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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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 (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 preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
As of January 23, 1998, there were issued
and outstanding 50,000 shares of the
registrant's Class A Common Stock
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1
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STATER BROS. HOLDINGS INC.
DECEMBER 28, 1997
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF
SEPTEMBER 28, 1997 AND DECEMBER 28, 1997 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR
THE 13 WEEKS ENDED DECEMBER 29, 1996 AND DECEMBER 28, 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE 13 WEEKS ENDED DECEMBER 29, 1996 AND
DECEMBER 28, 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 28, DEC. 28,
1997 1997
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 59,086 $ 58,584
Receivables .................................. 21,481 20,554
Inventories .................................. 115,513 114,654
Prepaid expenses ............................. 4,667 6,604
Deferred income taxes ........................ 2,978 2,979
Properties held for sale ..................... 1,342 1,205
-------- --------
Total current assets ............................. 205,067 204,580
Investment in unconsolidated affiliate ........... 10,313 9,264
Property and equipment
Land ......................................... 16,443 16,476
Buildings and improvements ................... 87,605 90,112
Store fixtures and equipment ................. 86,644 91,206
Property subject to capital leases ........... 14,368 14,368
-------- --------
205,060 212,162
Less accumulated depreciation and amortization 96,203 98,909
-------- --------
108,857 113,253
Deferred income taxes ............................ 4,699 4,699
Deferred debt issuance costs, net ................ 14,273 14,117
Lease guarantee escrow ........................... 8,069 8,219
Other assets ..................................... 7,199 7,250
-------- --------
Total assets ..................................... $358,477 $361,382
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SEPT. 28, DEC. 28,
1997 1997
--------- ---------
<S> <C> <C>
Current Liabilities
Accounts payable ............................................... $ 66,834 $ 62,340
Accrued payroll and related expenses ........................... 23,851 21,427
Other accrued liabilities ...................................... 21,113 29,906
Current portion of capital lease obligations ................... 1,256 1,262
--------- ---------
Total current liabilities .......................................... 113,054 114,935
Long-term debt, less current portion ............................... 265,000 265,000
Capital lease obligations, less current portion .................... 5,661 5,344
Long-term portion of self-insurance and other reserves ............. 7,409 7,409
Other long-term liabilities ........................................ 3,939 3,906
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) (47,928)
--------- ---------
Total stockholders' equity (deficit) ............................... (36,586) (35,212)
--------- ---------
Total liabilities and stockholders' equity (deficit) ............... $ 358,477 $ 361,382
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
DEC. 29, DEC. 28,
1996 1997
--------- ---------
<S> <C> <C>
Sales ................................................. $ 433,400 $ 430,918
Cost of goods sold .................................... 332,574 332,622
--------- ---------
Gross profit .......................................... 100,826 98,296
Operating expenses:
Selling, general and administrative expenses ...... 85,096 84,567
Depreciation and amortization ..................... 3,275 3,619
Consulting fees ................................... 375 --
--------- ---------
Total operating expenses .............................. 88,746 88,186
--------- ---------
Operating profit ...................................... 12,080 10,110
Interest income ....................................... 469 721
Interest expense ...................................... (4,995) (7,527)
Equity in earnings (loss) from unconsolidated affiliate (443) (1,049)
Other income - net .................................... -- 71
--------- ---------
Income before income taxes ............................ 7,111 2,326
Income taxes .......................................... 2,916 953
--------- ---------
Net income ............................................ $ 4,195 $ 1,373
Less preferred dividends .............................. 1,816 --
--------- ---------
Earnings available to common shareholders ............. $ 2,379 $ 1,373
========= =========
Earnings per common share ............................. $ 47.58 $ 27.46
========= =========
Average common shares outstanding ..................... 50,000 50,000
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------
DEC. 29, DEC. 28,
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 4,195 $ 1,373
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................. 3,275 3,619
Provision for deferred income taxes ............................ (2,087) (1)
Loss (gain) on disposals of assets ............................. -- (71)
Net undistributed loss in investment in unconsolidated affiliate 443 1,049
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............................ (816) 927
(Increase) decrease in inventories ............................ 2,400 859
(Increase) decrease in prepaid expenses ....................... (1,935) (1,937)
(Increase) decrease in other assets ........................... (767) (501)
Increase (decrease) in accounts payable ....................... (18,452) (4,494)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves ........................... 4,833 6,337
-------- --------
Net cash (used by) provided by operating activities ................ (8,911) 7,160
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ............................. (5,000) --
Purchase of property and equipment ................................. (2,544) (7,621)
Proceeds from sale of property and equipment and properties
held for sale .................................................... 16,010 270
-------- --------
Net cash (used by) provided by investing activities ................ 8,466 (7,351)
-------- --------
FINANCING ACTIVITIES:
Dividends paid on preferred stock .................................. (1,816) --
Principal payments on capital lease obligations .................... (286) (311)
-------- --------
Net cash (used by) financing activities ............................ (2,102) (311)
-------- --------
Net (decrease) in cash and cash equivalents ........................ (2,547) (502)
Cash and cash equivalents at beginning of period ................... 45,279 59,086
-------- --------
Cash and cash equivalents at end of period ......................... $ 42,732 $ 58,584
======== ========
Interest paid ...................................................... $ 195 $ 150
Income taxes paid .................................................. $ 550 $ 0
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 1997
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of September 28, 1997 and December 28, 1997
and the results of its operations and cash flows for the thirteen weeks ended
December 28, 1997 and December 29, 1996. These consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's latest annual report filed on Form 10-K. The
operating results for the thirteen weeks ended December 28, 1997 are not
necessarily indicative of the results of operations for a full year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the thirteen weeks ended December
29, 1996 and December 28, 1997 consists of the following:
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------
Dec. 29, Dec. 28,
1996 1997
---------- ----------
(In thousands)
<S> <C> <C>
Federal Income Taxes $ 2,506 $ 737
State Income Taxes 410 216
---------- ----------
$ 2,916 $ 953
========== ==========
</TABLE>
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
$1,049,000 and $443,000 for the thirteen weeks ended December 28, 1997 and
December 29, 1996, respectively. The Company is a significant customer of Santee
which supplies the Company with a substantial portion of its fluid milk and
dairy products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------
Dec. 29, Dec. 28,
1996 1997
--------- ----------
(In thousands)
<S> <C> <C>
Current Assets $ 17,589 $ 38,787
Non-current assets 48,179 96,657
Current liabilities 35,672 34,078
Non-current liabilities 4,255 83,011
Shareholder's equity 25,841 18,355
Sales 50,138 43,892
Gross Profit 4,353 3,628
Net income (loss) $ (768) $ (2,098)
</TABLE>
7
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 1997
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
$375,000 for the thirteen weeks ended December 29, 1996. 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.
8
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STATER BROS. HOLDINGS INC.
DECEMBER 28, 1997
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, (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 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.
9
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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 ended December
29, 1996 and December 28, 1997.
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------
Dec. 29, Dec. 28,
1996 1997
-------- ---------
<S> <C> <C>
Sales 100.00% 100.00%
Gross profit 23.26 22.81
Operating expenses:
Selling, general and
administrative expense 19.63 19.62
Depreciation and amortization .76 .84
Consulting fees .09 -
Operating profits 2.78 2.35
Interest income .11 .17
Interest expense (1.15) (1.75)
Equity in (loss) from
unconsolidated affiliate (.10) (.24)
Other income (loss) - (net) - .01
Earnings before income taxes 1.64% .54%
</TABLE>
Total sales for the thirteen weeks ended December 28, 1997, the first
quarter of fiscal 1998, decreased .57% and amounted to $430.9 million
compared to $433.4 million for the same period in the prior year. Like
store sales decreased 1.41% for the thirteen week period ended
December 28, 1997. The Company operated 110 and 111 supermarkets at
December 29, 1996 and December 28, 1997, respectively.
The decrease in like store sales in the first quarter of 1998 was due
to competitor new store openings and aggressive competitor pricing
strategies during the Thanksgiving and Christmas holidays.
Gross profits for the thirteen weeks ended December 28, 1997, amounted
to $98.3 million or 22.81% of sales compared to $100.8 million or
23.26% of sales in the same period of the prior year. The decrease in
gross profits for the first quarter of fiscal 1998, as a percent of
sales, was due to aggressive competitive pricing in selected areas of
Southern California. The Company adjusted its pricing strategy as
necessary to retain its everyday low price marketing position and
reflects the Company's commitment to retain its existing customer
base.
Operating expenses include selling, general and administrative
expenses, depreciation and amortization, and consulting expenses. For
the thirteen weeks ended December 28, 1997, selling, general and
administrative expenses amounted to $84.6 million or 19.62% of sales.
For the thirteen weeks ended December 29, 1996, selling, general and
administrative expenses amounted to $85.1 million or 19.63% of sales.
10
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Depreciation and amortization expenses amounted to $3.6 million for
the thirteen weeks ended December 28, 1997 and amounted to $3.3
million for the like period of the prior year and included
amortization of $250,000 in both years from a five-year prepaid
covenant not to compete.
Effective March 8, 1994, and in conjunction with the Recapitalization
Transaction, the Company entered into a consulting agreement with
Craig Corporation whereby the Company 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 of $375,000 was
recognized during the thirteen weeks ended December 29, 1996.
Operating profit for the thirteen weeks ended December 28, 1997
amounted to $10.1 million or 2.35% of sales compared to $12.1 million
or 2.78% of sales for the thirteen weeks ended December 29, 1996.
Interest expense amounted to $7.5 million for the thirteen weeks ended
December 28, 1997 compared to $5.0 million for the like period ending
December 29, 1996. Interest expense for the thirteen weeks ended
December 28, 1997 and December 29, 1996 includes amortization of
$694,000 and $295,000, respectively, from fees and expenses incurred
to acquire debt. The increase in interest expense in the first quarter
of fiscal 1998 when compared to the first quarter of fiscal 1997, is
due to the interest paid or accrued on 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 first quarter of fiscal 1998 was due to increases in
expenses such as depreciation and rent expenses associated with a
planned move in March 1998, to a new facility located in City of
Industry, California. Additionally sales and gross profits at Santee
Dairies LLC ("Santee") have been reduced due to a reduction of
by-product bulk sales, such as cream, to unrelated third parties.
Santee is constructing a new fluid milk and dairy products processing
facility in City of Industry. The Company believes Santee will vacate
the Los Angeles facility in March 1998 and will thereafter, occupy the
new facility which is located in City of Industry, California.
Income before income taxes amounted to $2.3 million and $7.1 million
for the thirteen weeks ended December 28, 1997 and December 29, 1996,
respectively.
Net income for the thirteen week first quarter of fiscal 1998 ended
December 28, 1997, amounted to $1.4 million compared to $4.2 million
for the quarter ended December 29, 1996.
11
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements
through funds provided by operations and through borrowings from
short-term revolving credit facilities. The Company's short-term Bank
Credit Agreement is between a bank and Stater Bros. Markets, a wholly
owned subsidiary of the Company and consists of revolving credit
facilities for working capital purposes of $15.0 million, which was
available at December 28, 1997, and a $25.0 million standby letter of
credit facility maintained pursuant to its workers' compensation and
general liability self-insurance requirements. The Bank Credit
Agreement expires on June 1, 1998.
Working capital amounted to $89.6 million at December 28, 1997 and
$92.0 million at September 28, 1997, and the Company's current ratios
were 1.78:1, and 1.81:1, respectively. Fluctuations in working capital
and current ratios are not unusual in the industry.
The net cash provided by operating activities in the first quarter of
fiscal 1998 amounted to $7.2 million and consisted of reductions in
accounts payable, net of decreases in inventories and receivables and
increases due from the accrual of interest expense due on the
Company's 11% Senior Notes and 9% Senior Subordinated Notes. The
increase of $6.3 million in accrued liabilities and long term portion
of self-insurance reserves reflects the accrual for interest expense
on the Company's 11% Notes which is paid September 1 and March 1 and
on the Company's 9% Notes which is paid July 1 and January 1 of each
year.
Net cash used by operating activities in the first quarter of fiscal
1997 (ended December 29, 1996), amounted to $8.9 million and consisted
of reductions in accounts payable, net of decreases in inventories,
the timing of interest payments due on the Company's 11% Senior Notes
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
December 29, 1996, the Company's investment in inventories and related
accounts payable are reflected at more traditional balances. The
increase of $4.8 million in accrued liabilities and long term portion
of self-insurance reserves reflects the accrual for interest due on
the Company's 11% Senior Notes, such interest payments are due
September 1 and March 1 of each year. The increase in the deferred tax
benefit of $2.1 million was due primarily to the timing difference
between tax and book requirements for recognizing the gain and
resulting tax liability from the October 1996 sale and leaseback
transaction.
12
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Net cash used by investing activities for the thirteen weeks ended
December 28, 1997, amounted to $7.4 million, compared to net cash
provided by investing activities of $8.5 million for the first quarter
of fiscal 1997. The difference in net cash used by or provided by
investing activities between the comparable periods is due to the
Company's capital expenditures during such periods, net of proceeds
from asset dispositions and the Company's additional investment in
Santee Dairies LLC. Capital expenditures for the thirteen week periods
amounted to $7.6 million in the first quarter of 1998 compared to $2.5
million in the like period of 1997. During the thirteen weeks ended
December 28, 1997, the Company opened a new 43,000 square foot
supermarket in Laguna Hills, California, remodeled two supermarkets
and continued to construct its new supermarket 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 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.
Net cash used by financing activities amounted to $311,000 and $2.1
million for the first quarters 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.
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 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
December 28, 1997, the Company was in compliance with all such
convenants. However, there can be no assurance that the Company will
be able to achieve the expected operating results or implement the
capital expenditure strategy upon which future compliance with such
covenants is based.
THE BANK FACILITIES
Stater Bros. Markets, the Company's operating subsidiary, and Bank of
America National Trust and Savings Association (the "Bank") entered
into a Credit Agreement in March 1994, as amended and effective June
1, 1996, whereby the Bank provides Stater Bros. Markets with a
revolving operating line of credit (the "Operating Facility") with a
maximum availability of $15.0 million which was available at December
28, 1997 and a revolving letter of credit facility (the "LC Facility")
with a maximum availability of $25.0 million (collectively, the "Bank
Facilities"). As of December 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.
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
As of December 28, 1997, for purposes of the Bank Facilities, Stater
Bros. Markets was in compliance with all restrictive covenants and had
(i) a current ratio of 1.94:1, (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
0.53:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 2.61:1. 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 December 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.
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 issue of $100
million of 9% Senior Subordinated Notes due 2004.
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 REDEMPTION OF SERIES B PREFERRED STOCK (CONTD.)
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 and (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 are 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.
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.
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
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.
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
DECEMBER 28, 1997
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in
the ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending legal
actions and claims will not have a material adverse effect on the
Company's consolidated financial position or its results of
operations.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Form 10-K for the fiscal
year ended September 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>
18
<PAGE> 19
STATER BROS. HOLDINGS INC.
DECEMBER 28, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (contd.)
(a) Exhibits (contd.)
Copies of Exhibits listed herein can be obtained by writing
and requesting such Exhibits from: Corporate Secretary, P. O.
Box 150, Colton, California 92324.
(b) Reports on Form 8-K
None
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: February 9, 1998 /s/ Jack H. Brown
------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: February 9, 1998 /s/ Dennis N. Beal
------------------------------------
Dennis N. Beal
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
---------------------------
Dec. 29, Dec. 28,
1996 1997
-------- --------
<S> <C> <C>
Net income $ 4,195 $ 1,373
Less: Preferred dividends (1,816) --
-------- --------
Net income available to common shareholders $ 2,379 $ 1,373
======== ========
Earnings per common share $ 47.58 $ 27.46
======== ========
Average common shares outstanding 50,000 50,000
======== ========
Common Shares outstanding at end of period 50,000 50,000
======== ========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 58,584
<SECURITIES> 0
<RECEIVABLES> 20,554
<ALLOWANCES> 0
<INVENTORY> 114,654
<CURRENT-ASSETS> 204,580
<PP&E> 212,162
<DEPRECIATION> 98,909
<TOTAL-ASSETS> 361,382
<CURRENT-LIABILITIES> 114,395
<BONDS> 270,344
0
0
<COMMON> 1
<OTHER-SE> (35,213)
<TOTAL-LIABILITY-AND-EQUITY> 361,382
<SALES> 430,918
<TOTAL-REVENUES> 430,918
<CGS> 332,622
<TOTAL-COSTS> 332,622
<OTHER-EXPENSES> 88,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,527
<INCOME-PRETAX> 2,326
<INCOME-TAX> 953
<INCOME-CONTINUING> 1,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,373
<EPS-PRIMARY> 27.46
<EPS-DILUTED> 27.46
</TABLE>
