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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 33-0350671
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
21700 Barton Road
Colton, California 92324
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
</TABLE>
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceeding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO ___ .
As of January 25, 1997, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock
1
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STATER BROS. HOLDINGS INC.
DECEMBER 29, 1996
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
- - ------ --------------------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 29, 1996
AND DECEMBER 29, 1996 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
DECEMBER 24, 1995 AND DECEMBER 29, 1996 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13 WEEKS
ENDED DECEMBER 24, 1995 AND DECEMBER 29, 1996 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
- - ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 29, DEC. 29,
1996 1996
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<S> <C> <C>
Current Assets
Cash and cash equivalents $ 45,279 $ 42,732
Receivables 19,009 19,825
Inventories 117,372 114,972
Prepaid expenses 3,357 5,292
Deferred income taxes 4,710 4,710
Properties held for sale 1,787 1,779
-------- --------
Total current assets 191,514 189,310
Investment in unconsolidated affiliate 7,626 12,183
Property and equipment
Land 18,688 14,603
Buildings and improvements 89,856 79,721
Store fixtures and equipment 78,570 79,675
Property subject to capital leases 14,368 14,368
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201,482 188,367
Less accumulated depreciation and amortization 87,267 88,067
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114,215 100,300
Deferred income taxes 5,295 7,382
Deferred debt issuance cost, net 5,221 4,926
Lease guarantee escrow 6,701 7,691
Other assets 7,722 7,500
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Total assets $338,294 $329,292
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT. 29, DEC. 29,
1996 1996
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<S> <C> <C>
Current Liabilities
Accounts payable $ 79,271 $ 60,819
Accrued payroll and related expenses 23,981 22,649
Other accrued liabilities 23,607 30,839
Current portion of capital lease obligations 1,182 1,182
-------- --------
Total current liabilities 128,041 115,489
Long-term debt 165,000 165,000
Capital lease obligations, less current portion 6,917 6,631
Long-term portion of self-insurance reserves 10,332 9,475
Other long-term liabilities 2,526 4,840
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 earnings (41,953) (39,574)
Less option to acquire stock (14,650) (14,650)
-------- --------
Total stockholders' equity (43,887) (41,508)
-------- --------
Total liabilities and stockholders' equity $338,294 $329,292
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------
DEC. 24, DEC. 29,
1995 1996
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<S> <C> <C>
Sales $408,740 $433,400
Cost of goods sold 316,479 332,574
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Gross profit 92,261 100,826
Operating expenses
Selling, general and administrative expenses 77,813 85,096
Depreciation and amortization 3,058 3,275
Consulting fees 375 375
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Total operating expenses 81,246 88,746
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Operating profit 11,015 12,080
Interest income 258 469
Interest expense (4,958) (4,995)
Equity in earnings (loss) from unconsolidated affiliate (272) (443)
Other income - net 2 -
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Income before income taxes 6,045 7,111
Income taxes 2,448 2,916
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Net income $ 3,597 $ 4,195
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Less preferred dividends - 1,816
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Earnings available to common shareholders $ 3,597 $ 2,379
======== ========
Earnings per common share $ 35.97 $ 47.58
======== ========
Average common shares outstanding 100,000 50,000
======= ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
DEC. 24, DEC. 29,
1995 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,597 $ 4,195
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,058 3,275
Provision for deferred income taxes - (2,087)
Gain (loss) on disposals of assets (2) -
Net undistributed loss in investment in unconsolidated affiliate 272 443
Changes in operating assets and liabilities:
(Increase) decrease in receivables 1,291 (816)
(Increase) decrease in inventories (3,340) 2,400
(Increase) decrease in prepaid expenses (363) (1,935)
(Increase) decrease in other assets 1,131 (767)
Increase (decrease) in accounts payable (1,895) (18,452)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves 5,941 4,833
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Net cash (used by) provided by operating activities 9,690 (8,911)
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INVESTING ACTIVITIES:
Investment in unconsolidated affiliate - (5,000)
Purchase of property and equipment (4,047) (2,544)
Proceeds from sale of property and equipment and properties
held for sale 391 16,010
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Net cash (used by) provided by investing activities (3,656) 8,466
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FINANCING ACTIVITIES:
Dividends paid on preferred stock - (1,816)
Principal payments on capital lease obligations (263) (286)
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Net cash (used by) financing activities (263) (2,102)
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Net increase (decrease) in cash and cash equivalents 5,771 (2,547)
Cash and cash equivalents at beginning of period 26,308 45,279
------- -------
Cash and cash equivalents at end of period $32,079 $42,732
======= =======
Interest paid $ 383 $ 195
Income taxes paid $ - $ 550
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 29, 1996
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of December 29, 1996 and December 24, 1995
and the results of its operations and cash flows for the thirteen weeks ended
December 29, 1996 and December 24, 1995. 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 thirteen weeks ended December 29,
1996 are not necessarily indicative of the results of operations for a full
year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the thirteen weeks ended December 24,
1995 and December 29, 1996 consists of the following:
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
Dec. 24, 1995 Dec. 29, 1996
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(In thousands)
<S> <C> <C>
Federal Income Taxes $2,100 $2,506
State Income Taxes 348 410
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$2,448 $2,916
====== ======
</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 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 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. 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. The Company recognized undistributed losses from
its investment in Santee Dairies, Inc. of $443,000 and $272,000 for the
thirteen weeks ended December 29, 1996 and December 24, 1995, respectively.
7
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 29, 1996
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 will
render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company will pay Craig $1.5
million per year, payable quarterly during the term of the Consulting
Agreement. The Company will have the right to terminate its obligations under
the Consulting Agreement in the event it exercises its option to purchase the
Series B Preferred Stock owned by Craig. Additionally, in accordance with the
terms of the Consulting Agreement, Craig has agreed not to engage in any
business that competes with the Company in any of the five counties in which
the Company operates until the end of the five-year period of the Consulting
Agreement. The Company paid Craig $5.0 million 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.
8
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STATER BROS. HOLDINGS INC.
DECEMBER 29, 1996
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the
Company to La Cadena, reclassified the Company's outstanding equity,
provided for certain cash payments and distributions to Craig
Corporation ("Craig"), previously a shareholder of the Company, and
provided the Company with an option to acquire Craig's remaining equity
in the Company. The Recapitalization was funded through an offering of
$165.0 million of 11% Senior Notes due 2001 which are listed and trade
on the American Stock Exchange.
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into in March 1994, as
part of the Recapitalization between the Company and Craig, the Company
exercised its right to convert all of the Common Stock held by Craig
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.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen weeks ended December
24, 1995 and December 29, 1996.
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
Dec. 24, 1995 Dec. 29, 1996
------------- -------------
<S> <C> <C>
Sales 100.00% 100.00%
Gross profit 22.57 23.26
Selling, general and administrative
expense 19.04 19.63
Depreciation and amortization .75 .76
Consulting expense .09 .09
Other (income)(net) - (.01)
Interest expense 1.21 1.15
Earnings before income taxes 1.48% 1.64%
</TABLE>
Total sales for the thirteen weeks ended December 29, 1996, the first
quarter of fiscal 1997, increased 6.0% and amounted to $433.4 million
compared to $408.7 million for the same period in the prior year. Like
store sales increased 6.0% for the thirteen week period in 1997. The
Company operated 110 supermarkets at December 24, 1995 and December 29,
1996.
9
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
The increase in sales in the first quarter of 1997 compared to the first
quarter of 1996 is due to many factors, including very 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 which
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.
Gross profits for the thirteen weeks ended December 29, 1996, increased to
$100.8 million or 23.26% of sales compared to $92.3 million or 22.57% of sales
in the same period of the prior year. The increase in gross profits as a
percent of sales was due to increased efficiencies in the Company's warehousing
and transportation departments and the introduction of higher gross margin
categories, such as prepackaged gourmet vegetables and fresh cut flowers and a
decrease in competitive activity when compared to the prior year.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and consulting expenses. For the thirteen weeks
ended December 29, 1996, selling, general and administrative expenses amounted
to $85.1 million or 19.63% of sales. Selling, general and administrative
expenses in the first quarter of fiscal 1997 include rent expenses of $580,000,
net of reductions in depreciation expenses, from the sale and leaseback of five
supermarkets in January 1996 and the sale and leaseback of four additional
supermarkets in October 1996. For the thirteen weeks ended December 24, 1995,
selling, general and administrative expenses amounted to $77.8 million or
19.04% of sales. The increase in selling, general and administrative expenses
of $7.3 million in the first quarter of fiscal 1997 was due primarily to costs
incurred to operate at the higher level of sales and additional net rent
expenses from the sale and leaseback transactions.
During the quarter ended December 24, 1995, the Company entered into a four
year collective bargaining agreement with the Retail Clerks Union. The new
four year collective bargaining agreement included an immediate one-time bonus
expense paid to all full and part time union members and a suspension of
employer contributions to a union benefits trust. Accordingly, as a result of
the suspension of employer contributions to the benefits trust fund, net of the
one-time bonus paid pursuant to the new Retail Clerks collective bargaining
agreement, salaries, wages and related benefits expense was reduced by $1.3
million in the quarter ended December 24, 1995. The Company's primary
competitors in Southern California entered into similar collective bargaining
agreements with the Retail Clerks collective bargaining union.
10
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Depreciation and amortization expenses amounted to $3.3 million for the
thirteen weeks ended December 29, 1996 and amounted to $3.1 million for the
like period of the prior year and included amortization of $250,000 in both
years from a five-year prepaid covenant not to compete.
Effective March 8, 1994, and in conjunction with the Recapitalization
Transaction, the Company entered into a consulting agreement with Craig
Corporation whereby the Company is required to pay Craig Corporation $375,000
per quarter for up to five years. Accordingly, consulting fees expense of
$375,000 was recognized during the thirteen weeks ended December 24, 1995 and
December 29, 1996.
Operating profit for the thirteen weeks ended December 29, 1996 amounted to
$12.1 million or 2.79% of sales compared to $11.0 million or 2.69% of sales for
the thirteen weeks ended December 24, 1995.
Interest expense amounted to $5.0 million for the thirteen weeks ended December
29, 1996 and December 24, 1995. Interest expense for the thirteen weeks ended
December 29, 1996 and December 24, 1995 includes amortization of $295,000 from
fees and expenses incurred to acquire debt.
Income before income taxes amounted to $7.1 million and $6.1 million for the
thirteen weeks ended December 29, 1996 and December 24, 1995, respectively.
Net income for the thirteen week first quarter of fiscal 1997 amounted to $4.2
million compared to $3.6 million for the quarter ended December 24, 1995.
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 Agreement is between a
bank and Stater Bros. Markets, a wholly owned subsidiary of the Company and
consists of revolving credit facilities for working capital purposes of $15.0
million, which was available at December 29, 1996, and a $25.0 million standby
letter of credit facility maintained pursuant to its workers' compensation and
general liability self-insurance requirements. The Bank Credit Agreement
expires on June 1, 1998.
Working capital amounted to $73.8 million at December 29, 1996 and $63.5
million at September 29, 1996, and the Company's current ratios were 1.64:1,
and 1.50:1, respectively. Fluctuations in working capital and current ratios
are not unusual in the industry.
The net cash used by operating activities in the first quarter of fiscal 1997
amounted to $8.9 million and consisted of reductions in accounts payable, net
of decreases in inventories, the timing of the interest payments due on the
Company's 11% Senior Notes and the deferred tax benefits arising from the
11
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 December 29,
1996, the Company's investment in inventories and related accounts payable are
reflected at more traditional balances. The increase of $4.8 million in
accrued liabilities and long term portion of self-insurance reserves reflects
the accrual for interest due on the Company's 11% Senior Notes, such interest
payments are due September 1 and March 1 of each year. 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 investing activities for the thirteen weeks ended December
29, 1996, amounted to $8.5 million, compared to net cash used by investing
activities of $3.7 million for the first quarter of fiscal 1996. The
difference in net cash provided by or used by investing activities between the
comparable periods is due to the Company's capital expenditures during such
periods, net of proceeds from asset dispositions. Capital expenditures for the
thirteen week periods amounted to $2.5 million in the first quarter of 1997
compared to $4.1 million in the like period of 1996. During the thirteen weeks
ended December 29, 1996, the Company remodeled five supermarkets. Capital
expenditures for the first quarter of fiscal 1997 were financed from cash
provided by the October 1996 sale and leaseback transaction.
In October 1996, the Company completed a sale and leaseback transaction with an
unrelated third party for four of the Company's supermarkets. The net proceeds
from the sale of the four supermarkets amounted to approximately $16.0 million,
which approximated fair market value. The Company entered into leases for the
four supermarkets with initial terms of 20 years and with options available to
the Company which extend the lease terms up to an additional 20 years. The
Company believes the rents due under the leases approximate fair market rents.
The gains from the sale of the supermarkets were approximately $2.5 million and
will be deferred and amortized into income over the initial term of the leases.
As a result of the additional rent expenses, net of reductions in depreciation
expense, due on the four supermarkets, operating expenses for the 52-week 1997
fiscal year will increase by approximately $1.2 million.
In November 1996 and for approximately $200,000, the Company increased its
ownership in Santee to 50%. Santee provides the Company with a significant
amount of the fluid milk products offered for sale in the Company's
supermarkets. Additionally, during the first quarter of fiscal 1997, the
Company acquired approximately $4.8 million worth of the Preferred Stock of
Santee. Hughes Supermarkets, located in Irwindale, California, retained a 50%
ownership in Santee and acquired a like amount of the Preferred Stock of
Santee. Santee operates a fluid milk processing plant in Los Angeles,
12
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
California and is constructing a new fluid milk and other fluid dairy products
processing plant in the City of Industry, California. The Company believes
that its 50% ownership and additional investment in Santee and its
representation on the Santee Board by Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of the Company, will, for the foreseeable
future, provide the Company's supermarkets with an uninterrupted supply of high
quality fluid milk and other dairy products.
Net cash used by financing activities amounted to $2.1 million and $263,000 for
the first quarters of fiscal 1997 and 1996, respectively, and consisted of
payments on the Company's capitalized lease obligations and dividend payments
on the Company's 10.5% Series B Preferred Stock. Such preferred stock
dividends are paid quarterly and such dividend payments on the Company's
preferred stock commenced in March 1996.
The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001 and covenants included in the Bank Credit Agreement between a
bank and Stater Bros. Markets, a wholly owned subsidiary of the Company. As of
December 29, 1996, the Company was in compliance with all such convenants.
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 BANK FACILITIES
The Company believes that cash flow from operations and proceeds from
borrowings, including lease financings, and funds available under the short-term
revolving credit facility will be adequate to meet the Company's currently
identifiable working capital requirements. Stater Bros. Markets, the Company's
operating subsidiary, and Bank of America National Trust and Savings Association
(the "Bank") entered into a Credit Agreement in March 1994, as amended and
effective June 1, 1996, whereby the Bank provides Stater Bros. Markets with a
revolving operating line of credit (the "Operating Facility") with a maximum
availability of $15.0 million which was available at December 29, 1996 and a
revolving letter of credit facility (the "LC Facility") with a maximum
availability of $25.0 million (collectively, the "Bank Facilities"). As of
December 29, 1996, approximately $11.3 million of the LC Facility was available
to the Company. The Bank Credit Agreement expires on June 1, 1998.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of
at least $145.0 million; (iii) maintain a ratio of total liabilities to
tangible
13
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for
liens for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any
new advances for at least 5 calendar days each month.
As of December 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 1.77:1, (ii) tangible net worth and debt subordinated to the Bank of
$199.4 million; (iii) a ratio of total liabilities to tangible net worth and
debt subordinated to the Bank of 0.63:1 and (iv) a fixed charge coverage ratio
(as defined in the Bank Facilities) of 1.57:1. If for any reason Stater Bros.
Markets is unable to comply with the terms of the Bank Facilities, including
the covenants contained therein, such noncompliance would result in an event of
default under the Bank Facilities, and could result in acceleration of the
payment of indebtedness then outstanding under Bank Facilities or, in certain
situations, the prohibition of payments of dividends or advances to the
Company. In addition, no amendment, waiver or supplement may be made to the
Indenture without the prior written consent of the Bank if such amendment,
waiver or supplement adversely affects the rights of the Bank as lender to
Stater Bros. Markets. The financial and operational covenants contained in the
Bank Facilities significantly limit Stater Bros. Markets' ability to pay
dividends and make loans or advances to the Company, the primary source of
anticipated cash for the Company, and could limit the Company's ability to
respond to changing business and economic conditions, and to finance future
operations or capital needs including the Company's ability to achieve its
plans to remodel and expand existing supermarkets and open new supermarkets.
THE PREFERRED STOCK CONVERSION
In March 1994, the Company acquired, for $14.7 million, an option to purchase
all, but not less than all, shares of the Common Stock held by Craig for a cash
purchase price of $60.0 million plus an adjustment factor equal to 8.83% per
annum from March 8, 1994 to March 8, 1996, compounded annually and $69,365,000
thereafter.
The Option Agreement also included an option available to the Company to
convert the Company's 50,000 shares of Common Stock held by Craig
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE PREFERRED STOCK CONVERSION (CONTD.)
into 693,650 shares of 10.5% Series B Preferred Stock on or before March 8,
1996. Effective March 8, 1996, the Company exercised its option to convert the
Company's 50,000 shares of Common Stock held by Craig into 693,650 shares of
the Company's Series B Preferred Stock. The Series B Preferred Stock is
redeemable by the Company in whole, but not in part, for $69.4 million plus
accrued and unpaid dividends. The holders of the Series B Preferred Stock can,
beginning in the year 2009, cause the Company to redeem such Preferred Stock.
Dividends on the Preferred Stock are paid quarterly in arrears at the rate of
10.5% per annum through September 2002, and beginning October 2002, will
increase to 12% per annum and will increase by 100 basis points per year
thereafter to a maximum rate of 15% per annum.
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.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements contained in this report are forward looking statements.
Such forward looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from future
results expressed or implied by such forward looking statements. Potential
uncertainties and risks include, but are not limited to, changes in the economic
environment in the Company's market areas and changes in the competitive
environment. Due to risks and uncertainties, actual results may differ from any
future performance discussed in the Company's Securities and Exchange filings.
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
DECEMBER 29, 1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in the
ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending legal
actions and claims will not have a material adverse effect on the
Company's consolidated financial position or its results of operations.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Form 10-K for the fiscal
year ended September 29, 1996.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
11 Calculation of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
DECEMBER 29, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (contd.)
(a) Exhibits (contd.)
Copies of Exhibits listed herein can be obtained by writing and
requesting such Exhibits from: Corporate Secretary, P. O. Box
150, Colton, California 92324.
(b) Reports on Form 8-K
None
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: February 10, 1997 /s/ Jack H. Brown
------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: February 10, 1997 /s/ Dennis N. Beal
-------------------
Dennis N. Beal
Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
18
<PAGE> 1
Exhibit 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(Unaudited)
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
Dec. 24, Dec. 29,
1995 1996
------ ------
<S> <C> <C>
Net income $3,597 $4,195
Less: Preferred dividends - (1,816)
------ ------
Net income available to common shareholders $3,597 $2,379
====== ======
Earnings per common share $35.97 $47.58
====== ======
Average common shares outstanding 100,000 50,000
======= ======
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 42,732
<SECURITIES> 0
<RECEIVABLES> 19,825
<ALLOWANCES> 0
<INVENTORY> 114,972
<CURRENT-ASSETS> 189,310
<PP&E> 188,367
<DEPRECIATION> 88,067
<TOTAL-ASSETS> 329,292
<CURRENT-LIABILITIES> 115,489
<BONDS> 185,946
0
69,365
<COMMON> 1
<OTHER-SE> (41,509)
<TOTAL-LIABILITY-AND-EQUITY> 329,292
<SALES> 433,400
<TOTAL-REVENUES> 433,400
<CGS> 332,574
<TOTAL-COSTS> 332,574
<OTHER-EXPENSES> 88,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,995
<INCOME-PRETAX> 7,111
<INCOME-TAX> 2,916
<INCOME-CONTINUING> 4,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,195
<EPS-PRIMARY> 47.58
<EPS-DILUTED> 47.58
</TABLE>
