<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 December 27, 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 January 22, 1999, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock.
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1
<PAGE> 2
STATER BROS. HOLDINGS INC.
DECEMBER 27, 1998
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
- - ------ --------------------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 27,
1998 AND DECEMBER 27, 1998 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13
WEEKS ENDED DECEMBER 28, 1997 AND DECEMBER 27, 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
13 WEEKS ENDED DECEMBER 28, 1997 AND DECEMBER 27, 1998 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 19
</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. 27, DEC. 27,
1998 1998
--------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents ......................... $ 57,281 $ 64,142
Receivables ....................................... 20,451 22,131
Inventories ....................................... 116,274 117,949
Prepaid expenses .................................. 5,176 6,483
Deferred income taxes ............................. 4,588 4,589
Properties held for sale .......................... 3,969 4,312
-------- --------
Total current assets ................................. 207,739 219,606
Investment in unconsolidated affiliate ............... 8,472 9,270
Property and equipment
Land .............................................. 15,924 17,170
Buildings and improvements ........................ 94,794 95,927
Store fixtures and equipment ...................... 100,781 104,415
Property subject to capital leases ................ 14,368 14,368
-------- --------
225,867 231,880
Less accumulated depreciation and amortization .... 107,513 110,456
-------- --------
118,354 121,424
Deferred income taxes ................................ 2,449 2,449
Deferred debt issuance costs, net .................... 12,294 11,591
Lease guarantee escrow ............................... 9,629 10,656
Other assets ......................................... 5,381 5,624
-------- --------
Total assets ......................................... $364,318 $380,620
======== ========
</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. 27, DEC. 27,
1998 1998
--------- ---------
<S> <C> <C>
Current Liabilities
Accounts payable ...................................... $ 65,553 $ 70,373
Accrued payroll and related expenses .................. 25,363 25,923
Other accrued liabilities ............................. 24,788 33,778
Current portion of capital lease obligations .......... 1,310 1,339
--------- ---------
Total current liabilities ................................ 117,014 131,413
Long-term debt, less current portion ..................... 265,000 265,000
Capital lease obligations, less current portion .......... 4,350 4,004
Long-term portion of self-insurance and other reserves ... 8,284 8,284
Other long-term liabilities .............................. 3,725 3,687
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) ........................... (46,771) (44,484)
--------- ---------
Total stockholders' equity (deficit) ..................... (34,055) (31,768)
--------- ---------
Total liabilities and stockholders' equity (deficit) ..... $ 364,318 $ 380,620
========= =========
</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>
13 WEEKS ENDED
------------------------
DEC. 28, DEC. 27,
1997 1998
-------- --------
<S> <C> <C>
Sales....................................................... $430,918 $441,422
Cost of goods sold.......................................... 332,622 339,021
-------- --------
Gross profit................................................ 98,296 102,401
Operating expenses:
Selling, general and administrative expenses.............. 84,567 88,671
Depreciation and amortization............................. 3,619 3,903
-------- --------
Total operating expenses.................................... 88,186 92,574
-------- --------
Operating profit............................................ 10,110 9,827
Interest income............................................. 721 775
Interest expense............................................ (7,527) (7,531)
Equity in earnings (loss) from unconsolidated affiliate..... (1,049) 798
Other income (loss) - net................................... 71 (58)
-------- --------
Income before income taxes.................................. 2,326 3,811
Income taxes................................................ 953 1,524
-------- --------
Net income.................................................. $ 1,373 $ 2,287
======== ========
Earnings per share.......................................... $ 27.46 $ 45.74
======== ========
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 CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
DEC. 28, DEC. 27,
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 1,373 $ 2,287
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 3,619 3,903
Provision for deferred income taxes ............................. (1) (1)
(Gain) loss on disposals of assets .............................. (71) 58
Net undistributed (gain) loss in investment in unconsolidated
affiliate ..................................................... 1,049 (798)
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............................. 927 (1,680)
(Increase) decrease in inventories ............................. 859 (1,675)
(Increase) decrease in prepaid expenses ........................ (1,937) (1,307)
(Increase) decrease in other assets ............................ (501) (841)
Increase (decrease) in accounts payable ........................ (4,494) 4,820
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves ............................ 6,337 9,512
-------- --------
Net cash provided by operating activities .......................... 7,160 14,278
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (7,621) (7,811)
Proceeds from sale of property and equipment and properties
held for sale ..................................................... 270 711
-------- --------
Net cash (used by) investing activities ............................ (7,351) (7,100)
-------- --------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations .................... (311) (317)
-------- --------
Net cash (used by) financing activities ............................ (311) (317)
-------- --------
Net increase (decrease) in cash and cash equivalents ............... (502) 6,861
Cash and cash equivalents at beginning of period ................... 59,086 57,281
-------- --------
Cash and cash equivalents at end of period ......................... $ 58,584 $ 64,142
======== ========
Interest paid ...................................................... $ 150 $ 123
Income taxes paid .................................................. $ 0 $ 1,675
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 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 27, 1998 and December 27, 1998
and the results of its operations and cash flows for the thirteen weeks ended
December 28, 1997 and December 27, 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 thirteen weeks ended December 27, 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 thirteen weeks ended December 28,
1997 and December 27, 1998 consists of the following:
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------
Dec. 28, Dec. 27,
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Federal income taxes $ 737 $1,296
State income taxes 216 228
------ ------
$ 953 $1,524
====== ======
</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 City of Industry, 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 a loss
of $1,049,000 for the thirteen weeks ended December 28, 1997, and recognized
income of $798,000 for the thirteen weeks ended December 27, 1998. 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. 28, Dec. 27,
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Current assets $ 38,787 $ 16,585
Non-current assets 96,657 109,870
Current liabilities 34,078 26,652
Non-current liabilities 83,011 81,260
Shareholder's equity 18,355 18,543
Sales 43,892 48,227
Gross profit 3,628 3,033
Net income (loss) $ (2,098) $ 1,602
</TABLE>
7
<PAGE> 8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 1998
NOTE 4 - COVENANT NOT TO COMPETE
On March 8, 1994, the Company entered into a $5.0 million prepaid five
year covenant not to compete which was included in a Consulting Agreement with
Craig Corporation and is amortized to earnings over the five year term of the
covenant not to compete.
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.
8
<PAGE> 9
STATER BROS. HOLDINGS INC.
DECEMBER 27, 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 trade 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. The Series B Preferred Stock
redemption was funded through an offering of $100 million of 9% Senior
Subordinated Notes due 2004 (the "9% Notes"), which are listed and trade
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
<PAGE> 10
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
28, 1997 and December 27, 1998.
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------
Dec. 28, Dec. 27,
1997 1998
-------- ---------
<S> <C> <C>
Sales 100.00% 100.00%
Gross profit 22.81 23.20
Operating expenses:
Selling, general and administrative
expense 19.62 20.09
Depreciation and amortization .84 .89
Operating profit 2.35 2.22
Interest income .17 .18
Interest expense (1.75) (1.71)
Equity in (loss) from
unconsolidated affiliate (.24) .18
Other income (loss) - (net) .01 (.01)
Income before income taxes .54% .86%
</TABLE>
Total sales for the thirteen weeks ended December 27, 1998, the first
quarter of fiscal 1999, increased 2.4% and amounted to $441.4 million
compared to $430.9 million for the same period in the prior year. Like
store sales increased 1.4% for the thirteen week period ended December
27, 1998. The Company operated 112 and 111 supermarkets at December 27,
1998 and December 28, 1997, respectively.
The increase in sales in the first quarter of fiscal 1999 was due to
favorable customer response to the Company's first quarter marketing
plan, which emphasized the Company's high quality and expanded product
selections in the produce and other perishable departments, and due to a
new supermarket, which opened in March 1998, and a new replacement
supermarket, which opened in December 1998.
Gross profits for the thirteen weeks ended December 27, 1998, amounted
to $102.4 million or 23.20% of sales compared to $98.3 million or 22.81%
of sales in the same period of the prior year. Gross profits for the
first quarter of fiscal 1999 were reduced by approximately $3.1 million
from the temporary increase in the cost of products purchased from
Santee Dairies, Inc. ("Santee"). The increase in the first quarter of
fiscal 1999 gross profits, as a percent of sales, was due to several
factors including increased sales in perishable departments such as the
produce, service deli and service bakery departments, which have a
higher gross profit margin, and a reduction in competitive pricing when
compared to the same period in fiscal 1998.
Operating expenses include selling, general and administrative expenses
and depreciation and amortization. For the thirteen weeks ended December
27, 1998, selling, general and administrative expenses amounted to $88.7
million or 20.09% of sales. For the thirteen weeks ended December 28,
1997, selling, general and administrative expenses amounted to $84.6
million or 19.62% of
10
<PAGE> 11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
sales. The increase in selling, general and administrative expenses in
the first quarter of fiscal 1999, reflects expenses incurred to operate
at the increased sales level and expenses incurred to operate the new
supermarket opened in March 1998 and the costs incurred with the
December 1998 opening of the new replacement supermarket in Loma Linda,
California.
Depreciation and amortization expenses amounted to $3.9 million for the
thirteen weeks ended December 27, 1998 and amounted to $3.6 million for
the like period of the prior year and included amortization of $250,000
in both periods from a five-year prepaid covenant not to compete.
Operating profit for the thirteen weeks ended December 27, 1998 amounted
to $9.8 million or 2.22% of sales and were reduced by approximately $3.1
million from the temporary increase in the cost of product purchased
from Santee Dairies, Inc. and compare to $10.1 million or 2.35% of sales
for the thirteen weeks ended December 28, 1997.
Interest expense amounted to $7.5 million for the thirteen weeks ended
December 27, 1998 and December 28, 1997. Interest expense for the
thirteen weeks ended December 27, 1998 and December 28, 1997 includes
amortization of $703,000 and $694,000, respectively, from fees and
expenses incurred to acquire debt.
The Company's equity in earnings from unconsolidated affiliate, amounted
to $798,000 for the first quarter of fiscal 1999 compared to a loss of
$1.1 million in the first quarter of the prior year. The 1999 first
quarter earnings of Santee were favorably impacted by temporary
increases in the cost of products charged to the two owners of Santee,
Hughes Family Markets and Stater Bros. Markets, which amounted to
approximately $4.6 million (pre-tax). In March of 1998, Santee vacated
its Los Angeles, California facility and moved into a newly constructed
facility in City of Industry, California. Santee has incurred expenses
associated with commissioning the new facility and transferring and
integrating the production of dairy products into the new facility.
Since June 1998, the Company has accepted and paid approximately $1.0
million per month from a temporary increase in the cost of products
purchased from Santee by the Company. The temporary increase in the cost
of products purchased from Santee is included in the Company's cost of
goods sold and amounted to approximately $3.1 million in the first
quarter of fiscal 1999. The Company believes, that the temporary
increase in the cost of products purchased from Santee by the Company
will continue through June 1999, but no assurances can be given that the
temporary price increase will cease on or before June 1999. The Company
continues to explore alternatives available to it regarding its
investment in Santee.
Income before income taxes amounted to $3.8 million for the thirteen
weeks ended December 27, 1998 compared to $2.3 million for the thirteen
weeks ended December 28, 1997.
11
<PAGE> 12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Net income for the thirteen week first quarter ended December 27, 1998,
amounted to $2.3 million compared to $1.4 million for the thirteen week
first quarter of the prior year.
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 27, 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, 2000.
Working capital amounted to $88.2 million at December 27, 1998 and $90.7
million at September 27, 1998, and the Company's current ratios were
1.67:1, and 1.78:1, 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 1999 amounted to $14.3 million and consisted of increases in
accounts payable and accrued liabilities, net of increases in
inventories, receivables and prepaid expenses. The increase of $9.5
million in accrued liabilities and current portion of long-term debt in
the first quarter of fiscal 1999, was primarily due to the timing of
payments on accrued liabilities such as utilities, payroll taxes, union
benefits and the accrued interest due on the Company's long-term debt.
The increase in net cash provided by operating activities in the first
quarter of fiscal 1998, amounted to $7.2 million and was primarily due
to increases in accrued liabilities and current portion of long-term
debt, reductions in accounts payable, net of decreases in inventories,
decreases in accounts receivables and increases in prepaid expenses. The
increase in accrued liabilities and current portion of long-term debt of
$6.3 million for the quarter ended December 28, 1997, was due primarily
from the accrual of interest due on the Company's long-term debt.
Fluctuations in net cash provided by operating activities are not
unusual in the industry.
Net cash used by investing activities for the thirteen weeks ended
December 27, 1998, amounted to $7.1 million, compared to net cash used
by investing activities of $7.4 million for the first quarter of fiscal
1998. 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. Capital
expenditures amounted to $7.8 million in the first quarter of fiscal
1999 compared to $7.6 million in the first quarter of fiscal 1998.
Capital expenditures for the first quarter of fiscal 1999 were incurred
to complete the construction of a new 37,377 square foot replacement
supermarket in Loma Linda, California which opened in December 1998, and
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
to complete two major remodels and three minor remodels, install five
new NCR ACS Scan systems and to acquire previously leased land.
Net cash used by financing activities amounted to $317,000 and $311,000
for the first quarters of 1999 and 1998, respectively, and consisted of
payments on the Company's capitalized lease obligations.
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 27, 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, 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 27, 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 December 27, 1998,
approximately $14.2 million of the LC Facility was available to the
Company. The Bank Credit Agreement expires on June 1, 2000.
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 $190.0 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.
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 BANK FACILITIES (CONTD.)
As of December 27, 1998, for purposes of the Bank Facilities, Stater
Bros. Markets was in compliance with all restrictive covenants and had
(i) a current ratio of 1.84:1, (ii) tangible net worth and debt
subordinated to the Bank of $242.8 million; (iii) a ratio of total
liabilities to tangible net worth and debt subordinated to the Bank of
0.56:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.10:1. 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 27, 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.
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
1998 and expires in September 2002. 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. In 1997, the Company established a Year 2000 Compliance
Committee and developed a Year 2000 Compliance Plan. The Company's Year
2000 Compliance Plan
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE (CONTD.)
addresses the Company's Information Systems, communications with
vendors, financial institutions and others, and provides for contingency
planning. The Company is in the process of updating its Information
Systems for Year 2000 compliance requirements and has engaged
independent consultants since mid-1998 to assist in achieving Year 2000
compliance with its Information Systems by the third quarter of 1999.
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.
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's
Year 2000 Compliance Committee is developing a contingency plan for its
Information Systems and is developing contingency plans in the event
vendors, financial institutions and others that the Company conducts
business with do not comply with the Year 2000 requirements. The Company
believes that costs required to replace or modify Information Systems,
including scheduled replacements of in-store Point of Sale equipment,
will approximate $8.4 million, of which $6.9 million will be capitalized
and $1.5 million will be expensed. Through December 1998, the Company
has incurred capitalized expenditures of $3.9 million and expenses of
$480,000. The Company believes that it will successfully achieve
compliance with the year 2000 requirements by the third quarter of 1999,
however, no assurances can be given that the Company's Information
Systems and it's vendors, financial institutions and others will be
successful in achieving Year 2000 compliance.
The Company's ability to timely implement its Year 2000 Compliance Plan
may be adversely affected by a variety of factors, some of which are
beyond the Company's control, including the potential for unforeseen
implementation problems, delays in the delivery of products, and
disruption of store operations resulting from a loss of power or
communication links between stores, distribution centers and
headquarters. Based on currently available information, the Company is
unable to determine if such interruptions are likely to have a material
adverse effect on the Company's results of operations, liquidity or
financial condition.
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the
impact of inflation on the operations of the Company has been moderate.
As inflation has increased expenses, the Company has recovered, to the
extent permitted by competition, the increase in expenses by increasing
prices over time. However, the economic and competitive environment in
Southern California continues to challenge the Company to become more
cost efficient as its ability to recover increases in expenses through
price increases is diminished. The future results of operations of the
Company will depend upon the ability of the Company to adapt to the
current economic environment as well as the current competitive
conditions.
The Company conducts business in one industry segment, the operation of
retail food supermarkets, which offer for sale to the public most
merchandise typically found in supermarkets. The supermarket industry is
highly competitive and is characterized by low profit margins. The
Company's primary competitors include Lucky, Vons, Albertson's, Ralphs,
and a number of independent supermarket operators. Competitive factors
typically include the price, quality and selection of products offered
for sale, customer service, and the convenience and location of retail
facilities. The Company monitors competitive activity and Senior
Management regularly reviews the Company's marketing and business
strategy and periodically adjusts them to adapt to changes in the
Company's primary trading area.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
DECEMBER 27, 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 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 27, 1998.
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>
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
DECEMBER 27, 1998
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
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: February 9, 1999 /s/ Jack H. Brown
-------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: February 9, 1999 /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
-------------------------
Dec. 28, Dec. 27,
1997 1998
-------- --------
<S> <C> <C>
Net income $ 1,373 $ 2,287
Less preferred dividends -- --
------- -------
Net income available to common shareholders $ 1,373 $ 2,287
======= =======
Earnings per common share $ 27.46 $ 45.74
======= =======
Average common shares outstanding 50,000 50,000
======= =======
Common shares outstanding at end of period 50,000 50,000
======= =======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 64,142
<SECURITIES> 0
<RECEIVABLES> 22,131
<ALLOWANCES> 0
<INVENTORY> 117,949
<CURRENT-ASSETS> 219,606
<PP&E> 231,880
<DEPRECIATION> 110,456
<TOTAL-ASSETS> 380,620
<CURRENT-LIABILITIES> 131,413
<BONDS> 269,004
0
0
<COMMON> 1
<OTHER-SE> (31,769)
<TOTAL-LIABILITY-AND-EQUITY> 380,620
<SALES> 441,422
<TOTAL-REVENUES> 441,422
<CGS> 339,021
<TOTAL-COSTS> 339,021
<OTHER-EXPENSES> 91,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,531
<INCOME-PRETAX> 3,811
<INCOME-TAX> 1,524
<INCOME-CONTINUING> 2,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,287
<EPS-PRIMARY> 45.74
<EPS-DILUTED> 45.74
</TABLE>
