<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
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 (I.R.S. 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
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
--- ---
As of July 25, 1998, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock
================================================================================
1
<PAGE> 2
STATER BROS. HOLDINGS INC.
JUNE 28, 1998
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
- - ------ --------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 28, 1997
AND JUNE 28, 1998 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 39 WEEKS ENDED
JUNE 29, 1997 AND JUNE 28, 1998 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
JUNE 29, 1997 AND JUNE 28, 1998 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 39 WEEKS
ENDED JUNE 29, 1997 AND JUNE 28, 1998 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
- - ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 28, JUNE 28,
1997 1998
--------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 59,086 $ 48,000
Receivables .................................. 21,481 24,059
Inventories .................................. 115,513 118,927
Prepaid expenses ............................. 4,667 6,908
Deferred income taxes ........................ 2,978 2,978
Properties held for sale ..................... 1,342 1,194
-------- --------
Total current assets ............................. 205,067 202,066
Investment in unconsolidated affiliate ........... 10,313 8,721
Property and equipment
Land ......................................... 16,443 16,540
Buildings and improvements ................... 87,605 94,507
Store fixtures and equipment ................. 86,644 98,661
Property subject to capital leases ........... 14,368 14,368
-------- --------
205,060 224,076
Less accumulated depreciation and amortization 96,203 105,008
-------- --------
108,857 119,068
Deferred income taxes ............................ 4,699 3,019
Deferred debt issuance costs, net ................ 14,273 12,997
Lease guarantee escrow ........................... 8,069 9,507
Other assets ..................................... 7,199 6,237
-------- --------
Total assets ..................................... $358,477 $361,615
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SEPT. 28, JUNE 28,
1997 1998
--------- --------
<S> <C> <C>
Current Liabilities
Accounts payable ............................................... $ 66,834 $ 68,003
Accrued payroll and related expenses ........................... 23,851 23,584
Other accrued liabilities ...................................... 21,113 22,153
Current portion of capital lease obligations ................... 1,256 1,287
--------- ---------
Total current liabilities .......................................... 113,054 115,027
Long-term debt, less current portion ............................... 265,000 265,000
Capital lease obligations, less current portion .................... 5,661 4,689
Long-term portion of self-insurance and other reserves ............. 7,409 8,294
Other long-term liabilities ........................................ 3,939 3,778
Stockholders' equity (deficit) Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 ...................... 1 1
Additional paid-in capital ..................................... 12,715 12,715
Retained earnings (deficit) .................................... (49,302) (47,889)
--------- ---------
Total stockholders' equity (deficit) ............................... (36,586) (35,173)
--------- ---------
Total liabilities and stockholders' equity (deficit) ............... $ 358,477 $ 361,615
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
-------------------------
JUNE 29, JUNE 28,
1997 1998
--------- --------
<S> <C> <C>
Sales ................................................. $ 1,292,267 $ 1,285,048
Cost of goods sold .................................... 997,032 987,172
----------- -----------
Gross profit .......................................... 295,235 297,876
Operating expenses
Selling, general and administrative expenses ...... 248,683 261,216
Depreciation and amortization ..................... 9,858 11,345
Consulting fees ................................... 1,125 --
----------- -----------
Total operating expenses .............................. 259,666 272,561
----------- -----------
Operating profit ...................................... 35,569 25,315
Interest income ....................................... 1,733 2,371
Interest expense ...................................... (14,871) (22,641)
Equity in earnings (loss) from unconsolidated affiliate (1,123) (2,692)
Other income - net .................................... 96 42
----------- -----------
Income before income taxes ............................ 21,404 2,395
Income taxes .......................................... 8,777 982
----------- -----------
Net income ............................................ $ 12,627 $ 1,413
Less preferred dividends .............................. 5,448 --
----------- -----------
Earnings available to common shareholders ............. $ 7,179 $ 1,413
=========== ===========
Earnings per common share ............................. $ 143.58 $ 28.26
=========== ===========
Average common shares outstanding ..................... 50,000 50,000
=========== ===========
Shares outstanding at end of period ................... 50,000 50,000
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
JUNE 29, JUNE 28,
1997 1998
-------- --------
<S> <C> <C>
Sales ................................................. $ 427,445 $ 431,301
Cost of goods sold .................................... 330,731 332,188
--------- ---------
Gross profit .......................................... 96,714 99,113
Operating expenses:
Selling, general and administrative expenses ...... 81,531 90,087
Depreciation and amortization ..................... 3,297 3,911
Consulting fees ................................... 375 --
--------- ---------
Total operating expenses .............................. 85,203 93,998
--------- ---------
Operating profit ...................................... 11,511 5,115
Interest income ....................................... 738 1,060
Interest expense ...................................... (4,892) (7,608)
Equity in earnings (loss) from unconsolidated affiliate (544) (561)
Other income (loss) - net ............................. 99 (14)
--------- ---------
Income (loss) before income taxes ..................... 6,912 (2,008)
Income taxes (benefit) ................................ 2,834 (823)
--------- ---------
Net income (loss) ..................................... $ 4,078 $ (1,185)
Less preferred dividends .............................. 1,816 --
--------- ---------
Earnings (loss) available to common shareholders ...... $ 2,262 $ (1,185)
========= =========
Earnings (loss) per common share ...................... $ 45.24 $ (23.70)
========= =========
Average common shares outstanding ..................... 50,000 50,000
========= =========
Shares outstanding at end of period ................... 50,000 50,000
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
----------------------
JUNE 29, JUNE 28,
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 12,627 $ 1,413
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................. 9,858 11,345
Provision for deferred income taxes ............................ (2,086) 1,680
(Gain) on disposals of assets .................................. (96) (42)
Net undistributed loss in investment in unconsolidated affiliate 1,123 2,692
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............................ (401) (2,578)
(Increase) decrease in inventories ............................ 1,633 (3,414)
(Increase) decrease in prepaid expenses ....................... (1,643) (2,241)
(Increase) decrease in other assets ........................... (741) (547)
Increase (decrease) in accounts payable ....................... (16,131) 1,169
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves ........................... (493) 1,496
-------- --------
Net cash provided by operating activities .......................... 3,650 10,973
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ............................. (5,000) (1,100)
Purchase of property and equipment ................................. (14,329) (20,287)
Proceeds from sale of property and equipment and properties
held for sale .................................................... 16,552 269
-------- --------
Net cash (used by) investing activities ............................ (2,777) (21,118)
-------- --------
FINANCING ACTIVITIES:
Dividends paid or accrued on preferred stock ....................... (5,448) --
Principal payments on capital lease obligations .................... (874) (941)
-------- --------
Net cash (used by) financing activities ............................ (6,322) (941)
-------- --------
Net increase (decrease) in cash and cash equivalents ............... (5,449) (11,086)
Cash and cash equivalents at beginning of period ................... 45,279 59,086
-------- --------
Cash and cash equivalents at end of period ......................... $ 39,830 $ 48,000
======== ========
Interest paid ...................................................... $ 9,629 $ 13,428
Income taxes paid .................................................. $ 4,275 $ 950
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 1998
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of September 28, 1997 and June 28, 1998 and
the results of its operations and cash flows for the thirty-nine weeks ended
June 29, 1997 and June 28, 1998. These consolidated financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's latest annual report filed on Form 10-K. The operating
results for the thirty-nine weeks ended June 28, 1998 are not necessarily
indicative of the results of operations for a full year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the thirty-nine weeks ended June 29,
1997 and June 28, 1998 consists of the following:
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
June 29, 1997 June 28, 1998
------------- -------------
(In thousands)
<S> <C> <C>
Federal Income Taxes $ 6,785 $ 760
State Income Taxes 1,992 222
---------- ----------
$ 8,777 $ 982
========== ==========
</TABLE>
NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 50% of Santee Dairies LLC. Through its wholly-owned
subsidiary, Santee Dairies, Inc. ("Santee"), it operated a fluid milk processing
plant located in Los Angeles, California, and as of May 1, 1998, Santee moved
its operations to a newly constructed fluid milk processing plant in City of
Industry. 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 $1.1 million and $2.7 million for
the thirty-nine weeks ended June 29, 1997 and June 28, 1998, 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>
39 Weeks Ended
---------------------------------
June 29, 1997 June 28, 1998
------------- -------------
(In thousands)
<S> <C> <C>
Current Assets $ 20,923 $ 20,324
Non-current assets 67,027 109,800
Current liabilities 62,367 29,876
Non-current liabilities 3,044 82,804
Shareholder's equity 22,539 17,444
Sales 136,020 127,428
Gross Profit 12,176 5,588
Net income (loss) $ (2,947) $ (5,208)
</TABLE>
8
<PAGE> 9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 1998
NOTE 3 - UNCONSOLIDATED AFFILIATE (CONTD.)
The Company accepted and paid a temporary increase in costs of approximately
$1.2 million for product delivered by Santee to the Company during the five
weeks of June 1998. The temporary increase in the cost of product is included in
cost of goods sold for the quarter and year to date periods ended June 28, 1998.
The Company believes the temporary increase in the cost of product delivered to
the Company by Santee will continue through August 1998.
NOTE 4 - CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
In March 1994, the Company entered into a five-year Consulting
Agreement with Craig Corporation ("Craig"), previously a shareholder of the
Company, 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
$1,125,000 for the thirty-nine weeks ended June 29, 1997. The agreement to make
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.
NOTE 5 - RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to conform
to the current period financial statement presentation.
NOTE 6 - 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 7 - SERIES B PREFERRED STOCK REDEMPTION
In August 1997, the Company redeemed all of the outstanding shares of
its Series B Preferred Stock for approximately $69.4 million plus accrued and
unpaid dividends of approximately $4.6 million. The redemption of the Series B
Preferred Stock was funded from the proceeds of a debt offering of $100 million
of 9% Senior Subordinated Notes due 2004.
9
<PAGE> 10
STATER BROS. HOLDINGS INC.
JUNE 28, 1998
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction
(the "Recapitalization") which transferred effective voting control of
the Company to La Cadena Investments ("La Cadena"), reclassified the
Company's outstanding equity, provided for certain cash payments and
distributions to Craig Corporation ("Craig"), previously a shareholder
of the Company, and provided the Company with an option to acquire
Craig's remaining equity in the Company. The Recapitalization was
funded through an offering of $165.0 million of 11% Senior Notes due
2001 (the "11% Notes") which are listed and traded on the American
Stock Exchange.
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 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, and (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 are also listed and traded on the
American Stock Exchange.
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.
10
<PAGE> 11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain income statement components expressed as
a percent of sales for the thirteen weeks and thirty-nine weeks ended June 29,
1997 and June 28, 1998.
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 22.63 22.98 22.85 23.18
Operating expenses:
Selling, general and
administrative expense 19.07 20.89 19.24 20.33
Depreciation and amortization .78 .91 .76 .88
Consulting fees .09 - .09 -
Operating profits 2.69 1.18 2.76 1.97
Interest income .17 .24 .13 .19
Interest expense (1.13) (1.76) (1.15) (1.76)
Equity in (loss) from
unconsolidated affiliate (.13) (.13) (.09) (.21)
Other income (loss) - (net) .02 - - -
Earnings (loss) before income taxes 1.62% (.47%) 1.65% .19%
</TABLE>
Total sales for the thirteen weeks ended June 28, 1998 increased .90% and
amounted to $431.3 million compared to $427.4 million for the like period in
1997. Total sales for the thirty-nine weeks year to date ended June 28, 1998
decreased .56% and amounted to $1,285.0 million, compared to $1,292.3 million
for the same period in 1997. The decrease in sales in the year-to-date period of
1998 compared to 1997 was partially due to competitor new store openings and the
introduction of competitor reward card programs. Comparable like store sales
(like store sales as adjusted for the impact of the new store opening on
surrounding like stores) for the third quarter of fiscal 1998 decreased .32% as
compared to a decrease of 1.6% in the second quarter of fiscal 1998. Like store
sales decreased .89% for the quarter and decreased 1.81% for the year to date
period. The Company operated 112 supermarkets at June 28, 1998 and 110
supermarkets at June 29, 1997.
Gross profits for the thirteen weeks ended June 28, 1998, amounted to $99.1
million or 22.98% of sales compared to $96.7 million or 22.63% of sales in the
same period of the prior year. For the thirty-nine week year to date period,
gross profits increased to $297.9 million or 23.18% of sales compared to $295.2
million or 22.85% of sales in the prior year. The increase in gross profits in
1998 as a percent of sales, is due to the introduction of higher gross margin
products, such as prepackaged gourmet vegetables, fresh cut flowers and expanded
product offerings in the dairy, deli and frozen foods departments and a decrease
in competitive pricing activity when compared to the prior year. The Company
accepted and paid a temporary increase in costs of approximately $1.2 million
for dairy product delivered by Santee to the Company during the five weeks of
June 1998. The temporary increase in the cost of product is included in cost of
goods sold for the quarter and year to
11
<PAGE> 12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
date periods ended June 28, 1998. The Company believes the temporary increase in
the cost of product delivered to the Company by Santee will continue through
August 1998.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses and consulting fees. For the thirteen
weeks ended June 28, 1998, selling, general and administrative expenses amounted
to $90.1 million or 20.89% of sales compared to $81.5 million or 19.07% of sales
for the like period of the prior year. For the year to date period, selling,
general and administrative expenses amounted to $261.2 million or 20.33% of
sales compared to $248.7 million or 19.24% of sales for the like period of the
prior year. The increase in selling, general and administrative expenses in 1998
when compared to 1997 is due to the costs and expenses incurred to operate two
additional supermarkets which were opened in the 1998 year to date period,
increased labor costs due to contractual wage rate increases in collective
bargaining agreements and increased advertising expenses. During the second and
third quarters of fiscal 1998, the Company invested a combined total of
approximately $2.1 million in additional advertising expenses in response to the
introduction of competitors' reward card programs and to re-affirm the Company's
strategy of Everyday Low Price leadership in its primary marketing areas.
Additionally, commencing in April 1998, the Company was required to resume
employer contributions to a previously over-funded collective bargaining unit
Pension trust. Such employer contributions to the Pension trust had been
suspended since 1994, and amounted to $2.4 million for the third quarter and
year-to date periods in 1998.
Depreciation and amortization expenses amounted to $3.9 million and $11.3
million for the third quarter and year to date periods ended June 28, 1998,
respectively. Depreciation and amortization expense amounted to $3.3 million and
$9.9 million for the quarter and year to date periods of the prior year.
Depreciation and amortization includes amortization of a prepaid five-year
covenant not to compete between the Company and Craig which became effective as
of March 8, 1994.
Effective March 8, 1994, and in conjunction with the Recapitalization
Transaction, the Company entered into a consulting agreement with Craig
Corporation whereby the Company was required to pay Craig Corporation $375,000
per quarter for up to five years. The agreement to make consulting payments to
Craig was terminated at the election of the Company, in August 1997. Consulting
fees expense amounted to $375,000 and $1,125,000 for the third quarter and year
to date periods in fiscal 1997.
Operating profits for the third quarter of 1998 amounted to $5.1 million or
1.18% of sales, compared to $11.5 million or 2.69% of sales in the third quarter
of 1997. Operating profits for the thirty-nine weeks year to date ended June 28,
1998, amounted to $25.3 million or 1.97% of sales, compared to $35.6 million or
2.76% of sales for the like period in 1997.
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Interest expense amounted to $7.6 million for the third quarter of 1998 compared
to $4.9 million for the third quarter of fiscal 1997. For the year to date
periods of 1998 and 1997, interest expense amounted to $22.6 million and $14.9
million, respectively. Interest expense in the third quarter includes
amortization of $703,000 and $295,000, respectively, for 1998 and 1997 from fees
and expenses incurred to acquire debt. Year to date amortization of fees and
expenses incurred to acquire debt was $2.1 million in 1998 and $885,000 in 1997.
The increases in interest expense and amortization of fees and expenses to
acquire debt in fiscal 1998 when compared to fiscal 1997, was due to the
Company's 9% Notes, which were issued in July 1997.
The increase in the Company's equity in loss from unconsolidated affiliate in
the third quarter and year to date of fiscal 1998 was due primarily to start up
expenses incurred to begin production in the new fluid milk processing facility
located in City of Industry, California, net of additional income received by
Santee from a temporary increase in the price of product sold to the owners of
Santee of approximately $1.5 million. Additionally, sales and gross profits at
Santee Dairies LLC ("Santee") decreased in 1998 due to a reduction of by-product
bulk sales, such as cream, to unrelated third parties.
Loss before income tax benefits amounted to $2.0 million compared to income
before income taxes of $6.9 million for the third quarters of 1998 and 1997,
respectively. Income before income taxes amounted to $2.4 million and $21.4
million for the year to date periods of 1998 and 1997, respectively.
For the third quarter of 1998 the net loss amounted to $1.2 million compared to
net income of $4.1 million for the prior year. For the year to date periods of
1998 and 1997, the net income amounted to $1.4 million and $12.6 million,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements through
funds provided by operations and through borrowings from short-term revolving
credit facilities. The Company's short-term Bank Credit Agreement is between a
bank and Stater Bros. Markets, a wholly-owned subsidiary of the Company and
consists of revolving credit facilities for working capital purposes of $15.0
million, all of which was available at June 28, 1998, and a $25.0 million
standby letter of credit facility maintained pursuant to its workers'
compensation and general liability self-insurance requirements. The Bank Credit
Agreement, which was scheduled to expire on June 1, 1998, was extended through
September 30, 1998.
Working capital amounted to $87.0 million at June 28, 1998 and $92.0 million at
September 28, 1997, and the Company's current ratios were 1.75:1, and 1.81:1,
respectively. Fluctuations in working capital and current ratios are not unusual
in the industry.
13
<PAGE> 14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
The net cash provided by operating activities for the thirty-nine weeks ended
June 28, 1998 amounted to $11.0 million and consisted of increases in accounts
payable, inventories, other assets and prepaid expenses. The increase in losses
associated with Santee Dairies was partially due to adverse effects of El Nino
weather conditions which delayed completion of the new facility and start up
costs and expenses incurred at the new facility.
Net cash provided by operating activities for the thirty-nine weeks ended June
29, 1997 amounted to $3.7 million and consisted of reductions in accounts
payable net of decreases in inventories and the deferred tax benefits arising
from the October 1996 sale and leaseback transaction. As of September 29, 1996,
the Company had increased its inventory and related accounts payable in
anticipation of the implementation of the Company's 60th Anniversary Marketing
Program in the first quarter of fiscal 1997. Accordingly, as of June 29, 1997,
the Company's investment in inventories and related accounts payable are
reflected at more traditional balances. The increase in the deferred tax benefit
of $2.1 million was due primarily to the timing difference between tax and book
requirements for recognizing the gain and resulting tax liability from the
October 1996 sale and leaseback transaction.
Net cash used by investing activities for the thirty-nine weeks ended June 28,
1998, amounted to $21.1 million, compared to net cash used by investing
activities of $2.8 million for the same period of fiscal 1997. The difference in
net cash used by investing activities between the comparable periods is due to
the Company's capital expenditures during such periods, net of proceeds from
asset dispositions and the Company's additional investment in Santee Dairies
LLC. Capital expenditures for the thirty-nine week periods amounted to $20.3
million in 1998 compared to $14.3 million in the like period of 1997. During the
thirty-nine weeks ended June 28, 1998, the Company remodeled eight supermarkets
and opened two new 43,000 square foot supermarkets, one in Laguna Hills,
California and one in Yucaipa, California.
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 were deferred and will be amortized into income
over the initial term of the leases. 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 Dairies, Inc. Both the
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Company and Hughes subsequently exchanged all of the Common Stock of Santee
Dairies, Inc. for equal interests in Santee Dairies Limited Liability Company.
In May 1998, the Company increased its investment in Santee Dairies LLC, by
contributing $1.1 million into Santee's capital structure. Hughes contributed a
similar amount into Santee's capital structure. Santee Dairies, Inc. is a
wholly-owned subsidiary of Santee Dairies LLC. Santee Dairies, Inc. operated a
fluid milk processing plant in Los Angeles, California and constructed and
operates 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.
Net cash used by financing activities amounted to $941,000 and $6.3 million for
the thirty-nine weeks of fiscal 1998 and 1997, respectively, and consisted of
payments on the Company's capitalized lease obligations and the accretion or
payment of dividends on the Company's Series B Preferred Stock. 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.
The Company is subject to certain covenants associated with its 11% Senior Notes
due 2001, its 9% Senior Subordinated Notes due 2004, and covenants included in
the Bank Credit Agreement between a bank and Stater Bros. Markets, a
wholly-owned subsidiary of the Company. As of June 28, 1998, the Company was in
compliance with all such covenants. However, there can be no assurance that the
Company will be able to achieve the expected operating results or implement the
capital expenditure strategy upon which future compliance with such covenants is
based.
THE BANK FACILITIES
Stater Bros. Markets, the Company's operating subsidiary, and Bank of America
National Trust and Savings Association (the "Bank") entered into a Credit
Agreement in March 1994, as amended and effective June 1, 1996, whereby the Bank
provides Stater Bros. Markets with a revolving operating line of credit (the
"Operating Facility") with a maximum availability of $15.0 million which was
available at June 28, 1998 and a revolving letter of credit facility (the "LC
Facility") with a maximum availability of $25.0 million (collectively, the "Bank
Facilities"). As of June 28, 1998, approximately $14.3 million of the LC
Facility, which was available to the Company. The Bank Credit Agreement was
scheduled to expire on June 1, 1998 and was extended through September 30, 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
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
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 June 28, 1998, for purposes of the Bank Facilities, Stater Bros. Markets
was in compliance with all restrictive covenants and had (i) a current ratio of
1.87:1, (ii) tangible net worth and debt subordinated to the Bank of $226.5
million; (iii) a ratio of total liabilities to tangible net worth and debt
subordinated to the Bank of 0.55:1 and (iv) a fixed charge coverage ratio (as
defined in the Bank Facilities) of 1.29:1. 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 the 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 June 28,
1998, 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.
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE REDEMPTION OF SERIES B PREFERRED STOCK
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. Funds used to redeem the Series B Preferred Stock were
provided by the July 1997 issue of $100 million of 9% Senior Subordinated Notes
due 2004.
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 of the Company's 11% Notes to permit the issue of
the 9% Notes, (d) $2.0 million to La Cadena for a financial advisory fee
relating to the transaction, and (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 are
also listed and trade on the American Stock Exchange.
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.
YEAR 2000 COMPLIANCE
The efficient operations of the Company are dependent, in part, upon its
computer software programs, systems and processes (collectively, the
"Information Systems"). The Company's Information Systems are used in several
key areas of the Company, including, but not limited to, supermarket operations,
warehousing and distribution, merchandising and purchasing, inventory
management, and accounting and financial reporting. The Company is in the
process of updating its Information Systems for Year 2000 compliance
requirements. Additionally, the Company has also been in communication with some
of its vendors, financial institutions and others whose computer software,
programs and information systems may interface with those of the Company to
assess the status of their compliance with Year 2000 requirements. Failure of
companies (that the Company conducts business with) to comply with the Year 2000
requirements could have an adverse effect on the Company's operations.
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE (CONTD.)
Based on the information currently available, the Company believes it will meet
the Year 2000 compliance requirements through a combination of Information
Systems modifications and through the acquisition of new equipment and
technology that are Year 2000 compliant. The Company believes that costs
required to replace or modify Information Systems, including scheduled
replacements of in-store Point of Sale equipment, will approximate $7.7 million,
of which $6.8 million will be capitalized and $900,000 will be expensed. Through
June 28, 1998, the Company has incurred capitalized expenditures of $1.9 million
and expenses of $160,000. The Company believes that it will successfully achieve
compliance with the year 2000 requirements, however no assurances can be given
that the Company's Information Systems and its vendors, financial institutions
and others will be successful in achieving Year 2000 compliance.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement 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 were adopted by the Company at
the beginning of 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.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements
contained in this report are forward looking statements. Such forward looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied. Potential uncertainties and risks include, but are not limited to,
changes in the economic environment in the Company's market areas and changes in
the competitive environment. Due to risks and uncertainties, actual results may
differ from any future performance discussed in the Company's filings with the
Securities and Exchange Commission.
18
<PAGE> 19
STATER BROS. HOLDINGS INC.
JUNE 28, 1998
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in
the ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending routine
legal actions and claims will not have a material adverse effect on
the Company's consolidated financial position.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Annual Report on Form
10-K for the fiscal year ended September 28, 1997.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
11 Calculation of Earnings Per Common Share
27 Financial Data Schedule
--------------------------------------------------------------
</TABLE>
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
19
<PAGE> 20
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 10, 1998 /s/ Jack H. Brown
-------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 10, 1998 /s/ Dennis N. Beal
--------------------------
Dennis N. Beal
Senior Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
20
<PAGE> 1
EXHIBIT 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(Unaudited)
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------- --------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,078 $ (1,185) 12,627 $ 1,413
Less preferred dividends 1,816 -- 5,448 --
-------- -------- -------- --------
Net income (loss) available to common shareholders $ 2,262 $ (1,185) $ 7,179 $ 1,413
======== ======== ======== ========
Earnings (loss) per common share $ 45.24 $ (23.70) $ 143.58 $ 28.26
======== ======== ======== ========
Average common shares outstanding 50,000 50,000 50,000 50,000
======== ======== ======== ========
Common shares outstanding at end of period 50,000 50,000 50,000 50,000
======== ======== ======== ========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 48,000
<SECURITIES> 0
<RECEIVABLES> 24,059
<ALLOWANCES> 0
<INVENTORY> 118,927
<CURRENT-ASSETS> 202,066
<PP&E> 224,076
<DEPRECIATION> 105,008
<TOTAL-ASSETS> 361,615
<CURRENT-LIABILITIES> 115,027
<BONDS> 269,689
0
0
<COMMON> 1
<OTHER-SE> (35,174)
<TOTAL-LIABILITY-AND-EQUITY> 361,615
<SALES> 1,285,048
<TOTAL-REVENUES> 1,285,048
<CGS> 987,172
<TOTAL-COSTS> 987,172
<OTHER-EXPENSES> 272,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,641
<INCOME-PRETAX> 2,395
<INCOME-TAX> 982
<INCOME-CONTINUING> 1,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,413
<EPS-PRIMARY> 28.26
<EPS-DILUTED> 28.26
</TABLE>
