<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21700 Barton Road
Colton, California 92324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of January 28, 2000, there were issued and
outstanding 50,000 shares of the registrant's
Class A Common Stock.
<PAGE> 2
STATER BROS. HOLDINGS INC.
DECEMBER 26, 1999
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 DECEMBER 26, 1999 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
DECEMBER 27, 1998 AND DECEMBER 26, 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13 WEEKS ENDED
DECEMBER 27, 1998 AND DECEMBER 26, 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15
PART II OTHER INFORMATION
- - ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</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, DEC. 26,
1999 1999
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 93,352 $ 66,248
Receivables .................................. 34,238 39,129
Inventories .................................. 155,361 172,235
Prepaid expenses ............................. 5,926 9,469
Deferred income taxes ........................ 3,523 3,523
Properties held for sale ..................... 3,886 3,881
-------- --------
Total current assets ............................ 296,286 294,485
Investment in unconsolidated affiliate .......... 9,599 9,738
Property and equipment
Land ......................................... 44,941 45,520
Buildings and improvements ................... 160,406 163,518
Store fixtures and equipment ................. 150,027 160,022
Property subject to capital leases ........... 25,261 25,261
-------- --------
380,635 394,321
Less accumulated depreciation and amortization 120,906 126,883
-------- --------
259,729 267,438
Deferred income taxes ........................... 4,297 4,297
Deferred debt issuance costs, net ............... 16,774 16,675
Lease guarantee escrow .......................... 11,280 11,489
Other assets .................................... 5,952 6,163
-------- --------
Total assets..................................... $603,917 $610,285
======== ========
</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, DEC. 26,
1999 1999
--------- ---------
<S> <C> <C>
Current Liabilities
Accounts payable .................................. $ 97,169 $ 89,974
Accrued payroll and related expenses .............. 35,757 32,974
Other accrued liabilities ......................... 30,501 45,526
Current portion of capital lease obligations ...... 1,944 1,943
--------- ---------
Total current liabilities ............................ 165,371 170,417
Long-term debt, less current portion ................. 455,048 455,048
Capital lease obligations, less current portion ...... 15,625 15,149
Long-term portion of self-insurance and other reserves 7,450 7,450
Other long-term liabilities .......................... 3,510 3,456
--------- ---------
Total liabilities .................................... 647,004 651,520
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) (53,951)
--------- ---------
Total stockholders' equity (deficit) ................. (43,087) (41,235)
--------- ---------
Total liabilities and stockholders' equity (deficit) . $ 603,917 $ 610,285
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
DEC. 27, DEC. 26,
1998 1999
--------- ---------
<S> <C> <C>
Sales .......................................... $ 441,422 $ 597,168
Cost of goods sold ............................. 339,021 441,346
--------- ---------
Gross profit ................................... 102,401 155,822
Operating expenses:
Selling, general and administrative expenses 88,671 133,563
Depreciation and amortization ............... 3,903 6,014
Acquisition integration expenses ............ - 668
--------- ---------
Total operating expenses ....................... 92,574 140,245
--------- ---------
Operating profit ............................... 9,827 15,577
Interest income ................................ 775 995
Interest expense ............................... (7,531) (13,571)
Equity in earnings from unconsolidated affiliate 798 139
Other income (loss) - net ...................... (58) (1)
--------- ---------
Income before income taxes ..................... 3,811 3,139
Income taxes ................................... 1,524 1,287
--------- ---------
Net income ..................................... $ 2,287 $ 1,852
========= =========
Earnings per share ............................. $ 45.74 $ 37.04
========= =========
Average common shares outstanding .............. 50,000 50,000
========= =========
Shares outstanding at end of period ............ 50,000 50,000
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------
DEC. 27, DEC. 26,
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 2,287 $ 1,852
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 3,903 6,014
Provision for deferred income taxes ..................... (1) -
Loss on disposals of assets ............................. 58 2
Net undistributed (gain) in investment
in unconsolidated affiliate ........................... (798) (139)
Changes in operating assets and liabilities:
(Increase) decrease in receivables ..................... (1,680) (4,891)
(Increase) decrease in inventories ..................... (1,675) (16,874)
(Increase) decrease in prepaid expenses ................ (1,307) (3,549)
(Increase) decrease in other assets .................... (841) (321)
Increase (decrease) in accounts payable ................ 4,820 (7,195)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves .................... 9,512 12,188
-------- --------
Net cash provided by (used in) operating activities ........ 14,278 (12,913)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ......................... (7,811) (13,714)
Proceeds from sale of property and equipment and properties
held for sale ............................................. 711 -
-------- --------
Net cash (used in) investing activities .................... (7,100) (13,714)
-------- --------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations ............ (317) (477)
-------- --------
Net cash (used in) financing activities .................... (317) (477)
-------- --------
Net increase (decrease) in cash and cash equivalents ....... 6,861 (27,104)
Cash and cash equivalents at beginning of period ........... 57,281 93,352
-------- --------
Cash and cash equivalents at end of period ................. $ 64,142 $ 66,248
======== ========
Interest paid .............................................. $ 123 $ 698
Income taxes paid .......................................... $ 1,675 $ -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 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 26, 1999 and December 26, 1999
and the results of its operations and cash flows for the thirteen weeks ended
December 27, 1998 and December 26, 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 thirteen weeks ended December 26, 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 thirteen weeks ended December 27,
1998 and December 26, 1999 consists of the following:
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
Dec. 27, 1998 Dec. 26, 1999
------------- -------------
(In thousands)
<S> <C> <C>
Federal income taxes $ 1,296 $ 1,009
State income taxes 228 278
-------- --------
$ 1,524 $ 1,287
======== ========
</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 $798,000 and $139,000 for the thirteen weeks ended December 27, 1998 and
December 26, 1999, 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>
13 Weeks Ended
-----------------------------
Dec. 27, 1998 Dec. 26, 1999
------------- -------------
(In thousands)
<S> <C> <C>
Current assets $ 16,585 $ 15,115
Non-current assets 109,870 105,067
Current liabilities 26,652 24,101
Non-current liabilities 81,260 76,604
Shareholder's equity 18,543 19,477
Sales 48,227 46,954
Gross profit 6,991 7,010
Net income (loss) $ 1,602 $ 279
</TABLE>
7
<PAGE> 8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 1999
NOTE 4 - COVENANT NOT TO COMPETE
On March 8, 1994, the Company entered into a $5.0 million prepaid five
year covenant not to compete which was included in a Consulting Agreement with
Craig Corporation (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 - 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 - 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 of operations for the prior
period exclude a non-recurring extraordinary loss of approximately $17.3 million
($28.5 million less tax effect of $11.2 million) related to the early
extinguishment of debt.
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------
Dec. 27, 1998 Dec. 26, 1999
------------- -------------
(In thousands, except per share amounts)
(Pro forma) (Unaudited)
<S> <C> <C>
Sales $ 604,814 $ 597,168
Net income (loss) before
extraordinary loss $ (597) $ 1,852
Earnings (loss) per common share $ (11.94) $ 37.04
</TABLE>
8
<PAGE> 9
STATER BROS. HOLDINGS INC.
DECEMBER 26, 1999
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the
Company to La Cadena Investments ("La Cadena"), reclassified the
Company's outstanding equity, provided for certain cash payments and
distributions to Craig Corporation ("Craig"), previously a shareholder
of the Company, and provided the Company with an option to acquire
Craig's remaining equity in the Company. The Recapitalization was funded
through an offering of $165.0 million of 11% Senior Notes due 2001 (the
"11% Notes"). 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 the first quarter of fiscal 2000 and fiscal 1999 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 acquired during the week ended
August 22, 1999, an
9
<PAGE> 10
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 weeks ended December
27, 1998 and December 26, 1999.
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
Dec. 27, 1998 Dec. 26, 1999
------------- -------------
<S> <C> <C>
Sales 100.00% 100.00%
Gross profit 23.20 26.09
Operating expenses:
Selling, general and administrative
expense 20.09 22.36
Depreciation and amortization .89 1.01
Acquisition integration expenses - .11
Operating profit 2.22 2.61
Interest income .18 .17
Interest expense (1.71) (2.27)
Equity in earnings from
unconsolidated affiliate .18 .02
Other income (loss) - (net) (.01) -
Income before income taxes .86% .53%
</TABLE>
Total sales for the thirteen weeks ended December 26, 1999, the first
quarter of fiscal 2000, increased 35.3% and amounted to $597.2 million
compared to $441.4 million for the same period in the prior year. The
increase in total sales in the first quarter of fiscal 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 supermarkets. Like store sales increased 2.0% (before erosion of
like store sales of 0.7% to newly acquired stores) for the thirteen week
period ended December 26, 1999 and was due to favorable customer
response to the Company's first quarter marketing plan, which emphasized
the Company's high quality and expanded product selections in the
produce and other perishable departments. The Company operated 155 and
112 supermarkets at December 26, 1999 and December 27, 1998,
respectively.
Gross profits for the thirteen weeks ended December 26, 1999, amounted
to $155.8 million or 26.09% of sales compared to $102.4 million or
23.20% of sales in the same
10
<PAGE> 11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
period of the prior year. The increase in the first quarter of fiscal
2000 gross profits, 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 and
significant investments in perishable product display fixtures in the
newly acquired supermarkets. Gross profits for the first quarter of
fiscal 2000 included an incremental price increase in the cost of fluid
dairy products purchased from Santee Dairies, Inc ("Santee") of
approximately $48,000 compared to approximately $3.1 million for the
first quarter of fiscal 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 December 26, 1999, selling, general and
administrative expenses amounted to $133.6 million or 22.36% of sales
compared to $88.7 million or 20.09% of sales for the thirteen weeks
ended December 27, 1998. The increase in selling, general and
administrative expenses as a percentage of sales in the first quarter of
fiscal 2000 included expenses incurred to operate the additional 43
supermarkets acquired in August 1999, from increased labor costs due to
contractual wage and benefit increases, and from increased advertising
expenses incurred to campaign the Company's Aggressive Everyday Low
Price leadership strategy.
Depreciation and amortization expenses amounted to $6.0 million for the
thirteen weeks ended December 26, 1999 and amounted to $3.9 million for
the like period of the prior year. Depreciation expense in fiscal 1999
included amortization of $250,000 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 $668,000 for the thirteen
weeks ended December 26, 1999 and were related to the acquisition of the
43 supermarkets. Acquisition integration expenses consist of salaries
and wages and non-recurring advertising expenses incurred during the
integration of the supermarkets and the grand openings of service meat
departments in fourteen of the acquired supermarkets.
Operating profit for the thirteen weeks ended December 26, 1999 amounted
to $15.6 million or 2.61% of sales compared to $9.8 million or 2.22% of
sales for the thirteen weeks ended December 27, 1998.
Interest expense amounted to $13.6 million for the thirteen weeks ended
December 26, 1999 compared to $7.5 million for the thirteen weeks ended
December 27, 1998. 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 $139,000 for the first quarter of fiscal 2000 compared $798,000 in
the first quarter of the prior year. The decrease in earnings is
primarily due to the termination of incremental prices paid by the two
owners of Santee Dairies LLC (Hughes and Stater Bros. Markets) in the
first quarter of fiscal 2000 compared to incremental prices paid by the
owners in the first quarter of fiscal 1999 of approximately $4.6
million. 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
11
<PAGE> 12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
included in the Company's cost of goods sold and amounted to
approximately $48,000 in the first quarter of fiscal 2000 compared to
approximately $3.1 million in the first quarter of fiscal 1999.
Income before income taxes amounted to $3.1 million for the thirteen
weeks ended December 26, 1999 compared to $3.8 million for the thirteen
weeks ended December 27, 1998.
Net income for the thirteen week first quarter ended December 26, 1999,
amounted to $1.9 million compared to $2.3 million for the thirteen week
first quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements
through funds provided by operations and through borrowings from
short-term revolving credit facilities. The Company's 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, which
was available at December 26, 1999 and a letter of credit facility with
a maximum availability of $25.0 million, of which $14.2 million was
available at December 26, 1999. The letter of credit facility is
maintained pursuant to the Company's workers' compensation and general
liability self-insurance requirements.
Working capital amounted to $124.1 million at December 26, 1999 and
$130.9 million at September 26, 1999, and the Company's current ratios
were 1.73:1, and 1.79:1, respectively. Fluctuations in working capital
and current ratios are not unusual in the industry.
The net cash used in operating activities in the thirteen weeks ended
December 26, 1999 amounted to $12.9 million compared to net cash
provided by operating activities of $14.3 million for the thirteen weeks
ended December 27, 1998. Fluctuations in net cash provided by or used in
operating activities are not unusual in the industry. Cash used in
operating activities in fiscal 2000 of $12.9 million consisted of
increases in inventories in both the warehouses and the supermarkets of
$16.9 million and a decrease in accounts payable of $7.2 million,
partially offset by increases in accrued liabilities, such as interest,
utilities and rents, of approximately $12.2 million.
Net cash used in investing activities for the thirteen weeks ended
December 26, 1999, amounted to $13.7 million, compared to $7.1 million
for the thirteen weeks ended December 27, 1998. 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 $13.7
million in the first quarter of fiscal 2000 compared to $7.8 million in
the first quarter of fiscal 1999. During the first quarter of fiscal
2000, capital expenditures of $10.5 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 $477,000 and $317,000
for the thirteen weeks ended December 26, 1999, and December 27, 1998,
respectively, and consisted of payments on the Company's capitalized
lease obligations.
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
13
<PAGE> 14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 26, 1999, for purposes of the credit facility with Bank
of America, Stater Bros. Markets was in compliance with all restrictive
covenants and exceeded the minimum net worth covenant by approximately
$113.7 million. The minimum EBITDA (as defined) covenant measurement
period begins in the quarter ending March 26, 2000, and requires an
annualized minimum EBITDA of $75.0 million.
As of December 26, 1999, for the 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
December 26, 1999, the Company was in compliance with all such
covenants. However, there can be no assurance that the Company will be
able to achieve the expected operating results or implement the capital
expenditure strategy upon which future compliance with such covenants is
based.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1999, with the United
Food and Commercial Workers Union. The Company's collective bargaining
agreement with the International Brotherhood of Teamsters was renewed in
1998 and expires in September 2002. Management believes it has good
relations with its employees.
YEAR 2000 COMPLIANCE
The 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
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
service, and the convenience and location of retail facilities. The
Company monitors competitive activity and Senior Management regularly
reviews the Company's marketing and business strategy and periodically
adjusts them to adapt to changes in the Company's primary trading area.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information contained in
the Company's filings with the Securities and Exchange Commission (as
well as information included in oral statements or other written
statements made or to be made by the Company) includes statements that
are forward-looking, such as statements relating to plans for future
activities. Such forward-looking information involves important risks
and uncertainties that could significantly affect results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, those relating
to domestic economic conditions, seasonal and weather fluctuations,
expansion and other activities of competitors, changes in federal or
state laws and the administration of such laws and the general condition
of the economy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
DECEMBER 26, 1999
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
11 Calculation of Earnings Per Common Share.
27 Financial Data Schedule
</TABLE>
Copies of Exhibits listed herein can be obtained by
writing and requesting such Exhibits from: Corporate
Secretary, P. O. Box 150, Colton, California 92324.
(b) Reports on Form 8-K
None
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 4, 2000 /s/ Jack H. Brown
---------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: February 4, 2000 /s/ Dennis N. Beal
----------------------------------
Dennis N. Beal
Senior Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
17
<PAGE> 1
Exhibit 11
STATER BROS. HOLDINGS INC.
CALCULATION OF EARNINGS PER COMMON SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------
Dec. 27, Dec. 26,
1998 1999
------- -------
<S> <C> <C>
Net income ..................................... $ 2,287 $ 1,852
Less preferred dividends ....................... - -
------- -------
Net income available to common shareholders .... $ 2,287 $ 1,852
======= =======
Earnings per common share ...................... $ 45.74 $ 37.04
======= =======
Average common shares outstanding .............. 50,000 50,000
======= =======
Common shares outstanding at end of period ..... 50,000 50,000
======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-24-2000
<PERIOD-START> SEP-27-1999
<PERIOD-END> DEC-26-1999
<CASH> 66,248
<SECURITIES> 0
<RECEIVABLES> 39,129
<ALLOWANCES> 0
<INVENTORY> 172,235
<CURRENT-ASSETS> 294,485
<PP&E> 394,321
<DEPRECIATION> 126,883
<TOTAL-ASSETS> 610,285
<CURRENT-LIABILITIES> 170,417
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> (41,236)
<TOTAL-LIABILITY-AND-EQUITY> 610,285
<SALES> 597,168
<TOTAL-REVENUES> 597,168
<CGS> 441,346
<TOTAL-COSTS> 441,346
<OTHER-EXPENSES> 140,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,571
<INCOME-PRETAX> 3,139
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 1,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,852
<EPS-BASIC> 37.04
<EPS-DILUTED> 37.04
</TABLE>
