<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
Commission file number 001-13222
---------
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
21700 Barton Road, Colton, California 92324
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
</TABLE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
As of July 23, 1999, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock.
1
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
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 June 27, 1999 3
Consolidated Statements of Income (Unaudited) for
the 39 weeks ended June 28, l998 and June 27, 1999 5
Consolidated Statements of Income (Unaudited) for
the 13 weeks ended June 28, 1998 and June 27, 1999 6
Consolidated Statements of Cash Flows (Unaudited)
for the 39 weeks ended June 28, 1998 and June 27, 1999 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 21
PART II OTHER INFORMATION 21
- - ------- -----------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- - ------
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
Sept. 27, June 27,
1998 1999
--------- ---------
Current Assets
<S> <C> <C>
Cash and cash equivalents................................................. $ 57,281 $ 55,427
Receivables............................................................... 20,451 21,636
Inventories............................................................... 116,274 113,048
Prepaid expenses.......................................................... 5,176 6,588
Deferred income taxes..................................................... 4,588 4,589
Properties held for sale.................................................. 3,969 1,251
--------- ---------
Total current assets....................................................... 207,739 202,539
Investment in unconsolidated affiliate..................................... 8,472 9,396
Property and equipment
Land...................................................................... 15,924 17,287
Buildings and improvements................................................ 94,794 99,378
Store fixtures and equipment.............................................. 100,781 126,723
Property subject to capital leases........................................ 14,368 14,368
--------- ---------
225,867 257,756
Less accumulated depreciation and amortization............................ 107,513 116,901
--------- ---------
118,354 140,855
Deferred income taxes...................................................... 2,449 2,449
Deferred debt issuance costs, net.......................................... 12,294 10,185
Lease guarantee escrow..................................................... 9,629 10,957
Other assets............................................................... 5,381 5,871
--------- ---------
Total assets............................................................... $ 364,318 $ 382,252
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Cont.)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Sept. 27, June 27,
1998 1999
--------- ---------
Current Liabilities
<S> <C> <C>
Accounts payable.......................................................... $ 65,553 $ 65,728
Accrued payroll and related expenses...................................... 25,363 27,804
Other accrued liabilities................................................. 24,788 31,989
Current portion of capital lease obligations.............................. 1,310 1,371
--------- ---------
Total current liabilities.................................................. 117,014 126,892
Long-term debt, less current portion....................................... 265,000 265,000
Capital lease obligations, less current portion............................ 4,350 3,317
Long-term portion of self-insurance and other reserves..................... 8,284 8,284
Other long-term liabilities................................................ 3,725 3,580
Stockholders' equity (deficit)
Class A Common Stock, $.0l 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) (37,537)
--------- ---------
Total stockholders' equity (deficit)....................................... (34,055) (24,821)
--------- ---------
Total liabilities and stockholders' equity (deficit)....................... $ 364,318 $ 382,252
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------------
June 28, June 27,
1998 1999
----------- -----------
<S> <C> <C>
Sales...................................................................... $ 1,285,048 $ 1,324,358
Cost of goods sold......................................................... 987,172 1,011,542
----------- -----------
Gross profit............................................................... 297,876 312,816
Operating expenses
Selling, general and administrative expenses.............................. 261,216 265,907
Depreciation and amortization............................................. 11,345 11,813
----------- -----------
Total operating expenses................................................... 272,561 277,720
----------- -----------
Operating profit........................................................... 25,315 35,096
Interest income............................................................ 2,371 2,388
Interest expense........................................................... (22,641) (22,699)
Equity in earnings (loss) from unconsolidated affiliate.................... (2,692) 924
Other income - net......................................................... 42 (319)
----------- -----------
Income before income taxes................................................. 2,395 15,390
Income taxes............................................................... 982 6,156
----------- -----------
Net income................................................................. $ 1,413 $ 9,234
=========== ===========
Earnings available to common shareholders.................................. $ 1,413 $ 9,234
=========== ===========
Earnings per common share.................................................. $ 28.26 $ 184.68
=========== ===========
Average common shares outstanding.......................................... 50,000 50,000
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------
June 28, June 27,
1998 1999
----------- -----------
<S> <C> <C>
Sales...................................................................... $431,301 $441,134
Cost of goods sold......................................................... 332,188 335,530
----------- -----------
Gross profit............................................................... 99,113 105,604
Operating expenses
Selling, general and administrative expenses.............................. 90,087 89,476
Depreciation and amortization............................................. 3,911 3,944
----------- -----------
Total operating expenses................................................... 93,998 93,420
----------- -----------
Operating profit........................................................... 5,115 12,184
Interest income............................................................ 1,060 734
Interest expense........................................................... (7,608) (7,580)
Equity in earnings (loss) from unconsolidated affiliate.................... (561) 59
Other income - net......................................................... (14) (45)
----------- -----------
Income (loss) before income taxes.......................................... (2,008) 5,352
Income taxes............................................................... (823) 2,141
----------- -----------
Net income (loss).......................................................... $ (1,185) $ 3,211
=========== ===========
Earnings available to common shareholders.................................. $ (1,185) $ 3,211
=========== ===========
Earnings per common share.................................................. $(23.70) $64.22
=========== ===========
Average common shares outstanding.......................................... 50,000 50,000
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
-----------------------------
June 28, June 27,
1998 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income................................................................. $ 1,413 $ 9,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................................. 11,345 11,813
Provision for deferred income taxes....................................... 1,680 1
Gain (loss) on disposals of assets........................................ (42) 319
Net undistributed (gain) loss in investment in unconsolidated affiliate... 2,692 (924)
Changes in operating assets and liabilities:
(Increase) decrease in receivables....................................... (2,578) (1,185)
(Increase) decrease in inventories....................................... (3,414) 3,226
(Increase) decrease in prepaid expenses.................................. (2,241) (1,412)
(Increase) decrease in other assets...................................... (547) (162)
Increase (decrease) in accounts payable.................................. 1,169 175
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves...................................... 1,496 9,497
-------- --------
Net cash provided by operating activities.................................. 10,973 30,582
-------- --------
Investing activities:
Investment in unconsolidated affiliate..................................... (1,100) -
Purchase of property and equipment......................................... (20,287) (34,382)
Proceeds from sale of property and equipment and properties
held for sale............................................................ 269 2,918
-------- --------
Net cash (used by) investing activities.................................... (21,118) (31,464)
-------- --------
Financing activities:
Principal payments on capital lease obligations............................ (941) (972)
-------- --------
Net cash (used by) financing activities.................................... (941) (972)
-------- --------
Net increase (decrease) in cash and cash equivalents....................... (11,086) (1,854)
Cash and cash equivalents at beginning of period........................... 59,086 57,281
-------- --------
Cash and cash equivalents at end of period................................. $ 48,000 $ 55,427
======== ========
Interest paid.............................................................. $ 13,428 $ 13,922
Income taxes paid.......................................................... $ 950 $ 2,600
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 27, 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 June 27, 1999 and
the results of its operations and cash flows for the thirty-nine weeks ended
June 28, 1998 and June 27, 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 thirty-nine weeks ended June 27, 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 thirty-nine weeks ended June 28,
1998 and June 27, 1999 consists of the following:
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------------------------
June 28, 1998 June 27, 1999
--------------------- ------------------
(In thousands)
<S> <C> <C>
Federal income taxes $760 $5,233
State income taxes 222 923
---- ------
$982 $6,156
==== ======
</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 $2,692,000 for the thirty-nine weeks ended June 28, 1998, and recognized
income of $924,000 for the thirty-nine weeks ended June 27, 1999. The Company
is a significant customer of Santee which supplies the Company with a
substantial portion of its fluid milk and dairy products.
8
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 27, 1999
Note 3 (Cont.)
Summary of unaudited financial information for Santee Dairies LLC is as follows:
<TABLE>
<CAPTION>
39 Weeks Ended
-------------------------------------------
June 28, 1998 June 27, 1999
---------------------- ------------------
(In thousands)
<S> <C> <C>
Current assets $ 20,324 $ 15,633
Non-current assets 109,800 106,971
Current liabilities 29,876 24,631
Non-current liabilities 82,804 79,019
Shareholder's equity 17,444 18,954
Sales 127,428 130,045
Gross profit 5,588 13,868
Net income (loss) $ (5,208) $ 2,115
</TABLE>
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 was 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.
Note 7 - Subsequent Events
Acquisition of 43 Supermarkets from Albertson's
Upon the consummation of the merger of Albertson's, Inc. and American
Stores Company, the Company entered into a definitive Asset Purchase Agreement
with Albertson's, Inc. by which it will acquire 43 supermarkets, one future
store site and the related inventories and
9
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 27, 1999
Note 7 (Cont.)
assume capitalized lease obligations for a total purchase price of approximately
$147.0 million. The acquisition of the supermarkets, the future store site and
the related inventories is expected to be completed in August 1999 and will be
funded through an offering of new Senior Notes due 2006 (the "New Senior
Notes"). The New Senior Notes have not been registered under the Securities Act
of 1933 and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements.
Senior Notes
On July 1, 1999, the Company commenced a concurrent cash tender offer and
consent solicitation with the registered holders of all of the outstanding 11%
Senior Notes due 2001, and 9% Senior Subordinated Notes due 2004 (collectively
"the Notes"). On July 15, 1999, the Company received the requisite consents (97%
of the 11% Senior Notes and 100% of the 9% Senior Subordinated Notes) and
promptly executed supplemental indentures governing the Notes. On July 27, 1999,
the Company extended the expiration date of the tender offer for its outstanding
Notes until midnight, New York City time, on August 6, 1999, unless further
extended. The early redemption of the Notes is expected to create an
extraordinary loss of approximately $17.2 million (net of tax) from the early
retirement of debt in the quarter ending September 26, 1999.
The redemption of the Notes and the acquisition of the 43 supermarkets will
be funded through an offering of $440.0 million of New Senior Notes, which is
expected to be completed in August 1999. Proceeds from the New Senior Notes
will be used to retire the Notes pursuant to the tender offer, consummate the
acquisition of the 43 supermarkets and related inventories, fund anticipated
capital expenditures in the acquired supermarkets and pay fees and expenses
related to the acquisition of the supermarkets, the redemption of the Notes and
the issuance of the New Senior Notes.
In addition to the net proceeds raised from the New Senior Notes, the
Company will be required to use approximately $30.4 million of its cash on hand
to complete the acquisition of the supermarkets and to redeem the Notes.
Bank Credit Facility
On July 16, 1999, Bank of America National Trust & Savings Association
issued a commitment letter with respect to a new unsecured bank credit facility
(the "New Credit Facility") for the Company's principal operating subsidiary,
Stater Bros. Markets. The Company anticipates that the New Credit Facility will
consist of a $50.0 million revolving credit facility with an additional $25.0
million facility available for the issuance of commercial and standby letters of
credit. The availability of the loans and letters of credit will be subject to
certain sublimits and other borrowing restrictions. The term of the New Credit
Facility will be three years. It is expected that borrowings under the New
Credit Facility will be used for working capital and general corporate purposes.
10
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
PART I - FINANCIAL INFORMATION (CONT.)
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 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.
11
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------ OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen weeks and thirty-nine weeks
ended June 27, 1999 and June 28, 1998.
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
June 27, June 28, June 27, June 28,
-------- -------- -------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.94 22.98 23.62 23.18
Operating expenses:
Selling, general and
administrative expense 20.28 20.89 20.08 20.33
Depreciation and amortization .90 .91 .89 .88
Operating profits 2.76 1.18 2.65 1.97
Interest income .17 .24 .18 .19
Interest expense (1.72) (1.76) (1.72) (1.76)
Equity in (loss) from
unconsolidated affiliate - (.13) .07 (.21)
Other income (loss) - (net) - - (.02) -
Earnings before income taxes 1.21% (.47%) 1.16% .19%
</TABLE>
Total sales for the thirteen weeks ended June 27, 1999 increased 2.28% and
amounted to $441.1 million compared to $431.3 million for the like period in
1998. Total sales for the thirty-nine weeks year to date ended June 27, 1999
increased 3.06% and amounted to $1,324.4 million compared to $1,285.1 million
for the same period in 1998. Like store sales increased 2.28% for the quarter
and increased 2.51% for the year to date period. The increase in sales in the
fiscal 1999 third quarter and thirty-nine week year to date periods was due to
favorable customer response to the Company's 1999 marketing plan, which
emphasizes the Company's 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. The Company operated 112
supermarkets at June 27, 1999 and June 28, 1998.
Gross profits for the thirteen weeks ended June 27, 1999, amounted to
$105.6 million or 23.94% of sales compared to $99.1 million or 22.98% of sales
in the same period of the prior year. For the thirty-nine week year to date
period, gross profits increased to $312.8 million or 23.62% of sales in 1999,
compared to $297.9 million or 23.18% of sales in the prior year. Gross profits,
for the 1999 third quarter and thirty-nine 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
12
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS (cont.)
$2.4 million and $8.2 million for the third quarter and thirty-nine weeks year
to date, respectively, from a temporary increase in the cost of products
purchased by the Company from Santee, compared to $1.2 million for the 1998
third quarter and thirty-nine weeks year to date.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses. For the thirteen weeks ended June 27,
1999, selling, general and administrative expenses amounted to $89.5 million or
20.28% of sales compared to $90.1 million or 20.89% of sales for the like period
of the prior year. For the year to date period, selling, general and
administrative expenses amounted to $265.9 million or 20.08% of sales compared
to $261.2 million or 20.33% of sales for the like period of the prior year. The
reduction in selling, general and administrative expenses in 1999 when compared
to 1998 was due to cost savings, primarily in labor and advertising expenses
which were partially offset by costs and expenses incurred to operate at the
higher sales level and contractual wage rate increases in collective bargaining
agreements.
Depreciation and amortization expenses amounted to $3.9 million and $11.8
million for the third quarter and year to date periods ended June 27, 1999,
respectively. Depreciation and amortization expense amounted to $3.9 million
and $11.4 million for the corresponding quarter and year to date periods of the
prior year. Depreciation and amortization included 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 third quarter of 1999 amounted to $12.2 million
or 2.76% of sales, compared to $5.1 million or 1.18% of sales in the third
quarter of 1998. Operating profits for the thirty-nine weeks year to date ended
June 27, 1999, amounted to $35.1 million or 2.65% of sales, compared to $25.3
million or 1.97% of sales for the like period in 1998.
Interest expense amounted to $7.6 million for the third quarter of 1999 and
the third quarter of fiscal 1998. For the year to date periods of 1999 and
1998, interest expense amounted to $22.7 million and $22.6 million,
respectively. Interest expense in the third quarter includes amortization of
$703,000, 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 $2.1 million in 1999 and 1998.
The Company's equity in earnings from Santee, its unconsolidated affiliate,
amounted to $59,000 for the third quarter of fiscal 1999 compared to a loss of
$561,000 in the third quarter of the prior year. For the thirty-nine week
periods, the Company's equity in the earnings from Santee, amounted to $924,000
in 1999, compared to a loss of $2.7 million in 1998. The 1999 earnings of
Santee were favorably impacted by temporary increases in the cost of products
Santee charged to its two owners, Hughes Family Markets and Stater Bros.
Markets, which
13
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS (cont.)
amounted to approximately $11.4 million (pre-tax) for the thirty-nine week year
to date period. In March 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, and through January 1999, the Company
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 by the
Company decreased to approximately $800,000 per month. The temporary increase in
the cost of products purchased from Santee is included in the Company cost of
goods sold and amounted to approximately $2.4 million in the third quarter of
fiscal 1999 and approximately $8.2 million for the 1999 year to date period
compared to $1.2 million for the third quarter and year to date periods of
fiscal 1998. The Company believes that the temporary increase in the cost of
products purchased from Santee by the Company 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 $5.4 million in the third quarter of
1999 compared to a loss of $2.0 million for the third quarter of 1998. Income
before income taxes amounted to $15.4 million and $2.4 million for the year to
date periods of 1999 and 1998, respectively.
Net income for the third quarters of 1999 amounted to $3.2 million or .73%
of sales, compared to a loss of $1.2 million or .27% of sales for the third
quarter of 1998. Net income for the year to date periods for 1999 and 1998,
amounted to $9.2 million or .70% of sales and $1.4 million or .11% of sales,
respectively.
14
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------ OF OPERATIONS (CONT.)
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 (as
defined herein) is between a bank and Stater Bros. Markets, a wholly owned
subsidiary of the Company ("Stater Bros. Markets"), and consists of revolving
credit facilities for working capital purposes of $15.0 million, all of which
was available at June 27, 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.
Working capital amounted to $75.7 million at June 27, 1999 and $90.7
million at September 27, 1998, and the Company's current ratios were 1.60:1, 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 thirty-nine weeks in 1999
amounted to $30.6 million. The increase in net cash provided by operating
activities in 1999 when compared to 1998 was due to increased earnings and an
increase in accrued liabilities, net of a decrease in inventories. Net cash
provided by operating activities for the thirty-nine weeks ended in 1998
amounted to $11.0 million and consisted of increases in accounts payable,
inventories, other assets and prepaid expenses.
Net cash used by investing activities for the thirty-nine weeks ended June
27, 1999 and June 28, 1998, amounted to $31.5 million and $21.1 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 and
the Company's additional investment in Santee Dairies LLC in 1998. Capital
expenditures for the thirty-nine week periods amounted to $34.4 million and
$20.3 million in 1999 and 1998, respectively. The increase in capital
expenditures in fiscal 1999 was due primarily to the purchase of store point of
sale scan systems and related equipment and warehouse material handling
equipment purchased in anticipation of the acquisition of 43 stores from
Albertson's, which amounted to $10.6 million. Additionally, capitalized
expenditures to achieve Year 2000 compliance amounted to $3.0 million. During
the second quarter of fiscal 1999, the Company 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 thirty-nine weeks
ended June 27, 1999, were incurred to open a new 37,400 square foot replacement
supermarket in Loma Linda, California. Additionally, the Company completed five
major remodels and six minor remodels and installed 31 new NCR 7452 and NCR 2127
point of sale scan systems.
Net cash used by financing activities amounted to $972,000 and $941,000 for
the first thirty-nine weeks of fiscal 1999 and 1998, respectively, and consisted
of payments on the Company's capitalized lease obligations.
15
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
LIQUIDITY AND CAPITAL RESOURCES (cont.)
The Company is subject to certain covenants associated with its 11% Notes,
its 9% Notes and covenants included in the Bank Credit Agreement between a bank
and Stater Bros. Markets. As of June 27, 1999, the Company was in compliance
with all such covenants except for the minimum fixed charge ratio requirement
(discussed below) which the Bank (as defined herein) has waived. 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 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 (the "Bank Credit Agreement"), whereby the
Bank provides Stater Bros. Markets with a revolving operating line of credit
(the "Operating Facility") with a maximum availability of $15.0 million which
was available at June 27, 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 June 27, 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 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 therein) 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 five calendar days each month.
As of June 27, 1999, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive covenants, except for the minimum
fixed charge ratio requirement which the Bank has waived, and had (i) a current
ratio of 1.81:1, (ii) tangible net worth and debt subordinated to the Bank of
$245.5 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
of 1.08:1. If
16
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
LIQUIDITY AND CAPITAL RESOURCES (cont.)
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 indentures covering the Notes 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, which is 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%
Notes and its 9% Notes. As of June 27, 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, which expires in October 2003, 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.
17
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------ OF OPERATIONS (CONT.)
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, 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 Year
2000 Compliance Plan 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 September 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 June 1999, the amount of
expenditures incurred by the Company in connection with its attempts to satisfy
Year 2000 compliance requirements was approximately $6.2 million for capitalized
expenditures and approximately $982,000 for expenses. The Company believes that
it will successfully achieve compliance with the Year 2000 requirements by
September 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
18
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
information, the Company 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
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.
SUBSEQUENT EVENTS
Acquisition of 43 Supermarkets from Albertson's
Upon the consummation of the merger of Albertson's, Inc. and American
Stores Company, the Company entered into a definitive Asset Purchase Agreement
with Albertson's, Inc. by which it will acquire 43 supermarkets, one future
store site and the related inventories and assume capitalized lease obligations
for a total purchase price of approximately $147.0 million. The acquisition of
the supermarkets, the future store site and the related inventories is expected
to be completed in August 1999 and will be funded through an offering of new
Senior Notes due 2006 (the "New Senior Notes"). The New Senior Notes have not
been registered under the Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration requirements.
Senior Notes
On July 1, 1999, the Company commenced a concurrent cash tender offer and
consent solicitation with the registered holders of all of the outstanding 11%
Senior Notes due 2001, and 9% Senior Subordinated Notes due 2004 (collectively
"the Notes"). On July 15, 1999, the
19
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------ AND RESULTS OF OPERATIONS (CONT.)
Company received the requisite consents (97% of the 11% Senior Notes and
100% of the 9% Senior Subordinated Notes) and promptly executed supplemental
indentures governing the Notes. On July 27, 1999, the Company extended the
expiration date of the tender offer for its outstanding Notes until midnight,
New York City time, on August 6, 1999, unless further extended. The early
redemption of the Notes is expected to create an extraordinary loss of
approximately $17.2 million (net of tax) from the early retirement of debt in
the quarter ending September 26, 1999.
The redemption of the Notes and the acquisition of the 43 supermarkets will
be funded through an offering of $440.0 million of New Senior Notes, which is
expected to be completed in August 1999. Proceeds from the New Senior Notes
will be used to retire the Notes pursuant to the tender offer, consummate the
acquisition of the 43 supermarkets and related inventories, fund anticipated
capital expenditures in the acquired supermarkets and pay fees and expenses
related to the acquisition of the supermarkets, the redemption of the Notes and
the issuance of the New Senior Notes.
In addition to the net proceeds raised from the New Senior Notes, the
Company will be required to use approximately $30.4 million of its cash on hand
to complete the acquisition of the supermarkets and to redeem the Notes.
Bank Credit Facility
On July 16, 1999, Bank of America National Trust & Savings Association
issued a commitment letter with respect to a new unsecured bank credit facility
(the "New Credit Facility") for the Company's principal operating subsidiary,
Stater Bros. Markets. The Company anticipates that the New Credit Facility will
consist of a $50.0 million revolving credit facility with an additional $25.0
million facility available for the issuance of commercial and standby letters of
credit. The availability of the loans and letters of credit will be subject to
certain sublimits and other borrowing restrictions. The term of the New Credit
Facility will be three years. It is expected that borrowings under the New
Credit Facility will be used for working capital and general corporate purposes.
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,
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.
20
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - ------
Not Applicable.
PART II- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- - ------
Various legal actions and claims arising in the ordinary course of
business are pending against the Company. 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 the Company.
For a description of legal proceedings, please refer to the footnote
entitled "Litigation Matters" 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 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
21
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 27, 1999
PART II-OTHER INFORMATION(CONT.)
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
Stater Bros. Holdings Inc. filed a Press Release on Form 8-K on July
16, 1999, which announced the receipt of the required consents and the
completion of the Consent Solicitation, effective as of 5 p.m., New York
City time on July 15, 1999. Stater Bros. received the consents of 97% of
the registered holders of the 11% Senior Notes and 100% of the registered
holders of the 9% Senior Subordinated Notes and Stater Bros. promptly
executed the supplemental indentures reflecting the proposed amendments to
the indentures governing the 11% Senior Notes and the 9% Senior
Subordinated Notes. Stater Bros. Holding Inc. also announced the offering
of $440,000,000 Senior Notes due 2006.
22
<PAGE>
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 2, 1999 /s/ Jack H. Brown
------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 2, 1999 /s/ Dennis N. Beal
------------------------------------
Senior Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
23
<PAGE>
Exhibit 11
Calculation of Earnings Per Common Share
(Unaudited)
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
---------------------------- ---------------------------
June 28, June 27, June 28, June 27,
1998 1999 1998 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $(1,185) $ 3,211 $ 1,413 $ 9,234
Less preferred dividends -- -- -- --
------- ------- ------- -------
Net income (loss) available to common shareholders $(1,185) $ 3,211 $ 1,413 $ 9,234
======= ======= ======= =======
Earnings per common share $(23.70) $ 64.22 $ 28.26 $184.68
======= ======= ======= =======
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>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 55,427
<SECURITIES> 0
<RECEIVABLES> 21,636
<ALLOWANCES> 0
<INVENTORY> 113,048
<CURRENT-ASSETS> 202,539
<PP&E> 257,756
<DEPRECIATION> 116,901
<TOTAL-ASSETS> 382,252
<CURRENT-LIABILITIES> 126,892
<BONDS> 268,892
0
0
<COMMON> 1
<OTHER-SE> (24,822)
<TOTAL-LIABILITY-AND-EQUITY> 382,252
<SALES> 1,324,358
<TOTAL-REVENUES> 1,324,358
<CGS> 1,011,542
<TOTAL-COSTS> 1,011,542
<OTHER-EXPENSES> 274,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,699
<INCOME-PRETAX> 15,390
<INCOME-TAX> 6,156
<INCOME-CONTINUING> 9,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,234
<EPS-BASIC> 184.68
<EPS-DILUTED> 184.68
</TABLE>
