lease the
properties and assets of the Company substantially as an entirety or in the
case of a Plan of Liquidation, the Person to which assets of the Company have
been transferred (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, and premium, if
any, and interest on all of the Notes and the performance of every covenant of
the Notes and the Indenture on the part of the Company to be performed or
observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (y) above (including giving effect to any
Indebtedness (including Acquired Indebtedness) incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company
(in the case of clause (1) of the foregoing clause (i)) or such Person (in the
case of clause (2) thereof) (a) shall have a Consolidated Net Worth
(immediately after the transaction but prior to any purchase accounting
adjustments relating to such transaction) equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction
and (b) shall be permitted to incur (assuming a market rate of interest with
respect thereto) at least $1.00 of additional Indebtedness under the first
paragraph of "Limitation on Indebtedness" above, provided that this clause
(ii) shall not apply if the purpose of such transaction is solely to change
the jurisdiction of incorporation of the Company; (iii) immediately before and
after giving effect to such transaction and the assumption contemplated by
clause (y) above (including giving effect to any Indebtedness (including
Acquired Indebtedness) incurred or anticipated to be incurred in connection
with or in respect of the transaction) no Default or Event of Default shall
have occurred or be continuing or shall occur as a consequence thereof;
(iv) the Company or such Person shall have
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delivered to the Trustee (A) an Officers' Certificate and an Opinion of
Counsel (which counsel shall not be in-house counsel of the Company), each
stating that such consolidation, merger, conveyance, transfer or lease or Plan
of Liquidation and, if a supplemental indenture is required in connection with
such transaction, such supplemental indenture, comply with this provision of
the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied and (B) a certificate from the Company's
independent certified public accountants stating that the Company has made the
calculation required by clause (ii) above in accordance with the terms of the
Indenture; and (v) neither the Company nor such Person, as the case may be,
would thereupon become obligated with respect to any Indebtedness (including
Acquired Indebtedness), nor any of its property become subject to any lien,
unless the Company or such Person, as the case may be, could incur such
Indebtedness (including Acquired Indebtedness) or create such lien under the
Indenture (giving effect to such Person being bound by all the terms of the
Indenture).
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
a. default in the payment of principal of the Notes when due at maturity,
upon repurchase, upon acceleration or otherwise, including, without
limitation, failure of the Company to repurchase the Notes duly tendered
for purchase following a Change of Control or an Asset Sale Offer;
b. default in the payment of any installment of interest on the Notes
when due and continuance of such Default for more than 30 days;
c. the Company or any Subsidiary (other than any Unrestricted Subsidiary)
fails to observe, perform or comply with any of the provisions described
under "Change of Control," and "Merger, Consolidation, Etc." above;
d. default (other than a default set forth in clauses (a), (b) and (c)
above) in the performance, or breach, of any other covenant or warranty of
the Company in the Indenture or the Notes and failure to remedy such
default or breach within a period of 60 days after written notice from the
Trustee or the Holders of at least 25% in aggregate principal amount of the
then Notes;
e. failure to pay at maturity or default on any other Indebtedness,
whether outstanding on the Issue Date or thereafter, of the Company or any
Subsidiary (other than any Unrestricted Subsidiary) if either (x) such
default results from the failure to pay principal of, or premium, if any,
or interest on, such Indebtedness when due in excess of $5.0 million or (y)
as a result of such default, the maturity of such Indebtedness has been
accelerated prior to its scheduled maturity, and the principal amount of
such Indebtedness, together with the principal amount of any other such
Indebtedness which has not been paid at maturity or is in default, or the
maturity of which has been so accelerated, aggregates $5.0 million or more;
f. the entry by a court of one or more judgments or orders against the
Company or any Subsidiary or any of their respective properties in an
aggregate amount in excess of $2.0 million and that are not covered by
insurance underwritten by third parties, which judgments or orders have not
been vacated, discharged, satisfied or stayed pending appeal within 60 days
from the entry thereof; or
g. certain events of bankruptcy, insolvency, foreclosure or
reorganization involving the Company or any Subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(g) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in aggregate
principal amount of the then outstanding Notes may declare the unpaid
principal of and accrued and unpaid interest on, all the Notes then
outstanding to be due and payable, by a notice in writing to the Company (and
to the Trustee, if given by Holders) and upon such declaration such principal
amount, and accrued and unpaid interest will become immediately due and
payable, notwithstanding anything contained in the Indenture or the Notes to
the contrary. If an Event of Default specified in clause (g) above with
respect to the
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Company occurs, all unpaid principal of and accrued and unpaid interest on,
the Notes then outstanding will ipso facto become due and payable without any
declaration or other act on the part of the Trustee or any Holder.
At any time after declaration of acceleration with respect to the Notes has
been made and before a judgment or decree for payment of the money due has
been obtained by the Trustee or the Holders, where applicable, the Holders of
a majority in aggregate principal amount of the then outstanding Notes, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all overdue installments of interest
on all the Notes, (ii) the principal of any Notes that have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate or rates prescribed therefor in the Notes, (iii) to the extent that
payment of such interest is lawful, interest on the defaulted interest at the
rate or rates prescribed therefor in the Senior Subordinated Notes, and (iv)
all money paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agent and counsel and other advisors; and (b) all Defaults and Events of
Default, other than the non-payment of the principal of Notes that have become
due solely by such declaration of acceleration, have been cured or waived as
provided in the Indenture. No such rescission will affect any subsequent
Default or impair any right consequent thereon.
No Holder will have any right to institute any proceeding, judicial or
otherwise, with respect to the Indenture, or for the appointment of a receiver
or trustee or for any other remedy under the Indenture, unless (a) such Holder
has previously given notice to the Trustee of a continuing Event of Default,
(b) the Holders of not less than 25% in aggregate principal amount of the then
outstanding Notes have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
under the Indenture, (c) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request, (d) the Trustee for 30 days after
its receipt of such notice, request and offer of indemnity has failed to
institute any such proceeding, and (e) no direction inconsistent with such
written request has been given to the Trustee during such 30-day period by the
Holders of a majority in principal amount of the outstanding Notes.
Each Holder will have the right, which is absolute and unconditional, to
receive payment of the principal of and interest on, such Note on the stated
maturity thereof and to institute suit for the enforcement of any such
payment, and such right may not be impaired without the consent of such
Holder.
The Holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on such Trustee, provided that (a)
such direction is not in conflict with any rule of law or with the Indenture
and (b) the Trustee may take any other action it deems proper that is not
inconsistent with such direction.
The Company is required to give to the Trustee annually within 120 days
after the end of each fiscal year a statement regarding compliance with the
Indenture, and the Company is required upon becoming aware of any Default or
Event of Default, to deliver to the Trustee a statement specifying such
Default or Event of Default.
AMENDMENTS, MODIFICATIONS AND WAIVERS
The Indenture may be amended or modified or rights thereunder may be waived
with the consent of Holders of at least a majority of the principal amount of
Notes then outstanding, provided that, without the consent of each Holder
affected thereby, no such amendment, modification or waiver may:
a. reduce the percentage in outstanding aggregate principal amount of the
Notes the Holders of which must consent to an amendment, supplement or
waiver of any provision of the Indenture or the Notes;
b. reduce the rate of or change the time for payment of interest on any
Note;
c. reduce the aggregate principal amount outstanding of or change the
fixed maturity of any Note;
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d. waive a default in the payment of the principal of, premium, if any,
or interest on, or an offer to purchase required under the Indenture with
respect to, any Note (except a rescission of acceleration of the Notes and
a waiver of the payment default that resulted from such acceleration);
e. make the principal of or interest on any Note payable in money other
than that stated in the Note;
f. amend, change or modify the obligation of the Company to make and
consummate a Change of Control Offer in the event of a Change of Control or
to make and consummate the Asset Sale Offer with respect to any Asset Sale
or modify any of the provisions or definitions with respect thereto; or
g. modify any of the provisions relating to amendments or modifications
of the Indenture requiring the consent of Holders or relating to the waiver
of past Events of Default or certain covenants or waive any default in
payment in respect of the Notes or impair the right to institute suit for
the enforcement of payment of the Notes.
Notwithstanding the foregoing, from time to time, the Company, when
authorized by a resolution of its Board of Directors, and the Trustee may,
without the consent of the Holders of any outstanding Notes, amend, waive or
supplement the Indenture or the Notes for certain specified purposes,
including, among other things, (i) curing ambiguities, defects or
inconsistencies, (ii) complying with the requirements of the SEC in order to
effect or maintain the qualification of the Indenture under the TIA or (iii)
making any change that does not adversely affect the rights of any Holder;
provided, however, that in the case of a change pursuant to clauses (i) or
(iii) of this sentence, the Company has delivered to the Trustee an Opinion of
Counsel stating that such change does not adversely affect the rights of any
Holder.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Indenture provides that the Company may discharge all of its obligations
in respect of the Notes, or certain of its obligations under "Certain
Covenants," if (i) all Notes previously authenticated and delivered have been
delivered to the Trustee for cancellation or the Company has paid or caused to
be paid all sums payable by it thereunder or (ii) the Company has irrevocably
deposited or caused to be deposited with the Trustee and conveyed all right,
title and interest for the benefit of the Holders of such Notes, under the
terms of an irrevocable trust agreement in form and substance satisfactory to
the Trustee, as trust funds solely for the benefit of the Holders for that
purpose, money and/or United States government obligations maturing as to
principal and interest in such amounts and at such times as are sufficient
without consideration of any reinvestment of such interest to pay principal,
premium, if any, and interest on such outstanding Notes at maturity to pay all
remaining Indebtedness on the Notes; provided, that among other things, the
Company will have delivered to the Trustee: (a) either (x) a ruling directed
to the Trustee from the Internal Revenue Service to the effect that the
Holders of the Notes will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option under
the defeasance provision of the Indenture and will be subject to federal
income tax on the same amount and in the same manner and at the same times as
exercised or (y) an opinion of counsel to the same effect as the ruling
described in the foregoing clause (x) accompanied by a ruling to that effect
published by the Internal Revenue Service, unless there has been a change in
the applicable federal income tax law since the date of the Indenture such
that such a ruling is no longer required, (b) an opinion of counsel to the
effect that the Company's exercise of its option under this paragraph will not
result in any of the Company, the Trustee or the trust created by the
Company's deposit of funds pursuant to this provision becoming or being deemed
to be an "investment company" under the Investment Company Act of 1940, as
amended, and (c) an opinion of counsel to the effect that after the passage of
90 days following deposit, the trust funds will not be subject to Section 547
of the United States Bankruptcy Code; and provided, further, that no Event of
Default (and no event that, with the passing of time or the giving of notice,
or both, would constitute an Event of Default) shall have occurred and be
continuing on the date of such deposit. Certain obligations of the Company
under the Indenture and the Notes will remain in full force and effect until
all outstanding Notes have been paid in full.
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GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers as are vested in it by the
Indenture, and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions, provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
The Indenture also provides that the Company shall indemnify the Trustee,
paying agent and registrar and their agents and advisors for certain claims
made against, or certain liabilities incurred by, them in connection with the
performance of the duties under the Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person merged with or into or
became a Subsidiary of such specified Person or assumed in connection with the
acquisition of assets from such other Person including, without limitation,
Indebtedness of such other Person incurred in connection with or in
anticipation of such other Person being merged with or into or becoming a
Subsidiary of such specified Person or such acquisition.
"Affiliate" means, when used with reference to the Company or another
Person, any Person directly or indirectly controlling, controlled by, or under
direct or indirect common control with, the Company or such other Person, as
the case may be, or any Person who beneficially owns, directly or indirectly,
5% or more of the equity interests of such Person or warrants, options or
other rights to acquire or hold more than 5% of any class of equity interests
of such Person. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct or cause the
direction of management or policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Sale" means any sale, lease, transfer, exchange or other disposition
(or series of related sales, leases, transfers, exchanges or dispositions),
including, without limitation, dispositions pursuant to merger, consolidation
or sale and leaseback transactions, of (a) shares of Capital Stock of a
Subsidiary, whether by such Subsidiary or another Person or (b) any other
assets of the Company or any assets of the Subsidiaries outside the ordinary
course of business of the Company or such Subsidiary.
"Associate" of, or a person "associated" with, any person, means (i) any
trust or other estate in which such person has a substantial beneficial
interest or as to which such person serves as trustee or in a similar
fiduciary capacity and (ii) any relative or spouse of such person, or any
relative of such spouse, who has the same home as such person.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from such date to the date of each
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successive scheduled principal payment of such Indebtedness multiplied by (ii)
the amount of such principal payment by (b) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests (partnership or otherwise), participations, rights in, or other
equivalents (however designated and whether voting or non-voting) of, such
Person's capital stock, including each class of common or preferred stock of
such Person, whether outstanding on the Issue Date or issued after the Issue
Date, and any and all rights, warrants or options exchangeable for or
convertible into such capital stock or Capital Stock (but excluding any debt
security that is exchangeable for or convertible into such capital stock).
"Capitalized Lease Obligation" means obligations under a lease that are
required to be classified and accounted for as a capital lease obligation
under GAAP and, for purposes of the Indenture, the amount of such obligations
at any date shall be the capitalized amount of such obligations at such date,
determined in accordance with such principles.
"Change of Control" means the occurrence of one or more of the following
events (whether or not approved by the Board of Directors): (a) an event or
series of events by which any Person or other entity or group of Persons or
other entities acting in concert as determined in accordance with Section
13(d) of the Exchange Act (a "Group of Persons") (other than La Cadena)
together with its or their Affiliates and Associates shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated
purchases, merger, consolidation or otherwise (i) be or become the beneficial
owner (within the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act,
whether or not applicable, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time) of 50% or more of the combined voting power of the then
outstanding Voting Stock of the Company, or (ii) have the ability to elect,
directly or indirectly, a majority of the members of the Board of Directors of
the Company or other equivalent governing body thereof, (b) the stockholders
of the Company shall approve any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of the Indenture), (c) a majority of the Board of Directors of the
Company consists of persons other than Continuing Directors or (d) the direct
or indirect sale, assignment, lease, exchange, disposition or other transfer,
in one transaction or a series of related transactions, of all or
substantially all of the property or assets of the Company to any Person or
Group of Persons together with any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Indenture).
"Consolidated EBITDA" for any person means for any period for which it is to
be determined the sum of, without duplication, the amounts for such period,
taken as a single accounting period, of (i) Consolidated Net Income; and (ii)
to the extent consolidated Net Income has been reduced thereby, (A)
Consolidated Tax Expense of such Person paid or accrued in accordance with
GAAP for such period; (B) Consolidated Interest Expense of such Person for
such period; and (C) depreciation, depletion and amortization expenses
(including, without limitation, amortization of capitalized debt issuance
costs) and other non-cash expenses (other than any non-cash expense which
requires the accrual of or a reserve for cash charges for any future period)
of such Person and its subsidiaries for such period, less the amount of
consolidated non-cash items increasing Consolidated Net Income for such
period, all as determined on a consolidated basis in conformity with GAAP
consistent with those applied in the preparation of the audited financial
statements of the Company and its Consolidated Subsidiaries.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of (a) the aggregate amount of Consolidated EBITDA of such
Person for the four full fiscal quarters ending on or immediately prior to the
date of the transaction (the "Transaction Date") giving rise to the need to
calculate the Consolidated Fixed Charge Coverage Ratio (such four full fiscal
quarter period being referred to herein as the "Four Quarter Period") to (b)
the aggregate Consolidated Fixed Charges of such Person for such Four Quarter
Period. For purposes of this definition, if the Transaction Date occurs prior
to the first anniversary of the Issue Date, Consolidated EBITDA and
Consolidated Fixed Charges shall be calculated, in the case of the Company,
after giving effect on a pro forma basis as if the issuance of the Old Notes
and the application of the net proceeds
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therefrom occurred on the first day of the Four Quarter Period. In addition to
and without limitation of the foregoing, for purposes of this definition,
Consolidated EBITDA and Consolidated Fixed Charges shall be calculated after
giving effect on a pro forma basis for the period of such calculation to (i)
the incurrence or retirement, as the case may be, of any Indebtedness
(including Acquired Indebtedness) of such Person or any of its subsidiaries
during the period commencing on the first day of the Four Quarter Period to
and including the Transaction Date (the "Reference Period"), including,
without limitation, the incurrence of the Indebtedness giving rise to the need
to make such calculation, as if such incurrence or retirement, as the case may
be, occurred on the first day of the Reference Period and (ii) the
Consolidated EBITDA during the Reference Period attributable to any acquired
or divested Person, business, property or asset, provided that with respect to
any such acquisition, only to the extent the EBITDA of such Person is
otherwise includable in the referent Person's Consolidated EBITDA, as if such
transaction occurred on the first day of the Reference Period. If the Person
for whom this ratio is being calculated or any of its subsidiaries directly or
indirectly guarantees Indebtedness of a third person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness as of the first day of the Reference
Period. Furthermore, in calculating "Consolidated Fixed Charges" for purposes
of determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio," (1) interest on Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; (2) if interest on any Indebtedness actually incurred on the
Transaction Date may be optionally determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered rate or
other rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period; and (3)
notwithstanding the foregoing, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements
relating to interest swap agreements, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum of, without duplication, the amounts for such period, taken as
a single accounting period, of (i) Consolidated Interest Expense; and (ii) the
aggregate amount of all dividends on Preferred Stock of such Person and its
Consolidated Subsidiaries, whether in cash or otherwise (except dividends
payable in shares of Qualified Capital Stock) declared or paid during such
period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense of such Person and its
Consolidated Subsidiaries for such period, on a consolidated basis, as
determined in accordance with GAAP, including all amortization of original
issue discount, the interest component of Capitalized Lease Obligations, net
cash costs under all Interest Rate Protection Agreements (including
amortization of fees), all capitalized interest, the interest portion of any
deferred payment obligations for such period and cash contributions to any
employee stock ownership plan to the extent such contributions are used by
such employee stock ownership plan to pay interest or fees to any Person
(other than the referent Person or one of its Wholly Owned Subsidiaries) in
connection with loans incurred by such employee stock ownership plan to
purchase capital stock of the referent Person, but net of any amortization of
any debt issuance costs.
"Consolidated Net Income" means, with respect to any Person for any period,
the consolidated net income (or deficit) of such Person and its Consolidated
Subsidiaries for such period, on a consolidated basis, as determined in
accordance with GAAP consistently applied, provided that the net income of any
other Person (other than a subsidiary) in which such Person or any subsidiary
of such Person has a joint interest with a third party (which interest does
not cause the net income of such other Person to be consolidated into the net
income of such Person in accordance with GAAP) shall be included only to the
extent of the lesser of (a) such net income that has been actually received by
such Person or such subsidiary in the form of cash dividends or similar cash
distributions or (b) the net income of such Person (which in no event shall be
less than zero), provided further that there shall be excluded (i)(x) the net
income (but not loss) of any subsidiary of such Person that is subject to
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any restriction or encumbrance on the ability of such subsidiary to make the
payment of dividends or other distributions to such Person to the extent of
such encumbrance or restriction and (y) the net income of any Person acquired
in a pooling of interests transaction accrued prior to the date it became a
subsidiary of such Person or is merged into or consolidated with such Person
or any subsidiary of such Person; (ii) any restoration to income of any
contingency reserve, except to the extent that provision for such reserve was
made out of Consolidated Net Income accrued at any time following the Issue
Date; (iii) any gain (but not loss), together with any related provisions for
taxes, realized upon the sale or other disposition (including, without
limitation, dispositions pursuant to sale and leaseback transactions) of any
property or assets that are not sold or otherwise disposed of in the ordinary
course of business and upon the sale or other disposition of any Capital Stock
of any subsidiary of such Person; (iv) any gain arising from the acquisition
of any securities, or the extinguishment, under GAAP, of any Indebtedness of
such Person; (v) any extraordinary gain (but not extraordinary loss) together
with any related provision for taxes on any such extraordinary gain and any
one time gains or losses (including, without limitation, those resulting from
litigation settlements and those related to the adoption of new accounting
standards), realized by the referent Person or any of its subsidiaries during
the period for which such determination is made; and (vi) in the case of a
successor to the Company by consolidation or merger or as a transferee of the
Company's assets (other than any calculation made under "Merger,
Consolidation, Etc." above), any earnings of the successor corporation prior
to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of a Person at any date means the Consolidated
Stockholders' Equity of such Person less (a) the amount of any gain resulting,
directly or indirectly, from the extinguishment, retirement or repurchase of
any Indebtedness of such Person or any of its subsidiaries, (b) any
revaluation or other write-ups subsequent to the Issue Date in the book value
of any asset owned by such Person or a Consolidated Subsidiary, (c) the book
value of all intangible assets (as determined in accordance with GAAP) of such
Person and its Consolidated Subsidiaries, (d) any amounts attributable to the
cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of Capital Stock of such Person or of any of its
subsidiaries and (e) any gains from the sale of assets other than in the
ordinary course of business.
"Consolidated Stockholders' Equity" as of any date means with respect to any
Person the amount by which the assets of such Person and its Consolidated
Subsidiaries exceed (a) the total liabilities of such Person and its
Consolidated Subsidiaries, plus (b) any redeemable Preferred Stock (including
Disqualified Capital Stock) of such Person or any Preferred Stock of any
Consolidated Subsidiary of such Person issued to any Person other than such
Person or a Wholly Owned Subsidiary of such Person, in each case determined in
accordance with GAAP.
"Consolidated Subsidiary" of any Person means a Subsidiary which for
financial reporting purposes is or, in accordance with GAAP, should be,
accounted for by such Person as a consolidated subsidiary; provided, however,
that the Unrestricted Subsidiaries of any Person shall not be included as
Consolidated Subsidiaries of such Person for purposes of the Indenture,
regardless of whether such Unrestricted Subsidiaries are or, in accordance
with GAAP, should be, accounted for as consolidated subsidiaries provided,
further, that any Person that is not a Subsidiary (as such term is defined
herein) of a Person shall not be included as a Consolidated Subsidiary of such
Person for purposes of the Indenture, regardless of whether such Person is, or
in accordance with GAAP, should be, accounted for as a consolidated
subsidiary.
"Consolidated Tax Expense" means, with respect to any person for any period,
the aggregate of the U.S. Federal, state and local tax expense attributable to
taxes based on income and foreign income tax expenses of such Person and its
Consolidated Subsidiaries for such period (net of any income tax benefit),
determined in accordance with GAAP, other than taxes (either positive or
negative) attributable to extraordinary, unusual or nonrecurring gains or
losses, or taxes attributable to Asset Sales.
"Continuing Director" means at any date a member of the Board of Directors
of the Company who (i) was a member of the Board of Directors of the Company
on the Issue Date or (ii) was nominated for election or elected to the Board
of Directors of the Company with the affirmative vote of at least a majority
of the directors who were Continuing Directors at the time of such nomination
or election.
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"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default (as defined in the Indenture).
"Designated Senior Indebtedness" shall mean each issue of Senior
Indebtedness that (i) has an outstanding principal amount of at least
$25,000,000 (including the amount of all reimbursement obligations pursuant to
letters of credit thereunder and the maximum principal amount available to be
drawn thereunder), and (ii) has been designated as Designated Senior
Indebtedness pursuant to an Officers' Certificate of the Company received by
the Trustee.
"Disqualified Capital Stock" means any Capital Stock that, other than solely
at the option of the issuer thereof, by its terms (or by the terms of any
security into which it is convertible or exchangeable) is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased, in whole or in part, or has, or upon the happening of an event
or the passage of time would have, a redemption or similar payment due on or
prior to the first anniversary of the Maturity Date, or is convertible into or
exchangeable for debt securities at the option of the holder thereof at any
time prior to the first anniversary of the Maturity Date.
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Capital Stock) of the Company other than any private
sales to an Affiliate of the Company.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"11% Senior Notes" means the Company's $165,000,000 11% Senior Notes Due
2001.
"Fair Market Value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between a willing seller and a willing and able buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction.
In connection with any Asset Sale, compliance by the Company with clause (a)
of the first paragraph of "Limitation on Sale of Assets" shall be evidenced by
(i) an Officers' Certificate if the Net Cash Proceeds resulting from such
Asset Sale are less than or equal to $1.0 million (ii) subject to clause (iii)
below, a resolution of the Board of Directors, which shall be approved by at
least a majority of the independent directors of the Company, if the Net Cash
Proceeds resulting from such Asset Sale exceed $1.0 million or (iii) an
Officer's Certificate if such Asset Sale involves the sale of property in a
shopping center developed or held for resale by the Company or in connection
with a sale-leaseback transaction for a newly constructed or remodeled
supermarket and the Net Cash Proceeds resulting from such Asset Sale are less
than or equal to $10.0 million.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical or legal effect of which is to assure in any way the payment or
performance (or payment of damages in the event of a non-performance) of all
or any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange, in connection with
an acquisition or otherwise), assume, guarantee or otherwise become liable in
respect of such Indebtedness or other obligation or the recording, as required
pursuant to GAAP
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or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "incurrence," "incurred," "incurable" and
"incurring" shall have meanings correlative to the foregoing), provided that a
change in GAAP that results in an obligation of such Person that exists at
such time becoming Indebtedness shall not be deemed an incurrence of such
Indebtedness.
"Indebtedness" means, with respect to any Person, at any date, any of the
following, without duplication, (i) any liability, contingent or otherwise, of
such Person (A) for borrowed money (whether or not the recourse of the lender
is to the whole of the assets of such Person or only to a portion thereof),
(B) evidenced by a note, bond, debenture or similar instrument or letters of
credit (including a purchase money obligation) or (C) for the payment of money
relating to a Capitalized Lease Obligation or other obligation (whether issued
or assumed) relating to the deferred purchase price of property; (ii) all
conditional sale obligations and all obligations under any title retention
agreement (even if the rights and remedies of the seller under such agreement
in the event of default are limited to repossession or sale of such property),
but excluding trade accounts payable arising in the ordinary course of
business that are not overdue by 90 days or more or are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted; (iii) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction entered
into the ordinary course of business; (iv) all Indebtedness of others secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on any asset or property
(including, without limitation, leasehold interests and any other tangible or
intangible property) of such Person, whether or not such Indebtedness is
assumed by such Person or is not otherwise such Person's legal liability,
provided that if the Indebtedness so secured has not been assumed in full by
such Person or is otherwise not such Person's legal liability in full, the
amount of such Indebtedness for the purposes of this definition shall be
limited to the lesser of the amount of such Indebtedness secured by such Lien
or the Fair Market Value of the assets or property securing such Lien; (v) all
Indebtedness of others (including all dividends of other Persons the payment
of which is) guaranteed, directly or indirectly, by such Person or that is
otherwise its legal liability or which such Person has agreed to purchase or
repurchase or in respect of which such Person has agreed contingently to
supply or advance funds; (vi) all Preferred Stock issued by such Person and
its subsidiaries (other than Qualified Capital Stock) with the amount of
Indebtedness represented by such Preferred Stock being equal to the greater of
its voluntary or involuntary liquidation preference and its "maximum fixed
repurchase price," but excluding accrued dividends if any; and (vii) all
obligations under Interest Rate Protection Agreements. For purposes hereof,
the "maximum fixed repurchase price" of any Preferred Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Preferred Stock as if such Preferred Stock were purchased on any date
on which Indebtedness shall be required to be determined under the Indenture,
and if such price is based upon, or measured by, the Fair Market Value of such
Preferred Stock, such Fair Market Value shall be determined reasonably and in
good faith by the board of directors of the issuer of such Preferred Stock.
For the avoidance of doubt, the Santee Financing and the Santee Documents
shall be deemed not to constitute, nor to have given rise to, the incurrence
of any Indebtedness of the Company or any of its Subsidiaries.
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement designed to protect a
Person or any of its subsidiaries against fluctuations in interest rates.
"Investment" by any Person means any direct or indirect (i) loan, advance or
other extension of credit or capital contribution to (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise), (ii) purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by, any other Person (whether by merger, consolidation,
amalgamation or otherwise and whether or not purchased directly from the
issuer of such securities or evidences of Indebtedness), (iii) guarantee or
assumption of the Indebtedness of any other Person and (iv) all other items
that would be classified as investments (including, without limitation,
purchases of assets outside the ordinary course of business) on a balance
sheet of such Person prepared in accordance with GAAP. Investments shall
exclude extensions of trade credit and advances to customers and suppliers to
the extent in the ordinary course of business and made in accordance with
customary industry practice. The amount of any
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Investment shall be the original cost of such Investment plus the cost of all
additions thereto, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such
Investment.
"Issue Date" means the date on which the Notes were originally issued under
the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance against real or personal property of such Person, or a security
interest of any kind.
"Maturity Date" means July 1, 2004.
"Net Cash Proceeds" means, with respect to any Asset Sale of any Person,
cash proceeds received therefrom, in each case net of (a) all legal expenses
and all title and recording tax expenses, all commissions and other fees and
expenses directly related to such Asset Sale, (b) all Federal, state or local
taxes required to be accrued as a liability as a consequence of such Asset
Sale, and (c) all Indebtedness incurred in accordance with the Indenture that
is secured by such assets, in accordance with the terms of any Lien incurred
in accordance with the Indenture upon or with respect to such assets that must
by the terms of such Indebtedness and such Lien, or in order to obtain a
necessary consent to such Asset Sale or by applicable law, be repaid out of
the proceeds from such Asset Sale and which is actually so repaid in cash. For
purposes of this definition and "Certain Covenants--Limitation on Sale of
Assets" "cash" means U.S. dollars or such money as is freely and readily
convertible into U.S. dollars.
"Net Equity Proceeds" means (a) in the case of any sale by the Company of
Qualified Capital Stock, the aggregate net proceeds received by the Company,
after payment of expenses, commissions and the like incurred in connection
therewith, whether such proceeds are in cash or in other property (valued as
determined reasonably and in good faith by the Board of Directors of the
Company, as evidenced by a resolution approved by the Board of Directors, at
the Fair Market Value thereof at the time of receipt) and (b) in the case of
any exchange, exercise, conversion or surrender of any outstanding
Indebtedness of the Company or any Subsidiary for or into shares of Qualified
Capital Stock, the amount of such Indebtedness (or, if such Indebtedness was
issued at an amount less than the stated principal amount thereof, the accrued
amount thereof as determined in accordance with GAAP) as reflected in the
consolidated financial statements of the Company prepared in accordance with
GAAP as of the most recent date next preceding the date of such exchange,
exercise, conversion or surrender (plus any additional amount required to be
paid by the holder of such Indebtedness to the Company or to any Wholly Owned
Subsidiary of the Company upon such exchange, exercise, conversion or
surrender and less any and all payments made to the holders of such
Indebtedness, and all other expenses incurred by the Company in connection
therewith), in the case of each of clauses (a) and (b) to the extent
consummated after June 30, 1997.
"New Notes" means the Company's $100 million 9% Senior Subordinated Notes
due 2004.
"Permitted Construction Indebtedness" means Indebtedness of the Company or
any Wholly Owned Subsidiary representing the deferred purchase price, or the
net proceeds of which are used solely to finance the purchase price, cost of
construction, lease, or major remodeling or major refurbishment of any new or
existing supermarket (including any fixtures therein) operated or to be
operated by the Company or Stater Bros. Markets. For purposes hereof, "major
remodeling" or "major refurbishment" of a supermarket shall mean a remodeling
or refurbishment of a supermarket in a single transaction or a series of
related transactions involving aggregate expenditures equal to or greater than
$1.0 million per project site.
"Permitted Investments" means the following kinds of instruments if, in the
case of instruments referred to in clauses (a) through (d) below, on the date
of purchase or other acquisition of any such instrument by the Company or any
Subsidiary, the remaining term to maturity is not more than one year: (a)
readily marketable obligations issued or unconditionally guaranteed as to
principal and interest by the United States or by any agency or authority
controlled or supervised by and acting as an instrumentality of the United
States; (b) repurchase obligations for instruments of the type described in
clause (a) for which delivery of the instrument is made against payment; (c)
obligations (including, but not limited to, demand or time deposits, banker's
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acceptances and certificates of deposit) issued by a depository institution or
trust company incorporated or doing business under the laws of the United
States, any state thereof or the District of Columbia or a branch or
subsidiary of any such depository institution or trust company operating
outside the United States, provided that such depository institution or trust
company has, at the time of the Company's or such Subsidiary's investment
therein or contractual commitment providing for such investment, capital,
surplus or undivided profits (as of the date of such institution's most
recently published financial statements) in excess of $100.0 million;
(d) commercial paper issued by any corporation, if such commercial paper has,
at the time of the Company's or any Subsidiary's investment therein or
contractual commitment providing for such investment, credit ratings of A-1 by
Standard & Poor's Corporation and P-1 by Moody's Investors Service, Inc.; and
(e) money market, mutual or similar funds registered under the Investment
Company Act of 1940, as amended, having assets in excess of $100.0 million and
whose sole investments are comprised of securities of the type described in
clauses (a) through (d), above irrespective of whether such funds are
Affiliates of or otherwise associated with the Trustee.
"Permitted Liens" means (a) Liens existing on the Issue Date and renewals,
extensions and replacements thereof; provided that such renewals, extensions
or replacements shall not apply to any property or assets not previously
subject to such Liens or increase the principal amount of obligations secured
thereby, (b) Liens on deposits made in the ordinary course of business and (c)
Liens in favor of collecting banks having a right of setoff, revocation,
refund or chargeback with respect to money or instruments of the Company or
any Subsidiary on deposit with or in possession of such banks (d) Liens for
taxes not yet due or which are being contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are
maintained on the books of the Company or its Subsidiaries, as the case may
be, in conformity with GAAP, (e) carriers', warehousemen's, mechanics'
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business and not overdue for a period of more than 90 days or which are
being contested in good faith by appropriate proceedings, (f) pledges or
deposits in connection with workers' compensation, unemployment insurance and
other social security legislation; (g) deposits to secure the performance of
bids, trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other obligations
of like nature incurred in the ordinary course of business, (h) easements,
rights-of-way, restrictions and other similar encumbrances incurred in the
ordinary course of business which, in the aggregate, are not substantial in
amount and which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary course of
business of the Company or its Subsidiaries, as the case may be, and any
exceptions to title set forth in any title policies, (i) any attachment or
judgment Lien so long as the execution or other enforcement thereof is
effectively stayed, the claims secured thereby are being contested in good
faith by appropriate proceedings, adequate reserves have been established with
respect to such claims in accordance with GAAP and no Default or Event of
Default would result thereby, (j) any Liens relating solely to property leased
by the Company or any Subsidiary and arising solely out of the lease for such
property and (k) Liens on assets securing any Permitted Construction
Indebtedness incurred in accordance with the Indenture.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, limited liability company, unincorporated organization or
government or any agency or political subdivision thereof.
"Plan of Liquidation" means a plan (including by operation of law) that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously) (i) the sale,
lease, conveyance or other disposition of all or substantially all of the
assets of the Company otherwise than as an entirety or substantially as an
entirety and (ii) the distribution of all or substantially all of the proceeds
of such sale, lease, conveyance or other disposition and all or substantially
all of the remaining assets of the Company to holders of Capital Stock of the
Company.
"Preferred Stock" means, as applied to the Capital Stock of any Person, the
Capital Stock of such Person (other than the common stock of such Person) of
any class or classes (however designated) that ranks prior, as to the payment
of dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding-up of such Person, to shares
of Capital Stock of any other class of such Person.
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"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Capital Stock or convertible
into or exchangeable or exercisable for Disqualified Capital Stock.
"Qualified La Cadena Investment" means an Investment in the Company by La
Cadena for the purpose of providing funds to either the Company or Stater
Bros. Markets, as the case may be, to purchase additional limited liability
company interests in Santee LLC; provided, however, that if such an Investment
is made in the form of Indebtedness, then such Indebtedness shall be (a)
unsecured Indebtedness, and (b) Subordinated Indebtedness.
"Qualified Non-Recourse Indebtedness" means Indebtedness of any Person (i)
as to which neither the Company nor any of its Subsidiaries (other than any
Unrestricted Subsidiary) (a) provides credit support of any kind (including
any undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a guarantor or otherwise) or (c)
constitutes the lender; and (ii) no default with respect to which (including
any right that the holders thereof may have to take enforcement action against
such Person) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any of its Subsidiaries (other than
any Unrestricted Subsidiary) to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity; provided, however, that the Company or any Subsidiary may execute
and become obligated under the Santee Documents and perform its obligations
thereunder, and such execution, obligation and performance shall not
disqualify the Indebtedness of Santee or Santee LLC from constituting
Qualified Non-Recourse Indebtedness.
"Qualified Santee LLC Interest Sale" means a sale by Stater Bros. Markets of
its interest in Santee LLC.
"Related Person" means with respect to any Person (a) any Affiliate of such
Person, (b) any individual or other Person who directly or indirectly is the
registered or beneficial owner of 5% or more of any class of Capital Stock of
such Person or warrants, rights, options or other rights to acquire more than
5% of any class of Capital Stock of such Person, (c) any relative of such
individual by blood, marriage or adoption not more remote than first cousin
and (d) any officer or director of such Person.
"Restricted Payment" means (i) the declaration or payment of any dividend or
the making of any other distribution or other payment (whether in cash,
securities or other property or assets of the Company or of any Subsidiary) of
the Company's or any Subsidiary's Capital Stock, or to the holders of the
Company's or any Subsidiary's Capital Stock or to any Affiliate of the
Company, whether outstanding on the Issue Date or thereafter (other than
dividends or distributions payable solely in Qualified Capital Stock of the
Company, dividends or distributions declared or paid by any Subsidiary to the
Company); (ii) any purchase, redemption, retirement or other acquisition for
value of any Capital Stock of the Company or of any Subsidiary or of any
Affiliate of the Company, whether outstanding on the Issue Date or thereafter,
or any warrants, rights or options to purchase or acquire shares of the
Capital Stock of the Company or of any Subsidiary or of any Affiliate of the
Company, whether outstanding on the Issue Date or thereafter, held by any
Person other than the Company or one of its Wholly Owned Subsidiaries (other
than through the issuance in exchange therefor solely of Qualified Capital
Stock); (iii) the prepayment, acquisition, decrease or retirement prior to
maturity, scheduled repayment or scheduled sinking fund payment of any
Indebtedness of the Company that is subordinated (whether pursuant to its
terms, structurally or by operation of law) to the Notes or (iv) to incur,
create, assume or suffer to exist any guarantee of Indebtedness of, or make
any loan or advancement to, or other Investment in, any Related Person of the
Company (other than a Wholly Owned Subsidiary (other than an Unrestricted
Subsidiary)). The dollar amount of any non-cash dividend or distribution by
the Company or any Subsidiary on the Company's, any Subsidiary's or any of the
Company's Affiliate's Capital Stock shall be equal to the Fair Market Value of
such dividend or distribution at the time of such dividend or distribution.
Notwithstanding the foregoing, provided that no Default or Event of Default
shall have occurred and be continuing or would result as a consequence
thereof, the following shall not be or be deemed to be Restricted Payments:
(a) the repayment upon the consummation of an Asset Sale of any Indebtedness
of the Company permitted by the covenant "Limitation on
63
<PAGE>
Indebtedness" which is subordinated (whether pursuant to its terms or by
operation of law) to the Notes and which is secured by a Lien permitted by the
covenant "Limitation on Liens" to the extent that such Indebtedness is
required to be repaid in connection with such Asset Sale pursuant to the terms
of the instrument governing such Indebtedness and such Lien, provided that
concurrent or prior repayment of the Notes is provided for with the proceeds
of such Asset Sale if the Notes are secured by a Lien pari passu with or
senior to the Lien of such Indebtedness, or (b) the prepayment, acquisition,
retirement or decrease of Indebtedness of the Company that is subordinated
(whether pursuant to its terms or by operation of law) to the Notes that is
prepaid, acquired, decreased or retired by conversion into or in exchange for
Qualified Capital Stock.
"Revolving Credit Facility" means the Company's or any Subsidiary's
revolving credit facilities or any replacement facilities with respect
thereto.
"Santee" means Santee Dairies, Inc., a California corporation.
"Santee LLC" means Santee Dairies, LLC, a Delaware limited liability
company.
"Santee Documents" means that certain Product Purchase Agreement between
Stater Bros. Markets and Santee, that certain Owner Consent between Stater
Bros. Markets and the trustee pursuant to the trust agreement executed as part
of the Santee Financing, that certain Limited Liability Company Agreement
between Stater Bros. Markets, Hughes Markets, Inc., and Santee LLC, and all
documents effecting and ancillary to the Santee Financing.
"Santee Financing" means the issuance by Santee of up to $80,000,000 in
principal amount of notes with respect to the construction of a new dairy in
the City of Industry, California, and all transactions incident and ancillary
thereto.
"Santee Noteholders" mean the purchasers of notes with respect to the Santee
Financing.
"Senior Indebtedness" means (x) all obligations of the Company now or
hereafter existing to pay the principal of, and interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization to the extent a claim for post-filing interest is allowed in
such proceedings) on, any Indebtedness (other than Capitalized Lease
Obligations) of the Company, whether outstanding on the date of the Indenture
or thereafter created, incurred, assumed, guaranteed or in effect guaranteed
by the Company, (y) Indebtedness of the Company represented by Capitalized
Lease Obligations if the instrument creating or evidencing the same expressly
provides that such Indebtedness shall be senior in right of payment to the
Notes and (z) Indebtedness of the Company with respect to Interest Rate
Protection Agreements. Notwithstanding the foregoing, Senior Indebtedness
shall not include (a) any Indebtedness, if the instrument creating or
evidencing the same or the assumption or guarantee thereof expressly provides
that such Indebtedness shall not be senior in right of payment to the Notes,
(b) in the case of each Note, the other Notes, (c) Indebtedness of the Company
to, or guaranteed on behalf of, an Affiliate of the Company (other than to a
Subsidiary (other than an Unrestricted Subsidiary)), (d) Indebtedness to trade
creditors incurred or assumed in the ordinary course of business in connection
with obtaining goods, materials or services, (e) any liability for federal,
state, local or other taxes owed or owing by the Company, (f) Indebtedness
incurred in violation of the Indenture provisions summarized below under
"Limitation on Indebtedness," (g) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of the
Company and (h) Indebtedness represented by Disqualified Capital Stock.
"Subordinated Indebtedness" means any Indebtedness of the Company or any of
its Subsidiaries (whether outstanding on the date of the Indenture or
thereafter incurred) that (i) matures no earlier than the date that is one
year after the maturity date of the Notes and (ii) is subordinated with
respect to payment of principal and interest to the payment of principal and
interest on the Notes (whether upon a dissolution, liquidation, or
reorganization of the Company or any such Subsidiary, or otherwise).
64
<PAGE>
"subsidiary" of any Person means (a) a corporation a majority of whose
Voting Stock is at the time, directly or indirectly, owned by such Person, by
one or more subsidiaries of such Person or by such Person and one or more
subsidiaries of such Person or (b) any other Person (other than a corporation)
in which such Person, a subsidiary of such Person or such Person and one or
more subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, have (i) at least a majority ownership interest or (ii)
the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Subsidiary" means any subsidiary of the Company.
"Unrestricted Subsidiary" means, to the extent such Persons become
Subsidiaries, (i) Santee LLC, (ii) Santee, and (iii) any subsidiary of an
Unrestricted Subsidiary; provided, however, that any Unrestricted Subsidiary
that incurs Indebtedness other than Qualified Non-Recourse Indebtedness shall
no longer be deemed an Unrestricted Subsidiary, for so long as such
Indebtedness not constituting Qualified Non-Recourse Indebtedness shall be
outstanding; provided further, that at such time as any Unrestricted
Subsidiary ceases to be an Unrestricted Subsidiary, all Indebtedness of such
Subsidiary shall be deemed to have been incurred by the Company and such
Subsidiary for the purposes hereof.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the board of
directors or other governing body of such Person.
"Wholly Owned Subsidiary" means, with respect to any Person, any subsidiary
of such Person all the outstanding shares of Capital Stock (other than
directors' qualifying shares, if applicable) of which are owned directly by
such Person or another Wholly Owned Subsidiary of such Person, and with
respect to the Company, shall include Stater Bros. Markets so long as the
Company or any Wholly Owned Subsidiary of the Company owns all of the
outstanding shares of Capital Stock of Stater Bros. Markets, other than the
Markets Preferred Stock held by Texas Eastern on the Issue Date.
DESCRIPTION OF THE 11% SENIOR NOTES
The 11% Senior Notes were issued primarily to finance the cost of the 1994
Recapitalization, pursuant to the Senior Note Indenture. The Senior Note
Indenture contains covenants and agreements which are substantially identical
to those in the Indenture, except as described below. The 11% Senior Notes are
unsecured senior obligations of the Company and rank senior with respect to
payment in full of principal and interest to the Notes. Unlike the Notes which
contain certain limited optional redemption features, the 11% Senior Notes are
not redeemable prior to the maturity date. The 11% Senior Notes permit a
smaller revolving bank facility.
The 11% Senior Notes will mature on March 1, 2001 and are limited to an
aggregate principal amount of $165,000,000. The 11% Senior Notes accrue
interest at the rate per annum of 11% with interest payable on March 1 and
September 1 of each year.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain material United States federal
income tax consequences of the Offer. It is based on the Internal Revenue Code
of 1986, as amended to the date hereof (the "Code"), existing and proposed
Treasury regulations, and judicial and administrative decisions, all of which
are subject to change at any time, possibly on a retroactive basis. This
discussion relates to Old Notes, and the New Notes received therefor, that are
held as "capital assets" within the meaning of Section 1221 of the Code by
persons who are citizens or residents of the United States. It does not
discuss state, local or foreign tax consequences, nor does it discuss tax
consequences to categories of Holders that are subject to special rules, such
as foreign persons, tax-exempt organizations, insurance companies, banks and
dealers in stocks and securities. Federal income tax consequences may vary
depending on the particular status of an investor. No rulings will be sought
from the Internal Revenue Service ("IRS") with respect to the federal income
tax consequences of the Offer.
65
<PAGE>
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MIGHT BE RELEVANT TO AN INVESTOR'S DECISION TO PARTICIPATE IN
THE OFFER. EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS
PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE OFFER.
The Offer
In the opinion of Gibson, Dunn & Crutcher LLP, special counsel to the
Company, the exchange of Old Notes for New Notes pursuant to the Offer will
not constitute a material modification of the terms of either the Old Notes or
the New Notes and, accordingly, such exchange will not give rise to gain or
loss for federal income tax purposes, and each Holder of New Notes will
continue to be required to include interest on such New Notes in its gross
income in accordance with such Holder's method of accounting for federal
income tax purposes. The Company intends, to the extent required, to take the
position described above.
Backup Withholding
Under the Code, a Holder of a New Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments
of interest thereon or the gross proceeds from the disposition thereof. This
withholding generally applies only if the Holder (i) fails to furnish his or
her social security number or other taxpayer identification number ("TIN")
within a reasonable time after request therefor, (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that he or she has failed to report properly
payments of interest and dividends and the IRS has notified the Company that
he or she is subject to backup withholding or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is his or her correct number and that he or she
is not subject to backup withholding. Any amount withheld from a payment to a
Holder under the backup withholding rules is allowable as a credit against
such Holder's federal income tax liability, provided that the required
information is furnished to the IRS. Corporations and certain other entities
described in the Code and Treasury regulations are exempt from such
withholding if their exempt status is properly established.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 180 days from the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until January 14, 1998 (90 days from the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Offer and any broker or dealer
66
<PAGE>
that participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus as required, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Offer (which shall not include the expenses of any holder in
connection with resales of the New Notes). The Company has agreed to indemnify
holders of the Notes, including any broker-dealers participating in the Offer,
against certain liabilities, including liabilities under the Securities Act.
This Prospectus has been prepared for use in connection with the Offer and
may be used by BancAmerica Securities, Inc. in connection with the offers and
sales related to market-making transactions in the New Notes. BancAmerica
Securities, Inc. may act as a principal or an agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time
of sale. The Company will not receive any of the proceeds of such sales.
BancAmerica Securities, Inc. has no obligation to make a market in the New
Notes and may discontinue its market-making activities at any time without
notice, at its sole discretion.
LEGAL MATTERS
The validity of the New Notes offered hereby and certain other legal matters
will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los
Angeles, California. Certain legal matters for the Company will be passed upon
by Varner, Saleson & Dobler LLP, Riverside, California. Bruce D. Varner, a
partner of Varner, Saleson & Dobler LLP, is a director of the Company.
EXPERTS
The consolidated financial statements of Stater Bros. Holdings Inc. and
Subsidiaries as of September 29, 1996, September 24, 1995 and September 25,
1994 and for each of the three fiscal years in the period ended September 29,
1996, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
67
<PAGE>
STATER BROS. HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Auditors.......................................... F-2
Audited Financial Statements:
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-4
Consolidated Statements of Cash Flows................................. F-5
Consolidated Statements of Stockholders' Equity....................... F-6
Notes to Audited Consolidated Financial Statements.................... F-7
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at September 29, 1996 and June
29, 1997............................................................. F-19
Unaudited Consolidated Income Statements for the 39 Weeks Ended June
23, 1996 and June 29, 1997........................................... F-20
Unaudited Consolidated Statements of Cash Flows for the 39 Weeks Ended
June 23, 1996 and June 29, 1997...................................... F-21
Notes to Unaudited Consolidated Financial Statements as of June 29,
1997................................................................. F-22
</TABLE>
F-1
<PAGE>
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>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
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
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
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-3
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 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-4
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 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)
-------- -------- --------
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-5
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS
SERIES A A ADDITIONAL OPTION 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-6
<PAGE>
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-7
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
MOST
RANGE 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>
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 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-8
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 million 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.
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
F-9
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
covenants 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.
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.
F-10
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of future minimum lease payments as of September 29,
1996:
<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASES
FISCAL YEAR LEASES MINIMUM 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>
Rental expense and sublease income were as follows:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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
F-11
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 7--INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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>
F-12
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <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>
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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 liabili-
ties.......................... 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 LIABILI-
TIES:
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
F-13
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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-14
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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 es-
tablished 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.
The Company's expense for these retirement and health and welfare plans
consisted of the following:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS
--------------------------- -------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 29,
1994 1995 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 $13.6 million credit which was applied
against employer contributions to multi-employer health and
F-15
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 29,
1996
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<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
F-16
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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--1994 RECAPITALIZATION
In March 1994, the Company completed a recapitalization transaction (the
"1994 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 1994 Recapitalization 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 $14.7
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 1994
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 1994 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 1994 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,
F-17
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 EFFECT OF
FOR INCOME CHANGE IN EXTRAORDINARY
TAXES AND ACCOUNTING LOSS, NET OF
GROSS EXTRAORDINARY FOR INCOME INCOME TAX NET
SALES PROFIT LOSS TAXES BENEFIT INCOME/(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>
F-18
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 29, JUNE 29,
ASSETS 1996 1997
------ ------------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents............................ $ 45,279 $ 39,830
Receivables.......................................... 19,009 19,410
Inventories.......................................... 117,372 115,739
Prepaid expenses..................................... 3,357 5,000
Deferred income taxes................................ 4,710 4,710
Properties held for sale............................. 1,787 1,348
-------- --------
Total current assets................................ 191,514 186,037
Investment in unconsolidated affiliate................. 7,626 11,503
Property and equipment
Land................................................. 18,688 16,418
Buildings and improvements........................... 89,856 84,009
Store fixtures and equipment......................... 78,570 84,678
Property subject to capital leases................... 14,368 14,368
-------- --------
201,482 199,473
Less accumulated depreciation and amortization....... 87,267 93,452
-------- --------
114,215 106,021
Deferred income taxes.................................. 5,295 7,381
Deferred debt issuance cost, net....................... 5,221 4,335
Lease guarantee escrow................................. 6,701 7,970
Other assets........................................... 7,722 7,196
-------- --------
Total assets........................................... $338,294 $330,443
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable..................................... $ 79,271 $ 63,140
Accrued payroll and related expenses................. 23,981 23,597
Other accrued liabilities............................ 23,607 25,359
Current portion of capital lease obligations......... 1,182 1,180
-------- --------
Total current liabilities........................... 128,041 113,276
Long-term debt......................................... 165,000 165,000
Capital lease obligations, less current portion........ 6,917 6,042
Long-term portion of self-insurance reserves........... 10,332 9,475
Other long-term liabilities............................ 2,526 3,992
10.5% Cumulative Series B Preferred Stock:(stated value
$100 per share)
Authorized shares--693,650
Issued and outstanding shares--693,650............... 69,365 69,365
Stockholders' equity
Class A Common Stock, $.01 par value:
Authorized shares--100,000
Issued and outstanding shares--50,000................ 1 1
Additional paid-in capital........................... 12,715 12,715
Retained deficit..................................... (41,953) (34,773)
Less option to acquire stock......................... (14,650) (14,650)
-------- --------
Total stockholders' equity........................... (43,887) (36,707)
-------- --------
Total liabilities and stockholders' equity............. $338,294 $330,443
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-19
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
----------------------
JUNE 23, JUNE 29,
1996 1997
---------- ----------
<S> <C> <C>
Sales.................................................. $1,244,312 $1,292,267
Cost of goods sold..................................... 959,246 997,032
---------- ----------
Gross profit........................................... 285,066 295,235
Operating expenses
Selling, general and administrative expenses......... 239,252 248,683
Depreciation and amortization........................ 9,220 9,858
Consulting fees...................................... 1,125 1,125
---------- ----------
Total operating expenses........................... 249,597 259,666
---------- ----------
Operating profit....................................... 35,469 35,569
Interest income........................................ 1,309 1,733
Interest expense....................................... (14,943) (14,871)
Equity in earnings (loss) from unconsolidated
affiliate............................................. (935) (1,123)
Other income (loss)--net............................... (187) 96
---------- ----------
Income before income taxes............................. 20,713 21,404
Income taxes........................................... 8,390 8,777
---------- ----------
Net income............................................. $ 12,323 $ 12,627
Less preferred dividends............................... 2,155 5,448
---------- ----------
Earnings available to common shareholders.............. $ 10,168 $ 7,179
========== ==========
Earnings per common share.............................. $ 126.75 $ 143.58
========== ==========
Average common shares outstanding...................... 80,220 50,000
========== ==========
Shares outstanding at end of period.................... 50,000 50,000
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-20
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------
JUNE 23, JUNE 29,
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................. $ 12,323 $ 12,627
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 9,220 9,858
Provision for deferred income taxes...................... 2 (2,086)
Gain (loss) on disposals of assets....................... 187 (96)
Net undistributed loss in investment in unconsolidated
affiliate............................................... 935 1,123
Changes in operating assets and liabilities:
(Increase) decrease in receivables..................... (2,584) (401)
(Increase) decrease in inventories..................... (1,642) 1,633
(Increase) decrease in prepaid expenses................ (581) (1,643)
(Increase) decrease in other assets.................... 1,167 (741)
Increase (decrease) in accounts payable................ (4,949) (16,131)
Increase (decrease) in accrued liabilities and long-
term portion of self-insurance reserves............... 7,463 (493)
-------- --------
Net cash (used by) provided by operating activities........ 21,541 3,650
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate..................... -- (5,000)
Purchase of property and equipment......................... (13,658) (14,329)
Proceeds from sale of property and equipment and properties
held for sale............................................. 18,629 16,552
-------- --------
Net cash (used by) provided by investing activities........ 4,971 (2,777)
-------- --------
FINANCING ACTIVITIES:
Dividends paid or accrued on preferred stock............... (2,155) (5,448)
Redemption of common stock................................. (69,365) --
Issuance of preferred stock................................ 69,365 --
Principal payments on capital lease obligations............ (806) (874)
-------- --------
Net cash (used by) financing activities.................... (2,961) (6,322)
-------- --------
Net increase (decrease) in cash and cash equivalents....... 23,551 (5,449)
Cash and cash equivalents at beginning of period........... 26,308 45,279
-------- --------
Cash and cash equivalents at end of period................. $ 49,859 $ 39,830
======== ========
Interest paid.............................................. $ 9,938 $ 9,629
Income taxes paid.......................................... $ 7,175 $ 4,275
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-21
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 29, 1997
NOTE 1--BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of September 29, 1996 and June 29, 1997 and
the results of its operations and cash flows for the thirty-nine weeks ended
June 23, 1996 and June 29, 1997. These consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's latest annual report filed on Form 10-K. The
operating results for the thirty-nine weeks ended June 29, 1997 are not
necessarily indicative of the results of operations for a full year.
NOTE 2--INCOME TAXES
The provision for income taxes for the thirty-nine weeks ended June 23, 1996
and June 29, 1997 consists of the following:
<TABLE>
<CAPTION>
39 WEEKS ENDED
-----------------
JUNE 23, JUNE 29,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal Income Taxes.................................... $7,198 $6,785
State Income Taxes...................................... 1,192 1,992
------ ------
$8,390 $8,777
====== ======
</TABLE>
NOTE 3--CONVERSION OF COMMON STOCK
Effective March 8, 1996, the Company converted the Company's 50,000 shares
of Common Stock held by Craig Corporation ("Craig") into 693,650 shares of the
Company's Series B Preferred Stock. The Series B Preferred Stock is redeemable
by the Company in whole but not in part for $69.4 million plus accrued and
unpaid dividends. On July 24, 1997, the Company gave notice of exercise of
option to redeem all outstanding shares of the Company's Series B Preferred
Stock for approximately $74.0 million, including accrued and unpaid dividends.
NOTE 4--UNCONSOLIDATED AFFILIATE
Prior to November 1996, and since 1986, Stater Bros. Markets, a wholly owned
subsidiary of the Company, owned 49.6% of Santee Dairies, Inc., ("Santee") an
operator of a fluid milk processing plant located in Los Angeles, California.
In November 1996 and for approximately $200,000, Stater Bros. Markets
increased its ownership in Santee to 50%, but is not the controlling
shareholder. Additionally, during the quarter ended December 29, 1996, Stater
Bros. Markets acquired Preferred Stock issued by Santee for an aggregate
amount of $4.8 million. Subsequently, Stater Bros. Markets exchanged the
Preferred Stock of Santee Dairies, Inc. for Common Stock of Santee Dairies,
Inc. It is not anticipated that Santee will issue dividends on either its
Preferred Stock or Common Stock in the foreseeable future. Santee is not a
significant subsidiary of Stater Bros. Markets or the Company, and
accordingly, the Company accounts for its investment in Santee Dairies Inc.
using the equity method of accounting. For the thirty-nine weeks year to date,
the Company recognized losses of $1,123,000 and $935,000 for 1997 and 1996,
respectively. On July 30, 1997, the Company exchanged its Common Stock in
Santee Dairies, Inc. for a 50% ownership in Santee LLC, at which time Santee
Dairies, Inc. became a wholly owned subsidiary of Santee LLC.
F-22
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 5--CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing March 8, 1994, Craig agreed
to render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company will pay Craig $1.5
million per year, payable quarterly during the term of the Consulting
Agreement. On July 31, 1997, the Company gave notice to terminate its
obligation under the Consulting Agreement. Additionally, in accordance with
the terms of the Consulting Agreement, Craig has agreed not to engage in any
business that competes with the Company in any of the five counties in which
the Company operates until the end of the five-year period of the Consulting
Agreement. The Company paid Craig $5.0 million on March 8, 1994 which is
amortized to earnings over the five-year term of the covenant not to compete
included in the Consulting Agreement.
NOTE 6--RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
NOTE 7--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 8--ADOPTION OF ACCOUNTING STANDARD
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 adopted at the beginning of fiscal year 1997. Management believes that
the adoption of SFAS 121 will not have a material adverse effect on the
Company's financial position or its results of operations for fiscal 1997.
NOTE 9--SUBSEQUENT EVENTS
In July 1997, the Company solicited and obtained the requisite consents from
the majority of the noteholders of the Company's 11% Senior Notes due 2001
which permitted the Company to amend the Indenture which governs its 11%
Senior Notes due 2001 to:
1) permit the Company to issue and sell up to $100 million aggregate
principal amount of its 9% Senior Subordinated Notes due 2004, and to
use a portion of the net proceeds from the issuance of such notes to
redeem all issued and outstanding shares of the Company's Series B
Preferred Stock, held by Reading Australia PTY Limited ("Reading"),
2) designate Santee LLC and Santee Dairies, Inc., to the extent such
entities ever become Subsidiaries of the Company, as Unrestricted
Subsidiaries (as defined) which would not be subject to certain
significant covenants of the 11% Senior Note Indenture,
3) permit the Company to make certain additional investments in Santee LLC
(including investments funded by La Cadena Investments, a California
general partnership which owns all of the issued and outstanding Common
Stock of the Company),
F-23
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4) permit the Company to repay under limited circumstances investments made
by La Cadena in the Company to enable it to increase its ownership
interest in Santee LLC, and
5) make certain other amendments to the 11% Senior Note Indenture.
On July 24, 1997, the Company completed an offering for $100 million of 9%
Senior Subordinated Notes due 2004 under Rule 144A of the Securities Act.
Proceeds from the offering were used or will be used to pay for consent
solicitation fees of approximately $5.0 million, fees and expenses related to
the offering of approximately $4.0 million, pay a financial advisory fee to La
Cadena of $2.0 million and to pay approximately $74.0 million to redeem all of
the outstanding shares of the Company's Series B Preferred Stock including
accrued and unpaid dividends.
On July 24, 1997, concurrently with the sale of the 9% Senior Subordinated
Notes due 2004, the Company gave notice of exercise of option to redeem all
outstanding shares of the Company's Series B Preferred Stock to Reading
Australia PTY Limited ("Reading") a majority owned indirect subsidiary of
Craig Corporation ("Craig"). On August 4, 1997, the Company deposited
approximately $74.0 million into an Escrow account for the benefit of Reading
Australia PTY Limited, the amounts required to redeem the Series B Preferred
Stock and to pay accrued and unpaid dividends up to and including August 4,
1997.
On July 31, 1997, the Company gave notice to terminate a five-year
consulting agreement with Craig that was entered into in connection with the
1994 Recapitalization. Annual fees payable to Craig under the Consulting
Agreement were $1.5 million per year.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
The Offer................................................................. 15
Capitalization............................................................ 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 30
Management................................................................ 37
Security Ownership of Certain Beneficial Owners and Management............ 39
Certain Relationships and Related Transactions............................ 40
Description of the New Notes.............................................. 42
Description of the 11% Senior Notes....................................... 65
Certain Federal Income Tax Consequences................................... 65
Plan of Distribution...................................................... 66
Legal Matters............................................................. 67
Experts................................................................... 67
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF STATER BROS.]
STATER BROS. HOLDINGS INC.
$100,000,000
9% SENIOR SUBORDINATED NOTES
DUE 2004
--------------------
PROSPECTUS
--------------------
OCTOBER 17, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the General Corporation Law of the State of
Delaware (the "GCL"), the Certificate of Incorporation of the Company
eliminates the liability of the directors of the Company to the Company or its
stockholders, except for liabilities related to breach of the duty of loyalty,
actions not in good faith, and certain other liabilities. As permitted by
Section 145 of the GCL, Article V of the Bylaws of the Company provides for
the indemnification of all directors, officers, employees and agents against
expenses actually and reasonably incurred in connection with certain stated
proceedings and under certain stated conditions.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1(1) Certificate of Incorporation of the Company
3.2(1) By-Laws of the Company
4.1(2) Indenture between the Company and First Trust of New York, as
Trustee, for $100,000,000 9% Senior Subordinated Notes due 2004,
dated as of July 24, 1997 (the "Indenture")
4.2(2) First Supplemental Indenture between the Company and IBJ
Schroder Bank & Trust Company, as Trustee, for $165,000,000 11%
Senior Notes due 2001, dated as of July 22, 1997 (the "First
Supplemental Indenture")
4.3(3) Form of Specimen Certificate evidencing Global Notes of the
Company issued pursuant to the Indenture
4.4(2) Registration Rights Agreement among the Company and BancAmerica
Securities, Inc. dated July 24, 1997
4.5(3) Form of Letter of Transmittal regarding the Offer for all
Outstanding Privately Placed 9% Senior Subordinated Notes due
2004 in Exchange for 9% Senior Subordinated Notes due 2004
(including Notice of Guaranteed Delivery)
5.1(3) Opinion of Gibson, Dunn & Crutcher LLP regarding certain matters
in connection with the New Notes
8.1 Tax Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax
matters in connection with the New Notes**
10.1(1) Reclassification Agreement dated September 3, 1993 by and among
the Company, Craig and La Cadena
10.2(1) Amendment to Reclassification Agreement, dated January 12, 1994,
by and among the Company, Craig and La Cadena
10.3(1) Agreement of Stockholders dated May 10, 1989 by and among the
Company, Craig and La Cadena
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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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
10.11(1) Escrow Agreement dated March 8, 1994, by and between the
Company, Craig and the Bank of America Trust and Savings
Association
10.12(1) 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
10.14(1) La Cadena Blocked Account Agreement dated March 8, 1994 by and
among Stater Bros. Markets, La Cadena and Bank of America
10.15(1) Subordination Agreement dated March 8, 1994 by and among the
Company, Stater Bros. Markets and Bank of America Trust and
Savings Association
10.16(1) Amended and Restated Sublease Agreement dated June 1, 1983
between Wren Leasing Corp., as Lessor, and Stater Bros. Markets,
as Lessee
10.17(1) Preferred Stock Agreement dated March 22, 1983 between Stater
Bros. Markets and Petrolane Incorporated
10.18(1) Escrow Agreement dated September 19, 1985 by and among Stater
Bros. Markets, Petrolane Incorporated and First Interstate Bank
of California
21(1) Subsidiaries of the Company
23.1(3) Consent of Ernst & Young
23.2(3) Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
23.3 Consent of Gibson, Dunn & Crutcher LLP regarding certain tax
matter (included in Exhibit 8.1)**
24(2) Power of Attorney (included on page II-4)
25(2) Statement of Eligibility of Trustee (separately bound)
</TABLE>
- --------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement as originally filed on April 4, 1994.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement as originally filed on August 21, 1997.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to Amendment No. 1 to the Registration Statement as originally filed on
October 10, 1997.
** Filed herewith.
(b) Not Applicable.
(c) Not Applicable.
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
II-2
<PAGE>
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF COLTON,
STATE OF CALIFORNIA, ON OCTOBER 16, 1997.
Stater Bros. Holdings Inc.
/s/ Jack H. Brown
By: _________________________________
JACK H. BROWN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THEIR CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jack H. Brown Chairman of the October 16, 1997
- ------------------------------------- Board, President
JACK H. BROWN and Chief Executive
Officer
/s/ Bruce D. Varner Director and October 16, 1997
- ------------------------------------- Secretary
BRUCE D. VARNER
/s/ Dennis N. Beal Vice President-- October 16, 1997
- ------------------------------------- Finance and Chief
DENNIS N. BEAL Financial Officer
(Chief Accounting
Officer)
Director October --, 1997
- -------------------------------------
JAMES J. COTTER
/s/ Thomas W. Field, Jr. Director October 16, 1997
- -------------------------------------
THOMAS W. FIELD, JR.
</TABLE>
II-4
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
October 16, 1997
(213) 229-7000 C 87217-00008
Stater Bros. Holdings Inc.
21700 Barton Road
Colton, California 92324
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-4, as amended, Registration No. 333-34113, of Stater Bros. Holdings Inc., a
Delaware corporation (the "Company"), and the Prospectus forming a part thereof
(the "Prospectus"), filed in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of $100,000,000
aggregate principal amount of the Company's 9% Senior Subordinated Notes due
2004 (the "New Notes") and the exchange of the New Notes for a like principal
amount of the Company's 9% Senior Subordinated Notes due 2004.
We hereby confirm our opinion as set forth in the Prospectus under the
caption "Certain Federal Income Tax Consequences."
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
captions "Legal Matters" and "Certain Federal Income Tax Consequences." In
giving this consent, we do not thereby admit
<PAGE>
Stater Bros. Holdings Inc.
October 16, 1997
Page 2
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations promulgated
thereunder.
Sincerely,
/s/ GIBSON, DUNN & CRUTCHER LLP
GIBSON, DUNN & CRUTCHER LLP
