As filed with the Securities and Exchange Commission on August 20, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Stater Bros. Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 5411 33-0350671
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
21700 Barton Road
Colton, California 92324
(909) 783-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JACK H. BROWN
Stater Bros. Holdings Inc.
21700 Barton Road
Colton, California 92324
(909) 783-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
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Copies to:
ANDREW E. BOGEN, ESQ.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
(213) 229-7000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the exchange offer pursuant to the registration rights agreement
described in the enclosed prospectus have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class of Amount Maximum Maximum Amount of
Securities to be to be Offering Price Aggregate Registration
Registered Registered Per Security Offering Price(1) Fee(1)
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10 3/4% Senior Notes due
2006.................. $450,000,000 100% $450,000,000 $125,100
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(f) of the Securities Act of 1933, as amended.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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Subject to Completion Dated August 20, 1999
PROSPECTUS
$450,000,000
Stater Bros. Holdings Inc.
[LOGO OF STATER BROS.]
Offer to Exchange its 10 3/4% Senior Notes due 2006
Which Have Been Registered Under the Securities Act of 1933
for
Any and All of its Outstanding
10 3/4% Senior Notes due 2006
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1999, UNLESS EXTENDED
Stater Bros. Holdings Inc. is offering to exchange its 10 3/4% Senior Notes
due 2006, which have been registered under the Securities Act of 1933, as
amended, for any and all of its outstanding 10 3/4% Senior Notes due 2006
issued on August 6, 1999.
The Exchange Notes
. The terms of the registered exchange notes to be issued are
substantially identical to the terms of the outstanding notes that
Stater Bros. issued on August 6, 1999, except for transfer restrictions,
registration rights and liquidated damages provisions relating to the
outstanding notes which will not apply to the exchange notes.
. Interest on the exchange notes accrues at the rate of 10 3/4% per year,
payable in cash every six months on February 15 and August 15, with the
first payment on February 15, 2000.
. Stater Bros. may redeem any of the exchange notes beginning on August
15, 2003 at an initial redemption price of 105.375% of their principal
amount plus accrued interest. In addition, before August 15, 2002,
Stater Bros. may redeem up to 35% of the exchange notes at a redemption
price of 110.750% of their principal amount plus accrued interest using
proceeds from sales of its capital stock.
. The exchange notes will be general unsecured obligations of Stater Bros.
and will rank equally with the existing and future unsubordinated,
unsecured indebtedness of Stater Bros.
. Stater Bros. does not intend to list the exchange notes on any
securities exchange.
Material Terms of the Exchange Offer
. The exchange offer expires at 5 p.m., New York City time, on ,
1999, unless extended.
. All outstanding notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount of exchange
notes which are registered under the Securities Act of 1933.
. Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
. The exchange offer is not subject to any minimum tender condition, but
is subject to the terms of the registration rights agreement that Stater
Bros. entered into on August 6, 1999 with the initial purchaser of the
outstanding notes.
. Stater Bros. will not receive any proceeds from the exchange offer.
Stater Bros. will pay the expenses of the exchange offer.
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For a discussion of risks that should be considered in connection with the
exchange offer, see "Risk Factors" beginning on page .
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The exchange offer is not being made to, nor will Stater Bros. accept
surrender for exchange from, holders of outstanding notes in any jurisdiction
in which the exchange offer or the acceptance thereof would not be in
compliance with the securities or Blue Sky laws of such jurisdiction.
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The date of this prospectus is , 1999
This prospectus incorporates important business and financial information
about Stater Bros. that is not included in or delivered with this prospectus.
This information is available without charge to investors upon written or oral
request. Requests should be made to:
Stater Bros. Holdings Inc.
21700 Barton Road
P.O. Box 150
Colton, California 92324
Attn.: Corporate Secretary
(909) 783-5000
The exchange offer is expected to expire on , 1999 and investors
must make their exchange decisions by this expiration date. To obtain timely
delivery of the requested information, Stater Bros. must receive requests from
investors by , 1999, or the date that is no later than five
business days before the expiration date. See "Additional Information."
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TABLE OF CONTENTS
Page
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FORWARD-LOOKING STATEMENTS................................................ ii
ADDITIONAL INFORMATION.................................................... iii
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 15
THE EXCHANGE OFFER........................................................ 19
CAPITALIZATION............................................................ 28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA................. 29
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 38
BUSINESS.................................................................. 45
MANAGEMENT................................................................ 57
Page
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 59
DESCRIPTION OF CERTAIN INDEBTEDNESS...................................... 60
DESCRIPTION OF THE EXCHANGE NOTES........................................ 62
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES FOR UNITED STATES HOLDERS
AND NON-UNITED STATES HOLDERS........................................... 97
PLAN OF DISTRIBUTION..................................................... 102
LEGAL MATTERS............................................................ 102
EXPERTS.................................................................. 103
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
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i
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
the securities laws. Statements regarding Stater Bros.' expected financial
position, business, strategies and financing plans under the headings
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus are forward-looking statements. In addition, in those and other
portions of this prospectus, the words "anticipates," "expects," "plans,"
"intends" and similar expressions, as they relate to Stater Bros. or its
management, indicate forward-looking statements. Although Stater Bros.
believes that the expectations reflected in such forward-looking statements
are reasonable, and has based these expectations on its beliefs as well as
assumptions it has made, such expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from
such expectations are disclosed in this prospectus, and include the following:
. Stater Bros.' substantial leverage and debt service requirements;
. challenges posed by the acquisition and integration of supermarkets
acquired from Albertson's;
. pricing, market strategies, expansion, consolidation and other
activities of competitors;
. Stater Bros.' relationship with Santee Dairies, LLC and Santee Dairies,
Inc.;
. the effect of economic conditions in Southern California;
. customer demand;
. Stater Bros.' relationship with unions and unionized employees;
. the effect of seasonal and weather fluctuations;
. the ability of third party vendors to provide products and services that
are Year 2000 compliant; and
. the ability of Stater Bros. to retain key personnel.
Potential investors in the exchange notes are urged to consider these
factors carefully in evaluating the forward-looking statements contained or
incorporated by reference in this prospectus.
All subsequent written and oral forward-looking statements attributable to
Stater Bros. or persons acting on its behalf are expressly qualified in their
entirety by Stater Bros.' cautionary statements. The forward-looking
statements included or incorporated herein are made only as of the date of
this prospectus (or as of the date of the document incorporated by reference).
Stater Bros. does not intend, and undertakes no obligation, to update these
forward-looking statements.
Investors should read carefully the factors described in the "Risk Factors"
section of this prospectus for a description of certain risks that could cause
actual results to differ from these forward-looking statements.
ii
ADDITIONAL INFORMATION
Stater Bros. Holdings Inc. files annual and quarterly reports and other
information with the Securities and Exchange Commission. Investors may read
and copy any document filed by Stater Bros. Holdings Inc. at the Commission's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Investors can obtain copies of these materials from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission
(http://www.sec.gov).
Stater Bros. Holdings Inc. is "incorporating by reference" into this
prospectus the information it has filed with the Commission. This means that
Stater Bros. Holdings Inc. is disclosing important information to investors by
referring to those documents. Stater Bros. Holdings Inc. incorporates by
reference the documents listed below and any future filings made with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this prospectus and before the exchange of the outstanding notes
for the exchange notes:
. Annual Report on Form 10-K for the fiscal year ended September 27, 1998;
. Quarterly Report on Form 10-Q for the fiscal quarter ended December 27,
1998;
. Quarterly Report on Form 10-Q for the fiscal quarter ended March 28,
1999;
. Current Report on Form 8-K dated July 16, 1999; and
. Quarterly Report on Form 10-Q for the fiscal quarter ended June 27,
1999.
The information incorporated by reference is an important part of this
prospectus and information that Stater Bros. Holdings Inc. files later with
the Commission is a part of the prospectus from the date of filing those
documents. Investors may request a free copy of these filings by writing or
telephoning Stater Bros. at the following address:
Stater Bros. Holdings Inc.
21700 Barton Road
P.O. Box 150
Colton, California 92324
Attn.: Corporate Secretary
Telephone: (909) 783-5000
iii
SUMMARY
Because this is a summary, it does not contain all the information that may
be important to investors. Investors should read this entire prospectus
carefully. In this prospectus, "Stater Bros." refers to Stater Bros. Holdings
Inc., a Delaware corporation, and its subsidiaries, Stater Bros. Markets and
Stater Bros. Development, Inc., unless the context otherwise indicates.
Stater Bros.
Stater Bros., founded in 1936, is the largest independently-owned supermarket
chain in Southern California, operating 112 supermarkets, of which 81 are
located in the Inland Empire, one of the fastest growing areas in the United
States. The Inland Empire is comprised primarily of San Bernardino and
Riverside counties. Stater Bros. also operates supermarkets in Orange, eastern
Los Angeles and Kern counties. Stater Bros.' supermarkets offer a high level of
customer service, a broad selection of brand-name merchandise, and quality
meats and produce. All of Stater Bros.' supermarkets have full-service meat
departments and a broad selection of produce. In addition, many of the
supermarkets have service delicatessens and service bakery departments. For the
latest twelve months ended June 27, 1999, Stater Bros. generated sales in
excess of $1.76 billion.
Stater Bros. operates all of its supermarkets under the "everyday low price"
format and management believes that Stater Bros. is recognized as a low price
leader in its primary operating territory. Substantially all of Stater Bros.'
supermarkets are located in neighborhood shopping centers in well-populated
residential areas. The average Stater Bros. supermarket is approximately 30,000
square feet, while newly constructed supermarkets range from approximately
35,300 to 43,500 square feet. Stater Bros.' supermarkets carry an average of
35,000 items and are similarly designed and stocked for ease of shopping.
Approximately 84% of the merchandise sold in Stater Bros.' supermarkets is
processed through Stater Bros.' centralized warehouse and distribution
facilities located an average of 31.5 miles from Stater Bros.' 112 supermarket
locations. Due to the close proximity of Stater Bros.' distribution facilities
to store locations, Stater Bros.' supermarkets operate with minimal back-room
storage space. Management believes Stater Bros.' ratio of retail selling space
to total store square footage of approximately 72% is one of the highest in the
industry.
Since 1980, the Inland Empire's population has more than doubled, increasing
from approximately 1.5 million to 3.1 million. Several factors have contributed
to the Inland Empire's significant growth, including affordable housing,
availability of land, affordable industrial and commercial office space, and
the region's favorable geographic location and quality of life.
Stater Bros. believes that its 62 years of continuous service in the Inland
Empire, its commitment to everyday low prices and the involvement of members of
its management team in community activities have contributed significantly to
Stater Bros.' leading market position. To foster continued growth in sales and
EBITDA and help Stater Bros. maintain its strong market share, Stater Bros.'
operating strategy is to:
. maintain its commitment to "everyday low prices";
. offer its customers quality products and breadth of selection combined
with a high level of customer service; and
. enhance margins through a variety of merchandising strategies and cost
control measures, including productivity-related initiatives in Stater
Bros.' warehouse and distribution operations.
1
Stater Bros. has an experienced management team led by Jack H. Brown, its
Chairman of the Board, President and Chief Executive Officer, who has 47 years
of experience in the supermarket industry and has occupied his position as
Stater Bros.' President and Chief Executive Officer since 1981. In addition,
the five members of the Stater Bros. senior management team have an average of
40 years of experience in the food industry and an average of 20 years with
Stater Bros.
The Acquisition
On May 7, 1999, Stater Bros. entered into an agreement with Albertson's, Inc.
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 are being divested in connection with the merger of
Albertson's and the parent of Lucky Stores. The purchase price is estimated to
be $147 million for land, buildings and equipment plus the value of inventories
on hand at closing, estimated to be $39 million. Acquisition of the stores will
take place sequentially over a thirty-day period which commenced on August 8,
1999. The acquired stores will be operated under the Stater Bros. name as fully
integrated units within the Stater Bros. system. It is expected that each
acquired store will be reopened under the Stater Bros. name within two days of
acquisition.
Existing Stores
Stores After Acquisition
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Inland Empire
San Bernardino County......................... 46 46
Riverside County.............................. 35 40
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81 86
Orange County................................... 16 30
Los Angeles County.............................. 13 27
Kern County..................................... 2 2
San Diego County................................ -- 10
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Total stores................................ 112 155
=== ===
Benefits of the Acquisition
Management believes that the acquisition will provide a number of key
benefits, including the following:
. Increase Leading Market Share in the Inland Empire. Stater Bros.
currently is the largest supermarket chain in both San Bernardino and
Riverside counties. The acquisition will increase Stater Bros.' presence
in these counties from 81 to 86 supermarkets and, more importantly, will
provide Stater Bros. with a strong presence (three supermarkets) in the
Palm Springs area, where Stater Bros. does not have any existing
supermarkets.
. Enhance Presence in Existing and Contiguous Market Areas. Stater Bros.
will enhance significantly its market presence in Orange County and the
eastern and Palmdale areas of Los Angeles County, where it presently
operates. Stater Bros. will increase its presence from 16 to 30
supermarkets in Orange County, a region where Stater Bros. has
experienced its strongest sales volume increases for the most recent two
fiscal years. Stater Bros. will also increase its presence in eastern
Los Angeles County from 13 to 27 supermarkets including establishing a
presence in the Palmdale area with three stores. In addition, Stater
Bros. will enter northern San Diego County with 10 supermarkets and
one future store site. Management believes that northern San Diego
County is an attractive market based on its strong demographic trends
and proximity to Stater Bros.' headquarters and warehouse/distribution
facilities.
2
. Leverage Stater Bros.' Market Presence. Stater Bros. currently operates
in market areas which are overlapping or contiguous to all of the 43
supermarkets being acquired. Since Stater Bros. has been advertising
within these areas for many years, management believes Stater Bros.'
prospective customers are familiar with the Stater Bros. name and
understand Stater Bros.' market position as the low price leader. In
connection with the acquisition, Stater Bros. plans to direct the
advertising expenses of the acquired stores towards a "direct-mail"
strategy. As such, management believes that Stater Bros. can leverage
its advertising expenses to achieve greater awareness among potential
customers within its operating territories.
. Increase Purchasing Leverage. Management expects that Stater Bros.'
merchandise purchases will increase by approximately 34% following the
acquisition. As a result, management believes that Stater Bros. should
be able to negotiate more favorable terms with its vendors.
. Improve Warehousing and Distribution Efficiencies. Stater Bros.
currently leases approximately 1.3 million square feet of warehouse and
distribution space located in Colton, California, which is central to,
and can efficiently supply, Stater Bros.' existing 112 supermarkets.
Management believes that its existing warehouse and distribution
facilities will be adequate for its currently identified needs,
including supplying the 43 supermarkets to be acquired in the
acquisition. During the first quarter of calendar 1999, Stater Bros.
implemented productivity-related initiatives in its warehouse and
distribution operations. Stater Bros. is currently realizing cost
savings from these initiatives and expects to realize additional
economies by distributing the added product requirements for the
acquired stores.
Related Transactions
This exchange offer is one of a series of related transactions designed to
provide financial flexibility to Stater Bros. in connection with the
acquisition. In addition to the acquisition, the related transactions include
the following:
. The Tender Offer and Consent Solicitation. On July 1, 1999, Stater Bros.
commenced a tender offer for all $165.0 million principal amount of its
11% senior notes due 2001 and all $100.0 million principal amount of its
9% senior subordinated notes due 2004. On July 1, 1999, Stater Bros.
also commenced the solicitation of consents to amend the indentures
governing the 11% senior notes and the 9% senior subordinated notes to
eliminate most of the financial and restrictive covenants.
On July 15, 1999, Stater Bros. received the required consents to the
proposed amendments from holders of approximately 97% and 100% of the
outstanding principal amount of the 11% senior notes and the 9% senior
subordinated notes, respectively. The amendments became operative when
Stater Bros. consummated the tender offer on August 6, 1999.
. The Offering. Stater Bros. issued an aggregate of $450.0 million
principal amount of the outstanding notes on August 6, 1999. The
proceeds from the issuance of the outstanding notes, together with cash
on hand, were used to (i) retire approximately 97% of the 11% senior
notes and all of the 9% senior subordinated notes pursuant to the tender
offer; (iii) consummate the acquisition, including capital expenditures
related to the acquisition that will be incurred post-closing; and (iv)
pay fees and expenses.
. The New Credit Facility. On August 6, 1999, Stater Bros. Markets
entered into an unsecured bank credit facility with Bank of America,
N.A. The new credit facility consists of a $50.0 million revolving
credit facility with an additional $25.0 million facility available for
the issuance of commercial and standby letters of credit. The term of
the new credit facility is three years. It is expected that borrowings
under the new credit facility will be used for certain working capital
and corporate purposes. At August 17, 1999 there were no revolving
borrowings outstanding thereunder and the
3
aggregate amount of all letters of credit issued thereunder was
approximately $10.0 million. See "Description of Certain Indebtedness."
In this prospectus the acquisition and related transactions are referred to
collectively as the "Acquisition Transactions."
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The principal executive office of Stater Bros. is located at 21700 Barton
Road, Colton, California 92324 and its telephone number is (909) 783-5000, and
its mailing address is P.O. Box 150, Colton, California 92324.
4
The Exchange Offer
The Exchange Offer.......... Up to $450,000,000 aggregate principal amount of
exchange notes registered under the Securities
Act are being offered in exchange for the same
principal amount of the outstanding notes. The
terms of the exchange notes and the outstanding
notes are substantially identical except for
transfer restrictions, registration rights and
liquidated damages provisions relating to the
outstanding notes which will not apply to the
exchange notes. Outstanding notes may be tendered
for exchange in whole or in part in any integral
multiple of $1,000. Stater Bros. is making the
exchange offer in order to satisfy its
obligations under the registration rights
agreement relating to the outstanding notes. For
a description of the procedures for tendering the
outstanding notes, see "The Exchange Offer--
Procedures for Tendering Outstanding Notes."
Expiration Date............. 5:00 p.m., New York City time, ,
1999, unless the exchange offer is extended, in
which case the expiration date will be the latest
date and time to which the exchange offer is
extended. See "The Exchange Offer--Terms of the
Exchange Offer."
Conditions to the Exchange The exchange offer is subject to customary
Offer....................... conditions described under "The Exchange Offer--
Conditions to the Offer," some of which Stater
Bros. may waive in its sole discretion. The
exchange offer is not conditioned upon any
minimum principal amount of outstanding notes
being tendered. Stater Bros. reserves the right
in its sole and absolute discretion, subject to
applicable law, at any time and from time to
time:
. to delay the acceptance of the outstanding
notes for exchange;
. to terminate the exchange offer if one or more
specific conditions have not been satisfied;
. to extend the expiration date of the exchange
offer and retain all outstanding notes
tendered pursuant to the exchange offer,
subject, however, to the right of holders of
outstanding notes to withdraw their tendered
outstanding notes; or
. to waive any condition or otherwise amend the
terms of the exchange offer in any respect.
See "The Exchange Offer--Terms of the Exchange
Offer."
Withdrawal Rights........... Tenders of outstanding notes may be withdrawn at
any time on or prior to the expiration date by
delivering a written notice of withdrawal to the
exchange agent in conformity with the procedures
discussed under "The Exchange Offer--Withdrawal
of Tenders."
Procedures for Tendering
Outstanding Notes..........
Tendering holders of outstanding notes must
complete and sign a letter of transmittal in
accordance with the instructions contained in the
letter of transmittal. Tendering holders must
forward the completed letter of transmittal by
mail, facsimile or hand delivery, together with
any other required documents, to the exchange
agent,
5
or must submit to the exchange agent the
outstanding notes they are tendering or comply
with the specified procedures for guaranteed
delivery of outstanding notes. Brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. Investors whose outstanding notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee,
must contact their nominee holder promptly if
they wish to tender outstanding notes pursuant to
the exchange offer. See "The Exchange Offer--
Procedures for Tendering Outstanding Notes."
Letters of transmittal and certificates
representing outstanding notes should not be sent
to Stater Bros. Those documents should be sent
only to the exchange agent. The address, and
telephone and facsimile numbers, of the exchange
agent are set forth in "The Exchange Offer--
Exchange Agent" and in the letter of transmittal.
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes............. Upon consummation of the exchange offer, Stater
Bros. will accept any and all outstanding notes
that are properly tendered in the exchange offer
and not withdrawn prior to 5:00 p.m., New York
City time, on the expiration date. The exchange
notes issued pursuant to the exchange offer will
be delivered promptly after acceptance of the
outstanding notes. See "The Exchange Offer--Terms
of the Exchange Offer."
Resales of Exchange Notes... Stater Bros. believes that investors will be able
to offer for resale, resell or otherwise transfer
exchange notes issued in the exchange offer
without compliance with the registration and
prospectus delivery provisions of the federal
securities laws, provided that:
. they are not a broker-dealer;
. they are not participating in a distribution
of the exchange notes; and
. they are not an "affiliate" of Stater Bros.
Holdings Inc., as the term is defined in Rule
144A under the Securities Act of 1933.
Stater Bros.' belief is based on interpretations
by the staff of the Commission, as set forth in
no-action letters issued to unrelated third
parties.
6
Each broker-dealer that receives exchange notes
for its own account in exchange for outstanding
notes which were acquired by the broker-dealer as
a result of market-making or other trading
activities must agree to deliver a prospectus
meeting the requirements of the federal
securities laws in connection with any resale of
the exchange notes. See "The Exchange Offer--
Resales of the Exchange Notes."
Exchange Agent.............. The exchange agent with respect to the exchange
offer is IBJ Whitehall Bank & Trust Company. The
address, and telephone and facsimile numbers, of
the exchange agent are set forth in "The Exchange
Offer--Exchange Agent" and in the letter of
transmittal.
Use of Proceeds............. Stater Bros. will not receive any cash proceeds
from the issuance of the exchange notes offered
hereby.
Material United States
Federal Income Tax
Consequences............... Investors should review the information set forth
under "Material United States Federal Tax
Consequences for United States Holders and Non-
United States Holders" prior to tendering
outstanding notes in the exchange offer.
Accounting Treatment........ No gain or loss will be recognized by Stater
Bros. upon the consummation of the exchange
offer. See "The Exchange Offer--Accounting
Treatment."
Terms of the Exchange Notes
The exchange offer applies to an aggregate principal amount of $450,000,000
of the outstanding notes. The form and terms of the exchange notes will be
identical in all material respects to the form and terms of the outstanding
notes, except:
. the exchange notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer;
. holders of the exchange notes will not be entitled to any liquidated
damages under the registration rights agreement relating to the
outstanding notes; and
. holders of the exchange notes will not be, and upon consummation of the
exchange offer, holders of the outstanding notes will no longer be,
entitled to specific rights under the registration rights agreement for
the outstanding notes intended for the holders of unregistered
securities.
The exchange notes will be obligations of Stater Bros. entitled to the
benefits of the indenture. See "Description of the Exchange Notes."
Exchange Notes Offered...... $450.0 million in principal amount of 10 3/4%
Senior Notes due 2006.
Maturity.................... August 15, 2006.
Interest.................... Annual rate: 10 3/4%.
Payment frequency: every six months on February
15 and August 15.
First payment: February 15, 2000.
7
Ranking..................... The exchange notes will be general unsecured
obligations of Stater Bros. and will rank equally
with Stater Bros.' existing and future
unsubordinated, unsecured indebtedness.
The exchange notes will rank junior to Stater
Bros.' secured indebtedness to the extent of the
value of the assets securing such indebtedness.
The exchange notes will effectively rank junior
to indebtedness and other obligations of Stater
Bros.' subsidiaries, including Stater Bros.
Markets' obligations under the new credit
facility. At June 27, 1999, the exchange notes
would have been effectively subordinated to
approximately $18.1 million of indebtedness.
Optional Redemption......... On or after August 15, 2003, Stater Bros. may
redeem some or all of the exchange notes at any
time at the redemption prices described in the
section "Description of the Exchange Notes" under
the heading "Optional Redemption."
Prior to August 15, 2002, Stater Bros. may redeem
up to 35% of the exchange notes with the net cash
proceeds from sales of equity of Stater Bros. at
the redemption price listed in the section
"Description of the Exchange Notes" under the
heading "Optional Redemption." However, Stater
Bros. may only make such redemptions if at least
65% of the aggregate principal amount of exchange
notes issued under the indenture remains
outstanding after each redemption.
Mandatory Offer to If Stater Bros. experiences specific kinds of
Repurchase................. changes in control or, under certain
circumstances, if it sells assets, it must offer
to repurchase the exchange notes at the prices
listed in the section "Description of the
Exchange Notes" under the heading "Repurchase at
the Option of Holders."
Basic Covenants of
Indenture.................. The indenture under which the exchange notes will
be issued will, among other things, restrict the
ability of Stater Bros. and certain of its
subsidiaries to:
. borrow money;
. pay dividends on stock or repurchase stock;
. make investments;
. use assets as security in other transactions;
and
. sell certain assets or merge with or into other
companies.
For more details, see the section "Description of
the Exchange Notes" under the heading "Certain
Covenants."
Investors should refer to the section entitled "Risk Factors" for a
discussion of factors that should be considered in connection with the exchange
notes.
8
Summary Unaudited Pro Forma Condensed Consolidated Financial and Other Data
The following table shows summarized pro forma financial data for Stater
Bros. reflecting the completion of the Acquisition Transactions. The pro forma
earnings and operating information for the 52 weeks ended September 27, 1998
give effect to the Acquisition Transactions as if they had occurred as of
September 30, 1997. The pro forma earnings and operating information for the 39
weeks ended June 27, 1999 give effect to the Acquisition Transactions as if
they had occurred on September 28, 1998, and the pro forma balance sheet
information gives effect to the Acquisition Transactions as if they had
occurred on June 27, 1999. This pro forma information, while helpful in
illustrating the financial characteristics of Stater Bros. after the completion
of the Acquisition Transactions under one set of assumptions, does not attempt
to predict or suggest future results. It also does not necessarily reflect what
the historical results of Stater Bros. would have been had the Acquisition
Transactions actually occurred as of or on the dates stated above. For a
discussion of factors that could impact the accuracy of the pro forma financial
information, see "Risk Factors--Risks Related to the Acquisition." The
information in the following table is based on historical financial information
that Stater Bros. has presented in its prior filings with the Commission and
historical financial information for the acquired stores contained elsewhere in
this prospectus. Investors should read the following table in connection with
the historical financial information filed with the Commission and with the
more detailed financial information Stater Bros. has provided in this document.
52 Weeks Ended 39 Weeks Ended
September 27, June 27,
1998 1999
-------------- --------------
(In thousands)
Statement of Earnings Data:
Sales............................................ $2,395,353 $1,823,992
Cost of goods sold............................... 1,818,039 1,375,606
---------- ----------
Gross profit..................................... 577,314 448,386
Operating expenses:
Selling, general and administrative expenses.... 500,158 374,848
Depreciation and amortization................... 28,391 21,526
---------- ----------
Total operating expenses......................... 528,549 396,374
---------- ----------
Operating profit................................. 48,765 52,012
Interest income.................................. 2,412 1,903
Interest expense................................. (52,941) (39,731)
Equity in earnings (loss) from unconsolidated
affiliate....................................... (2,941) 924
Other income (expense)--net...................... 2 (319)
---------- ----------
Income (loss) before income (taxes) benefit...... (4,703) 14,789
Income (taxes) benefit........................... 1,928 (6,063)
---------- ----------
Net earnings (loss)(1)........................... $ (2,775) $ 8,726
========== ==========
Other Operating Data:
EBITDA(2)........................................ $ 79,568 $ 75,441
Depreciation and amortization.................... 28,391 21,526
Ratio of net debt to EBITDA(3)................... 5.6x 5.7x
Ratio of EBITDA to cash interest expense(2)(4)... 1.5x 1.9x
Ratio of earnings to fixed charges(5)............ -- 1.3x
Balance Sheet Data:
Cash and cash equivalents........................ $ 50,948
Working capital(6)............................... 66,923
Total assets..................................... 587,726
Total debt....................................... 473,265
Total stockholders' (deficit).................... (41,908)
footnotes on following page
9
- --------
(1) Excludes extraordinary charges, net of taxes, associated with the write-off
of deferred financing fees ($6.0 million) and the tender premiums related
to the tender offer ($11.1 million).
(2) EBITDA, as calculated per the definition of "Consolidated Cash Flow"
contained in the indenture governing the exchange notes offered hereby,
represents the sum of net loss, extraordinary (charge), income taxes,
interest expense, depreciation and amortization and non-cash expenses
(income). Stater Bros.' non-cash expenses (income) are reflected in other
income (expense)--net and equity in earnings from unconsolidated affiliate.
Stater Bros. has included information concerning EBITDA as it is relevant
for covenant analysis under the exchange notes and because it is used by
certain investors as a measure of a company's ability to service its debt.
EBITDA should not be used as an alternative to, or be construed as more
meaningful than, operating income or cash flows as an indicator of Stater
Bros.' operating performance.
(3) For purposes of the ratio of net debt to EBITDA, EBITDA is calculated as
the sum of operating profit and depreciation and amortization. For the 52
weeks ended September 27, 1998 and 39 weeks ended June 27, 1999, these
amounts would have been $77.2 million and $73.5 million, respectively.
(4) Cash interest expense represents interest expense on the exchange notes and
the imputed interest associated with capital lease obligations.
(5) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary charges,
amortization of previously capitalized interest and undistributed earnings
or loss from less than 50% owned subsidiaries and includes fixed charges.
Fixed charges consist of interest expense whether expensed or capitalized,
amortization of deferred debt expense, preferred stock dividends adjusted
to represent pre-tax earnings requirements and such portion of rental
expenses as deemed by management to be representative of the interest
factor in the particular case. Earnings were insufficient to cover fixed
charges for the 52 weeks ended September 27, 1998 by approximately $7.0
million. However earnings included non-cash charges relating to
depreciation and amortization of approximately $28.4 million.
(6) Working capital excludes cash and cash equivalents and current portion of
capital lease obligations.
10
Summary Historical Financial and Statistical Data of Stater Bros.
The following table shows summarized annual historical financial and
statistical data derived from the audited financial statements of Stater Bros.
and the related notes which, except for 1994 and 1995, appear elsewhere in this
prospectus. The summary data for the 39-week periods are derived from unaudited
financial statements which are included in this prospectus. In the opinion of
management, such unaudited financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of this data. The results for the 39 weeks ended June 27, 1999 and
June 28, 1998 are not necessarily indicative of the results for a full year or
for any future period. Investors should read the complete historical financial
statements included elsewhere in this prospectus.
Unaudited
----------------------
Fiscal Years Ended 39 Weeks Ended
--------------------------------------------------------------------- ----------------------
September 25, September 24, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996(1) 1997 1998 1998 1999
------------- ------------- ------------- ------------- ------------- ---------- ----------
(In thousands, except for other operating and financial data and store data)
Statement of
Earnings Data:
Sales............ $1,539,717 $1,579,895 $1,705,332 $1,717,924 $1,726,107 $1,285,048 $1,324,358
Cost of goods
sold............ 1,199,794 1,227,355 1,315,726 1,326,410 1,323,522 987,172 1,011,542
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit..... 339,923 352,540 389,606 391,514 402,585 297,876 312,816
Operating
expenses:
Selling, general
and
administrative
expenses....... 297,474 308,332 328,242 333,199 353,075 261,216 265,907
Depreciation and
amortization... 11,656 11,756 12,583 13,265 15,434 11,345 11,813
Consulting
fees(2)........ 830 1,500 1,525 1,458 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses........ 309,960 321,588 342,350 347,922 368,509 272,561 277,720
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating
profit.......... 29,963 30,952 47,256 43,592 34,076 25,315 35,096
Interest income.. 384 952 1,929 3,034 3,059 2,371 2,388
Interest
expense......... (15,501) (20,076) (20,258) (21,563) (30,206) (22,641) (22,699)
Equity in
earnings (loss)
from
unconsolidated
affiliate....... (592) (980) (1,624) (2,313) (2,941) (2,692) 924
Other income
(expense)--net.. 391 97 (172) 76 2 42 (319)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes,
extraordinary
charge and
cumulative
effect of a
change in
accounting for
income taxes.... 14,645 10,945 27,131 22,826 3,990 2,395 15,390
Income taxes..... 5,856 4,218 11,120 9,359 1,459 982 6,156
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary
charge and
cumulative
effect of a
change in
accounting for
income taxes.... 8,789 6,727 16,011 13,467 2,531 1,413 9,234
Extraordinary
(charge)(3)..... (8,036) -- -- -- -- -- --
Cumulative effect
of a change in
accounting for
income
taxes(4)........ 372 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....... $ 1,125 $ 6,727 $ 16,011 $ 13,467 $ 2,531 $ 1,413 $ 9,234
========== ========== ========== ========== ========== ========== ==========
Balance Sheet
Data (end of
period):
Cash and cash
equivalents..... $ 21,289 $ 26,308 $ 45,279 $ 59,086 $ 57,281 $ 48,000 $ 55,427
Working capital.. 41,422 45,014 63,473 92,013 90,725 87,039 75,647
Total assets..... 306,489 314,082 338,294 358,477 364,318 361,615 382,252
Total debt....... 175,342 174,186 173,099 271,917 270,660 270,976 269,688
Total
stockholders'
equity
(deficit)....... 6,851 13,578 (43,887) (36,586) (34,055) (35,173) (24,821)
Other Operating
and Financial
Data:
EBITDA
(000s)(5)....... $ 42,003 $ 43,660 $ 61,768 $ 59,891 $ 52,569 $ 39,031 $ 49,297
Capital
expenditures
(000s).......... 19,409 13,178 22,415 20,268 26,278 20,287 34,382
Gross profit as a
percentage of
sales........... 22.08% 22.31% 22.85% 22.79% 23.32% 23.18% 23.62%
Selling, general
and
administrative
expenses as a
percentage of
sales........... 19.32% 19.52% 19.25% 19.40% 20.46% 20.33% 20.08%
EBITDA as a
percentage of
sales........... 2.73% 2.76% 3.62% 3.49% 3.05% 3.04% 3.72%
Ratio of earnings
to fixed
charges(6)...... 1.47x 1.36x 1.53x 1.23x 1.03x -- 1.42x
11
Unaudited
-------------------
Fiscal Years Ended 39 Weeks Ended
--------------------------------------------------------------------- -------------------
September 25, September 24, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996(1) 1997 1998 1998 1999
------------- ------------- ------------- ------------- ------------- -------- --------
(In thousands, except for other operating and financial data and store data)
Store Data:
Number of stores (at end
of period)............. 111 110 110 110 112 112 112
Sales increases
(decreases):
Total stores........... 0.9% 2.6% 7.9% 0.7% 0.5% (0.6)% 3.1%
Like stores............ (0.7) 1.2 6.3 2.6 (1.0) (1.8) 2.5
Average sales per store
(000s)................. $13,997 $14,298 $15,503 $15,617 $15,551 $11,474 $11,825
Average store size:
Total square feet...... 28,617 28,717 28,809 28,809 29,061 29,061 29,177
Selling square feet.... 20,708 20,773 20,845 20,845 20,991 20,991 21,047
Total square feet (at
end of period) (000s).. 3,177 3,159 3,169 3,169 3,255 3,255 3,268
Total selling square
feet (at end of period)
(000s)................. 2,299 2,285 2,293 2,293 2,351 2,351 2,357
Sales per average total
square foot............ $ 492 $ 499 $ 538 $ 542 $ 537 $ 395 $ 405
Sales per average
selling square foot.... $ 680 $ 689 $ 744 $ 749 $ 743 $ 547 $ 562
- --------
(1) The year ending September 29, 1996 was a 53-week year, whereas fiscal 1994,
1995, 1997 and 1998 were 52-week years.
(2) Effective 1994, consulting fees were paid to Craig Corporation pursuant to
consulting agreements with La Cadena Investments and Craig Corporation.
These consulting agreements were terminated on July 31, 1997.
(3) Extraordinary charge in 1994 represents the after tax charge from early
retirement of debt.
(4) Stater Bros. adopted SFAS No. 109 ("Accounting for Income Taxes") effective
the beginning of fiscal 1994 as a cumulative effect of a change in
accounting principles.
(5) EBITDA, as calculated per the definition of "Consolidated Cash Flow"
contained in the indenture governing the exchange notes offered hereby,
represents the sum of net income, income taxes, interest expense,
depreciation and amortization and non-cash expenses (income). For each of
the periods presented above, Stater Bros.' non-cash expenses (income) were
reflected in other income (expense)--net and equity in earnings (loss) from
unconsolidated affiliate. Stater Bros. has included information concerning
EBITDA as it is relevant for covenant analysis under the exchange notes and
because it is used by certain investors as a measure of a company's ability
to service its debt. EBITDA should not be used as an alternative to, or be
construed as more meaningful than, operating income or cash flows as an
indicator of Stater Bros.' operating performance.
(6) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary charges,
amortization of previously capitalized interest and undistributed earnings
or loss from less than 50% owned subsidiaries and includes fixed charges.
Fixed charges consist of interest expense whether expensed or capitalized,
amortization of deferred debt expense, preferred stock dividends adjusted
to represent pre-tax earnings requirements and such portion of rental
expenses as deemed by management to be representative of the interest
factor in the particular case. Earnings were insufficient to cover fixed
charges for the 39 weeks ended June 28, 1998 by approximately $1.1 million.
12
Summary Historical Financial and Statistical Data
of the Acquired Stores
The following tables show summarized historical financial and statistical
data for the stores to be acquired from Albertson's. This information is
derived from the audited financial statements for stores to be acquired from
Albertson's and the related notes which appear elsewhere in this prospectus.
The summary data set forth below for the 13-week periods are derived from
unaudited financial statements which are included elsewhere in this prospectus.
In the opinion of management, such unaudited financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of this data. The results for the 13-week periods are not
necessarily indicative of the results for a full year or for any future period.
The other operating data information contained below are unaudited and are
derived from their respective financial data. Investors should read the
complete historical financial statements included elsewhere in this prospectus.
Unaudited
-------------------
Fiscal Years Ended 13 Weeks Ended
----------------------------------- -------------------
January 30, January 29, January 28, April 30, April 29,
Albertson's Stores 1997 1998 1999 1998 1999
----------- ----------- ----------- --------- ---------
(In thousands, except store data)
Statement of Store Level
Earnings:
Sales................... $474,928 $507,088 $519,684 $129,845 $130,612
Cost of sales(1)........ 354,723 375,988 381,448 96,326 94,093
-------- -------- -------- -------- --------
Gross profit............ 120,205 131,100 138,236 33,519 36,519
Store operating
expenses(2)............ 105,685 115,832 122,972 29,902 30,292
-------- -------- -------- -------- --------
Store level earnings.... $ 14,520 $ 15,268 $ 15,264 $ 3,617 $ 6,227
======== ======== ======== ======== ========
Other Operating Data:
EBITDA(3)............... $ 23,005 $ 24,769 $ 25,300 $ 6,092 $ 8,660
Interest expense........ 966 929 886 226 214
Depreciation and
amortization........... 7,519 8,572 9,150 2,249 2,219
Store Data:
Number of stores (at end
of period)............. 32 33 33 33 33
Unaudited
-----------------
Fiscal Years Ended 13 Weeks Ended
----------------------------------- -----------------
Lucky February 1, January 31, January 30, May 2, May 1,
Stores 1997 1998 1999 1998 1999
------ ----------- ----------- ----------- -------- --------
(In thousands, except store data)
Statement of Store Level
Earnings:
Sales................... $150,714 $144,510 $149,562 $ 37,904 $ 36,579
Cost of sales(1)........ 111,313 108,073 110,340 28,668 26,964
-------- -------- -------- -------- --------
Gross profit............ 39,401 36,437 39,222 9,236 9,615
Store operating
expenses(2)............ 30,347 31,413 33,003 7,791 8,037
-------- -------- -------- -------- --------
Store level earnings.... $ 9,054 $ 5,024 $ 6,219 $ 1,445 $ 1,578
======== ======== ======== ======== ========
Other Operating Data:
EBITDA(3)............... $ 12,123 $ 7,953 $ 9,476 $ 2,215 $ 2,388
Interest expense........ 563 545 523 132 127
Depreciation and
amortization........... 2,506 2,384 2,734 638 683
Store Data:
Number of stores (at end
of period)............. 9 10 10 10 10
footnotes on following page
13
- --------
(1) Includes an allocation for warehouse and transportation expenses.
(2) Includes depreciation and amortization and interest expense related to
capital lease obligations.
(3) EBITDA represents the sum of store level earnings, interest expense and
depreciation and amortization. EBITDA should not be used as an alternative
to, or be construed as more meaningful than, operating income or cash flows
as an indicator of operating performance.
14
RISK FACTORS
Investors should consider the following risk factors:
Risks Related to the Acquisition
There are Significant Business Risks in Integrating and Profitably Managing
the Acquisition
As a result of the acquisition of stores from Albertson's, heavy demands
will be placed on Stater Bros.' management, store operations, warehousing,
distribution systems, data processing and other resources. While management
believes that Stater Bros. has adequate resources to support the increased
scale of operations, any acquisition of such magnitude involves substantial
risks. Effective integration and management of the stores being acquired in
the acquisition will require the successful completion of numerous major
tasks, including the following:
. hiring and training large numbers of new employees;
. conversion of acquired stores to Stater Bros.' format;
. inclusion of acquired stores in Stater Bros.' information systems;
. integration of acquired stores in Stater Bros.' purchasing, warehousing
and distribution systems;
. substantial increases in the scope and demands on management and financial
controls; and
. development of customer loyalties in markets where Stater Bros. has not
heretofore been well known.
During the fiscal quarter ending September 26, 1999, Stater Bros. expects to
incur up to $5.0 million of costs associated with the acquisition and related
integration activities. Delays or unanticipated costs in meeting these
challenges, or failure to do so, could have a material adverse affect on
Stater Bros.' results of operations.
The pro forma financial statements contained in this prospectus reflect
estimates of increased warehouse and distribution costs, additional selling,
general and administrative expenses and other estimated costs related to the
acquisition. The actual costs and expenses could differ significantly from,
and there may be additional costs not reflected in, the estimates used in the
pro forma financial statements.
Results of Operations Following the Acquisition Could be Worse than
Anticipated
Stater Bros. is proceeding with the acquisition based on expectations as to
its effect on revenues and EBITDA, which may not be realized. These
expectations include, among other things:
. additional selling, general and administrative expenses required to
support the acquired stores;
. warehouse and distribution costs associated with the acquired stores; and
. the impact of discontinuing pharmacy departments and other merchandise
previously operated and sold in the acquired stores.
These expectations are not based on actual experience, and actual costs could
be materially higher. Certain of these expectations, pertaining to the costs
of integrating and operating the acquired stores, are reflected in the pro
forma financial information presented elsewhere herein.
The results of operations of the stores to be acquired, presented elsewhere
herein, reflect higher gross profit and operating profit margins than those
realized in Stater Bros.' existing operations. There can be no assurance that
the results of operations for the acquired stores will continue at their
historic levels. To this extent, profitability of the acquired stores
reflected in the pro forma financial data may be overstated.
15
Profitability of the acquisition could also be adversely affected if
unplanned delays are encountered in completing any of the store acquisitions
and reopenings, or in integrating the acquired stores into the Stater Bros.'
system. Failure to acquire one or more of the stores would also affect the
anticipated profitability of the acquisition.
Stores Subject to the Acquisition Could be Subject to Unexpected Problems
Stores subject to the acquisition could be the subject of facts
significantly affecting their value which were not discovered, or fully
provided for, in the course of the acquisition. Such facts could include:
. structural or equipment deficiencies;
. real estate restrictions;
. environmental contamination or non-compliance;
. pending developments affecting the desirability of particular locations,
such as changes in highway access;
. the opening of competitive stores nearby; and
. changes in local ordinances and regulations.
Depending on the particular circumstances, Stater Bros. may not be entitled to
any recourse against Albertson's in respect of such matters.
Certain Stores Could be Excluded from the Acquisition
The planned store acquisitions from Albertson's will be accomplished
sequentially through September 6, 1999. Pursuant to the acquisition agreement,
Albertson's has the right to exclude one or more of the stores from the
acquisition in the event it is unable to eliminate applicable monetary
encumbrances or to obtain necessary consents to transfer leased properties. In
such circumstances, Stater Bros. would be entitled to a mutually agreed
reduction in the purchase price. While Stater Bros. does not expect that any
of the stores will be eliminated from the acquisition, no absolute assurance
can be provided in this respect.
If one or more stores were excluded from the acquisition, the pro forma
financial information presented herein with respect to the related
transactions would be affected, since such information assumes that all 43 of
the stores involved in the acquisition will be acquired.
Risks Related to the Exchange Notes
Stater Bros.' High Ratio of Debt to Equity Provides Little Protection for Debt
Holders in the Event of Losses
As the result of the related transactions, including the offering of the
outstanding notes, Stater Bros. would have had total indebtedness of
approximately $473.3 million and negative net worth of approximately
$41.9 million as of June 27, 1999. If Stater Bros.' operations fail to
generate sufficient cash for the payment of principal and interest on its
indebtedness, the amount of assets that could potentially be liquidated to
provide funds for the payment of debt is limited and could be insufficient.
Stater Bros. Operations are Subject to Stringent Limitations Imposed by its
Debt Instruments
The indenture governing the exchange notes and Stater Bros. Markets' new
credit facility will each contain financial and other covenants that restrict,
among other things, the ability of Stater Bros. to:
. incur additional indebtedness;
. make restricted payments;
. make investments;
16
. grant liens on assets;
. sell assets;
. enter into transactions with related persons;
. issue capital stock of subsidiaries; and
. merge, consolidate or transfer substantially all of its assets.
The need for Stater Bros. to remain in compliance with its covenants may
restrict its flexibility in managing and making changes in its business.
High Levels of Debt Restrict the Ability of Stater Bros. to Invest in its
Business and Respond to Competitive Challenges
Because a large part of funds generated in Stater Bros. operations will be
required for the payment of interest on indebtedness, Stater Bros. will be
constrained in its ability to acquire or develop new stores, undertake store
remodeling, invest in improved computer and other systems or make other
investments in its business. Stater Bros.' financing costs will also impose
limitations on its ability to reduce prices in its stores. As a result, Stater
Bros. could be at a competitive disadvantage to more strongly capitalized
competitors.
Stater Bros.' Holding Company Structure Restricts the Funds and Assets
Available for the Payment of Principal and Interest on the Exchange Notes
Stater Bros. Holdings Inc. is a holding company whose principal asset is the
stock of Stater Bros. Markets. Funds for the payment of principal and interest
by Stater Bros. Holdings Inc. must be obtained from its operating
subsidiaries, principally Stater Bros. Markets. The ability of Stater Bros.
Holdings Inc. to obtain such funds is subject to the superior rights of
creditors of such subsidiaries. The new credit facility is with the principal
operating subsidiary, Stater Bros. Markets, and, under certain circumstances,
will restrict the payment of dividends to Stater Bros. Holdings Inc. In
addition, the operating subsidiaries are not obligated or required to pay any
amounts due in connection with the exchange notes or to make funds available
to make such payments in the form of dividends or advances to the holding
company. In the event of a default by Stater Bros. Markets under the new
credit facility, the lender thereunder would be entitled to exercise certain
remedies which could impair Stater Bros. Holdings Inc.'s ability to pay
principal and interest.
Stater Bros. May Be Unable to Raise the Funds Necessary to Finance a Change of
Control Offer Required by the Indenture
Upon the occurrence of certain change of control events, Stater Bros. will
be required to offer to repurchase all outstanding exchange notes at a price
equal to 101% of the principal balance of the exchange notes, plus accrued and
unpaid interest, if any. It is possible that Stater Bros. will not have
sufficient funds at the time of the change of control to make the required
repurchase of the exchange notes. Indebtedness outstanding under the new
credit facility may require prepayment before funds may be used to repurchase
the exchange notes in the event of a change of control.
There is No Existing Public Market for the Exchange Notes and the Offering or
Sale of the Exchange Notes is Subject to Significant Legal Restrictions and
Uncertainties Regarding the Liquidity of the Trading Market for the Exchange
Notes.
There is no public market for the exchange notes, and there is no assurance
that any such market will develop. The exchange notes will not be listed on
any securities exchange, but are expected to be eligible for trading in the
PORTAL market. If the exchange notes are traded after their initial issuance,
they may trade at a discount from their price at the time the exchange offer
is consummated, depending upon prevailing interest rates,
17
the market for similar securities, Stater Bros.' performance and other
factors. Stater Bros. has been advised by Banc of America Securities LLC, the
initial purchaser of the outstanding notes, that it intends to make a market
in the exchange notes after consummation of the exchange offer, as permitted
by applicable laws and regulations. However, the initial purchaser is not
obligated to do so and these market making activities may be discontinued at
any time without notice. As a result, purchasers of the exchange notes may
find it difficult to dispose of exchange notes without a discount.
General declines in the market for similar securities may also adversely
affect the liquidity of, and trading market for, the exchange notes. These
declines may adversely affect liquidity and trading markets independent of
Stater Bros.' financial performance and prospects.
Risks Related to the Supermarket Industry and Stater Bros.
Stater Bros.' Results are Subject to Risks Relating to Intense Competition and
Narrow Profit Margins in the Supermarket Industry
The supermarket industry is highly competitive and generally characterized
by narrow profit margins. Stater Bros. competes with various types of
retailers, including local, regional and national supermarket retailers,
convenience stores, retail drug chains, general merchandisers and discount
retailers, membership clubs and warehouse stores, some of which have greater
resources than Stater Bros. Competitive factors in the supermarket industry
include location, quality of products and service, price, variety of product
offerings and supermarket conditions. In addition, the supermarket industry
has undergone substantial consolidation, resulting in competitors with
increased financial resources and purchasing power.
Stater Bros. is Heavily Dependent on Key Personnel
Stater Bros.' success is largely dependent upon its senior management team,
led by Jack H. Brown, Stater Bros.' Chairman of the Board, President and Chief
Executive Officer, and other key managers. The loss of such persons could have
a material adverse effect on Stater Bros.' operations.
Stater Bros. Results are Subject to Risks Relating to Santee Dairies
Stater Bros. owns one-half of the equity interests in Santee Dairies, LLC,
which owns and operates a fluid milk production facility through its wholly-
owned subsidiary, Santee Dairies, Inc. ("Santee Dairies"). Stater Bros. is
party to a requirements agreement under which it is obligated to purchase its
fluid milk and certain other products from Santee Dairies at a price based
upon Santee Dairies' direct and indirect costs. Delays and operational issues
encountered by Santee Dairies in connection with the construction and opening
of a new dairy during 1998 have caused Santee Dairies to increase product
prices to enable it to meet its financial obligations. As a result, Stater
Bros.' results of operations have been adversely affected. Final completion of
the new dairy was achieved on April 30, 1999. Stater Bros. is not a guarantor
of Santee Dairies' indebtedness and Santee Dairies' earnings are not a source
of cash flow for Stater Bros. Nevertheless Stater Bros.' future results of
operations could be adversely affected by problems at Santee Dairies as the
result of its requirements agreement.
The Geographic Concentration of Stater Bros. Supermarkets Creates a Heavy
Exposure to the Risks of the Local Economy
An adverse change in the economy of Southern California or the Inland Empire
would adversely impact Stater Bros. Stater Bros. does not have operations in
other geographic areas to provide a cushion against the effect of local
economic changes.
18
Prolonged Labor Disputes with Unionized Employees May Impede Stater Bros.'
Ability to Timely Pay Interest on the Exchange Notes
Substantially all of Stater Bros.' employees are represented by unions.
Prolonged disputes between Stater Bros. and any of the unions representing its
employees could have a material adverse effect on Stater Bros.' cash flow from
operations and, as a result, its ability to pay interest on the exchange notes
in a timely manner.
Stater Bros.' Operations Are Subject to Year 2000 Compliance Risks
The efficient operations of Stater Bros. are dependent, in part, upon its
information systems and upon the timely and consistent delivery of goods and
services from its vendors, financial institutions and other companies. If
Stater Bros.' information systems are not Year 2000 compliant or if companies
conducting business with Stater Bros. are not Year 2000 compliant,
interruptions caused by Year 2000 non-compliance may have a material adverse
effect on Stater Bros.' operations, liquidity and financial condition.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
On August 6, 1999, Stater Bros. sold $450.0 million in principal amount of
the outstanding notes in a private placement through Banc of America
Securities LLC to a limited number of "Qualified Institutional Buyers," as
defined under the Securities Act of 1933, and to limited persons outside the
United States. In connection with the sale of the outstanding notes, Stater
Bros. and Banc of America Securities LLC entered into a registration rights
agreement dated as of August 6, 1999. Under that agreement, Stater Bros. must,
among other things, file with the Commission a registration statement under
the Securities Act of 1933 covering the exchange offer and use its best
efforts to cause that registration statement to become effective under the
Securities Act of 1933. Upon the effectiveness of that registration statement,
Stater Bros. must also offer each holder of the outstanding notes the
opportunity to exchange its securities for an equal principal amount of
exchange notes.
Stater Bros. is making the exchange offer to comply with its obligations
under the registration rights agreement. A copy of the registration rights
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
In order to participate in the exchange offer, an investor must represent to
Stater Bros., among other things, that the investor:
. is not a broker-dealer;
. is not participating in a distribution of the exchange notes; and
. is not an "affiliate" of Stater Bros. Holdings Inc., as the term is
defined in Rule 144A under the Securities Act of 1933.
Resale of the Exchange Notes
Based on previous interpretations by the staff of the Commission set forth
in no-action letters issued to third parties, Stater Bros. believes that the
exchange notes issued in the exchange offer may be offered for resale, resold
and otherwise transferred by investors, unless they are affiliates of Stater
Bros., without compliance with the registration and prospectus delivery
provisions of the Securities Act of 1933, provided that the representations
set forth in "Purpose and Effect of the Exchange Offer" apply.
19
If holders tender in the exchange offer with the intention of participating
in a distribution of the exchange notes, they cannot rely on the
interpretation by the staff of the Commission as set forth in the no-action
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933 in connection with a secondary
resale transaction. In the event that Stater Bros.' belief regarding resale is
inaccurate, those who transfer exchange notes in violation of the prospectus
delivery provisions of the Securities Act of 1933 and without an exemption
from registration under the federal securities laws may incur liability under
these laws. Stater Bros. does not assume, nor will it indemnify investors
against, this liability.
The exchange offer is not being made to, nor will Stater Bros. accept
surrenders for exchange from, holders of outstanding notes in any jurisdiction
in which the exchange offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of the particular
jurisdiction. Each broker-dealer that receives exchange notes for its own
account in exchange for outstanding notes, where the outstanding notes were
acquired by that broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the exchange notes. In order to facilitate
the disposition of exchange notes by broker-dealers participating in the
exchange offer, Stater Bros. has agreed, subject to specific conditions, to
make this prospectus, as it may be amended or supplemented from time to time,
available for delivery by those broker-dealers to satisfy their prospectus
delivery obligations under the Securities Act of 1933.
Terms of the Exchange Offer
Upon the terms and conditions in this prospectus, and in the accompanying
letter of transmittal, Stater Bros. will accept all outstanding notes validly
tendered prior to 5:00 p.m., New York City time, on the expiration date.
Stater Bros. will issue $1,000 in principal amount of exchange notes in
exchange for an equal principal amount of outstanding notes tendered and
accepted in the exchange offer. Holders may tender some or all of their
outstanding notes pursuant to the exchange offer in any denomination of $1,000
or in integral multiples thereof.
In addition, in connection with any resales of exchange notes, any broker-
dealer who acquired outstanding notes for its own account as a result of
market-making activities or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of the exchange notes. The Commission has taken the position that
participating broker-dealers may fulfill their prospectus delivery
requirements for the exchange notes, other than a resale of an unsold
allotment from the original sales of outstanding notes, with the prospectus
contained in the exchange offer registration statement. Under the registration
rights agreement, Stater Bros. is required to allow participating broker-
dealers, and other persons, if any, subject to similar prospectus delivery
requirements, to use the prospectus contained in the exchange offer
registration statement in connection with the resale of exchange notes.
However, Stater Bros. is not required to amend or supplement this prospectus
for a period exceeding 90 days after the date of the last expiration date. The
term "expiration date" means 5:00 p.m., New York City time, on , 1999
unless Stater Bros., in its sole discretion, extends the exchange offer. If
Stater Bros. extends the exchange offer, the "expiration date" will be 5:00
p.m., New York City time, on the latest date to which the exchange offer is
extended. The expiration date will be at least 30 days from the date that this
prospectus is mailed to the holders of the outstanding notes.
If Stater Bros. consummates the exchange offer on or before February 2,
2000, it will not be required to file a shelf registration statement to
register any outstanding notes. The interest rate on any outstanding notes
will remain at the initial level of 10 3/4% per annum. The exchange offer
will be deemed to have been consummated when Stater Bros. has exchanged,
pursuant to the exchange offer, exchange notes for outstanding notes that have
been properly tendered and not withdrawn by the expiration date. In this
event, holders of outstanding notes not participating in the exchange offer
who are seeking liquidity in their investment would have to rely on exemptions
to registration requirements under the securities laws, including the
Securities Act.
The form and terms of the exchange notes will be the same as the form and
terms of the outstanding notes except that the exchange notes will not bear
legends restricting the transfer thereof. The exchange notes will
20
evidence the same debt as the outstanding notes. The exchange notes will be
issued under and entitled to the benefits of the indenture.
As of the date of this prospectus, $450,000,000 aggregate principal amount
of the outstanding notes are outstanding and there is one registered holder
thereof. In connection with the issuance of the outstanding notes,
Stater Bros. arranged for the outstanding notes to be eligible for trading in
the Private Offering, Resale and Trading through Automated Linkages Market.
The PORTAL market is the National Association of Securities Dealers' screen
based, automated market trading of securities eligible for resale under Rule
144A. The exchange notes will also be issuable and transferable in book-entry
form through DTC.
Stater Bros. will be deemed to have accepted validly tendered outstanding
notes when, as and if it gives oral or written notice of acceptance to the
exchange agent. See "--Exchange Agent." The exchange agent will act as agent
for the tendering holders of outstanding notes for the purpose of receiving
exchange notes from Stater Bros. and delivering exchange notes to the holders.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events described in this
prospectus, certificates for the unaccepted outstanding notes will be
returned, without expense, to the tendering holder as promptly as practicable
after the expiration date.
Holders of outstanding notes who tender in the exchange offer will not be
required to pay:
. brokerage commissions or fees; or
. transfer taxes with respect to the exchange of outstanding notes
pursuant to the exchange offer, subject to the instructions in the
accompanying letter of transmittal.
Stater Bros. will pay all charges and expenses, other than specified taxes,
in connection with the exchange offer. See "--Fees and Expenses."
Holders of outstanding notes do not have any appraisal or dissenters' rights
in connection with the exchange offer. Stater Bros. intends to conduct the
exchange offer in accordance with the provisions of the registration rights
agreement and the applicable requirements of the Exchange Act and the rules
and regulations of the Commission interpreting the Exchange Act. Outstanding
notes that are not tendered for exchange in the exchange offer will remain
outstanding and be entitled and continue to accrue interest, but will not be
entitled to any rights or benefits under the registration rights agreement.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m. New York City time, on ,
1999 unless Stater Bros., in its sole discretion, extends the exchange offer.
If Stater Bros. extends the exchange offer, the "expiration date" will be
5:00 p.m. New York City time on the latest date to which the exchange offer is
extended.
If Stater Bros. extends the expiration date, it will:
. notify the exchange agent of any extension by oral or written notice;
and
. mail an announcement of the extension to the record holders of
outstanding notes prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
Any announcement may state that Stater Bros. is extending the exchange offer
for a specified period of time.
If any of the conditions listed under "Conditions to the Offer" occur and
are not waived by Stater Bros., by giving oral or written notice to the
exchange agent, Stater Bros. reserves the right:
. to delay acceptance of any outstanding notes;
. to extend the exchange offer;
21
. to terminate the exchange offer;
. to refuse to accept outstanding notes not previously accepted; and
. to amend the terms of the exchange offer in any manner it deems to be
advantageous to the holders of the outstanding notes.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as possible by oral or written notice to the exchange
agent. If the exchange offer is amended in a manner Stater Bros. determines
constitutes a material change, it will promptly disclose the amendment in a
way reasonably calculated to inform holders of the amendment.
Without limiting the manner in which Stater Bros. may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, Stater Bros. has no obligation to publish, advertise,
or otherwise communicate any public announcement, other than by making a
timely release to the Dow Jones News Service or PR Newswire.
Interest on the Exchange Notes
The exchange notes will bear interest from the last interest payment date on
which interest was paid on the outstanding notes. If interest has not yet been
paid, the outstanding notes will bear interest from August 6, 1999. Interest
will be paid with the first interest payment on the exchange notes. Interest
on the outstanding notes accepted for exchange will cease to accrue upon
issuance of the exchange notes.
The exchange notes will bear interest at a rate of 10 3/4% per annum.
Interest on the exchange notes will be payable semi-annually, in arrears, on
each February 15 and August 15 following the consummation of the exchange
offer. Untendered outstanding notes that are not exchanged for exchange notes
pursuant to the exchange offer will bear interest at a rate of 10 3/4% per
annum after the expiration date.
Procedures for Tendering Outstanding Notes
To tender in the exchange offer, holders must do the following:
. complete, sign and date the letter of transmittal, or a facsimile of it;
. have the signatures guaranteed, if required by the letter of
transmittal; and
. mail or deliver the letter of transmittal, or the facsimile, together
with the outstanding notes and any other required documents, to the
exchange agent.
The exchange agent must receive these documents by 5:00 p.m., New York City
time, on the expiration date.
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the outstanding notes by
causing DTC to transfer the outstanding notes into the exchange agent's
account via the ATOP system in accordance with DTC's transfer procedure.
Although delivery of outstanding notes may be effected through book-entry
transfer into the exchange agent's account at DTC, the letter of transmittal,
or its facsimile, with any required signature guarantees and documents, must,
in any case, be transmitted to and received or confirmed by the exchange agent
at its addresses in this prospectus prior to 5:00 p.m., New York City time, on
the expiration date. Delivery of documents to DTC in accordance with its
procedures does not constitute delivery to the exchange agent.
Tender of outstanding notes by a holder will constitute an agreement between
the holder and Stater Bros. in accordance with the terms and subject to the
conditions in this prospectus and in the letter of transmittal.
22
Delivery of all documents must be made to the exchange agent at its address
listed in this prospectus. Holders may also request that their respective
brokers, dealers, commercial banks, trust companies or nominees effect tender
for them.
The method of delivery of outstanding notes and the letter of transmittal
and all other required documents to the exchange agent is up to each holder.
However, holders also bear the risks of non-delivery. Instead of delivery by
mail, Stater Bros. recommends use of an overnight or hand delivery service. In
all cases, holders should allow sufficient time to assure timely delivery. No
letter of transmittal should be sent to Stater Bros.
Only a holder of outstanding notes may tender outstanding notes in the
exchange offer. The term "holder" with respect to the exchange offer means any
person in whose name outstanding notes are registered on Stater Bros.' books
or any other person who has obtained a properly completed bond power from the
registered holder or any person whose outstanding notes are held of record by
DTC who desires to deliver the outstanding notes by book-entry transfer at
DTC.
Any beneficial holder whose outstanding notes are registered in the name of
the holder's broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder promptly and
instruct the registered holder to tender on the holder's behalf. If the
beneficial holder wishes to tender on the holder's own behalf, the beneficial
holder must, prior to completing and executing the letter of transmittal and
delivering the outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in the holder's name or obtain a
properly completed bond power from the registered holder. The transfer of
record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an "eligible institution" unless the outstanding
notes tendered are:
. tendered by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
. tendered for the account of an "eligible institution."
An eligible institution is:
. a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
. a commercial bank or trust company having an office or correspondent in
the United States, or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act; or
. an "eligible institution" that is a participant in a recognized
medallion signature guarantee program.
If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes listed therein, the outstanding notes tendered
must be endorsed or accompanied by appropriate bond powers which authorize
that person to tender the outstanding notes on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the outstanding notes.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, the person should indicate this when signing, and unless waived by
Stater Bros., submit evidence satisfactory to Stater Bros. of that person's
authority to so act with the letter of transmittal.
Stater Bros. will determine, in its sole discretion, all questions as to the
validity, form, and eligibility, including time of receipt, acceptance and
withdrawal of the tendered outstanding notes. Stater Bros.' determination will
be final and binding. Stater Bros. reserves the absolute right to reject any
and all outstanding notes not properly tendered or any outstanding notes of
which acceptance would, in the opinion of Stater Bros.' counsel, be unlawful.
Stater Bros. also reserves the absolute right to waive any irregularities or
conditions of
23
tender as to particular outstanding notes. Stater Bros.' interpretation of the
terms and conditions of the exchange offer, including the instructions in the
letter of transmittal, will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of
outstanding notes must be cured within the time as Stater Bros. determines.
Neither Stater Bros., the exchange agent nor any other person is under any
duty to give notification of defects or irregularities with respect to tenders
of outstanding notes. Additionally, none of them will incur any liability for
failure to give this notification. Tenders of outstanding notes will not be
deemed to have been made until these irregularities have been cured or waived.
Any outstanding notes received by the exchange agent that have defects or
irregularities not cured or waived by Stater Bros. will be returned to holders
without cost by the exchange agent, unless otherwise provided in the letter of
transmittal as soon as practicable after the expiration date.
In addition, Stater Bros. reserves the right in its sole discretion to:
. purchase or make offers for any outstanding notes that remain
outstanding subsequent to the expiration date;
. terminate the exchange offer according to the terms in "--Conditions to
the Offer"; and
. to the extent permitted by applicable law, purchase outstanding notes in
the open market, in privately negotiated transactions or otherwise.
The terms of any of these purchases or offers may differ from the terms of
the exchange offer.
Guaranteed Delivery Procedures
If holders wish to tender their outstanding notes and either their
outstanding notes are not immediately available, or they cannot deliver their
outstanding notes, the letter of transmittal or any other required documents
to the exchange agent prior to the expiration date, or if they cannot complete
the procedure for book-entry transfer on a timely basis, they may effect a
tender if:
. the tender is made through an eligible institution;
. prior to the expiration date, the exchange agent receives from an
eligible institution a properly completed and duly executed notice of
guaranteed delivery, by facsimile transmission, mail or hand delivery,
stating the name and address of the holder of the outstanding notes, the
certificate number or numbers of such outstanding notes and the
principal amount of outstanding notes tendered, stating that the tender
is being made, and guaranteeing that, within three business days after
the expiration date, the letter of transmittal, or facsimile thereof,
together with the certificate(s) representing the outstanding notes,
unless the book-entry transfer procedures are to be used, to be tendered
in proper form for transfer and any other documents required by the
letter of transmittal, will be deposited by the eligible institution
with the exchange agent; and
. the properly completed and executed letter of transmittal, or facsimile
thereof, together with the certificates representing all tendered
outstanding notes in proper form for transfer, or confirmation of a
book-entry transfer into the exchange agent's account at DTC of
outstanding notes delivered electronically, and all other documents
required by the letter of transmittal are received by the exchange agent
within three business days after the expiration date.
If holders wish to tender their outstanding notes according to the
guaranteed delivery procedures, they should make request to the exchange agent
and a notice of guaranteed delivery will be sent to them.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.
24
To withdraw a tender of outstanding notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the
exchange agent at the address given in this prospectus prior to 5:00 p.m., New
York City time, on the expiration date. Any notice of withdrawal must:
. specify the name of the person having deposited the outstanding notes to
be withdrawn;
. identify the outstanding notes to be withdrawn, including the
certificate number or numbers and principal amount of the outstanding
notes;
. be signed by the depositor in the same manner as the original signature
on the letter of transmittal by tendering the outstanding notes,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to permit the trustee of the
outstanding notes to register the transfer of the outstanding notes into
the name of the depositor withdrawing the tender; and
. specify the name in which any outstanding notes are to be registered, if
different from that of the depositor.
All questions as to the validity, form and eligibility, including time of
receipt, of any withdrawal notices will be determined by Stater Bros., and
will be final and binding on all parties. Any outstanding notes so withdrawn
will be deemed not to have been validly tendered for purposes of the exchange
offer, and no exchange notes will be issued unless the outstanding notes
previously withdrawn are validly re-tendered. Any outstanding notes that have
been tendered but which are not accepted for exchange will be returned to the
holder without cost to the holder as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn
outstanding notes may be re-tendered by following one of the procedures
described above under "Procedures for Tendering Outstanding Notes" at any time
prior to the expiration date.
Conditions to the Offer
Regardless of any other term of the exchange offer, Stater Bros. is not
required to accept for exchange or to exchange any outstanding notes that are
not accepted for exchange according to the terms of the exchange offer.
Additionally, Stater Bros. may terminate or amend the exchange offer as
provided in this prospectus before accepting the outstanding notes if:
. any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer,
which, in Stater Bros.' judgment, might materially impair its ability to
proceed with the exchange offer; or
. any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the
staff of the Commission in a manner, which, in Stater Bros.' judgment,
might materially impair its ability to proceed with the exchange offer.
These conditions are for Stater Bros.' sole benefit. Stater Bros. may assert
them in whole or in part at any time and from time to time, in its sole
discretion. Stater Bros.' failure at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any right and the right shall be deemed
an ongoing right which may be asserted at any time and from time to time.
In addition, Stater Bros. will not accept for exchange any outstanding notes
tendered, and no exchange notes will be issued in exchange for any outstanding
notes, if at the time of tender:
. a stop order is threatened by the Commission or is in effect for the
registration statement that this prospectus is a part of; or
. a stop order is threatened or in effect regarding qualification of the
indenture under the Trust Indenture Act of 1939, as amended.
If Stater Bros. determines that it may terminate or amend the exchange
offer, it may:
. refuse to accept any outstanding notes and return any tendered
outstanding notes to the holder;
25
. extend the exchange offer and retain all outstanding notes tendered
prior to the expiration of the exchange offer, subject to the rights of
the holders of tendered outstanding notes to withdraw their tendered
outstanding notes;
. waive the termination event with respect to the exchange offer and
accept all properly tendered outstanding notes that have not been
withdrawn; or
. amend the exchange offer at any time prior to 5:00 p.m. New York City
time on the expiration date.
If the waiver or amendment constitutes a material change in the exchange
offer, Stater Bros. will disclose the change by means of a supplement to this
prospectus that will be distributed to each registered holder of outstanding
notes, and Stater Bros. will extend the exchange offer for a period of five to
ten business days, if the exchange offer would otherwise expire during that
period, depending on the significance of the waiver or amendment and the
manner of disclosure to the registered holders of the outstanding notes.
The exchange offer is not conditioned on any minimum principal amount of
outstanding notes being tendered for exchange.
Exchange Agent
IBJ Whitehall Bank & Trust Company has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to the exchange agent addressed as follows:
By Mail, Overnight Courier or Hand Delivery:
IBJ Whitehall Bank & Trust Company
1 State Street
New York, NY 10004
Attention: Customer Service
Telephone number: (212) 858-2103
Facsimile transmission: (212) 858-2611
Fees and Expenses
Stater Bros. will bear the expenses of soliciting tenders pursuant to the
exchange offer. The principal solicitation for tenders pursuant to the
exchange offer is being made by mail. Additional solicitations may be made by
Stater Bros. officers and regular employees and Stater Bros.' affiliates in
person, by telegraph or by telephone.
Stater Bros. will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. Stater Bros. will, however, pay
the exchange agent reasonable customary fees for its services and will
reimburse the exchange agent for its reasonable out-of-pocket expenses in
connection with this exchange offer. Stater Bros. may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable out-of-
pocket expenses they incur in forwarding copies of this prospectus, letters of
transmittal and related documents to the beneficial owners of the outstanding
notes and in handling or forwarding tenders for exchange.
Stater Bros. will pay the fees and expenses incurred in connection with the
exchange offer, for the following:
. the exchange agent;
. the trustee;
. accounting; and
. legal services.
26
Stater Bros. will pay all transfer taxes, if any, applicable to the exchange
of outstanding notes pursuant to the exchange offer. The amount of these
transfer taxes, whether imposed on the registered holder or any other persons,
will be payable by the tendering holder if:
. certificates representing exchange notes or outstanding notes not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the
registered holder of the outstanding notes tendered;
. tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of
outstanding notes pursuant to the exchange offer.
If satisfactory evidence of payment of, or exemption from, these taxes is
not submitted with the letter of transmittal, the amount of these transfer
taxes will be billed directly to the tendering holder.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
outstanding notes, which is face value, as reflected in Stater Bros.'
accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes will be recognized by Stater Bros. upon the
consummation of the exchange offer. The expenses of the exchange offer will be
amortized by Stater Bros. over the term of the exchange notes under generally
accepted accounting principles.
27
CAPITALIZATION
The following table sets forth the unaudited capitalization of Stater Bros.
as of June 27, 1999 on an actual basis and on a pro forma basis after giving
effect to the related transactions and the application of the proceeds from
the offering of the outstanding notes as if they had occurred on June 27,
1999. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Stater
Bros.' consolidated financial statements.
As of June 27, 1999
-------------------
Actual Pro Forma
-------- ---------
(In thousands)
Cash and cash equivalents(1)............................... $ 55,427 $ 50,948
======== ========
Long-term debt (including current maturities):
Capital lease obligations(2)............................. $ 4,688 $ 18,117
New Credit Facility(3)................................... -- --
11% Senior Notes due 2001................................ 165,000 5,148
10 3/4% Senior Notes due 2006............................ -- 450,000
9% Senior Subordinated Notes due 2004.................... 100,000 --
-------- --------
Total long-term debt................................... 269,688 473,265
Stockholders' deficit(4)................................... (24,821) (41,908)
-------- --------
Total capitalization................................... $244,867 $431,357
======== ========
- --------
(1) Pro forma cash and cash equivalents reflect year-to-date expenditures of
$10.6 million for capital expenditures related to the acquisition. As a
result, pro forma cash and cash equivalents reflect the use of $15.1
million for the related transactions less Stater Bros.' year-to-date
expenditure of $10.6 million for capital expenditures related to the
acquisition.
(2) Pro forma amount includes the assumption of $13.4 million of capitalized
lease obligations related to the acquisition.
(3) On August 6, 1999, Stater Bros. Markets entered into a new unsecured bank
credit facility with Bank of America. The new credit facility consists of
a $50.0 million credit facility with an additional $25.0 million facility
available for the issuance of commercial and standby letters of credit.
The term of the new credit facility is three years. It is expected that
borrowings under the new credit facility will be used for certain working
capital and corporate purposes. At August 17, 1999, there were no
revolving borrowings outstanding thereunder and the aggregate amount of
all letters of credit issued thereunder was approximately $10.0 million.
See "Description of Certain Indebtedness."
(4) Pro forma amount reflects the following extraordinary charges, net of
taxes, associated with the related transactions: (i) a $6.0 million write-
off of deferred financing fees associated with the 11% senior notes, the
9% senior subordinated notes and the existing bank credit facility and
(ii) $11.1 million of estimated aggregate tender premiums associated with
the tender offer.
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following tables provide pro forma financial data for Stater Bros.
reflecting the completion of the Acquisition Transactions. The pro forma
earnings and operating information for the 52 weeks ended September 27, 1998
gives effect to the Acquisition Transactions as if they had occurred September
30, 1997. The pro forma earnings and operating information for the 39 weeks
ended June 27, 1999 gives effect to the Acquisition Transactions as if they
had occurred as of September 28, 1998 and the pro forma balance sheet
information as of June 27, 1999 gives effect to the Acquisition Transactions
as if they had occurred on June 27, 1999. This pro forma information, while
helpful in illustrating the financial characteristics of Stater Bros. after
the completion of the Acquisition Transactions under one set of assumptions,
does not attempt to predict or suggest future results. It also does not
necessarily reflect what the historical results of Stater Bros. would have
been had the Acquisition Transactions actually occurred as of or on the dates
stated above. For a discussion of factors that could impact the accuracy of
the pro forma financial information, see "Risk Factors--Risk Related to the
Acquisition." The information in the following tables is based on historical
financial information of Stater Bros. The information for Albertson's Stores
and Lucky Stores is derived from the historical financial information included
in this prospectus. Investors should read the following tables in connection
with this historical financial information and with the more detailed
financial information Stater Bros. has provided in this document.
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(As of June 27, 1999)
Historical
----------------------------------------------- Pro Forma Stater Bros.
Stater Bros. Albertson's(a) Lucky(a) Combined Adjustments Pro Forma
------------ -------------- -------- --------- ----------- ------------
(In thousands)
ASSETS:
-------
Current assets
Cash and cash
equivalents........... $ 55,427 $ -- $ -- $ 55,427 $ (4,479)(b) $ 50,948
Receivables............ 21,636 -- -- 21,636 11,874 (c) 33,510
Inventories............ 113,048 36,236 7,900 157,184 8,306 (d) 165,490
Prepaid expenses....... 6,588 747 239 7,574 (986)(e) 6,588
Deferred income taxes.. 4,589 -- -- 4,589 -- 4,589
Properties held for
sale.................. 1,251 -- -- 1,251 -- 1,251
Other current assets... -- 1,214 884 2,098 (2,098)(e) --
--------- -------- -------- --------- --------- ---------
Total current assets... 202,539 38,197 9,023 249,759 12,617 262,376
Investment in
unconsolidated
affiliate.............. 9,396 -- -- 9,396 -- 9,396
Property and equipment
Land................... 17,287 23,186 2,598 43,071 2,643 (f) 45,714
Buildings and
improvements.......... 99,378 56,156 7,235 162,769 5,546 (f) 168,315
Store fixtures and
equipment............. 126,723 53,706 27,771 208,200 (53,004)(f) 155,196
Property subject to
capital leases, net... 14,368 5,617 4,933 24,918 1,966 (f) 26,884
--------- -------- -------- --------- --------- ---------
257,756 138,665 42,537 438,958 (42,849) 396,109
Less accumulated
depreciation and
amortization.......... (116,901) (59,229) (18,663) (194,793) 77,892 (g) (116,901)
--------- -------- -------- --------- --------- ---------
Net property and
equipment.............. 140,855 79,436 23,874 244,165 35,043 279,208
Deferred income taxes... 2,449 -- -- 2,449 -- 2,449
Deferred debt issuance
costs, net............. 10,185 -- -- 10,185 6,215 (h) 16,400
Lease guarantee escrow.. 10,957 -- -- 10,957 -- 10,957
Other assets............ 5,871 -- -- 5,871 1,069 (i) 6,940
--------- -------- -------- --------- --------- ---------
Total assets............ $ 382,252 $117,633 $ 32,897 $ 532,782 $ 54,944 $ 587,726
========= ======== ======== ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT):
------------------------
Current liabilities
Accounts payable....... $ 65,728 $ -- $ -- $ 65,728 $ 18,984 (j) $ 84,712
Accrued payroll and
related expenses...... 27,804 -- -- 27,804 -- 27,804
Other accrued
liabilities........... 31,989 5,239 331 37,559 (5,570)(e) 31,989
--------- -------- -------- --------- --------- ---------
Total current
liabilities........... 125,521 5,239 331 131,091 13,414 144,505
Net purchase obligation. -- 104,673 26,858 131,531 (131,531)(k) --
Long-term debt,
including current
portion................ 265,000 -- -- 265,000 190,148 (l) 455,148
Capital lease
obligations, including
current portion........ 4,688 7,721 5,708 18,117 -- 18,117
Long-term portion of
self-insurance and
other reserves......... 8,284 -- -- 8,284 -- 8,284
Other long-term
liabilities............ 3,580 -- -- 3,580 -- 3,580
Stockholders' (deficit)
Class A Common Stock... 1 -- -- 1 -- 1
Additional paid-in
capital............... 12,715 -- -- 12,715 -- 12,715
Retained earnings
(deficit)............. (37,537) -- -- (37,537) (17,087)(m) (54,624)
--------- -------- -------- --------- --------- ---------
Total stockholders'
(deficit)............. (24,821) -- -- (24,821) (17,087) (41,908)
--------- -------- -------- --------- --------- ---------
Total liabilities and
stockholders'
(deficit).............. $ 382,252 $117,633 $ 32,897 $ 532,782 $ 54,944 $ 587,726
========= ======== ======== ========= ========= =========
footnotes on following page
30
- --------
(a) Reflects the financial position of Albertson's Stores and Lucky Stores as
of April 29, 1999 and May 1, 1999, respectively.
(b) The net adjustments to cash and cash equivalents are anticipated to be as
follows:
Increases:
Offering of outstanding notes.................................. $ 450,000
---------
Total increases.............................................. $ 450,000
Decreases:
Repurchase of 11% Senior Notes and 9% Senior Subordinated
Notes......................................................... $(259,852)
Acquisition consideration(1)................................... (133,613)
Capital expenditures(2)........................................ (24,198)
Tender premiums(3)............................................. (18,777)
Estimated fees and expenses.................................... (16,400)
Other, net(4).................................................. (1,639)
---------
Total decreases.............................................. (454,479)
---------
Net adjustment to cash and cash equivalents.................... $ (4,479)
=========
--------
(1) Reflects the purchase of property, plant and equipment ($94.9 million)
and the estimated value of inventories at closing ($38.7 million).
(2) Reflects capital expenditures related to the acquisition which are
expected to be incurred after June 27, 1999.
(3) As of July 30, 1999, Stater Bros. had received the consents and tenders
from holders of approximately $159.9 million and holders of $100.0
million of the outstanding principal amount of the 11% senior notes and
the 9% senior subordinated notes, respectively. The 11% senior notes
and the 9% senior subordinated notes mature on March 1, 2001 and July
1, 2004, respectively. Stater Bros. may choose to defease any
outstanding 11% senior notes that are not purchased pursuant to the
tender offer, in accordance with the applicable indenture.
(4) Reflects estimated post-closing adjustments related to the acquisition.
(c) Reflects the income tax receivable associated with the write-off of
deferred financing fees and the tender premiums related to the tender
offer.
(d) Reflects an estimated increase associated with certain warehouse
inventories ($17.8 million) offset in part by the anticipated write-down
of Albertson's and Lucky's private label and other inventories ($9.5
million).
(e) Reflects the elimination of certain net accrued real estate liabilities
which are obligations of the previous owner of the acquired stores.
(f) Reflects purchase accounting adjustments associated with the acquisition.
(g) Reflects the elimination of the accumulated depreciation and amortization
associated with the fixed assets of the acquired stores.
(h) Reflects the write-off of deferred financing fees ($10.2 million) and the
addition of issuance costs associated with the related transactions ($16.4
million).
(i) Reflects the assumed value of liquor licenses acquired in the acquisition.
(j) Reflects an increase in trade payables associated with the acquisition of
inventories.
(k) Reflects the elimination of the net book value of the assets acquired.
(l) Reflects the retirement of a substantial portion of the 11% senior notes
and the retirement of the 9% senior subordinated notes ($259.9 million)
and the addition of the exchange notes ($450.0 million).
(m) Reflects the write-off (net of taxes) of deferred financing fees ($6.0
million) and the tender premiums related to the tender offer ($11.1
million).
31
STATER BROS. HOLDINGS INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND OTHER OPERATING DATA
52 WEEKS ENDED SEPTEMBER 27, 1998
(In thousands, except per share and share amounts)
Historical
------------------------------------------------ Pro Forma Stater Bros.
Stater Bros. Albertson's(a) Lucky(a) Combined Adjustments Pro Forma
------------ -------------- -------- ---------- ----------- ------------
(In thousands)
Sales................... $1,726,107 $519,684 $149,562 $2,395,353 $ -- $2,395,353
Cost of sales........... 1,323,522 381,448 110,340 1,815,310 2,729 (b) 1,818,039
---------- -------- -------- ---------- -------- ----------
Gross profit............ 402,585 138,236 39,222 580,043 (2,729) 577,314
Operating expenses:
Selling, general and
administrative
expenses............. 353,075 112,936 29,746 495,757 4,401 (c) 500,158
Depreciation and
amortization......... 15,434 9,150 2,734 27,318 1,073 (d) 28,391
---------- -------- -------- ---------- -------- ----------
Operating profit........ 34,076 16,150 6,742 56,968 (8,203) 48,765
Interest income......... 3,059 3,059 (647)(e) 2,412
Interest expense........ (30,206) (886) (523) (31,615) (21,326)(f) (52,941)
Equity in earnings
(loss) from
unconsolidated
affiliate.............. (2,941) -- -- (2,941) -- (2,941)
Other, net.............. 2 -- -- 2 -- 2
---------- -------- -------- ---------- -------- ----------
Earnings (loss) before
income taxes........... 3,990 $ 15,264 $ 6,219 25,473 (30,176) (4,703)
======== ========
Income taxes (benefit).. 1,459 1,459 (3,387)(g) (1,928)
---------- ---------- -------- ----------
Net earnings............ $ 2,531 $ 24,014 $(26,789)(h) $ (2,775)
========== ========== ======== ==========
Earnings (loss) per
common share........... $ 50.62 $ (55.50)
========== ==========
Average number of shares
outstanding............ 50,000 50,000
========== ==========
Other Operating Data:
EBITDA(i)............... $ 52,569 $ 25,300 $ 9,476 $ 87,345 $ (7,777) $ 79,568
Depreciation and
amortization........... $ 15,434 $ 9,150 $ 2,734 $ 27,318 $ 1,073 $ 28,391
[footnotes on page 34]
32
STATER BROS. HOLDINGS INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND OTHER OPERATING DATA
39 WEEKS ENDED JUNE 27, 1999
(In thousands, except per share and share amounts)
Historical
------------------------------------------------ Pro Forma Stater Bros.
Stater Bros. Albertson's(a) Lucky(a) Combined Adjustments ProForma
------------ -------------- -------- ---------- ----------- ------------
Sales..................... $1,324,358 $389,189 $110,445 $1,823,992 $ $1,823,992
Cost of sales............. 1,011,542 281,424 80,593 1,373,559 2,047 (b) 1,375,606
---------- -------- -------- ---------- -------- ----------
Gross profit.............. 312,816 107,765 29,852 450,433 (2,047) 448,386
Operating expenses:
Selling, general and
administrative expenses. 265,907 83,423 22,217 371,547 3,301 (c) 374,848
Depreciation and
amortization ............ 11,813 6,821 2,087 20,721 805 (d) 21,526
---------- -------- -------- ---------- -------- ----------
Operating profit.......... 35,096 17,521 5,548 58,165 (6,153) 52,012
Interest income........... 2,388 2,388 (485)(e) 1,903
Interest expense.......... (22,699) (651) (386) (23,736) (15,995)(f) (39,731)
Equity in earnings (loss)
from unconsolidated
affiliate................ 924 -- -- 924 -- 924
Other, net................ (319) -- -- (319) -- (319)
---------- -------- -------- ---------- -------- ----------
Earnings (loss) before
income taxes............. 15,390 $ 16,870 $ 5,162 37,422 (22,633) 14,789
======== ========
Income taxes (benefit).... 6,156 6,156 (93)(g) 6,063
---------- ---------- -------- ----------
Net earnings.............. $ 9,234 $ 31,266 $(22,540)(h) $ 8,726
========== ========== ======== ==========
Earnings (loss) per common
share.................... $ 184.68 $174.52
========== ==========
Average number of shares
outstanding.............. 50,000 50,000
========== ==========
Other Operating Data:
EBITDA(i)................ $ 49,297 $ 24,342 $ 7,635 $ 81,274 $ (5,833) $ 75,441
Depreciation and
amortization............ $ 11,813 $ 6,821 $ 2,087 $ 20,721 $ 805 $ 21,526
[footnotes on following page]
33
- --------
(a) Reflects, for the 52 weeks ended September 27, 1998 for Stater Bros.
Holdings Inc., 52 weeks ended January 28, 1999 for the Albertson's Stores
and 52 weeks ended January 30, 1999 for the Lucky Stores.
Reflects, for the 39 weeks ended June 27, 1999 for Stater Bros. Holdings
Inc., 39 weeks ended April 29, 1999 for the Albertson's Stores and 39 weeks
ended May 1, 1999 for the Lucky Stores.
(b) Reflects the estimated additional warehousing and distribution costs
associated with processing the product requirements of the acquired stores
through Stater Bros.' warehouse and distribution facilities.
(c) Reflects estimated additional selling, general and administrative expenses
required to support the acquired stores.
(d) Reflects an increase in depreciation and amortization.
(e) Reflects a reduction in interest income resulting from the use of cash and
cash equivalents in connection with the related transactions.
(f) Reflects additional interest expense and amortization of debt issue costs
from debt incurred to finance the transaction.
(g) Reflects the adjustment necessary to state the pro forma income taxes at
an assumed rate of 41%.
(h) Excludes extraordinary loss from early extinguishment of debt of $17.1
million, net of income tax benefit of $11.9 million.
(i) EBITDA, as calculated per the definition of "Consolidated Cash Flow"
contained in the indenture governing the exchange notes offered hereby,
represents the sum of net loss, extraordinary (charge), income taxes,
interest expense, depreciation and amortization and non-cash expenses
(income). Stater Bros.' non-cash expenses (income) are reflected in other
income (expense)--net and equity in earnings from unconsolidated
affiliate. Stater Bros. has included information concerning EBITDA as it
is relevant for covenant analysis under the exchange notes and because it
is used by certain investors as a measure of a company's ability to
service its debt. EBITDA should not be used as an alternative to, or be
construed as more meaningful than, operating income or cash flows as an
indicator of Stater Bros.' operating performance.
34
SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected consolidated financial data and other
information. The annual data for 1994 and 1995 are derived from audited
consolidated financial statements not included in this prospectus. The annual
data for 1996, 1997 and 1998 are derived from the audited consolidated
financial statements of Stater Bros. and the related notes which appear
elsewhere in this document. The information for the 39-week periods is derived
from unaudited consolidated financial statements contained elsewhere in this
document. In the opinion of management, such unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of this data. The results for
the 39 weeks ended June 27, 1999 are not necessarily indicative of the results
for a full year or for any future period. Investors should read the complete
historical financial statements included elsewhere in this prospectus and
should read the following information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
which appears elsewhere in the prospectus.
SELECTED HISTORICAL FINANCIAL AND STATISTICAL DATA
OF STATER BROS.
Unaudited
----------------------
Fiscal Years Ended 39 Weeks Ended
--------------------------------------------------------------------- ----------------------
September 25, September 24, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996(1) 1997 1998 1998 1999
------------- ------------- ------------- ------------- ------------- ---------- ----------
(In thousands, except for other operating and financial data and store data)
Statement of Earnings
Data:
Sales................... $1,539,717 $1,579,895 $1,705,332 $1,717,924 $1,726,107 $1,285,048 $1,324,358
Cost of goods sold...... 1,199,794 1,227,355 1,315,726 1,326,410 1,323,522 987,172 1,011,542
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 339,923 352,540 389,606 391,514 402,585 297,876 312,816
Operating expenses:
Selling, general and
administrative
expenses.............. 297,474 308,332 328,242 333,199 353,075 261,216 265,907
Depreciation and
amortization.......... 11,656 11,756 12,583 13,265 15,434 11,345 11,813
Consulting fees(2)..... 830 1,500 1,525 1,458 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 309,960 321,588 342,350 347,922 368,509 272,561 277,720
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit........ 29,963 30,952 47,256 43,592 34,076 25,315 35,096
Interest income......... 384 952 1,929 3,034 3,059 2,371 2,388
Interest expense........ (15,501) (20,076) (20,258) (21,563) (30,206) (22,641) (22,699)
Equity in earnings
(loss) from
unconsolidated
affiliate.............. (592) (980) (1,624) (2,313) (2,941) (2,692) 924
Other income (expense)--
net.................... 391 97 (172) 76 2 42 (319)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes, extraordinary
charge and cumulative
effect of a change in
accounting for income
taxes.................. 14,645 10,945 27,131 22,826 3,990 2,395 15,390
Income taxes............ 5,856 4,218 11,120 9,359 1,459 982 6,156
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary charge
and cumulative effect
of a change in
accounting for income
taxes.................. 8,789 6,727 16,011 13,467 2,531 1,413 9,234
Extraordinary
(charge)(3)............ (8,036) -- -- -- -- -- --
Cumulative effect of a
change in accounting
for income taxes(4).... 372 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. 1,125 6,727 16,011 13,467 2,531 1,413 9,234
Preferred dividends..... 327 -- 4,111 6,166 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income available to
common stockholders.... $ 798 $ 6,727 $ 11,900 $ 7,301 $ 2,531 $ 1,413 $ 9,234
========== ========== ========== ========== ========== ========== ==========
Earnings per common
share before
extraordinary charge
and cumulative effect
of a change in
accounting for income
taxes.................. $ 84.62 $ 67.27 $ 165.28 $ 146.02 $ 50.62 $ 28.26 $ 184.68
Earnings per common
share.................. $ 7.98 $ 67.27 $ 165.28 $ 146.02 $ 50.62 $ 28.26 $ 184.68
35
Unaudited
-------------------
Fiscal Years Ended 39 Weeks Ended
--------------------------------------------------------------------- -------------------
September 25, September 24, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996(1) 1997 1998 1998 1999
------------- ------------- ------------- ------------- ------------- -------- --------
(In thousands, except for other operating and financial data and store data)
Balance Sheet Data (end
of period):
Cash and cash
equivalents............ $ 21,289 $ 26,308 $ 45,279 $ 59,086 $ 57,281 $48,000 $55,427
Working capital......... 41,422 45,014 63,473 92,013 90,725 87,039 75,647
Total assets............ 306,489 314,082 338,294 358,477 364,318 361,615 382,252
Total debt.............. 175,342 174,186 173,099 271,917 270,660 270,976 269,688
Total stockholders'
equity (deficit)....... 6,851 13,578 (43,887) (36,586) (34,055) (35,173) (24,821)
Other Operating and
Financial Data:
Sales increases
(decreases):
Total stores........... 0.9% 2.6% 7.9% 0.7% 0.5% (0.6)% 3.1%
Like stores (comparable
52 weeks)............. (0.7)% 1.2% 6.3% 2.6% (1.0)% (1.8)% 2.5%
EBITDA (000s)(5)........ $ 42,003 $ 43,660 $ 61,768 $ 59,891 $ 52,569 $39,031 $49,297
Capital expenditures
(000s)................. 19,409 13,178 22,415 20,268 26,278 20,287 34,382
Gross profit as a
percentage of sales.... 22.08% 22.31% 22.85% 22.79% 23.32% 23.18% 23.62%
Selling, general and
administrative expenses
as a percentage of
sales.................. 19.32% 19.52% 19.25% 19.40% 20.46% 20.33% 20.08%
EBITDA as a percentage
of sales............... 2.73% 2.76% 3.62% 3.49% 3.05% 3.04% 3.72%
Ratio of earnings to
fixed charges(6)....... 1.47x 1.36x 1.53x 1.23x 1.03x -- 1.42x
Store Data:
Number of stores (at end
of period)............. 111 110 110 110 112 112 112
Average sales per store
(000s)................. $ 13,997 $ 14,298 $ 15,503 $ 15,617 $ 15,551 $11,474 $11,825
Average store size:
Total square feet...... 28,617 28,717 28,809 28,809 29,061 29,061 29,177
Selling square feet.... 20,708 20,773 20,845 20,845 20,991 20,991 21,047
Total square feet (at
end of period) (000s).. 3,177 3,159 3,169 3,169 3,255 3,255 3,268
Total selling square
feet (at end of period)
(000s)................. 2,299 2,285 2,293 2,293 2,351 2,351 2,357
Sales per average total
square foot............ $ 492 $ 499 $ 538 $ 542 $ 537 $ 395 $ 405
Sales per average
selling square foot.... $ 680 $ 689 $ 744 $ 749 $ 743 $ 547 $ 562
- -------
(1) The year ending September 29, 1996 was a 53-week year, whereas fiscal
1994, 1995, 1997 and 1998 were 52-week years.
(2) During 1994, 1995, 1996 and 1997, consulting fees were paid pursuant to
consulting agreements with La Cadena Investments and Craig Corporation.
These consulting agreements were terminated on July 31, 1997.
(3) The extraordinary charge for 1994 represents an after-tax charge for the
early retirement of debt.
(4) Stater Bros. adopted SFAS No. 109 ("Accounting For Income Taxes")
effective at the beginning of the fiscal year ended September 25, 1994 as
a cumulative effect of a change in accounting principles.
(5) EBITDA, as calculated per the definition of "Consolidated Cash Flow"
contained in the indenture governing the exchange notes offered hereby,
represents the sum of net income, cumulative effect of a change in
accounting for income taxes, extraordinary (charge), income taxes,
interest expense, depreciation and amortization and non-cash expenses
(income). For each of the periods presented above, Stater Bros.' non-cash
expenses (income) were reflected in other income (expense)--net and equity
in earnings (loss) from unconsolidated affiliate. Stater Bros. has
included information concerning EBITDA as it is relevant for covenant
analysis under the exchange notes and because it is used by certain
investors as a measure of a company's ability to service its debt. EBITDA
should not be used as an alternative to, or be construed as more
meaningful than, operating income or cash flows as an indicator of Stater
Bros.' operating performance.
(6) For purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary charges,
amortization of previously capitalized interest and undistributed earnings
or loss from less than 50% owned subsidiaries and includes fixed charges.
Fixed charges consist of interest expense whether expensed or capitalized,
amortization of deferred debt expense, preferred stock dividends adjusted
to represent pre-tax earnings requirements and such portion of rental
expenses as deemed by management to be representative of the interest
factor in the particular case. Earnings were insufficient to cover fixed
charges for the 39 weeks ended June 28, 1998 by approximately $1.1
million.
36
SELECTED HISTORICAL FINANCIAL AND STATISTICAL DATA
OF THE ACQUIRED STORES
The following tables show selected historical financial and statistical data
for the stores to be acquired from Albertson's. This information is derived
from the audited financial statements for stores to be acquired from
Albertson's and the related notes which appear elsewhere in this prospectus.
The data set forth below for the 13-week periods are derived from unaudited
financial statements which are included elsewhere in this prospectus. In the
opinion of management, such unaudited financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of this data. The results for the 13-week periods are not
necessarily indicative of the results for a full year or for any future
period. The other operating data information contained below are unaudited and
are derived from their respective financial data. Investors should read the
complete historical financial statements included elsewhere in this
prospectus.
Unaudited
--------------------
Fiscal Years Ended 13 Weeks Ended
----------------------------------- --------------------
January 30, January 29, January 28, April 30, April 29,
Albertson's Stores 1997 1998 1999 1998 1999
- ------------------ ----------- ----------- ----------- --------- ---------
(In thousands, except store data)
Statement of Store Level
Earnings:
Sales.................... $474,928 $507,088 $519,684 $129,845 $130,612
Cost of sales(1)......... 354,723 375,988 381,448 96,326 94,093
-------- -------- -------- -------- --------
Gross profit............. 120,205 131,100 138,236 33,519 36,519
Store operating
expenses(2)............. 105,685 115,832 122,972 29,902 30,292
-------- -------- -------- -------- --------
Store level earnings..... $ 14,520 $ 15,268 $ 15,264 $ 3,617 $ 6,227
======== ======== ======== ======== ========
Other Operating Data:
EBITDA(3)................ $ 23,005 $ 24,769 $ 25,300 $ 6,092 $ 8,660
Interest expense......... 966 929 886 226 214
Depreciation and
amortization............ 7,519 8,572 9,150 2,249 2,219
Store Data:
Number of stores (at end
of period).............. 32 33 33 33 33
Unaudited
-----------------
Fiscal Years Ended 13 Weeks Ended
----------------------------------- --------------------
February 1, January 31, January 30, May 2, May 1,
Lucky Stores 1997 1998 1999 1998 1999
- ------------ ----------- ----------- ----------- --------- ---------
(In thousands, except store data)
Statement of Store Level
Earnings:
Sales.................... $150,714 $144,510 $149,562 $ 37,904 $ 36,579
Cost of sales(1)......... 111,313 108,073 110,340 28,668 26,964
-------- -------- -------- -------- --------
Gross profit............. 39,401 36,437 39,222 9,236 9,615
Store operating
expenses(2)............. 30,347 31,413 33,003 7,791 8,037
-------- -------- -------- -------- --------
Store level earnings..... $ 9,054 $ 5,024 $ 6,219 $ 1,445 $ 1,578
======== ======== ======== ======== ========
Other Operating Data:
EBITDA(3)................ $ 12,123 $ 7,953 $ 9,476 $ 2,215 $ 2,388
Interest Expense......... 563 545 523 132 127
Depreciation and
amortization............ 2,506 2,384 2,734 638 683
Store Data:
Number of stores (at end
of period).............. 9 10 10 10 10
- --------
(1) Includes an allocation for warehouse and transportation expenses.
(2) Includes depreciation and amortization and interest expense related to
capital lease obligations.
(3) EBITDA represents the sum of store level earnings, interest expense and
depreciation and amortization. EBITDA should not be used as an alternative
to, or be construed as more meaningful than, operating income or cash
flows as an indicator of operating performance.
37
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 53-week fiscal year ended September 29, 1996,
the 52-week fiscal years ended September 27, 1998 and September 28, 1997 and
the thirty-nine weeks ended June 28, 1998 and June 27, 1999.
Fiscal Year Ended 39 Weeks Ended
----------------------------- -----------------
Sept. 29, Sept. 28, Sept. 27, June 28, June 27,
1996 1997 1998 1998 1999
--------- --------- --------- -------- --------
Sales.......................... 100.00% 100.00% 100.00% 100.00% 100.00%
Gross profit................... 22.85 22.79 23.32 23.18 23.62
Operating expenses:
Selling, general and
administrative expense...... 19.25 19.40 20.46 20.33 20.08
Depreciation and
amortization................ .74 .77 .89 .88 .89
Consulting fees.............. .09 .08 -- -- --
Operating profit............... 2.77 2.54 1.97 1.97 2.65
Interest income................ .11 .18 .18 .19 .18
Interest (expense)............. (1.19) (1.26) (1.75) (1.76) (1.72)
Equity in (loss) from
unconsolidated affiliate...... (.10) (.13) (.17) (.21) .07
Other income (expense)--net.... -- -- -- -- (.02)
Earning before income taxes.... 1.59% 1.33% .23% .19% 1.16%
39 Weeks Ended June 28, 1998 and June 27, 1999
Sales. Total sales for the thirty-nine weeks year to date ended June 27,
1999 increased 3.06% and amounted to $1,324.4 million, compared to $1,285.1
million for the same period in 1998. Like store sales increased 2.51% for the
year to date period. The increase in sales in the thirty-nine week year to
date period was due to favorable customer response to Stater Bros.' marketing
plan, which emphasizes Stater Bros.' high quality and expanded product
selections in the produce and other perishable departments and the opening of
a new replacement supermarket, which opened in December 1998. Stater Bros.
operated 112 supermarkets at June 27, 1999 and June 28, 1998.
Gross Profit Margin. Gross profit margin for the thirty-nine week year to
date period increased to $312.8 million or 23.62% of sales in 1999, compared
to $297.9 million or 23.18% of sales in the prior year. Gross profit margin
for the thirty-nine week year to date period was favorably impacted by the
1999 marketing plan which features the perishable departments which typically
have higher gross margins as a percent of sales, and by lower costs in the
warehousing and transportation departments. Additionally, 1999 gross profit
margin was reduced by approximately $8.2 million for the thirty-nine weeks
year to date from a temporary increase in the cost of products purchased by
Stater Bros. from Santee Dairies, compared to $1.2 million for the 1998
thirty-nine weeks year to date.
Operating Expenses. Operating expenses include selling, general and
administrative expenses and depreciation and amortization expenses. For the
thirty-nine week year to date period, selling, general and administrative
expenses amounted to $265.9 million or 20.08% of sales, compared to $261.2
million or 20.33% of sales for the like period of the prior year. The
reduction in selling, general and administrative expenses in 1999 when
compared to 1998 was due to cost savings, primarily in labor and advertising
expenses which were partially offset by costs and expenses incurred to operate
at the higher sales level and contractual wage rate increases in collective
bargaining agreements.
Depreciation and amortization expenses amounted to $11.8 million for the
year to date period ended June 27, 1999. Depreciation and amortization expense
amounted to $11.4 million for the corresponding year to
38
date period of the prior year. Depreciation and amortization included
amortization of approximately $250,000 per quarter from a prepaid five-year
covenant not to compete between Stater Bros. and Craig Corporation which
became effective in March 1994 and terminated in March 1999.
Operating Profit. Operating profits for the thirty-nine weeks year to date
ended June 27, 1999 amounted to $35.1 million or 2.65% of sales, compared to
$25.3 million or 1.97% of sales for the like period in 1998.
Interest Expense. Interest expense for the year to date periods of 1999 and
1998 amounted to $22.7 million and $22.6 million, respectively. Interest
expense in the year to date periods includes amortization of $2.1 million in
1999 and 1998 from fees and expenses incurred to acquire debt.
Santee Dairies, LLC. Stater Bros.' equity in earnings from Santee Dairies,
its unconsolidated affiliate, amounted to $924,000 for the thirty-nine week
year to date period in 1999, compared to a loss of $2.7 million for the
thirty-nine week year to date period in 1998. The 1999 earnings of Santee
Dairies were favorably impacted by temporary increases in the cost of products
Santee Dairies charged to its two owners, Hughes Family Markets and Stater
Bros. Markets, which amounted to approximately $11.4 million (pre-tax) for the
thirty-nine week year to date period. In March 1998, Santee Dairies vacated
its Los Angeles, California facility and moved into a newly constructed
facility in City of Industry, California. Santee Dairies has incurred expenses
associated with commissioning the new facility and transferring and
integrating the production of dairy products into the new facility. From June
1998 through January 1999, Stater Bros. accepted and paid approximately $1.0
million per month as a result of a temporary increase in the cost of products
it purchased from Santee Dairies. Beginning in February 1999, the temporary
increase in the cost of products purchased from Santee Dairies by Stater Bros.
decreased to approximately $800,000 per month. The temporary increase in the
cost of products purchased from Santee Dairies is included in Stater Bros.
cost of goods sold and amounted to approximately $8.2 million for the 1999
year to date period compared to $1.2 million for the year to date period of
fiscal 1998. Stater Bros. believes that the temporary increase in the cost of
products purchased from Santee Dairies by Stater Bros. will eventually be
eliminated, but no assurances can be given that the temporary price increase
will be eliminated. Stater Bros. continues to explore alternatives available
to it regarding its investment in Santee Dairies. For further information
concerning Stater Bros. arrangements with Santee Dairies, see "Business--
Santee Dairies, LLC"
Income Before Income Taxes. Income before income taxes amounted to $15.4
million and $2.4 million for the year to date periods of 1999 and 1998,
respectively.
Net Income. Net income for the year to date periods for 1999 and 1998,
amounted to $9.2 million and $1.4 million, respectively.
Fiscal Years Ended September 27, 1998, September 28, 1997 and September 29,
1996
Sales. Total sales amounted to $1.726 billion in the 52-week 1998 fiscal
year compared to $1.718 billion in the 52-week 1997 fiscal year and $1.705
billion in the 53-week 1996 fiscal years. Like-store sales for comparable 52-
week periods decreased 1.0% in 1998 compared to increases of 2.6% in fiscal
1997 and 6.3% in fiscal 1996. The increase in like-store sales in fiscal 1997
and 1996 was due to many factors, including slight improvements in the
Southern California economy and favorable customer response to Stater Bros.'
merchandising expansion and upgrading program. This included expanding product
offerings in the deli, bakery, frozen foods and dairy departments and
continuing with the introduction of fresh cut flowers and prepackaged
vegetables into most of Stater Bros.' supermarkets. Additionally, like store
sales were impacted by the departure of a competitor from the market place.
During the second quarter of fiscal 1996, Smith's Food & Drug ("Smith's"),
announced the termination of its Southern California operations and began
closing all of its supermarkets located in Southern California. Approximately
fifteen Smith's supermarkets competed with Stater Bros. As of September 29,
1996, nine Smith's supermarkets remained closed and as of September 28, 1997,
five Smith's supermarkets remained closed. Sales for fiscal 1997 and 1998 were
adversely affected as competitors periodically acquired and reopened the
vacated
39
Smith's supermarkets. Management believes it has been successful in attracting
and retaining many of the previous Smith's customers to its supermarkets.
Gross Profit Margin. Stater Bros.' gross profit margin increased to 23.32%
of sales in fiscal 1998 compared to 22.79% of sales in 1997 and 22.85% of
sales in 1996. The increase in gross profit, as a percentage of sales in
fiscal year 1998 was due to the introduction of higher gross margin products
achieved through Stater Bros.' merchandising expansion and upgrading programs.
The decrease in gross profit as a percentage of sales in 1997 when compared to
1996, was due to aggressive competitive pricing in selected areas of Southern
California in the third and fourth quarters of fiscal 1997. Stater Bros.
adjusts its pricing strategy as necessary to retain its "every day low price"
marketing position.
Operating Expenses. In fiscal 1998, selling, general and administrative
expenses amounted to 20.46% of sales compared to 19.40% of sales in 1997 and
19.25% of sales in 1996. Selling, general and administrative expenses for
fiscal 1998 included expenses incurred to operate two additional supermarkets
and non-recurring advertising expenses of approximately $2.1 million incurred
in the second and third quarters to re-affirm Stater Bros.' strategy of "every
day low price" leadership in its primary marketing areas. Additionally,
commencing in April 1998, Stater Bros. was required to resume employer
contributions of approximately $750,000 per month to a previously over-funded
collective bargaining pension trust. Such employer contributions had been
suspended since 1994. In fiscal 1997, selling, general and administrative
expenses increased as a percentage of sales due to contractual increases in
collective bargaining employees rates of pay and increases in fixed expenses
such as rent expense, utilities, depreciation and supermarket supplies.
Depreciation and amortization expenses include amortization of $1.0 million
in fiscal 1998, 1997 and 1996, from a $5.0 million prepaid five-year covenant
not to compete included in a consulting agreement between Stater Bros. and a
former stockholder.
Operating Profit. Operating profit amounted to $34.1 million or 1.97% of
sales in 1998 compared to $43.6 million or 2.54% of sales in 1997 and $47.3
million or 2.77% of sales in 1996.
Interest Expense. Interest expense increased in fiscal 1998 due to the
issuance, in July 1997, of $100.0 million of the 9% senior subordinated notes.
Interest expense included amortization of fees and expenses incurred to
acquire debt of $2.8 million in 1998, $1.5 million in 1997 and $1.2 million in
1996.
Santee Dairies, LLC. The increase in Stater Bros.' equity in loss from
unconsolidated affiliate in fiscal years 1998, 1997 and 1996 relates to Stater
Bros.' investment at September 27, 1998 of $8.5 million in Santee Dairies,
LLC. Santee Dairies, a wholly-owned subsidiary of Santee Dairies LLC, moved
from its previous facility in Los Angeles to a newly constructed facility in
the City of Industry in March 1998. Santee Dairies' decision to move reduced
the economic lives of certain assets associated with its former facility,
thereby increasing depreciation in 1996, 1997 and 1998. The decision to move
also resulted in increased rent expense during a two year lease extension that
was required while the new facility was constructed. During fiscal 1998,
Stater Bros.' equity in loss from unconsolidated affiliate included its share
of Santee Dairies' costs and expenses incurred to relocate to the new facility
and costs incurred to start up and commission the new plant. Since June 1998,
Stater Bros. has incurred increased prices for fluid milk and other products
purchased pursuant to a requirements contract with Santee Dairies, as the
result of delays and higher-than-anticipated start-up and operating costs of
the new Santee Dairies facility.
Income Before Income Taxes. Income before income taxes amounted to $4.0
million, $22.8 million and $27.1 million for the 1998, 1997 and 1996 fiscal
years, respectively.
Net Income. Net income amounted to $2.5 million in 1998, $13.5 million in
1997 and $16.0 million in 1996.
40
Liquidity and Capital Resources
Working Capital Requirements. Stater Bros. historically has funded its daily
cash flow requirements through funds generated from operations and from
borrowings from short-term revolving credit facilities. Stater Bros.' existing
credit agreement as amended, expires in June 2000, and consists of a revolving
credit facility for working capital of $15.0 million, all of which was
available at June 27, 1999, and a standby letter of credit facility with a
maximum availability of $25.0 million, of which $14.2 million was available at
June 27, 1999. The standby letter of credit facility is maintained pursuant to
Stater Bros.' workers' compensation and general liability self-insurance
requirements.
Stater Bros. did not have short-term borrowings outstanding at June 27, 1999
or at fiscal years end 1998, 1997 and 1996, and Stater Bros. did not incur
short-term borrowings during the 1999 interim period or during fiscal 1998,
1997 and 1996.
On August 6, 1999, Stater Bros. Markets entered into a new unsecured bank
credit facility with Bank of America. The new credit facility consists of a
$50.0 million revolving unsecured credit facility with an additional $25.0
million facility available for the issuance of commercial and standby letters
of credit. The term of the new credit facility is three years. It is expected
that borrowings under the new credit facility will be used for certain working
capital and corporate purposes. At August 17, 1999 there were no revolving
borrowings outstanding thereunder and the aggregate amount of all letters of
credit issued thereunder was approximately $10.0 million. See "Description of
Certain Indebtedness."
Working capital amounted to $90.7 million at September 27, 1998, $92.0
million at September 28, 1997, $63.5 million at September 29, 1996 and $75.7
million at June 27, 1999. Stater Bros.' current ratio was 1.78:1, 1.81:1 and
1.50:1 for fiscal year end 1998, 1997 and 1996, respectively, and 1.60:1 as of
June 27, 1999. Fluctuations in working capital and current ratios are not
unusual in the industry.
Cash Flows from Operating Activities. Net cash provided by operating
activities amounted to $26.4 million in fiscal 1998, $9.7 million in fiscal
1997, $27.9 million in fiscal 1996. The net cash provided by operating
activities for the 1999 interim period amounted to $30.6 million and consisted
of increased earnings and an increase in accounts receivables, prepaid
expenses, other assets, accounts payable and accrued liabilities, net of a
decrease in inventories. Net cash provided by operating activities for the
1998 interim period, amounted to $11.0 million and consisted of increases in
accounts payable, inventories, other assets and prepaid expenses. The change
in net cash provided by operating activities between 1998, 1997 and 1996 is
primarily due to fluctuations in inventories and related accounts payable. In
September 1996, Stater Bros. increased its inventory and related accounts
payable in anticipation of the implementation of Stater Bros.' 60th
Anniversary Marketing Program in the first quarter of fiscal 1997 and the
subsequent decrease in accounts payable in the first quarter of 1997. Fiscal
1998 reflects a return to a more traditional year end balance of accounts
payable. Fluctuations in net cash provided by operating activities are not
unusual in the industry.
Financing Activities. Net cash used by financing activities amounted to
$972,000 and $941,000 for the 1999 interim period and the 1998 interim period,
respectively, and consisted of reductions in capital lease obligations. Net
cash used in financing activities during fiscal 1998 amounted to $1.3 million
and consisted of reductions in capitalized lease obligations. Net cash
provided by financing activities in fiscal 1997 amounted to $12.8 million and
resulted from the issuance of $100.0 million of 9% senior subordinated notes,
redemption of the Series B preferred stock for $69.4 million, costs and
expenses to issue debt of $10.5 million, payment of dividends on the Series B
preferred stock of $6.2 million and reduction to amounts due on capitalized
lease obligations of $1.2 million. Net cash used in financing activities in
fiscal year 1996 amounted to $5.2 million and consisted of reductions in
capital lease obligations and payments of deferred dividends.
Investing Activities and Capital Expenditures. Net cash used in investing
activities for the 1998, 1997 and 1996 fiscal years, amounted to $27.0
million, $8.6 million and $3.8 million, respectively. Net cash used by
investing activities for the 1999 interim period amounted to $31.5 million,
compared to net cash used by investing activities of $21.1 million for the
1998 interim period. The difference in net cash used by investing
41
activities between comparable periods is due to Stater Bros.' capital
expenditures during such periods, net of proceeds from asset dispositions.
Capital expenditures amounted to $26.3 million in 1998, $20.3 million in 1997
and $22.4 million in 1996. Capital expenditures amounted to $34.4 million for
the 1999 interim period compared to $20.3 million for the 1998 interim period.
The increase in capital expenditures in fiscal 1999 was due primarily to the
purchase of store point of sale scan systems and related equipment and
warehouse material handling equipment purchased in anticipation of the
acquisition of 43 stores from Albertson's, which amounted to $10.6 million.
Additionally, capitalized expenditures to achieve Year 2000 compliance
amounted to $3.0 million. During the second quarter of fiscal 1999, Stater
Bros. was reimbursed by the landlord for costs incurred to construct the new
Loma Linda replacement supermarket, which opened in December 1998. Capital
expenditures for the thirty-nine weeks ended June 27, 1999, were incurred to
open a new 37,400 square foot replacement supermarket in Loma Linda,
California. Additionally, Stater Bros. completed five major remodels and six
minor remodels and installed 31 new point of sale scan systems. The difference
in net cash used in investing activities between fiscal 1998, 1997 and 1996
was due to Stater Bros.' capital expenditures during such periods, net of
proceeds from asset dispositions.
Capital expenditures for fiscal 1998 included costs to complete construction
and to open two supermarkets, to begin construction on a third supermarket
(which opened in December 1998) and to complete five minor and six major
remodels. Additionally, during fiscal 1998, Stater Bros. installed 15 new
point of sale scan systems in its supermarkets. Capital expenditures for 1998
were funded through cash flow from operations.
Capital expenditures for 1997 amounted to $20.3 million and included costs
incurred to complete thirteen minor remodels and one major remodel, acquire
one supermarket site and to remodel a perishable products warehouse. Two
supermarkets were under construction during fiscal 1997. Capital expenditures
for fiscal 1997 were funded from the proceeds of an October 1996 sale and
leaseback transaction and from a portion of the net proceeds from the July
1997 issuance of the 9% senior subordinated notes.
In October 1996 (fiscal 1997), Stater Bros. completed a sale and leaseback
transaction with an unrelated third party for four of Stater Bros.'
supermarkets. The net proceeds from the sale of the four supermarkets amounted
to approximately $16.0 million, which approximated fair market value. Stater
Bros. entered into leases for the four supermarkets with initial terms of 20
years and with options available to Stater Bros. which extend the lease terms
up to an additional 20 years. The gains from the sale of the supermarkets were
approximately $2.5 million and will be deferred and amortized into income over
the initial terms of the leases. As a result of the additional rent expenses,
net of reductions in depreciation expense, due on the four supermarkets,
operating expenses increased by approximately $1.2 million in fiscal 1997.
Capital expenditures for 1996 amounted to $22.4 million and included costs
incurred to construct a replacement supermarket, to complete eight major
remodels and eight minor remodels and capital expenditures incurred to acquire
store equipment to support the 1996 merchandising expansion and upgrade
program. Capital expenditures in 1996 were financed primarily by proceeds from
the January 1996 sale and leaseback of five supermarkets.
In January 1996 (fiscal 1996), Stater Bros. completed a sale and leaseback
transaction with an unrelated third party for five of Stater Bros.'
supermarkets. Gross proceeds from the sale of the five supermarkets amounted
to approximately $18.5 million. Stater Bros. entered into leases for the five
supermarkets with initial terms of 20 years and with options available to
Stater Bros. which extend the lease terms up to an additional 20 years. The
gains from the sale of the supermarkets are deferred and will be amortized
into income over the initial term of the leases. As a result of the additional
rent expenses, net of reductions in depreciation expense, paid on the five
supermarkets, operating expenses increased by approximately $900,000 in fiscal
1996 and by $259,000 in fiscal 1997.
Management believes that, in addition to the purchase price related to the
acquisition (including related capital expenditures), cash capital
expenditures for fiscal 1999 will be approximately $28.0 million. Management
believes that operating cash flow will be sufficient to meet Stater Bros.'
currently identified operating needs and scheduled capital expenditures.
42
Conversion and Redemption of Series B Preferred Stock. In March 1994, Stater
Bros. acquired, for $14.7 million, an option available to Stater Bros. to
convert 50,000 shares of Stater Bros. common stock held by Craig Corporation
into 693,650 shares of 10.5% Series B preferred stock on or before March 8,
1996. Effective March 8, 1996, Stater Bros. exercised its option. The Series B
preferred stock which resulted was redeemed by Stater Bros. in August 1997 for
$69.4 million plus accrued and unpaid dividends.
Recent Accounting Standards
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"; No. 130,
"Reporting on Comprehensive Income"; and No. 131, "Disclosures about Segments
of an Enterprise and Related Information", all of which were adopted by
Stater Bros. in its fiscal year ending on September 27, 1998 (fiscal 1998).
The adoption of SFAS No. 128, No. 130 and No. 131 did not have a material
effect on its financial position or its results of operations in fiscal 1998.
Effect of Inflation and Competition
Stater Bros.' performance is affected by inflation. In recent years the
impact of inflation on the operations of Stater Bros. has been moderate. As
inflation has increased expenses, Stater Bros. has recovered, to the extent
permitted by competition, the increase in expenses by increasing prices over
time. However, the economic environment in Southern California continues to
challenge Stater Bros. to become more cost efficient as its ability to recover
increases in expenses through price increases is diminished. The future
results of operations of Stater Bros. will depend upon the ability of Stater
Bros. to adapt to the current economic environment as well as to the current
competitive conditions.
Stater Bros. conducts business in an industry segment, the operation of
retail food supermarkets, which offers for sale to the public most merchandise
typically found in supermarkets. The supermarket industry is highly
competitive and is characterized by low profit margins. Stater Bros.' primary
competitors include Lucky, Vons, Albertson's, Ralph's 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. Stater Bros. monitors
competitive activity and senior management regularly reviews Stater Bros.'
marketing and business strategy and periodically adjusts them to adapt to
changes in Stater Bros.' primary trading area.
Year 2000 Compliance
The efficient operations of Stater Bros. are dependent, in part, upon its
computer software programs, systems, and processes, which are used in several
key areas, including, but not limited to, supermarket operations, warehousing
and distribution, merchandising and purchasing, inventory management, and
accounting and financial reporting. In 1997, Stater Bros. established a Year
2000 compliance committee and developed a Year 2000 compliance plan. Stater
Bros.' Year 2000 compliance plan addresses Stater Bros.' information systems,
communications with vendors, financial institutions and others, and provides
for contingency planning. Stater Bros. is in the process of updating its
information systems for Year 2000 compliance requirements and has engaged
independent consultants since mid-1998 to assist in achieving Year 2000
compliance with its information systems by September 1999. Additionally,
Stater Bros. has also been in communication with some of its vendors,
financial institutions and others whose computer software, programs and
information systems may interface with those of Stater Bros. to assess the
status of their compliance with Year 2000 requirements. Failure of companies
that Stater Bros. conducts business with to comply with the Year 2000
requirements could have an adverse effect on Stater Bros.' operations.
Based on the information currently available, Stater Bros. believes it will
meet the Year 2000 compliance requirements through a combination of
information systems modifications and through the acquisition of new equipment
and technology that are Year 2000 compliant. Stater Bros.' Year 2000
compliance committee is
43
developing a contingency plan for its information systems and is developing
contingency plans in the event vendors, financial institutions and others that
Stater Bros. conducts business with do not comply with the Year 2000
requirements. Stater Bros. believes that costs required to replace or modify
information systems, including scheduled replacements of in-store point of
sale equipment, will approximate $8.4 million, of which $6.9 million will be
capitalized and $1.5 million will be expensed. Through June 27, 1999, Stater
Bros. has incurred capitalized expenditures of $6.2 million and operating
expenses of $982,000. Stater Bros. believes that it will successfully achieve
compliance with the Year 2000 requirements by September 1999, however, no
assurances can be given that Stater Bros.' information systems and its
vendors, financial institutions and others will be successful in achieving
Year 2000 compliance.
Stater Bros.' ability to timely implement its Year 2000 compliance plan may
be adversely affected by a variety of factors, some of which are beyond Stater
Bros.' control, including the potential of unforeseen implementation problems,
delays in the delivery of products, and disruption of store operations
resulting from a loss of power or communication links between stores,
distribution centers and headquarters. Based on currently available
information, Stater Bros. is unable to determine whether such interruptions
are likely to have a material adverse effect on Stater Bros.' results of
operations, liquidity or financial condition.
Costs to Integrate Newly Acquired Stores
During the fiscal quarter ending September 26, 1999, Stater Bros. expects to
incur up to $5.0 million of costs associated with the acquisition and related
integration activities.
44
BUSINESS
General
Stater Bros., the largest independently-owned supermarket chain in Southern
California, was founded in 1936 when the first Stater Bros. market opened in
Yucaipa, California, located in the Inland Empire. Historically, Stater Bros.'
supermarkets have been concentrated in the Inland Empire counties of San
Bernardino (46 stores) and Riverside (35 stores), one of the fastest growing
areas of the United States. Stater Bros.' 112 existing supermarkets are
currently located as follows:
. Inland Empire: 81;
. Eastern Los Angeles and Kern Counties: 15; and
. Orange County: 16.
Stater Bros. is recognized as a low price leader and its supermarkets offer
a high level of customer service, a broad selection of brand-name merchandise,
and quality meats and produce. All of Stater Bros.' supermarkets have full-
service meat departments and a broad selection of produce. In addition, many
of the supermarkets have full service delicatessens and service bakery
departments. Stater Bros., with sales in excess of $1.76 billion for the
twelve months ended June 27, 1999, is the largest supermarket chain in its
primary market area.
La Cadena Investments is the sole holder of Stater Bros.' common stock. La
Cadena is a California general partnership whose partners include Jack H.
Brown, Chairman of the Board, President and Chief Executive Officer of Stater
Bros. and one other present and one other former member of senior management.
Jack H. Brown has a majority interest in La Cadena and is the managing general
partner with the power to vote the shares of Stater Bros. held by La Cadena.
The Acquisition
On May 7, 1999, Stater Bros. entered into an agreement with 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 are being divested in connection with the merger of
Albertson's and the parent of Lucky Stores. The purchase price is estimated to
be $147 million for land, buildings and equipment plus the value of
inventories on hand at closing, estimated to be $39 million. Acquisition of
the stores will take place sequentially over a thirty-day period which is
expected to commence on or about August 9, 1999. The acquired stores will be
operated under the Stater Bros. name as fully integrated units within the
Stater Bros. system. It is expected that each acquired store will be reopened
under the Stater Bros. name within two days of acquisition.
The acquired supermarkets are located as follows:
. Riverside County...................................................... 5
. Orange County......................................................... 14
. Los Angeles County.................................................... 14
. San Diego County...................................................... 10
---
43
===
Benefits of the Acquisition
Management believes that the acquisition will provide a number of key
benefits, including the following:
. Increase Leading Market Share in the Inland Empire. Stater Bros.
currently is the largest supermarket chain in both San Bernardino and
Riverside counties. The acquisition will increase Stater Bros.' presence
in these counties from 81 to 86 supermarkets and, more importantly, will
provide Stater Bros. with a strong presence (three supermarkets) in the
Palm Springs area, where Stater Bros. does not have any existing
supermarkets.
45
. Enhance Presence in Existing and Contiguous Market Areas. Stater Bros.
will enhance significantly its market presence in Orange County and the
eastern and Palmdale areas of Los Angeles County, where it presently
operates. Stater Bros. will increase its presence from 16 to 30
supermarkets in Orange County, a region where Stater Bros. has
experienced its strongest sales volume increases for the most recent two
fiscal years. Stater Bros. will also increase its presence in eastern
Los Angeles County from 13 to 27 supermarkets including establishing a
presence in the Palmdale area with three stores. In addition, Stater
Bros. will enter northern San Diego County with 10 supermarkets and one
future store site. Management believes that northern San Diego County is
an attractive market based on its strong demographic trends and
proximity to Stater Bros.' headquarters and warehouse/distribution
facilities.
. Leverage Stater Bros.' Market Presence. As discussed above, Stater Bros.
currently operates in market areas which are overlapping or contiguous
to all of the 43 supermarkets being acquired. Since Stater Bros. has
been advertising within these areas for many years, management believes
Stater Bros.' prospective customers are familiar with the Stater Bros.
name and understand Stater Bros.' market position as the low price
leader. In connection with the acquisition, Stater Bros. plans to direct
the advertising expenses of the acquired stores towards a "direct-mail"
strategy. As such, management believes that Stater Bros. can leverage
its advertising expenses to achieve greater awareness among potential
customers within its operating territories.
. Increase Purchasing Leverage. Management expects that Stater Bros.'
merchandise purchases will increase by approximately 34% following the
acquisition. As a result, management believes that Stater Bros. should
be able to negotiate more favorable terms with its vendors.
. Improve Warehousing and Distribution Efficiencies. Stater Bros.
currently leases approximately 1.3 million square feet of warehouse and
distribution space located in Colton, California, which is central to,
and can efficiently supply, Stater Bros.' existing 112 supermarkets.
Management believes that its existing warehouse and distribution
facilities will be adequate for its currently identified needs,
including supplying the 43 supermarkets to be acquired in the
acquisition. During the first quarter of calendar 1999, Stater Bros.
implemented productivity-related initiatives in its warehouse and
distribution operations. Stater Bros. is currently realizing cost
savings from these initiatives and expects to realize additional
economies by distributing the added product requirements for the
acquired stores.
46
Market Areas
Southern California. Stater Bros.' primary operating territory includes San
Bernardino and Riverside counties. Following the acquisition, Stater Bros.
will also maintain significant store counts in Orange and Los Angeles
counties. As shown in the table below, a sizable population base resides
within Stater Bros.' operating territory. Additionally, the table shows that
there has been a relatively strong level of recent net migration into Stater
Bros.' primary market area. Specifically, the San Bernardino/Riverside
Metropolitan Statistical Area or MSA ranked sixth in 1998 among 256 domestic
MSAs in terms of net migration. Modest home prices represent one of the
factors promoting growth in the Inland Empire. This strong growth is also
evidenced by the significant percentage increase in the number of households
within the San Bernardino/ Riverside MSA over the last ten years. Only the Las
Vegas, Nevada MSA ranks higher in terms of this metric.
10-yr Growth
Stater Median Rate in Number
Metropolitan Statistical Bros. 1998 1998 Net Home Price of Households
Area(1) Stores(2) Population Migration(3) 1Q99 (1986-1996)
- ------------------------ --------- ---------- ------------ ---------- --------------
San
Bernardino/Riverside... 86 3,114,100 36,100 $108,500 45.9%
National Rank.......... 11 6 114 2
Orange County........... 30 2,721,700 27,000 $249,500 16.5%
National Rank.......... 15 11 6 92
Los Angeles/Long Beach.. 27 9,213,500 (9,600) $186,800 5.2%
National Rank.......... 1 248 20 195
San Diego County........ 10 2,780,600 30,300 $216,700 19.7%
National Rank.......... 14 9 12 60
- --------
(1) Represents a core area containing a large population nucleus, together
with adjacent communities having a high degree of economic and social
integration with that core. There are 256 MSAs recognized in the
United States, excluding 3 in Puerto Rico.
(2) Pro Forma for the acquisition. Excludes two stores located in Kern County.
(3) The difference between the influx of new people, including both
international and domestic migration, and the outflow of current
residents.
Sources: United States Census Bureau and National Association of Realtors.
Inland Empire. Pro forma for the acquisition, over 55% of Stater Bros.'
stores will be located in the Inland Empire region of Southern California. The
Inland Empire is comprised primarily of San Bernardino and Riverside Counties.
Since 1980, this region has been one of the fastest growing areas in the
United States. Specifically, from 1980 to 1998, the Inland Empire's population
more than doubled to approximately 3.1 million.
Several factors have contributed to the Inland Empire's significant growth,
including affordable housing, availability of land, affordable industrial and
commercial office space, and the region's favorable geographic location and
quality of life. According to the National Association of Realtors, the median
home price in the first quarter of 1999 for the San Bernardino/Riverside MSA
was approximately $108,500, compared to $186,800, $216,700 and $249,500 for
the Los Angeles/Long Beach, San Diego County and Orange County MSAs,
respectively. Additionally, low commercial and industrial lease rates,
compared to those of the adjacent coastal counties, coupled with the region's
standing as a logistics hub and freight gateway, have prompted many firms to
expand or relocate their operations to the Inland Empire.
According to the California Department of Finance, the Inland Empire should
continue to be one of the fastest growing regions in the United States,
increasing its population to 4.6 million by 2010, representing a compound
annual growth rate of approximately 3.4%.
47
Business Strategy
Stater Bros. offers its customers a high level of customer service and broad
selections of grocery, meat, produce, liquor and general merchandise. All of
Stater Bros.' supermarkets have full-service meat departments and a broad
selection of produce. In addition, many of the supermarkets have service
delicatessens and service bakery departments.
Stater Bros. believes that 62 years of continuous service in the Inland
Empire, its commitment to everyday low prices and the involvement of members
of its management in community activities have contributed significantly to
Stater Bros.' leading market position. Management has developed an operating
strategy which it believes will foster continued growth in revenues and EBITDA
and help maintain market share in its market area. Specifically, the strategy
includes the following:
Everyday Low Prices. Stater Bros. uses the "everyday low price" format,
combined with an aggressive advertising program, as an integral part of its
strategy to provide the best overall supermarket value in its market area.
Stater Bros. supplements its everyday low price format with temporary price
reductions on selected food and non-food merchandise. Stater Bros.'
information systems and distribution network give management the flexibility
to respond to market conditions by rapidly adjusting its prices.
Quality and Breadth of Selection. A key factor in Stater Bros.' business
strategy is to provide its customers with a variety of quality brand-name
merchandise as well as alternative selections of high quality private label
and generic brands of merchandise. Stater Bros. carries an average of 35,000
items in each of its supermarkets and places particular emphasis on the
freshness and quality of its meat and produce, which management believes
contributes significantly to attracting customers to its supermarkets. Stater
Bros. is able to maintain consistently fresh and high quality meat and produce
because this merchandise is received and distributed through its central
distribution facilities where the quality and freshness of the merchandise are
carefully controlled. Each supermarket features a full-service meat
department, where custom-cut meats, as well as prepackaged self-service
selections of meat, are available. Stater Bros.' close proximity to the
Southern California produce growers and its strong relationships with produce
distributors help to ensure a reliable supply of high quality produce.
Additionally, Stater Bros. has a product quality assurance inspector who
regularly tests and samples product delivered to the distribution center.
Customer Service. Stater Bros. considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees. Stater Bros. maintains an intensive checker
training school to train prospective checkers and to provide a refresher
program for existing checkers. Store efficiencies are increased by employing
technological advances, such as computerized scanning check-out equipment in
each location and on-line communications between Stater Bros.' supermarkets
and the mainframe computer which is located in the main office. All of Stater
Bros.' supermarkets provide customers with purchase carry-out service and have
express check-out lanes for purchases of ten items or less.
Centralized Warehousing and Distribution Operations. Management believes
that its centralized warehousing and distribution operations give Stater Bros.
a competitive advantage. Upon completion of the acquisition, Stater Bros.'
centralized distribution facilities will be located an average distance of
40.5 miles from its supermarkets, a nine-mile increase from the pre-
acquisition average. Most stores can be reached without using the most
congested portions of the Southern California freeway system. With a
distribution facility located in the Inland Empire, management believes that
Stater Bros. has a shorter average haul, in time and distance, than any of its
major competitors.
48
Store Profile and Locations
Stater Bros.' existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most cases. Stater Bros.
believes that its supermarkets are well-maintained and generally require
capital expenditures only for customary maintenance. An average Stater Bros.
supermarket is approximately 30,000 square feet, while newly constructed
Stater Bros. supermarkets range from approximately 35,300 to 43,500 square
feet. The average size of the stores being acquired in the Acquisition, 42,579
square feet, is similar in size to the newer Stater Bros. supermarkets. Stater
Bros.' supermarkets typically utilize approximately 72% of total square feet
for retail selling space. Stater Bros. operates its supermarkets with minimal
back-room storage space because of the close proximity of its distribution
facility to its store locations. Generally, Stater Bros. supermarkets are
similarly designed and stocked, allowing customers to find items easily in
most locations.
Substantially all of Stater Bros.' 112 supermarkets, and the 43 stores being
acquired in the acquisition, are located in neighborhood shopping centers in
well-populated residential areas. Stater Bros. endeavors to locate its
supermarkets in growing areas that will be convenient to potential customers
and will accommodate future supermarket expansion.
Management continually reviews the acquisition of sites for new
supermarkets. In an effort to determine sales potential, new supermarket sites
are carefully researched and analyzed by management for population shifts,
zoning changes, traffic patterns, nearby new construction and competitive
locations. Stater Bros. works with developers to attain Stater Bros.' criteria
for potential supermarket sites, and to insure adequate parking and a
complementary co-tenant mix.
Store Expansion and Remodeling
Stater Bros. has historically focused its expansion in the Inland Empire
and, more recently, Orange and Los Angeles counties and adjacent market areas.
Such expansion has been accomplished through improving and remodeling existing
stores and constructing new supermarkets.
Stater Bros. monitors sales and profitability of its operations on a store-
by-store basis and enlarges, remodels or replaces stores in light of their
performance and management's assessment of their future potential. Since the
beginning of fiscal 1996, approximately 50% of Stater Bros.' supermarkets have
been either newly constructed or remodeled. Minor remodels cost between
$100,000 and $250,000 and typically include new fixtures, a change in decor,
and the addition of one or more specialty service departments such as a
delicatessen or bakery. Major remodels cost in excess of $250,000, typically
involve more extensive refurbishment of the store's interior and often
increase the retail selling space per store. Expansions entail enlargement of
the store building and typically include breaking through an exterior wall.
The primary objectives of remodelings and expansions are to improve the
attractiveness of supermarkets, to increase sales of higher margin product
categories and, where feasible, to increase selling area. Stater Bros.
conducts all of its new construction and remodeling through its wholly-owned
subsidiary, Stater Bros. Development, Inc., which serves as the general
contractor for all of Stater Bros.' construction projects.
In fiscal fourth quarter 1999, Stater Bros. intends to complete one major
remodel and two minor remodels in its existing stores. Stater Bros. also plans
to complete either minor or major remodels in all of the stores purchased in
the acquisition. Stater Bros. estimates that the remodeling of acquired stores
will cost approximately $23 million (including new scan systems and MIS
related equipment installed at each store). These expenditures will be funded
with a portion of the proceeds from the offering of the outstanding notes. In
addition, upon successful integration (including the remodeling program) of
the stores purchased in the acquisition, Stater Bros. plans to open
approximately two to five new stores per year, based upon a number of factors,
including customer demand, market conditions, profitability, costs of opening
and availability of financing for such new stores.
49
The following table sets forth certain statistical information with respect
to Stater Bros.' supermarket expansion and remodeling for the periods
indicated.
Fiscal Year Ended 39 Weeks Ended
----------------------------- -----------------
Sept. 29, Sept. 28, Sept. 27, June 28, June 27,
1996 1997 1998 1998 1999
--------- --------- --------- -------- --------
Number of supermarkets:
Opened..................... 1 -- 2 2 1
Replaced................... (1) -- -- -- (1)
Closed..................... -- -- -- -- --
Total at end of year....... 110 110 112 112 112
Minor Remodel.............. 8 13 5 3 6
Major Remodel.............. 8 1 6 5 5
Warehouse and Distribution Facilities
Stater Bros.' main complex warehouse and distribution facilities and
administrative offices are located in Colton, California, and as of June 27,
1999 encompassed approximately 1,268,000 square feet. The facilities include
warehouses for:
. grocery, produce and deli products;
. health and beauty aids;
. meats and frozen products; and
. bakery merchandise.
Approximately 84% of the products offered for sale in Stater Bros.'
supermarkets are processed through Stater Bros.' warehouse and distribution
facilities.
During the first calendar quarter of 1999, Stater Bros. began an expansion
and a reorganization study of its warehouse and distribution facilities. This
expansion, which was completed in the second calendar quarter of 1999,
included the addition of approximately 250,000 square feet of newly leased
warehouse facilities located approximately four miles from the main complex.
Management believes its existing warehouse and distribution facilities will be
adequate for its currently identified needs, including supplying the stores to
be acquired from Albertson's.
Stater Bros.' warehouse and distribution facilities are centrally located
and are an average distance of 31.5 miles from its supermarkets. Upon
completion of the acquisition, the average distance will increase to
40.5 miles. Most supermarkets can be reached without using the most congested
portions of the Southern California freeway system.
Stater Bros.' transportation fleet consists of modern, well-maintained
vehicles. As of June 27, 1999, Stater Bros. operated approximately 113
tractors and 302 trailers, approximately 5% of which were leased by Stater
Bros. Stater Bros. also operates a repair terminal at the Colton distribution
facility. Upon completion of the acquisition, Stater Bros. will increase its
fleet by approximately 25 tractors and 80 trailers, the majority of which will
be leased.
Operations
Stater Bros.' supermarkets are well maintained, provide off-street parking
and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m., seven
days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all of its supermarkets under a single format,
management believes it is able to achieve certain operating economies.
50
Store Management. Each supermarket is managed by a store manager and an
assistant manager, each of whom receives a base salary and may receive a bonus
based on the individual supermarket's overall performance and management of
labor costs within the supermarket. Additionally, beginning with fiscal year
1998, the store manager and assistant manager could receive an additional
bonus based on their store's sales increase when compared to a specific target
sales increase. The store manager and assistant manager are supported by their
store management staff who have the training and skills necessary to provide
proper customer service, operate the store and manage personnel in each
department. The store manager is also supported by individual department
managers for grocery, meat, produce, and where applicable, bakeries and
delicatessens. Store managers report to one of six district managers, each of
whom is responsible for an average of 18 supermarkets. District managers
report to one of three regional vice presidents.
Purchasing and Marketing. Stater Bros. uses an aggressive everyday low price
format supported by an aggressive advertising campaign including radio, TV,
newspaper and direct mail programs. Stater Bros.' strategy is to provide its
customers with the best overall supermarket value in its primary market areas.
Stater Bros. supplements its everyday low price structure with chain-wide
temporary price reductions on selected food and non-food merchandise.
A key factor in Stater Bros.' business strategy is to provide its customers
with a variety of quality brand-name merchandise as well as alternative
selections of high-quality private label and generic brands. Stater Bros.
believes that it is able to satisfy customers' desire for variety in selection
by stocking most of its supermarkets with approximately 35,000 items. Stater
Bros. places particular emphasis on the freshness and quality of its meat and
produce and maintains high standards for these perishables by processing and
distributing the merchandise through its perishable warehouses and
distribution facilities.
Advertising and Promotion. Stater Bros. promotes sales through aggressive
advertising in local and regional newspapers, on television and radio, and
through direct mail programs and printed circulars. The geographic location of
Stater Bros.' supermarkets allows it to reach its target consumers through a
variety of media and Stater Bros. aggressively advertises its everyday low
prices through local and regional newspapers, direct mail and printed
circulars as well as advertisements on radio and television. Stater Bros.
believes it is the largest supermarket chain print advertiser in local
newspapers and circulars in the Inland Empire. Stater Bros. advertising
features high-demand and name brand products at competitive prices and avoids
the use of promotional activities such as games, gimmicks or double coupons.
Stater Bros. actively promotes its everyday low prices strategy in its
advertising and operations, and virtually all buying discounts, promotion and
slotting allowances it receives are passed on to its customers through lower
prices.
Customer Service. Stater Bros. considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees. Stater Bros. maintains an intensive checker
training school to train prospective checkers and to provide a refresher
program for existing checkers. Store efficiencies are increased by employing
technological advances, such as computerized scanning check-out equipment in
each location and on-line communications between Stater Bros.' supermarkets
and the mainframe computer which is located in the main office. All of Stater
Bros.' supermarkets provide customers with purchase carry-out service and have
express check-out lanes for purchases of 10 items or less.
Management Information Systems. Stater Bros.' management information systems
and point-of-sale scanning technology reduce the labor costs attributable to
product pricing and customer check-out, and provide management with
information that facilitates purchasing, receiving and management of inventory
and accounts payable. Stater Bros. has point-of-sale scanning checkout
technology in all of its stores. All stores use electronic systems for
employee time and attendance records, inventory orderings, and labor
scheduling, which assist store management in developing a more efficient and
customer-sensitive work schedule.
During fiscal 1998, Stater Bros. installed in fifteen stores a new
generation of electronic scan systems, and has installed an additional 28 such
systems during fiscal 1999. These new systems are more customer oriented,
operate more efficiently and reduce the time required to check out customers.
51
During fiscal 1995, Stater Bros. completed the installation of the Stater
Express(R) system in all of Stater Bros.' supermarkets. Stater Express(R) is a
combined supermarket technology platform that includes enhanced systems for
check verification and acceptance and provides alternative payment choices,
such as debit and credit cards. Stater Express(R) also provides each
supermarket with the technology required to print in-store advertising signs
and connects each supermarket to Stater Bros.' host computer for data
transfers between the supermarkets and Stater Bros.' main office. Stater Bros.
has obtained a federal service mark for the name "Stater Express."
Santee Dairies, LLC
Stater Bros. and Hughes Family Markets currently each own a 50% interest in
Santee Dairies, LLC, and have jointly owned the Santee Dairies operation since
1986. Recently, through a series of transactions, Kroger Company became the
indirect owner of Hughes, which it operates as Ralph's supermarkets. Santee
Dairies operates one of the largest dairy plants in California and provides
fluid milk products to Stater Bros., Ralph's, and other customers in Southern
California. Santee Dairies processes, packages and distributes whole milk,
low-fat and non-fat milk, as well as orange juice, fruit drinks and certain
other cultured milk products under the Knudsen, Foremost and certain store
brand names. Santee Dairies is the exclusive licensee of the Knudsen trademark
from Kraft Foods, Inc. for fluid milk, juices and certain other cultured milk
products in the Southern California market. In addition, Santee Dairies is the
exclusive licensee for Foremost Farms USA, Cooperative of the Foremost
trademark for fluid milk in Southern California. Santee Dairies also
distributes Hershey chocolate milk under license. In calendar 1998, Santee
Dairies processed approximately 66 million gallons of fluid products,
including 49 million gallons of fluid milk. Total revenues in Santee Dairies'
53-week fiscal year ended January 2, 1999 were $170.7 million, of which
approximately $75.7 million were sales to Stater Bros. and Ralph's. Santee
Dairies also sells to unaffiliated supermarkets, independent food
distributors, military bases and food service providers in Southern
California.
In 1998 Santee Dairies moved to a new dairy plant in City of Industry,
California. The new dairy increased Santee Dairies' capacity to process milk
to approximately 250,000 to 350,000 gallons per day, with the ability to
expand capacity to approximately 500,000 gallons per day. Plans for the new
dairy contemplated that, when operating at full capacity, the new dairy would
lower Santee Dairies' costs of producing fluid milk and other products.
However, the new dairy has not, to date, achieved the planned operating
efficiencies and Santee Dairies' costs of production have been higher than
anticipated.
Stater Bros. and Santee Dairies are parties to a ten-year fluid milk
purchase agreement entered into in August 1997. It requires that Stater Bros.
purchase its requirements of fluid milk and certain other products, subject to
a minimum volume each year equal to approximately 80% of the volume purchased
during Stater Bros.' 1996 fiscal year. Prices under the agreement are
calculated to cover Santee Dairies' direct and indirect costs of production,
including financing costs. However, recoverable costs by Santee Dairies may
not include under any circumstances amounts owing solely by reason of the
acceleration of principal payments under any loan agreement to which Santee
Dairies is a party. During 1998, the prices paid by Stater Bros. pursuant to
the fluid milk agreement were adversely affected by delays in completion of
the new dairy, cost overruns and lower production volumes than anticipated.
Beginning in June 1998, Stater Bros. accepted and paid incremental prices of
approximately $1.0 million per month to Santee Dairies as the result of its
increased cost structure. In February 1999, incremental prices paid to Santee
Dairies by Stater Bros. decreased to approximately $800,000 per month. Stater
Bros. believes that further reductions will be achieved in the incremental
prices paid for products purchased from Santee Dairies, but no assurances can
be given that such incremental prices will be completely eliminated.
Stater Bros. accounts for its investment in Santee Dairies using the equity
method of accounting.
Properties
Stater Bros. leases its warehouses, distribution facilities and main office
which are located in Colton, California, and management believes that its
central warehouses and distribution facilities are well maintained
52
and are adequate to serve the currently identified expansion plans of Stater
Bros., including stores acquired in the acquisition.
The following schedule presents Stater Bros.' warehouse and distribution
facilities by product classification and the size of each facility as of the
dates indicated.
As of As of
Dec. 27, June 27,
1998 1999
--------- ---------
Facility Square Feet
-------- -------------------
Grocery................................................ 416,000 416,000
Grocery--Offsite....................................... 237,000 414,000
Produce/deli........................................... 118,000 118,000
Meat................................................... 116,000 116,000
Frozen--Offsite........................................ -- 74,000
Health and beauty aids................................. 35,000 35,000
Bakery................................................. 21,000 21,000
Support and administrative offices..................... 74,000 74,000
--------- ---------
Total................................................ 1,017,000 1,268,000
========= =========
As of June 27, 1999, Stater Bros. owned 24 of its supermarkets and leased
the remaining 88 supermarkets. Management believes that its supermarkets are
well maintained and adequately meet the expectations of its customers.
The following schedule presents Stater Bros.' stores by size, county, and
the number of stores that are either leased or owned as of June 27, 1999.
No. of Stores Total Square Feet
------------------ --------------------------------------
Under 24,001- 29,001- 34,001- 39,001-
County Total Owned Leased 24,000 29,000 34,000 39,000 45,000
------ ----- ----- ------ ------ ------- ------- ------- -------
San Bernardino.... 46 9 37 -- 18 10 14 4
Riverside......... 35 7 28 -- 15 14 5 1
Orange............ 16 7 9 1 13 -- 1 1
Los Angeles....... 13 1 12 -- 11 1 1 --
Kern.............. 2 -- 2 -- -- 1 1 --
--- --- --- --- --- --- --- ---
Total........... 112 24 88 1 57 26 22 6
=== === === === === === === ===
The average size of the stores to be acquired from Albertson's is
approximately 42,500 square feet. The following table presents the stores that
will be acquired by size, county and the number of stores that are either
leased or owned as of June 27, 1999.
No. of Stores Total Square Feet
------------------ ---------------------------------------------
Under 29,001- 34,001- 39,001- 45,001- Above
County Total Owned Leased 29,000 34,000 39,000 45,000 50,000 50,001
------ ----- ----- ------ ------ ------- ------- ------- ------- ------
Riverside............... 5 3 2 -- -- -- 2 1 2
Orange.................. 14 4 10 3 1 2 8 -- --
Los Angeles............. 14 4 10 -- -- 2 6 4 2
San Diego............... 10 4 6 1 1 1 3 2 2
--- --- --- --- --- --- --- --- ---
Total................. 43 15 28 4 2 5 19 7 6
=== === === === === === === === ===
53
The following table presents combined store data by size, county and number
of stores for Stater Bros. and the stores to be acquired that are either
leased or owned as of June 27, 1999.
No. of Stores Total Square Feet
------------------ ---------------------------------------------
Under 29,001- 34,001- 39,001- 45,001- Above
County Total Owned Leased 29,000 34,000 39,000 45,000 50,000 50,001
------ ----- ----- ------ ------ ------- ------- ------- ------- ------
San Bernardino.......... 46 9 37 18 10 14 4 -- --
Riverside............... 40 10 30 15 14 5 3 1 2
Orange.................. 30 11 19 17 1 3 9 -- --
Los Angeles............. 27 5 22 11 1 3 6 4 2
Kern.................... 2 -- 2 -- 1 1 -- -- --
San Diego............... 10 4 6 1 1 1 3 2 2
--- --- --- --- --- --- --- --- ---
Total................. 155 39 116 62 28 27 25 7 6
=== === === === === === === === ===
Employees
Stater Bros. has approximately 8,700 employees, approximately 600 of whom
are management and administrative employees and approximately 8,100 of whom
are hourly employees. Approximately 69% of Stater Bros.' employees work part-
time. Substantially all of Stater Bros.' hourly employees are members of
either the United Food & Commercial Workers or International Brotherhood of
Teamsters labor unions and are represented by several different collective
bargaining agreements. Stater Bros.' collective bargaining agreements with the
United Food & Commercial Workers, which covers the largest number of
employees, were renewed in June 1999 and expire in October 2003. The
International Brotherhood of Teamsters agreement was renewed in September 1998
and expires in September 2002.
As a result of the acquisition, Stater Bros. expects that it will add
approximately 3,000 employees, approximately 100 of whom will be management
and administration and approximately 2,900 of whom will be hourly employees.
In the acquisition, Stater Bros. will assume collective bargaining agreements
with the same unions mentioned above, covering employees at the acquired
stores.
Stater Bros. values its employees and believes its relationship with them is
good and that employee loyalty and enthusiasm are key elements of its
operating performance.
Competition
Stater Bros. operates in a highly competitive industry characterized by
narrow profit margins. Competitive factors include:
. price;
. customer service;
. quality and variety of products; and
. store location and condition.
Stater Bros. believes that its competitive strengths include its:
. specialty services;
. high product quality;
. everyday low prices;
. one-stop shopping convenience;
. breadth of product selection;
54
. attention to customer service;
. convenient store locations;
. central warehouse and distribution facilities' proximity to its stores;
and
. long history of community involvement.
Given the wide assortment of products it offers, Stater Bros. competes with
various types of retailers, including local, regional and national supermarket
retailers, convenience stores, retail drug stores, national general
merchandisers and discount retailers, membership clubs and warehouse stores.
Stater Bros.' primary competitors include Lucky, Vons, Albertson's, Ralph's
and a number of independent supermarket operators.
Environmental
During fiscal 1998, Stater Bros. removed all of its underground gasoline
fuel storage tanks and remediated the surrounding soils, where necessary. The
costs incurred in 1998 to remove the underground gasoline storage tanks and to
remediate the surrounding soils amounted to approximately $84,000. During
fiscal 1997, Stater Bros. removed all of its underground diesel fuel storage
tanks and related diesel refueling equipment from its Colton, California
distribution facility. The costs incurred during fiscal 1997 to remove the
underground diesel fuel storage tanks and to remediate the surrounding soils,
amounted to approximately $330,000. Stater Bros. refuels its transportation
equipment at several off-site locations which are owned and operated by an
unrelated third party.
Environmental remediation costs incurred over the past five years have been
approximately $684,000, in the aggregate, including remediation costs of
approximately $174,000 in 1998, $330,000 in 1997, and $80,000, in 1996.
Management believes that any such future remediation costs will not have an
adverse material effect on the financial condition or results of operations of
Stater Bros.
Year 2000 Compliance
The efficient operations of Stater Bros. are dependent, in part, upon its
computer software programs, systems and processes. Stater Bros.' information
systems are used in several key areas of Stater Bros., including, but not
limited to, supermarket operations, warehousing and distribution,
merchandising and purchasing, inventory management, and accounting and
financial reporting. In 1997, Stater Bros. established a Year 2000 compliance
committee and developed a Year 2000 compliance plan. Stater Bros.' Year 2000
compliance plan addresses Stater Bros.' information systems, communications
with vendors, financial institutions and others, and provides for contingency
planning. Stater Bros. is in the process of updating its information systems
for Year 2000 compliance requirements and has engaged independent consultants
since mid-1998 to assist in achieving Year 2000 compliance with its
information systems by September 1999. Additionally, Stater Bros. has also
been in communication with some of its vendors, financial institutions and
others whose computer software, programs and information systems may interface
with those of Stater Bros. to assess the status of their compliance with Year
2000 requirements. Failure of companies that Stater Bros. conducts business
with to comply with the Year 2000 requirements could have an adverse effect on
Stater Bros.' operations.
Based on the information currently available, Stater Bros. believes it will
meet the Year 2000 compliance requirements through a combination of
information systems modifications and through the acquisition of new equipment
and technology that are Year 2000 compliant. Stater Bros.' Year 2000
compliance committee is developing a contingency plan for its information
systems and is developing contingency plans in the event vendors, financial
institutions and others that Stater Bros. conducts business with do not comply
with the Year 2000 requirements. Stater Bros. believes that costs required to
replace or modify information systems, including scheduled replacements of in-
store point of sale equipment, will approximate $8.4 million, of which $6.9
million will be capitalized and $1.5 million will be expensed. Through June
27, 1999, Stater Bros. has incurred capitalized expenditures of $6.2 million
and operating expenses of $982,000. Stater Bros. believes that
55
it will successfully achieve compliance with the Year 2000 requirements by
September 1999, however, no assurances can be given that Stater Bros.'
information systems and its vendors, financial institutions and others will be
successful in achieving Year 2000 compliance.
Stater Bros.' ability to timely implement its Year 2000 compliance plan may
be adversely affected by a variety of factors, some of which are beyond Stater
Bros.' control, including the potential of unforeseen implementation problems,
delays in the delivery of products, and disruption of store operations
resulting from a loss of power or communication links between stores,
distribution centers and headquarters. Based on currently available
information, Stater Bros. is unable to determine whether such interruptions
are likely to have a material adverse effect on Stater Bros.' results of
operations, liquidity or financial condition.
Legal Proceedings
In the ordinary course of its business, Stater Bros. is party to various
legal actions which it believes are incidental to the operation of its
business. Stater Bros. records an appropriate provision when the occurrence of
loss is probable and can be reasonably estimated. Stater Bros. believes that
the outcome of such legal proceedings to which Stater Bros. is currently a
party will not have a material adverse effect upon its results of operations
or its consolidated financial condition.
In April 1998, certain environmental groups and the California State
Attorney General filed two separate lawsuits against Stater Bros. Markets and
lawsuits against other supermarket chains in California. Both cases filed
against Stater Bros. Markets involve claims alleging that the aggregate
release of diesel fuel emissions caused by the ingress and egress of diesel
engine vehicles at its distribution facility in Colton, California violate
California law. The lawsuits filed against the other California supermarket
chains involved similar allegations. Both cases involving Stater Bros. Markets
are currently in the discovery stage. Management anticipates that the
resolution of these cases will not involve adverse financial consequences to
Stater Bros.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case
of Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the
State of California for the County of San Bernardino. The complaint filed by
twelve employees seeks unspecified damages alleging racial discrimination in
Stater Bros.' employment practices. Stater Bros. believes the complaint is
without merit and intends to vigorously defend the case. There can be no
assurances, however, as to the outcome of this case.
Government Regulation
Stater Bros. is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies. Regulations cover
trade practices, building standards, labor, health, safety and environmental
matters. The distribution and sale of alcoholic beverages, tobacco products,
milk and other agricultural products are also subject to regulation.
56
MANAGEMENT
The following table sets forth certain information with respect to the
current executive officers and directors of Stater Bros., their ages and
principal occupations for at least the past five years. Directors of Stater
Bros. each serve for a term of one year, or until their successors are
elected. The officers serve at the discretion of the Board of Directors of
Stater Bros.
Name Age Position
---- --- --------
Jack H. Brown........... 60 Chairman of the Board, President and Chief Executive Officer
Donald I. Baker......... 58 Executive Vice President
H. Harrison Lightfoot... 61 Group Senior Vice President--Development
A. Gayle Paden.......... 62 Group Senior Vice President--Human Resources
Dennis N. Beal.......... 48 Senior Vice President--Finance and Chief Financial Officer
Bruce D. Varner......... 62 Director and Secretary
Thomas W. Field, Jr..... 64 Vice Chairman of the Board of Directors
Background of Directors and Executive Officers
Jack H. Brown. Jack H. Brown has been President and Chief Executive Officer
of Stater Bros. since June 1981 and Chairman of the Board since 1986. From
September 1978 to June 1981, Mr. Brown served as President of Pantry Food
Markets, Inc. and American Community Stores Corporation, Inc., both wholly-
owned subsidiaries of Cullum Companies, Inc., a publicly held corporation.
From 1972 to 1978, Mr. Brown served as Corporate Vice President of Marsh
Supermarkets, Inc., a publicly held corporation. Mr. Brown has been employed
in various capacities in the supermarket industry for 47 years. Mr. Brown has
a majority interest and is the managing general partner of La Cadena
Investments.
Donald I. Baker. Donald I. Baker has been Executive Vice President of Stater
Bros. since October 1998. Mr. Baker joined Stater Bros. in November 1983 as
Vice President--Warehouse and Transportation and was Group Senior Vice
President--Administration from July 1996 to October 1998. From July 1992 to
July 1996, Mr. Baker was Group Senior Vice President--Human Resources and
Distribution. From August 1986 to July 1992, Mr. Baker was Senior Vice
President--Human Resources and Distribution. Mr. Baker has approximately 39
years of experience in the supermarket industry. Prior to joining Stater
Bros., Mr. Baker was employed by American Community Stores Corporation, Inc.,
a subsidiary of Cullum Companies, Inc., a publicly held corporation, from 1972
to 1983 in various capacities including Vice President of Retail Operations,
and was also employed by Kroger Company from 1966 to 1972.
H. Harrison Lightfoot. H. Harrison Lightfoot has been Group Senior Vice
President--Development since May 1998 and was Group Senior Vice President--
Retail Operations of Stater Bros. from June 1986 to May 1998. Mr. Lightfoot
has served Stater Bros. for 45 years in various capacities, including store
manager, buyer, general supervisor and Vice President. Mr. Lightfoot is a
general partner of La Cadena Investments.
A. Gayle Paden. A. Gayle Paden has been Group Senior Vice President--Human
Resources since May 1998 and was Group Senior Vice President--Distribution
from July 1996 to May 1998. Mr. Paden joined Stater Bros. in 1986 as Group
Senior Vice President--Administration and served in that capacity until July
1996. Mr. Paden was previously with Lucky Stores for 35 years where he served
in various capacities, the most recent of which was President of the Southern
California Food Division.
Dennis N. Beal. Dennis N. Beal has been Senior Vice President--Finance and
Chief Financial Officer since May 1998 and was Vice President of Finance and
Chief Financial Officer of Stater Bros. from September 1992 to May 1998. Mr.
Beal was Vice President and Controller of American Stores Company from 1989 to
1992 and Vice President and Controller of subsidiaries of American Stores
Company from 1987 to 1989 and served in various financial positions since
1981. Mr. Beal, a certified public accountant, was also a partner in the
accounting firm of Bushman, Daines, Rasmussen & Wisan and served in various
capacities with the firm from 1974 to 1981.
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Bruce D. Varner. Bruce D. Varner has been a director of Stater Bros. Markets
since September 1985 and director of Stater Bros. since May 1989. Since
February 1997, Mr. Varner has been a partner in the law firm of Varner,
Saleson & Dobler LLP. From 1967 to February 1997, Mr. Varner was a partner in
the law firm of Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner
specializes in business and corporate matters. Mr. Varner and the law firm of
Varner, Saleson & Dobler LLP have performed legal services in the past for
Stater Bros. and Stater Bros. expects such services to continue in the future.
Thomas W. Field, Jr. Thomas W. Field, Jr. has been Vice Chairman of the
Board of Directors of Stater Bros. since May 1998 and a Director of Stater
Bros. since 1994. He has been President of Field and Associates since 1989.
From 1988 to 1989, Mr. Field was Chairman of the Board, President and Chief
Executive Officer of McKesson Corporation and was its President since 1984,
and President and Chief Executive Officer from 1986 to 1988. Mr. Field was
President of American Stores Company from 1981 to 1984 and was President of
Alpha Beta Company from 1976 to 1984. Mr. Field was a Director of American
Stores Company from 1979 to 1984. Mr. Field is a nationally recognized and
highly regarded supermarket executive. Mr. Field has held various positions in
the supermarket industry for over 40 years and serves as a Director for
several companies including Campbell Soup Company and Maxicare.
58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 27, 1999, the number and
percentage of outstanding shares of common stock beneficially owned by (a)
each person known by Stater Bros. to beneficially own more than 5% of such
stock; (b) each director of Stater Bros.; (c) each of the named executive
officers; and (d) all directors and executive officers of Stater Bros. as a
group:
Percentage of
Shares of Class A Class A
Common Stock Common Stock
Name and Address of Beneficial Owner Beneficially Owned Outstanding
------------------------------------ ------------------ -------------
La Cadena Investments(1)...................... 50,000 100%
Jack H. Brown(1)(2)........................... 50,000 100
H. Harrison Lightfoot(1)(2)................... 50,000 100
Richard C. Moseley(1)(2)...................... 50,000 100
A. Gayle Paden(2)............................. -- --
Donald J. Baker(2)............................ -- --
Dennis N. Beal(2)............................. -- --
Bruce D. Varner(2)............................ -- --
Thomas W. Field, Jr.(2)....................... -- --
All directors and executive officers as a
group (7 persons)(1)(3)...................... 50,000 100
- --------
(1) The 50,000 outstanding shares of Stater Bros.' Class A common stock are
owned by La Cadena Investments and may be deemed to be beneficially owned
by the partners of La Cadena Investments. The general partners of La
Cadena Investments are Jack H. Brown, Richard C. Moseley and H. Harrison
Lightfoot. Mr. Brown has the majority interest and is the managing general
partner of La Cadena Investments and has the power to vote the shares of
Stater Bros. owned by La Cadena Investments on all matters. Certain La
Cadena Investments issues, such as the disposition of such shares of
Stater Bros., may require approval of 60% of the voting power of La Cadena
Investments. Accordingly, Messrs. Brown, Moseley and Lightfoot may be
deemed to have shared voting power or shared investment power with respect
to the shares owned by La Cadena Investments, and such individuals
therefore may be deemed to be the beneficial owners thereof. The address
of La Cadena Investments is 3750 University Avenue, Suite 610, Riverside,
California 92501.
(2) The address of Messrs. Brown, Lightfoot, Moseley, Paden, Baker, Beal,
Varner and Field is c/o Stater Bros. at 21700 Barton Road, Colton,
California 92324.
(3) Does not include Mr. Moseley.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Bruce D. Varner and the law firm of Varner, Saleson & Dobler LLP, of
which Mr. Varner is a partner, have performed legal services in the past for
Stater Bros. The total cost of such legal services incurred by Stater Bros.
during fiscal 1998 was approximately $1.6 million. Stater Bros. believes that
the terms and costs of such legal services provided by Mr. Varner and the law
firm of Varner, Saleson & Dobler LLP were at least as fair to Stater Bros. as
could have been obtained from unaffiliated law firms. Stater Bros. expects
such services to continue in the future.
Stater Bros. has agreed to pay La Cadena Investments a fee for advisory
services rendered in connection with the related transactions equal to 1% of
the aggregate principal amount of the outstanding notes.
59
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of important terms of Stater Bros.' material
indebtedness:
New Credit Facility
Stater Bros.' principal operating subsidiary, Stater Bros. Markets, signed a
new credit facility with Bank of America on August 6, 1999. The new credit
facility provides for (i) a $50.0 million three-year revolving loan facility
and (ii) a $25.0 million three-year letter of credit facility. Borrowings
under the revolving loan facility are expected to be used for certain working
capital and corporate purposes. Letters of credit under the letter of credit
facility are expected to be used to support the purchase of inventory,
obligations incurred in connection with the construction of stores, and
workmen's compensation insurance obligations. The availability of the loans
and letters of credit are subject to certain sublimits and other borrowing
restrictions.
Indebtedness of Stater Bros. Markets under the new credit facility is
guaranteed by Stater Bros. Development, Inc., a subsidiary of Stater Bros.,
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 new credit facility bear interest at a rate based upon
either (i) the "Base Rate" (defined as the higher of (a) the rate of interest
publicly announced by Bank of America as its "reference rate" and (b) the
federal funds effective rate from time to time plus 0.50%), plus 1.00%, or
(ii) the "Offshore Rate" (defined as the rate (adjusted for statutory reserve
requirements for eurocurrency liabilities) at which eurodollar deposits for
one, two, three or six months (as selected by Stater Bros. Markets) are
offered to Bank of America in the interbank 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 of credit under the new credit facility can
be issued until August 6, 2002, and all letters of credit must expire not
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 reborrowed. 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
redeployment costs in the case of loans based on the offshore rate. The
commitments under the new 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 usage
of the letter of credit facility. Stater Bros. Markets will also be required
to pay a commission on all 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 letters of credit issued under the letter of credit facility.
Availability of the loans and letters of credit under the new credit
facility is subject to a monthly borrowing base test based on inventory. The
new credit facility requires Stater Bros. Markets to meet certain financial
tests, including minimum net worth and minimum EBITDA tests. The new 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-leasebacks, other matters
customarily restricted in such agreements and modifications to the holding
company status of Stater Bros.
The new credit facility also contains covenants that apply to Stater Bros.
Holdings Inc., and Stater Bros. Holdings Inc. is a party to the new credit
facility for purposes of these covenants. These covenants, among other things,
limit dividends and other payments in respect of Stater Bros. Holdings Inc.'s
capital stock, prepayments and redemptions of the exchange notes and other
debt, and limit indebtedness, investments, loans and advances by Stater Bros.
Holdings Inc. The new 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.
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The new 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.
The new credit facility replaced Stater Bros.' previous credit facility with
Bank of America. The previous credit facility provided Stater Bros. Markets
with a revolving facility of $15.0 million and a letter of credit facility of
$25.0 million. As of June 27, 1999, $15.0 million was available to Stater
Bros. Markets under the previous revolving facility and $14.2 million was
available under the previous letter of credit facility. At August 17, 1999
there were no revolving borrowings outstanding under the new credit facility
and the aggregate amount of all letters of credit issued thereunder was
approximately $10.0 million.
11% Senior Notes
In March 1994, Stater Bros. issued $165.0 million principal amount of its
11% senior notes. At August 6, 1999, approximately $5 million of the principal
amount of such senior notes remained outstanding. The 11% senior notes are
governed by the terms of an indenture, as amended, and are unsecured senior
obligations of Stater Bros. The 11% senior notes mature on March 1, 2001 and
interest thereon is payable semi-annually in arrears on March 1 and September
1 of each year. The 11% senior notes rank equally with all of Stater Bros.'
existing and future unsubordinated, unsecured indebtedness.
In connection with Stater Bros.' repurchase of 11% senior notes, Stater
Bros. amended the indenture pursuant to which the 11% senior notes were issued
to eliminate substantially all financial and restrictive covenants. See
"Summary--The Related Transactions."
61
DESCRIPTION OF THE EXCHANGE NOTES
In this description, the term "Stater Bros." refers only to Stater Bros.
Holdings Inc. and not to any of its subsidiaries. Definitions of certain other
terms used in this description are found under the subheading "--Certain
Definitions." Certain defined terms used in this description but not defined
below under "--Certain Definitions" have the meanings assigned to them in the
Indenture.
Stater Bros. will issue the exchange notes under an indenture dated August
6, 1999 between itself and IBJ Whitehall Bank & Trust Company, as trustee (the
"Indenture"). The terms of the exchange notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended.
The terms of the exchange notes are nearly identical to the outstanding
notes in all material respects, including interest rate and maturity, except
that the exchange notes will not be subject to:
. the restrictions on transfer; and
. the registration agreement covenants regarding registration.
The following description is a summary of the material provisions of the
Indenture. It does not restate the Indenture in its entirety. The Indenture,
and not this description, defines investors' rights as holders of the exchange
notes.
Brief Description of the Exchange Notes
The Exchange Notes
The exchange notes:
. are general unsecured obligations of Stater Bros.;
. are pari passu in right of payment with existing and future unsecured
senior Indebtedness of Stater Bros.; and
. are senior in right of payment to any future subordinated Indebtedness
of Stater Bros.
The operations of Stater Bros. are conducted through its subsidiaries and,
therefore, Stater Bros. depends on the cash flow of its subsidiaries to meet
its obligations, including its obligations under the exchange notes. The
exchange notes will be effectively subordinated in right of payment to all
Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of Stater Bros.' subsidiaries. The ability of Stater
Bros., as the owner of equity interests in its subsidiaries, to receive assets
upon the liquidation or reorganization of any of its subsidiaries (and the
consequent right of the holders of the exchange notes to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors. As of June 27, 1999, Stater Bros.' subsidiaries would have had
approximately $18.1 million of Indebtedness and $144.5 million of trade
payables and other current liabilities outstanding assuming the Transactions
were completed on June 27, 1999. See "Risk Factors--Risks Related to the
Exchange Notes--Stater Bros.' Holding Company Structure Restricts the Funds
and Assets Available for the Payment of Principal and Interest on the Exchange
Notes."
Principal, Maturity and Interest
The Indenture provides for the issuance by Stater Bros. of notes with an
initial aggregate principal amount of $450 million and a maximum aggregate
principal amount of $550 million. Stater Bros. may issue additional notes
under the Indenture from time to time after this offering. Any offering of
additional notes is subject to the covenant described below under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock." The exchange notes and any additional notes subsequently issued under
the Indenture would be treated as a single class for all purposes under the
Indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase. Stater Bros. will issue exchange notes in denominations of
$1,000 and integral multiples of $1,000. The exchange notes will mature on
August 15, 2006.
62
Interest on the exchange notes will accrue at the rate of 10 3/4% per annum
and will be payable semi-annually in arrears on February 15 and August 15,
commencing on February 15, 2000. Stater Bros. will make each interest payment
to the Holders of record on the immediately preceding February 1 and August 1.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Methods of Receiving Payments on the Exchange Notes
If a Holder has given wire transfer instructions to Stater Bros., Stater
Bros. will pay all principal, interest and premium and Liquidated Damages, if
any, on that Holder's exchange notes in accordance with those instructions.
All other payments on exchange notes will be made at the office or agency of
the Paying Agent and Registrar within the City and State of New York unless
Stater Bros. elects to make interest payments by check mailed to the Holders
at their addresses set forth in the register of Holders.
Paying Agent and Registrar for the Exchange Notes
The Trustee will initially act as Paying Agent and Registrar. Stater Bros.
may change the Paying Agent or Registrar without prior notice to the Holders,
and Stater Bros. or any of its Subsidiaries may act as Paying Agent or
Registrar.
Transfer and Exchange
A Holder may transfer or exchange exchange notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and Stater
Bros. may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. Stater Bros. is not required to transfer or
exchange any exchange note selected for redemption. Also, Stater Bros. is not
required to transfer or exchange any exchange note for a period of 15 days
before a selection of exchange notes to be redeemed. The registered Holder of
a exchange note will be treated as the owner of it for all purposes.
Optional Redemption
At any time prior to August 15, 2002, Stater Bros. may on any one or more
occasions redeem up to 35% of the aggregate principal amount of exchange notes
issued under the Indenture at a redemption price of 110.750% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the redemption date, with the net cash proceeds of one or more sales
of Capital Stock of Stater Bros., resulting for each such sale in net cash
proceeds to Stater Bros. in excess of $25.0 million, provided that:
(1) at least 65% of the aggregate principal amount of exchange notes
issued under the Indenture remains outstanding immediately after the
occurrence of such redemption (excluding exchange notes held by Stater
Bros. and its Subsidiaries); and
(2) the redemption must occur within 45 days of the date of the closing
of such offering.
Except pursuant to the preceding paragraph, the exchange notes will not be
redeemable at Stater Bros.' option prior to August 15, 2003.
After August 15, 2003, Stater Bros. may redeem all or a part of the exchange
notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on August 15 of the years indicated below:
Year Percentage
---- ----------
2003........................................................... 105.3750%
2004........................................................... 102.6875%
2005 and thereafter............................................ 100.0000%
63
Mandatory Redemption
Stater Bros. is not required to make mandatory redemption or sinking fund
payments with respect to the exchange notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of exchange notes will have the
right to require Stater Bros. to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of that Holder's exchange notes pursuant to a
Change of Control Offer on the terms set forth in the Indenture. In the Change
of Control Offer, Stater Bros. will offer a payment in cash equal to 101% of
the aggregate principal amount of exchange notes repurchased plus accrued and
unpaid interest and Liquidated Damages, if any, thereon, to the date of
purchase (the "Change of Control Payment"). Within thirty (30) days following
any Change of Control, Stater Bros. will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase exchange notes on the date specified in
such notice (the "Change of Control Payment Date"), which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed, pursuant to the procedures required by the Indenture and described in
such notice. Stater Bros. will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the exchange notes as a result of a Change
of Control. To the extent that the provisions of any securities laws or
regulations conflict with the Change of Control provisions of the Indenture,
Stater Bros. will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Change of
Control provisions of the Indenture by virtue of such conflict.
On the Change of Control Payment Date, Stater Bros. will, to the extent
lawful:
(1) accept for payment all exchange notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the Trustee the exchange notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of exchange notes or portions thereof being purchased by
Stater Bros.
The Paying Agent will promptly mail to each Holder of exchange notes so
tendered the Change of Control Payment for such exchange notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new exchange note equal in principal amount to
any unpurchased portion of the exchange notes surrendered, if any; provided
that each such new exchange note will be in a principal amount of $1,000 or an
integral multiple thereof.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control,
Stater Bros. will either (i) cause each of its Restricted Subsidiaries to
obtain the requisite consents, if any, under any agreements governing
outstanding Indebtedness of such Restricted Subsidiary to permit the
repurchase of exchange notes required by such "Change in Control" covenant or
(ii) if any of such requisite consents cannot be obtained, cause the
applicable Restricted Subsidiary or Restricted Subsidiaries to repay the
Indebtedness pursuant to which such consent is required.
Stater Bros. will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Stater Bros. to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that
64
permit the Holders of the exchange notes to require that Stater Bros.
repurchase or redeem the exchange notes in the event of a takeover,
recapitalization or similar transaction.
Stater Bros. will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by Stater
Bros. and purchases all exchange notes validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of Stater Bros. and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of exchange notes to require Stater Bros. to repurchase such exchange
notes as a result of a sale, lease, transfer, conveyance or other disposition
of less than all of the assets of Stater Bros. and its Restricted Subsidiaries
taken as a whole to another Person or group may be uncertain.
Asset Sales
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale (other than a Qualified Santee LLC
Interest Sale) unless:
(1) Stater Bros. (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is evidenced by (i) for any Asset Sale
resulting in Net Proceeds less than or equal to $1.0 million, an Officers'
Certificate delivered to the Trustee or (ii) for any Asset Sale resulting
in Net Proceeds in excess of $1.0 million, a resolution of Stater Bros.'
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee; and
(3) at least 75% of the consideration therefor received by Stater Bros.
or such Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following shall be deemed to be cash:
(a) any liabilities (as shown on Stater Bros.' or such Restricted
Subsidiary's most recent balance sheet) of Stater Bros. or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the exchange notes)
that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases Stater Bros. or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Stater
Bros. or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
Stater Bros. or such Restricted Subsidiary into cash (to the extent of
the cash received in that conversion);
provided, that any non-cash consideration that becomes Net Proceeds will
thereafter be subject to the provisions of the next paragraph.
Upon the date of consummation of any Asset Sale by Stater Bros. or any
Restricted Subsidiary which, taken individually or together with all such
Asset Sales since the date of the Indenture, results in the receipt of Net
Proceeds in excess of $10.0 million, such Net Proceeds and all Net Proceeds
from all such Asset Sales consummated concurrently therewith or consummated
thereafter (such first consummation date and each such date thereafter a
"Consummation Date") will be applied by Stater Bros. or such Restricted
Subsidiary within 12 months of the relevant Consummation Date (or, in the
event of a Qualified Santee LLC Interest Sale, within 24 months of the
relevant Consummation Date) at its election to either:
(1) investments in assets or businesses in the same line of business as
Stater Bros. or such Restricted Subsidiary;
65
(2) the permanent repayment of (and permanent reduction of commitments,
if any, under) any Indebtedness (a) that is secured by or incurred to
construct such assets or (b) of a Restricted Subsidiary;
(3) a combination of payment and investment permitted by the foregoing
clauses (1) and (2); or
(4) pending the final application of any such Net Proceeds, the temporary
reduction of revolving credit borrowings or other investment of such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in clauses (1), (2) or (3) of the preceding paragraph will constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, Stater Bros. will be required under the Indenture to make an Asset
Sale Offer to all Holders of exchange notes and all holders of other
Indebtedness that is pari passu with the exchange notes containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum
principal amount of exchange notes and such other pari passu Indebtedness that
may be purchased out of the Excess Proceeds. The offer price in any Asset Sale
Offer will be equal to 100% of principal amount plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase, and will be
payable in cash. If any Excess Proceeds remain after consummation of an Asset
Sale Offer, Stater Bros. or such Restricted Subsidiary may use such Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of exchange notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the exchange notes and such other pari
passu Indebtedness to be purchased on a pro rata basis based on the principal
amount of exchange notes and such other pari passu Indebtedness tendered. Upon
completion of each Asset Sale Offer, the amount of Excess Proceeds will be
reset at zero.
Stater Bros. will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
repurchase of exchange notes pursuant to an Asset Sale Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
Asset Sales provisions of the Indenture, Stater Bros. will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Asset Sale provisions of the Indenture by
virtue of such conflict.
The agreements governing certain Indebtedness of Stater Bros. Markets limit
the ability of Stater Bros. to purchase the exchange notes in the event of a
Change of Control or an Asset Sale, and also provide that certain change of
control or asset sale events with respect to Stater Bros. Markets would
constitute a default under these agreements. Any future credit agreements or
other agreements relating to Indebtedness to which Stater Bros. Markets
becomes a party may contain similar restrictions and provisions. In the event
a Change of Control or Asset Sale occurs at a time when the ability of Stater
Bros. to purchase the exchange notes is restricted, Stater Bros. Markets could
seek the consent of its lenders to the purchase of exchange notes or could
attempt to repay the borrowings that contain such restriction. If Stater Bros.
Markets did not obtain such a consent or repay such borrowings, Stater Bros.
might not be able to purchase the exchange notes. In such case, Stater Bros.'
failure to purchase tendered exchange notes would constitute an Event of
Default under the Indenture. In addition, the exercise by the Holders of
exchange notes of their right to require Stater Bros. to repurchase the
exchange notes upon a Change of Control or an Asset Sale could cause a default
under these other agreements, even if the Change of Control or Asset Sale
itself does not, due to the financial effect of such repurchases on Stater
Bros. Finally, Stater Bros.' ability to pay cash to the Holders of exchange
notes upon a repurchase may be limited by Stater Bros.' then existing
financial resources. See "Risk Factors--States Bros. May Be Unable to Raise
the Funds Necessary to Finance a Change of Control Offer Required by the
Indenture."
Selection and Notice
If less than all of the exchange notes are to be redeemed at any time, the
Trustee will select exchange notes for redemption as follows:
(1) if the exchange notes are listed, in compliance with the requirements
of the principal national securities exchange on which the exchange notes
are listed; or
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(2) if the exchange notes are not so listed, on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate.
No exchange notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of exchange notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any exchange note is to be redeemed in part only, the notice of
redemption that relates to that exchange note shall state the portion of the
principal amount thereof to be redeemed. A new exchange note in principal
amount equal to the unredeemed portion of the original exchange note will be
issued in the name of the Holder thereof upon cancellation of the original
exchange note. Exchange notes called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest and
Liquidated Damages, if any, ceases to accrue on exchange notes or portions of
them called for redemption.
Certain Covenants
Restricted Payments
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Stater Bros.' or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any such payment in connection
with any merger or consolidation involving Stater Bros. or any of its
Restricted Subsidiaries) or to the direct or indirect holders of Stater
Bros.' or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of Stater Bros. or payable to
Stater Bros. or a Restricted Subsidiary of Stater Bros.);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving Stater Bros.) any Equity Interests of Stater Bros. or any direct
or indirect parent or Affiliate of Stater Bros.;
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the exchange notes, except a payment of interest or
principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions
set forth in clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless such Restricted Payment occurs on or after September 27, 1999 and, at
the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(2) Stater Bros. would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Stater Bros. and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (2), (3), (4), (5), (6), (7), (9), (10) and (11) of
the next succeeding paragraph), is less than the sum, without duplication,
of:
(a) 50% of the Consolidated Net Income of Stater Bros. for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the Indenture to the
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end of Stater Bros.' most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit); plus
(b) 100% of the aggregate net cash proceeds received by Stater Bros.
since the date of the Indenture as a contribution to its common equity
capital or from the issue or sale of Equity Interests of Stater Bros.
(other than Disqualified Stock) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of Stater Bros. that have been converted
into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to a
Restricted Subsidiary of Stater Bros. or to Santee or Santee LLC); plus
(c) to the extent that any Restricted Investment that was made after
the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment; plus
(d) an amount equal to the fair market value of the Equity Interests
of each Unrestricted Subsidiary that has been redesignated as a
Restricted Subsidiary pursuant to the terms of the Indenture; provided,
that such amount shall not in any case exceed the amount of Restricted
Investments previously made by Stater Bros. or any Restricted
Subsidiary in such Person; plus
(e) $5.0 million.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(2) if no Default or Event of Default shall have occurred and be
continuing or would be caused thereby, the redemption, repurchase,
retirement, defeasance or other acquisition of any subordinated
Indebtedness of Stater Bros. or of any Equity Interests of Stater Bros. in
exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of Stater Bros.) of,
Equity Interests of Stater Bros. (other than Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (3) (b) of the preceding paragraph;
(3) if no Default or Event of Default shall have occurred and be
continuing or would be caused thereby, the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness of Stater
Bros. with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Stater
Bros. to the holders of its Equity Interests on a pro rata basis;
(5) the payment to La Cadena Investments of an amount equal to 1% of the
aggregate principal amount of the exchange notes sold pursuant to this
offering for advisory services rendered in connection therewith;
(6) the payment of any costs and expenses (including any related premium)
in connection with (a) the offering of the exchange notes and the tender
offer and consent solicitation for Stater Bros.' 11% senior notes due 2001
and 9% senior subordinated notes due 2004 and (b) the acquisition of
certain supermarkets and one store site pursuant to the Asset Purchase
Agreement, including all costs and expenses incidental to the foregoing;
(7) the payment to La Cadena Investments or any La Cadena Successor of an
amount equal to the lesser of the amount of (i) the sum of (X) any
Qualified La Cadena Investment, plus (Y) an amount equal to a commercially
reasonable rate of interest on such Qualified La Cadena Investment to the
extent that the net proceeds received by Stater Bros. Markets from the sale
or disposition of that portion of Stater Bros. Markets' interest in Santee
LLC which was acquired with the proceeds from such Qualified La Cadena
Investment exceeds the original amount of the Qualified La Cadena
Investment; and (ii) net proceeds
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received by Stater Bros. Markets from the sale or disposition of that
portion of Stater Bros. Markets' interest in Santee LLC which was acquired
with the proceeds from such Qualified La Cadena Investment;
(8) if no Default or Event of Default shall have occurred and be
continuing or would be caused thereby, other Investments in any Person
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to
this clause (8) since the date of the Indenture not to exceed $5 million;
(9) if no Default or Event of Default shall have occurred and be
continuing or would be caused thereby, the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of Stater Bros.
held by any key employee of Stater Bros. or its Restricted Subsidiaries
(other than any key employee that is a partner of or otherwise holds any
Equity Interest in La Cadena Investments or any La Cadena Successor) upon
any such person's death, disability or termination of employment and
pursuant to any management equity subscription agreement, stock option
agreement or other incentive compensation plan or agreement entered into in
the ordinary course of business; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $500,000, which aggregate amount shall increase by $500,000 on
each anniversary of the date of the Indenture;
(10) payment of dividends on the Markets Preferred Stock as outstanding
and in effect on the date of the Indenture not to exceed five thousand
dollars ($5,000) per year; and
(11) any redemption or repurchase of the Markets Preferred Stock
outstanding on the date of the Indenture, provided that the aggregate cash
payments made with respect to such redemption or repurchase shall not
exceed fifty thousand dollars ($50,000).
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued to or by Stater Bros. or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant shall be determined by a majority of Stater Bros.'
directors whose resolution with respect thereto shall be delivered to the
Trustee. Not later than the date of making any Restricted Payment (other than
Restricted Payments permitted pursuant to clauses (1), (4), (5), (6), (10) and
(11) of the preceding paragraph), Stater Bros. shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this
"Restricted Payments" covenant were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt), and Stater Bros. will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that if no Default or Event of Default
shall have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, Stater Bros. may incur Indebtedness
(including Acquired Debt) or issue Disqualified Stock if the Fixed Charge
Coverage Ratio for Stater Bros.' most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding
the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1, determined on
a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Stater Bros. or its Restricted Subsidiaries of
Indebtedness in an aggregate principal amount not to exceed $50 million at
any time outstanding under any Credit Facilities or any replacement
facility thereof;
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(2) the incurrence by Stater Bros. and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by Stater Bros. of Indebtedness represented by the
outstanding notes issued on the date of the Indenture and the exchange
notes to be issued hereby;
(4) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Acquired Debt represented by Capital Lease Obligations with respect to
assets acquired pursuant to the acquisition in an amount not to exceed $15
million in the aggregate, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness incurred pursuant
to this clause (4);
(5) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations or of Permitted
Construction Indebtedness in an aggregate principal amount, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (5), not to exceed $25.0
million at any time outstanding;
(6) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph of this covenant or clauses (1), (2) or
(3) of this paragraph;
(7) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among Stater Bros. and any of its
Wholly-Owned Subsidiaries (other than an Unrestricted Subsidiary);
provided, however, that:
(a) if Stater Bros. is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the exchange notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Stater Bros. or a Restricted Subsidiary thereof and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either
Stater Bros. or a Wholly-Owned Subsidiary (other than an Unrestricted
Subsidiary) thereof, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Stater Bros. or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(7);
(8) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding;
(9) the guarantee by Stater Bros. of Indebtedness of Stater Bros. or a
Restricted Subsidiary of Stater Bros. that was permitted to be incurred by
another provision of this covenant;
(10) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in Fixed
Charges of Stater Bros. as accrued;
(11) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Indebtedness to secure workers' compensation and other insurance
coverages, not to exceed the minimum amount required by Stater Bros.' or
any of its Restricted Subsidiaries' insurance carriers or applicable
regulatory agencies (which may be Indebtedness under Credit Facilities in
addition to that permitted under clause (1));
(12) the incurrence by Stater Bros. of Indebtedness to La Cadena
Investments or any La Cadena Successor incurred by Stater Bros. in
connection with a Qualified La Cadena Investment; provided, however, that
the repayment of principal with respect to, and the payment of interest
with respect to, any such Qualified La Cadena Investment constituting
Indebtedness will be subject to the covenant set forth in "Limitation on
Restricted Payments and Investments";
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(13) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of Indebtedness represented by letters of credit entered into as security
for the obligations of Stater Bros. or any of its Restricted Subsidiaries
pursuant to any or all of the Petrolane Leases;
(14) the incurrence of Indebtedness arising from agreements of Stater
Bros. or any Restricted Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of Stater Bros. or any Restricted Subsidiary pursuant to such
agreements, incurred or assumed in connection with the disposition of any
business, assets or Subsidiary of Stater Bros. or any Restricted
Subsidiary, other than guarantees or similar credit support by Stater Bros.
or such Restricted Subsidiary of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary for the
purpose of financing such acquisition; provided that the maximum aggregate
liability in respect of all such Indebtedness described in this clause
shall not exceed the net proceeds actually received in connection with any
such disposition; and
(15) the incurrence by Stater Bros. or any of its Restricted Subsidiaries
of other Indebtedness not to exceed $25 million (which may be Indebtedness
under Credit Facilities in addition to that permitted by clause (1)).
Stater Bros. will not incur any Indebtedness (including Permitted Debt) that
is contractually subordinated in right of payment to any other Indebtedness of
Stater Bros. unless such Indebtedness is also contractually subordinated in
right of payment to the exchange notes on substantially identical terms;
provided, however, that no Indebtedness of Stater Bros. shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of
Stater Bros. solely by virtue of being unsecured.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (15) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, Stater Bros.
will be permitted to classify such item of Indebtedness on the date of its
incurrence, or later reclassify all or a portion of such item of Indebtedness,
in any manner that complies with this covenant.
Indebtedness under the Revolving Credit Facility outstanding on the date on
which exchange notes are first issued and authenticated under the Indenture
shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (1) of the definition of Permitted Debt.
Liens
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind on any asset now owned or hereafter acquired,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction of any kind:
(1) on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on its Capital
Stock to Stater Bros. or any of its Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to Stater Bros. or any of its
Restricted Subsidiaries;
(b) make loans or advances to Stater Bros. or any of its Restricted
Subsidiaries; or
(c) transfer any of their respective properties or assets to Stater
Bros. or any of its Restricted Subsidiaries;
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(2) On the ability of Stater Bros. or any of its Restricted Subsidiaries
to receive or retain any such:
(a) dividends, payments or distributions,
(b) loans or advances, or
(c) transfer of property (any such restriction being referred to
herein as a "Payment Restriction").
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements in effect as of the date of the Indenture and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof (provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in such Existing Indebtedness, as in effect on the date of
the Indenture) or any provisions of any articles of incorporation or
certificate of incorporation with respect to Stater Bros. or any Restricted
Subsidiary (including without limitation the rights, preferences and
privileges of any class or series of preferred stock included therein) in
effect as of the date of the Indenture;
(2) the Indenture and the exchange notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Stater Bros. or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture
to be incurred;
(5) customary non-assignment provisions in leases and other contracts
entered into in the ordinary course of business;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (2)(c) of the preceding paragraph;
(7) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(8) the Revolving Credit Facility;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to such Lien; and
(10) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
Stater Bros. may not, directly or indirectly: (1) consolidate or merge with
or into another Person (whether or not Stater Bros. is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of Stater Bros. and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person; unless:
(1) either: (a) Stater Bros. would be the surviving corporation; or (b)
the Person formed by or surviving any such consolidation or merger (if
other than Stater Bros.) or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made would be a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
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(2) the Person formed by or surviving any such consolidation or merger
(if other than Stater Bros.) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of Stater Bros. under the exchange notes, the Indenture and
the Registration Rights Agreement pursuant to agreements reasonably
satisfactory to the Trustee;
(3) immediately after giving effect to such transaction (including giving
effect to any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of the transaction) no Default or Event of
Default would exist or be continuing; and
(4) Stater Bros. or the Person formed by or surviving any such
consolidation or merger (if other than Stater Bros.), or to which such
sale, assignment, transfer, conveyance or other disposition shall have been
made:
(a) would have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of
Stater Bros. immediately preceding the transaction; and
(b) would, on the date of such transaction after giving pro forma
effect thereto and any related financing transactions as if the same
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(5) Stater Bros. or such Person will have delivered to the Trustee (a) an
officers' certificate of Stater Bros. and an opinion of counsel (which
counsel may not be in-house counsel of Stater Bros.), each stating that
such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture, comply with this provision of the Indenture
and that all conditions precedent in the Indenture relating to such
transaction have been satisfied and (b) a certificate from Stater Bros.'
independent certified public accountants stating that Stater Bros. has made
the calculations required by clause (4) above in accordance with the terms
of the Indenture.
In addition, Stater Bros. may not, and may not permit any of its Restricted
Subsidiaries to, directly or indirectly, lease all or substantially all of its
properties or assets, in one or more related transactions, to any other
Person. This "Merger, Consolidation or Sale of Assets" covenant will not apply
to a sale, assignment, transfer, conveyance or other disposition of assets
between or among Stater Bros. and any of its Restricted Subsidiaries.
Designation of Restricted and Unrestricted Subsidiaries
The board of directors of Stater Bros. may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of any
Wholly-Owned Subsidiary of Stater Bros. other than a Wholly-Owned Subsidiary
of such Subsidiary; provided, that Stater Bros. provides the Trustee with an
Officers' Certificate accompanied by a resolution of Stater Bros.' board of
directors stating that (x) such designation complies with the covenant
described above under "--Restricted Payments" and (y) such designation will
not otherwise result in any Default or Event of Default. The board of
directors of Stater Bros. may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if (x) immediately after giving effect to such
designation, Stater Bros. is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
covenant described above under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and (y) immediately before and immediately after giving
effect to such designation, no Default or Event of Default shall have occurred
and be continuing. Any such designation by the board of directors shall be
evidenced to the Trustee by promptly providing the Trustee a copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
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Transactions with Affiliates
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are consistent with
industry practice and no less favorable to Stater Bros. or the relevant
Restricted Subsidiary than those that would have been obtained in a
comparable transaction by Stater Bros. or such Restricted Subsidiary with
an unrelated Person; and
(2) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, Stater Bros. delivers to the Trustee a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the members of the Board of
Directors.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) transactions, to the extent not otherwise prohibited under the
Indenture, between or among Stater Bros. and/or its Wholly-Owned
Subsidiaries;
(2) transactions contemplated by the Santee Documents, as amended,
modified, renewed, refunded or replaced from time to time; provided, that
such transactions are not otherwise prohibited by the Indenture;
(3) payment of reasonable directors fees to directors of Stater Bros.;
(4) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of Stater Bros.;
(5) payment to La Cadena Investments of an amount equal to 1% of the
aggregate principal amount of the exchange notes sold pursuant to this
offering for advisory services rendered in connection therewith; and
(6) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
Limitation on Issuances and Sales of Equity Interests in Wholly-Owned
Subsidiaries (other than an Unrestricted Subsidiary)
Stater Bros. will not, and will not permit any of its Wholly-Owned
Subsidiaries (other than an Unrestricted Subsidiary) to, transfer, convey,
sell, lease or otherwise dispose of any Equity Interests in any Wholly-Owned
Subsidiary (other than an Unrestricted Subsidiary) of Stater Bros. to any
Person (other than Stater Bros. or a Wholly-Owned Subsidiary of Stater Bros.),
unless:
(1) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Restricted Subsidiary; and
(2) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
In addition, Stater Bros. will not permit any Wholly-Owned Subsidiary (other
than an Unrestricted Subsidiary) of Stater Bros. to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to Stater Bros. or a
Wholly-Owned Subsidiary (other than an Unrestricted Subsidiary) of Stater
Bros.
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Limitations on Issuances of Guarantees of Indebtedness
Stater Bros. will not permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee or pledge any assets to secure the payment of any
other Indebtedness of Stater Bros. with a principal amount in excess of an
aggregate of $10.0 million unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture providing for the Guarantee of
the payment of the exchange notes by such Restricted Subsidiary, which
Guarantee shall be senior to or pari passu with such Subsidiary's Guarantee of
or pledge to secure such other Indebtedness.
Payments for Consent
Stater Bros. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of exchange notes for or as
an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the exchange notes unless such consideration is
offered to be paid and is paid to all Holders of the exchange notes that
consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Reports
Whether or not required by the Commission, so long as any exchange notes are
outstanding, Stater Bros. will furnish to the Holders of exchange notes,
within the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if
Stater Bros. were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by Stater Bros.' certified independent accountants;
and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Stater Bros. were required to file such reports.
In addition, following the consummation of this exchange offer, whether or
not required by the Commission, Stater Bros. will file a copy of all of the
information and reports referred to in clauses (1) and (2) above with the
Commission for public availability within the time periods specified in the
Commission's rules and regulations (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the exchange notes;
(2) default in payment when due of the principal of, or premium, if any,
on the exchange notes;
(3) failure by Stater Bros. or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "--Repurchase at
the Option of Holders--Change of Control," "--Repurchase at the Option of
Holders--Asset Sales," or "--Certain Covenants--Merger, Consolidation or
Sale of Assets";
(4) failure by Stater Bros. or any of its Restricted Subsidiaries for 60
days after notice to comply with any of the other agreements in the
Indenture or the exchange notes (other than a default set forth in clauses
(1), (2) or (3) above);
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Stater Bros. or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Stater Bros. or any
of its Restricted
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Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has
been so accelerated, aggregates $5.0 million or more;
(6) failure by Stater Bros. or any of its Restricted Subsidiaries to pay
final judgments to the extent not covered by insurance underwritten by
third parties aggregating in excess of $2.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency with respect to Stater
Bros. or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency with respect to Stater Bros. or any Restricted Subsidiary, all
outstanding exchange notes will become due and payable immediately and
automatically without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding exchange notes may declare all the
exchange notes to be due and payable immediately.
Holders of the exchange notes may not enforce the Indenture or the exchange
notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding exchange
notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the exchange notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest or Liquidated Damages, if
any) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the exchange
notes then outstanding by notice to the Trustee may, on behalf of the Holders
of all of the exchange notes, waive any existing Default or Event of Default
and its consequences under the Indenture except a continuing Default or Event
of Default in the payment of interest or Liquidated Damages, if any, on, or
the principal of, the exchange notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Stater Bros. with the
intention of avoiding payment of the premium that Stater Bros. would have had
to pay if Stater Bros. then had elected to redeem the exchange notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the exchange notes. If an Event of Default
occurs prior to August 15, 2003, by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of Stater Bros. with the intention of
avoiding the prohibition on redemption of the exchange notes prior to August
15, 2003, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the exchange notes.
Stater Bros. is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, Stater Bros. is required to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Stater Bros.
or any Subsidiary, as such, shall have any liability for any obligations of
Stater Bros. under the exchange notes or the Indenture, or for any claim
76
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of exchange notes by accepting a exchange note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the exchange notes. The waiver may not be effective to waive
liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
Stater Bros. may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding exchange notes ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding exchange notes to receive
payments in respect of the principal of, or interest or premium and
Liquidated Damages, if any, on such exchange notes when such payments are
due from the trust referred to below;
(2) Stater Bros.' obligations with respect to the exchange notes
concerning issuing temporary exchange notes, registration of exchange
notes, mutilated, destroyed, lost or stolen exchange notes and the
maintenance of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
Stater Bros.' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, Stater Bros. may, at its option and at any time, elect to have
the obligations of Stater Bros. released with respect to certain covenants
that are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with those covenants shall not constitute a Default or
Event of Default with respect to the exchange notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Stater Bros. must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the exchange notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, or
interest and premium and Liquidated Damages, if any, on the outstanding
exchange notes on the stated maturity or on the applicable redemption date,
as the case may be, and Stater Bros. must specify whether the exchange
notes are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Stater Bros. shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) Stater Bros. has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the date
of the Indenture, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Holders of the exchange notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Stater Bros. shall have delivered
to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the exchange notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing either:
(a) on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit); or
(b) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the
date of deposit;
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(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which Stater Bros. or
any of its Subsidiaries is a party or by which Stater Bros. or any of its
Subsidiaries is bound;
(6) Stater Bros. must have delivered to the Trustee an Opinion of Counsel
to the effect that, assuming no intervening bankruptcy of Stater Bros.
between the date of deposit and the 91st day following the deposit and
assuming that no Holder is an "insider" of Stater Bros. under applicable
bankruptcy law, after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) Stater Bros. must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by Stater Bros. with the intent of
preferring the Holders of exchange notes over the other creditors of
Stater Bros. with the intent of defeating, hindering, delaying or
defrauding creditors of Stater Bros. or others; and
(8) Stater Bros. must deliver to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the exchange notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the exchange notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, exchange notes),
and any existing default or compliance with any provision of the Indenture or
the exchange notes may be waived with the consent of the Holders of a majority
in principal amount of the then outstanding exchange notes (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, exchange notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any exchange notes held by a non-consenting Holder):
(1) reduce the principal amount of exchange notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any exchange
note or alter the provisions with respect to the redemption of the exchange
notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
exchange note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or Liquidated Damages, if any, on the exchange
notes (except a rescission of acceleration of the exchange notes by the
Holders of at least a majority in aggregate principal amount of the
exchange notes and a waiver of the payment default that resulted from such
acceleration);
(5) make any exchange note payable in money other than that stated in the
exchange notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or Events of Default or the rights of Holders of
exchange notes to receive payments of principal of, or interest or premium
or Liquidated Damages, if any, on the exchange notes;
(7) waive a redemption payment with respect to any exchange note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
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Notwithstanding the foregoing, without the consent of any Holder of exchange
notes, Stater Bros. and the Trustee may amend or supplement the Indenture or
the exchange notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated exchange notes in addition to or in
place of certificated exchange notes;
(3) to provide for the assumption of Stater Bros.' obligations to Holders
of exchange notes in the case of a merger or consolidation or sale of all
or substantially all of Stater Bros.' assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of exchange notes or that does not adversely affect
the legal rights under the Indenture of any such Holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act;
provided, however, that in the case of a change pursuant to clause (1) or (4)
above, Stater Bros. has delivered to the Trustee an Opinion of Counsel stating
that such change does not adversely affect the rights of any Holder.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect as
to all exchange notes issued thereunder, when:
(1) either:
(a) all exchange notes that have been authenticated (except lost,
stolen or destroyed exchange notes that have been replaced or paid and
exchange notes for whose payment money has theretofore been deposited
in trust and thereafter repaid to Stater Bros.) have been delivered to
the Trustee for cancellation; or
(b) all exchange notes that have not been delivered to the Trustee
for cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise or will become due and payable
within one year and Stater Bros. has irrevocably deposited or caused to
be deposited with the Trustee as trust funds in trust solely for the
benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be
sufficient without consideration of any reinvestment of interest, to
pay and discharge the entire indebtedness on the exchange notes not
delivered to the Trustee for cancellation for principal, premium and
Liquidated Damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of such deposit or shall occur as a result of such deposit and such
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which Stater Bros. is a party or by
which Stater Bros. is bound;
(3) Stater Bros. has paid or caused to be paid all sums payable by it
under the Indenture; and
(4) Stater Bros. has delivered irrevocable instructions to the Trustee
under the Indenture to apply the deposited money toward the payment of the
exchange notes at maturity or the redemption date, as the case may be.
In addition, Stater Bros. must deliver an Officers' Certificate and an Opinion
of Counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Concerning the Trustee
If the Trustee becomes a creditor of Stater Bros., the Indenture limits its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest as described in the Trust Indenture Act of
1939, as amended, it must eliminate such conflict within 90 days, apply to the
Commission for permission to continue or resign.
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The Holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default occurs and is continuing, the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of its own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any Holder of exchange notes, unless
such Holder has offered to the Trustee security and indemnity satisfactory to
it against any loss, costs, liability or expense that might be incurred by it
in connection with such request or direction.
Governing Law
The Indenture will provide that it and the exchange notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
Additional Information
Anyone who receives this prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Stater Bros.
Holdings Inc., 21700 Barton Road, P.O. Box 150, Colton, California 92324,
Attention: Chief Financial Officer.
Book-Entry, Delivery and Form
The outstanding notes were offered and sold to qualified institutional
buyers in reliance on Rule 144A ("Rule 144A Notes") and in offshore
transactions in reliance on Regulation S ("Regulation S Notes") and were
issued in registered, global form in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
Rule 144A Notes are represented by one or more notes in registered, global
form without interest coupons (collectively, the "Rule 144A Global Notes").
Regulation S Notes are represented by one or more notes in registered, global
form without interest coupons (collectively, the "Regulation S Global Notes"
and, together with the Rule 144A Global Notes, the "Outstanding Global
Notes"). The Outstanding Global Notes are on deposit with the Trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below. Through
and including the 40th day after the later of the commencement of the offering
of the outstanding notes and the issuance of the outstanding notes (such
period through and including such 40th day, the "Restricted Period"),
beneficial interests in the Regulation S Global Notes may be held only through
the Euroclear System ("Euroclear") and Cedel, S.A. ("Cedel") (as indirect
participants in DTC), unless transferred to a person that takes delivery
through a Rule 144A Global Note in accordance with the certification
requirements described below. Beneficial interests in the Rule 144A Global
Notes may not be exchanged for beneficial interests in the Regulation S Global
Notes at any time except in the limited circumstances described below. See "--
Exchanges between Regulation S Notes and Rule 144A Notes."
Except as set forth below, the Outstanding Global Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Outstanding Global Notes may
not be exchanged for notes in certificated form except in the limited
circumstances described below. See "--Exchange of Global Notes for
Certificated Notes." Except in the limited circumstances described below,
owners of beneficial interests in the Outstanding Global Notes will not be
entitled to receive physical delivery of notes in certificated form.
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) are subject to certain restrictions on transfer and bear a restrictive
legend. Regulation S Notes also bear a similar restrictive legend. In
addition, transfers of beneficial interests in the Outstanding Global Notes
will be subject to the applicable rules and procedures of DTC and its direct
or indirect participants (including, if applicable, those of Euroclear and
Cedel), which may change from time to time.
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Exchange Notes
Exchange notes issued in exchange for outstanding notes originally offered
and sold (1) to QIBs in reliance on Rule 144A under the Securities Act or (2)
in reliance on Regulation S under the Securities Act will be represented by a
single, permanent Global Note in definitive, fully registered book-entry form
(the "Exchange Global Note" and together with the Rule 144A Global Note and
the Regulation S Global Note, the "'Global Notes"), which will be registered
in the name of DTC, or its nominee, on behalf of persons who receive exchange
notes represented thereby for credit to the respective accounts of such
persons, or to such other accounts as they may direct at DTC.
Exchange notes issued in exchange for outstanding notes will be issued, upon
request, in fully registered form, but otherwise such holders will only be
entitled to registration of their respective exchange notes in book-entry form
under the Exchange Global Note.
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them. Stater Bros. takes no responsibility for
these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised Stater Bros. that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised Stater Bros. that, pursuant to procedures established
by it:
(1) upon deposit of the Global Notes, DTC would credit the accounts of
Participants designated by the initial purchaser with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes would be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes who are Participants in DTC's system
may hold their interests therein directly through DTC. Investors in the Rule
144A Global Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Cedel) which are
Participants in such system. Investors in the Regulation S Global Notes must
initially hold their interests therein through Euroclear or Cedel, if they are
participants in such systems, or indirectly through organizations that are
participants in such systems. After the expiration of the Restricted Period
(but not earlier), investors may also hold interests in the Regulation S
Global Notes through Participants in the DTC system other than Euroclear and
Cedel. Euroclear and Cedel will hold interests in the Regulation S Global
Notes on behalf of their participants through customers' securities accounts
in their respective names on the books of their respective depositories, which
are Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear, and Citibank, N.A., as operator of Cedel. All interests in a Global
Note, including those held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
Cedel may also be subject to the procedures and requirements of such systems.
The laws of some states require that certain Persons take physical
81
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such Persons will
be limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants, the ability of a Person
having beneficial interests in a Global Note to pledge such interests to
Persons that do not participate in the DTC system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Except as described below, owners of interests in the Global Notes will not
have exchange notes registered in their names, will not receive physical
delivery of exchange notes in certificated form and will not be considered the
registered owners or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, Stater Bros. and the
Trustee will treat the Persons in whose names the exchange notes, including
the Global Notes, are registered as the owners thereof for the purpose of
receiving payments and for all other purposes. Consequently, neither Stater
Bros., the Trustee nor any agent of Stater Bros. or the Trustee has or will
have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised Stater Bros. that its current practice, upon receipt of any
payment in respect of securities such as the exchange notes (including
principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date unless DTC has reason to
believe it will not receive payment on such payment date. Each relevant
Participant is credited with an amount proportionate to its beneficial
ownership of an interest in the principal amount of the relevant security as
shown on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of exchange notes will be governed by
standing instructions and customary practices and will be the responsibility
of the Participants or the Indirect Participants and will not be the
responsibility of DTC, the Trustee or Stater Bros. Neither Stater Bros. nor
the Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the exchange notes, and Stater Bros. and
the Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Cedel will be effected in accordance with their
respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
exchange notes described herein, cross-market transfers between the
Participants in DTC, on the one hand, and Euroclear or Cedel participants, on
the other hand, will be effected through DTC in accordance with DTC's rules on
behalf of Euroclear or Cedel, as the case may be, by its respective
depositary; however, such cross-market transactions will require delivery of
instructions to Euroclear or Cedel, as the case may be, by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel, as
the case may be, will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action to effect
final settlement on its behalf by delivering or receiving interests in the
relevant Global Note in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for Euroclear or Cedel.
DTC has advised Stater Bros. that it will take any action permitted to be
taken by a Holder of exchange notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the
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Global Notes and only in respect of such portion of the aggregate principal
amount of the exchange notes as to which such Participant or Participants has
or have given such direction. However, if there is an Event of Default under
the exchange notes, DTC reserves the right to exchange the Global Notes for
legended exchange notes in certificated form, and to distribute such exchange
notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and may discontinue such procedures at
any time. Neither Stater Bros. nor the Trustee nor any of their respective
agents will have any responsibility for the performance by DTC, Euroclear or
Cedel or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Stater Bros. that it is unwilling or unable to
continue as depositary for the Global Notes and Stater Bros. fails to
appoint a successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2) Stater Bros., at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the exchange notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the applicable restrictive legend
referred to in "Notice to Investors," unless that legend is not required by
applicable law.
Exchange of Certificated Notes for Global Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes.
Exchanges Between Regulation S Notes and Rule 144A Notes
Prior to the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if:
(1) such exchange occurs in connection with a transfer of the notes
pursuant to Rule 144A; and
(2) the transferor first delivers to the Trustee a written certificate
(in the form provided in the Indenture) to the effect that the notes are
being transferred to a Person:
(a) who the transferor reasonably believes to be a qualified
institutional buyer within the meaning of Rule 144A;
(b) purchasing for its own account or the account of a qualified
institutional buyer in a transaction meeting the requirements of Rule
144A; and
(c) in accordance with all applicable securities laws of the states
of the United States and other jurisdictions.
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Beneficial interests in a Rule 144A Global Note may be transferred to a
Person who takes delivery in the form of an interest in the Regulation S
Global Note, whether before or after the expiration of the Restricted Period,
only if the transferor first delivers to the Trustee a written certificate (in
the form provided in the Indenture) to the effect that such transfer is being
made in accordance with Rule 903 or 904 of Regulation S or Rule 144 (if
available) and that, if such transfer occurs prior to the expiration of the
Restricted Period, the interest transferred will be held immediately
thereafter through Euroclear or Cedel.
Transfers involving exchanges of beneficial interests between the Regulation
S Global Notes and the Rule 144A Global Notes will be effected in DTC by means
of an instruction originated by the Trustee through the DTC Deposit/Withdraw
at Custodian system. Accordingly, in connection with any such transfer,
appropriate adjustments will be made to reflect a decrease in the principal
amount of the Regulation S Global Note and a corresponding increase in the
principal amount of the Rule 144A Global Note or vice versa, as applicable.
Any beneficial interest in one of the Global Notes that is transferred to a
Person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and will
become an interest in the other Global Note and, accordingly, will thereafter
be subject to all transfer restrictions and other procedures applicable to
beneficial interest in such other Global Note for so long as it remains such
an interest. The policies and practices of DTC may prohibit transfers of
beneficial interests in the Regulation S Global Note prior to the expiration
of the Restricted Period.
Same Day Settlement and Payment
Stater Bros. will make payments in respect of the exchange notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) by wire transfer of immediately available funds to
the accounts specified by the Global Note Holder. Stater Bros. will make all
payments of principal, interest and premium and Liquidated Damages, if any,
with respect to Certificated Notes by wire transfer of immediately available
funds to the accounts specified by the Holders thereof or, if no such account
is specified, by mailing a check to each such Holder's registered address. The
exchange notes represented by the Global Notes are expected to be eligible to
trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such exchange
notes will, therefore, be required by DTC to be settled in immediately
available funds. Stater Bros. expects that secondary trading in any
Certificated Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. DTC has advised Stater Bros.
that cash received in Euroclear or Cedel as a result of sales of interests in
a Global Note by or through a Euroclear or Cedel participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into, became a Subsidiary of, or substantially all
of its business and assets were acquired by, such specified Person, whether
or not such Indebtedness is incurred in connection with, or in
contemplation of, such other
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Person merging with or into, becoming a Subsidiary of, or substantially all
of its business and assets being acquired by, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control," as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial ownership of
5% or more of the Voting Stock of a Person shall be deemed to be control. For
purposes of this definition, the terms "controlling," "controlled by" and
"under common control with" shall have correlative meanings. For purposes of
this definition but solely with respect to clause (2) of the first paragraph
of the covenant described under the caption "--Certain Covenants--Restricted
Payments," Santee LLC shall not be deemed to be an Affiliate of Stater Bros.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights (including but not limited to sale and leaseback transactions),
other than any such sale or other disposition in the ordinary course of
business; provided that the sale, conveyance or other disposition of all or
substantially all of the assets of Stater Bros. and its Subsidiaries taken
as a whole will be governed by the provisions of the Indenture described
above under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Stater Bros.' Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries.
Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among Stater Bros. and its Wholly-
Owned Subsidiaries (other than an Unrestricted Subsidiary);
(3) an issuance of Equity Interests by a Restricted Subsidiary to Stater
Bros. or to another Wholly-Owned Subsidiary (other than an Unrestricted
Subsidiary) of Stater Bros.;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) any sale by Stater Bros. Markets of its interest in Santee LLC
pursuant to the terms of the limited liability company agreement governing
Santee LLC;
(6) the sale or other disposition of cash or Cash Equivalents; and
(7) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire by
conversion or exercise of other securities, whether such right is currently
exercisable or is exercisable only after the passage of time or upon the
occurrence of a subsequent condition. The terms "Beneficially Owns" and
"Beneficially Owned" shall have a corresponding meaning.
85
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof (provided
that the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than one year from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year and overnight bank deposits, in each
case, with any domestic commercial bank having capital and surplus in
excess of $500.0 million and a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations for underlying securities of the types
described in clauses (2) and (3) above entered into with any financial
institution meeting the qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of Stater Bros. and its Restricted Subsidiaries taken
as a whole to any "person" or "group" of persons (as such terms are used in
Section 13(d)(3) of the Exchange Act) other than either La Cadena
Investments or any La Cadena Successor;
(2) the adoption of a plan relating to the liquidation or dissolution of
Stater Bros.;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" or
"group" (as defined above), other than either La Cadena
86
Investments or any La Cadena Successor, becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the Voting Stock of Stater
Bros., measured by voting power rather than number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of Stater Bros. are not Continuing Directors;
(5) Stater Bros. consolidates with, or merges with or into, any Person,
or any Person consolidates with, or merges with or into, Stater Bros., in
any such event pursuant to a transaction in which any of the outstanding
Voting Stock of Stater Bros. or such other Person is converted into or
exchanged for cash, securities or other property, other than any such
transaction where all or a portion of the Voting Stock of Stater Bros.
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving
or transferee Person constituting a majority of the outstanding shares of
such Voting Stock of such surviving or transferee Person (immediately after
giving effect to such issuance); or
(6) at any time prior to the date that a La Cadena Successor is the
Beneficial Owner of more than 50% of the Voting Stock of Stater Bros., Jack
H. Brown shall cease to (A) be a general partner or managing member of La
Cadena Investments, (B) have the power to vote the majority of the Capital
Stock of La Cadena Investments, (C) be the Beneficial Owner of at least 35%
of the Equity Interests in La Cadena Investments, or (D) be the Beneficial
Owner of a higher percentage of the Equity Interests in La Cadena
Investments than any other "person" or "group" of persons (as such terms
are used in Section 13(d)(3) of the Exchange Act).
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus the amount of any net
loss realized by such Person or any of its Consolidated Subsidiaries in
connection with (a) an Asset Sale, or (b) the disposition of any securities
by such Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries, in each case to the
extent such losses were deducted in computing such Consolidated Net Income;
plus
(2) provision for taxes based on income or profits of such Person and its
Consolidated Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Consolidated
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Obligations), to the extent
that any such expense was deducted in computing such Consolidated Net
Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Consolidated Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash
expenses of, a Consolidated Subsidiary of Stater Bros. shall be
87
added to Consolidated Net Income to compute Consolidated Cash Flow of Stater
Bros. only to the extent that a corresponding amount would be permitted at the
date of determination to be dividended to Stater Bros. by such Consolidated
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Consolidated Subsidiary
or its stockholders.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its
Consolidated Subsidiaries for such period, on a consolidated basis, determined
in accordance with GAAP; provided that:
(1) the Net Income (but not loss) of Santee LLC and any Person that is
not a Consolidated Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or a
Restricted Subsidiary thereof;
(2) the Net Income of any Consolidated Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by such Consolidated Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such
Consolidated Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; and
(4) the cumulative effect of a change in accounting principles shall be
excluded.
"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its Consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock, less
(a) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a Consolidated Subsidiary of such
Person;
(b) the book value of all intangible assets (as determined in
accordance with GAAP) of such Person and its Consolidated Subsidiaries;
(c) any amounts attributable to the cost of treasury stock and the
principal amount of any promissory notes receivable from the sale of
Capital Stock of such Person or any of its Subsidiaries;
(d) all investments in Persons that are not Consolidated
Subsidiaries; and
(e) all unamortized debt discount and expense and unamortized
deferred charges, all of the foregoing determined in accordance with
GAAP.
"Consolidated Subsidiary" of any Person means a subsidiary which for
financial reporting purposes is or, in accordance with GAAP, should be,
accounted for by such Person as a consolidated subsidiary; provided, however,
that the Unrestricted Subsidiaries of Stater Bros. will not be included as
Consolidated Subsidiaries of Stater Bros. for purposes of the Indenture,
regardless of whether such Unrestricted Subsidiaries are or, in accordance
with GAAP, should be accounted for as consolidated subsidiaries; provided,
further, that any Person
88
that is not a Subsidiary (as such term is defined herein) of a Person will not
be included as a Consolidated Subsidiary of such Person, regardless of whether
such Person is, or in accordance with GAAP, should be accounted for as a
consolidated subsidiary.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Stater Bros. who:
(1) was a member of such Board of Directors on the date of the Indenture;
or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Revolving Credit Facility) or commercial paper facilities, in
each case with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special-purpose entities formed to borrow
from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part (whether by revolving or other long-term
Indebtedness) from time to time.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the exchange notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders thereof have the right to require Stater Bros. to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale shall not constitute Disqualified Stock if the terms of such
Capital Stock provide that Stater Bros. may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means up to $6.0 million in aggregate principal
amount of Indebtedness of Stater Bros. and its Restricted Subsidiaries (other
than Indebtedness under the Revolving Credit Facility) in existence on the
date of the Indenture, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any specified Person for
any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, repays, repurchases or redeems any Indebtedness (other than
ordinary working capital borrowings) or issues, repurchases or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated and on or prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
Guarantee, repayment, repurchase or redemption of Indebtedness, or such
issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom as if the same had occurred at the beginning of the
applicable four-quarter reference period.
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In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Subsidiaries, including through mergers or consolidations and including
any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be given pro forma effect as if they had occurred on
the first day of the four-quarter reference period and Consolidated Cash
Flow for such reference period shall be calculated on a pro forma basis in
accordance with Regulation S-X under the Securities Act, but without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Subsidiaries following
the Calculation Date.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Consolidated
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and
excluding (A) the amortization of any debt issuance costs and (B) the
effect of all payments made or received pursuant to Hedging Obligations;
plus
(2) the consolidated interest of such Person and its Consolidated
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Consolidated Subsidiaries or
secured by a Lien on assets of such Person or one of its Consolidated
Subsidiaries, whether or not such Guarantee or Lien is called upon; plus
(4) all dividends, whether paid or accrued and whether or not in cash, on
any series of preferred stock of such Person or any of its Consolidated
Subsidiaries, other than dividends on Equity Interests payable solely in
Equity Interests of Stater Bros. (other than Disqualified Stock) or to
Stater Bros. or a Consolidated Subsidiary of Stater Bros.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
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"Holders" means the holders of the exchange notes.
"Indebtedness" means, with respect to any specified Person and without
duplication, any liability of such Person, whether or not contingent:
(1) for borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued expense
or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
For the avoidance of doubt, the Santee Financing and the Santee Documents, as
amended, modified, renewed, refunded or replaced from time to time (provided,
that the terms of such documents as so amended, modified, renewed, refunded or
replaced are at least as favorable to the Holders of exchange notes as those
contained in the Santee Documents as in effect on the date of the Indenture)
will be deemed not to constitute, nor to have given rise to, the incurrence of
any Indebtedness of Stater Bros. or any of its Subsidiaries; provided,
however, that if Santee LLC or Santee becomes a Restricted Subsidiary, and at
such time, the Santee Financing would otherwise qualify as "Indebtedness" of
Santee under this definition, the Santee Financing shall not fail to so
qualify solely because of the provisions of this sentence.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the
forms of loans (including Guarantees or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Stater
Bros. or any Restricted Subsidiary of Stater Bros. sells or otherwise disposes
of any Equity Interests of any direct or indirect Restricted Subsidiary of
Stater Bros. such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of Stater Bros., then Stater Bros. shall
be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of pursuant to such sale or disposition in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Certain Covenants--Restricted Payments." If Stater
Bros. or any Restricted Subsidiary of Stater Bros. designates a Restricted
Subsidiary to be an Unrestricted Subsidiary pursuant to the provisions of the
Indenture, then Stater Bros. shall be deemed to have made an Investment on the
date of such designation equal to the fair market value of the Equity
Interests of such Subsidiary in an amount determined as provided in the final
paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted
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Payments." The acquisition by Stater Bros. or any Restricted Subsidiary of
Stater Bros. of a Person that holds an Investment in any third Person shall be
deemed to be an Investment by Stater Bros. or such Subsidiary in such third
Person in an amount equal to the fair market value of the Investment held by
the acquired Person in such third Person in an amount determined as provided
in the final paragraph of the covenant described above under the caption "--
Certain Covenants--Restricted Payments."
"La Cadena Investments" means La Cadena Investments, a California general
partnership.
"La Cadena Successor" means a partnership or limited liability company
(other than La Cadena Investments) with respect to which (a) Jack H. Brown is
a general partner or managing member, (b) Jack H. Brown has the power to vote
the majority of the Capital Stock, (c) Jack H. Brown is the Beneficial Owner
of at least 35% of the Equity Interests therein and (d) Jack H. Brown is the
Beneficial Owner of a higher percentage of the Equity Interests therein than
any other "person" or "group" of persons (as such terms are used in
Section 13(d)(3) of the Exchange Act).
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction.
"Markets Preferred Stock" means the $11.00 Cumulative Preferred Stock issued
by Stater Bros. Markets.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Stater Bros. or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof, in each case, after taking into account any available tax credits or
deductions and any tax sharing arrangements, and amounts required to be
applied to the repayment of Indebtedness, other than Indebtedness under the
Revolving Credit Facility, secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Construction Indebtedness" means Indebtedness of Stater Bros. or
any Restricted Subsidiary representing the deferred purchase price, or the net
proceeds of which are used solely to finance the purchase price, cost of
construction, lease, or major remodeling or major refurbishment of any new or
existing supermarket (including any fixtures therein) operated or to be
operated by Stater Bros. or Stater Bros. Markets. For purposes hereof, "major
remodeling" or "major refurbishment" of a supermarket will mean a remodeling
or refurbishment of a supermarket in a single transaction or a series of
related transactions involving aggregate expenditures equal to or greater than
$250,000 per project site.
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"Permitted Investments" means:
(1) any Investment in Stater Bros. or in a Restricted Subsidiary
(including any Person who becomes a Subsidiary as a result of any
Investment, other than an Unrestricted Subsidiary), provided that any
Indebtedness evidencing such Investment in a Restricted Subsidiary is not
subordinated to any Indebtedness or other obligation of such Restricted
Subsidiary;
(2) the making of Investments in Stater Bros. by any Subsidiary (provided
that any Indebtedness evidencing such Investment is subordinated and junior
to the exchange notes);
(3) any Investment in Cash Equivalents;
(4) any Investment by Stater Bros. or any Restricted Subsidiary in a
Person, if as a result of such Investment:
(a) such Person becomes a Wholly-Owned Subsidiary (other than an
Unrestricted Subsidiary) of Stater Bros.; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Stater Bros. or a Restricted Subsidiary;
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales";
(6) any acquisition of assets or any Investment in any Person solely in
exchange for the issuance of Equity Interests (other than Disqualified
Stock) of Stater Bros.;
(7) the making of Investments in Santee LLC of up to $25.0 million;
(8) the making of Investments in Santee LLC for the purpose of purchasing
additional limited liability company interests in Santee LLC with the
proceeds of a Qualified La Cadena Investment;
(9) the extensions of trade credit and advances to customers and
suppliers to the extent in the ordinary course of business and made in
accordance with customary industry practice; and
(10) Hedging Obligations.
"Permitted Liens" means:
(1) Liens of Stater Bros. and any Restricted Subsidiary securing
Indebtedness and other Obligations (a) under the Revolving Credit Facility
and (b) under other Credit Facilities that, in each case, were permitted by
the terms of the Indenture to be incurred;
(2) Liens in favor of Stater Bros. or any Restricted Subsidiary;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Stater Bros. or any Restricted
Subsidiary of Stater Bros.; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or
consolidated with Stater Bros. or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by
Stater Bros. or any Restricted Subsidiary of Stater Bros., provided that
such Liens were in existence prior to the contemplation of such acquisition
and do not extend to any assets other than such acquired property;
(5) Liens or deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations and
Permitted Construction Indebtedness) permitted by clauses (2), (4), (5),
(8), (11), (13), (14) and (15) of the second paragraph of the
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covenant entitled "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with or
improved with the proceeds of such Indebtedness;
(7) Liens securing the exchange notes;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) Liens incurred in the ordinary course of business of Stater Bros. or
any Restricted Subsidiary with respect to obligations that do not exceed
$5.0 million at any one time outstanding;
(10) Liens existing on the date of the Indenture and renewals, extensions
and replacements thereof, provided that such renewals, extensions or
replacements will not apply to any property or assets not previously
subject to such Liens or increase the principal amount of obligations
secured thereby;
(11) Liens on deposits made in the ordinary course of business;
(12) Liens in favor of collecting banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments of
Stater Bros. or any Restricted Subsidiary on deposit with or in possession
of such banks;
(13) Liens in respect of Permitted Refinancing Indebtedness; provided
that the terms of such liens in respect of such Permitted Refinancing
Indebtedness are not less favorable to the Holders of the exchange notes
than the terms of the Liens securing the indebtedness being refinanced and
do not extend to any assets not securing such indebtedness;
(14) carriers', warehousemen's, mechanics' materialmen's, repairmen's or
other like Liens arising in the ordinary course of business and not overdue
for a period of more than 90 days or which are being contested in good
faith by appropriate proceedings;
(15) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(16) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary course of business of Stater Bros.
or its Subsidiaries, as the case may be, and any exceptions to title set
forth in any title policies;
(17) any attachment or judgment Lien so long as the execution or other
enforcement thereof is effectively stayed, the claims secured thereby are
being contested in good faith by appropriate proceedings, adequate reserves
have been established with respect to such claims in accordance with GAAP
and no Default or Event of Default would result thereby; and
(18) any Liens relating solely to property leased by Stater Bros. or any
Subsidiary and arising solely out of the lease for such property.
"Permitted Refinancing Indebtedness" means any Indebtedness of Stater Bros.
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Stater Bros. or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest thereon
and the amount of all expenses and premiums incurred in connection
therewith);
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(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the exchange
notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of
payment to, the exchange notes on terms at least as favorable to the
holders of the exchange notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) such Indebtedness is incurred either by Stater Bros. or by the
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Petrolane Leases" means that certain Amended and Restated Sublease
Agreement between ARM Leasing Corp., as Lessor and Stater Bros. Markets, as
Lessee dated as of June 1, 1963, that certain Amended and Restated Sublease
Agreement between Clipse Leasing Corp., as Lessor and Stater Bros. Markets, as
Lessee dated as of May 2, 1983, that certain Sublease Agreement between ARM
Leasing Corp., as Lessor and Stater Bros. Markets, as Lessee dated as of
December 1, 1983, and that certain Amended and Restated Sublease Agreement
between Wren Leasing Corp., as Lessor and Stater Bros. Markets, as Lessee
dated as of June 1, 1983, in each case as amended, modified, renewed, refunded
or replaced from time to time; provided, that the terms of such documents as
so amended, modified, renewed, refunded or replaced are at least as favorable
to the Holders of exchange notes as those contained in the Petrolane Leases as
in effect on the date of the Indenture.
"Qualified La Cadena Investment" means an Investment made in Stater Bros. by
La Cadena Investments or any La Cadena Successor for the purpose of providing
funds to either Stater Bros. or Stater Bros. Markets, as the case may be, to
purchase additional limited liability company interests in Santee LLC;
provided, however, that if such an Investment is made in the form of
Indebtedness, then such Indebtedness will be (a) unsecured Indebtedness, and
(b) subordinated Indebtedness.
"Qualified Santee LLC Interest Sale" means a sale by Stater Bros. Markets of
all or any portion of its interest in Santee LLC.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of Stater Bros. that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the credit facility governed by that
certain Credit Agreement, dated August 6, 1999, by and among Stater Bros.
Markets, Stater Bros., the lenders from time to time parties thereto, and Bank
of America, N.A. as agent, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time, including any such amendment, restatement, modification,
renewal, refunding, replacement, or refinancing facility that alters the
maturity thereof.
"Santee" means Santee Dairies, Inc., a California corporation, a wholly-
owned Subsidiary of Santee LLC.
"Santee Documents" means that certain Product Purchase Agreement between
Stater Bros. Markets and Santee, that certain Owner Consent between Stater
Bros. Markets and the trustee pursuant to the trust agreement executed as part
of the Santee Financing, that certain Limited Liability Company Agreement
between Stater Bros. Markets, Hughes Markets, Inc., and Santee LLC, that
certain Letter Agreement between Stater Bros. and each of the Santee
Noteholders and all documents effecting and ancillary to the Santee Financing.
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"Santee Financing" means the issuance of Santee of up to $80,000,000 in
principal amount of notes pursuant to that certain Note Purchase Agreement
dated as of July 30, 1997, as amended through and including the date of the
Indenture, and all transactions incident and ancillary thereto.
"Santee LLC" means Santee Dairies, LLC, a Delaware limited liability
company.
"Santee Noteholders" means the holders of notes with respect to the Santee
Financing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (a) if and at such time as such Persons
become Subsidiaries, Santee LLC and Santee (provided, however, that the board
of directors of Stater Bros. may at such time, if any, as such Persons become
Subsidiaries designate either or both of them as Restricted Subsidiaries by
board resolution in accordance with the terms of the Indenture), (b) any
Subsidiary of Stater Bros. that is designated by the board of directors of
Stater Bros. as an Unrestricted Subsidiary pursuant to a board resolution in
accordance with the terms of the Indenture, and (c) any Subsidiary of an
Unrestricted Subsidiary.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment;
by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly-Owned Subsidiary" of any specified Person means any subsidiary of
such Person all the outstanding shares of Capital Stock (other than directors'
qualifying shares, if applicable) of which are owned directly by such Person
or another Wholly Owned Subsidiary of such Person, and with respect to Stater
Bros., shall include Stater Bros. Markets so long as Stater Bros. or any
Wholly Owned Subsidiary of Stater Bros. owns all of the outstanding shares of
Capital Stock of Stater Bros. Markets other than the Markets Preferred Stock.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
FOR UNITED STATES HOLDERS AND NON-UNITED STATES HOLDERS
The following is a general discussion of United States federal tax
consequences associated with the exchange of the outstanding notes for the
exchange notes and of the ownership and disposition of the exchange notes by
an initial beneficial owner of the exchange notes. These consequences depend
on whether the beneficial owner is or is not a "United States person." For
purposes of this discussion, a "United States person" means (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in the United States or under the laws of the United
States or of any political subdivision thereof, (c) an estate whose income is
includible in gross income for United States federal income tax purposes
regardless of its source, or (d) a trust, if a United States court is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust, or certain electing trusts that were in existence on
August 19, 1996, and treated as a domestic trust on such date.
This discussion is based upon current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable Treasury Regulations,
judicial authority and administrative rulings and practice, any of which may
be altered with retroactive effect thereby changing the federal tax
consequences discussed herein. The tax treatment of the holders of the
exchange notes may vary depending upon their particular situations. In
addition, certain other holders, including insurance companies, tax exempt
organizations, financial institutions and broker-dealers, may be subject to
special rules not included in this discussion. Stater Bros. will not seek a
ruling from the Internal Revenue Service ("IRS") with respect to any of the
matters discussed herein and there can be no assurance that the IRS will not
challenge one or more of the tax consequences described herein. Investors
should consult their own tax advisor concerning the consequences of the
acquisition, ownership, and disposition of the exchange notes, including the
tax consequences under the laws of any foreign, state, local or other taxing
jurisdictions and the possible effects on investors of changes in United
States federal or other tax laws.
The Exchange Offer
The exchange of outstanding notes for exchange notes pursuant to this
exchange offer will not be treated as a disposition for United States federal
income tax purposes because the exchange notes will not be considered to
differ materially in kind or extent from the outstanding notes. Rather, any
exchange notes received by investors should be treated as a continuation of
their investment in the outstanding notes. As a result, there should be no
United States federal income tax consequences to investors resulting from the
exchange offer. In addition, investors will have the same adjusted basis and
holding period in the exchange notes as they had in the outstanding notes
immediately prior to the exchange.
United States Holders
Stated Interest
Interest on an exchange note will be includable by a United States person
holding an exchange note (a "United States Holder") as ordinary interest
income at the time it accrues or is received in accordance with such holder's
method of accounting for tax purposes.
Sale, Exchange or Redemption of the Exchange Notes
Upon the disposition of an exchange note by sale, exchange or redemption, a
United States Holder will generally recognize gain or loss equal to the
difference between (i) the amount realized on the disposition (other than
amounts attributable to accrued interest) and (ii) the United States Holder's
tax basis in the exchange note. A United States Holder's tax basis in an
exchange note generally will equal the cost of the exchange note (other than
any cost attributable to accrued interest as of the date the United States
Holder acquired the exchange note).
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Assuming that the exchange note is held as a capital asset, such gain or
loss will generally constitute capital gain or loss and will be long-term
capital gain or loss if the United States Holder has held such exchange note
for longer than one year. Non-corporate taxpayers are generally subject to a
maximum regular federal income tax rate of 20% on net long-term capital gains.
The deductibility of capital losses is subject to certain limitations.
Backup Withholding and Information Reporting
Under the Code, a United States Holder of an exchange note may be subject,
under certain circumstances, to information reporting and/or to backup
withholding at a 31% rate with respect to interest payments with respect to
such a note or the gross proceeds from dispositions of such a note. This
withholding applies only if the holder (i) fails to furnish its social
security or other taxpayer identification number ("TIN") within a reasonable
time after a request therefor, (ii) furnishes an incorrect TIN, (iii) fails to
report interest or dividends properly, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not
subject to backup withholding. Any amount withheld from a payment to a United
States Holder under the backup withholding rules is allowable as a credit
against such holder's United States federal income tax liability (and may
entitle such holder to a refund), provided that the required information is
furnished to the IRS. Certain persons are exempt from backup withholding,
including corporations and certain financial institutions. Holders of exchange
notes should consult their tax advisors as to their qualification for
exemption from withholding and the procedure for obtaining such exemption.
Non-United States Holders
Interest
Generally, interest income of a non-United States person holding an exchange
note (a "Non-United States Holder") that is not effectively connected with a
United States trade or business will be subject to a United States federal
income tax and withholding tax at a 30% rate. However, such interest may be
exempt from, or subject to a lower rate of, income tax withholding tax
pursuant to an income tax treaty between the United States and the country of
residence of the Non-United States Holder. A Non-United States Holder claiming
the benefit of such a treaty must provide Stater Bros. or its paying agent
with a properly executed IRS Form 1001 (or a suitable substitute or successor
form or such other form as the IRS may prescribe). Moreover, interest paid on
the exchange notes by Stater Bros. or its paying agent to a Non-United States
Holder will qualify for the so-called "portfolio-interest exemption" and,
therefore, will not be subject to United States federal income tax or
withholding tax provided that such interest income is not effectively
connected with a United States trade or business of the Non-United States
Holder and provided that:
. the Non-United States Holder does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of
Stater Bros. that is entitled to vote;
. the Non-United States Holder is not
. a controlled foreign corporation related to Stater Bros. actually or
constructively through the stock ownership rules under Section
864(d)(4) of the Code, or
. a bank which acquired the exchange notes in consideration for an
extension of credit made pursuant to a loan agreement entered into
in the ordinary course of business;
. the interest paid to the Non-United States Holder is not considered
contingent interest under Section 871(h)(4) of the Code and the
regulations thereunder; and
. the beneficial owner satisfies the requirements set forth in Section
871(h) and 881(c) of the Code and the Treasury regulations issued
thereunder relating to registered securities.
. Currently, this requirement will be satisfied in either of the
following circumstances:
. First, this requirement will be satisfied if the Non-United
States Holder provides to Stater Bros. or its paying agent a Form
W-8 (or a suitable substitute or successor form, such as a
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Form W-8BEN), that is signed under penalties of perjury, includes
the holder's name and address, and contains a certification that
the holder is not a United States person.
. Second, the requirement will be satisfied if (a) the Non-United
States Holder provides a Form W-8 (or a suitable substitute or
successor form, such as a Form W-8BEN), signed under the
penalties of perjury, to a qualified intermediary, such as a
securities clearing organization, bank, or other financial
institution who holds customers' securities in the ordinary
course of its trade or business and holds the exchange notes on
behalf of a beneficial owner, and (b) the qualified intermediary
certifies to Stater Bros. or its paying agent, under the
penalties of perjury, that such statement has been received by it
from the beneficial owner, directly or through another
intermediary financial institution, and furnishes Stater Bros. or
its paying agent with a copy thereof.
. Recently finalized Treasury regulations that are applicable to
interest paid after December 31, 2000, provide alternative
documentation procedures for satisfying the certification requirement
described above. Such regulations add intermediary certification
options for certain qualifying agents. For instance, under one such
option, a withholding agent would be allowed to rely on an IRS Form
W-8IMY (or suitable substitute or successor form) furnished by a
financial institution or other intermediary on behalf of one or more
beneficial owners or other intermediaries without having to obtain
the beneficial owner certificate described in the preceding
paragraph, provided that the financial institution or intermediary
has entered into a withholding agreement with the IRS and thus is a
qualified intermediary.
Except to the extent that an applicable treaty otherwise provides, interest
received by a Non-United States Holder that is effectively connected with a
United States trade or business conducted by such holder will be taxed at the
graduated rates applicable to United States persons. Effectively connected
interest received by a corporate Non-United States Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a
30% rate, or, if applicable, a lower treaty rate. Even though such effectively
connected interest will be subject to federal income tax, and possibly subject
to the branch profits tax, it will not be subject to withholding if the Non-
United States Holder delivers a properly executed IRS Form 4224 (or suitable
substitute or successor form, such as a W-8ECI or such other form as the IRS
may prescribe) to Stater Bros. or its agent.
Gain on Disposition
A Non-United States Holder will generally not be subject to United States
federal income tax on gain realized on a sale, redemption or other disposition
of the exchange notes unless:
. the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-United States Holder, or
. in the case of a Non-United States Holder who is a nonresident alien
individual and holds the exchange note as a capital asset, such holder
is present in the United States for 183 or more days in the taxable year
and certain other requirements are met.
If a Non-United States Holder falls under the first clause in the preceding
paragraph, the holder will be taxed on the net gain derived from the sale under
the graduated United States federal income tax rates that are applicable to
United States persons and, if the Non-United States Holder is a foreign
corporation, it may also be subject to the branch profits tax described above.
Even though the effectively connected income will be subject to federal income
tax, and possibly subject to the branch profits tax, it will not be subject to
withholding if the Non-United States Holder delivers a properly executed IRS
Form 4224 (or a suitable substitute or successor form, such as a Form W-8ECI)
to Stater Bros. or its agent. If an individual Non-United States Holder falls
under the second clause in the preceding paragraph, the holder generally will
be subject to United States federal income tax at a rate of 30% on the amount
by which the gain derived from the sale from sources within the United States
were to exceed such holder's capital losses allocable to sources within the
United States for the taxable year of the sale.
99
Backup Withholding and Information Reporting
Stater Bros. must report annually to the IRS and to each Non-United States
Holder the amount of any interest paid on the exchange notes that is subject
to withholding or that is exempt from withholding pursuant to a tax treaty. We
must also report interest that is exempt from tax under the "portfolio
interest exception." Copies of these information returns may also be made
available under the provisions of a specific tax treaty or agreement to the
tax authorities of the country in which the Non-United States Holder resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments on the exchange notes by
Stater Bros. to a Non-United States Holder if the holder certifies as to its
status as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption, provided that neither Stater Bros. nor its paying
agent has actual knowledge that the holder is a United States person or that
the conditions of any other exemption are not, in fact, satisfied.
Information reporting and backup withholding requirements with respect to
the payment of the proceeds from the disposition of the exchange notes by a
Non-United States Holder are as follows:
. If the proceeds are paid to or through the United States office of a
broker, they generally will be subject to information reporting and
backup withholding at a rate of 31%. However, no such reporting and
withholding is required if: (a) the holder either certifies as to its
status as a Non-United States Holder under penalties of perjury on an
IRS Form W-8 or suitable substitute or successor form (as described
above) or otherwise establishes an exemption, and (b) the broker does
not have actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not, in fact, satisfied.
. If the proceeds are paid to or through a non-United States office of a
broker that is not a United States person or a "United States related
person," as defined below, they will not be subject to backup
withholding or information reporting.
. If the proceeds are paid to or through a Non-United States office of a
broker that is either a United States person or a "United States related
person", they generally will be subject to information reporting.
However, no such reporting is required if (a) the holder certifies as to
its status as a Non-United States Holder under penalties of perjury or
the broker has certain documentary evidence in its files as to the Non-
United States Holder's foreign status, and (b) the broker has no actual
knowledge to the contrary. Backup withholding will generally not apply
to payments made through foreign offices of a United States person or
United States related person.
For purposes of this paragraph, a "United States related person" is:
. a "controlled foreign corporation" for United States federal income tax
purposes;
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker
has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business; or
. for payments made after December 31, 2000, a foreign partnership if at
any time during its tax year one or more of its partners are United
States persons who, in the aggregate, hold more than 50% of the income
or capital interest of the partnership or if, at any time during its
taxable year, the partnership is engaged in the conduct of a United
States trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
Non-United States Holder will be allowed as a refund or a credit against such
Non-United States Holder's United States federal income tax liability provided
that the requisite procedures are followed.
100
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, these
regulations impose more stringent conditions on the ability of financial
intermediaries acting for a Non-United States Holder to provide certifications
on behalf of the holder, which may include entering into an agreement with IRS
to audit certain documentation with respect to such certifications. These
regulations are generally effective for payments made after December 31, 2000,
subject to certain transition rules. Investors should consult their own tax
advisors to determine the effects of the application of these regulations to
their particular circumstances.
The federal tax discussion set forth above as to both United States Holders
and Non-United States Holders is included for general information only and may
not be applicable depending upon a Holder's particular situation. Holders
should consult their own tax advisors with respect to the tax consequences to
them of the acquisition, ownership and disposition of the exchange notes,
including the tax consequences under state, local, foreign and other tax laws
and the possible effects of changes in federal or other tax laws.
101
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in exchange for
outstanding notes where such outstanding notes were acquired as a result of
market-making activities or other trading activities.
Stater Bros. will not receive any proceeds from any sale of exchange notes
by broker-dealers. Exchange notes received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of exchange notes and any commissions or concessions received by
such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Stater Bros. will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. Stater Bros. has agreed to pay
all expenses incident to the exchange offer other than commissions or
concessions of any brokers or dealers and will indemnify original holders of
the outstanding notes, including any broker-dealers, against certain
liabilities, including certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for
Stater Bros. by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain
legal matters for Stater Bros. will be passed upon by Varner, Saleson & Dobler
LLP, Riverside, California. Bruce D. Varner, a partner at Varner, Saleson &
Dobler LLP, is a director of Stater Bros.
102
EXPERTS
Ernst & Young LLP, independent auditors, have audited Stater Bros.'
consolidated financial statements at September 29, 1996, September 28, 1997
and September 27, 1998, and for the 53 weeks ended September 29, 1996 and for
each of the 52 weeks ended September 28, 1997 and September 27, 1998, as set
forth in their report. Stater Bros. has included its financial statements in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
The Albertson's Stores statements of net assets as of January 28, 1999 and
January 29, 1998 and store level earnings for the three 52 weeks ended January
28, 1999 included in this prospectus and included elsewhere in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement (which report expresses an unqualified opinion and
includes an explanatory paragraph referring to the preparation of the
statements in order to present the net assets relating to certain stores to be
acquired of Albertson's Stores by Stater Bros. pursuant to the Asset Purchase
Agreement and the related statements of store level earnings related to such
net assets, and were not intended to be a complete presentation of
Albertson's, Inc.'s financial position and results of operations) and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the statements of net
assets of Lucky Stores at January 31, 1998 and January 30, 1999, and the
statements of store level earnings for each of the three 52 week periods ended
January 30, 1999, as set forth in their report. Stater Bros. has included the
financial statements of the Lucky Stores in the prospectus and elsewhere in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
103
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Stater Bros. Holdings Inc.
Report of Independent Auditors.......................................... F-2
Audited Financial Statements:
Consolidated Balance Sheets at September 29, 1996, September 28, 1997
and September 27, 1998............................................... F-3
Fiscal years ended September 29, 1996, September 28, 1997 and
September 27, 1998:
Consolidated Statements of Income..................................... F-4
Consolidated Statements of Cash Flows................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)............. F-6
Notes to Consolidated Financial Statements............................ F-7
Unaudited Financial Statements:
Consolidated Balance Sheets at September 27, 1998 and June 27, 1999... F-19
Consolidated Statements of Income for the 39 Weeks Ended June 28, 1998
and June 27, 1999.................................................... F-20
Consolidated Statements of Cash Flows for the 39 Weeks Ended June 28,
1998 and June 27, 1999 .............................................. F-21
Notes to Consolidated Financial Statements ........................... F-22
Albertson's Stores
Independent Auditors' Report............................................ F-25
Financial Statements:
Audited Statements of Net Assets at January 28, 1999 and January 29,
1998 and Unaudited Statements of Net Assets at April 29, 1999 and
April 30, 1998....................................................... F-26
Audited Statements of Store Level Earnings for the 52 weeks ended
January 28, 1999, January 29, 1998 and January 30, 1997 and Unaudited
Statements of Store Level Earnings for the 13 weeks ended April 29,
1999 and April 30, 1998.............................................. F-27
Notes to Statements of Net Assets and Statements of Store Level
Earnings............................................................. F-28
Lucky Stores
Report of Independent Auditors.......................................... F-31
Financial Statements:
Audited Statements of Store Level Earnings for the 52 weeks ended
January 30, 1999, January 31, 1998 and February 1, 1997 and Unaudited
Statements of Store Level Earnings for the 13 weeks ended May 1, 1999
and May 2, 1998...................................................... F-32
Audited Statements of Net Assets at January 30, 1999 and January 31,
1998 and Unaudited Statements of Net Assets at May 1, 1999 and May 2,
1998................................................................. F-33
Notes to Financial Statements......................................... F-34
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater Bros.
Holdings Inc. and subsidiaries as of September 29, 1996, September 28, 1997
and September 27, 1998, and the related consolidated statements of income,
stockholders' equity (deficit), and cash flows for the 53-week period then
ended for 1996 and for each of the 52-week periods then ended for 1997 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stater Bros. Holdings Inc. and subsidiaries as of September 29, 1996,
September 28, 1997 and September 27, 1998, and the consolidated results of
their operations and their cash flows for the 53-week period then ended for
1996 and for each of the 52-week periods then ended for 1997 and 1998 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Riverside, California
December 1, 1998
F-2
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Sept. 29 Sept. 28 Sept. 27
1996 1997 1998
-------- -------- --------
ASSETS
------
Current Assets
Cash and cash equivalents...................... $ 45,279 $ 59,086 $ 57,281
Receivables.................................... 19,009 21,481 20,451
Inventories.................................... 117,372 115,513 116,274
Prepaid expenses............................... 3,357 4,667 5,176
Deferred income taxes.......................... 4,710 2,978 4,588
Properties held for sale....................... 1,787 1,342 3,969
-------- -------- --------
Total current assets............................. 191,514 205,067 207,739
Investment in unconsolidated affiliate........... 7,626 10,313 8,472
Property and equipment
Land........................................... 18,688 16,443 15,924
Buildings and improvements..................... 89,856 87,605 94,794
Store fixtures and equipment................... 78,570 86,644 100,781
Property subject to capital leases............. 14,368 14,368 14,368
-------- -------- --------
201,482 205,060 225,867
Less accumulated depreciation and amortization. 87,267 96,203 107,513
-------- -------- --------
114,215 108,857 118,354
Deferred income taxes............................ 5,295 4,699 2,449
Deferred debt issuance costs, net................ 5,221 14,273 12,294
Lease guarantee escrow........................... 6,701 8,069 9,629
Other assets..................................... 7,722 7,199 5,381
-------- -------- --------
Total assets..................................... $338,294 $358,477 $364,318
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable............................... $ 79,271 $ 66,834 $ 65,553
Accrued payroll and related expenses........... 23,981 23,851 25,363
Other accrued liabilities...................... 23,607 21,113 24,788
Current portion of capital lease obligations... 1,182 1,256 1,310
-------- -------- --------
Total current liabilities........................ 128,041 113,054 117,014
Long-term debt, less current portion............. 165,000 265,000 265,000
Capital lease obligations, less current portion.. 6,917 5,661 4,350
Long-term portion of self-insurance and other
reserves........................................ 10,332 7,409 8,284
Other long-term liabilities...................... 2,526 3,939 3,725
10.5% Cumulative Series B Preferred Stock:
(stated value $100 per share)
Authorized shares--693,650
Issued and outstanding shares--693,650 in 1996,
and 0 in 1997 and 1998........................ 69,365 -- --
Stockholders' equity (deficit)
Common Stock, $.01 par value:
Authorized shares--100,000
Issued and outstanding shares--0 in 1996, 1997
and 1998..................................... -- -- --
Class A Common Stock, $.01 par value:
Authorized shares--100,000
Issued and outstanding shares--50,000 in 1996,
1997 and 1998................................ 1 1 1
Additional paid-in capital..................... 12,715 12,715 12,715
Retained earnings (deficit).................... (41,953) (49,302) (46,771)
Less option to acquire stock................... (14,650) -- --
-------- -------- --------
Total stockholders' equity (deficit)........... (43,887) (36,586) (34,055)
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $338,294 $358,477 $364,318
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
Fiscal Year Ended
----------------------------------
53 Weeks 52 Weeks 52 Weeks
---------- ---------- ----------
Sept. 29, Sept. 28, Sept. 27,
1996 1997 1998
---------- ---------- ----------
Sales...................................... $1,705,332 $1,717,924 $1,726,107
Cost of goods sold......................... 1,315,726 1,326,410 1,323,522
---------- ---------- ----------
Gross profit............................... 389,606 391,514 402,585
Operating expenses:
Selling, general and administrative
expenses................................ 328,242 333,199 353,075
Depreciation and amortization............ 12,583 13,265 15,434
Consulting fees.......................... 1,525 1,458 --
---------- ---------- ----------
Total operating expenses................... 342,350 347,922 368,509
---------- ---------- ----------
Operating profit........................... 47,256 43,592 34,076
Interest income............................ 1,929 3,034 3,059
Interest expense........................... (20,258) (21,563) (30,206)
Equity in (loss) from unconsolidated
affiliate................................. (1,624) (2,313) (2,941)
Other income (expense) -- net.............. (172) 76 2
---------- ---------- ----------
Income before income taxes................. 27,131 22,826 3,990
Income taxes............................... 11,120 9,359 1,459
---------- ---------- ----------
Net income................................. 16,011 13,467 2,531
Less preferred dividends................. 4,111 6,166 --
---------- ---------- ----------
Net income available to common
shareholders.............................. $ 11,900 $ 7,301 $ 2,531
========== ========== ==========
Earnings per common share.................. $ 165.28 $ 146.02 $ 50.62
========== ========== ==========
Average common shares outstanding.......... 72,000 50,000 50,000
========== ========== ==========
Common shares outstanding at end of year... 50,000 50,000 50,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
--------------------------------------------
53 Weeks 52 Weeks 52 Weeks
-------------- -------------- --------------
Sept. 29, 1996 Sept. 28, 1997 Sept. 27, 1998
-------------- -------------- --------------
Operating activities:
Net income........................ $ 16,011 $ 13,467 $ 2,531
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 12,583 13,265 15,434
Deferred income taxes........... (2,238) 2,328 640
Loss (gain) on disposals of
assets......................... 172 (75) (2)
Net undistributed loss in
unconsolidated affiliate....... 1,624 2,313 2,941
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables.................... (3,132) (2,472) 1,030
(Increase) decrease in
inventories.................... (10,226) 1,859 (761)
(Increase) decrease in prepaid
expenses....................... 234 (1,310) (509)
(Increase) decrease in other
assets......................... 1,738 (629) 557
Increase (decrease) in accounts
payable........................ 11,667 (12,437) (1,281)
Increase (decrease) in accrued
liabilities and long-term
portion of self-insurance
reserves....................... (514) (6,649) 5,848
-------- -------- --------
Net cash provided by operating
activities....................... 27,919 9,660 26,428
-------- -------- --------
Financing activities:
Proceeds from long-term debt...... -- 100,000 --
Debt issuance cost................ -- (10,513) --
Redemption of preferred stock..... -- (69,365) --
Common stock exchanged for
preferred stock.................. (69,365) -- --
Preferred stock issued and
exchanged for common stock....... 69,365 -- --
Principal payments on long-term
debt and capital lease
obligations...................... (1,087) (1,182) (1,257)
Dividends paid on preferred stock. (4,111) (6,166) --
-------- -------- --------
Net cash provided by (used in)
financing activities............. (5,198) 12,774 (1,257)
-------- -------- --------
Investing activities:
Investments in unconsolidated
affiliate........................ -- (5,000) (1,100)
Purchase of property and
equipment........................ (22,415) (20,268) (26,278)
Proceeds from sale of property and
equipment and properties held
for sale......................... 18,665 16,641 402
-------- -------- --------
Net cash (used in) investing
activities....................... (3,750) (8,627) (26,976)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents............. 18,971 13,807 (1,805)
Cash and cash equivalents at
beginning of year................ 26,308 45,279 59,086
-------- -------- --------
Cash and cash equivalents at end
of year.......................... $ 45,279 $ 59,086 $ 57,281
======== ======== ========
Interest paid..................... $ 21,360 $ 18,859 $ 27,133
Income taxes paid................. $ 9,725 $ 6,500 $ 1,000
See accompanying notes to consolidated financial statements.
F-5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Class
A Additional Retained Option to
Common Common Paid-in Earnings Acquire
Stock Stock Capital (Deficit) Stock
------ ------ ---------- -------- ---------
Balances at September 24, 1995.... $ 1 $ 1 $12,715 $ 15,511 $(14,650)
Conversion of Common Stock for
Series B Preferred Stock....... (1) -- -- (69,364) --
Net income for 53 weeks ended
September 29, 1996............. -- -- -- 16,011 --
Preferred stock dividends paid.. -- -- -- (4,111) --
---- --- ------- -------- --------
Balances at September 29, 1996.... -- 1 12,715 (41,953) (14,650)
Net income for 52 weeks ended
September 28, 1997............. -- -- -- 13,467 --
Preferred stock dividends paid.. -- -- -- (6,166) --
Exercise Option to Acquire
Stock.......................... -- -- -- (14,650) 14,650
---- --- ------- -------- --------
Balances at September 28, 1997.... -- 1 12,715 (49,302) --
Net income for 52 weeks ended
September 27, 1998............. -- -- -- 2,531 --
---- --- ------- -------- --------
Balances at September 27, 1998.... $ -- $ 1 $12,715 $(46,771) $ --
==== === ======= ======== ========
See accompanying notes to consolidated financial statements.
F-6
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
Note 1 -- The Company and Its Significant Accounting Policies
Description of Business
Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the
operation of retail supermarkets. As of September 27, 1998, the Company
operated 112 retail food supermarkets under the name "Stater Bros." The
Company's supermarkets are located principally in the "Inland Empire" area of
Southern California--San Bernardino, Riverside and the eastern portions of Los
Angeles, Orange and Kern counties. The Company and its predecessor companies
have operated retail grocery stores under the "Stater Bros." name in the
Inland Empire since 1936.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Stater Bros. Markets ("Markets") and Stater
Bros. Development, Inc. All significant inter-company transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in September. The fiscal
years ended September 28, 1997 and September 27, 1998 were 52-week years and
the fiscal year ended September 29, 1996 was a 53-week year.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Receivables
Receivables represents amounts expected to be received during the next
operating cycle of the Company. The carrying amount reported in the balance
sheet for receivables approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value
and consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized to interest expense over the terms of the applicable debt
agreements.
F-7
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 1 -- The Company and Its Significant Accounting Policies (continued)
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its self-
insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"; No. 130,
"Reporting on Comprehensive Income"; and No. 131, "Disclosures about Segments
of an Enterprise and Related Information", all of which were adopted by the
Company at the beginning of its fiscal year ending on September 27, 1998
(fiscal 1998). Adoption of SFAS No. 128, No. 130 and No. 131 did not have a
material adverse effect on the Company's financial position or its results of
operations in fiscal 1998.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized,
principally on the straight-line method over the estimated useful lives of the
assets, and for capitalized leases over the initial lease term or the
estimated economic life of the asset.
The average economic lives are as follows:
Most
Range Prevalent
------------- ---------
Buildings and improvements......................... 8-30 Years 25 Years
Store furniture and equipment...................... 3-10 Years 5 Years
Property subject to capital leases................. Life of Lease 25 Years
Income Taxes
The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and
distribution costs.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2 -- Debt
Long-term debt consisted of the following:
Sept. 29 Sept. 28 Sept. 27
1996 1997 1998
-------- -------- --------
(In thousands)
11% Senior Notes due March 2001.................. $165,000 $165,000 $165,000
9% Senior Subordinated Notes due July 2004....... -- 100,000 100,000
-------- -------- --------
Total long-term debt............................. $165,000 $265,000 $265,000
======== ======== ========
As of September 27, 1998, principal payments amounting to $165 million were
due in the next three years. Interest on the 11% Senior Notes due 2001 is
payable semi-annually on September 1 and March 1. Interest on the 9% Senior
Subordinated Notes due 2004 is payable semi-annually on July 1 and January 1.
Interest capitalized during fiscal years 1996, 1997 and 1998 amounted to
$116,000, $251,000 and $224,000, respectively. Interest expense incurred,
before the effect of capitalized interest, during 1996, 1997 and 1998 amounted
to $20,374,000, $21,814,000 and $30,430,000, respectively.
The Company did not have short-term borrowings outstanding at September 29,
1996, September 28, 1997 and September 27, 1998. The Company did not incur any
short-term borrowings during fiscal years 1996, 1997 and 1998.
The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001 and 9% Senior Subordinated Notes due 2004 and its bank credit
agreement. As of September 27, 1998, the Company was in compliance with all
such covenants.
Note 3 -- Unconsolidated Affiliate
The Company owns 50% of Santee Dairies LLC. Through its wholly owned
subsidiary, Santee Dairies, Inc. ("Santee"), it operated a fluid milk
processing plant located in Los Angeles, California, and as of May 1, 1998,
Santee moved its operations to a newly constructed fluid milk processing plant
in City of Industry, California. 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 losses of
$1,624,000, $2,313,000, and $2,941,000 for fiscal years 1996, 1997 and 1998,
respectively. The Company is a significant customer of Santee which supplies
the Company with a substantial portion of its fluid milk and dairy products.
F-9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3 -- Unconsolidated Affiliate (continued)
Summary of unaudited financial information for Santee Dairies LLC is as
follows:
52 Weeks
----------------------------
Sept. 28 Sept. 27 Sept. 26
1996 1997 1998
-------- -------- ---------
(In thousands)
Current assets............................... $ 16,937 $ 41,657 $ 19,690
Non-current assets........................... 26,351 86,371 111,236
Current liabilities.......................... 23,410 24,548 31,178
Non-current liabilities...................... 2,860 83,028 82,807
Shareholder's equity......................... 17,018 20,452 16,941
Sales........................................ 191,481 175,937 166,314
Gross profit................................. 16,174 12,592 3,509
Net income (loss)............................ $ (1,640) $ (6,156) $ (5,711)
The Company accepted and paid a temporary increase in costs of product
purchased from Santee of approximately $4.3 million for product delivered by
Santee to the Company during the last eighteen weeks of fiscal 1998. The
temporary increase in cost of product is included in cost of goods sold for
the year to date period ended September 27, 1998. The Company believes the
temporary increase in cost of product purchased from Santee by the Company
will continue through March 1999, however, no assurance can be provided that
the temporary increase in the cost of product will terminate on or before
March 1999.
Note 4 -- Bank Facilities
Stater Bros. Markets and Bank of America National Trust and Savings
Association (the "Bank") have entered into a credit agreement (as amended)
whereby the Bank provides Stater Bros. Markets with a revolving operating line
of credit (the "Operating Facility") with a maximum availability of $15.0
million, which was available on September 27, 1998, and a revolving letter of
credit facility (the "LC Facility") with a maximum availability of $25.0
million, of which $14.2 million was available on September 27, 1998
(collectively, the "Bank Facilities"). The Bank Facilities will expire on June
1, 2000. Interest on the outstanding principal balance of the Operating
Facility is payable monthly at either the Bank's reference rate plus one
percent per annum or at a fixed rate of interest. Borrowings under the Bank
Facilities are unsecured general obligations of Stater Bros. Markets and are
guaranteed by Stater Bros. Development, Inc. The Bank Facilities contain
customary cross-default provisions with respect to the Company's 11% Senior
Notes due 2001 and 9% Senior Subordinated Notes due 2004.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of
at least $190.0 million; (iii) maintain a ratio of total liabilities to
tangible net worth plus debt subordinated to the Bank of not in excess of
1.30:1; (iv) maintain a minimum fixed charge coverage ratio (as defined) of at
least 1.10:1 for each consecutive four fiscal quarters beginning with the four
fiscal quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v)
limit the sale of assets; (vi) prohibit additional indebtedness except for
normal trade credit and indebtedness secured only by real property constructed
or acquired within the prior twelve months; (vii) prohibit additional liens
except for liens for indebtedness secured by real property pursuant to
clause (v); (viii) prohibit the acquisition of other business entities; (ix)
restrict the payment of dividends (as discussed below); (x) prohibit changes
of ownership; (xi) prohibit the liquidation, consolidation or merger of the
business; and (xii) repay all advances outstanding under the Operating
Facility and not draw any new advances
F-10
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 -- Bank Facilities (continued)
for at least 5 calendar days each month. As of September 27, 1998, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with
all restrictive covenants and had (i) a current ratio of 1.86:1, (ii) tangible
net worth and debt subordinated to the Bank of $234.4 million; (iii) a ratio
of total liabilities to tangible net worth and debt subordinated to the Bank
of .55:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.51:1. If for any reason Stater Bros. Markets is unable to
comply with the terms of the Bank Facilities, including the covenants
contained therein, such noncompliance would result in an event of default
under the Bank Facilities, and could result in acceleration of the payment of
indebtedness then outstanding under the Bank Facilities or, in certain
situations, the prohibition of the payment of dividends or advances to the
Company. In addition, no amendment, waiver or supplement may be made to the
Indenture without the prior written consent of the Bank if such amendment,
waiver or supplement adversely affects the rights of the Bank as lender to
Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for
the Company, and could limit the Company's ability to respond to changing
business and economic conditions, and to finance future operations or capital
needs including the Company's ability to achieve its plans to remodel and
expand existing supermarkets and open new supermarkets.
Note 5 -- Leases
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.
A portion of the Company's lease obligations are guaranteed by Petrolane
Incorporated ("Petrolane") or its successor (see Note 6). The leases
guaranteed by Petrolane had initial terms of 20 years and expire in the year
2003. Lease payments for the properties subject to the Petrolane guarantees
are 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 is required to make annual
deposits into a lease guarantee escrow account. The amount of each annual
deposit is to be based on (a) a percentage of sales of 20 supermarkets, as
specified in the agreement, to the extent they exceed a defined base; and (b)
a percentage of rents adjusted for increases in the Consumer Price Index for
certain rental property, including the Company's office and warehouse complex.
The Company deposited $738,000, $1,064,000 and $1,113,000 into the lease
guarantee escrow account during fiscal years 1996, 1997 and 1998,
respectively.
Upon termination of the leases, or the termination of the Petrolane lease
guarantees, all amounts deposited into the lease guarantee escrow account,
plus interest thereon, less any amounts disbursed, will be returned to the
Company. At September 27, 1998, the lease guarantee escrow account had a
cumulative balance of $9,629,000, compared to $8,069,000 and $6,701,000 as of
September 28, 1997 and September 29, 1996, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the lease guarantee escrow account for
any amounts which Petrolane or its successor may be required to pay as
guarantor of the lease obligations of Stater Bros. Markets.
F-11
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5 -- Leases (continued)
Following is a summary of future minimum lease payments as of September 27,
1998:
Capital Operating Leases
Fiscal Year Leases Minimum Payment
----------- ------- ----------------
(In thousands)
1999.............................................. $1,760 $ 20,375
2000.............................................. 1,693 19,648
2001.............................................. 1,397 17,946
2002.............................................. 980 17,673
2003.............................................. 629 14,788
Thereafter........................................ 413 61,732
------ --------
Total minimum lease payments...................... 6,872 $152,162
========
Less amounts representing interest................ 1,212
------
Present value of minimum lease payments........... 5,660
Less current portion.............................. 1,310
------
Long-term portion................................. $4,350
======
Rental expense and sublease income were as follows:
53 Weeks 52 Weeks
-------- -------------------
Sept. 26 Sept. 28 Sept. 27
1996 1997 1998
-------- -------- --------
(In thousands)
Minimum rentals................................. $19,267 $20,710 $20,194
Rentals based on sales.......................... $ 5,072 $ 5,101 $ 4,727
Sublease income................................. $ 1,186 $ 1,121 $ 1,267
Aggregate sublease income to be received subsequent to September 27, 1998 is
approximately $5,481,000.
Note 6 -- Preferred Stock
Stater Bros. Markets has issued and outstanding 10 shares of its $11.00
Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and
unpaid dividends. Dividends are accrued at the rate of $11.00 per share per
annum. The preferred stock was issued in conjunction with a guarantee of
Stater Bros. Markets lease obligations by Petrolane Incorporated or its
successors (see Note 5). For as long as shares of the $11.00 Cumulative
Redeemable Preferred Stock remain outstanding, Stater Bros. Markets is subject
to certain covenants. The most restrictive covenant limits the amount of
dividends that may be paid to amounts that may be legally paid under
applicable state laws. At September 27, 1998, accumulated earnings available
for dividend distributions were approximately $221.9 million. In the event of
non-compliance by Stater Bros. Markets, the holders of the Stater Bros.
Markets preferred stock may elect the Board of Directors of Stater Bros.
Markets. At September 27, 1998, Stater Bros. Markets was in compliance with
these covenants.
Effective March 8, 1996, pursuant to options available to the Company, the
Company exercised its right to convert all of its outstanding shares of Common
Stock previously held by Craig Corporation ("Craig") into 693,650 shares of
its Series B Preferred Stock. The Series B Preferred Stock had a redemption
value of approximately $69.4 million and currently paid dividends at the rate
of 10.5% per annum. In August 1997, the Company redeemed all of the
outstanding shares of its Series B Preferred Stock for $69.4 million plus
accrued and unpaid dividends.
F-12
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7 -- Income Taxes
The provision for income taxes consisted of the following:
53 Weeks 52 Weeks
-------- --------------------
Sept. 29 Sept. 28, Sept. 27,
1996 1997 1998
-------- --------- ----------
(In thousands)
Current
Federal..................................... $ 8,116 $4,771 $ 1,921
State....................................... 2,478 1,756 795
------- ------ -------
10,594 6,527 2,716
------- ------ -------
Deferred
Federal..................................... 488 2,480 (813)
State....................................... 38 352 (444)
------- ------ -------
526 2,832 (1,257)
------- ------ -------
Income tax expense............................ $11,120 $9,359 $ 1,459
======= ====== =======
A reconciliation of the provision for income taxes to amounts computed at the
federal statutory rate is as follows:
53 Weeks 52 Weeks
-------- --------------------
Sept. 29 Sept. 28, Sept. 27,
1996 1997 1998
-------- --------- ----------
Statutory federal income tax rate............ 35.0% 35.0% 34.0%
State franchise tax rate, net of federal
income tax benefit.......................... 6.1 6.0 6.1
Tax credits.................................. -- -- (2.7)
Other........................................ (.1) -- (.9)
---- ---- ----
41.0% 41.0% 36.5%
==== ==== ====
Deferred income taxes resulted from timing differences in recognizing revenue
and expense for tax and financial statement purposes. The sources of these
timing differences and the income tax (benefit) of each were as follows:
53 Weeks 52 Weeks
--------- -------------------
Sept. 29, Sept. 28, Sept. 27,
1996 1997 1998
--------- --------- ---------
(In thousands)
Accrued liabilities.......................... $ 364 $1,340 $ (744)
California franchise tax..................... (590) 678 306
Depreciation................................. (22) (39) (240)
Other, net................................... 774 853 (579)
----- ------ -------
$ 526 $2,832 $(1,257)
===== ====== =======
F-13
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7 -- Income Taxes (continued)
Components of deferred income taxes are as follows:
Sept. 29, Sept. 28, Sept. 27,
1996 1997 1998
--------- --------- ---------
(In thousands)
Deferred income tax assets:
--------------------------
Property and equipment..................... $ 671 $ 228 $ --
Self-insurance reserves.................... 4,533 3,768 3,712
Pension and vacation liabilities........... 2,453 2,740 1,812
Inventories................................ 1,213 1,469 1,341
Investment in unconsolidated affiliate..... -- 943 1,917
Income deferred for book purposes.......... 1,254 1,187 1,695
Other...................................... -- --
------- ------- -------
Total deferred income tax assets......... 10,124 10,335 10,477
------- ------- -------
Deferred income tax liabilities:
-------------------------------
Property and equipment..................... -- -- (347)
Investment in unconsolidated affiliate..... (5) -- --
Other assets............................... -- -- (950)
Other, net................................. (114) (2,658) (2,143)
------- ------- -------
Total deferred income tax liabilities.... (119) (2,658) (3,440)
------- ------- -------
Net deferred income tax assets............. $10,005 $ 7,677 $ 7,037
======= ======= =======
Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable income,
when combined with the income taxes paid in prior years, will be adequate to
realize the deferred income tax assets.
Note 8 -- Related Party Transactions
Consulting Agreements and Covenant Not to Compete
Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena Investments ("La Cadena") and
Craig, that required them to provide consultation and advice to the Company in
connection with general business, financial, management consulting, real
estate acquisition and development, and product diversification matters. These
consulting agreements with its stockholders terminated on September 26, 1993.
In March 1994, the Company entered into a new five-year Consulting Agreement
with Craig, whereby the Company paid Craig $1.5 million per year and Craig
provided the Company with consultation and advise in connection with general
business issues, financial management consulting, real estate acquisition and
development and product diversification matters. Consulting fees expense
amounted to $1.5 million in 1997 and 1996. The agreement to make annual
consulting payments to Craig was terminated, at the election of the Company,
in August 1997. Additionally, on March 8, 1994, the Company paid Craig
$5.0 million which is amortized to earnings over the five-year term of the
covenant not to compete included in the Consulting Agreement.
Note 9 -- Retirement Plans
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employee's compensation during the three years before
F-14
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9 -- Retirement Plans (continued)
retirement. The Company's funding policy for this plan is to contribute
annually at a rate that is intended to provide sufficient assets to meet
future benefit payment requirements.
Net periodic pension cost included the following components:
53 Weeks 52 Weeks
-------------- -----------------------------
Sept. 29, 1996 Sept. 28, 1997 Sept. 27, 1998
-------------- -------------- --------------
(In thousands)
Service cost--benefits earned
during the period............ $ 752 $ 826 $ 902
Interest cost on projected
benefit obligation........... 1,000 1,109 1,241
Actual return on assets....... (429) (761) (1,033)
Net amortization and deferral. (181) 78 187
------ ------ -------
Net periodic pension cost..... $1,142 $1,252 $ 1,297
====== ====== =======
Assumptions used for
accounting were:
Discount rate................. 7.50% 7.50% 7.50%
Rate of increase in
compensation levels.......... 5.00% 5.00% 5.00%
Expected long-term rate of
return on assets............. 9.00% 9.00% 9.00%
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
53 Weeks 52 Weeks
-------------- -----------------------------
Sept. 29, 1996 Sept. 28, 1997 Sept. 27, 1998
-------------- -------------- --------------
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit obligation..... $ 10,591 $ 11,794 $ 15,376
======== ======== ========
Accumulated benefit
obligation................... $ 10,930 $ 12,160 $ 15,850
======== ======== ========
Projected benefit obligation... $(14,991) $(16,639) $(21,636)
Plan assets at fair value,
primarily notes and bonds..... 9,028 10,442 11,951
-------- -------- --------
Projected benefit obligation in
excess of plan assets......... (5,963) (6,197) (9,685)
Unrecognized net loss.......... 3,745 3,597 6,774
Unrecognized prior service
cost.......................... (71) (66) (61)
Unrecognized net obligations
established October 1, 1987... 216 189 162
-------- -------- --------
Pension (liability) recognized
in the balance sheet.......... $ (2,073) $ (2,477) $ (2,810)
======== ======== ========
Expenses recognized for this retirement plan were $1,290,000, $1,392,000 and
$1,499,000 in 1996, 1997 and 1998, respectively.
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may
participate if their collective bargaining agreement specifically provides for
their inclusion. The Company may contribute up to 7.5% of total compensation
paid or accrued during the year to each plan participant subject to
limitations imposed by the Internal Revenue Code. The Company recognized
expenses for this plan in the amount of $347,000, $396,000 and $420,000 in
1996, 1997 and 1998, respectively.
F-15
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9 -- Retirement Plans (continued)
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the
number of hours worked. Information for these plans as to vested and non-
vested accumulated benefits and net assets available for benefits is not
available.
The Company's expense for these retirement plans and health and welfare
plans consisted of the following:
53 Weeks 52 Weeks
-------- -------------------
Sept. 29 Sept. 28, Sept. 27,
1996 1997 1998
-------- --------- ---------
(In thousands)
Multi-Employer Pension Plans....................... $ 7,376 $ 8,677 $12,420
Multi-Employer Health and Welfare.................. 36,632 36,771 36,930
------- ------- -------
Total Multi-Employer Benefits...................... $44,008 $45,448 $49,350
======= ======= =======
The Company's employer contributions increased in fiscal 1998 as a result of
the resumption of employer contributions to a collective bargaining pension
trust, such employer contributions had previously been suspended since 1994.
Note 10 -- Labor Relations
The Company entered into a four-year collective bargaining agreement with
the United Food & Commercial Workers collective bargaining units in October
1995 and entered into a four-year collective bargaining agreement in September
1998 with the International Brotherhood of Teamsters collective bargaining
units.
Note 11 -- Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Receivables
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Long-Term Debt
The fair value of the 11% Senior Notes due 2001 and 9% Senior Subordinated
Notes due 2004, is based on quoted market prices. Although market quotes for
the fair value of the Company's capitalized lease obligations are not readily
available, the Company believes the stated value approximates fair value.
F-16
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 11 -- Fair Value of Financial Instruments (continued)
The estimated fair values of the Company's financial instruments are as
follows:
As of
September 27,
1998
-----------------
Carrying Fair
Amount Value
-------- --------
(In thousands)
Cash and cash equivalents............................... $ 57,281 $ 57,281
Receivables............................................. $ 20,451 $ 20,451
Long-term debt.......................................... $270,660 $276,060
Note 12 -- Litigation Matters
In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are incidental to the operation of
the business of the Company and its subsidiaries. The Company records an
appropriate provision when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a
class action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs sought unspecified damages. The Company has recently
entered into a settlement agreement with this case and such settlement does
not involve payment of monetary damages and is currently being processed
through the courts for approval and will not have an adverse material effect
on the Company.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case
of Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the
State of California for the County of San Bernardino. The complaint filed by
twelve employees seeks unspecified damages alleging racial discrimination in
the Company's employment practices. The Company believes the complaint is
without merit and intends to vigorously defend the case. There can be no
assurances, however, as to the outcome of this case.
F-17
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 13 -- Quarterly Results (Unaudited)
Quarterly results for fiscal 1996, 1997 and 1998 are as follows:
Net
Income (Loss)
Gross Operating Net Preferred Available to
Sales Profit Profit Income (Loss) Dividends Shareholders
---------- -------- --------- ------------- --------- -------------
(In thousands)
Fiscal 1996 Quarters
13 weeks ended 12/24/95. $ 408,740 $ 92,261 $11,015 $ 3,597 $ -- $ 3,597
13 weeks ended 03/24/96. 406,223 93,548 12,266 4,341 339 4,002
13 weeks ended 06/23/96. 429,349 99,257 12,188 4,385 1,816 2,569
14 weeks ended 09/29/96. 461,020 104,540 11,787 3,688 1,956 1,732
---------- -------- ------- ------- ------ -------
Total (53 weeks)...... $1,705,332 $389,606 $47,256 $16,011 $4,111 $11,900
========== ======== ======= ======= ====== =======
Fiscal 1997 Quarters
13 weeks ended 12/29/96. $ 433,400 $100,826 $12,080 $ 4,195 $1,816 $ 2,379
13 weeks ended 03/30/97. 431,422 97,695 11,978 4,354 1,816 2,538
13 weeks ended 06/29/97. 427,445 96,714 11,511 4,078 1,816 2,262
13 weeks ended 09/28/97. 425,657 96,279 8,023 840 718 122
---------- -------- ------- ------- ------ -------
Total (52 weeks)...... $1,717,924 $391,514 $43,592 $13,467 $6,166 $ 7,301
========== ======== ======= ======= ====== =======
Fiscal 1998 Quarters
13 weeks ended 12/28/97. $ 430,918 $ 98,296 $10,110 $ 1,373 $ -- $ 1,373
13 weeks ended 03/29/98. 422,829 100,467 10,090 1,225 -- 1,225
13 weeks ended 06/28/98. 431,301 99,113 5,115 (1,185) -- (1,185)
13 weeks ended 09/27/98. 441,059 104,709 8,761 1,118 -- 1,118
---------- -------- ------- ------- ------ -------
Total (52 weeks)...... $1,726,107 $402,585 $34,076 $ 2,531 $ -- $ 2,531
========== ======== ======= ======= ====== =======
F-18
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
Sept. 27, 1998 June 27, 1999
-------------- -------------
ASSETS
------
Current Assets
Cash and cash equivalents....................... $ 57,281 $ 55,427
Receivables..................................... 20,451 21,636
Inventories..................................... 116,274 113,048
Prepaid expenses................................ 5,176 6,588
Deferred income taxes........................... 4,588 4,589
Properties held for sale........................ 3,969 1,251
-------- --------
Total current assets.............................. 207,739 202,539
Investment in unconsolidated affiliate............ 8,472 9,396
Property and equipment
Land............................................ 15,924 17,287
Buildings and improvements...................... 94,794 99,378
Store fixtures and equipment.................... 100,781 126,723
Property subject to capital leases.............. 14,368 14,368
-------- --------
225,867 257,756
Less accumulated depreciation and amortization.. 107,513 116,901
-------- --------
118,354 140,855
Deferred income taxes............................. 2,449 2,449
Deferred debt issuance costs, net................. 12,294 10,185
Lease guarantee escrow............................ 9,629 10,957
Other assets...................................... 5,381 5,871
-------- --------
Total assets...................................... $364,318 $382,252
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable................................ $ 65,553 $ 65,728
Accrued payroll and related expenses............ 25,363 27,804
Other accrued liabilities....................... 24,788 31,989
Current portion of capital lease obligations.... 1,310 1,371
-------- --------
Total current liabilities......................... 117,014 126,892
Long-term debt, less current portion.............. 265,000 265,000
Capital lease obligations, less current portion... 4,350 3,317
Long-term portion of self-insurance and other
reserves......................................... 8,284 8,284
Other long-term liabilities....................... 3,725 3,580
Stockholders' equity (deficit)
Class A Common Stock, $.01 par value:
Authorized shares--100,000
Issued and outstanding shares--50,000......... 1 1
Additional paid-in capital...................... 12,715 12,715
Retained earnings (deficit)..................... (46,771) (37,537)
-------- --------
Total stockholders' equity (deficit).............. (34,055) (24,821)
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $364,318 $382,252
======== ========
See accompanying notes to unaudited consolidated financial statements.
F-19
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
39 Weeks Ended
----------------------
June 28, June 27,
1998 1999
---------- ----------
Sales.................................................. $1,285,048 $1,324,358
Cost of goods sold..................................... 987,172 1,011,542
---------- ----------
Gross profit........................................... 297,876 312,816
Operating expenses
Selling, general and administrative expenses......... 261,216 265,907
Depreciation and amortization........................ 11,345 11,813
---------- ----------
Total operating expenses............................... 272,561 277,720
---------- ----------
Operating profit....................................... 25,315 35,096
Interest income........................................ 2,371 2,388
Interest expense....................................... (22,641) (22,699)
Equity in earnings (loss) from unconsolidated
affiliate............................................. (2,692) 924
Other income (expense)--net............................ 42 (319)
---------- ----------
Income before income taxes............................. 2,395 15,390
Income taxes........................................... 982 6,156
---------- ----------
Net income............................................. $ 1,413 $ 9,234
========== ==========
Earnings available to common shareholders.............. $ 1,413 $ 9,234
========== ==========
Earnings per common share.............................. $ 28.26 $ 184.68
========== ==========
Average common shares outstanding...................... 50,000 50,000
========== ==========
See accompanying notes to unaudited consolidated financial statements.
F-20
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
39 Weeks Ended
------------------
June 28, June 27,
1998 1999
-------- --------
Operating Activities:
Net income................................................. $ 1,413 $ 9,234
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 11,345 11,813
Provision for deferred income taxes...................... 1,680 1
(Gain) loss on disposals of assets....................... (42) 319
Net undistributed (gain) loss in investment in
unconsolidated affiliate................................ 2,692 (924)
Changes in operating assets and liabilities:
(Increase) decrease in receivables..................... (2,578) (1,185)
(Increase) decrease in inventories..................... (3,414) 3,226
(Increase) decrease in prepaid expenses................ (2,241) (1,412)
(Increase) decrease in other assets.................... (547) (162)
Increase (decrease) in accounts payable................ 1,169 175
Increase (decrease) in accrued liabilities and long-
term portion of self-insurance reserves............... 1,496 9,497
-------- --------
Net cash provided by operating activities.................. 10,973 30,582
-------- --------
Investing Activities:
Investment in unconsolidated affiliate..................... (1,100) --
Purchase of property and equipment......................... (20,287) (34,382)
Proceeds from sale of property and equipment and properties
held for sale............................................. 269 2,918
-------- --------
Net cash (used by) investing activities.................... (21,118) (31,464)
-------- --------
Financing Activities:
Principal payments on capital lease obligations............ (941) (972)
-------- --------
Net cash (used by) financing activities.................... (941) (972)
-------- --------
Net increase (decrease) in cash and cash equivalents....... (11,086) (1,854)
Cash and cash equivalents at beginning of period........... 59,086 57,281
-------- --------
Cash and cash equivalents at end of period................. $ 48,000 $ 55,427
======== ========
Interest paid.............................................. $ 13,428 $ 13,922
Income taxes paid.......................................... $ 950 $ 2,600
See accompanying notes to unaudited consolidated financial statements.
F-21
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 27, 1999
Note 1 -- Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc.
(the "Company") and its subsidiaries as of September 27, 1998 and June 27,
1999 and the results of its operations and cash flows for the thirty-nine
weeks ended June 28, 1998 and June 27, 1999. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's latest annual report filed on Form
10-K. The operating results for the thirty-nine weeks ended June 27, 1999 are
not necessarily indicative of the results of operations for a full year.
Note 2 -- Income Taxes
The provision for income taxes for the thirty-nine weeks ended June 28, 1998
and June 27, 1999 consists of the following:
39 Weeks Ended
-----------------
June 28, June 27,
1998 1999
-------- --------
(In thousands)
Federal income taxes..................................... $760 $5,233
State income taxes....................................... 222 923
---- ------
$982 $6,156
==== ======
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 a loss of $2,692,000 for the thirty-nine weeks ended June 28, 1998,
and recognized income of $924,000 for the thirty-nine weeks ended June 27,
1999. 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 28, June 27,
1998 1999
-------- --------
(In thousands)
Current assets......................................... $ 20,324 $ 15,633
Non-current assets..................................... 109,800 106,971
Current liabilities.................................... 29,876 24,631
Non-current liabilities................................ 82,804 79,019
Shareholder's equity................................... 17,444 18,954
Sales.................................................. 127,428 130,045
Gross profit........................................... 5,588 13,868
Net income (loss)...................................... $ (5,208) $ 2,115
F-22
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 -- Covenant Not to Compete
On March 8, 1994, the Company entered into a $5.0 million prepaid five year
covenant not to compete which was included in a Consulting Agreement with
Craig Corporation and was amortized to earnings over the five year term of the
covenant not to compete. The Covenant Not To Compete terminated in March 1999.
Note 5 -- Reclassifications
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
Note 6 -- Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note 7 -- Subsequent Events
Acquisition of 43 Supermarkets from Albertson's
Upon the consummation of the merger of Albertson's, Inc. and American Stores
Company, the Company entered into a definitive Asset Purchase Agreement with
Albertson's, Inc. by which it will acquire 43 supermarkets, one future store
site and the related inventories and assume capitalized lease obligations for
a total purchase price of approximately $147.0 million. The acquisition of the
supermarkets, the future store site and the related inventories is expected to
be completed in August 1999 and are being funded through an offering of $450.0
million of new Senior Notes due 2006 (the "New Senior Notes").
Senior Notes
With the proceeds from the New Senior Notes, the Company repurchased
substantially all of the outstanding 11% Senior Notes due 2001 and all of the
9% Senior Subordinated Notes due 2004 and amended the indenture under which
the 11% Senior Notes were issued to eliminate substantially all of its
financial and restrictive covenants. Approximately $5 million in principal
amount of the 11% Senior Notes remain outstanding and are governed by the
terms of the amended indenture. In connection with the repurchase of the 11%
Senior Notes and the 9% Senior Subordinated Notes, the Company incurred
repurchase premiums of $11.7 million and $7.0 million, respectively. The
repurchase premiums and the write-offs of unamortized debt issuance costs
resulted in an extraordinary loss of $17.1 million, net of applicable income
tax benefit of $11.9 million.
The acquisition of the 43 supermarkets are being funded through the offering
of New Senior Notes, which was completed on August 6, 1999. Proceeds from the
New Senior Notes are being used to consummate the acquisition of the 43
supermarkets and related inventories, fund anticipated capital expenditures in
the acquired supermarkets and pay fees and expenses related to the acquisition
of the supermarkets and the issuance of the New Senior Notes.
In addition to the net proceeds raised from the New Senior Notes, the
Company will be required to use approximately $15.1 million of its cash on
hand to complete the acquisition of the supermarkets and to redeem the Notes.
F-23
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7 -- Subsequent Events (continued)
Bank Credit Facility
On August 6, 1999, Stater Bros. Markets, the Company's principal operating
subsidiary, entered into a new unsecured bank credit facility (the "New Credit
Facility") with Bank of America, N.A. The New Credit Facility consists of a
$50.0 million revolving credit facility with an additional $25.0 million
facility available for the issuance of commercial and standby letters of
credit. The term of the New Credit Facility is three years. It is expected
that borrowings under the New Credit Facility will be used for certain working
capital and corporate purposes. The availability of the loans and letters of
credit will be subject to certain sublimits and other borrowing restrictions.
F-24
INDEPENDENT AUDITORS' REPORT
Board of Directors
Albertson's, Inc.
We have audited the accompanying statements of net assets of Albertson's
Stores as of January 28, 1999 and January 29, 1998 and the related statements
of store level earnings attributable to such net assets of Albertson's Stores
for the fiscal years ended January 28, 1999, January 29, 1998 and January 30,
1997, pursuant to the Asset Purchase Agreement between Albertson's, Inc.,
Stater Bros. Markets and Stater Bros. Holdings Inc. ("Stater Bros.") dated May
7, 1999 as described in Note 1 to the statements. These statements are the
responsibility of Albertson's, Inc. management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of net assets and
store level earnings are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the statements of net assets and store level earnings.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared to present the net assets relating
to certain stores to be acquired of Albertson's Stores by Stater Bros.
pursuant to the Asset Purchase Agreement described in Note 1, and the related
statements of store level earnings related to such net assets, and are not
intended to be a complete presentation of Albertson's, Inc.'s financial
position and results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the net assets of Albertson's Stores as of January 28, 1999
and January 29, 1998 and the store level earnings of Albertson's Stores for
the fiscal years ended January 28, 1999, January 29, 1998 and January 30,
1997, pursuant to the Asset Purchase Agreement referred to in Note 1 to the
statements, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boise, Idaho
May 7, 1999
F-25
ALBERTSON'S STORES
STATEMENTS OF NET ASSETS
(in thousands)
Unaudited
--------------------
January 28, January 29, April 29, April 30,
1999 1998 1999 1998
----------- ----------- --------- ---------
ASSETS
------
Prepaid expenses................... $ 595 $ 621 $ 747 $ 723
Inventories........................ 36,793 34,670 36,236 34,666
Other assets....................... 1,214 1,214 1,214 1,214
Land, buildings and equipment:
Land............................. 23,186 21,053 23,186 21,053
Buildings........................ 56,137 54,687 56,156 54,767
Equipment, fixtures and leasehold
improvements.................... 53,869 51,650 53,706 52,425
-------- -------- -------- --------
133,192 127,390 133,048 128,245
Less accumulated depreciation and
amortization.................... (57,515) (50,046) (59,229) (52,012)
-------- -------- -------- --------
75,677 77,344 73,819 76,233
Property under capital leases,
net of accumulated amortization
of $4,362 and $3,886 in 1998 and
1997, respectively, and $4,481
and $4,005 at April 29, 1999 and
April 30, 1998, respectively.... 5,735 6,212 5,617 6,093
-------- -------- -------- --------
81,412 83,556 79,436 82,326
LIABILITIES
-----------
Obligations under capital leases. 7,824 8,208 7,721 8,162
Accrued real estate liabilities.. 5,345 5,412 5,239 5,182
-------- -------- -------- --------
13,169 13,620 12,960 13,344
-------- -------- -------- --------
Net Assets......................... $106,845 $106,441 $104,673 $105,585
======== ======== ======== ========
See accompanying notes.
F-26
ALBERTSON'S STORES
STATEMENTS OF STORE LEVEL EARNINGS
(in thousands)
Unaudited
52 Weeks Ended 13 Weeks Ended
----------------------------------- ---------------------
January 28, January 29, January 30, April 29, April 30,
1999 1998 1997 1999 1998
----------- ----------- ----------- ---------- ----------
Sales.................... $519,684 $507,088 $474,928 $130,612 $129,845
Cost of sales............ 381,448 375,988 354,723 94,093 96,326
-------- -------- -------- -------- --------
Gross profit............. 138,236 131,100 120,205 36,519 33,519
Store operating expenses. 122,972 115,832 105,685 30,292 29,902
-------- -------- -------- -------- --------
Store level earnings..... $ 15,264 $ 15,268 $ 14,520 $ 6,227 $ 3,617
======== ======== ======== ======== ========
See accompanying notes.
F-27
ALBERTSON'S STORES
NOTES TO STATEMENTS OF NET ASSETS AND STATEMENTS
OF STORE LEVEL EARNINGS
YEARS ENDED JANUARY 28, 1999, JANUARY 29, 1998 AND JANUARY 30, 1997
1. BASIS OF PRESENTATION
On May 7, 1999, Albertson's, Inc. entered into an agreement ("Asset Purchase
Agreement") with Stater Bros. Markets and Stater Bros. Holdings Inc. ("Stater
Bros.") to sell 33 Albertson's combination food and drug stores ("Albertson's
Stores" or the "Company") and one land site located in California.
These financial statements relate solely to the 33 Albertson's Stores to be
acquired by Stater Bros. and are not intended to represent the complete
financial position and results of operations of Albertson's, Inc. There are no
complete financial statements issued or prepared for issuance by store.
The statements of store level earnings attributable to the net assets
presented herein differ from a complete statement of earnings in that certain
allocations of indirect charges, including, but not limited to, income tax
expense, interest expense, legal expense and overhead costs incurred at the
corporate and division levels have been excluded. Accordingly, the statements
of store level earnings do not include any expenses, including depreciation,
related to the corporate and division offices. The statements of store level
earnings contain the results of those stores that are to be acquired pursuant
to the Asset Purchase Agreement. Certain amounts, including, cost of sales and
store operating expenses include allocated charges. The allocations of these
costs are based on usage, wages and/or sales. The allocated costs included in
the accompanying statements are not representative of the actual results that
would have resulted had the stores to be acquired been operated as a stand
alone entity. The statement of net assets differs from a complete balance
sheet in that it contains only those assets and liabilities related to the
Albertson's Stores to be acquired pursuant to the Asset Purchase Agreement.
Certain net accrued real estate liabilities included in the statements of net
assets will be prorated at the date of closing and will not be assumed by
Stater Bros. The information contained in the statements has been prepared in
accordance with generally accepted accounting principles.
In the opinion of management, the accompanying unaudited financial
statements include all adjustments necessary to present fairly, in all
material respects, the net assets to be acquired of the Company and the
related store level earnings attributable to such net assets for the periods
presented. Such adjustments consisted only of normal recurring items.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories -- The Company values inventories at the lower of cost or
market. Cost of substantially all inventories is determined on a first-in,
first-out (FIFO) basis.
Capitalization, Depreciation and Amortization -- Land, buildings and
equipment are recorded at cost. Depreciation is provided on the straight-line
method over the estimated useful life of the asset. Estimated useful lives are
generally as follows:
Buildings and improvements.................................... 10 to 25 years
Fixtures and equipment........................................ 3 to 8 years
Leasehold improvements........................................ 10 to 15 years
Capitalized leases............................................ 25 to 30 years
Depreciation and amortization for the fiscal years ended January 28, 1999,
January 29, 1998, January 30, 1997 was approximately $9,150,000, $8,572,000,
and $7,519,000, respectively.
The costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements are amortized on
the straight-line method over the shorter of the life of
F-28
ALBERTSON'S STORES
NOTES TO STATEMENTS OF NET ASSETS AND STATEMENTS
OF STORE LEVEL EARNINGS--(continued)
the applicable lease or the useful life of the asset. Capital leases are
recorded at the lower of the fair market value of the asset or the present
value of future minimum lease payments. These leases are amortized on the
straight-line method over their primary term.
Use of Estimates -- The preparation of the Company's financial statements,
in conformity with generally accepted accounting principles, requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
3. LEASES
The Company leases a portion of its real estate. The typical lease period is
25 to 30 years and most leases contain renewal options. Exercise of such
options is dependent on the level of business conducted at the location. In
addition, the Company leases certain equipment. Some leases contain contingent
rental provisions based on sales volume at retail stores.
Capitalized leases are calculated using interest rates appropriate at the
inception of each lease. Contingent rents (net of rental offsets) associated
with capitalized leases were $22,000 in 1998, $3,000 in 1997 and $6,000 in
1996.
Future minimum lease payments for noncancelable operating leases, related
subleases and capital leases at January 28, 1999, were as follows (in
thousands):
Operating Capital
Leases Subleases Leases
--------- --------- -------
1999.......................................... $ 3,374 $(143) $1,274
2000.......................................... 3,503 (143) 1,274
2001.......................................... 3,425 (125) 1,239
2002.......................................... 3,324 (25) 1,061
2003.......................................... 3,309 1,004
Remainder..................................... 32,770 8,902
------- ----- ------
Total minimum obligations (receivables)....... $49,705 $(436) 14,754
======= =====
Interest...................................... (6,930)
------
Present value of net minimum obligations...... $7,824
======
Rent expense under operating leases was as follows:
January 28, January 29, January 30,
1999 1998 1997
----------- ----------- -----------
Minimum rent........................... $3,082 $2,966 $2,556
Contingent rent........................ 31 48 58
Sublease rent.......................... (143) (118) (18)
------ ------ ------
$2,970 $2,896 $2,596
====== ====== ======
Interest expense under capital leases for the fiscal years ended January 28,
1999, January 29, 1998, and January 30, 1997 was approximately $886,000,
$929,000, and $966,000, respectively.
F-29
ALBERTSON'S STORES
NOTES TO STATEMENTS OF NET ASSETS AND STATEMENTS
OF STORE LEVEL EARNINGS--(continued)
4. ADVERTISING EXPENSE
The Company expenses advertising costs when the advertisement occurs. Net
advertising expense was approximately $5,288,000, $4,639,000, and $3,089,000
in 1998, 1997 and 1996, respectively, and has been reported in cost of sales
in the accompanying statements of store level earnings.
5. DEPRECIATION, INTEREST AND ADVERTISING EXPENSE (Unaudited)
Depreciation and amortization for the 13 weeks ending April 29, 1999 and
April 30, 1998 was approximately $2,219,000 and $2,249,000, respectively.
Interest expense related to capital leases for the 13 weeks ending April 29,
1999, and April 30, 1998, was approximately $214,000 and $226,000,
respectively.
Net advertising expense for the 13 weeks ending April 29, 1999 and April 30,
1998 was approximately $1,029,000 and $1,449,000, respectively.
******
F-30
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Stores Company
We have audited the accompanying statements of net assets of the Lucky
Stores as of January 30, 1999 and January 31, 1998 and the statements of store
level earnings for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997. These statements are the responsibility of the
management of Lucky Stores. Our responsibility is to express an opinion on
these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of net assets and
store level earnings are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of net assets and store level earnings. An audit also includes
assessing the basis of accounting used and significant estimates made by
management, as well as evaluating the overall presentation of the statements
of net assets and store level earnings. We believe that our audits provide a
reasonable basis for our opinion.
As described in the notes to financial statements, the accompanying
statements of net assets and store level earnings were prepared pursuant to
the Asset Purchase Agreement between Albertson's, Inc., Stater Bros. Markets
and Stater Bros. Holdings Inc. dated as of May 7, 1999, and are not intended
to be complete presentations of the earnings or the assets and liabilities of
the Lucky Stores to be acquired.
In our opinion, the statements referred to above present fairly, in all
material respects, the net assets of the Lucky Stores at January 30, 1999 and
January 31, 1998 and the store level earnings for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997, pursuant to the Asset
Purchase Agreement as described in the Notes to Financial Statements, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
May 17, 1999
F-31
LUCKY STORES
STATEMENTS OF STORE LEVEL EARNINGS
(in thousands)
(unaudited)
52 Weeks Ended 13 Weeks Ended
----------------------------------- -------------------
January 30, January 31, February 1, May 1, May 2,
1999 1998 1997 1999 1998
----------- ----------- ----------- ------- -------
Sales................... $149,562 $144,510 $150,714 $36,579 $37,904
Cost of merchandise
sold................... 110,340 108,073 111,313 26,964 28,668
-------- -------- -------- ------- -------
Gross profit............ 39,222 36,437 39,401 9,615 9,236
Store operating expense. 33,003 31,413 30,347 8,037 7,791
-------- -------- -------- ------- -------
Store level earnings.... $ 6,219 $ 5,024 $ 9,054 $ 1,578 $ 1,445
======== ======== ======== ======= =======
See accompanying notes.
F-32
LUCKY STORES
STATEMENTS OF NET ASSETS
(in thousands)
(unaudited)
January 30, January 31, May 1, May 2,
1999 1998 1999 1998
----------- ----------- ------- -------
ASSETS
------
Prepaid expenses....................... $ 226 $ 220 $ 239 $ 230
Inventories............................ 7,737 6,910 7,900 7,184
Other assets........................... 892 920 884 294
Property, Plant and Equipment:
Land................................. 2,598 2,598 2,598 2,598
Buildings............................ 7,088 7,285 7,235 7,029
Equipment, fixtures and leasehold
improvements........................ 27,651 22,787 27,771 23,218
------- ------- ------- -------
37,337 32,670 37,604 32,845
Less accumulated depreciation and
amortization........................ 18,046 15,755 18,663 16,317
------- ------- ------- -------
Property under capital leases, net of
accumulated amortization of $4,324
and $4,884 in 1998 and 1997,
respectively and $4,415 and $4,987
in 1st Qtr 1999 and 1st Qtr 1998,
respectively........................ 5,024 5,419 4,933 5,315
------- ------- ------- -------
33,170 30,384 32,897 29,551
LIABILITIES
-----------
Obligations under capital leases..... 5,775 6,030 5,708 5,968
Accrued real estate liabilities...... 304 266 331 278
------- ------- ------- -------
Net Assets ............................ $27,091 $24,088 $26,858 $23,305
======= ======= ======= =======
See accompanying notes.
F-33
LUCKY STORES
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
On May 7, 1999, Lucky Stores, Inc., American Stores Properties, Inc. and
American Food and Drug entered into an agreement ("Asset Purchase Agreement")
with Stater Bros. Holdings Inc. to sell ten stores located in California
(these stores are hereinafter referred to as the Lucky Stores). Lucky Stores,
Inc., American Stores Properties, Inc. and American Food and Drug are indirect
wholly-owned subsidiaries of American Stores Company. The ten stores do not
represent a separate legal entity, but represent the assets and operations to
be acquired as defined by the Asset Purchase Agreement. Some of the Lucky
Stores leased certain buildings and land from certain related entities under
operating lease agreements. For purposes of these statements, cost,
accumulated depreciation and depreciation expense related to these properties,
as recorded by the related entities, have been recorded as if the property was
owned by the store.
The accompanying financial statements relate solely to the 10 Lucky Stores
to be acquired by Stater Bros. Holdings Inc. and are not intended to represent
the complete financial position and results of operations of the Lucky Stores.
There are no complete financial statements issued or prepared for issuance by
store.
Amounts in cost of merchandise sold and store operating expense include some
allocated charges. However, certain allocations of indirect charges,
including, but not limited to, income tax expense, interest expense and
overhead costs incurred at the corporate, region and district levels have been
excluded. Also, the statements of store level earnings do not include any
expenses, including depreciation, related to the region and district offices.
The statements of store level earnings contains the results of those stores
that are to be acquired. The allocations of these costs are based on usage,
wages and/or sales. The allocated costs included in the accompanying
statements are not necessarily representative of the actual results that would
have resulted had the stores to be acquired been operated as a stand alone
entity. The statements of net assets differs from a complete balance sheet in
that it contains only those assets and liabilities related to the Lucky Stores
to be acquired pursuant to the Asset Purchase Agreement. Certain net accrued
real estate liabilities included in the statements of net assets will be
prorated at the date of closing and will not be assumed by Stater Bros. The
information contained in the statements has been prepared in accordance with
generally accepted accounting principles.
Summary of Significant Accounting Policies
Inventories
Inventories are stated at the lower of cost or market. The FIFO (first-in-
first-out) or average cost methods are used to determine the cost of the
inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization charged to earnings for financial statement purposes, including
amortization of property under capital leases, are computed using the
straight-line method applied to individual property items. The depreciable
lives are primarily 20 to 25 years for buildings, 3 to 10 years for equipment
and fixtures and generally 20 to 25 years for leasehold improvements and
property under capital lease, depending on the lease terms. Depreciation and
amortization for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997 was $2,733,560, $2,384,051 and $2,505,867, respectively.
Depreciation and amortization for the thirteen-week unaudited periods ended
May 1, 1999 and May 2, 1998 was $683,558 and $638,043, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-34
LUCKY STORES
NOTES TO FINANCIAL STATEMENTS--(continued)
Advertising Expense
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense amounted to $2,327,911, $2,450,346 and $2,215,329 in 1998,
1997 and 1996, respectively. Advertising expense for the thirteen-week
unaudited periods ended May 1, 1999 and May 2, 1998 was $685,383 and $733,135,
respectively.
Leases
Certain of the retail stores are leased from unrelated third parties.
Remaining initial lease terms range from 2 to 23 years plus renewal options
that may provide for additional rentals based on sales volume in excess of
specified levels.
The summary below shows the aggregate future minimum lease commitments as of
January 30, 1999.
Operating Capital
Fiscal Year Leases Leases
----------- ----------- -----------
1999.............................................. $ 1,475,260 $ 790,212
2000.............................................. 1,496,984 768,488
2001.............................................. 1,508,765 725,040
2002.............................................. 1,445,432 725,040
2003.............................................. 1,390,688 725,040
Thereafter........................................ 16,298,940 6,343,420
----------- -----------
Total minimum rental commitments.................. $23,616,069 10,077,240
===========
Less:
Amount representing interest.................... (4,113,994)
Amount representing executory costs............. (188,185)
-----------
Capital lease obligation.......................... $ 5,775,061
===========
Rental expense was $1,467,165 for fiscal 1998, $1,000,376 for fiscal 1997
and $681,133 for fiscal 1996, which includes contingent rents of $103,057 for
fiscal 1998, $135,780 for fiscal 1997 and $153,951 for fiscal 1996. Rental
expense for the thirteen-week unaudited periods ended May 1, 1999 and May 2,
1998 was $387,547 and $324,845, respectively, which includes contingent rents
of $26,139 for the period ended May 1, 1999 and $30,568 for the period ended
May 2, 1998.
Interest expense under capital leases amounted to $522,994, $544,899 and
$563,317 in 1998, 1997 and 1996, respectively. Interest expense under capital
leases for the thirteen-week unaudited periods ended May 1, 1999 and May 2,
1998 amounted to $127,087 and $132,880, respectively.
Corporate, Region and District Overhead Allocations (Unaudited)
Various administrative and operational services are provided to the Lucky
Stores which includes, but is not limited to, operational supervision, data
processing, legal assistance, employee benefit administration, human
resources, treasury, accounting, audit, tax and real estate functions. The
costs are allocated based on usage, wages and/or sales. The costs are not
necessarily indicative of costs that would be incurred on a stand alone basis.
The allocations to the Lucky Stores for fiscal 1998, 1997 and 1996 were
$2,440,102, $1,594,376 and $1,904,070, respectively. The allocations for the
unaudited thirteen-week periods ended May 1, 1999 and May 2, 1998 were
$542,826 and $584,227, respectively. As discussed in the Basis of Presentation
footnote above, none of these costs are included in the accompanying
statements of store level earnings.
F-35
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All tendered outstanding notes, executed letters of transmittal and other
related documents should be directed to the exchange agent. Questions and
requests for additional copies of this prospectus, the letter of transmittal
and other related documents should be addressed to the exchange agent as
follows:
By Mail, Overnight Courier or Hand:
IBJ Whitehall Bank & Trust Company
1 State Street
New York, New York 10004
Attention: Customer Service
By Facsimile:
(212) 858-2611
Confirm by Telephone:
(212) 858-2103
(Originals of all documents submitted by facsimile should be sent promptly
by hand, overnight courier, or registered or certified mail.)
No broker dealer or other person is authorized in connection with any offer
made hereby to give any information or to make any representations not
contained in this prospectus and, if given or made, the unauthorized
information or representations must not be relied upon as having been
authorized by us. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
hereby nor does it constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby to any person in any jurisdiction
in which it is unlawful to make such an offer or solicitation to such person.
Neither the delivery of this prospectus nor any sale made hereunder shall
under any circumstances create any implication that the information contained
herein is correct as of any time subsequent to the date hereof.
Until , 1999 (90 days from the date of this prospectus) all dealers
effecting transactions in the exchange notes, whether or not participating in
this exchange offer, may be required to deliver a prospectus.
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[LOGO OF STATER BROS.]
Stater Bros. Holdings Inc.
Offer to Exchange
its 10 3/4% Senior Notes due 2006
which have been Registered under the
Securities Act of 1933
for
Any and All of its Outstanding
10 3/4% Senior Notes due 2006
---------------
PROSPECTUS
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("DGCL") permits a
corporation to indemnify any of its directors or officers who was or is a
party or is threatened to be made a party to any third party proceeding by
reason of the fact that such person is or was a director or officer of the
corporation against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that such person's
conduct was unlawful. In a derivative action, i.e., one by or in the right of
a corporation, the corporation is permitted to indemnify any of its directors
or officers against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and
only to the extent that the court in which such action or suit was brought
shall determine upon application that such person is fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of
liability.
Pursuant to Section 102(b)(7) of the DGCL, Stater Bros.' Certificate of
Incorporation eliminates the liability of our directors to Stater Bros. or its
stockholders, except for liabilities related to breach of the duty of loyalty,
actions not in good faith, and certain other liabilities. As permitted by
Section 145 of the DGCL, Article V of Stater Bros.' Bylaws provides for the
indemnification of all directors, officers, employees and agents against
expenses actually and reasonably incurred in connection with certain stated
proceedings and under certain stated conditions.
ITEM 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
1 Purchase Agreement dated August 6, 1999 by and between Stater Bros.
and Banc of America Securities LLC.
2.1 Asset Purchase Agreement dated as of May 7, 1999, by and between
Albertson's, Inc., Stater Bros. Markets and Stater Bros.
3.1(1) Certificate of Incorporation of Stater Bros. Holdings Inc.
3.2(1) Bylaws of Stater Bros. Holdings Inc.
4.2(4) First Supplemental Indenture between Stater Bros. and IBJ Schroder
Bank & Trust Company, as Trustee, for $165,000,000 11% Senior
Notes due 2001, dated as of July 22, 1997.
4.6 Indenture dated as of August 6, 1999 between Stater Bros. and IBJ
Whitehall Bank & Trust Company.
4.7 Registration Rights Agreement dated as of August 6, 1999, by and
between Stater Bros. and Banc of America Securities LLC.
4.8 Second Supplemental Indenture dated as of July 16, 1999 between
Stater Bros. and IBJ Whitehall Bank & Trust Company, for the
securities issued under the indenture dated as of March 8, 1994,
as amended by the First Supplemental Indenture dated as of July
22, 1997.
5(5) Opinion of Gibson, Dunn & Crutcher LLP.
10.1(1) Reclassification Agreement dated September 3, 1993, by and among
Stater Bros., Craig and La Cadena.
10.2(1) Amendment to Reclassification Agreement, dated January 12, 1994, by
and among Stater Bros., Craig and La Cadena.
10.3(1) Agreement of Stockholders dated May 10, 1989, by and among Stater
Bros., Craig and La Cadena.
II-1
Exhibit
Number Description of Exhibit
------- ----------------------
10.4(1) Amendment to Agreement of Stockholders dated September 3, 1993, by
and among Stater Bros., Craig, Craig Management, Inc. ("CMI") and
La Cadena.
10.5(1) Option Agreement dated September 3, 1993, by and between Stater
Bros. and Craig.
10.6(1) Amendment to Option Agreement dated January 12, 1994, by and
between Stater Bros. and Craig.
10.7(1) Consulting Agreement dated September 3, 1993, by and between
Stater Bros., Craig and CMI.
10.8(1) Letter Agreement regarding Consulting Agreement, dated March 8,
1994, by and between Stater Bros., Craig and CMI.
10.9(1) Second Amended and Restated Stock Agreement dated January 12,
1994, by and among Stater Bros., Craig, CMI, La Cadena and James
J. Cotter.
10.10(1) Security Agreement dated March 8, 1994, by and between Stater
Bros. and Craig.
10.12(1) Credit Agreement dated March 8, 1994, by and between Stater Bros.
Markets and Bank of America Trust and Savings Association.
10.12(a)(2) Amendment dated June 23, 1995 to the Credit Agreement dated March
8, 1994, by and between Stater Bros. Markets and Bank of America
Trust and Savings Association.
10.12(b)(3) Amendment dated July 22, 1996 to the Credit Agreement dated March
8, 1994, by and between Stater Bros. Markets and Bank of America
Trust and Savings Association.
10.12(c) Credit Agreement dated as of August 6, 1999 by and among Stater
Bros. Markets, Stater Bros., and Bank of America, N.A.
10.13(1) Continuing Guaranty dated March 8, 1994, of Stater Bros.
Development, Inc. in favor of Bank of America Trust and Savings
Association.
10.15(1) Subordination Agreement dated March 8, 1994, by and among Stater
Bros., Stater Bros. Markets and Bank of America Trust and Savings
Association.
10.16(1) Amended and Restated Sublease Agreement dated June 1, 1983,
between Wren Leasing Corp., as Lessor, and Stater Bros. Markets,
as Lessee.
10.17(1) Preferred Stock Agreement dated March 22, 1983, between Stater
Bros. Markets and Petrolane Incorporated.
10.18(1) Escrow Agreement dated September 19, 1985, by and among Stater
Bros. Markets, Petrolane Incorporated and First Interstate Bank
of California.
10.19 Dealer Manager Agreement dated as of July 1, 1999 by and between
Stater Bros. and Banc of America Securities LLC.
12 Computation of Ratio of Earnings to Fixed Charges.
21(1) Subsidiaries of Stater Bros.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
23.4(5) Consent of Gibson, Dunn & Crutcher (included in Exhibit 5).
24 Powers of Attorney (included on signature pages of this
Registration Statement on Form S-4).
25 Form T-1 Statement of Eligibility and Qualification of IBJ
Whitehall Bank & Trust Company, as Trustee.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
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(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement S-4 No. 33-77296 dated July 21, 1994.
II-2
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registrant's Quarterly Report on Form 10-Q dated June 25, 1995 and
filed on August 8, 1995.
(3) Previously filed with the Securities and Exchange Commission as exhibit
10.12(b) with the Annual Report on Form 10-K for the fiscal year ended
September 29, 1996.
(4) Previously filed with the Securities and Exchange Commission as exhibits
to the Registration Statement S-4, No. 333-34113 dated October 17, 1997.
(5) To be filed by amendment.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted because of the
absence of conditions under which they are required or because the information
required is set forth in the financial statements or the notes thereto.
ITEM 22. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors officers or persons
controlling the registrant pursuant to the foregoing provisions, the
registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, Stater Bros. Holdings
Inc. has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Colton, California,
on August 19, 1999.
Stater Bros. Holdings Inc.
/s/ Jack H. Brown
By: ______________________________
Jack H. Brown
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Bruce D. Varner as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the foregoing, as fully to all intents and purposes as he might or could
do in person, lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jack H. Brown Chairman of the Board, August 19, 1999
____________________________________ President, Chief Executive
Jack H. Brown Officer and Director
(Principal executive
officer)
/s/ Thomas W. Field, Jr. Vice Chairman of the Board August 19, 1999
____________________________________ and Director
Thomas W. Field, Jr.
/s/ Bruce D. Varner Secretary and Director August 19, 1999
____________________________________
Bruce D. Varner
/s/ Dennis N. Beal Senior Vice President-- August 19, 1999
____________________________________ Finance and Chief Financial
Dennis N. Beal Officer (Principal
financial and accounting
officer)
II-4
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
1 Purchase Agreement dated August 6, 1999 by and between Stater Bros.
and Banc of America Securities LLC.
2.1 Asset Purchase Agreement dated as of May 7, 1999, by and between
Albertson's, Inc., Stater Bros. Markets and Stater Bros.
4.6 Indenture dated as of August 6, 1999 between Stater Bros. and IBJ
Whitehall Bank & Trust Company.
4.7 Registration Rights Agreement dated as of August 6, 1999, by and
between Stater Bros. and Banc of America Securities LLC.
4.8 Second Supplemental Indenture dated as of July 16, 1999 between
Stater Bros. and IBJ Whitehall Bank & Trust Company, for the
securities issued under the indenture dated as of March 8, 1994 as
amended under the First Supplemental Indenture dated as of July 22,
1999.
5 (1) Opinion of Gibson, Dunn & Crutcher LLP.
10.12(c) Credit Agreement dated as of August 6, 1999 by and among Stater Bros.
Markets, Stater Bros., and Bank of America, N.A.
10.19 Dealer Manager Agreement dated as of July 1, 1999 by and between
Stater Bros. and Banc of America Securities LLC.
12 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
23.4(1) Consent of Gibson, Dunn & Crutcher (included in Exhibit 5).
24 Powers of Attorney (included on signature pages of this Registration
Statement on Form S-4).
25 Form T-1 Statement of Eligibility and Qualification of IBJ Whitehall
Bank & Trust Company, as Trustee.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
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(1) To be filed by amedment.