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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 28, 1999
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 incorporation or (I.R.S. Employer
organization) Identification No.)
21700 Barton Road 92324
----------------- -----
Colton, California (Zip Code)
(Address of principal executive offices)
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 23, 1999, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock.
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 27, 1998
AND MARCH 28, 1999 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 29, 1998 AND MARCH 28, 1999 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
MARCH 29, 1998 AND MARCH 28, 1999 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 29, 1998 AND MARCH 28, 1999 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</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. 27, MAR. 28,
1998 1999
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 57,281 $ 65,347
Receivables .................................. 20,451 19,300
Inventories .................................. 116,274 111,233
Prepaid expenses ............................. 5,176 7,364
Deferred income taxes ........................ 4,588 4,589
Properties held for sale ..................... 3,969 1,256
-------- --------
Total current assets ............................ 207,739 209,089
Investment in unconsolidated affiliate .......... 8,472 9,337
Property and equipment
Land ......................................... 15,924 17,287
Buildings and improvements ................... 94,794 99,882
Store fixtures and equipment ................. 100,781 110,598
Property subject to capital leases ........... 14,368 14,368
-------- --------
225,867 242,135
Less accumulated depreciation and amortization 107,513 113,435
-------- --------
118,354 128,700
Deferred income taxes ........................... 2,449 2,449
Deferred debt issuance costs, net ............... 12,294 10,888
Lease guarantee escrow .......................... 9,629 10,883
Other assets .................................... 5,381 5,821
-------- --------
Total assets .................................... $364,318 $377,167
======== ========
</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. 27 MAR. 28,
1998 1999
--------- ---------
<S> <C> <C>
Current Liabilities
Accounts payable ................................................ $ 65,553 $ 68,833
Accrued payroll and related expenses ............................ 25,363 26,681
Other accrued liabilities ....................................... 24,788 27,747
Current portion of capital lease obligations .................... 1,310 1,359
--------- ---------
Total current liabilities .......................................... 117,014 124,620
Long-term debt, less current portion ............................... 265,000 265,000
Capital lease obligations, less current portion .................... 4,350 3,660
Long-term portion of self-insurance and other reserves ............. 8,284 8,284
Other long-term liabilities ........................................ 3,725 3,635
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) (40,748)
--------- ---------
Total stockholders' equity (deficit) ............................... (34,055) (28,032)
--------- ---------
Total liabilities and stockholders' equity (deficit) ............... $ 364,318 $ 377,167
========= =========
</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. 29, MAR. 28,
1998 1999
--------- ---------
<S> <C> <C>
Sales ................................................. $ 853,747 $ 883,224
Cost of goods sold .................................... 654,984 676,012
--------- ---------
Gross profit .......................................... 198,763 207,212
Operating expenses:
Selling, general and administrative expenses ....... 171,129 176,431
Depreciation and amortization ...................... 7,434 7,869
--------- ---------
Total operating expenses .............................. 178,563 184,300
--------- ---------
Operating profit ...................................... 20,200 22,912
Interest income ....................................... 1,311 1,654
Interest expense ...................................... (15,033) (15,119)
Equity in earnings (loss) from unconsolidated affiliate (2,132) 865
Other income (loss) - net ............................. 57 (274)
--------- ---------
Income before income taxes ............................ 4,403 10,038
Income taxes .......................................... 1,805 4,015
--------- ---------
Net income ............................................ $ 2,598 $ 6,023
========= =========
Earnings available to common shareholders ............. $ 2,598 $ 6,023
========= =========
Earnings per common share ............................. $ 51.96 $ 120.46
========= =========
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 INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 WEEKS ENDED
---------------------------
MAR. 29, MAR. 28,
1998 1999
--------- ---------
<S> <C> <C>
Sales ................................................. $ 422,829 $ 441,802
Cost of goods sold .................................... 322,362 336,991
--------- ---------
Gross profit .......................................... 100,467 104,811
Operating expenses:
Selling, general and administrative expenses ....... 86,562 87,760
Depreciation and amortization ...................... 3,815 3,966
--------- ---------
Total operating expenses .............................. 90,377 91,726
--------- ---------
Operating profit ...................................... 10,090 13,085
Interest income ....................................... 590 879
Interest expense ...................................... (7,506) (7,588)
Equity in earnings (loss) from unconsolidated affiliate (1,083) 67
Other income (loss) - net ............................. (14) (216)
--------- ---------
Income before income taxes ............................ 2,077 6,227
Income taxes .......................................... 852 2,491
--------- ---------
Net income ............................................ $ 1,225 $ 3,736
========= =========
Earnings available to common shareholders ............. $ 1,225 $ 3,736
========= =========
Earnings per common share ............................. $ 24.50 $ 74.72
========= =========
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. 29, MAR. 28,
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................... $ 2,598 $ 6,023
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................................... 7,434 7,869
Provision for deferred income taxes ................................... 8 (1)
Gain (loss) on disposals of assets .................................... (57) 274
Net undistributed (gain) loss in investment in unconsolidated affiliate 2,132
(865)
Changes in operating assets and liabilities:
(Increase) decrease in receivables ................................... 944 1,151
(Increase) decrease in inventories ................................... (1,956) 5,041
(Increase) decrease in prepaid expenses .............................. (3,293) (2,188)
(Increase) decrease in other assets .................................. (1,036) (737)
Increase (decrease) in accounts payable .............................. (7,229) 3,280
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves .................................. (79) 4,187
-------- --------
Net cash (used by) provided by operating activities ...................... (534) 24,034
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ....................................... (15,303) (18,245)
Proceeds from sale of property and equipment and properties
held for sale ........................................................... 269 2,918
-------- --------
Net cash (used by) investing activities .................................. (15,034) (15,327)
-------- --------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations .......................... (627) (641)
-------- --------
Net cash (used by) financing activities .................................. (627) (641)
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... (16,195) 8,066
Cash and cash equivalents at beginning of period ......................... 59,086 57,281
-------- --------
Cash and cash equivalents at end of period ............................... $ 42,891 $ 65,347
======== ========
Interest paid ............................................................ $ 13,292 $ 13,814
Income taxes paid ........................................................ $ 950 $ 2,600
</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 28, 1999
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 March 28, 1999 and
the results of its operations and cash flows for the twenty-six weeks ended
March 29, 1998 and March 28, 1999. 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 28, 1999 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 29,
1998 and March 28, 1999 consists of the following:
<TABLE>
<CAPTION>
26 WEEKS ENDED
-----------------------------
MAR. 29, 1998 MAR. 28, 1999
------------- -------------
(In thousands)
<S> <C> <C>
Federal income taxes $1,396 $3,413
State income taxes 409 602
------ ------
$1,805 $4,015
====== ======
</TABLE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 1999
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 $2,132,000 for the twenty-six weeks ended March 29, 1998, and recognized
income of $865,000 for the twenty-six weeks ended March 28, 1999. 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. 29, 1998 MAR. 28, 1999
------------- -------------
(In thousands)
<S> <C> <C>
Current assets $ 25,574 $ 17,639
Non-current assets 106,702 109,222
Current liabilities 33,334 27,744
Non-current liabilities 82,817 80,244
Shareholder's equity 16,125 18,873
Sales 87,542 92,954
Gross profit 6,636 7,872
Net income (loss) $ (4,264) $ 1,932
</TABLE>
8
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 1999
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. The Covenant Not to Compete terminated in March 1999.
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.
9
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
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 its option rights, the Company
converted all of its outstanding shares of Common Stock, then 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, one other active member of senior management of the Company
and one retired and previous member 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.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen weeks and twenty-six
weeks ended March 28, 1999 and March 29, 1998.
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
------------------------ ------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.72 23.76 23.46 23.28
Operating expenses:
Selling, general and
administrative expense 19.86 20.47 19.98 20.04
Depreciation and amortization .90 .90 .89 .87
Operating profits 2.96 2.39 2.59 2.37
Interest income .20 .14 .19 .15
Interest expense (1.72) (1.78) (1.71) (1.76)
Equity in (loss) from
unconsolidated affiliate .02 (.26) .10 (.25)
Other income (loss) - (net) (.05) -- (.03) .01
Earnings before income taxes 1.41% .49% 1.14% .52%
</TABLE>
Total sales for the thirteen weeks ended March 28, 1999 increased 4.5%
and amounted to $441.8 million compared to $422.8 million for the like
period in 1998. Total sales for the twenty-six weeks year to date ended
March 28, 1999 increased 3.5% and amounted to $883.2 million compared to
$853.8 million for the same period in 1998. Like store sales increased
3.8% for the quarter and increased 2.6% for the year to date period. The
increase in sales in the fiscal 1999 second quarter and twenty-six week
year to date periods was due to favorable customer response to the
Company's 1999 marketing plan, which emphasizes Stater Bros. high
quality and expanded product selections in the produce and other
perishable departments and the opening of a new replacement supermarket,
which opened in December 1998. Stater Bros. operated 112 supermarkets at
March 28, 1999 and March 29, 1998.
Gross profits for the thirteen weeks ended March 28, 1999, amounted to
$104.8 million or 23.72% of sales compared to $100.5 million or 23.76%
of sales in the same period of the prior year. For the twenty-six week
year to date period, gross profits increased to $207.2 million or 23.46%
of sales in 1999, compared to $198.8 million or 23.28% of sales in the
prior year. Gross profits, for the 1999 second quarter and twenty-six
week year to date periods, were favorably impacted by the 1999 marketing
plan which features the perishable departments which typically have
higher gross margins as a percent of sales, and by lower costs in the
warehousing and transportation departments. Additionally, 1999 gross
profits were reduced by approximately $2.7 million and $5.8 million for
the second quarter and twenty-six weeks year to date, respectively, from
a temporary increase in the cost of products purchased by Stater Bros.
from Santee Dairies, Inc.
11
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
Operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses. For the thirteen weeks ended
March 28, 1999, selling, general and administrative expenses amounted to
$87.8 million or 19.86% of sales compared to $86.6 million or 20.47% of
sales for the like period of the prior year. For the year to date
period, selling, general and administrative expenses amounted to $176.4
million or 19.98% of sales compared to $171.1 million or 20.04% of sales
for the like period of the prior year. The increase in selling, general
and administrative expenses in 1999 when compared to 1998 was due to the
costs and expenses incurred to operate at the higher sales level,
increased labor costs due to contractual wage rate increases in
collective bargaining agreements and decreases in advertising expenses.
In the second quarter of last year (fiscal 1998), Stater Bros. 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 Every Day Low Price leadership in
its primary marketing areas.
Depreciation and amortization expenses amounted to $4.0 million and $7.9
million for the second quarter and year to date periods ended March 28,
1999, respectively. Depreciation and amortization expense amounted to
$3.8 million and $7.4 million for the quarter and year to date periods
of the prior year. Depreciation and amortization includes amortization
of approximately $250,000 per quarter from a prepaid five-year covenant
not to compete between Stater Bros. and Craig which became effective in
March 1994 and terminated in March 1999.
Operating profits for the second quarter of 1999 amounted to $13.1
million or 2.96% of sales, compared to $10.1 million or 2.39% of sales
in the second quarter of 1998. Operating profits for the twenty-six
weeks year to date ended March 28, 1999, amounted to $22.9 million or
2.59% of sales, compared to $20.2 million or 2.37% of sales for the like
period in 1998.
Interest expense amounted to $7.6 million for the second quarter of 1999
compared to $7.5 million for the second quarter of fiscal 1998. For the
year to date periods of 1999 and 1998, interest expense amounted to
$15.1 million and $15.0 million, respectively. Interest expense in the
second quarter includes amortization of $703,000 and $691,000,
respectively, for 1999 and 1998 from fees and expenses incurred to
acquire debt. Year to date amortization of fees and expenses incurred to
acquire debt amounted to $1.4 million in 1999 and 1998.
12
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
Stater Bros.' equity in earnings from unconsolidated affiliate (Santee),
amounted to $67,000 for the second quarter of fiscal 1999 compared to a
loss of $1.1 million in the second quarter of the prior year. For the
twenty-six week periods, Stater Bros.' equity in the earnings from an
unconsolidated affiliate amounted to $865,000 in 1999, compared to a
loss of $2.1 million in 1998. The 1999 earnings of Santee were favorably
impacted by temporary increases in the cost of products Santee charged
to the two owners of Santee; Hughes Family Markets and Stater Bros.
Markets, which amounted to approximately $8.1 million (pre-tax) for the
twenty-six week year to date period. 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, through January 1999, Stater Bros. accepted and paid
approximately $1.0 million per month from a temporary increase in the
cost of products it purchased from Santee. Beginning in February 1999,
the temporary increase in the cost of products purchased from Santee
decreased to approximately $800,000 per month. The temporary increase in
the cost of products purchased from Santee is included in the Stater
Bros. cost of goods sold and amounted to approximately $2.7 million in
the second quarter of fiscal 1999 and approximately $5.8 million for the
1999 year to date period. The Company believes, that the temporary
increase in the cost of products purchased from Santee by Stater Bros.
will eventually be eliminated, but no assurances can be given that the
temporary price increase will be eliminated. The Company continues to
explore alternatives available to it regarding its investment in Santee.
Income before income taxes amounted to $6.2 million and $2.1 million for
the second quarters of 1999 and 1998, respectively, and amounted to
$10.0 million and $4.4 million for the year to date periods of 1999 and
1998, respectively.
Net income for the second quarters of 1999 and 1998 amounted to $3.7
million or .85% of sales and $1.2 million or .29% of sales,
respectively, and for the year to date periods for 1999 and 1998,
amounted to $6.0 million or .68% of sales and $2.6 million or .30% 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 28, 1999, 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.
13
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Working capital amounted to $84.5 million at March 28, 1999 and $90.7
million at September 27, 1998, and the Company's current ratios were
1.68:1, and 1.78:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
Net cash provided by operating activities for the twenty-six weeks in
1999 amounted to $24.0 million compared to cash used by operating
activities of $534,000 in the like period of fiscal 1998. The increase
in net cash provided by operating activities in 1999 when compared to
1998 was due to increased earnings, reductions in inventory and a net
increase in accounts payable. During the second quarter of fiscal 1999,
Stater Bros. reduced its inventories in its forward buying grocery
warehouse to facilitate the installation of racking in the warehouse.
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.
Net cash used by investing activities for the twenty-six weeks ended
March 28, 1999 and March 29, 1998, amounted to $15.3 million and $15.0
million, respectively. 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. Capital expenditures for the twenty-six week periods
amounted to $18.3 million and $15.3 million in 1999 and 1998,
respectively. During the second quarter of fiscal 1999, Stater Bros. was
reimbursed by the landlord for costs incurred to construct the new Loma
Linda replacement supermarket, which opened in December 1998. Capital
expenditures for the twenty-six weeks ended March 28, 1999, were
incurred to open a new 37,400 square foot replacement supermarket, in
Loma Linda, California. Additionally, Stater Bros. completed six major
remodels and two minor remodels and installed 25 new NCR 7452 point of
sale scan systems.
Net cash used by financing activities amounted to $641,000 and $627,000
for the first twenty-six weeks of fiscals 1999 and 1998, respectively,
and consisted of payments on the Company's capitalized lease
obligations.
Stater Bros. 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 Stater Bros. Holdings
Inc. As of March 28, 1999, Stater Bros. was in compliance with all such
covenants However, there can be no assurance that Stater Bros. will be
able to achieve the expected operating results or implement the capital
expenditure strategy upon which future compliance with such covenants is
based.
14
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STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES
Stater Bros. Markets 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 28, 1999 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 28, 1999, 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.
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
As of March 28, 1999, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive covenants and had (i) a
current ratio of 1.77:1, (ii) tangible net worth and debt subordinated
to the Bank of $240.8 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
1.38:1. 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 28, 1999, 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.
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
RECENT ACCOUNTING STANDARDS
YEAR 2000 COMPLIANCE
The efficient operations of Stater Bros. are dependent, in part, upon
its computer software programs, systems and processes (collectively, the
"Information Systems"). Stater Bros.' 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, Stater Bros. established a Year 2000 Compliance
Committee and developed a Year 2000 Compliance Plan. The Year 2000
Compliance Plan addresses Stater Bros.' 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, Stater Bros. 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 Stater Bros.' operations.
Based on the information currently available, Stater Bros. 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. Stater Bros.'
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. Stater
Bros. 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 March 1999, the
amount of expenditures incurred by Stater Bros. was approximately $5.8
million for capitalized expenditures and approximately $711,000 for
expenses. 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.
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
YEAR 2000 COMPLIANCE (CONTD.)
Stater Bros.' 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, Stater Bros. is
unable to determine if such interruptions are likely to have a material
adverse effect on its results of operations, liquidity or financial
condition.
EFFECT OF INFLATION AND COMPETITION
Stater Bros.' 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.
Stater Bros. 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. Stater
Bros.' 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.
18
<PAGE> 19
STATER BROS. HOLDINGS INC.
MARCH 28, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTD.)
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
Stater Bros.' 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 Stater Bros. These
risks and uncertainties include, but are not limited to, those relating
to domestic economic conditions, seasonal and weather fluctuations,
expansions, mergers, acquisitions and other activities of competitors,
changes in federal or state laws and the administration of such laws and
the general conditions of the economy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
19
<PAGE> 20
STATER BROS. HOLDINGS INC.
MARCH 28, 1999
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against Stater Bros. 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
consolidated financial position of Stater Bros.
For a description of legal proceedings, please refer to the footnote
entitled "Litigation Matters" contained in the Notes to Consolidated
Financial Statements section of Stater Bros.' Annual Report on 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>
--------------------------------------------------------------
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
20
<PAGE> 21
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: April 30, 1999 /s/ Jack H. Brown
----------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: April 30, 1999 /s/ Dennis N. Beal
----------------------------------------
Dennis N. Beal
Senior Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
21
<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 29, MARCH 28, MARCH 29, MARCH 28,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,225 $ 3,736 $ 2,598 $ 6,023
Less preferred dividends -- -- -- --
------- ------- ------- -------
Net income available to common shareholders $ 1,225 $ 3,736 $ 2,598 $ 6,023
======= ======= ======= =======
Earnings per common share $ 24.50 $ 74.72 $ 51.96 $120.46
======= ======= ======= =======
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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> MAR-28-1999
<CASH> 65,347
<SECURITIES> 0
<RECEIVABLES> 19,300
<ALLOWANCES> 0
<INVENTORY> 111,233
<CURRENT-ASSETS> 209,089
<PP&E> 242,135
<DEPRECIATION> 113,435
<TOTAL-ASSETS> 377,167
<CURRENT-LIABILITIES> 124,620
<BONDS> 268,660
0
0
<COMMON> 1
<OTHER-SE> (28,033)
<TOTAL-LIABILITY-AND-EQUITY> 377,167
<SALES> 883,224
<TOTAL-REVENUES> 883,224
<CGS> 676,012
<TOTAL-COSTS> 676,012
<OTHER-EXPENSES> 182,055
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,119
<INCOME-PRETAX> 10,038
<INCOME-TAX> 4,015
<INCOME-CONTINUING> 6,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,023
<EPS-PRIMARY> 120.46
<EPS-DILUTED> 120.46
</TABLE>
