Stater Bros 10-Q 2002 Q1 Quarterly report

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 30, 2001

OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition from ____ to ____

Commission file number 001-13222

STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)

Delaware	33-0350671
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 February 1, 2002, there were issued and outstanding
38,301 shares of the registrant’s Class A Common Stock.

1

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II — OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 2. CHANGES IN SECURITIES
	Item 3. DEFAULTS UPON SENIOR SECURITIES.
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
EXHIBIT 10.26
EXHIBIT 10.27
EXHIBIT 10.28
EXHIBIT 10.29
EXHIBIT 11

STATER BROS. HOLDINGS INC.
DECEMBER 30, 2001

INDEX

		Page
PART I	FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of September 30, 2001 and December 30, 2001	3
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 24, 2000 and December 30, 2001	5
	Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 24, 2000 and December 30, 2001	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	16
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 2.	Changes in Securities	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES		19

2

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

		Sept. 30,		Dec. 30,
		2001		2001
Current Assets
	Cash and cash equivalents	$	101,636	$	108,404
	Receivables		29,894		33,346
	Income tax receivables		358		—
	Inventories		170,189		169,310
	Prepaid expenses		6,743		8,342
	Deferred income taxes		6,634		6,634
	Properties held for sale		3,840		3,834
Total current assets			319,294		329,870
Investment in unconsolidated affiliate			12,666		13,314
Property and equipment
	Land		47,574		47,574
	Buildings and improvements		181,641		184,645
	Store fixtures and equipment		190,581		198,214
	Property subject to capital leases		24,670		24,670
			444,466		455,103
	Less accumulated depreciation and amortization		169,979		175,067
			274,487		280,036
Deferred income taxes			4,897		4,897
Deferred debt issuance costs, net			12,042		11,422
Other assets			5,908		6,553
			22,847		22,872
Total assets		$	629,294	$	646,092

See accompanying notes to unaudited consolidated financial statements.

3

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS(Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS’ DEFICIT

			Sept. 30,			Dec. 30,
			2001			2001
Current Liabilities
	Accounts payable		$	107,485		$	103,053
	Accrued payroll and related expenses			41,737			39,454
	Accrued income taxes			—			2,708
	Other accrued liabilities			44,340			60,384
	Current portion of capital lease obligations			1,435			1,313
Total current liabilities				194,997			206,912
Long-term debt				439,000			439,000
Capital lease obligations, less current portion				12,098			11,807
Long-term portion of self-insurance and other reserves				15,852			15,852
Other long-term liabilities				8,756			9,998
Total liabilities				670,703			683,569
Stockholders’ deficit
	Common Stock, $.01 par value:
		Authorized shares - 100,000
		Issued and outstanding shares - 0		—			—
	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 deficit			(54,125	)		(50,193	)
Total stockholders’ deficit				(41,409	)		(37,477	)
Total liabilities and stockholders’ deficit			$	629,294		$	646,092

See accompanying notes to unaudited consolidated financial statements.

4

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)

		13 Weeks Ended
		Dec. 24,			Dec. 30,
		2000			2001
Sales		$	624,849		$	662,587
Cost of goods sold			466,957			486,424
Gross profit			157,892			176,163
Operating expenses:
	Selling, general and administrative expenses		136,532			149,936
	Depreciation and amortization		6,928			7,504
Total operating expenses			143,460			157,440
Operating profit			14,432			18,723
Interest income			980			704
Interest expense			(12,888	)		(12,796	)
Equity in earnings from unconsolidated affiliate			482			648
Other income (loss) — net			83			(614	)
Income before income taxes			3,089			6,665
Income taxes			1,267			2,733
Net income		$	1,822		$	3,932
Earnings per share		$	36.44		$	78.64
Average common shares outstanding			50,000			50,000
Shares outstanding at end of period			50,000			50,000

See accompanying notes to unaudited consolidated financial statements.

5

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

			13 Weeks Ended
			Dec. 24,			Dec. 30,
			2000			2001
Operating activities:
Net income			$	1,822		$	3,932
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			6,928			7,504
	Provision for deferred income taxes			1,265			—
	(Gain) loss on disposals of assets			(83	)		614
	Net undistributed gain in investment in unconsolidated affiliate			(482	)		(648	)
	Changes in operating assets and liabilities:
		Decrease in lease guarantee escrow		13,180			—
		Increase in receivables		(6,182	)		(3,452	)
		Decrease in income tax receivables		263			358
		(Increase) decrease in inventories		(9,147	)		879
		Increase in prepaid expenses		(2,439	)		(1,603	)
		(Increase) decrease in other assets		31			(25	)
		Increase (decrease) in accounts payable		985			(4,432	)
		Increase in accrued income taxes		—			2,708
		Increase in accrued liabilities and long-term portion of self-insurance reserves		12,784			15,003
Net cash provided by operating activities				18,925			20,838
Investing activities:
Purchase of property and equipment				(8,118	)		(13,674	)
Proceeds from sale of property and equipment and properties held for sale				206			17
Net cash used in investing activities				(7,912	)		(13,657	)
Financing activities:
Principal payments on capital lease obligations				(667	)		(413	)
Net cash used in financing activities				(667	)		(413	)
Net increase in cash and cash equivalents				10,346			6,768
Cash and cash equivalents at beginning of period				62,631			101,636
Cash and cash equivalents at end of period			$	72,977		$	108,404
Interest paid			$	626		$	537
Income taxes paid			$	2		$	1,713

See accompanying notes to unaudited consolidated financial statements.

6

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 30, 2001

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 30, 2001 and December 30, 2001 and the results of its operations and cash flows for the thirteen weeks ended December 24, 2000 and December 30, 2001. 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 30, 2001 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 24, 2000 and December 30, 2001 consists of the following:

	13 Weeks Ended
	Dec. 24, 2000		Dec. 30, 2001
	(In thousands)
Federal income taxes	$	994	$	2,144
State income taxes		273		589
	$	1,267	$	2,733

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 $482,000 and $648,000 for the thirteen weeks ended December 24, 2000 and December 30, 2001, 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:

	13 Weeks Ended
	Dec. 24, 2000		Dec. 30, 2001
	(In thousands)
Current assets	$	21,107	$	23,508
Non-current assets		98,848		94,432
Current liabilities		25,953		24,872
Non-current liabilities		70,733		66,277
Shareholders’ equity		23,269		26,791
Sales		47,143		49,306
Gross profit		7,475		8,136
Net income	$	1,106	$	1,295

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 30, 2001

Note 4 — Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 5 — Subsequent Events

     Subsequent to quarter end, the Company obtained consent of the holders of its 10.75% Senior Notes due 2006 to make a distribution and payment to stockholders consisting of $25.0 million cash and its subordinated note in the principal amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699 shares of Stater Bros. Holdings Inc.’ stock previously held by La Cadena Investments and made a cash payment of $20.0 million and executed a $20.0 million subordinated note due March 31, 2007 to a former partner of La Cadena Investments. The subordinated note bears interest at a rate of 5.0% per annum, payable semi-annually. On February 1, 2002, the Company paid a $4.5 million dividend to La Cadena Investments. Fees for consent of the holders of its 10.75% Senior Notes and fees and expenses of the transaction, including a $500,000 financial advisory service fee to La Cadena Investments, were approximately $4.9 million.

     Subsequent to December 30, 2001, the Company redeemed $250,000 of its 10.75% Senior Notes due 2006. The Notes were restricted and unregistered. The Notes were redeemed for $250,000 plus accrued interest.

8

STATER BROS. HOLDINGS INC.
DECEMBER 30, 2001

PART I — FINANCIAL INFORMATION (contd.)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OWNERSHIP OF THE COMPANY

La Cadena Investments is 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

On May 7, 1999, Stater Bros. entered into an agreement with Albertson’s, Inc. (“Albertson’s”) to purchase 43 supermarkets and one future store site in Stater Bros.’ existing and contiguous market areas. The stores were formerly operated by Albertson’s or Lucky Stores and were divested in connection with the merger of Albertson’s and American Store Company, the parent of Lucky Stores. The purchase price was $94.4 million for land, buildings and equipment, $39.6 million for inventories on hand at closing, and the assumption of $13.3 million of capitalized lease obligations. The supermarkets were acquired sequentially over a twenty-four day period which began on August 9, 1999. Each acquired store was reopened under the Stater Bros. name within two days of its acquisition and was fully integrated into the Stater Bros. operating systems.

LEASE GUARANTEE ESCROW

As of September 24, 2000, a portion of the Company’s lease obligations were guaranteed by Petrolane Incorporated (“Petrolane”) or its successor. The leases guaranteed by Petrolane had initial terms of 20 years and expired in 2003. Lease payments for the properties subject to the Petrolane guarantees were approximately $10.0 million per year. Under the terms of the agreement related to the Company’s acquisition of Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater Bros. Markets was required to make annual deposits into a lease guarantee escrow account. In addition, 10 shares of Stater Bros. Markets $11.00 Cumulative Redeemable Preferred Stock due in 2003 were held by Petrolane in connection with the lease guarantees.

During the first quarter of fiscal 2001, Stater Bros. Markets redeemed all 10 outstanding shares of its $11.00 Cumulative Redeemable Preferred Stock due 2003 from Texas Eastern Corporation, Petrolane’s assignee of such preferred stock. The Petrolane lease guarantees were terminated in exchange for a $400,000 fee and a letter of credit was issued in favor of Texas Eastern to secure a portion of the remaining lease payments through 2003. As part of these transactions, the lease guarantee escrow account was terminated and the $13.2 million in such account was released to Stater Bros. Markets. All of the store leases that had been guaranteed by Petrolane were extended for an additional five years following expiration of their respective initial terms in 2003.

9

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth certain income statement components expressed as a percent of sales for the thirteen weeks ended December 24, 2000 and December 30, 2001.

		13 Weeks Ended
		Dec. 24, 2000			Dec. 30, 2001
Sales			100.00	%		100.00	%
Gross profit			25.27			26.59
Operating expenses:
	Selling, general and administrative expenses		21.85			22.63
	Depreciation and amortization		1.11			1.13
Operating profit			2.31			2.83
Interest income			0.16			0.11
Interest expense			(2.06	)		(1.93	)
Equity in earnings from unconsolidated affiliate			0.08			0.10
Other income (loss) — (net)			—			(0.10	)
Income before income taxes			0.49	%		1.01	%

Total sales for the thirteen weeks ended December 30, 2001, the first quarter of fiscal 2002, increased 6.0% and amounted to $662.6 million compared to $624.8 million for the same period in the prior year. The increase in total sales in the first quarter of fiscal 2002 was due primarily to continued favorable customer response to the Company’s marketing plan which emphasizes high quality, large product selections and customer service. Like store sales increased 6.0% for the thirteen-week period ended December 30, 2001. The Company operated 155 supermarkets at December 30, 2001 and December 24, 2000.

Gross profit for the thirteen weeks ended December 30, 2001, amounted to $176.2 million or 26.59% of sales compared to $157.9 million or 25.27% of sales in the same period of the prior year. The increase in the first quarter of fiscal 2002 gross profit, as a percent of sales, was due primarily to an increase in the sale of higher margin items and the effect of price increases, implemented in the second half of fiscal 2001, to offset higher utility costs.

Operating expenses include selling, general and administrative expenses and depreciation and amortization. For the thirteen weeks ended December 30, 2001, selling, general and administrative expenses amounted to $149.9 million or 22.63% of sales compared to $136.5 million or 21.85% of sales for the thirteen weeks ended December 24, 2000. The increase in selling, general and administration expenses, as a percentage of sales, in the first quarter of fiscal 2002 was due primarily to an increase in payroll related expenses and utility costs, as a percentage of sales, compared to fiscal 2001.

10

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Depreciation and amortization expenses amounted to $7.5 million for the thirteen weeks ended December 30, 2001 and amounted to $6.9 million for the like period of the prior year. The increase in depreciation and amortization expense in fiscal 2002 was primarily due to an increase in fixed assets.

Operating profit for the thirteen weeks ended December 30, 2001 amounted to $18.7 million or 2.83% of sales compared to $14.4 million or 2.31% of sales for the thirteen weeks ended December 24, 2000.

Interest expense amounted to $12.8 million for the thirteen weeks ended December 30, 2001 compared to $12.9 million for the thirteen weeks ended December 24, 2000.

The Company’s equity in earnings from unconsolidated affiliate, amounted to $648,000 for the first quarter of fiscal 2002 compared to $482,000 in the first quarter of the prior year. The increase in earnings in the first quarter of 2002 over the first quarter of 2001, was due to increased volume and improved efficiencies by Santee Dairies, LLC.

Income before income taxes amounted to $6.7 million for the thirteen weeks ended December 30, 2001 compared to $3.1 million for the thirteen weeks ended December 24, 2000.

Net income for the thirteen week first quarter ended December 30, 2001, amounted to $3.9 million compared to $1.8 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, as amended, became effective August 6, 1999 and expires in March 2003, and consists of a revolving loan facility for working capital of $50.0 million and a letter of credit facility with a maximum availability of $25.0 million. The credit agreement was amended December 13, 2001 to include a $15.0 million letter of credit sublimit. As of December 30, 2001, the Company had $30.2 million of outstanding letters of credit and had $44.8 million available under the revolving loan facility. The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements and as security for current rent obligations.

11

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth the Company’s contractual cash obligations and commercial commitments as of December 30, 2001.

	Contractual Cash Obligations (In thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Yrs.
10.75% Senior Notes due August 2006
Principal	$	439,000	$	—	$	—	$	439,000	$	—
Interest		235,963		47,193		94,385		94,385		—
		674,963		47,193		94,385		533,385		—
Capital Lease Obligations (1)
Principal		13,120		1,313		2,130		1,765		7,912
Interest		13,089		2,025		3,532		2,821		4,711
		26,209		3,338		5,662		4,586		12,623
Operating Leases (1)		209,413		29,123		48,087		37,685		94,518
Total Contractual Cash Obligations	$	910,585	$	79,654	$	148,134	$	575,656	$	107,141

	Other Commercial Commitments (In thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Yrs.
Standby Letters of Credit (2)	$	30,185	$	30,185	$	—	$	—	$	—
Total Other Commercial Commitments	$	30,185	$	30,185	$	—	$	—	$	—

⁽¹⁾ The Company leases the majority of its retail stores, offices and warehouse and distribution facilities. Certain leases provide for additional rents based on sales. Primary lease terms range from 10 to 99 years and substantially all leases provide for renewal options.

⁽²⁾ Standby letters of credit are committed as security for workers’ compensation obligations and as security for current rent obligations. Outstanding letters of credit expire between June 30, 2002 and October 1, 2002.

12

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $123.0 million at December 30, 2001 and $124.3 million at September 30, 2001, and the Company’s current ratios were 1.59:1, and 1.64:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

The net cash provided by operating activities in the thirteen weeks ended December 30, 2001 amounted to $20.8 million compared to $18.9 million for the thirteen weeks ended December 24, 2000. Fluctuations in net cash provided by operating activities are not unusual in the industry. Cash provided by operating activities in fiscal 2002 consisted of a $15.0 million increase in accrued liabilities and self-insurance reserves, $7.5 million from depreciation offset by a decrease of $4.4 million in accounts payable and a $3.5 million increase in accounts receivable. Cash provided by operating activities of $18.9 million in fiscal 2001 consisted of $13.2 million reduction in lease guarantee escrow and increases in accrued liabilities and self-insurance reserves of $12.8 million offset by increases in receivables of $6.2 million and increases in inventory of $9.1 million.

Net cash used by investing activities for the thirteen weeks ended December 30, 2001, amounted to $13.7 million, compared to $7.9 million for the thirteen weeks ended December 24, 2000. The difference in net cash used by investing activities between the comparable periods is due to the Company’s capital expenditures during these periods, net of proceeds from asset dispositions. Capital expenditures amounted to $13.7 million in the first quarter of fiscal 2002 compared to $8.1 million in the first quarter of fiscal 2001.

Net cash used by financing activities amounted to $413,000 and $667,000 for the thirteen weeks ended December 30, 2001, and December 24, 2000, respectively, and consisted of payments on the Company’s capitalized lease obligations.

Subsequent to quarter end, the Company obtained consent of the holders of its 10.75% Senior Notes due 2006 to make a distribution and payment to stockholders consisting of $25.0 million cash and its subordinated note in the principal amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699 shares of Stater Bros. Holdings Inc. stock previously held by La Cadena Investments and made a cash payment of $20.0 million and executed a $20.0 million subordinated note due March 31, 2007 to a former partner of La Cadena Investments. The subordinated note bears interest at a rate of 5.0% per annum, payable semi-annually. On February 1, 2002, the Company paid a $4.5 million dividend to La Cadena Investments. Fees for consent of the holders of its 10.75% Senior Notes and fees and expenses of the transaction, including a $500,000 financial advisory service fee to La Cadena Investments, were approximately $4.9 million.

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 credit facility with Bank of America N.A. on August 6, 1999. The credit facility, as amended December 13, 2001, provides for (i) a $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility and (iii) a “Revolving Loan Commitment L/C Sublimit” which is defined as an amount equal to the lessor of (a) the Revolving Loan Commitment and (b) $15,000,000. The Revolving Loan Commitment L/C Sublimit is part of, and not in addition to, the Revolving Loan Commitment. 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, workers’ compensation insurance obligations and security for current rent obligations. The availability of the loans and letters of credit are subject to certain sublimits 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 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 federal funds rate plus 0.50% and (b) the rate of interest publicly announced by Bank of America as its “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.25%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive interest periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Stater Bros. Markets, of one, two, three or six months.

The revolving loan facility, as amended January 18, 2002, will cease to be available and will be payable in full on March 31, 2003. Letters under the credit facility can be issued until March 31, 2003 and all letters of credit must expire no later than March 31, 2004. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.

Loans under the revolving loan facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the credit facility may be reduced by Stater Bros. Markets. Stater Bros. Markets is required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters of credit facility are subject to a fee of 1.50% per annum on the face amount of such letters of credit, payable quarterly in arrears. The Company will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letter of credit issued under the letter of credit facility.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Credit Facilities (contd.)

Availability of the loans and letters of credit under the credit facility is subject to a monthly borrowing base test based on inventory. 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. Markets.

The credit facility also contains covenants that apply to Stater Bros. Holdings Inc., and Stater Bros. Holdings Inc. is a party to the 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; judgments; 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 December 30, 2001, 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 $113.2 million and exceeded minimum inventory coverage by approximately $44.4 million. The minimum EBITDA (as defined) covenant measurement period begins (as amended) in the quarter ending June 25, 2000, and requires an annualized minimum EBITDA, as amended January 18, 2002, of $85.0 million. As of December 30, 2001, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $13.9 million.

As of December 30, 2001, for the purposes of the credit facility with Bank of America, Stater Bros. Holdings Inc. was in compliance with all restrictive covenants.

Labor Relations

The Company and other major supermarket employers in Southern California negotiated a four-year contract, beginning October 1999 and expiring 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.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EFFECT OF INFLATION AND COMPETITION

The Company’s performance is affected by inflation. In recent years the impact of inflation on the operations of the Company has been moderate. As inflation has increased expenses, the Company has recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge the Company to become more cost efficient as its ability to recover increases in expenses through price increases is diminished. The future results of operations of the Company will depend upon the ability of the Company to adapt to the current economic environment as well as the current competitive conditions.

The Company conducts business in one industry segment, the operation of retail food supermarkets, which offer for sale to the public most merchandise typically found in supermarkets. The supermarket industry is highly competitive and is characterized by low profit margins. The Company’s primary competitors include Vons, Albertson’s, Ralphs, and a number of independent supermarket operators. Competitive factors typically include the price, quality and selection of products offered for sale, customer service, and the convenience and location of retail facilities. The Company monitors competitive activity and Senior Management regularly reviews the Company’s marketing and business strategy and periodically adjusts them to adapt to changes in the Company’s primary trading area.

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained in the Company’s filings with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) includes statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, expansion and other activities of competitors, changes in federal or state laws and the administration of such laws and the general condition of the economy.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

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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 “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Form 10-K for the fiscal year ended September 30, 2001.

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

Subsequent to December 30, 2001, the Company redeemed $250,000 of its 10.75% Senior Notes due 2006. The Notes were restricted and unregistered. The Notes were redeemed for $250,000 plus accrued interest.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibits are as follows:

EXHIBIT NO.	DESCRIPTION
10.26	First Amendment dated September 15, 2000 to the Credit Agreement dated as of August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc. and Bank of America, N.A.
10.27	Second Amendment dated December 13, 2001 to the Credit Agreement dated as of August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc. and Bank of America, N.A.
10.28	Third Amendment dated January 18, 2002 to the Credit Agreement dated as of August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc. and Bank of America, N.A.

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Item 6. EXHIBITS AND REPORTS ON FORM 8-K (cont’d.)

(a) Exhibits (cont’d.)

10.29		Subordinated Note for $20,000,000 dated January 22, 2002 between the Company and H. Harrison Lightfoot with an interest rate of 5% due March 31, 2007.
11		Calculation of Earnings Per Common Share.
	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.

	/s/        Jack H. Brown
Date: February 12, 2002	Jack H. Brown Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
	/s/        Phillip J. Smith
Date: February 12, 2002	Phillip J. Smith Senior Vice President and Chief Financial Officer (Chief Accounting Officer)

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