<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 28, 1997
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)
Delaware 33-0350671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
21700 Barton Road
Colton, California 92324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES [X] NO [ ]
No voting stock of the registrant is held by non-affiliates of the
registrant.
Number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of December 10, 1997--Class A Common Stock - 50,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
1
<PAGE> 2
STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Item 1 Business.......................................................... 3
Item 2 Properties........................................................ 9
Item 3 Legal Proceedings................................................. 10
Item 4 Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 11
Item 6 Selected Financial Data........................................... 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 8 Financial Statements and Supplementary Data....................... 22
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 23
PART III
Item 10 Directors and Executive Officers of the Registrant................ 23
Item 11 Executive Compensation............................................ 25
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................. 27
Item 13 Certain Relationships and Related Transactions.................... 28
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 31
Signatures........................................................ 34
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively "Stater Bros." or the "Company") were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California, operating 111
supermarkets in the Inland Empire Region of Southern California.
The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The Company
offers its customers a high level of customer service, broad selections of
grocery, meat, produce, liquor and general merchandise. All of the Company's
supermarkets have full-service meat departments and many of the supermarkets
have service delicatessens and service bakery departments. All of the Company's
supermarkets have expanded selections of produce merchandise.
The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 80% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 1,017,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.
OWNERSHIP OF THE COMPANY
In August 1997, La Cadena Investments ("La Cadena") became the sole shareholder
of the Company and holds all of the shares of the Company's Class A Common Stock
which are entitled to 1.1 votes per share. La Cadena Investments is a California
General Partnership whose partners include Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of the Company and other members of senior
management of the Company. Jack H. Brown has a majority interest in La Cadena
and is the managing general partner with the power to vote the shares of the
Company held by La Cadena.
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the Company to
La Cadena, reclassified the Company's outstanding equity, provided for certain
cash payments and distributions to Craig Corporation ("Craig"), previously a
common shareholder of the Company, and provided the Company with an option to
acquire Craig's remaining equity in Stater Bros. Holdings Inc. The
Recapitalization Transaction was funded through an offering of $165.0 million of
11% Senior Notes due 2001 (the "11% Notes") under Rule 144A of the Securities
Act of 1933, as amended. Proceeds from the 1994 Notes were used to (a) repay
$75.5 million of 9.8% Senior Notes, together with prepayment premiums of $13.9
million, (b) repay outstanding bank loans and mortgages of approximately $12.0
million, (c) repay an outstanding capital expenditure revolving credit facility
of $9.0 million, (d) fund a $5.0 million five-year consulting agreement and
covenant not to compete with Craig, (e) fund a payment of $14.6 million to
purchase an option to acquire Craig's remaining interest in the Company, (f) pay
$20.0 million in dividends on the Company's Common Stock (held by Craig) and (g)
pay fees and expenses associated with the Recapitalization. The 11% Notes are
listed and trade on the American Stock Exchange.
3
<PAGE> 4
ITEM 1. BUSINESS (CONTD.)
CONVERSION AND REDEMPTION OF SERIES B PREFERRED STOCK
Effective March 8, 1996, pursuant to options available to the Company, the
Company exercised its right to convert all of its outstanding shares of Common
Stock (previously held by Craig) into 693,650 shares of its Series B Preferred
Stock. The Series B Preferred Stock had a redemption value of approximately
$69.4 million and currently paid dividends at the rate of 10.5% per annum. In
August 1997, the Company redeemed all of the outstanding shares of its Series B
Preferred Stock for $69.4 million plus accrued and unpaid dividends.
In July 1997, the Company issued $100 million of 9% Senior Subordinated Notes
due 2004 (the "9% Notes") under Rule 144A of the Securities Act of 1933.
Proceeds from the issuance of the 9% Notes were used as follows (a) $69.4
million to redeem the Series B Preferred Stock, (b) $4.6 million to pay accrued
dividends due from the Series B Preferred Stock, (c) $4.9 million to obtain
consents from the holders of the Company's 11% Senior Notes due 2001 to permit
the issue of the 9% Notes, (d) $2.0 million to La Cadena for financial advise
relating to the transaction, (e) $3.4 million for fees and expenses of the
transaction. The remaining proceeds from the issuance of the 9% Notes were used
for general corporate purposes, including capital expenditures. The 9% Notes
will trade on the American Stock Exchange.
BUSINESS STRATEGY
STORE PROFILE AND LOCATIONS
The Company's existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most supermarkets. In
addition, the Company believes that its existing supermarkets are
well-maintained and generally require capital expenditures only for customary
maintenance. An average Stater Bros. supermarket is approximately 28,800 square
feet, while newly constructed Stater Bros. supermarkets range from approximately
35,300 to 43,200 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 111 supermarkets are located in neighborhood
shopping centers in well-populated residential areas. The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future supermarket expansion.
Management actively pursues the acquisition of sites for new supermarkets. In an
effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Company's criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix.
STORE EXPANSION AND REMODELING
The Company has historically focused its expansion in the Inland Empire. Such
expansion has been accomplished through improving and remodeling existing stores
and constructing new supermarkets rather than by acquiring other supermarket
operations. The number of supermarkets operated by the Company has grown from 82
in September 1979 to 111 as of December 10, 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, if such
opportunities arise.
4
<PAGE> 5
ITEM 1. BUSINESS (CONTD.)
STORE EXPANSION AND REMODELING (CONTD.)
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
53% 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
----------------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 29, Sept. 28,
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of supermarkets:
Opened........................ 2 3 - 1 -
Replaced...................... - 1 - 1 -
Closed........................ - - 1 - -
Total at end of year.......... 109 111 110 110 110
Minor Remodel................. 10 4 8 8 13
Major Remodel................. - - - 8 1
Expansion..................... - - 1 - -
</TABLE>
Beyond 1997, the Company plans to open approximately two to four new stores per
year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores. The Company's plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company finances
its new store construction primarily from cash provided by operating activities
and short-term borrowings under its credit facilities. Long-term financing of
new stores generally will be obtained through either sale/leaseback transactions
or secured long-term financings. However, no assurances can be made as to the
availability of such financings. The Company opened a new supermarket in Laguna
Hills, California on October 9, 1997 which is not included in the table above.
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 are processed
through the Company's warehouse and distribution facilities.
The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 miles from its supermarkets. Most
supermarkets can be reached without using the most congested portions of the
Southern California freeway system.
5
<PAGE> 6
ITEM 1. BUSINESS (CONTD.)
WAREHOUSE AND DISTRIBUTION FACILITIES (CONTD.)
The Company's transportation fleet consists of modern well-maintained vehicles.
As of September 28, 1997, the Company operated approximately 102 tractors and
285 trailers, approximately 15% of which were leased by the Company. The Company
also operates a repair terminal at the Colton distribution facility.
PURCHASING AND MARKETING
The Company uses an Everyday Low Price ("EDLP") format as an integral part of
its purchasing and marketing strategy to provide its customers with the best
overall supermarket value in its primary market areas. The Company supplements
its everyday low price structure with chain-wide temporary price reductions on
selected food and non-food merchandise. The geographic location of the Company's
supermarkets allows it to reach its target consumers through a variety of media
and the Company aggressively advertises its everyday low prices through local
and regional newspapers, direct mail and printed circulars as well as
advertisements on radio and television.
A key factor in the Company's business strategy is to provide its customers with
a variety of quality brand-name merchandise as well as alternative selections of
high-quality private label and generic brands of merchandise. To meet the needs
of customers, most supermarkets are stocked with approximately 35,000 items. The
Company places particular emphasis on the freshness and quality of its meat and
produce merchandise and maintains high standards for these perishables by
processing and distributing the merchandise through its perishable warehouses
and distribution facilities.
RETAIL OPERATIONS
The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m.,
seven days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all its supermarkets under a single format,
management believes it is able to achieve certain operating economies.
Store Management. Each supermarket is managed by a store manager and an
assistant manager, each of whom receives a base salary and may receive a bonus
based on the individual supermarket's overall performance and management of
labor costs within the supermarket. The store manager and assistant manager are
supported by their store management staff who have the training and skills
necessary to provide proper customer service, operate the store and manage
personnel in each department. Additionally, the store manager is supported by
individual department managers for grocery, meat, produce, and where applicable,
bakeries and delicatessens. Store managers report to one of six district
managers, each of whom is responsible for an average of 18 supermarkets.
District managers report to one of three Regional Vice Presidents.
Customer Service. The Company considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees. The Company maintains an intensive checker training
school to train prospective checkers and to provide a refresher program for
existing checkers. All of the Company's supermarkets provide customers with
purchase carry-out service and have express check-out lanes for purchases of 10
items or less.
6
<PAGE> 7
ITEM 1. BUSINESS (CONTD.)
SANTEE DAIRIES, LLC
The Company and Hughes Family Markets ("Hughes") currently each own a 50%
interest in Santee Dairies Limited Liability Company, and have jointly owned
Santee Dairies, Inc. ("Santee") since 1986. Santee is a wholly-owned subsidiary
of Santee Dairies LLC. 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 in Santee's fiscal year ended December 28, 1996 were $194.2
million, of which approximately 27% were 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, fluid milk products and other dairy products to
accommodate expected expansion, and in order to contain costs, Santee is
currently in the process of constructing a new dairy plant in City of Industry,
California (the "New Facility"). The new facility, which is expected to be
operational by March 1998, will increase Santee's capacity to process milk to
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 Facility excluding land and capitalized interest,
are estimated to be approximately $87.8 million, including production equipment,
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. The Company does not
guarantee payment of the Santee Notes.
Stater Bros. Markets entered into a Fluid Milk and other Products Requirements
Agreement (the "Product Purchase Agreement") with Santee. The term of the
Product Purchase Agreement is 10 years and requires that Stater Bros. Markets
purchase essentially the same type of products from Santee's New Facility that
it purchased from Santee's existing facility, located in Los Angeles,
California. Stater Bros. Markets is required to purchase from Santee a minimum
volume of products each year equal to approximately 80% of such products
purchased by Stater Bros. Markets in its 1996 fiscal year. Additionally, the
price for products charged by Santee to Stater Bros. Markets, may increase or
decrease, subject to the financial performance of Santee. However, in no event
may the price for products charged to Stater Bros. Markets exceed the price for
products that would be charged by an unrelated third party for similar products.
The Company believes that any such change in the price for products purchased
from Santee will not have an adverse material effect on the results of
operations of the Company.
Jack H. Brown also serves as Chairman and Chief Executive Officer of Santee.
The Company accounts for its investment in Santee using the equity method of
accounting.
7
<PAGE> 8
ITEM 1. BUSINESS (CONTD.)
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 assist store management in developing a
more efficient and customer-sensitive work schedule.
During 1995, the Company completed the installation of the Stater Express(R)
system in all of the Company's supermarkets. Stater Express(R) 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(R) 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 obtained a federal
service mark for the name "Stater Express".
EMPLOYEES
The Company has approximately 8,900 employees, approximately 600 of whom are
management and administrative employees and approximately 8,300 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 or International Brotherhood of Teamsters labor
unions and are represented by several different collective bargaining
agreements. The Company's collective bargaining agreements, with the United Food
& Commercial Workers, which covers the largest number of employees, were renewed
in October 1995 and expire in October 1999. The International Brotherhood of
Teamsters 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 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.
8
<PAGE> 9
ITEM 1. BUSINESS (CONTD.)
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters and regulate
the distribution and sale of alcoholic beverages, tobacco products, milk and
other agricultural products and other food items.
ENVIRONMENTAL
During fiscal 1997, the Company removed all of its underground diesel fuel
storage tanks and related diesel refueling equipment from its Colton, California
distribution facility. The Company refuels its transportation equipment at
several off-site locations which are owned and operated by an unrelated third
party. The costs incurred during fiscal 1997 to remove the underground diesel
fuel storage tanks and to remediate the surrounding soils, amounted to
approximately $330,000.
Environmental remediation costs incurred over the past five years have been
approximately $510,000, in the aggregate, including remediation costs of
approximately, $8,000 in 1995, $80,000 in 1996 and $330,000 in 1997. Management
believes that any such future remediation costs will not have an adverse
material effect on the financial condition or results of operations of the
Company.
ITEM 2. PROPERTIES
The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company. The following schedule presents the
Company's warehouse and distribution facilities by product classification and
the size of each such facility as of December 10, 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 administrative offices............................. 74,000
-------
Total...................................................... 1,017,000
=========
</TABLE>
9
<PAGE> 10
ITEM 2. PROPERTIES (CONTD.)
As of December 10, 1997, the Company owned 23 of its supermarkets and leased the
remaining 88 supermarkets. Management believes that its supermarkets are well
maintained and adequately meet the expectations of its customers. The Company
operates 111 supermarkets in the Southern California counties of San Bernardino,
Riverside, Orange, Los Angeles and Kern. The following schedule reflects the
Company's store counts by size, county, and the number of stores that are either
leased or owned as of December 10, 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............. 15 6 9 3 10 - 1 1
Los Angeles........ 14 2 12 3 10 - 1 -
Kern............... 2 - 2 - - 1 1 -
--- -- -- -- -- -- -- -
Total.............. 111 23 88 22 51 13 20 5
=== == == == == == == =
</TABLE>
Subsequent to fiscal year end, in October 1997, the Company opened a new 43,200
square foot supermarket in Laguna Hills, California, which is included in the
table above.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company records a provision
when the occurrence of loss is probable and can be reasonably estimated. The
Company believes that the outcome of such legal proceedings to which the Company
is currently a party will not have a material adverse effect upon its results of
operations or its consolidated financial condition.
On May 2, 1993, the Company was named as a defendant along with all of the other
major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs sought unspecified damages. The Company has recently
entered into a settlement agreement of this case which settlement does not
involve payment of monetary damages and is currently being processed through the
courts for approval.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS (CONTD.)
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of
Ufondu, et al. vs. Stater Bros. Markets 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.
ENVIRONMENTAL MATTERS
During fiscal 1997, the Company removed all of its underground diesel fuel
storage tanks and related diesel refueling equipment from its Colton, California
distribution facility. The Company refuels its transportation equipment at
several off-site locations which are owned and operated by an unrelated third
party. The costs incurred during fiscal 1997 to remove the underground diesel
fuel storage tanks and to remediate the surrounding soils, amounted to
approximately $330,000.
Environmental remediation costs incurred during the last five years have been
approximately $510,000, in the aggregate, including remediation costs of
approximately $8,000 in 1995, $80,000 in 1996 and $330,000 in 1997. Management
believes that any such future remediation costs will not have an adverse
material effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
There is no established public trading market for the Company's
common equity.
(b) Holders
La Cadena Investments holds 50,000 shares of the Company's Class A
Common Stock.
(c) Dividends
No dividends were paid in fiscal years 1997, 1996 and 1995 on the
common equity of the Company and the Company does not intend to pay
dividends on its common equity in the foreseeable future.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data derived from the
audited financial statements of the Company as of and for the fiscal years ended
September 26, 1993, September 25, 1994, September 24, 1995, September 29, 1996
and September 28, 1997. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Consolidated Financial Statements of the Company
and related notes thereto contained elsewhere herein. The information included
in "Other Operating and Financial Data" and "Store Data" is unaudited.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------------------------------------
SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29,(7) SEPT. 28,
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Sales ............................. $ 1,526,002 $ 1,539,717 $ 1,579,895 $ 1,705,332 $ 1,717,924
Cost of goods sold ................ 1,195,399 1,199,794 1,227,355 1,315,726 1,326,410
----------- ----------- ----------- ----------- -----------
Gross profit ...................... 330,603 339,923 352,540 389,606 391,514
Selling, general and administrative
expenses ........................ 300,826 297,474 308,332 328,242 333,199
Depreciation and amortization ..... 9,910 11,656 11,756 12,583 13,265
Consulting fees(1) ................ - 830 1,500 1,525 1,458
----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 310,736 309,960 321,588 342,350 347,922
----------- ----------- ----------- ----------- -----------
Operating profit .................. 19,867 29,963 30,952 47,256 43,592
Interest and other income ......... 436 775 1,049 1,757 3,110
Interest expense .................. (10,292) (15,501) (20,076) (20,258) (21,563)
Equity in earnings (loss) from
unconsolidated affiliate ........ 107 (592) (980) (1,624) (2,313)
----------- ----------- ----------- ----------- -----------
Income before income taxes,
extraordinary charge and
cumulative effect of a change
in accounting for income taxes .. 10,118 14,645 10,945 27,131
22,826
Income taxes ...................... 4,426 5,856 4,218 11,120 9,359
----------- ----------- ----------- ----------- -----------
Income before extraordinary charge
and cumulative effect of a change
in accounting for income taxes .. 5,692 8,789 6,727 16,011
13,467
Extraordinary (charge)(2) ......... - (8,036) - - -
Cumulative effect of a change in
accounting for income taxes(5) .. - 372 - - -
----------- ----------- ----------- ----------- -----------
Net income ........................ 5,692 1,125 6,727 16,011 13,467
Preferred dividends ............... 323 327 - 4,111 6,166
----------- ----------- ----------- ----------- -----------
Income available to common
stockholders .................... $ 5,369 $ 798 $ 6,727 $ 11,900 $ 7,301
=========== =========== =========== =========== ===========
Earnings per common share before
extraordinary charge and
cumulative effect of a change
in accounting for income taxes .. $ 53.69 $ 84.62 $ 67.27 $ 165.28 $ 146.02
Earnings per common share ......... $ 53.69 $ 7.98 $ 67.27 $ 165.28 $ 146.02
</TABLE>
(footnotes on following page)
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------------------------
SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29,(7) SEPT. 28,
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF FISCAL YEAR):
Working capital ............................ $ 21,596 $ 41,422 $ 45,014 $ 63,473 $ 92,013
Total assets ............................... 264,484 306,489 314,082 338,294 358,477
Long-term notes and mortgages
payable .................................. 87,576 165,000 165,000 165,000 265,000
Long-term capitalized lease
obligations .............................. 10,456 9,187 8,099 6,917 5,661
Other long-term liabilities ................ 15,736 15,765 13,772 12,858 11,348
Series A Preferred Stock ................... 3,600 - - - -
Series B Preferred Stock ................... - - - 69,365 -
Common stockholders' equity ................ 40,702 6,851 13,578 (43,887) (36,586)
Dividends declared per share:
Common Stock ............................. - $ 400 - - -
Class A Common Stock ..................... - - - - -
10.5% Series B Preferred Stock ........... - - - $ 5.93 $ 8.91
OTHER OPERATING AND FINANCIAL DATA:
SALES INCREASES (DECREASES):
Total stores ............................. (0.9%) 0.9% 2.6% 7.9% 0.7%
Like stores (comparable 52-weeks) ........ (1.9%) (0.7%) 1.2% 6.3% 2.6%
EBITDA(3) .................................. $ 30,320 $ 45,802 $ 42,777 $ 59,972 $ 57,654
Operating profit ........................... $ 19,867 $ 29,963 $ 30,952 $ 47,256 $ 43,592
Ratio of earnings to fixed charges(4) 1.36x 1.47x 1.36x 1.53x 1.23x
Gross profits as a percentage
of sales ................................. 21.66% 22.08% 22.31% 22.85% 22.79%
Selling, general and administrative
expenses as a percentage of sales ........ 19.71% 19.32% 19.52% 19.25% 19.40%
STORE DATA:
Number of stores (at end of
fiscal year) ............................. 109 111 110 110 110
Average sales per store (000s) ............. $ 14,130 $ 13,997 $ 14,298 $ 15,503 $ 15,617
AVERAGE STORE SIZE:
Total square feet ........................ 28,309 28,617 28,717 28,809 28,809
Selling square feet ...................... 20,484 20,708 20,773 20,845 20,845
Total square feet (at end of
fiscal year) (000s) ...................... 3,086 3,177 3,159 3,169 3,169
Total selling square feet (at end
of fiscal year) (000s) ................... 2,233 2,299 2,285 2,293 2,293
Sales per average total sq. ft ............. $ 501 $ 492 $ 499 $ 538 $ 542
Sales per average selling sq. ft ........... $ 692 $ 680 $ 689 $ 744 $ 749
</TABLE>
(1) Effective March 1994, the Company paid $1.5 million annually in consulting
fees to Craig Corporation, subject to a certain five year Consulting
Agreement entered into between the Company and Craig. The Company's
agreement to pay Craig an annual consulting fee was terminated, at the
election of the Company, in August 1997.
(footnotes continued on following page)
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
(2) Extraordinary charges in 1994 represent the after-tax charge from the early
retirement of debt.
(3) EBITDA represents earnings before extraordinary charge, interest expense,
depreciation and amortization, standstill fees and income tax expense. The
Company has included information concerning EBITDA here as it is relevant
for covenant analysis under the Notes and because it is used by certain
investors as a measure of a company's ability to service its debt. EBITDA
should not be used as an alternative to, or be construed as more meaningful
than, operating profit or cash flows as an indicator of the Company's
operating performance.
(4) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and the extraordinary
charge, amortization of previously capitalized interest and undistributed
earnings or loss from less than 50% owned subsidiaries and includes fixed
charges. Fixed charges consist of interest expense whether expensed or
capitalized, amortization of deferred debt expense, preferred stock
dividends adjusted to represent pre-tax earnings requirements and such
portion of rental expense as can be deemed by management to be
representative of the interest factor in the particular case.
(5) The Company adopted SFAS No. 109 ("Accounting for Income Taxes") effective
at the beginning of fiscal 1994 as a cumulative effect of a change in
accounting principle.
(6) Certain amounts in prior periods have been reclassified to conform to the
current period financial statement presentation.
(7) The year ending September 29, 1996 was a 53-week year, whereas fiscal years
1993, 1994, 1995 and 1997 were 52-week years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparisons between the 1995, 1996 and 1997 fiscal years are difficult due to
the additional week in the 1996 fiscal year and the additional long-term debt
incurred in 1997. Fiscal year 1996 was a 53-week fiscal year, whereas fiscal
years 1995 and 1997 consisted of 52 weeks.
OWNERSHIP OF THE COMPANY
Effective August, 1997, La Cadena became the sole shareholder of the Company and
holds all of the shares of the Company's Class A Common Stock which are entitled
to 1.1 votes per share. La Cadena Investments is a California General
Partnership whose partners include Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of the Company and other members of senior
management of the Company. Jack H. Brown has a majority interest in La Cadena
and is the managing general partner with the power to vote the shares of the
Company held by La Cadena.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
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 28, 1997 and
September 24, 1995 and the 53-week fiscal year ended September 29, 1996.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Sales 100.00% 100.00% 100.00%
Gross profit 22.31 22.85 22.79
Operating expenses:
Selling, general and
administrative expense 19.52 19.25 19.40
Depreciation and amortization .74 .74 .77
Consulting fees .09 .09 .08
Operating profit 1.96 2.77 2.54
Interest income .06 .11 .18
Interest (expense) (1.27) (1.19) (1.26)
Equity in (loss) from
unconsolidated affiliate (.06) (.10) (.13)
Other income (expense) net - - -
Earnings before income taxes .69% 1.59% 1.33%
</TABLE>
Total sales amounted to $1.718 billion in the 52-week 1997 fiscal year, compared
to $1.705 billion in the 53-week 1996 fiscal year and $1.580 billion in the
52-week 1995 fiscal year. Like-store sales for comparable 52-week periods,
increased 2.6% in fiscal 1997, 6.3% in 1996 and 1.2% in fiscal 1995. The
increase in like-store sales in fiscals 1997, 1996 and 1995 was due to many
factors including slight improvements in the Southern California economy and
favorable customer response to the Company's merchandising expansion and
upgrading program which included expanding product offerings in the deli,
bakery, frozen foods and dairy departments and continuing with the introduction
of fresh cut flowers and prepackaged vegetables into most of the Company's
supermarkets.
During the second quarter of the Company's fiscal 1996, Smith's Food & Drug
("Smith's"), announced the termination of its Southern California operations and
began closing all of its supermarkets located in Southern California.
Approximately fifteen Smith's supermarkets competed with the Company. As of
September 29, 1996, nine Smith's supermarkets remained closed and as of
September 28, 1997, five Smith's supermarkets remained closed. Accordingly, the
Company's sales in fiscal 1996 were aided by a direct competitor leaving the
market place. Management believes it has been successful in attracting and
retaining many of the previous Smith's customers to its supermarkets, however,
sales for fiscal 1997 were adversely effected when compared to fiscal 1996, as
competitors periodically acquired and reopened the vacated Smith's supermarkets.
Gross profits increased to $391.5 million or 22.79% of sales in 1997 compared to
$389.6 million or 22.85% of sales in 1996 and $352.5 million or 22.31% of sales
in 1995. The increase in gross profits, as a percent of sales in fiscal years
1996 and 1995 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. The decrease in gross profits
as a percentage of sales in 1997 when compared to 1996, was due to aggressive
competitive pricing in selected areas of Southern California in the third and
fourth quarters of fiscal 1997. The Company adjusted its pricing strategy as
necessary to retain its every day low price marketing position.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and consulting fees expenses. In fiscal 1997,
selling, general and administrative expenses amounted to $333.2 million or
19.40% of sales. In fiscal 1996, selling, general and administrative expenses
amounted to $328.2 million or 19.25% of sales. For fiscal 1995, selling, general
and administrative expenses were $308.3 million or 19.52% of sales. In fiscal
1997, selling, general and administrative expenses increased as a percentage of
sales due to contractual increases in collective bargaining employees rates of
pay and increases in fixed expenses such as rent expense, utilities,
depreciation and supermarket supplies expenses. In fiscal 1996, selling, general
and administrative expenses decreased as a percent of sales primarily due to the
additional week in the 53-week 1996 fiscal year and a non-recurring reduction to
expenses of approximately $3.8 million from a two month suspension of employer
contributions to an over funded collective bargaining health and welfare benefit
trust. 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.
Depreciation and amortization expenses amounted to $13.3 million in 1997,
compared to $12.6 million in 1996 and $11.8 million in 1995 and includes
amortization of $1.0 million in 1997, 1996 and 1995, from a $5.0 million prepaid
five-year covenant not to compete included in a Consulting Agreement between the
Company and Craig, which became effective March 8, 1994 as part of the
Recapitalization Transaction.
Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena and Craig, that required them to
provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters. These consulting agreements
with its stockholders terminated on September 26, 1993. In March 1994, the
Company entered into a new five-year Consulting Agreement with Craig
Corporation, whereby the Company paid Craig $1.5 million per year and Craig
provided the Company with consultation and advice in connection with general
business issues, financial management consulting, real estate acquisition and
development and product diversification matters. Consulting fees expense
amounted to $1.5 million in 1997, 1996 and 1995. The agreement to make annual
consulting payments to Craig was terminated, at the election of the Company, in
August 1997.
Operating profits amounted to $43.6 million or 2.54% of sales in 1997 compared
to $47.3 million or 2.77% of sales in 1996 and $31.0 million or 1.96% of sales
in 1995.
Interest expense amounted to $21.6 million, $20.2 million, and $20.1 million for
the 1997, 1996 and 1995 fiscal years, respectively. Interest expense includes
amortization of fees and expenses incurred to acquire debt of $1.5 million in
1997 and $1.2 million in 1996 and 1995.
The increase in the Company's equity in loss from unconsolidated affiliate in
fiscal years 1997, 1996 and 1995 resulted from increased depreciation expense as
a result of Santee's decision to not exercise an option to extend the lease for
ten years, but to vacate the facility located in Los Angeles, California, which
reduced the economic lives of certain assets and increases in rent expense from
a two year extension to the lease for the Los Angeles, California facility. The
Company believes that Santee will vacate the Los Angeles, California facility in
March 1998 and will thereafter, occupy the new facility which is located in City
of Industry, California.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
Income before income taxes amounted to $22.8 million, $27.1 million and $10.9
million for the 1997, 1996 and 1995 fiscal years, respectively.
Net income amounted to $13.5 million in 1997, $16.0 million in 1996 and $6.7
million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements through
funds generated from operations and from borrowings from short-term revolving
credit facilities. The Company's credit agreement consists of a revolving credit
facility for working capital of $15.0 million, which was available at September
28, 1997 and a standby letter of credit facility with a maximum availability of
$25.0 million, of which $15.5 million was available at September 28, 1997. Such
standby letter of credit facility is maintained pursuant to the Company's
workers' compensation and general liability self-insurance requirements.
The Company had no short-term borrowings outstanding at fiscal year end 1997,
1996 and 1995. The average daily amount of short-term borrowings outstanding
amounted to $129,000 in 1995, and the weighted average interest rates during the
period was 9.68%. During fiscal years 1997 and 1996, the Company did not incur
short-term borrowings.
Working capital amounted to $92.0 million at September 28, 1997 compared to
$63.5 million at September 29, 1996 and $45.0 million at September 24, 1995 and
the Company's current ratios were 1.81:1, 1.50:1 and 1.40:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the
industry.
Net cash provided by operating activities in fiscal 1997 amounted to $9.7
million. The difference between cash provided by operating activities between
fiscals 1997 and 1996 amounted to approximately $18.3 million and consisted
primarily of reductions in accounts payable. The decrease in accounts payable in
fiscal 1997 reflects the Company's return to more traditional amounts of
accounts payable. In September 1996, the Company 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.
Net cash provided by operating activities amounted to $27.9 million and $18.9
million for fiscal years 1996 and 1995, respectively. Fluctuations in operating
assets and liabilities are not unusual in the supermarket industry.
Net cash provided by financing activities in fiscal 1997 amounted to $12.8
million and consisted of the issuance of $100 million of 9% Notes, redemption of
the Series B Preferred Stock for $69.365 million, costs and expenses to issue
debt of $10.5 million, payment of dividends on the Series B Preferred Stock of
$6.2 million and reduction to amounts due from capitalized leases by $1.2
million.
The 9% Notes are due in 2004 and are 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 agreement and effectively subordinated to
all indebtedness and other obligations of the subsidiaries of the Company.
Interest on the 9% Notes is payable semi-annually in arrears on January 1 and
July 1 of each year. The proceeds from the issuance of the 9% Notes were used
(approximately) as follows; (a) $69.4 million to redeem all of the outstanding
shares of the Company's Series B Preferred Stock, (b) $4.6 million to pay
accrued dividends on the Series B Preferred Stock, (c) $4.9 million to obtain
the consent from the holders
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
of the Company's 11% Notes to permit the issue of the 9% Notes, (d) $2.0 million
to La Cadena for financial advise relating to the transaction, and (e) $3.4
million for fees and expenses of the transaction. The remaining proceeds from
the 9% Notes were used for general corporate purposes, including capital
expenditures.
Net cash used in financing activities in fiscal years 1996 and 1995 amounted to
$5.2 million and $1.2 million, respectively. Net cash used in financing
activities in 1996 and 1995 reduced amounts due under capitalized lease
obligations by $1.1 million and $1.2 million, respectively. Effective March 8,
1996, the Company converted its outstanding Common Stock for 693,650 shares of
its 10.5% Series B Preferred Stock, stated value $100 per share. Dividends paid
or accrued for the 10.5% Series B Preferred Stock amounted to $4.1 million in
1996.
Net cash used in investing activities for the 1997, 1996 and 1995 fiscal years,
amounted to $8.6 million, $3.8 million, and $12.7 million, respectively. The
difference in net cash used in investing activities between the comparable
periods in 1997, 1996 and 1995 is due to the Company's capital expenditures
during such periods, net of proceeds from asset dispositions. Capital
expenditures amounted to $20.3 million in 1997, $22.4 million in 1996 and $13.2
million in 1995. In October 1996 (fiscal 1997), 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 increased by approximately $1.2 million in fiscal 1997. In January 1996
(fiscal 1996), the Company completed a sale and leaseback transaction with an
unrelated third party for five of the Company's supermarkets. Gross proceeds
from the sale of the five supermarkets amounted to approximately $18.5 million,
which approximated fair market value. The Company entered into leases for the
five supermarkets with initial terms of 20 years and with options available to
the Company which extend the lease terms up to an additional 20 years. The
Company believes the rents due in accordance with the terms of the leases
approximate fair market rents. The gains from the sale of the supermarkets are
deferred and will be amortized into income over the initial term of the leases.
As a result of the additional rent expenses, net of reductions in depreciation
expense, paid on the five supermarkets, operating expenses increased by
approximately $900,000 in fiscal 1996 and by $259,000 in fiscal 1997.
In November 1996, for approximately $200,000, the Company increased its
ownership in Santee Dairies, Inc. to 50%. Additionally, during the first quarter
of fiscal 1997, the Company increased its investment in Santee Dairies, Inc. by
approximately $4.8 million. Hughes Family Markets ("Hughes"), located in
Irwindale, California retained a 50% ownership in Santee. Both the Company and
Hughes subsequently exchanged all of the Common Stock of Santee Dairies, Inc.
for equal interests in Santee Dairies Limited Liability Company. Santee Dairies,
Inc. is a wholly owned subsidiary of Santee Dairies LLC. Santee Dairies, Inc.
operates a fluid milk processing plant in Los Angeles, California and is
constructing a new fluid milk and other fluid dairy products processing plant in
City of Industry, California. Mr. Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of Stater Bros. Markets also serves as
Chairman of the Board and Chief Executive Officer of Santee. Santee provides the
Company's supermarkets with a significant amount of high quality fluid milk and
other dairy products.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Capital expenditures for 1997 included costs incurred to complete thirteen minor
remodels and one major remodel and to acquire one supermarket site. Two
supermarkets were under construction during fiscal 1997. One supermarket opened
on October 9, 1997 (fiscal 1998) and the other supermarket is scheduled to open
in March 1998. Additional 1997 capital expenditures were incurred to remodel a
perishable products warehouse.
Capital expenditures for 1996 included costs incurred to construct a replacement
supermarket and to complete eight major remodels and eight minor remodels and
capital expenditures incurred to acquire store equipment to support the 1996
merchandising expansion and upgrade program. Capital expenditures for fiscal
1995 included costs incurred to complete eight supermarket minor remodels, the
acquisition and installation of technology and equipment required to implement
the Stater Express(R) choice of payment system and the completion of a
supermarket major remodel and expansion. The Stater Express(R) system is a
combined supermarket technology platform that includes enhanced systems for
check verification and acceptance and alternative pay choices such as VISA,
MasterCard, American Express and direct debit bank cards issued by most
nationally recognized financial institutions. Management believes the Stater
Express(R) system has been a key element in reducing the Company's bad check
expense while providing customers with alternative methods of payment. Stater
Express(R) was installed in each of the Company's supermarkets during fiscal
1995. The Stater Express(R) mark is an intellectual property of Stater Bros.
Markets and the Company has obtained a federal service mark for the name "Stater
Express".
During 1996, the Company opened one replacement supermarket. The new store that
opened in 1996 is located in the Company's primary trading area. No new
supermarkets were opened in either 1997 or 1995.
Capital expenditures for fiscal 1997 were funded from the proceeds of the
October 1996 sale and leaseback transaction and from a portion of the net
proceeds from the July 1997 issuance of the 9% Notes. Capital expenditures in
1995 were financed primarily from cash provided by operating activities while
capital expenditures in 1996 were financed primarily by proceeds from the
January 1996 sale and leaseback of five supermarkets. Management believes that
capital expenditures for fiscal 1998 will be approximately $31.0 million.
Management believes that operating cash flow, supplemented by capital
expenditures financings obtained through capital and operating leases, will be
sufficient to meet the Company's currently identified operating needs and
scheduled capital expenditures. However, there can be no assurance that such
lease financings will be available to the Company.
The Company operated 110 supermarkets at September 28, 1997, September 29, 1996
and September 24, 1995.
The Company's supermarkets had approximately 3.2 million retail square feet at
September 28, 1997, September 29, 1996 and September 24, 1995.
THE BANK FACILITIES
Stater Bros. Markets, the Company's operating subsidiary, and Bank of America
National Trust and Savings Association (the "Bank") entered into a Credit
Agreement in March 1994, as amended and effective June 1, 1996, whereby the Bank
provides Stater Bros. Markets with a revolving operating line of credit (the
"Operating Facility") with a maximum availability of $15.0 million which was
available at September 28, 1997 and a revolving letter of credit facility (the
"LC Facility") with a maximum availability of $25.0 million (collectively, the
"Bank Facilities").
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
As of September 28, 1997, approximately $15.5 million of the LC Facility was
available to the Company. The Bank Credit Agreement expires on June 1, 1998. The
Company intends to renew or replace its Bank Credit Agreement with a facility
with terms and conditions at least as favorable as the existing Bank Credit
Agreement.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $145.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month.
As of September 28, 1997, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive convenants and had (i) a current
ratio of 1.79:1, (ii) tangible net worth and debt subordinated to the Bank of
$211.5 million; (iii) a ratio of total liabilities to tangible net worth and
debt subordinated to the Bank of 0.59:1 and (iv) a fixed charge coverage ratio
(as defined in the Bank Facilities) of 2.66:1. If for any reason Stater Bros.
Markets is unable to comply with the terms of the Bank Facilities, including the
covenants contained therein, such noncompliance would result in an event of
default under the Bank Facilities, and could result in acceleration of the
payment of indebtedness then outstanding under Bank Facilities or, in certain
situations, the prohibition of payments of dividends or advances to the Company.
In addition, no amendment, waiver or supplement may be made to the Indenture
without the prior written consent of the Bank if such amendment, waiver or
supplement adversely affects the rights of the Bank as lender to Stater Bros.
Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.
The Company is also subject to certain covenants associated with its 11% Senior
Notes due 2001 and its 9% Senior Subordinated Notes due 2004. As of September
28, 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.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE CONVERSION AND REDEMPTION OF SERIES B PREFERRED STOCK
In March 1994, the Company acquired, for $14.7 million, an option available to
the Company to convert the Company's 50,000 shares of Common Stock held by Craig
Corporation into 693,650 shares of 10.5% Series B Preferred Stock on or before
March 8, 1996.
Effective March 8, 1996, the Company exercised its option to convert the
Company's 50,000 shares of Common Stock held by Craig Corporation into 693,650
shares of the Company's Series B Preferred Stock. The Series B Preferred Stock
was redeemed by the Company, in August 1997, for $69.4 million plus accrued and
unpaid dividends.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1995, with the United Food
and Commercial Workers Union. The Company's collective bargaining agreement with
the International Brotherhood of Teamsters was renewed in 1994 and expires in
September 1998. Management believes it has good relations with its employees.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board 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 was required to adopt in fiscal year 1997. The adoption of SFAS 121 did
not have a material effect on its financial position or its results of
operations in fiscal 1997. The Financial Accounting Standards Board has issued
Statements of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; No. 130, "Reporting on Comprehensive Income"; and No. 131, "Disclosures
about Segments of an Enterprise and Related Information", all of which will be
adopted by the Company in its fiscal year ending on September 27, 1998 (fiscal
1998). The Company believes that the adoption of SFAS No. 128, No. 130 and No.
131 will not have material effect on its financial position or its results of
operations in fiscal 1998.
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the impact
of inflation on the operations of the Company has been moderate. As inflation
has increased expenses, the Company has recovered, to the extent permitted by
competition, the increase in expenses by increasing prices over time. However,
the economic environment in Southern California continues to challenge the
Company to become more cost efficient as its ability to recover increases in
expenses through price increases is diminished. The future results of operations
of the Company will depend upon the ability of the Company to adapt to the
current economic environment as well as to the current competitive conditions.
The Company conducts business in one industry segment, the operation of retail
food supermarkets, which offer for sale to the public most merchandise typically
found in supermarkets. The supermarket industry is highly competitive and is
characterized by low profit margins. The Company's primary competitors include
Lucky, Vons, Hughes, Albertson's, Ralphs, and a number of independent
supermarket operators. Competitive factors typically include the price, quality
and selection of products offered for sale, customer service, and the
convenience and location of retail facilities. The Company monitors competitive
activity and Senior Management regularly reviews the Company's marketing and
business strategy and periodically adjusts them to adapt to changes in the
Company's primary trading area.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTD.)
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in the Company's
filings with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) includes 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the Company's financial
statements and supplementary data contained in this report. Specific financial
statements and supplementary data can be found on the pages listed in the
following index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors............................................... F-2
Consolidated Balance Sheets at September 24, 1995,
September 29, 1996 and September 28, 1997................................ F-3
Fiscal years ended September 24, 1995, September 29, 1996 and September 28,
1997:
Consolidated Statements of Income...................................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Consolidated Statements of Stockholders' Equity (Deficit).............. F-8
Notes to Consolidated Financial Statements................................... F-9
</TABLE>
22
<PAGE> 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth 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, President
and Chief Executive Officer
H. Harrison Lightfoot....... 59 Group Senior Vice President - Retail Operations
A. Gayle Paden.............. 61 Group Senior Vice President - Distribution
Donald I. Baker............. 56 Group Senior Vice President - Administration
Dennis N. Beal.............. 47 Vice President - Finance and Chief Financial
Officer
Bruce D. Varner............. 61 Director and Secretary
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 45 years. Mr. Brown has a majority interest and is the
managing general partner of La Cadena Investments.
H. Harrison Lightfoot has been Group Senior Vice President-Retail
Operations of the Company since June 1986. Mr. Lightfoot has served the Company
for 43 years in various capacities, including store manager, buyer, general
supervisor and Vice President. Mr. Lightfoot is a general partner of La Cadena
Investments.
A. Gayle Paden has been Group Senior Vice President-Distribution since
July 1996. Mr. Paden joined the Company in 1986 as Group Senior Vice
President-Administration and served in that capacity until July 1996. Mr. Paden
was previously with Lucky Stores for 35 years where he served in various
capacities, the most recent of which was President of the Southern California
Food Division.
23
<PAGE> 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTD.)
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS (CONTD.)
Donald I. Baker joined the Company in November 1983 as Vice
President-Warehouse and Transportation and has been Group Senior Vice
President-Administration since July 1996. From July 1992 to July 1996, Mr. Baker
was Group Senior Vice President-Human Resources and Distribution. From August
1986 to July 1992, Mr. Baker was Senior Vice President-Human Resources and
Distribution. Prior to joining the Company, Mr. Baker was employed by American
Community Stores Corporation, Inc., a subsidiary of Cullum Companies, Inc., a
publicly held corporation, from 1972 to 1983 in various capacities including
Vice President of Retail Operations, and was also employed by Kroger Company
from 1966 to 1972.
Dennis N. Beal has been Vice President of Finance and Chief Financial
Officer of the Company since September 1992. Mr. Beal was Vice President and
Controller of American Stores Company from 1989 to 1992 and Vice President and
Controller of subsidiaries of American Stores Company from 1987 to 1989 and
served in various financial positions since 1981. Mr. Beal, a certified public
accountant, was also a partner in the accounting firm of Bushman, Daines,
Rasmussen & Wisan and served in various capacities with the firm from 1974 to
1981.
Bruce D. Varner has been a director of Stater Bros. Markets since
September 1985 and director of Stater Bros. Holdings Inc. since May 1989. Since
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 in the law
firm of Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner specializes in
business and corporate matters. Mr. Varner and the law firm of Varner, Saleson &
Dobler LLP have performed legal services in the past for the Company and the
Company expects such services to continue in the future.
Thomas W. Field, Jr., has been President of Field and Associates since
1989. From 1988 to 1989, Mr. Field was Chairman of the Board, President and
Chief Executive Officer of McKesson Corporation and was its President since
1984, and President and Chief Executive Officer from 1986 to 1988. Mr. Field has
held various positions in the Supermarket Industry for over 40 years and serves
as a Director for several companies including, Campbell Soup Company and
Maxicare.
24
<PAGE> 25
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered during the
prior three fiscal years paid to the CEO and the four most highly compensated
executive officers other than the CEO of the Company:
<TABLE>
ANNUAL COMPENSATION
-----------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUSES COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(4) ($) ($)(1)(2)(3)
- - ---------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jack H. Brown 1997 $800,000 $ - $ - $ 25,500
Chairman, President and 1996 $729,500 $ 595,000 $ - $ 27,201
Chief Executive Officer 1995 $683,385 $ 524,000 $ - $ 28,921
H. Harrison Lightfoot 1997 $297,500 $ - $ - $ -
Group Senior Vice- 1996 $281,500 $ 130,000 $ - $ 1,701
President, Retail Operations 1995 $267,077 $ 120,000 $ - $ 2,421
A. Gayle Paden 1997 $269,000 $ - $ - $ -
Group Senior Vice 1996 $256,500 $ 50,000 $ - $ 1,701
President, Distribution 1995 $244,616 $ 40,000 $ - $ 2,421
Donald I. Baker 1997 $210,000 $ - $ - $ -
Group Senior Vice- 1996 $187,500 $ 80,000 $ - $ 1,701
President, Administration 1995 $169,615 $ 65,000 $ - $ 2,145
Dennis N. Beal 1997 $160,000 $ - $ - $ -
Vice-President and 1996 $150,500 $ 55,000 $ - $ 1,701
Chief Financial Officer 1995 $142,769 $ 50,000 $ - $ 1,826
</TABLE>
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Executive Officers was less than the reporting thresholds
established by the Securities and Exchange Commission.
(2) Amounts shown for the Named Executive Officers represent the Company's
contributions to the Company's Profit Sharing Plan, a defined contribution
plan, for the account of each Named Executive Officer. Plan participants
become fully vested in the plan after seven years of service.
(3) Includes Mr. Brown's Director Fees for 1995, 1996 and 1997 which amounted
to $26,500, $25,500, and $25,500, respectively.
(4) Bonuses to be paid to the Named Executive Officers for fiscal 1997 had
neither been calculated nor awarded as of December 14, 1997, the latest
practical date.
STOCK OPTIONS AND SARS
None
25
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION (CONTD.)
PENSION PLAN
The Company's Pension Plan for Salaried Employees (the "Pension Plan") is a
non-contributory, defined benefit plan which applies to all salaried employees
who have completed one year of qualified service, including directors who are
employees. For each year of credited service, the annual pension to which an
employee is entitled under the Pension Plan upon normal retirement at age 65 is
an amount equal to three quarters of one percent of the employee's compensation
for each year up to the social security wage base, plus 2.15 percent of the
employee's compensation for each year in excess of the social security wage
base. The Named Executive Officers have the following years of credited service
under the Pension Plan as of September 28, 1997: Jack H. Brown - 16 years, H.
Harrison Lightfoot - 43 years, A. Gayle Paden - 11 years, Donald I. Baker - 14
years and Dennis N. Beal - 4 years.
The amounts shown in the following table are estimated annual retirement
benefits under the Pension Plan (assuming payments are made on the normal life
annuity and not under any of the various survivor forms of benefits) based upon
retirement at age 65, after various years of service at selected salary levels.
Benefits under the Pension Plan do not become fully vested until the employee
has five years of credited service with the Company. The Internal Revenue Code
of 1986, as amended, places certain limitations on pension benefits that can be
paid from a tax-qualified pension plan and trust, as well as the compensation
that may be taken into account in determining such benefits. Such limitations
are not reflected in the table below. The maximum annual benefit for 1997
retirees with ten or more years of service at retirement is $125,000. The
maximum annual compensation that may be considered for 1997 retirees is
$160,000.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000.............. $ 23,808 $ 31,744 $ 39,680 $ 47,616 $ 55,552
150,000.............. 39,933 53,244 66,555 79,866 93,177
200,000.............. 56,058 74,744 93,430 112,116 130,802
250,000.............. 72,183 96,244 120,305 144,366 168,427
300,000.............. 88,308 117,744 147,180 176,616 206,052
350,000.............. 104,433 139,244 174,055 208,866 243,677
400,000.............. 120,558 160,744 200,930 241,116 281,302
450,000.............. 136,683 182,244 227,805 273,366 318,927
500,000.............. 152,808 203,744 254,680 305,616 356,552
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee of $25,000 plus $500 for each
board meeting attended.
EMPLOYMENT AND SEVERANCE AGREEMENTS
There are no written employment contracts between the Company and any Named
Executive Officer. The Company's severance policies generally provide for two
weeks of severance pay to full-time non-bargaining unit employees for every year
of service to the Company, up to a maximum of twelve weeks.
26
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 10, 1997, the number and
percentage of outstanding shares of Class A Common Stock beneficially owned by
(a) each person known by the Company to beneficially own more than 5% of such
stock, (b) each director of the Company, (c) each of the Named Executive
Officers, and (d) all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
Shares of
Class A Common Percentage of
Stock Class A
Name and Address Beneficially Common Stock
of Beneficial Owner Owned Outstanding
- - ------------------- ------------- -------------
<S> <C> <C>
La Cadena Investments(1) ...... 50,000 100%
Jack H. Brown(1)(2) ............ 50,000 100%
H. Harrison Lightfoot(1)(2) .... 50,000 100%
Richard C. Moseley(1)(2) ...... 50,000 100%
A. Gayle Paden(2) .............. -- --
Donald I. Baker(2) ............. -- --
Dennis N. Beal(2) .............. -- --
Bruce D. Varner(2) ............. -- --
Thomas W. Field, Jr.(2) ........ -- --
All directors and executive
officers as a group
(7 persons)(1) ................ 50,000 100%
</TABLE>
(1) The 50,000 outstanding shares of the Company's Class A Common Stock are
owned by La Cadena Investments and may be deemed to be beneficially owned
by the partners of La Cadena Investments. The general partners of La Cadena
Investments are Jack H. Brown, Richard C. Moseley and H. Harrison
Lightfoot. Mr. Brown has the 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) 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.
CHANGE OF CONTROL ARRANGEMENTS
As of September 3, 1993, the Company, La Cadena, Craig and certain of their
affiliates entered into a series of separate agreements, as subsequently
amended, and took certain actions, for the purpose of reclassifying the
Company's outstanding equity, providing for effective operating control of the
Company by La Cadena, making certain cash payments and distributions to Craig,
and providing the Company with the option to acquire Craig's equity interest in
the Company, all of which were completed simultaneously with the closing of the
Recapitalization Transaction. In August 1997, the Company redeemed all of the
outstanding shares of its Series B Preferred Stock and La Cadena became the sole
shareholder of the Company.
27
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Bruce D. Varner and the law firm of Varner, Saleson & Dobler LLP, 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 1997 was approximately $1.0 million. The Company believes that the terms
and costs of such legal services provided by Mr. Varner and the law firm of
Varner, Saleson & Dobler LLP 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.
In August 1997, the Company redeemed all outstanding shares of the Series B
Preferred Stock. The Company used a portion of the net proceeds from the
issuance and sale of $100 million of 9% Senior Subordinated Notes Due 2004 to
redeem the outstanding Series B Preferred Stock.
28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)
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.
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 shareholder's 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.
29
<PAGE> 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)
In connection with the 1994 Recapitalization, the Company utilized approximately
$88.9 million of the net proceeds from the 1994 debt 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.
The 50,000 outstanding shares of the Company's Class A Common Stock are owned by
La Cadena Investments and may be deemed to be beneficially owned by the partners
of La Cadena Investments. The general partners of La Cadena are Jack H. Brown,
Richard C. Moseley and H. Harrison Lightfoot. Mr. Brown has a majority interest
and is the managing general partner. Mr. Brown is a director of the Company and
Messrs. Brown and Lightfoot are Named Executive Officers of the Company. Mr.
Brown has the power to vote the shares of the Company owned by La Cadena, except
with respect to certain fundamental corporate changes of the Company, including
the disposition of such shares. Accordingly, Messrs. Brown, Moseley and
Lightfoot may be deemed to have shared voting power with respect to shares of
the Company owned by La Cadena. Mr. Moseley served the Company for over 44 years
and in many executive capacities, most recently and from September 1995 until
his retirement from the Company in January 1996, Mr. Moseley served as Executive
Vice President of the Company.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Document list
(1) Financial Statements See Financial Statement Index included
in Item 8 of Part II of this Form 10-K.
(2) Financial Statement Schedules The Financial Statement
Schedules required by Item 14(d) for which provision is made
in the applicable accounting regulations of the Securities
and Exchange Commission, are not required under the related
instructions or are inapplicable and therefore, have been
omitted.
(3) Exhibits
Exhibits as required by Item 14(c) are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.1 (4) 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 (4) 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 (4) Form of Specimen Certificate
evidencing Global Notes of the Company
issued pursuant to the Indenture.
4.4 (4) Registration Rights Agreement among
the Company and BancAmerica
Securities, Inc. dated July 24, 1997.
4.5 (4) 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).
10.1 (1) Reclassification Agreement dated
September 3, 1993, by and among the
Company, Craig and La Cadena.
</TABLE>
31
<PAGE> 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K (CONTD.)
(a)(3) Exhibits (contd.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.2 (1) Amendment to Reclassification Agreement,
dated January 12, 1994, by and among the
Company, Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated May 10,
1989, by and among the Company, Craig
and La Cadena.
10.4 (1) Amendment to Agreement of Stockholders
dated September 3, 1993, by and among
the Company, Craig, Craig Management,
Inc. ("CMI") and La Cadena.
10.5 (1) Option Agreement dated September 3,
1993, by and between the Company and
Craig.
10.6 (1) Amendment to Option Agreement dated
January 12, 1994, by and between the
Company and Craig.
10.7 (1) Consulting Agreement dated September 3,
1993, by and between the Company, Craig
and CMI.
10.8 (1) Letter Agreement regarding Consulting
Agreement, dated March 8,1994, by and
between the Company, Craig and CMI.
10.9 (1) Second Amended and Restated Stock
Agreement dated January 12, 1994, by and
among the Company, Craig, CMI, La Cadena
and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994,
by and between the Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994,
by and between Stater Bros. Markets and
Bank of America Trust and Savings
Association.
10.12 (a) (2) Amendment dated June 23, 1995 to the
Credit Agreement dated March 8, 1994, by
and between Stater Bros. Markets and
Bank of America Trust and Savings
Association.
10.12 (b) (3) Amendment dated July 22, 1996 to the
Credit Agreement dated March 8, 1994, by
and between Stater Bros. Markets and
Bank of America Trust and Savings
Association.
10.13 (1) Continuing Guaranty dated March 8, 1994,
of Stater Bros. Development, Inc. in
favor of Bank of America Trust and
Savings Association.
10.15 (1) Subordination Agreement dated March 8,
1994, by and among the Company, Stater
Bros. Markets and Bank of America Trust
and Savings Association.
10.16 (1) Amended and Restated Sublease Agreement
dated June 1, 1983, between Wren Leasing
Corp., as Lessor, and Stater Bros.
Markets, as Lessee.
</TABLE>
32
<PAGE> 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K (CONTD.)
(a)(3) Exhibits (contd.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.17 (1) Preferred Stock Agreement dated March
22, 1983, between Stater Bros. Markets
and Petrolane Incorporated.
10.18 (1) Escrow Agreement dated September 19,
1985, by and among Stater Bros. Markets,
Petrolane Incorporated and First
Interstate Bank of California.
11 Calculation of earnings per common share.
12 Computation of ratio of earnings to
fixed charges.
21 (1) Subsidiaries of the Company.
27 Financial Data Schedule
</TABLE>
- - ------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement S-4 No. 33-77296 dated July 21, 1994.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registrant's Quarterly Report on Form 10-Q dated June 25, 1995 and
filed on August 8, 1995.
(3) Previously filed with the Securities and Exchange Commission as exhibit
10.12(b) with the Annual Report on Form 10-K for the fiscal year ended
September 29, 1996.
(4) Previously filed with the Securities and Exchange Commission as exhibits to
the Registration Statement S-4, No. 333-34113 dated October 17, 1997.
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
33
<PAGE> 34
STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997
FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
December 17, 1997 STATER BROS. HOLDINGS INC.
- - -----------------------------
DATE
BY: /S/ JACK H. BROWN
-----------------------------
Jack H. Brown
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JACK H. BROWN Chairman of the Board, President DEcember 17, 1997
- - ------------------------------- and Chief Executive Officer -----------------
Jack H. Brown
/S/ BRUCE D. VARNER Secretary and Director December 17, 1997
- - ------------------------------- -----------------
Bruce D. Varner
/S/ DENNIS N. BEAL Vice President - Finance December 17, 1997
- - ------------------------------- and Chief FInancial Officer -----------------
Dennis N. Beal (Principal Accounting Officer)
/S/ THOMAS W. FIELD, JR. Director DEcember 17, 1997
- - ------------------------------- -----------------
Thomas W. Field, Jr.
</TABLE>
34
<PAGE> 1
Exhibit 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share (In
thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------
1995 1996(1) 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 6,727 $ 16,011 $ 13,467
Less preferred dividends - 4,111 6,166
-------- -------- --------
Net income available
to common shareholders $ 6,727 $ 11,900 $ 7,301
======== ======== ========
Earnings per common share $ 67.27 $ 165.28 $ 146.02
======== ======== ========
Average common shares outstanding 100,000 72,000 50,000
======== ======== ========
Common shares outstanding
at end of fiscal year 100,000 50,000 50,000
======== ======== ========
</TABLE>
(1) 53-Week Fiscal Year
35
<PAGE> 1
Exhibit 12
STATER BROS. HOLDINGS INC.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 29,(1) Sept. 28,(2)
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before income taxes $ 10,118 $ 14,645 $ 10,945 $ 27,131 $ 22,510
Share of undistributed (income)
loss of less than 50%-owned
affiliates (107) 592 980 1,624 -
Amortization of capitalized
interest 169 180 192 190 139
Interest 10,592 15,217 18,946 19,171 21,384
Less interest capitalized
during the period (417) (437) (50) (116) (1,263)
Net amortization of debt
discount and premium
and issuance expense 117 721 1,180 1,203 1,460
Interest portion of rental expense 14,380 13,985 13,588 13,918
-------- -------- -------- -------- --------
15,305
Earnings as adjusted $ 34,852 $ 44,903 $ 45,781 $ 63,121 $ 59,535
======== ======== ======== ======== ========
Fixed Charges:
Interest $ 10,592 $ 15,217 $ 18,946 $ 19,171 $ 21,384
Net amortization of debt
discount and premium
and issuance expense 117 721 1,180 1,203 1,460
Interest portion of rental
expense 14,380 13,985 13,588 13,918 15,305
Preferred stock dividends 574 545 - 6,967 10,451
-------- -------- -------- -------- --------
Fixed Charges $ 25,663 $ 30,468 $ 33,714 $ 41,259 $ 48,600
======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges 1.36 1.47 1.36 1.53 1.23
======== ======== ======== ======== ========
</TABLE>
(1) 53-Week Fiscal Year
(2) Includes the Company's 50% share of the fixed charges and earnings of an
unconsolidated affiliate.
36
<PAGE> 2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets at September 24, 1995,
September 29, 1996 and September 28, 1997............................... F-3
Fiscal years ended September 24, 1995, September 29, 1996 and September 28,
1997:
Consolidated Statements of Income..................................... F-5
Consolidated Statements of Cash Flows................................. F-6
Consolidated Statements of Stockholders' Equity (Deficit)............. F-8
Notes to Consolidated Financial Statements.................................. F-9
</TABLE>
F-1
<PAGE> 3
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 24, 1995, September 29,
1996 and September 28, 1997, and the related consolidated statements of income,
stockholders' equity (deficit), and cash flows for each of the 52-week periods
then ended for 1995 and 1997, 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 24, 1995, September
29, 1996 and September 28, 1997, and the consolidated results of their
operations and their cash flows for each of the 52-week periods then ended for
1995 and 1997, and the 53-week period then ended for 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
December 3, 1997
F-2
<PAGE> 4
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 24, SEPT. 29, SEPT. 28,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 26,308 $ 45,279 $ 59,086
Receivables .................................. 15,877 19,009 21,481
Inventories .................................. 107,146 117,372 115,513
Prepaid expenses ............................. 3,591 3,357 4,667
Deferred income taxes ........................ 2,792 4,710 2,978
Properties held for sale ..................... 2,933 1,787 1,342
-------- -------- --------
Total current assets ............................ 158,647 191,514 205,067
Investment in unconsolidated affiliate .......... 9,250 7,626 10,313
Property and equipment
Land ......................................... 20,653 18,688 16,443
Buildings and improvements ................... 96,653 89,856 87,605
Store fixtures and equipment ................. 68,338 78,570 86,644
Property subject to capital leases ........... 14,368 14,368 14,368
-------- -------- --------
200,012 201,482 205,060
Less accumulated depreciation and amortization 81,385 87,267 96,203
-------- -------- --------
118,627 114,215 108,857
Deferred income taxes ........................... 4,975 5,295 4,699
Deferred debt issuance costs, net ............... 6,423 5,221 14,273
Lease guarantee escrow .......................... 5,584 6,701 8,069
Other assets .................................... 10,576 7,722 7,199
-------- -------- --------
Total assets .................................... $314,082 $338,294 $358,477
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 5
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SEPT. 24, SEPT. 29, SEPT. 28,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current Liabilities
Accounts payable ........................................ $ 67,604 $ 79,271 $ 66,834
Accrued payroll and related expenses .................... 22,289 23,981 23,851
Other accrued liabilities ............................... 22,653 23,607 21,113
Current portion of capital lease obligations ............ 1,087 1,182 1,256
--------- --------- ---------
Total current liabilities .................................. 113,633 128,041 113,054
Long-term debt, less current portion ....................... 165,000 165,000 265,000
Capital lease obligations, less current portion ............ 8,099 6,917 5,661
Long-term portion of self-insurance and other reserve ...... 13,031 10,332 7,409
Other long-term liabilities ................................ 741 2,526 3,939
10.5% Cumulative Series B Preferred Stock:
(stated value $100 per share)
Authorized shares - 693,650
Issued and outstanding shares -
0 in 1995 and 1997, 693,650 in 1996 ................ - 69,365 -
Stockholders' equity (deficit) Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares -
50,000 in 1995, 0 in 1996 and 1997 ................. 1 - -
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares -
50,000 in 1995, 1996 and 1997 ...................... 1 1 1
Additional paid-in capital .............................. 12,715 12,715 12,715
Retained earnings (deficit) ............................. 15,511 (41,953) (49,302)
Less option to acquire stock ............................ (14,650) (14,650) -
--------- --------- ---------
Total stockholders' equity (deficit) ....................... 13,578 (43,887) (36,586)
--------- --------- ---------
Total liabilities and stockholders' equity (deficit) ....... $ 314,082 $ 338,294 $ 358,477
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 6
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 52 WEEKS
----------- ----------- -----------
SEPT. 24, SEPT. 29, SEPT. 28,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales ......................................... $ 1,579,895 $ 1,705,332 $ 1,717,924
Cost of goods sold ............................ 1,227,355 1,315,726 1,326,410
----------- ----------- -----------
Gross profit .................................. 352,540 389,606 391,514
Operating expenses:
Selling, general and administrative expenses 308,332 328,242 333,199
Depreciation and amortization .............. 11,756 12,583 13,265
Consulting fees ............................ 1,500 1,525 1,458
----------- ----------- -----------
Total operating expenses ...................... 321,588 342,350 347,922
----------- ----------- -----------
Operating profit .............................. 30,952 47,256 43,592
Interest income ............................... 952 1,929 3,034
Interest expense .............................. (20,076) (20,258) (21,563)
Equity in (loss) from unconsolidated affiliate (980) (1,624) (2,313)
Other income (expense) - net .................. 97 (172) 76
----------- ----------- -----------
Income before income taxes .................... 10,945 27,131 22,826
Income taxes .................................. 4,218 11,120 9,359
----------- ----------- -----------
Net income .................................... 6,727 16,011 13,467
Less preferred dividends ................... - 4,111 6,166
----------- ----------- -----------
Net income available to common stockholders ... $ 6,727 $ 11,900 $ 7,301
=========== =========== ===========
Earnings per common share ..................... $ 67.27 $ 165.28 $ 146.02
=========== =========== ===========
Average common shares outstanding ............. 100,000 72,000 50,000
=========== =========== ===========
Common shares outstanding at end of year ...... 100,000 50,000 50,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 7
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
52 WEEKS 53 WEEKS 52 WEEKS
--------- --------- ---------
SEPT. 24, SEPT. 29, SEPT. 28,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 6,727 $ 16,011 $ 13,467
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 11,756 12,583 13,265
Deferred income taxes ................................... 860 (2,238) 2,328
Loss (gain) on disposals of assets ...................... (97) 172 (75)
Net undistributed loss in unconsolidated affiliate ...... 980 1,624 2,313
Changes in operating assets and liabilities:
(Increase) decrease in receivables ..................... 626 (3,132) (2,472)
(Increase) decrease in inventories ..................... (3,491) (10,226) 1,859
(Increase) decrease in prepaid expenses ................ (170) 234 (1,310)
(Increase) decrease in other assets .................... (359) 1,738 (629)
Increase (decrease) in accounts payable ................ 4,066 11,667 (12,437)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves .................... (2,044) (514) (6,649)
--------- --------- ---------
Net cash provided by operating activities .................. 18,854 27,919 9,660
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................... - - 100,000
Debt issuance cost ......................................... - - (10,513)
Redemption of preferred stock .............................. - - (69,365)
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 ......................................... (1,156) (1,087) (1,182)
Dividends paid on preferred stock .......................... - (4,111) (6,166)
--------- --------- ---------
Net cash provided by (used in) financing activities ........ $ (1,156) $ (5,198) $ 12,774
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 8
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
52 WEEKS 53 WEEKS 52 WEEKS
-------- -------- --------
SEPT. 24, SEPT. 29, SEPT. 28,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Investments in unconsolidated affiliate ................... $ - $ - $ (5,000)
Purchase of property and equipment ........................ (13,178) (22,415) (20,268)
Proceeds from sale of property and equipment and properties
held for sale........................................... 499 18,665 16,641
-------- -------- --------
Net cash (used in) investing activities ................... (12,679) (3,750) (8,627)
-------- -------- --------
Net increase in cash and cash equivalents ................. 5,019 18,971 13,807
Cash and cash equivalents at beginning of year ............ 21,289 26,308 45,279
-------- -------- --------
Cash and cash equivalents at end of year .................. $ 26,308 $ 45,279 $ 59,086
======== ======== ========
Interest paid ............................................. $ 19,537 $ 21,360 $ 18,859
Income taxes paid ......................................... $ 4,633 $ 9,725 $ 6,500
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 9
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
OPTION
CLASS A ADDITIONAL RETAINED TO
COMMON COMMON PAID-IN EARNINGS ACQUIRE
STOCK STOCK CAPITAL (DEFICIT) STOCK
------- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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)
Net income for 52 weeks ended
September 28, 1997............... - - - 13,467 -
Preferred stock dividends paid...... - - - (6,166) -
Exercise Option to Acquire Stock.... - - - (14,650) 14,650
------- ----- -------- -------- --------
Balances at September 28, 1997......... $ - $ 1 $ 12,715 $(49,302) $ -
======= ===== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 10
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1997
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 28, 1997, 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 24, 1995 and September 28, 1997 were 52-week years
and the fiscal year ended September 29, 1996 was a 53-week year.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates
their fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Receivables
Receivables represents amounts expected to be received during the next
operating cycle of the Company. The carrying amount reported in the balance
sheet for receivables approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value and
consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are
capitalized and amortized to interest expense over the terms of the applicable
debt agreements.
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its
self-insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.
F-9
<PAGE> 11
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", (SFAS 121). The
Company was required to adopt SFAS 121 in fiscal year 1997. The adoption of SFAS
121 did not have a material effect on the Company's financial position or its
results of operations in fiscal 1997.
Property and Equipment
Property and equipment are stated at cost and are depreciated or
amortized, principally on the straight-line method over the estimated useful
lives of the assets, and for capitalized leases over the initial lease term or
the estimated economic life of the asset.
The average economic lives are as follows:
<TABLE>
<CAPTION>
Range Most Prevalent
----------- --------------
<S> <C> <C>
Buildings and improvements.............. 8 - 30 Years 25 Years
Store furniture and equipment........... 3 - 10 Years 5 Years
Property subject to capital leases...... Life of Lease 25 Years
</TABLE>
Income Taxes
The Company provides for deferred income taxes as timing differences
arise between income and expenses recorded for financial and income tax
reporting purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and
distribution costs.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform
to the current period financial statement presentation.
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Sept. 24, Sept. 29, Sept. 28,
1995 1996 1997
--------- --------- -------
(In thousands)
<S> <C> <C> <C>
11% Senior Notes due March 2001..................... $ 165,000 $165,000 $165,000
9% Senior Subordinated Notes due July 2004.......... - - 100,000
--------- --------- -------
Total long-term debt................................ $ 165,000 $165,000 $265,000
========= ======== ========
</TABLE>
F-10
<PAGE> 12
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 2 - DEBT (CONTD.)
As of September 28, 1997, no principal payments were due in the next
three years. Interest on the 11% Senior Notes due 2001 is payable semi-annually
on September 1 and March 1. Interest on the 9% Senior Subordinated Notes due
2004 is payable semi-annually on July 1 and January 1.
Interest capitalized during fiscal years 1995, 1996 and 1997 amounted to
$50,000, $116,000 and $251,000, respectively. Interest expense incurred, before
the effect of capitalized interest, during 1995, 1996 and 1997 amounted to
$20,126,000, $20,374,000 and $21,814,000, respectively.
The Company did not have short-term borrowings outstanding at September
24, 1995, September 29, 1996 and September 28, 1997. The average daily amount of
short-term borrowings was $129,000 during 1995, and the Company did not incur
any short-term borrowings during 1996 and 1997. The weighted average interest
rate was 9.68% for 1995.
The Company is subject to certain covenants associated with its 11%
Senior Notes due 2001 and 9% Senior Subordinated Notes due 2004 and its bank
credit agreement. As of September 28, 1997, the Company was in compliance with
all such covenants.
NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 50% of Santee Dairies LLC. Through its wholly owned
subsidiary, Santee Dairies, Inc. ("Santee"), it operates a fluid milk processing
plant located in Los Angeles, California, and the Company is not the controlling
stockholder. Accordingly, the Company accounts for its investment in Santee
Dairies LLC using the equity method of accounting and recognized losses of
$980,000, $1,624,000, and $2,313,000 for fiscal years 1995, 1996 and 1997,
respectively. The Company is a significant customer of Santee which supplies the
Company with a substantial portion of its fluid milk and dairy products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
--------- --------- ---------
Sept. 30, Sept. 28, Sept. 27,
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Current assets $ 23,372 $ 16,937 $ 41,657
Non-current assets 8,792 26,351 86,371
Current liabilities 13,337 23,410 24,548
Non-current liabilities 169 2,860 83,028
Shareholder's equity 18,658 17,018 20,452
Sales 177,484 191,481 175,937
Gross profit 16,094 16,174 15,666
Net income (loss) $ (1,976) $ (1,640) $ (6,156)
</TABLE>
F-11
<PAGE> 13
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
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 28, 1997, and a revolving letter of
credit facility (the "LC Facility") with a maximum availability of $25.0
million, of which $15.5 was available on September 28, 1997 (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 and 9% Senior
Subordinated Notes due 2004.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $145.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month. As of September 28, 1997, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with all
restrictive convenants and had (i) a current ratio of 1.79:1, (ii) tangible net
worth and debt subordinated to the Bank of $211.5 million; (iii) a ratio of
total liabilities to tangible net worth and debt subordinated to the Bank of
0.59:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 2.66:1. If for any reason Stater Bros. Markets is unable to
comply with the terms of the Bank Facilities, including the covenants contained
therein, such noncompliance would result in an event of default under the Bank
Facilities, and could result in acceleration of the payment of indebtedness then
outstanding under Bank Facilities or, in certain situations, the prohibition of
the payment of dividends or advances to the Company. In addition, no amendment,
waiver or supplement may be made to the Indenture without the prior written
consent of the Bank if such amendment, waiver or supplement adversely affects
the rights of the Bank as lender to Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.
F-12
<PAGE> 14
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
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 $861,000,
$738,000 and $1,064,000 into the lease guarantee escrow account during fiscal
years 1995, 1996 and 1997, 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 28, 1997, the lease guarantee escrow account had a cumulative
balance of $8,069,000, compared to $6,701,000 and $5,584,000 as of September 29,
1996 and September 24, 1995, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the lease guarantee escrow account for
any amounts which Petrolane or its successor may be required to pay as guarantor
of the lease obligations of Stater Bros. Markets.
Following is a summary of future minimum lease payments as of September 28,
1997:
<TABLE>
<CAPTION>
Operating
Leases
Capital Minimum
Fiscal Year Leases Payment
--------- --------
(In thousands)
<S> <C> <C>
1998.............................................. $ 1,814 $ 20,318
1999.............................................. 1,760 20,201
2000.............................................. 1,693 18,718
2001.............................................. 1,397 16,807
2002.............................................. 980 16,521
Thereafter........................................ 1,042 76,461
--------- --------
Total minimum lease payments...................... 8,686 $169,026
========
Less amounts representing interest................ 1,769
---------
Present value of minimum lease payments........... 6,917
Less current portion.............................. 1,256
---------
Long-term portion................................. $ 5,661
=========
</TABLE>
F-13
<PAGE> 15
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 5 - LEASES (CONTD.)
Rental expense and sublease income were as follows:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals..................... $ 17,906 $ 19,267 $ 20,710
Rentals based on sales.............. $ 5,179 $ 5,072 $ 5,101
Sublease income..................... $ 1,018 $ 1,186 $ 1,121
</TABLE>
Aggregate sublease income to be received subsequent to September 28,
1997 is approximately $6,070,000.
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 amortized into income over the initial term of
the leases. The future minimum rents due are $1.7 million in 1998, 1999, 2000,
2001 and 2002 and $23.5 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 28,
1997, accumulated earnings available for dividend distributions were
approximately $200.7 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 28, 1997, Stater Bros.
Markets was in compliance with these covenants.
Effective March 8, 1996, pursuant to options available to the Company,
the Company exercised its right to convert all of its outstanding shares of
Common Stock previously held by Craig Corporation ("Craig") into 693,650 shares
of its Series B Preferred Stock. The Series B Preferred Stock had a redemption
value of approximately $69.4 million and currently paid dividends at the rate of
10.5% per annum. In August 1997, the Company redeemed all of the outstanding
shares of its Series B Preferred Stock for $69.4 million plus accrued and unpaid
dividends.
F-14
<PAGE> 16
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 7 - INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Current
Federal............................ $ 2,991 $ 8,116 $ 4,771
State.............................. 944 2,478 1,756
----------- ----------- -----------
3,935 10,594 6,527
----------- ----------- -----------
Deferred
Federal............................ 213 488 2,480
State.............................. 70 38 352
----------- ----------- -----------
283 526 2,832
----------- ----------- -----------
Income tax expense $ 4,218 $ 11,120 $ 9,359
=========== =========== ===========
</TABLE>
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 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory federal income tax rate....... 35.0% 35.0% 35.0%
State franchise tax rate, net of
federal income tax benefit.......... 6.1 6.1 6.0
Other................................... (2.6) (.1) -
----------- --------- ---------
38.5% 41.0% 41.0%
=========== ========= =========
</TABLE>
Deferred income taxes resulted from timing differences in recognizing
revenue and expense for tax and financial statement purposes. The sources of
these timing differences and the income tax (benefit) of each were as follows:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Accrued liabilities..................... $ 366 $ 364 $ 1,340
California franchise tax................ (258) (590) 678
Depreciation............................ 542 (22) (39)
Other, net.............................. (367) 774 853
----------- ----------- -----------
$ 283 $ 526 $ 2,832
=========== =========== ===========
</TABLE>
F-15
<PAGE> 17
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 7 - INCOME TAXES (CONTD.)
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Deferred income tax assets:
Property and equipment.................. $ 1,542 $ 1,403 $ 1,566
Self-insurance reserves................. 4,313 4,533 3,768
Pension and vacation liabilities........ 2,218 2,453 2,740
Inventories............................. 1,140 1,213 1,469
Investment in unconsolidated affiliate.. - - 943
Other................................... - 408 -
----------- ----------- -----------
Total deferred income tax assets.... 9,213 10,010 10,486
Deferred income tax liabilities:
Investment in unconsolidated affiliate.. (630) (5) -
Other................................... (816) - (2,809)
----------- ----------- -----------
Total deferred income tax liabilities (1,446) (5) (2,809)
----------- ----------- -----------
Net deferred income tax assets.......... $ 7,767 $ 10,005 $ 7,677
=========== =========== ===========
</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.
NOTE 8 - RELATED PARTY TRANSACTIONS
Consulting Agreements and Covenant Not to Compete
Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena and Craig, that required them to
provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters. These consulting agreements
with its stockholders terminated on September 26, 1993. In March 1994, the
Company entered into a new five-year Consulting Agreement with Craig, whereby
the Company paid Craig $1.5 million per year and Craig provided the Company with
consultation and advise in connection with general business issues, financial
management consulting, real estate acquisition and development and product
diversification matters. Consulting fees expense amounted to $1.5 million in
1997, 1996 and 1995. The agreement to make annual consulting payments to Craig
was terminated, at the election of the Company, in August 1997. 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.
F-16
<PAGE> 18
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
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 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period.............................. $ 619 $ 752 $ 826
Interest cost on projected benefit
obligation.............................. 862 1,000 1,109
Actual return on assets................... (735) (429) (761)
Net amortization and deferral............. 200 (181) 78
----------- ----------- -----------
Net periodic pension cost $ 946 $ 1,142 $ 1,252
=========== =========== ===========
Assumptions used for accounting were:
Discount rate............................. 8.0% 7.5% 7.5%
Rate of increase in compensation levels... 5.0% 5.0% 5.0%
Expected long-term rate of return on
assets.................................. 9.0% 9.0% 9.0%
</TABLE>
F-17
<PAGE> 19
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Pension Plan (contd.)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation............... $ 9,400 $ 10,591 $ 11,794
=========== =========== ===========
Accumulated benefit obligation.......... $ 9,717 $ 10,930 $ 12,160
=========== =========== ===========
Projected benefit obligation.............. $ (13,484) $ (14,991) $ (16,639)
Plan assets at fair value,
primarily notes and bonds............... 8,138 9,028 10,442
----------- ----------- -----------
Projected benefit obligation in
excess of plan assets................... (5,346) (5,963) (6,197)
Unrecognized net loss..................... 3,407 3,745 3,597
Unrecognized prior service cost........... (76) (71) (66)
Unrecognized net obligations established
October 1, 1987......................... 243 216 189
----------- ----------- -----------
Pension (liability) recognized in the
balance sheet.......................... $ (1,772) $ (2,073) $ (2,477)
=========== =========== ===========
</TABLE>
Expenses recognized for this retirement plan were $967,000, $1,290,000
and $1,392,000 in 1995, 1996 and 1997, 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 $357,000, $347,000 and $396,000 in 1995, 1996 and 1997,
respectively.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit
retirement plans in accordance with the provisions of the various labor
agreements that govern the plans. Contributions to these plans are generally
based on the number of hours worked. Information for these plans as to vested
and non-vested accumulated benefits and net assets available for benefits is not
available.
F-18
<PAGE> 20
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Multi-Employer Plans (contd.)
The Company's expense for these retirement and health and welfare plans
consisted of the following: 52 Weeks 53 Weeks 52 Weeks Sept. 24, 1995 Sept. 29,
1996 Sept. 28, 1997 (In thousands)
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 24, 1995 Sept. 29, 1996 Sept. 28, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Multi-Employer Pension Plans............. $ 5,688 $ 7,376 $ 8,677
Multi-Employer Health and Welfare........ 36,320 36,632 36,771
--------- --------- --------
Total Multi-Employer Benefits............ $ 42,008 $ 44,008 $ 45,448
========= ========= ========
</TABLE>
In conjunction with a three-year collective bargaining agreement entered
into in 1993, the Company received a $.8 million credit which was applied
against employer contributions to multi-employer health and welfare benefit
plans during fiscal 1995. The Company received a $3.8 million reduction in
employer contributions during fiscal 1996 from a two month suspension of
employer contributions to an over-funded collective bargaining health and
welfare benefit trust.
NOTE 10 - LABOR RELATIONS
The Company entered into a four-year collective bargaining agreement with
the United Food & Commercial Workers collective bargaining units in October 1995
and entered into a four-year collective bargaining agreement in September 1994
with the International Brotherhood of 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 and 9% Senior
Subordinated Notes due 2004, is based on quoted market prices. Although market
quotes for the fair value of the Company's capitalized lease obligations are not
readily available, the Company believes the stated value approximates fair
value.
F-19
<PAGE> 21
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTD.)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
As of
September 28, 1997
-------------------------
(In thousands)
Carrying Fair
Amount Value
--------- ---------
<S> <C> <C>
Cash and cash equivalents...................... $ 59,086 $ 59,086
Receivables.................................... $ 21,481 $ 21,481
Long-term debt................................. $ 271,917 $ 289,592
</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 records a provision
when the occurrence of loss is probable and can be reasonably estimated. The
Company believes that the outcome of such legal proceedings to which the Company
is currently a party will not have a material adverse effect upon its results of
operations or its consolidated financial condition.
On May 2, 1993, the Company was named as a defendant along with all of
the other major supermarket chains located in the Los Angeles County area in a
class action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs sought unspecified damages. The Company has recently
entered into a settlement agreement of this case which settlement does not
involve payment of monetary damages and is currently being processed through the
courts for approval.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of
Ufondu, et al. vs. Stater Bros. Markets 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.
F-20
<PAGE> 22
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 13 - QUARTERLY RESULTS (UNAUDITED)
Quarterly results for fiscal 1995, 1996 and 1997 are as follows:
(In thousands)
<TABLE>
<CAPTION>
Net Income
Gross Operating Net Preferred Available to
Sales Profit Profit Income Dividends Shareholders
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1995 Quarters
13 weeks ended 12/25/94 .... $ 390,642 $ 86,685 $ 7,619 $ 1,553 $ - $ 1,553
13 weeks ended 03/26/95 .... 390,574 86,195 7,691 1,600 - 1,600
13 weeks ended 06/25/95 .... 396,072 89,984 8,640 2,162 - 2,162
13 weeks ended 09/24/95 .... 402,607 89,676 7,002 1,412 - 1,412
---------- ---------- ---------- ---------- ---------- ----------
Total (52 weeks) ....... $1,579,895 $ 352,540 $ 30,952 $ 6,727 $ - $ 6,727
========== ========== ========== ========== ========== ==========
Fiscal 1996 Quarters
13 weeks ended 12/24/95 .... $ 408,740 $ 92,261 $ 11,015 $ 3,597 $ - $ 3,597
13 weeks ended 03/24/96 .... 406,223 93,548 12,266 4,341 339 4,002
13 weeks ended 06/23/96 .... 429,349 99,257 12,188 4,385 1,816 2,569
14 weeks ended 09/29/96 .... 461,020 104,540 11,787 3,688 1,956 1,732
---------- ---------- ---------- ---------- ---------- ----------
Total (53 weeks) ....... $1,705,332 $ 389,606 $ 16,011 $ 4,111 $ 11,900
========== ========== ========== ========== ========== ==========
Fiscal 1997 Quarters
13 weeks ended 12/29/96 .... $ 433,400 $ 100,826 $ 12,080 $ 4,195 $ 1,816 $ 2,379
13 weeks ended 03/30/97 .... 431,422 97,695 11,978 4,354 1,816 2,538
13 weeks ended 06/29/97 .... 427,445 96,714 11,511 4,078 1,816 2,262
13 weeks ended 09/28/97 .... 425,657 96,279 8,023 840 718 122
---------- ---------- ---------- ---------- ---------- ----------
Total (52 weeks) ....... $1,717,924 $ 391,514 $ 43,592 $ 13,467 $ 6,166 $ 7,301
========== ========== ========== ========== ========== ==========
</TABLE>
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 59,086
<SECURITIES> 0
<RECEIVABLES> 21,481
<ALLOWANCES> 0
<INVENTORY> 115,513
<CURRENT-ASSETS> 205,067
<PP&E> 205,060
<DEPRECIATION> 96,203
<TOTAL-ASSETS> 358,477
<CURRENT-LIABILITIES> 113,054
<BONDS> 270,661
0
0
<COMMON> 1
<OTHER-SE> (36,587)
<TOTAL-LIABILITY-AND-EQUITY> 358,477
<SALES> 1,717,924
<TOTAL-REVENUES> 1,717,924
<CGS> 1,326,410
<TOTAL-COSTS> 1,326,410
<OTHER-EXPENSES> 347,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,563
<INCOME-PRETAX> 22,826
<INCOME-TAX> 9,359
<INCOME-CONTINUING> 13,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,467
<EPS-PRIMARY> 146.02
<EPS-DILUTED> 146.02
</TABLE>
