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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 March 29, 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
incorporation or organization) Identification No.)
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 April 24, 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.
MARCH 29, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 28, 1997
AND MARCH 29, 1998 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 30, 1997 AND MARCH 29, 1998 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
MARCH 30, 1997 AND MARCH 29, 1998 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS
ENDED MARCH 30, 1997 AND MARCH 29, 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 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 19
</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, MAR. 29,
1997 1998
---------- ----------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................................. $ 59,086 $ 42,891
Receivables............................................................... 21,481 20,537
Inventories............................................................... 115,513 117,469
Prepaid expenses.......................................................... 4,667 7,960
Deferred income taxes..................................................... 2,978 2,979
Properties held for sale.................................................. 1,342 1,200
---------- ----------
Total current assets.......................................................... 205,067 193,036
Investment in unconsolidated affiliate........................................ 10,313 8,181
Property and equipment
Land...................................................................... 16,443 16,562
Buildings and improvements................................................ 87,605 92,637
Store fixtures and equipment.............................................. 86,644 95,873
Property subject to capital leases........................................ 14,368 14,368
---------- ----------
205,060 219,440
Less accumulated depreciation and amortization............................ 96,203 101,882
---------- ----------
108,857 117,558
Deferred income taxes......................................................... 4,699 4,690
Deferred debt issuance costs, net............................................. 14,273 13,693
Lease guarantee escrow........................................................ 8,069 9,265
Other assets.................................................................. 7,199 6,717
---------- ----------
Total assets.................................................................. $ 358,477 $ 353,140
========== ==========
</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, MAR. 29,
1997 1998
---------- ----------
<S> <C> <C>
Current Liabilities
Accounts payable.......................................................... $ 66,834 $ 59,605
Accrued payroll and related expenses...................................... 23,851 22,809
Other accrued liabilities................................................. 21,113 22,183
Current portion of capital lease obligations.............................. 1,256 1,271
---------- ----------
Total current liabilities..................................................... 113,054 105,868
Long-term debt, less current portion.......................................... 265,000 265,000
Capital lease obligations, less current portion............................... 5,661 5,019
Long-term portion of self-insurance and other reserves........................ 7,409 7,409
Other long-term liabilities................................................... 3,939 3,832
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) (46,704)
---------- -----------
Total stockholders' equity (deficit).......................................... (36,586) (33,988)
---------- ----------
Total liabilities and stockholders' equity (deficit).......................... $ 358,477 $ 353,140
========== ==========
</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>
26 Weeks Ended
-------------------------
MAR . 30, MAR. 29,
1997 1998
--------- ----------
<S> <C> <C>
Sales......................................................................... $ 864,822 $ 853,747
Cost of goods sold............................................................ 666,301 654,984
--------- ----------
Gross profit.................................................................. 198,521 198,763
Operating expenses
Selling, general and administrative expenses.............................. 167,152 171,129
Depreciation and amortization............................................. 6,561 7,434
Consulting fees........................................................... 750 -
--------- ----------
Total operating expenses...................................................... 174,463 178,563
--------- ----------
Operating profit.............................................................. 24,058 20,200
Interest income............................................................... 995 1,311
Interest expense.............................................................. (9,979) (15,033)
Equity in earnings (loss) from unconsolidated affiliate....................... (579) (2,132)
Other income (loss) - net..................................................... (3) 57
--------- ----------
Income before income taxes.................................................... 14,492 4,403
Income taxes.................................................................. 5,943 1,805
--------- ----------
Net income.................................................................... $ 8,549 $ 2,598
Less preferred dividends...................................................... 3,632 -
--------- ----------
Earnings available to common shareholders..................................... $ 4,917 $ 2,598
========= ==========
Earnings per common share..................................................... $ 98.34 $ 51.96
========= ==========
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 INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------- ----------
MAR. 30, MAR. 29,
1997 1998
--------- ----------
<S> <C> <C>
Sales......................................................................... $ 431,422 $ 422,829
Cost of goods sold............................................................ 333,727 322,362
--------- ----------
Gross profit.................................................................. 97,695 100,467
Operating expenses:
Selling, general and administrative expenses.............................. 82,056 86,562
Depreciation and amortization............................................. 3,286 3,815
Consulting fees........................................................... 375 -
--------- ----------
Total operating expenses...................................................... 85,717 90,377
--------- ----------
Operating profit.............................................................. 11,978 10,090
Interest income............................................................... 526 590
Interest expense.............................................................. (4,984) (7,506)
Equity in earnings (loss) from unconsolidated affiliate....................... (136) (1,083)
Other income - net............................................................ (3) (14)
--------- ----------
Income before income taxes.................................................... 7,381 2,077
Income taxes.................................................................. 3,027 852
--------- ----------
Net income.................................................................... $ 4,354 $ 1,225
Less preferred dividends...................................................... 1,816 -
--------- ----------
Earnings available to common shareholders..................................... $ 2,538 $ 1,225
========= ==========
Earnings per common share..................................................... $ 50.76 $ 24.50
========= ==========
Average common shares outstanding............................................. 50,000 50,000
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-----------------------
MAR. 30, MAR. 29,
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................... $ 8,549 $ 2,598
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................................. 6,561 7,434
Provision for deferred income taxes....................................... (2,087) 8
Gain (loss) on disposals of assets........................................ 3 (57)
Net undistributed loss in investment in unconsolidated affiliate.......... 579 2,132
Changes in operating assets and liabilities:
(Increase) decrease in receivables....................................... 1,030 944
(Increase) decrease in inventories....................................... 1,575 (1,956)
(Increase) decrease in prepaid expenses.................................. (3,092) (3,293)
(Increase) decrease in other assets...................................... (725) (1,036)
Increase (decrease) in accounts payable.................................. (15,810) (7,229)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves...................................... (406) (79)
-------- --------
Net cash (used by) operating activities....................................... (3,823) (534)
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate........................................ (5,000) -
Purchase of property and equipment............................................ (7,192) (15,303)
Proceeds from sale of property and equipment and properties
held for sale............................................................... 16,010 269
-------- --------
Net cash (used by) provided by investing activities........................... 3,818 (15,034)
-------- --------
FINANCING ACTIVITIES:
Dividends paid or accrued on preferred stock.................................. (3,632) -
Principal payments on capital lease obligations............................... (577) (627)
-------- --------
Net cash (used by) financing activities....................................... (4,209) (627)
-------- --------
Net increase (decrease) in cash and cash equivalents.......................... (4,214) (16,195)
Cash and cash equivalents at beginning of period.............................. 45,279 59,086
-------- --------
Cash and cash equivalents at end of period.................................... $ 41,065 $ 42,891
======== ========
Interest paid................................................................. $ 9,466 $ 13,292
Income taxes paid............................................................. $ 3,225 $ 950
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 29, 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 March 29, 1998 and
the results of its operations and cash flows for the twenty-six weeks ended
March 30, 1997 and March 29, 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 twenty-six weeks ended March 29, 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 twenty-six weeks ended March 30,
1997 and March 29, 1998 consists of the following:
<TABLE>
<CAPTION>
26 Weeks Ended
---------------------------------
Mar. 30, 1997 Mar. 29, 1998
------------- -------------
(In thousands)
<S> <C> <C>
Federal Income Taxes $ 4,594 $ 1,396
State Income Taxes 1,349 409
---------- ----------
$ 5,943 $ 1,805
========== ==========
</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 $2,132,000 and $579,000 for the
twenty-six weeks ended March 29, 1998 and March 30, 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>
26 Weeks Ended
---------------------------------
Mar. 30, 1997 Mar. 29, 1998
------------- -------------
(In thousands)
<S> <C> <C>
Current Assets $ 16,150 $ 25,574
Non-current assets 56,561 106,702
Current liabilities 45,027 33,334
Non-current liabilities 3,561 82,817
Shareholder's equity 24,123 16,125
Sales 94,621 87,542
Gross Profit 8,151 6,636
Net income (loss) $ (2,485) $ (4,264)
</TABLE>
8
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 29, 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
$750,000 for the twenty-six weeks ended March 30, 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
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STATER BROS. HOLDINGS INC.
MARCH 29, 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
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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 and twenty-six
weeks ended March 30, 1997 and March 29, 1998.
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
------------------- ---------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 22.64 23.76 22.96 23.28
Operating expenses:
Selling, general and
administrative expense 19.02 20.47 19.33 20.04
Depreciation and amortization .76 .90 .76 .87
Consulting fees .09 - .09 -
Operating profits 2.77 2.39 2.78 2.37
Interest income .12 .14 .12 .15
Interest expense (1.15) (1.78) (1.15) (1.76)
Equity in (loss) from
unconsolidated affiliate (.03) (.26) (.07) (.25)
Other income (loss) - (net) - - - .01
Earnings before income taxes 1.71% .49% 1.68% .52%
</TABLE>
Total sales for the thirteen weeks ended March 29, 1998 decreased 2.0%
and amounted to $422.8 million compared to $431.4 million for the like
period in 1997. Total sales for the twenty-six weeks year to date
ended March 29, 1998 decreased 1.3% and amounted to $853.8 million
compared to $864.8 million for the same period in 1997. Sales for
1998, when compared to 1997, were negatively impacted by the timing of
the Easter holiday, which was in the second quarter of 1997, but in
the third quarter of 1998. Additionally, the decrease in sales in the
first and second quarters of 1998 compared to the like periods of 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 timing of the Easter
holiday and the impact of the new store opening on surrounding like
stores) for the second quarter of fiscal 1998 decreased 1.6% as
compared to a decrease of 1.4% in the first quarter of fiscal 1998.
Like store sales decreased 3.1% for the quarter and decreased 2.3% for
the year to date period. The Company operated 112 supermarkets at
March 29, 1998 and 110 supermarkets at March 30, 1997.
Gross profits for the thirteen weeks ended March 29, 1998, amounted to
$100.5 million or 23.76% of sales compared to $97.7 million or 22.64%
of sales in the same period of the prior year. During 1998, the
Company continued to introduce higher gross margin products into its
supermarkets, such as prepackaged gourmet vegetables and fresh cut
flowers. For the twenty-six week year to date period, gross profits
increased to $198.8 million or 23.28% of sales compared to $198.5
million or 22.96% of sales in the prior year. The increase in gross
profits for the year to date period is due to 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 the prior year.
11
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses and consulting fees.
For the thirteen weeks ended March 29, 1998, selling, general and
administrative expenses amounted to $86.6 million or 20.47% of sales
compared to $82.1 million or 19.02% of sales for the like period of
the prior year. For the year to date period, selling, general and
administrative expenses amounted to $171.1 million or 20.04% of sales
compared to $167.2 million or 19.33% 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. Late in the second quarter of
fiscal 1998, the Company invested approximately $1.0 million in
additional advertising expenses in response to the introduction of
competitor reward card programs and to re-affirm the Company's
strategy of Everyday Low Price leadership in its primary marketing
areas.
Depreciation and amortization expenses amounted to $3.8 million and
$7.4 million for the second quarter and year to date periods ended
March 29, 1998, respectively. Depreciation and amortization expense
amounted to $3.3 million and $6.6 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 $750,000 for the second quarter and year to date periods
in fiscal 1997.
Operating profits for the second quarter of 1998 amounted to $10.1
million or 2.39% of sales, compared to $12.0 million or 2.77% of sales
in the second quarter of 1997. Operating profits for the twenty-six
weeks year to date ended March 29, 1998, amounted to $20.2 million or
2.37% of sales, compared to $24.1 million or 2.78% of sales for the
like period in 1997.
Interest expense amounted to $7.5 million for the second quarter of
1998 compared to $5.0 million for the second quarter of fiscal 1997.
For the year to date periods of 1998 and 1997, interest expense
amounted to $15.0 million and $10.0 million, respectively. Interest
expense in the second quarter includes amortization of $691,000 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 $1,391,000 in 1998 and $594,000
in 1997. The increase in interest expense in fiscal 1998
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
when compared to 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 second quarter and year to date of fiscal 1998 was
due to increases in expenses such as depreciation and rent expenses
associated with a move in April 1998, to a new fluid milk processing
facility located in City of Industry, California. 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. Santee constructed a new fluid milk and dairy
products processing facility in City of Industry. Santee vacated the
Los Angeles facility on April 30, 1998 and occupied the new facility
which is located in City of Industry, California.
Income before income taxes amounted to $2.1 million and $7.4 million
for the second quarters of 1998 and 1997, respectively, and amounted
to $4.4 million and $14.5 million for the year to date periods of 1998
and 1997, respectively.
Net income for the second quarters of 1998 and 1997 amounted to $1.2
million or .29% of sales and $4.4 million or 1.01% of sales,
respectively, and for the year to date periods for 1998 and 1997,
amounted to $2.6 million or .30% of sales and $8.5 million or .99% of
sales, 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 March 29, 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 expires on June 1, 1998.
Working capital amounted to $87.2 million at March 29, 1998 and $92.0
million at September 28, 1997, and the Company's current ratios were
1.82:1, and 1.81:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
The net cash used by operating activities for the twenty-six weeks
ended March 29, 1998 amounted to $.5 million and consisted of
reductions in accounts payable, increases in inventories, other assets
and prepaid expenses, and was net of a decrease in receivables. The
increase in losses associated with Santee Dairies was partially due to
adverse effects of El Nino weather conditions which has delayed
completion of the new facility.
Net cash used by operating activities for the twenty-six weeks ended
March 30 , 1997 amounted to $3.8 million and consisted of reductions
in accounts
13
<PAGE> 14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 March 30, 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 twenty-six weeks ended
March 29, 1998, amounted to $15.0 million, compared to net cash
provided by investing activities of $3.8 million for the same period
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 twenty-six week
periods amounted to $15.3 million in 1998 compared to $7.2 million in
the like period of 1997. During the twenty-six weeks ended March 29,
1998, the Company opened two new 43,000 square foot supermarkets, one
in Laguna Hills, California and one in Yucaipa, California.
Additionally, the Company remodeled four supermarkets.
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. operated a fluid milk processing plant in
Los Angeles, California and constructed 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
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 $627,000 and $4.2
million for the first twenty-six 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
March 29, 1998, 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 March 29,
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 March 29, 1998, approximately $15.5 million of the
LC Facility, all of which 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
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.)
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 March 29, 1998, for purposes of the Bank Facilities, Stater
Bros. Markets was in compliance with all restrictive covenants and had
(i) a current ratio of 1.88:1, (ii) tangible net worth and debt
subordinated to the Bank of $224.2 million; (iii) a ratio of total
liabilities to tangible net worth and debt subordinated to the Bank of
0.52:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.86:1. 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 March 29, 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 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.
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 (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 of the Company's
11% Notes to permit the issue of the 9% Notes, (d) $2.0 million to La
Cadena for 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.
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.
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
MARCH 29, 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
--------------------------------------------------------------
Copies of Exhibits listed herein can be obtained by writing and requesting such
Exhibits from: Corporate Secretary, P. O. Box 150, Colton, California 92324.
</TABLE>
(b) Reports on Form 8-K
None
18
<PAGE> 19
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: May 11, 1998 /s/ Jack H. Brown
----------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: May 11, 1998 /s/ Dennis N. Beal
----------------------------------
Dennis N. Beal
Senior Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
19
<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 26 Weeks Ended
--------------------- ---------------------
March 30, March 29, March 30, March 29,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 4,354 $ 1,225 $ 8,549 $ 2,598
Less preferred dividends 1,816 - 3,632 -
-------- -------- -------- --------
Net income available to common shareholders $ 2,538 $ 1,225 $ 4,917 $ 2,598
======== ======== ======== ========
Earnings per common share $50.76 $24.50 $98.34 $51.96
====== ====== ====== ======
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>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 42,891
<SECURITIES> 0
<RECEIVABLES> 20,537
<ALLOWANCES> 0
<INVENTORY> 117,469
<CURRENT-ASSETS> 193,036
<PP&E> 219,440
<DEPRECIATION> 101,882
<TOTAL-ASSETS> 353,140
<CURRENT-LIABILITIES> 105,868
<BONDS> 270,019
0
0
<COMMON> 1
<OTHER-SE> (33,989)
<TOTAL-LIABILITY-AND-EQUITY> 353,140
<SALES> 853,747
<TOTAL-REVENUES> 853,747
<CGS> 654,984
<TOTAL-COSTS> 654,984
<OTHER-EXPENSES> 179,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,033
<INCOME-PRETAX> 4,403
<INCOME-TAX> 1,805
<INCOME-CONTINUING> 2,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,598
<EPS-PRIMARY> 51.96
<EPS-DILUTED> 51.96
</TABLE>
