<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
---------
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21700 Barton Road
Colton, California 92324
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
As of July 25, 2000, there were issued and outstanding 50,000 shares of the
registrant's Class A Common Stock.
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<PAGE> 2
STATER BROS. HOLDINGS INC.
JUNE 25, 2000
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
------ --------------------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 26, 1999
AND JUNE 25, 2000 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 39 WEEKS ENDED
JUNE 27, 1999 AND JUNE 25, 2000 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
JUNE 27, 1999 AND JUNE 25, 2000 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 39 WEEKS ENDED
JUNE 27, 1999 AND JUNE 25, 2000 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 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 26, JUNE 25,
1999 2000
--------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents ......................... $ 93,352 $ 51,612
Receivables ....................................... 28,296 28,736
Income tax receivable ............................. 5,942 2,945
Inventories ....................................... 155,361 159,569
Prepaid expenses .................................. 5,926 8,315
Deferred income taxes ............................. 3,523 6,701
Properties held for sale .......................... 3,886 3,869
--------- ---------
Total current assets ................................... 296,286 261,747
Investment in unconsolidated affiliate ................. 9,599 10,680
Property and equipment
Land .............................................. 44,941 46,834
Buildings and improvements ........................ 160,406 170,105
Store fixtures and equipment ...................... 150,027 170,851
Property subject to capital leases ................ 25,261 25,261
--------- ---------
380,635 413,051
Less accumulated depreciation and amortization .... 120,906 139,654
--------- ---------
259,729 273,397
Deferred income taxes .................................. 4,297 8,362
Deferred debt issuance costs, net ...................... 16,774 15,191
Lease guarantee escrow ................................. 11,280 12,911
Other assets ........................................... 5,952 6,352
--------- ---------
Total assets ........................................... $ 603,917 $ 588,640
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SEPT. 26, JUNE 25,
1999 2000
--------- ---------
<S> <C> <C>
Current liabilities
Accounts payable ................................................... $ 97,169 $ 89,847
Accrued payroll and related expenses ............................... 35,757 36,555
Other accrued liabilities .......................................... 30,501 41,591
Current portion of long-term debt and capital lease obligations .... 1,944 7,000
--------- ---------
Total current liabilities ............................................... 165,371 174,993
Long-term debt, less current portion .................................... 455,048 439,000
Capital lease obligations, less current portion ......................... 15,625 14,161
Long-term portion of self-insurance and other reserves .................. 7,450 7,450
Other long-term liabilities ............................................. 3,510 3,350
--------- ---------
Total liabilities ....................................................... 647,004 638,954
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) ........................................ (55,803) (63,030)
--------- ---------
Total stockholders' equity (deficit) .................................... (43,087) (50,314)
--------- ---------
Total liabilities and stockholders' equity (deficit) .................... $ 603,917 $ 588,640
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
JUNE 27, JUNE 25,
1999 2000
----------- -----------
<S> <C> <C>
Sales ................................................................... $ 1,324,358 $ 1,811,754
Cost of goods sold ...................................................... 1,011,542 1,366,738
----------- -----------
Gross profit ............................................................ 312,816 445,016
Operating expenses:
Selling, general and administrative expenses ....................... 265,907 398,448
Depreciation and amortization ...................................... 11,813 18,887
Acquisition integration expenses ................................... -- 4,594
----------- -----------
Total operating expenses ................................................ 277,720 421,929
----------- -----------
Operating profit ........................................................ 35,096 23,087
Interest income ......................................................... 2,388 2,190
Interest expense ........................................................ (22,699) (40,508)
Equity in earnings from unconsolidated affiliate ........................ 924 1,081
Other income (loss) - net ............................................... (319) (3)
----------- -----------
Income (loss) before income taxes (benefit) and extraordinary gain ..... 15,390 (14,153)
Income taxes (benefit) .................................................. 6,156 (5,803)
----------- -----------
Net Income (loss) before extraordinary gain ............................. 9,234 (8,350)
Extraordinary gain from early retirement of bonds
($1,896 less tax effect of $773) ................................... -- 1,123
----------- -----------
Net income (loss) ....................................................... $ 9,234 $ (7,227)
=========== ===========
Earnings (loss) per common share:
Before extraordinary gain .......................................... $ 184.68 $ (167.00)
Extraordinary gain ................................................. -- 22.46
----------- -----------
Earnings (loss) per share ............................................... $ 184.68 $ (144.54)
=========== ===========
Average common shares outstanding ....................................... 50,000 50,000
=========== ===========
Shares outstanding at end of period ..................................... 50,000 50,000
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
JUNE 27, JUNE 25,
1999 2000
--------- ---------
<S> <C> <C>
Sales ................................................. $ 441,134 $ 607,300
Cost of goods sold .................................... 335,530 454,797
--------- ---------
Gross profit .......................................... 105,604 152,503
Operating expenses:
Selling, general and administrative expenses ..... 89,476 132,381
Depreciation and amortization .................... 3,944 6,556
--------- ---------
Total operating expenses .............................. 93,420 138,937
--------- ---------
Operating profit ...................................... 12,184 13,566
Interest income ....................................... 734 485
Interest expense ...................................... (7,580) (13,378)
Equity in earnings from unconsolidated affiliate ...... 59 601
Other income (loss) - net ............................. (45) (2)
--------- ---------
Income before income taxes and extraordinary gain ..... 5,352 1,272
Income taxes .......................................... 2,141 521
--------- ---------
Net Income before extraordinary gain .................. 3,211 751
Extraordinary gain from early retirement of bonds
($1,896 less tax effect of $773) ................. -- 1,123
--------- ---------
Net income ............................................ $ 3,211 $ 1,874
========= =========
Earnings per common share:
Before extraordinary gain ........................ $ 64.22 $ 15.02
Extraordinary gain ............................... -- 22.46
--------- ---------
Earnings per share .................................... $ 64.22 $ 37.48
========= =========
Average common shares outstanding ..................... 50,000 50,000
========= =========
Shares outstanding at end of period ................... 50,000 50,000
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
JUNE 27, JUNE 25,
1999 2000
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 9,234 $ (7,227)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ......................................... 11,813 18,887
Provision for deferred income taxes ................................... 1 (7,243)
Gain on repurchase of bonds ........................................... -- (1,896)
Loss on disposals of assets ........................................... 319 2
Net undistributed (gain) in investment in unconsolidated affiliate .... (924) (1,081)
Changes in operating assets and liabilities:
(Increase) decrease in receivables ................................... (1,185) 2,557
(Increase) decrease in inventories ................................... 3,226 (4,208)
(Increase) decrease in prepaid expenses .............................. (1,412) (2,409)
(Increase) decrease in other assets .................................. (162) (832)
Increase (decrease) in accounts payable .............................. 175 (7,322)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves .................................. 9,497 11,728
--------- ---------
Net cash provided by operating activities .................................. 30,582 956
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment ......................................... (34,382) (32,520)
Proceeds from sale of property and equipment and properties
held for sale ............................................................ 2,918 --
--------- ---------
Net cash (used in) investing activities .................................... (31,464) (32,520)
--------- ---------
FINANCING ACTIVITIES:
Purchase of bonds .......................................................... -- (8,720)
Principal payments on capital lease obligations ............................ (972) (1,456)
--------- ---------
Net cash (used in) financing activities .................................... (972) (10,176)
--------- ---------
Net decrease in cash and cash equivalents .................................. (1,854) (41,740)
Cash and cash equivalents at beginning of period ........................... 57,281 93,352
--------- ---------
Cash and cash equivalents at end of period ................................. $ 55,427 $ 51,612
========= =========
Interest paid .............................................................. $ 13,922 $ 28,148
Income taxes paid .......................................................... $ 2,600 $ (704)
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 25, 2000
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 26, 1999 and June 25, 2000 and
the results of its operations and cash flows for the thirty-nine weeks ended
June 27, 1999 and June 25, 2000. 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 25, 2000 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 27,
1999 and June 25, 2000 consists of the following:
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
June 27, 1999 June 25, 2000
------------- -------------
(In thousands)
<S> <C> <C>
Federal income taxes (benefit) $ 5,233 $ (4,552)
State income taxes (benefit) 923 (1,251)
------------- -------------
$ 6,156 $ (5,803)
============= =============
</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 income
of $924,000 and $1,081,000 for the thirty-nine weeks ended June 27, 1999 and
June 25, 2000, respectively. The Company is a significant customer of Santee,
which supplies the Company with a substantial portion of its fluid milk and
dairy products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
June 27, 1999 June 25, 2000
------------- -------------
(In thousands)
<S> <C> <C>
Current assets $ 15,633 $ 15,013
Non-current assets 106,971 102,066
Current liabilities 24,631 22,070
Non-current liabilities 79,019 73,650
Shareholder's equity 18,954 21,359
Sales 130,045 133,561
Gross profit 13,868 21,562
Net income $ 2,115 $ 1,719
</TABLE>
8
<PAGE> 9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 25, 2000
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 (previously, a shareholder of the Company) 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 - 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 6 - PRO FORMA SUMMARY FINANCIAL INFORMATION
On May 7, 1999, the Company entered into an agreement with Albertson's to
acquire 43 supermarkets and one future store site and the supermarkets were
acquired in August 1999. The stores were formerly operated by Albertson's or
Lucky Stores and were divested in connection with the merger of Albertson's and
American Stores Company, the parent of Lucky Stores.
The following table provides unaudited pro forma financial data for the
Company reflecting the completion of the Acquisition as if it occurred September
28, 1998. These unaudited pro forma results have been prepared for comparative
purposes only and include certain pro forma adjustments. Such pro forma amounts
are not necessarily indicative of what actual results of operations might have
been or will be in the future. Pro forma results from operations for the current
period exclude a non-recurring gain of approximately $1.1 million ($1.9 million
net of tax effect of $0.8 million) related to early retirement of bonds.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------- --------------
June 27, June 25, June 27, June 25,
1999 2000 1999 2000
---- ---- ---- ----
(In thousands, excepts per share amounts)
(Pro forma) (Unaudited) (Pro forma) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 608,325 $ 607,300 $ 1,823,992 $ 1,811,754
Net income (loss) before
extraordinary gain $ 7,264 $ 751 $ 8,726 $ (8,350)
Earnings (loss) per
common share before
extraordinary gain $ 145.28 $ 15.02 $ 174.52 $ (167.00)
</TABLE>
NOTE 7 - EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT
In the third quarter of fiscal 2000, the Company retired $11 million of
10.75% Senior Notes due 2006. The Company realized an extraordinary gain of $1.1
million ($1.9 million less tax effect of $0.8 million) associated with the early
retirement of such bonds in the third quarter of fiscal 2000.
9
<PAGE> 10
STATER BROS. HOLDINGS INC.
JUNE 25, 2000
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"). Substantially all of
the 11% Notes ($160.0 million) were redeemed in August 1999.
Effective March 8, 1996, pursuant to options available to the
Company, the Company exercised its right to convert all of its
outstanding shares of Common Stock (previously held by Craig) into
693,650 shares of its Series B Preferred Stock. The Series B
Preferred Stock had a redemption value of approximately $69.4
million and paid dividends at the rate of 10.5% per annum. In August
1997, the Company redeemed all of the outstanding shares of its
Series B Preferred Stock for $69.4 million plus accrued and unpaid
dividends. The Series B Preferred Stock redemption was funded
through an offering of $100 million of 9% Senior Subordinated Notes
due 2004 (the "9% Notes"). The 9% Notes were redeemed in August
1999.
OWNERSHIP OF THE COMPANY
Effective August 1997, La Cadena became the sole shareholder of the
Company and holds all of the shares of the Company's Class A Common
Stock which are entitled to 1.1 votes per share. La Cadena
Investments is a California General Partnership whose partners
include Jack H. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company and two other members of senior
management of the Company. Jack H. Brown has a majority interest in
La Cadena and is the managing general partner with the power to vote
the shares of the Company held by La Cadena.
ACQUISITION
Comparisons between fiscal 2000 and fiscal 1999 for the third
quarter results and year to date results are difficult due to the
acquisition of 43 supermarkets and one future site in August 1999,
expenses incurred to integrate the acquired supermarkets into the
Company's retail operating and distribution systems and the issuance
of $450.0 million of 10.75% Notes and related redemptions, together
with early redemption premiums, on all of the 9% Notes and
substantially all the 11% Notes in August 1999. On May 7, 1999, the
Company entered into an agreement with Albertson's to acquire 43
supermarkets and one future store site. The stores were formerly
operated by Albertson's or Lucky Stores and were divested in
connection with the merger of Albertson's and American Stores
Company, the parent of Lucky Stores. The supermarkets were acquired
sequentially beginning August 9, 1999, with 8 supermarkets acquired
during the week ended August 15, 1999, 15 supermarkets were
10
<PAGE> 11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
acquired during the week ended August 22, 1999, an additional 15
supermarkets were acquired during the week ended August 29, 1999 and
the remaining 5 supermarkets were acquired by September 1, 1999. The
purchase price for the property, plant, equipment and inventories of
43 supermarkets and one future store site was approximately $134.0
million plus capital lease obligations assumed of $13.3 million and
approximately $2.2 million of capitalized costs related to the
transfer of ownership of the supermarkets. The acquisition was
accounted for using the purchase method of accounting and the
results of operations of the 43 supermarkets are included in the
Company's consolidated results of operations from the acquisition
date of each supermarket.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and thirty-nine
weeks ended June 25, 2000 and June 27, 1999.
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-nine Weeks
-------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 25.11 23.94 24.56 23.62
Operating expenses:
Selling, general and
administrative expense 21.80 20.28 21.99 20.08
Depreciation and amortization 1.08 0.90 1.04 0.89
Acquisition integration expenses - - 0.25 -
Operating profit 2.23 2.76 1.28 2.65
Interest income 0.08 0.17 0.12 0.18
Interest expense (2.20) (1.72) (2.24) (1.72)
Equity in earnings from
unconsolidated affiliate 0.10 -- 0.06 .07
Other income (loss) - (net) -- -- -- (.02)
Net income (loss) before income taxes
(benefit) and extraordinary gain 0.21% 1.21% (0.78%) 1.16%
</TABLE>
Total sales for the thirteen weeks ended June 25, 2000, the third
quarter of fiscal 2000, increased 37.7% and amounted to $607.3
million compared to $441.1 million for the same period in the prior
year. Total sales for the thirty-nine weeks ended June 25, 2000,
increased 36.8% and amounted to $1.8 billion compared to $1.3
billion for the same period in the prior year. The increase in total
sales in the third quarter of fiscal 2000 and fiscal year to date of
2000 was due primarily to the acquisition of 43 supermarkets in
August 1999, from Albertson's. The 43 acquired supermarkets were
opened in less than two days after their respective acquisition
dates as fully integrated Stater Bros. Markets. The Company acquired
8 supermarkets during the week ended August 15, 1999, 15
supermarkets during the week ended August 22, 1999, 15 supermarkets
during the week ended August 29, 1999 and acquired the remaining 5
supermarkets during the week ended September 5, 1999. Results of
operations of the 43 supermarkets have been included in the
Company's consolidated results of operations from the acquisition
date of each supermarket. Like store sales increased 2.3% (before
erosion of like store sales of 0.7% to newly acquired stores) for
the thirteen-week period ended June 25, 2000. Like store sales
increased 2.0% (before erosion of like store sales of 0.7% to newly
acquired stores) for the thirty-nine week period ended June 25,
2000. The like store sales increases for the third quarter and year
11
<PAGE> 12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to date of fiscal 2000 were due to favorable customer responses to
the Company's aggressive marketing plan emphasizing the Company's
high quality and expanded product selections in the produce and
other perishable departments. The Company operated 155 and 112
supermarkets at June 25, 2000 and June 27, 1999, respectively.
Gross profit for the thirteen weeks ended June 25, 2000, amounted to
$152.5 million or 25.11% of sales compared to $105.6 million or
23.94% of sales in the same period of the prior year. The increase
in gross profit, as a percentage of sales, in the third quarter of
2000 was due to several factors including the introduction of higher
gross margin products achieved through the Company's general
merchandise expansion program, expanded produce selection and
service meat cases. Gross profit for the third quarter of fiscal
2000 did not include an incremental price increase in the cost of
fluid dairy products purchased from Santee, however, gross profit
were reduced by approximately $2.4 million for the incremental price
increases during the third quarter of 1999.
Gross profit for the thirty-nine weeks ended June 25, 2000, amounted
to $445.0 million or 24.56% of sales compared to $312.8 million or
23.62% of sales in the same period of the prior year. The increase
in the fiscal year to date of 2000 gross profit, as a percent of
sales, was due to several factors including the introduction of
higher gross margin products achieved through the Company's general
merchandise expansion program, which were partially offset by
reductions in the second quarter in gross profits, as a percentage
of sales, from the aggressive grand reopening of service meat and
expanded produce departments in the newly acquired stores. Gross
profit for the fiscal year to date of 2000 included an incremental
price increase in the cost of fluid dairy products purchased from
Santee of approximately $48,000 compared to approximately $8.2
million for the fiscal year to date of 1999. Santee terminated the
incremental pricing charge to the Company on October 1,
1999.
Operating expenses include selling, general and administrative
expenses, depreciation and amortization, and acquisition integration
expenses. For the thirteen weeks ended June 25, 2000, selling,
general and administrative expenses amounted to $132.4 million or
21.80% of sales compared to $89.5 million or 20.28% of sales for the
thirteen weeks ended June 27, 1999. For the thirty-nine weeks ended
June 25, 2000, selling, general and administrative expenses amounted
to $398.4 million or 21.99% of sales compared to $265.9 million or
20.08% of sales for the thirty-nine weeks ended June 27, 1999. The
increase in selling, general and administrative expenses, as a
percentage of sales, was due primarily to higher than anticipated
labor and advertising expenses. The Company has implemented
corrective actions that have reduced both labor and advertising
expenses.
Depreciation and amortization expenses amounted to $6.6 million and
$18.9 million for the third quarter and year to date periods ended
June 25, 2000, respectively. Depreciation and amortization expenses
amounted to $3.9 million and $11.8 million for the quarter and year
to date periods of the prior year. Depreciation expense in fiscal
1999 included amortization of $438,000 from a five-year prepaid
covenant not to compete, which terminated in March 1999. The
increase in depreciation and amortization expense in fiscal 2000 was
primarily due to the acquisition of the 43 supermarkets in August
1999.
Acquisition integration expenses amounted to $4.6 million for the
fiscal year to date ended June 25, 2000 and were related to the
acquisition of the 43 supermarkets. No additional acquisition
integration expenses were incurred during the third quarter nor
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
are any anticipated in the future. Acquisition integration expenses
consisted of salaries and wages and non-recurring advertising
expenses incurred during the integration of the supermarkets and the
grand re-openings of service meat departments in most of the
acquired supermarkets. All acquired stores had service meat
departments installed by March 30, 2000.
Operating income for the third quarter of 2000 amounted to $13.6
million or 2.23% of sales compared to $12.2 million or 2.76% of
sales for the third quarter of 1999. Operating profit for the fiscal
year to date of 2000 amounted to $23.1 million or 1.28% of sales
compared to an operating profit of $35.1 million or 2.65% of sales
for the fiscal year to date of 1999.
Interest expense amounted to $13.4 million for the third quarter of
2000 compared to $7.6 million for the third quarter of 1999. For the
fiscal year to date of 2000 and 1999, interest expense amounted to
$40.5 million and $22.7 million, respectively. The increase in
interest expense was due to the issuance of $450.0 million of 10.75%
Senior Notes due 2006 in August 1999 related to the acquisition of
the 43 supermarkets and the redemption in August 1999 of all the 9%
Notes and substantially all ($5.1 million remain outstanding) of the
11% Notes.
The Company's equity in earnings from unconsolidated affiliate,
amounted to $601,000 for the third quarter of fiscal 2000 compared
to $59,000 in the third quarter of the prior year. For the fiscal
year to date periods of 2000 and 1999, the Company's equity in
earnings from unconsolidated affiliate, amounted to $1,081,00 and
$924,000, respectively. The incremental prices paid to Santee by the
owners terminated in October 1999. The incremental prices in the
cost of products purchased from Santee by the Company is included in
the Company's cost of goods sold and amounted to approximately
$48,000 in the fiscal year to date for 2000 compared to
approximately $2.4 million and $8.2 million for the third quarter
and fiscal year to date of 1999, respectively.
Income before income taxes and extraordinary gain amounted to $1.3
million and $5.4 million for the third quarter of 2000 and 1999,
respectively. Income before income taxes and extraordinary gain
amounted to a loss of $14.2 million and income of $15.4 million for
the thirty-nine weeks year to date periods of 2000 and 1999,
respectively.
The Company realized an extraordinary gain of $1.1 million ($1.9
million less tax effect of $0.8 million) in the third quarter of
fiscal 2000 associated with the early retirement of $11 million of
10.75% Senior Notes due 2006.
Net income for the third quarter amounted to $1.9 million and $3.2
million for 2000 and 1999, respectively. Net income for the fiscal
year to date periods amounted to a loss of $7.2 million and income
of $9.2 million for 2000 and 1999, 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 credit
agreement became effective August 6, 1999 and expires in August
2002, and consists of a revolving loan facility for working capital
of $50.0 million, all of which was available at June 25, 2000 and a
letter of credit facility with a maximum availability of $25.0
million, of which $15.0 million was available at June 25, 2000. The
letter of credit facility is maintained pursuant to the Company's
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workers' compensation and general liability self-insurance
requirements.
Working capital amounted to $86.8 million at June 25, 2000 and
$130.9 million at September 26, 1999, and the Company's current
ratios were 1.50:1, and 1.79:1, respectively. Fluctuations in
working capital and current ratios are not unusual in the industry.
The net cash provided by operating activities in the thirty-nine
weeks ended June 25, 2000 amounted to $1.0 million compared to net
cash provided by operating activities of $30.6 million for the
thirty-nine weeks ended June 27, 1999. Fluctuations in net cash
provided by or used in operating activities are not unusual in the
industry. Cash provided by operating activities in fiscal 2000 of
$1.0 million consisted of increases in inventories in both the
warehouses and the supermarkets of $4.2 million, an increase in
prepaid expenses of $2.4 million, a decrease in accounts receivable
of $2.6 million, an increase in deferred taxes of $7.2 million, a
decrease in accounts payable of $7.3 million and an increase in
accrued liabilities of $11.7 million.
Net cash used in investing activities for the thirty-nine weeks
ended June 25, 2000, amounted to $32.5 million, compared to $31.5
million for the thirty-nine weeks ended June 27, 1999. The
difference in net cash used in investing activities between the
comparable periods is due to the Company's capital expenditures
during such periods, net of proceeds from asset dispositions.
Capital expenditures amounted to $32.5 million in the fiscal year to
date of 2000 compared to $34.4 million in the fiscal year to date of
1999. During the fiscal year to date of 2000, capital expenditures
of $21.8 million were incurred to fund projects related to the
acquisition of the 43 supermarkets and related warehouse expansions.
Additional capital expenditures were used to acquire land for a
store site, fund the remaining Year 2000 projects as well as to fund
normal maintenance capital expenditures.
Net cash used by financing activities amounted to $10.2 million and
$1.0 million for the thirty-nine weeks ended June 25, 2000, and June
27, 1999, respectively, and consisted of payments on the Company's
capitalized lease obligations and repurchase of bonds for $8.7 in
the third quarter of fiscal 2000.
THE CREDIT FACILITIES
Stater Bros.' principal operating subsidiary, Stater Bros. Markets,
signed a new credit facility with Bank of America N.A. on August 6,
1999. The credit facility provides for (i) a $50.0 million
three-year revolving loan facility and (ii) a $25.0 million
three-year letter of credit facility. Borrowings under the revolving
loan facility are unsecured and expected to be used for certain
working capital and corporate purposes. Letters of credit under the
letter of credit facility are expected to be used to support the
purchase of inventory, obligations incurred in connection with the
construction of stores, and workmen's compensation insurance
obligations. The availability of the loans and letters of credit are
subject to certain sub-limits and other borrowing restrictions.
Indebtedness of Stater Bros. Markets under the credit facility is
guaranteed by Stater Bros. Development, Inc., a subsidiary of the
Company, and any subsidiaries that Stater Bros. Markets or Stater
Bros. Development, Inc. acquires or forms after the date of the new
credit facility.
Loans under the credit facility bear interest at a rate based upon
either (i) the "Base Rate" (defined as the higher of (a) the rate of
interest publicly announced by Bank of America as its "reference
rate" and (b) the federal funds effective rate from time to
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<PAGE> 15
time plus 0.50%), plus 1.00%, or (ii) the "Offshore Rate" (defined
as the rate (adjusted for statutory reserve requirements for
eurocurrency liabilities) at which eurodollar deposits for one, two,
three or six months (as selected by Stater Bros. Markets) are
offered to Bank of America in the inter-bank eurodollar market),
plus 2.25%. The loans under the revolving loan facility must be
repaid for a period of ten consecutive days semi-annually.
The credit facility requires Stater Bros. Markets to meet certain
financial tests, including minimum net worth and minimum EBITDA
tests. The credit facility contains covenants which, among other
things, will limit indebtedness, liens, guarantee obligations,
mergers, consolidations, liquidations and dissolutions, asset sales,
leases, investments, loans and advances, transactions with
affiliates, sale and leasebacks, other matters customarily
restricted in such agreements and modifications to the holding
company status of Stater Bros.
The credit facility also contains covenants that apply to Stater
Bros. Holdings Inc., and Stater Bros. Holdings Inc. is a party to
the new credit facility for purposes of these covenants. These
covenants, among other things, limit dividends and other payments in
respect of Stater Bros. Holdings Inc.'s capital stock, prepayments
and redemptions of the exchange notes and other debt, and limit
indebtedness, investments, loans and advances by Stater Bros.
Holdings Inc. The credit facility requires Stater Bros. Holdings
Inc. and Stater Bros. Markets to comply with certain covenants
intended to ensure that their legal identities remain separate.
The credit facility contains customary events of default, including
payment defaults; material inaccuracies in representations and
warranties; covenant defaults; cross-defaults to certain other
indebtedness; certain bankruptcy events; certain ERISA events;
judgment; defaults; invalidity of any guaranty; failure of Jack H.
Brown to be Chairman of the Board and Chief Executive Officer of
Stater Bros. Markets; and change of control.
As of June 25, 2000, for purposes of the credit facility with Bank
of America, Stater Bros. Markets was in compliance with all of the
restrictive covenants. Stater Bros. Markets exceeded the minimum net
worth covenant by approximately $101.6 million and exceeded minimum
inventory coverage by approximately $61.8 million. The minimum
EBITDA (as defined) covenant measurement period begins (as amended)
in the quarter ended June 25, 2000, and requires an annualized
minimum EBITDA of $75.0 million. Stater Bros. Markets exceeded
annualized minimum EBITDA by approximately $10.0 million.
As of June 25, 2000, for purposes of the credit facility with Bank
of America, Stater Bros. Holdings Inc. was in compliance with all
restrictive covenants.
The Company is also subject to certain covenants associated with its
11% Senior Notes due 2001 and its 10.75% Senior Notes due 2006. As
of June 25, 2000, 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 1999,
with the United Food and
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial Workers Union. The Company's collective bargaining
agreement with the International Brotherhood of Teamsters was
renewed in 1998 and expires in September 2002. Management believes
it has good relations with its employees.
YEAR 2000 COMPLIANCE
The Company successfully achieved compliance with the Year 2000
requirements and Year 2000 related issues had no material adverse
effect on the Company's results of operations, liquidity or
financial condition. However, no assurance can be given that
unforeseen problems may not occur in the future that may have
material adverse effect on the Company's results of operations,
liquidity or financial condition.
The Company's costs required to achieve Year 2000 compliance such as
replace or modify Information Systems, including scheduled
replacements of in-store Point of Sale equipment, was approximately
$8.5 million, of which $7.0 million was capitalized and $1.5 million
was expensed.
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 Vons,
Albertson's, Ralphs and a number of independent supermarket
operators. Competitive factors typically include the price, quality
and selection of products offered for sale, customer service, and
the convenience and location of retail facilities. The Company
monitors competitive activity and Senior Management regularly
reviews the Company's marketing and business strategy and
periodically adjusts them to adapt to changes in the Company's
primary trading area.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information
contained in the Company's filings with the Securities and Exchange
Commission (as well as information included in oral statements or
other written statements made or to be made by the Company) includes
statements that are forward-looking, such as statements relating to
plans for future activities. Such forward-looking information
involves important risks and uncertainties that could significantly
affect results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to domestic economic
conditions, seasonal and weather fluctuations, expansion and other
activities of competitors, changes in federal or state laws and the
administration of such laws and the general condition of the
economy.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
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STATER BROS. HOLDINGS INC.
JUNE 25, 2000
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in
the ordinary course of business. In the opinion of management and
its general legal counsel, the ultimate resolution of such pending
legal actions and claims will not have a material adverse effect on
the Company's consolidated financial position or its results of
operations.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Form 10-K for the
fiscal year ended September 26, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During the third quarter ended June 25, 2000, the Company's
operating entity Stater Bros. Markets entered into employment
contracts with 48 members of Senior Management.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
EXHIBIT NO. DESCRIPTION
----------- -----------
10.20 (1) Employment contract dated June 1, 2000 by and between
Stater Bros. Markets and Jack H. Brown.
10.21 (1) Employment contract dated June 1, 2000 by and between
Stater Bros. Markets and Donald I. Baker.
10.22 (1) Employment contract dated June 1, 2000 by and between
Stater Bros. Markets and A. Gayle Paden.
11 Calculation of Earnings Per Common Share
27 Financial Data Schedule
(1) Filed with the Security and Exchange
Commission as exhibits to the Registrant's
Quarterly Report on form 10Q dated June 25,
2000 and filed on August 9, 2000.
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
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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 7, 2000 /s/ Jack H. Brown
----------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 7, 2000 /s/ Phillip J. Smith
----------------------------------
Phillip J. Smith
Vice President and Controller
(Chief Accounting Officer)
19
