Stater Bros 10-Q 2001 Q3 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 June 24, 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 July 24, 2001, there were issued and outstanding 50,000 shares of the registrant’s Class A Common Stock.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS (Unaudited) as of September 24, 2000 and June 24, 2001
		CONSOLIDATED STATEMENTS OF INCOME (Unaudited) for the 39 weeks ended June 25, 2000 and June 24, 2001
		CONSOLIDATED STATEMENTS OF INCOME (Unaudited) for the 13 weeks ended June 25, 2000 and June 24, 2001
		CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) for the 39 weeks ended June 25, 2000 and June 24, 2001
		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
EXHIBIT 11

STATER BROS. HOLDINGS INC.
JUNE 24, 2001

INDEX

		Page
PART I	FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of September 24, 2000 and June 24, 2001	3
	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 25, 2000 and June 24, 2001	5
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 25, 2000 and June 24, 2001	6
	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 25, 2000 and June 24, 2001	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	16
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 2.	Changes in Securities and Use of Proceeds	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		18

2

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

		Sept. 24,		June 24,
		2000		2001
Current assets
	Cash and cash equivalents	$	62,631	$	91,363
	Lease guarantee escrow		13,180		—
	Receivables		28,181		34,009
	Income tax receivables		263		—
	Inventories		165,332		164,997
	Prepaid expenses		5,337		6,684
	Deferred income taxes		10,776		6,992
	Properties held for sale		3,863		3,846
Total current assets			289,563		307,891
Investment in unconsolidated affiliate			11,082		12,255
Property and equipment
	Land		47,574		47,574
	Buildings and improvements		169,584		179,310
	Store fixtures and equipment		172,465		186,031
	Property subject to capital leases		25,261		24,670
			414,884		437,585
	Less accumulated depreciation and amortization		144,370		163,246
			270,514		274,339
Deferred income taxes			3,676		3,676
Deferred debt issuance costs, net			14,569		12,710
Other assets			5,884		5,760
			24,129		22,146
Total assets		$	595,288	$	616,631

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’ EQUITY (DEFICIT)

			Sept. 24,			June 24,
			2000			2001
Current liabilities
	Accounts payable		$	100,777		$	99,728
	Accrued payroll and related expenses			35,385			42,121
	Other accrued liabilities			34,637			51,652
	Current portion of capital lease obligations and long-term debt			6,994			1,571
Total current liabilities				177,793			195,072
Long-term debt, less current portion				439,000			439,000
Capital lease obligations, less current portion				13,679			12,429
Long-term portion of self-insurance and other reserves				9,875			9,875
Other long-term liabilities				4,195			4,058
Total liabilities				644,542			660,434
Stockholders’ equity (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 earnings (deficit)			(61,970	)		(56,519	)
Total stockholders’ equity (deficit)				(49,254	)		(43,803	)
Total liabilities and stockholders’ equity (deficit)			$	595,288		$	616,631

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)

		39 Weeks Ended
		June 25,			June 24,
		2000			2001
Sales		$	1,811,754		$	1,877,079
Cost of goods sold			1,366,738			1,397,398
Gross profit			445,016			479,681
Operating expenses:
	Selling, general and administrative expenses		398,448			414,528
	Depreciation and amortization		18,887			21,102
	Acquisition integration expenses		4,594			—
Total operating expenses			421,929			435,630
Operating profit			23,087			44,051
Interest income			2,190			2,597
Interest expense			(40,508	)		(38,506	)
Equity in earnings from unconsolidated affiliate			1,081			1,173
Other loss — net			(3	)		(75	)
Income (loss) before income taxes (benefit) and extraordinary gain			(14,153	)		9,240
Income taxes (benefit)			(5,803	)		3,789
Net income (loss) before extraordinary gain			(8,350	)		5,451
Extraordinary gain from early retirement of bonds ($1,896 less tax effect of $773)			1,123			—
Net income (loss)		$	(7,227	)	$	5,451
Earnings (loss) per share:
	Before extraordinary gain	$	(167.00	)	$	109.02
	Extraordinary gain		22.46			—
Earnings (loss) per share		$	(144.54	)	$	109.02
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 INCOME

(Unaudited)
(In thousands, except per share and share amounts)

		13 Weeks Ended
		June 25,			June 24,
		2000			2001
Sales		$	607,300		$	639,925
Cost of goods sold			454,797			473,806
Gross profit			152,503			166,119
Operating expenses:
	Selling, general and administrative expenses		132,381			142,986
	Depreciation and amortization		6,556			7,194
Total operating expenses			138,937			150,180
Operating profit			13,566			15,939
Interest income			485			693
Interest expense			(13,378	)		(12,847	)
Equity in earnings from unconsolidated affiliate			601			215
Other loss — net			(2	)		(154	)
Income before income taxes and extraordinary gain			1,272			3,846
Income taxes			521			1,577
Net income before extraordinary gain			751			2,269
Extraordinary gain from early retirement of bonds ($1,896 less tax effect of $773)			1,123			—
Net income		$	1,874		$	2,269
Earnings per share:
	Before extraordinary gain	$	15.02		$	45.38
	Extraordinary gain		22.46			—
Earnings per share		$	37.48		$	45.38
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.

6

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

			39 Weeks Ended
			June 25,			June 24,
			2000			2001
Operating activities:
Net income (loss)			$	(7,227	)	$	5,451
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization			18,887			21,102
	Provision for deferred income taxes			(7,243	)		3,784
	Gain on repurchase of bonds			(1,896	)		—
	Loss on disposals of assets			2			75
	Net undistributed gain in investment in unconsolidated affiliate			(1,081	)		(1,173	)
	Changes in operating assets and liabilities:
		Decrease in lease guarantee escrow		—			13,180
		(Increase) decrease in receivables		2,557			(5,828	)
		Decrease in income tax receivables		—			263
		(Increase) decrease in inventories		(4,208	)		335
		Increase in prepaid expenses		(2,409	)		(1,363	)
		(Increase) decrease in other assets		(832	)		1,983
		Decrease in accounts payable		(7,322	)		(1,049	)
		Increase in accrued liabilities and long-term portion of self-insurance reserves		11,728			23,614
Net cash provided by operating activities				956			60,374
Investing activities:
Purchase of property and equipment				(32,520	)		(25,199	)
Proceeds from sale of property and equipment and properties held for sale				—			230
Net cash used in investing activities				(32,520	)		(24,969	)
Financing activities:
Purchase of bonds				(8,720	)		—
Principal payments on long-term debt				—			(5,048	)
Principal payments on capital lease obligations				(1,456	)		(1,625	)
Net cash used in financing activities				(10,176	)		(6,673	)
Net increase (decrease) in cash and cash equivalents				(41,740	)		28,732
Cash and cash equivalents at beginning of period				93,352			62,631
Cash and cash equivalents at end of period			$	51,612		$	91,363
Interest paid			$	28,148		$	25,691
Income taxes paid			$	(704	)	$	5

See accompanying notes to unaudited consolidated financial statements.

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 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 24, 2000 and June 24, 2001 and the results of its operations and cash flows for the thirty-nine weeks ended June 25, 2000 and June 24, 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 thirty-nine weeks ended June 24, 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 thirty-nine weeks ended June 25, 2000 and June 24, 2001 consists of the following:

	39 Weeks Ended
	June 25, 2000			June 24, 2001
	(In thousands)
Federal income taxes (benefit)	$	(4,552	)	$	2,972
State income taxes (benefit)		(1,251	)		817
	$	(5,803	)	$	3,789

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 $1.1 million and $1.2 million for the thirty-nine weeks ended June 25, 2000 and June 24, 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:

	39 Weeks Ended
	June 25, 2000		June 24, 2001
	(In thousands)
Current assets	$	15,013	$	23,578
Non-current assets		102,066		96,208
Current liabilities		22,070		26,621
Non-current liabilities		73,650		68,492
Shareholder’s equity		21,359		24,673
Sales		133,561		140,785
Gross profit		21,562		22,674
Net income	$	1,719	$	2,345

8

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 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.

9

STATER BROS. HOLDINGS INC.
JUNE 24, 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 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 thirty-nine weeks ended June 24, 2001 and June 25, 2000.

		Thirteen Weeks						Thirty-nine Weeks
		2001			2000			2001			2000
Sales			100.00	%		100.00	%		100.00	%		100.00	%
Gross profit			25.96			25.11			25.55			24.56
Operating expenses:
	Selling, general and administrative expense		22.35			21.80			22.08			21.99
	Depreciation and amortization		1.12			1.08			1.12			1.04
	Acquisition integration expenses		—			—			—			.25
Operating profit			2.49			2.23			2.35			1.28
Interest income			.11			.08			.14			.12
Interest expense			(2.01	)		(2.20	)		(2.05	)		(2.24	)
Equity in unconsolidated affiliate			.03			.10			.06			.06
Other income (loss) — (net)			(.02	)		—			(.01	)		—
Net income (loss) before income taxes (benefit) and extraordinary gain			.60	%		0.21	%		.49	%		(0.78	)%

Total sales for the thirteen weeks ended June 24, 2001, the third quarter of fiscal 2001, increased 5.4% and amounted to $639.9 million compared to $607.3 million for the same period in the prior year. Total sales for the thirty-nine weeks ended June 24, 2001, increased 3.6% and amounted to $1.877 billion compared to $1.812 billion for the same period in the prior year. The increase in total sales in the third quarter of fiscal 2001 and fiscal year to date of 2001 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 5.4% and 3.6% for the thirteen week and thirty-nine week periods ended June 24, 2001, respectively. The Company operated 155 supermarkets at June 24, 2001 and June 25, 2000.

Gross profit for the thirteen weeks ended June 24, 2001, amounted to $166.1 million or 25.96% of sales compared to $152.5 million or 25.11% of sales in the same period of the prior year. The increase in gross profit, as a percentage of sales, in the third quarter of 2001, was attributed to the introduction of higher margin general merchandise products and a company-wide merchandising effort to offset increased energy costs within the State of California. Gross profit for the thirty-nine weeks ended June 24, 2001, amounted to $479.7 million or 25.55% of sales compared to $445.0 million or 24.56% of sales in the same period of the prior year. The increase in the fiscal year to date of 2001 gross profit, as a percent of sales, was due to several factors including a company-wide merchandising effort to offset increased energy costs within the State of California, the continued expanded selection of perishable products, a continued emphasis on private label brand products and the Company’s general merchandise expansion program.

11

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

Operating expenses include selling, general and administrative expenses, depreciation and amortization, and acquisition integration expenses. For the thirteen weeks ended June 24, 2001, selling, general and administrative expenses amounted to $143.0 million or 22.35% of sales compared to $132.4 million or 21.80% of sales for the thirteen weeks ended June 25, 2000. For the thirty-nine weeks ended June 24, 2001, selling, general and administrative expenses amounted to $414.5 million or 22.08% of sales compared to $398.4 million or 21.99% of sales for the thirty-nine weeks ended June 25, 2000. The increase in selling, general and administrative expenses as a percentage of sales during the quarter reflects the effect of increased utility costs implemented within the State of California. The Company believes it has taken actions to minimize the effects of these increases in the future; however, the full financial impact of current and future increases in utility costs cannot be determined and may be significant.

Depreciation and amortization expenses amounted to $7.2 million and $21.1 million for the third quarter and year to date periods ended June 24, 2001, respectively. Depreciation and amortization expenses amounted to $6.6 million and $18.9 million for the quarter and year to date periods of the prior year. The increase in depreciation and amortization expense in fiscal 2001 was primarily due to the increase in fixed assets, much of which was related to the remodels of the acquired stores.

Acquisition integration expenses amounted to $4.6 million for the year to date period ended June 25, 2000 and were related to the acquisition of the 43 supermarkets. There were no acquisition integration expenses for the year to date period ended June 24, 2001. Acquisition integration expenses consisted of salaries and wages and non-recurring advertising expenses incurred during the integration of the supermarkets and the grand re-openings of service meat departments in most of the acquired supermarkets.

Operating profit for the third quarter of 2001 amounted to $15.9 million or 2.49% of sales compared to $13.6 million or 2.23% of sales for the third quarter of 2000. Operating profit for the fiscal year to date of 2001 amounted to $44.1 million or 2.35% of sales compared to an operating profit of $23.1 million or 1.28% of sales for the fiscal year to date of 2000.

Interest expense amounted to $12.8 million for the third quarter of 2001 compared to $13.4 million for the third quarter of 2000. For the fiscal year to date of 2001 and 2000, interest expense amounted to $38.5 million and $40.5 million, respectively. The decrease in interest expense was primarily due to the redemption (in the third quarter of fiscal 2000) of $11 million of the 10.75% Senior Notes due 2006, the maturity and redemption of the remaining $5 million of the 11.00% Notes (in the second quarter of fiscal 2001) and the capitalization of interest expense attributed to the construction of a replacement store.

The Company’s equity in earnings from unconsolidated affiliate, amounted to $215,000 for the third quarter of fiscal 2001 compared to $601,000 in the third quarter of the prior year. For the fiscal year to date periods of 2001 and 2000, the Company’s equity in earnings from unconsolidated affiliate amounted to $1.2 million and $1.1 million, respectively.

Results before income taxes and extraordinary gain amounted to income of $3.8 million and $1.3 million for the third quarter of 2001 and 2000, respectively. Results before income taxes and extraordinary gain amounted to income of $9.2 million and a

12

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

loss of $14.2 million for the thirty-nine week year to date periods of 2001 and 2000, respectively.

The Company realized an extraordinary gain of $1.1 million ($1.9 million less tax effect of $0.8 million) in the third quarter of fiscal 2000 associated with the early retirement of $11 million of 10.75% Senior Notes due 2006.

Net income for the third quarter amounted to $2.3 million and $1.9 million for 2001 and 2000, respectively. Net income for the fiscal year to date periods amounted to $5.5 million and a net loss of $7.2 million for 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. The Company’s credit agreement became effective August 6, 1999 and expires in August 2002, and consists of a revolving loan facility for working capital of $50.0 million, all of which was available at June 24, 2001 and a letter of credit facility with a maximum availability of $25.0 million, of which $8.2 million was available at June 24, 2001. 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.

Working capital amounted to $112.8 million at June 24, 2001 and $111.8 million at September 24, 2000, and the Company’s current ratios were 1.58:1, and 1.63:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

The net cash provided by operating activities in the thirty-nine weeks ended June 24, 2001 amounted to $60.4 million compared to $1.0 million for the thirty-nine weeks ended June 25, 2000. Fluctuations in net cash provided by operating activities are not unusual in the industry. Cash provided by operating activities in fiscal 2001 of $60.4 million consisted of an increase in accrued liabilities and self-insurance reserves of $23.6 million, a decrease in other assets of $2.0 million, an increase in accounts receivable of $5.8 million and a decrease in lease guarantee escrow of $13.2 million.

Net cash used in investing activities for the thirty-nine weeks ended June 24, 2001, amounted to $25.0 million compared to $32.5 million for the thirty-nine weeks ended June 25, 2000. 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 $25.2 million in the fiscal year to date of 2001 compared to $32.5 million in the fiscal year to date of 2000. The higher level of capital expenditures in the prior year was due primarily to additional remodeling expenditures in the 43 acquired supermarkets.

Net cash used by financing activities amounted to $6.7 million and $10.2 million for the thirty-nine weeks ended June 24, 2001 and June 25, 2000, respectively, and consisted of payments on the Company’s capitalized lease obligations and principal payments on long-term debt, and the repurchase of bonds in the third quarter of fiscal 2000.

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 provides for

13

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

(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, workmen’s compensation insurance obligations and security for current rent 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” or (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 revolving loan facility will cease to be available and will be payable in full on August 6, 2002. Letters under the credit facility can be issued until August 6, 2002 and all letters of credit must expire no later than August 6, 2003. 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. For purposes of that fee, commercial letters of credit will not constitute outstanding standby letters of credit issued under the letter of credit facility equal to 1.25% per annum on the face amount of such letters of credit, and 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.

Availability of the loans and letters of credit facility is subject to a monthly borrowing 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.

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

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

of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by Stater Bros. Holdings Inc. The credit facility requires Stater Bros. Holdings Inc. and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal identities remain separate.

The credit facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment; defaults; invalidity of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of control.

As of June 24, 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 $108.4 million and exceeded minimum inventory coverage by approximately $57.4 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 of $75.0 million. As of June 24, 2001, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $15.4 million.

The Company was in compliance with all restrictive covenants for the purpose of the credit facility with Bank of America.

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.

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.

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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.
JUNE 24, 2001

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 24, 2000.

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:

EXHIBIT NO.	DESCRIPTION
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.

Date:	July 31, 2001	/s/ Jack H. Brown
		Jack H. Brown Chairman of the Board, President, and Chief Executive Officer

Date:	July 31, 2001	/s/ Phillip J. Smith
		Phillip J. Smith Senior Vice President and Chief Financial Officer (Chief Accounting Officer)

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