Stater Bros 10-Q 2002 Q2 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 March 31, 2002

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 April 30, 2002, there were issued and outstanding
38,301 shares of the registrant’s Class A Common Stock.

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 AND USE OF PROCEEDS
	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

STATER BROS. HOLDINGS INC.
MARCH 31, 2002

INDEX

PART I	FINANCIAL INFORMATION (Unaudited)	Page
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of September 30, 2001 and March 31, 2002		3
	Consolidated Statements of Income (Unaudited) for the 26 weeks ended March 25, 2001 and March 31, 2002		5
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended March 25, 2001 and March 31, 2002		6
	Consolidated Statements of Cash Flows (Unaudited) for the 26 weeks ended March 25, 2001 and March 31, 2002		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

2

PART I — FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS

(Unaudited)
(In thousands)

ASSETS

		Sept. 30,		Mar. 31,
		2001		2002
Current assets
	Cash and cash equivalents	$	101,636	$	74,641
	Receivables		29,894		30,768
	Income tax receivables		358		681
	Inventories		170,189		165,773
	Prepaid expenses		6,743		8,696
	Deferred income taxes		6,634		6,634
	Properties held for sale		3,840		3,828
Total current assets			319,294		291,021
Investment in unconsolidated affiliate			12,666		14,689
Property and equipment
	Land		47,574		47,574
	Buildings and improvements		181,641		187,932
	Store fixtures and equipment		190,581		199,350
	Property subject to capital leases		24,670		24,670
			444,466		459,526
	Less accumulated depreciation and amortization		169,979		179,353
			274,487		280,173
Deferred income taxes			4,897		4,897
Deferred debt issuance costs, net			12,042		15,646
Other assets			5,908		6,608
			22,847		27,151
Total assets		$	629,294	$	613,034

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,			Mar. 31,
			2001			2002
Current liabilities
	Accounts payable		$	107,485		$	97,819
	Accrued payroll and related expenses			41,737			41,474
	Other accrued liabilities			44,340			51,578
	Current portion of capital lease obligations			1,435			1,253
Total current liabilities				194,997			192,124
Long-term debt				439,000			458,750
Capital lease obligations, less current portion				12,098			11,518
Long-term portion of self-insurance and other reserves				15,852			15,852
Other long-term liabilities				8,756			12,474
Total liabilities				670,703			690,718
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 at Sept. 30, 2001, 38,301 at March 31, 2002		1			—
	Additional paid-in capital			12,715			9,740
	Retained deficit			(54,125	)		(87,424	)
Total stockholders’ deficit				(41,409	)		(77,684	)
Total liabilities and stockholders’ deficit			$	629,294		$	613,034

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)

		26 Weeks Ended
		Mar. 25,			Mar. 31,
		2001			2002
Sales		$	1,237,154		$	1,316,800
Cost of goods sold			923,592			967,824
Gross profit			313,562			348,976
Operating expenses:
	Selling, general and administrative expenses		271,542			295,593
	Depreciation and amortization		13,908			15,184
Total operating expenses			285,450			310,777
Operating profit			28,112			38,199
Interest income			1,904			1,026
Interest expense			(25,659	)		(25,997	)
Equity in earnings from unconsolidated affiliate			958			2,023
Other income (loss) — net			79			(1,309	)
Income before income taxes			5,394			13,942
Income taxes			2,212			5,716
Net income		$	3,182		$	8,226
Earnings per share		$	63.64		$	180.28
Average common shares outstanding			50,000			45,629
Shares outstanding at end of period			50,000			38,301

See accompanying notes to unaudited consolidated financial statements.

5

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)

		13 Weeks Ended
		Mar. 25,			Mar. 31,
		2001			2002
Sales		$	612,305		$	654,213
Cost of goods sold			456,635			481,400
Gross profit			155,670			172,813
Operating expenses:
	Selling, general and administrative expenses		135,010			145,657
	Depreciation and amortization		6,980			7,680
Total operating expenses			141,990			153,337
Operating profit			13,680			19,476
Interest income			924			322
Interest expense			(12,771	)		(13,201	)
Equity in earnings from unconsolidated affiliate			476			1,375
Other loss — net			(4	)		(695	)
Income before income taxes			2,305			7,277
Income taxes			945			2,983
Net income		$	1,360		$	4,294
Earnings per share		$	27.20		$	104.08
Average common shares outstanding			50,000			41,258
Shares outstanding at end of period			50,000			38,301

See accompanying notes to unaudited consolidated financial statements.

6

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

			26 Weeks Ended
			Mar. 25,			Mar. 31,
			2001			2002
Operating activities:
Net income			$	3,182		$	8,226
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			13,908			15,184
	Provision for deferred income taxes			2,207			—
	(Gain) loss on disposals of assets			(79	)		1,309
	Net undistributed gain in investment in unconsolidated affiliate			(958	)		(2,023	)
	Changes in operating assets and liabilities:
		Decrease in lease guarantee escrow		13,180			—
		Increase in receivables		(3,107	)		(874	)
		(Increase) decrease in income tax receivables		263			(323	)
		Decrease in inventories		1,591			4,416
		Increase in prepaid expenses		(3,645	)		(1,963	)
		Decrease in other assets		765			729
		Decrease in accounts payable		(4,266	)		(9,666	)
		Increase in accrued liabilities and long-term portion of self-insurance reserves		4,387			10,693
Net cash provided by operating activities				27,428			25,708
Investing activities:
Purchase of property and equipment				(17,967	)		(22,208	)
Proceeds from sale of property and equipment and properties held for sale				223			50
Net cash used in investing activities				(17,744	)		(22,158	)
Financing activities:
Debt issuance cost				—			(5,033	)
Stock redemption				—			(20,000	)
Dividends paid				—			(4,500	)
Principal payments on long-term debt				(5,048	)		(250	)
Principal payments on capital lease obligations				(1,148	)		(762	)
Net cash used in financing activities				(6,196	)		(30,545	)
Net increase (decrease) in cash and cash equivalents				3,488			(26,995	)
Cash and cash equivalents at beginning of period				62,631			101,636
Cash and cash equivalents at end of period			$	66,119		$	74,641
Interest paid			$	25,107		$	25,009
Income taxes paid			$	5		$	6,039

See accompanying notes to unaudited consolidated financial statements.

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
MARCH 31, 2002

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 March 31, 2002 and the results of its operations and cash flows for the twenty-six and thirteen weeks ended March 25, 2001 and March 31, 2002. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s latest annual report filed on Form 10-K. The operating results for the twenty-six and thirteen weeks ended March 31, 2002 are not necessarily indicative of the results of operations for a full year.

Note 2 — Income Taxes

     The provision for income taxes for the twenty-six weeks ended March 25, 2001 and March 31, 2002 consists of the following:

	26 Weeks Ended
	Mar. 25, 2001		Mar. 31, 2002
	(In thousands)
Federal income taxes	$	1,735	$	4,484
State income taxes		477		1,232
	$	2,212	$	5,716

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 $958,000 and $2.0 million for the twenty-six weeks ended March 25, 2001 and March 31, 2002, 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:

	26 Weeks Ended
	Mar. 25, 2001		Mar. 31, 2002
	(In thousands)
Current assets	$	19,216	$	25,579
Non-current assets		97,328		93,330
Current liabilities		23,148		23,987
Non-current liabilities		69,316		65,383
Shareholder’s equity		24,080		29,539
Sales		93,529		94,295
Gross profit		15,097		23,114
Net income	$	1,916	$	4,043

8

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2002

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 — Stock Redemption

     During the second quarter of fiscal 2002, 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 in cash and a subordinated note in the principal amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699 shares of the Company’s 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 $5.0 million.

Note 6 — Redemption of Notes

     During the second quarter of fiscal 2002, 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.

Note 7 — New Accounting Pronouncement

     Effective January 1, 2002, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(FAS 144), which supersedes prior accounting standards concerning the financial accounting and reporting for the impairment or the disposal of long-lived assets and for the disposition of a segment of a business. The adoption of FAS 144 did not have an effect on the Company’s results of operations or financial condition and is effective for fiscal years beginning after December 15, 2001.

9

STATER BROS. HOLDINGS INC.
MARCH 31, 2002

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 a former member of senior management of the Company. Jack H. Brown has a majority interest in La Cadena Investments and is the managing general partner with the power to vote the shares of the Company held by La Cadena Investments.

ACQUISITION

On May 7, 1999, Stater Bros. Markets entered into an agreement with Albertson’s, Inc. (“Albertson’s”) to purchase 43 supermarkets and one future store site in Stater Bros. Markets’ 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. Markets’ name within two days of its acquisition and was fully integrated into the Stater Bros. Markets 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 were to expire 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 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.

10

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 and twenty-six weeks ended March 31, 2002 and March 25, 2001.

		Thirteen Weeks						Twenty-Six Weeks
		2002			2001			2002			2001
Sales			100.00	%		100.00	%		100.00	%		100.00	%
Gross profit			26.42			25.42			26.50			25.34
Operating expenses:
	Selling, general and administrative expenses		22.27			22.05			22.45			21.95
	Depreciation and amortization		1.17			1.14			1.15			1.12
Operating profit			2.98			2.23			2.90			2.27
Interest income			0.05			0.15			0.08			0.15
Interest expense			(2.02	)		(2.09	)		(1.97	)		(2.07	)
Equity in unconsolidated affiliate			0.21			0.08			0.15			0.08
Other income (loss) — (net)			(0.11	)		—			(0.10	)		0.01
Net income before income taxes			1.11	%		0.37	%		1.06	%		0.44	%

Total sales for the thirteen weeks ended March 31, 2002, the second quarter of fiscal 2002, increased 6.84% and amounted to $654.2 million compared to $612.3 million for the same period in the prior year. Total sales for the twenty-six weeks ended March 31, 2002, increased 6.44% and amounted to $1.317 billion compared to $1.237 billion for the same period in the prior year. The increase in total sales in the second quarter of fiscal 2002 and fiscal year to date of 2002 was due primarily to favorable customer response to the Company’s marketing plan, which emphasizes high quality, large product selections and customer service. Like store sales increased 6.84% and 6.44% for the thirteen-week and twenty-six week periods ended March 31, 2002, respectively. The Company operated 155 supermarkets at March 31, 2002 and March 25, 2001.

Gross profit for the thirteen weeks ended March 31, 2002, amounted to $172.8 million or 26.42% of sales compared to $155.7 million or 25.42% of sales in the same period of the prior year. Gross profit for the twenty-six weeks ended March 31, 2002, amounted to $349.0 million or 26.50% of sales compared to $313.6 million or 25.34% of sales in the same period of the prior year. The increase in gross profit, as a percentage of sales, in both the second quarter of 2002 and for the fiscal year to date of 2002, was due primarily to an increase in the sales of higher margin items and the effect of price increases, implemented in the second half of fiscal 2001, to offset higher utility costs.

11

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

RESULTS OF OPERATIONS (contd.)

Operating expenses include selling, general and administrative expenses, and depreciation and amortization. For the thirteen weeks ended March 31, 2002, selling, general and administrative expenses amounted to $145.7 million or 22.27% of sales compared to $135.0 million or 22.05% of sales for the thirteen weeks ended March 25, 2001. For the twenty-six weeks ended March 31, 2002, selling, general and administrative expenses amounted to $295.6 million or 22.45% of sales compared to $271.5 million or 21.95% of sales for the twenty-six weeks ended March 25, 2001. The increase in selling, general and administrative expenses as a percentage of sales during the second quarter of fiscal 2002 and for the year to date of fiscal 2002, was due primarily to increases in payroll related expenses.

Depreciation and amortization expenses amounted to $7.7 million and $15.2 million for the second quarter and year to date periods ended March 31, 2002, respectively. Depreciation and amortization expenses amounted to $7.0 million and $13.9 million for the quarter and year to date periods of the prior year. The increase in depreciation and amortization expense in fiscal 2002 was primarily due to the increase in fixed assets.

Operating profit for the second quarter of 2002 amounted to $19.5 million or 2.98% of sales compared to $13.7 million or 2.23% of sales for the second quarter of 2001. Operating profit for the fiscal year to date of 2002 amounted to $38.2 million or 2.90% of sales compared to $28.1 million or 2.27% of sales for the fiscal year to date of 2001.

Interest expense amounted to $13.2 million for the second quarter of 2002 compared to $12.8 million for the second quarter of 2001. For the fiscal year to date of 2002 and 2001, interest expense amounted to $26.0 million and $25.7 million, respectively. The increase in interest expense over the prior year was primarily due to the issuance of a $20.0 million subordinated note in connection with the redemption of the Company’s stock.

The Company’s equity in earnings from unconsolidated affiliate, amounted to $1.4 million for the second quarter of fiscal 2002 compared to $476,000 in the second quarter of the prior year. For the fiscal year to date periods of 2002 and 2001, the Company’s equity in earnings from unconsolidated affiliate amounted to $2.0 million and $958,000, respectively. The difference in equity in earnings from unconsolidated affiliate for both the quarter and year to date fiscal 2002 versus fiscal 2001, is due primarily to the revaluation, by the affiliate, of deferred tax benefits arising from past net operating losses.

Income before income taxes amounted to $7.3 million and $2.3 million for the second quarter of 2002 and 2001, respectively. Income before income taxes amounted to $13.9 million and $5.4 million for the twenty-six weeks year to date periods of 2002 and 2001, respectively.

Net income for the second quarter amounted to $4.3 million and $1.4 million for 2002 and 2001, respectively. Net income for the fiscal year to date periods amounted to $8.2 million and $3.2 million for 2002 and 2001, respectively.

12

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

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically 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 sub-limit. As of March 31, 2002, the Company had $30.2 million of outstanding letters of credit and had $44.8 million available under the revolving loan facility. As of March 31, 2002, and for the twenty-six weeks then ended, the Company had no outstanding balances and had not drawn down on 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.

The following table sets forth the Company’s contractual cash obligations and commercial commitments as of March 31, 2002.

	Contractual Cash Obligations (In thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
10.75% Senior Notes due August 2006
Principal	$	438,750	$	—	$	—	$	438,750	$	—
Interest		212,125		47,139		94,278		70,708		—
		650,875		47,139		94,278		509,458		—
5.0% Subordinated Note due March 2007
Principal		20,000		—		—		20,000		—
Interest		5,000		1,000		2,000		2,000		—
		25,000		1,000		2,000		22,000		—
Capital Lease Obligations(1)
Principal		12,771		1,253		2,090		1,739		7,689
Interest		12,566		1,981		3,440		2,747		4,398
		25,337		3,234		5,530		4,486		12,087
Operating Leases(1)		205,320		29,683		47,789		38,295		89,553
Total Contractual Cash Obligations	$	906,532	$	81,056	$	149,597	$	574,239	$	101,640

	Other Commercial Commitments (In thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
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, warehouses 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.

13

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 $98.9 million at March 31, 2002 and $124.3 million at September 30, 2001, and the Company’s current ratios were 1.51:1, and 1.64:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash provided by operating activities in the twenty-six weeks ended March 31, 2002 amounted to $25.7 million compared to $27.4 million for the twenty-six weeks ended March 25, 2001. Fluctuations in net cash provided by operating activities is not unusual in the industry. Cash provided by operating activities in fiscal 2002 of $25.7 million consisted of a $10.7 million increase in accrued liabilities and self-insurance reserves, a decrease of $4.4 million in inventory and $15.2 million of depreciation offset by a decrease in accounts payable of $9.7 million. Cash provided by operating activities in fiscal 2001 of $27.4 million consisted of a decrease in lease guarantee escrow of $13.2 million and $13.9 million of depreciation offset by an increase of $3.6 million in prepaid expenses, an increase of $3.1 million in receivables and a decrease of $4.3 million in accounts payable.

Net cash used in investing activities for the twenty-six weeks ended March 31, 2002, amounted to $22.2 million compared to $17.7 million for the twenty-six weeks ended March 25, 2001. 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 disposals. Capital expenditures amounted to $22.2 million in the fiscal year to date of 2002 compared to $18.0 million in the fiscal year to date of 2001.

Net cash used by financing activities amounted to $30.5 million and $6.2 million for the twenty-six weeks ended March 31, 2002 and March 25, 2001, respectively. The $30.5 million cash used in financing activities in fiscal 2002 included the redemption of 11,699 shares of the Company’s stock previously held by La Cadena Investments, for $20 million in cash and the issuance of a $20.0 million subordinated note, which bears interest at a rate of 5.0% per annum, payable semi-annually; $4.5 million for the payment of a dividend to La Cadena Investments; and fees of approximately $5.0 million for the 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. The Company redeemed $250,000 of its 10.75% Senior Notes due 2006 for $250,000 plus accrued interest. These Notes were restricted and unregistered. The remaining financing activities in the current and prior year was for principal payment of long-term debt and payments on capital lease obligations.

The Credit Facilities

The Company’s 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 31, 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.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

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 of credit 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 will be 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 under the 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 letters of credit issued under the letter of credit facility.

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 the Company and the Company 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 the Company’s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by the Company. The credit facility requires the Company and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal identities remain separate.

15

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

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 March 31, 2002, for purposes of the credit facility with Bank of America, the Company was in compliance with all restrictive covenants and exceeded the minimum net worth covenant by approximately $69.2 million and exceeded minimum inventory coverage by approximately $44.4 million. The minimum EBITDA (as defined) covenant measurement period began (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 March 31, 2002, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $19.8 million.

As of March 31, 2002, for purposes of the credit facility with Bank of America, the Company 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.

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.

16

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

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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STATER BROS. HOLDINGS INC.
MARCH 31, 2002

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 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
	None
(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: May 14, 2002	/s/                    Jack H. Brown Jack H. Brown Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Date: May 14, 2002	/s/                    Phillip J. Smith Phillip J. Smith Senior Vice President and Chief Financial Officer (Chief Accounting Officer)

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