1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21700 Barton Road
Colton, California 92324
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
--------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
As of April 28, 2000, there were issued and outstanding 50,000
shares of the registrant's Class A Common Stock.
================================================================================
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STATER BROS. HOLDINGS INC.
MARCH 26, 2000
INDEX
PAGE
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PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 26, 1999
AND MARCH 26, 2000 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 28, 1999 AND MARCH 26, 2000 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
MARCH 28, 1999 AND MARCH 26, 2000 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 28, 1999 AND MARCH 26, 2000 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
SEPT. 26, MAR. 26,
1999 2000
-------- --------
Current assets
Cash and cash equivalents ........................ $ 93,352 $ 35,695
Receivables ...................................... 28,296 26,910
Income tax receivable ............................ 5,942 11,485
Inventories ...................................... 155,361 171,375
Prepaid expenses ................................. 5,926 10,357
Deferred income taxes ............................ 3,523 3,523
Properties held for sale ......................... 3,886 3,875
-------- --------
Total current assets ................................ 296,286 263,220
Investment in unconsolidated affiliate .............. 9,599 10,079
Property and equipment
Land ............................................. 44,941 46,834
Buildings and improvements ....................... 160,406 168,418
Store fixtures and equipment ..................... 150,027 168,824
Property subject to capital leases ............... 25,261 25,261
-------- --------
380,635 409,337
Less accumulated depreciation and amortization ... 120,906 133,188
-------- --------
259,729 276,149
Deferred income taxes ............................... 4,297 4,297
Deferred debt issuance costs, net ................... 16,774 16,216
Lease guarantee escrow .............................. 11,280 12,661
Other assets ........................................ 5,952 6,745
-------- --------
Total assets ........................................ $603,917 $589,367
======== ========
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
SEPT. 26, MAR. 26,
1999 2000
--------- ---------
Current liabilities
Accounts payable .............................. $ 97,169 $ 92,289
Accrued payroll and related expenses .......... 35,757 35,384
Other accrued liabilities ..................... 30,501 31,375
Current portion of capital lease obligations .. 1,944 1,954
--------- ---------
Total current liabilities ........................ 165,371 161,002
Long-term debt, less current portion ............. 455,048 455,048
Capital lease obligations, less current portion .. 15,625 14,652
Long-term portion of self-insurance and other
reserves ....................................... 7,450 7,450
Other long-term liabilities ...................... 3,510 3,403
--------- ---------
Total liabilities ................................ 647,004 641,555
Stockholders' equity (deficit)
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 ..... 1 1
Additional paid-in capital .................... 12,715 12,715
Retained earnings (deficit) ................... (55,803) (64,904)
--------- ---------
Total stockholders' equity (deficit) ............. (43,087) (52,188)
--------- ---------
Total liabilities and stockholders' equity
(deficit) ...................................... $ 603,917 $ 589,367
========= =========
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
26 Weeks Ended
------------------------------
MAR. 28, MAR. 26,
1999 2000
----------- -----------
Sales ............................................. $ 883,224 $ 1,204,454
Cost of goods sold ................................ 676,012 911,941
----------- -----------
Gross profit ...................................... 207,212 292,513
Operating expenses:
Selling, general and administrative expenses ... 176,431 266,067
Depreciation and amortization .................. 7,869 12,331
Acquisition integration expenses ............... -- 4,594
----------- -----------
Total operating expenses .......................... 184,300 282,992
----------- -----------
Operating profit .................................. 22,912 9,521
Interest income ................................... 1,654 1,705
Interest expense .................................. (15,119) (27,130)
Equity in earnings from unconsolidated affiliate .. 865 480
Other income (loss) - net ......................... (274) (1)
----------- -----------
Income (loss) before income taxes (benefit) ....... 10,038 (15,425)
Income taxes (benefit) ............................ 4,015 (6,324)
----------- -----------
Net income (loss) ................................. $ 6,023 $ (9,101)
=========== ===========
Earnings (loss) per share ......................... $ 120.46 $ (182.02)
=========== ===========
Average common shares outstanding ................. 50,000 50,000
=========== ===========
Shares outstanding at end of period ............... 50,000 50,000
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
13 Weeks Ended
--------------------------
MAR. 28, MAR. 26,
1999 2000
--------- ---------
Sales................................................. $ 441,802 $ 607,286
Cost of goods sold.................................... 336,991 470,595
--------- ---------
Gross profit.......................................... 104,811 136,691
Operating expenses:
Selling, general and administrative expenses....... 87,760 132,504
Depreciation and amortization...................... 3,966 6,317
Acquisition integration expenses................... -- 3,926
--------- ---------
Total operating expenses.............................. 91,726 142,747
--------- ---------
Operating profit (loss)............................... 13,085 (6,056)
Interest income....................................... 879 710
Interest expense...................................... (7,588) (13,559)
Equity in earnings from unconsolidated affiliate...... 67 341
Other income (loss) - net............................. (216) --
--------- ---------
Income (loss) before income taxes (benefit)........... 6,227 (18,564)
Income taxes (benefit)................................ 2,491 (7,611)
--------- ---------
Net income (loss)..................................... $ 3,736 $ (10,953)
========= =========
Earnings (loss) per share............................. $ 74.72 $ (219.06)
========= =========
Average common shares outstanding..................... 50,000 50,000
========= =========
Shares outstanding at end of period................... 50,000 50,000
========= =========
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
26 Weeks Ended
------------------------
MAR. 28, MAR. 26,
1999 2000
-------- --------
OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 6,023 $ (9,101)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................................... 7,869 12,331
Provision for deferred income taxes.................................... (1) --
Loss on disposals of assets............................................ 274 2
Net undistributed (gain) in investment in unconsolidated affiliate..... (865) (480)
Changes in operating assets and liabilities:
(Increase) decrease in receivables.................................... 1,151 (4,157)
(Increase) decrease in inventories.................................... 5,041 (16,014)
(Increase) decrease in prepaid expenses............................... (2,188) (4,444)
(Increase) decrease in other assets................................... (737) (1,616)
Increase (decrease) in accounts payable............................... 3,280 (4,880)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves................................... 4,187 394
-------- --------
Net cash provided by (used in) operating activities....................... 24,034 (27,965)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (18,245) (28,729)
Proceeds from sale of property and equipment and properties
held for sale............................................................ 2,918 --
-------- --------
Net cash (used in) investing activities................................... (15,327) (28,729)
-------- --------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations........................... (641) (963)
-------- --------
Net cash (used in) financing activities................................... (641) (963)
-------- --------
Net increase (decrease) in cash and cash equivalents...................... 8,066 (57,657)
Cash and cash equivalents at beginning of period.......................... 57,281 93,352
-------- --------
Cash and cash equivalents at end of period................................ $ 65,347 $ 35,695
======== ========
Interest paid............................................................. $ 13,814 $ 27,055
Income taxes paid......................................................... $ 2,600 $ --
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 26, 2000
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of September 26, 1999 and March 26, 2000 and
the results of its operations and cash flows for the twenty-six weeks ended
March 28, 1999 and March 26, 2000. 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 twenty-six weeks ended March 26, 2000 are not
necessarily indicative of the results of operations for a full year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the twenty-six weeks ended March 28,
1999 and March 26, 2000 consists of the following:
26 Weeks Ended
--------------------------------
Mar. 28, 1999 Mar. 26, 2000
------------- -------------
(In thousands)
Federal income taxes (benefit) $ 3,413 $(4,960)
State income taxes (benefit) 602 (1,364)
------- -------
$ 4,015 $(6,324)
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NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 50% of Santee Dairies LLC. Through its wholly owned
subsidiary, Santee Dairies, Inc. ("Santee"), it operates a fluid milk processing
plant located in City of Industry, California, and the Company is not the
controlling stockholder. Accordingly, the Company accounts for its investment in
Santee Dairies LLC using the equity method of accounting and recognized income
of $865,000 and $480,000 for the twenty-six weeks ended March 28, 1999 and March
26, 2000, respectively. The Company is a significant customer of Santee which
supplies the Company with a substantial portion of its fluid milk and dairy
products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
26 Weeks Ended
---------------------------------
Mar. 28, 1999 Mar. 26, 2000
------------- -------------
(In thousands)
Current assets $ 17,639 $ 14,614
Non-current assets 109,222 103,182
Current liabilities 27,744 22,404
Non-current liabilities 80,244 75,356
Shareholder's equity 18,873 20,036
Sales 92,954 89,272
Gross profit 7,872 13,976
Net income $ 1,932 $ 838
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 26, 2000
NOTE 4 - COVENANT NOT TO COMPETE
On March 8, 1994, the Company entered into a $5.0 million prepaid five
year covenant not to compete which was included in a Consulting Agreement with
Craig Corporation (previously, a shareholder of the Company) and was amortized
to earnings over the five year term of the covenant not to compete. The covenant
not to compete terminated in March 1999.
NOTE 5 - 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 6 - PRO FORMA SUMMARY FINANCIAL INFORMATION
On May 7, 1999, the Company entered into an agreement with Albertson's
to acquire 43 supermarkets and one future store site and the supermarkets were
acquired in August 1999. The stores were formerly operated by Albertson's or
Lucky Stores and were divested in connection with the merger of Albertson's and
American Stores Company, the parent of Lucky Stores.
The following table provides unaudited pro forma financial data for the
Company reflecting the completion of the Acquisition as if it occurred September
28, 1998. These unaudited pro forma results have been prepared for comparative
purposes only and include certain pro forma adjustments. Such pro forma amounts
are not necessarily indicative of what actual results of operations might have
been or will be in the future. Pro forma results of operations for the prior
period exclude a non-recurring extraordinary loss of approximately $17.3 million
($28.5 million less tax effect of $11.2 million) related to the early
extinguishment of debt.
13 Weeks Ended 26 Weeks Ended
------------------------------ ------------------------------
Mar. 28, Mar. 26, Mar. 28, Mar. 26,
1999 2000 1999 2000
----------- ----------- ----------- -----------
(In thousands, excepts per share amounts)
(Pro forma) (Unaudited) (Pro forma) (Unaudited)
Sales $ 610,853 $ 607,286 $ 1,215,667 $ 1,204,454
Net income (loss) before
extraordinary loss $ 2,058 $ (10,953) $ 1,461 $ (9,101)
Earnings (loss) per
common share $ 41.16 $ (219.06) $ 29.22 $ (182.02)
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STATER BROS. HOLDINGS INC.
MARCH 26, 2000
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the
Company to La Cadena Investments ("La Cadena"), reclassified the
Company's outstanding equity, provided for certain cash payments and
distributions to Craig Corporation ("Craig"), previously a shareholder
of the Company, and provided the Company with an option to acquire
Craig's remaining equity in the Company. The Recapitalization was funded
through an offering of $165.0 million of 11% Senior Notes due 2001 (the
"11% Notes"). Substantially all of the 11% Notes ($160.0 million) were
redeemed in August 1999.
Effective March 8, 1996, pursuant to options available to the Company,
the Company exercised its right to convert all of its outstanding shares
of Common Stock (previously held by Craig) into 693,650 shares of its
Series B Preferred Stock. The Series B Preferred Stock had a redemption
value of approximately $69.4 million and paid dividends at the rate of
10.5% per annum. In August 1997, the Company redeemed all of the
outstanding shares of its Series B Preferred Stock for $69.4 million
plus accrued and unpaid dividends. The Series B Preferred Stock
redemption was funded through an offering of $100 million of 9% Senior
Subordinated Notes due 2004 (the "9% Notes"). The 9% Notes were redeemed
in August 1999.
OWNERSHIP OF THE COMPANY
Effective August 1997, La Cadena became the sole shareholder of the
Company and holds all of the shares of the Company's Class A Common
Stock which are entitled to 1.1 votes per share. La Cadena Investments
is a California General Partnership whose partners include Jack H.
Brown, Chairman of the Board, President and Chief Executive Officer of
the Company and two other members of senior management of the Company.
Jack H. Brown has a majority interest in La Cadena and is the managing
general partner with the power to vote the shares of the Company held by
La Cadena.
ACQUISITION
Comparisons between fiscal 2000 and fiscal 1999 for the second quarter
results and year to date results are difficult due to the acquisition of
43 supermarkets and one future site in August 1999, expenses incurred to
integrate the acquired supermarkets into the Company's retail operating
and distribution systems and the issuance of $450.0 million of 10.75%
Notes and related redemptions, together with early redemption premiums,
on all of the 9% Notes and substantially all the 11% Notes in August
1999. On May 7, 1999, the Company entered into an agreement with
Albertson's to acquire 43 supermarkets and one future store site. The
stores were formerly operated by Albertson's or Lucky Stores and were
divested in connection with the merger of Albertson's and American
Stores Company, the parent of Lucky Stores. The supermarkets were
acquired sequentially beginning August 9, 1999, with 8 supermarkets
acquired during the week ended August 15, 1999, 15 supermarkets
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
were acquired during the week ended August 22, 1999, an additional 15
supermarkets were acquired during the week ended August 29, 1999 and the
remaining 5 supermarkets were acquired by September 1, 1999. The
purchase price for the property, plant, equipment and inventories of 43
supermarkets and one future store site was approximately $134.0 million
plus capital lease obligations assumed of $13.3 million and
approximately $2.2 million of capitalized costs related to the transfer
of ownership of the supermarkets. The acquisition was accounted for
using the purchase method of accounting and the results of operations of
the 43 supermarkets are included in the Company's consolidated results
of operations from the acquisition date of each supermarket.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and twenty-six weeks
ended March 26, 2000 and March 28, 1999.
Thirteen Weeks Twenty-Six Weeks
------------------ -------------------
2000 1999 2000 1999
------ ------ ------ ------
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 22.51 23.72 24.29 23.46
Operating expenses:
Selling, general and
administrative expense 21.82 19.86 22.09 19.98
Depreciation and amortization 1.04 .90 1.02 .89
Acquisition integration expenses .65 -- .39 --
Operating profit (loss) (1.00) 2.96 .79 2.59
Interest income .12 .20 .14 .19
Interest expense (2.23) (1.72) (2.25) (1.71)
Equity in (loss) from
unconsolidated affiliate .06 .02 .04 .10
Other income (loss) - (net) -- (.05) -- (.03)
Net income (loss) before
income taxes (benefit) (3.05)% 1.41% (1.28)% 1.14%
Total sales for the thirteen weeks ended March 26, 2000, the second
quarter of fiscal 2000, increased 37.5% and amounted to $607.3 million
compared to $441.8 million for the same period in the prior year. Total
sales for the twenty-six weeks ended March 26, 2000, increased 36.4% and
amounted to $1.204 billion compared to $883.2 million for the same
period in the prior year. The increase in total sales in the second
quarter of fiscal 2000 and fiscal year to date of 2000 was due primarily
to the acquisition of 43 supermarkets in August 1999, from Albertson's.
The 43 acquired supermarkets were opened in less than two days after
their respective acquisition dates as fully integrated Stater Bros.
Markets. The Company acquired 8 supermarkets during the week ended
August 15, 1999, 15 supermarkets during the week ended August 22, 1999,
15 supermarkets during the week ended August 29, 1999 and acquired the
remaining 5 supermarkets during the week ended September 5, 1999.
Results of operations of the 43 supermarkets have been included in the
Company's consolidated results of operations from the acquisition date
of each supermarket. Like store sales increased 1.7% (before erosion of
like store sales of 0.7% to newly acquired stores) for the thirteen week
period ended March 26, 2000. Like store sales increased 1.8% (before
erosion of like store sales of 0.7% to newly acquired stores) for the
twenty-six week period ended March 26, 2000. The like store sales
increases for the second quarter and
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year to date of fiscal 2000 were due to favorable customer responses to
the Company's aggressive marketing plan emphasizing the Company's high
quality and expanded product selections in the produce and other
perishable departments. The Company operated 155 and 112 supermarkets at
March 26, 2000 and March 28, 1999, respectively.
Gross profit for the thirteen weeks ended March 26, 2000, amounted to
$136.7 million or 22.51% of sales compared to $104.8 million or 23.72%
of sales in the same period of the prior year. The decrease in gross
profit, as a percentage of sales, in the second quarter of 2000 was due
to aggressive marketing which was implemented in conjunction with the
Company's grand reopening of service meat and expanded produce
departments in most of the newly acquired supermarkets. By March 30,
2000, service meat departments had been installed in all of the newly
acquired supermarkets. As a result of aggressive grand reopenings, the
Company experienced higher than anticipated product losses in the
service meat, produce and service deli departments. Gross profit for the
second quarter of fiscal 2000 did not include an incremental price
increase in the cost of fluid dairy products purchased from Santee,
however, gross profit were reduced by approximately $2.7 million for the
incremental price increases during the second quarter of 1999.
Gross profit for the twenty-six weeks ended March 26, 2000, amounted to
$292.5 million or 24.29% of sales compared to $207.2 million or 23.46%
of sales in the same period of the prior year. The increase in the
fiscal year to date of 2000 gross profit, as a percent of sales, was due
to several factors including the introduction of higher gross margin
products achieved through the Company's general merchandise expansion
program, which were partially offset by reductions in the second quarter
in gross profits, as a percentage of sales, from the aggressive grand
reopening of service meat and expanded produce departments in the newly
acquired stores. Gross profit for the fiscal year to date of 2000
included an incremental price increase in the cost of fluid dairy
products purchased from Santee of approximately $48,000 compared to
approximately $5.8 million for the fiscal year to date of 1999. Santee
terminated the incremental pricing charge to the Company on October 1,
1999.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and acquisition integration expenses. For
the thirteen weeks ended March 26, 2000, selling, general and
administrative expenses amounted to $132.5 million or 21.82% of sales
compared to $87.8 million or 19.86% of sales for the thirteen weeks
ended March 28, 1999. For the twenty-six weeks ended March 26, 2000,
selling, general and administrative expenses amounted to $266.1 million
or 22.09% of sales compared to $176.4 million or 19.98% of sales for the
twenty-six weeks ended March 28, 1999. The increase in selling, general
and administrative expenses, as a percentage of sales, was due primarily
to higher than anticipated labor and advertising expenses. The Company
believes it has implemented corrective actions that should reduce both
labor and advertising expenses in the near future.
Depreciation and amortization expenses amounted to $6.3 million and
$12.3 million for the second quarter and year to date periods ended
March 26, 2000, respectively. Depreciation and amortization expenses
amounted to $4.0 million and $7.9 million for the quarter and year to
date periods of the prior year. Depreciation expense in fiscal 1999
included amortization of $438,000 from a five-year prepaid covenant not
to compete, which terminated in March 1999. The increase in depreciation
and amortization expense in fiscal 2000 was primarily due to the
acquisition of the 43 supermarkets in August 1999.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisition integration expenses amounted to $3.9 million and $4.6
million for the quarter and fiscal year to date ended March 26, 2000 and
were related to the acquisition of the 43 supermarkets. Acquisition
integration expenses consisted of salaries and wages and non-recurring
advertising expenses incurred during the integration of the supermarkets
and the grand re-openings of service meat departments in most of the
acquired supermarkets. All acquired stores had service meat departments
installed by March 30, 2000.
Operating loss for the second quarter of 2000 amounted to $6.1 million
or 1.00% of sales compared to an operating profit of $13.1 million or
2.96% of sales for the second quarter of 1999. Operating profit for the
fiscal year to date of 2000 amounted to $9.5 million or 0.79% of sales
compared to an operating profit of $22.9 million or 2.59% of sales for
the fiscal year to date of 1999.
Interest expense amounted to $13.6 million for the second quarter of
2000 compared to $7.6 million for the second quarter of 1999. For the
fiscal year to date of 2000 and 1999, interest expense amounted to $27.1
million and $15.1 million, respectively. The increase in interest
expense was due to the issuance of $450.0 million of 10.75% Senior Notes
due 2006 in August 1999 related to the acquisition of the 43
supermarkets and the redemption in August 1999 of all the 9% Notes and
substantially all ($5.1 million remain outstanding) of the 11% Notes.
The Company's equity in earnings from unconsolidated affiliate, amounted
to $341,000 for the second quarter of fiscal 2000 compared $67,000 in
the second quarter of the prior year. For the fiscal year to date
periods of 2000 and 1999, the Company's equity in earnings from
unconsolidated affiliate, amounted to $480,000 and $865,000,
respectively. The decrease in earnings is primarily due to the
termination of incremental prices paid by the two owners of Santee
Dairies LLC (Hughes and Stater Bros. Markets) in the fiscal year to date
of 2000 compared to incremental prices paid by the owners in the fiscal
year to date of 1999 of approximately $8.1 million (pre-tax). The
incremental prices paid to Santee by the owners terminated in October
1999. The incremental prices in the cost of products purchased from
Santee by the Company is included in the Company's cost of goods sold
and amounted to approximately $48,000 in the fiscal year to date for
2000 compared to approximately $2.7 million and $5.8 million for the
second quarter and fiscal year to date of 1999, respectively.
Results before income taxes amounted to a loss of $18.6 million and
income of $6.2 million for the second quarter of 2000 and 1999,
respectively. Results before income taxes amounted to a loss of $15.4
million and income of $10.0 million for the twenty-six weeks year to
date periods of 2000 and 1999, respectively.
Net income for the second quarter amounted to a loss of $11.0 million
and income of $3.7 million for 2000 and 1999, respectively. Net income
for the fiscal year to date periods amounted to a loss of $9.1 million
and income of $6.0 million for 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements
through funds provided by operations and through borrowings from
short-term revolving credit facilities. The Company's credit agreement
became effective August 6, 1999 and expires in August 2002, and consists
of a revolving loan facility for working capital of $50.0 million, all
of which was available at March 26, 2000 and a letter of credit
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
facility with a maximum availability of $25.0 million, of which $15.0
million was available at March 26, 2000. The letter of credit facility
is maintained pursuant to the Company's workers' compensation and
general liability self-insurance requirements.
Working capital amounted to $102.2 million at March 26, 2000 and $130.9
million at September 26, 1999, and the Company's current ratios were
1.63:1, and 1.79:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
The net cash used in operating activities in the twenty-six weeks ended
March 26, 2000 amounted to $28.0 million compared to net cash provided
by operating activities of $24.0 million for the twenty-six weeks ended
March 28, 1999. Fluctuations in net cash provided by or used in
operating activities are not unusual in the industry. Cash used in
operating activities in fiscal 2000 of $28.0 million consisted of
increases in inventories in both the warehouses and the supermarkets of
$16.0 million, an increase in prepaid expenses of $4.4 million, an
increase in accounts receivable of $4.2 million, and a decrease in
accounts payable of $4.9 million.
Net cash used in investing activities for the twenty-six weeks ended
March 26, 2000, amounted to $28.7 million, compared to $15.3 million for
the twenty-six weeks ended March 28, 1999. The difference in net cash
used in investing activities between the comparable periods is due to
the Company's capital expenditures during such periods, net of proceeds
from asset dispositions. Capital expenditures amounted to $28.7 million
in the fiscal year to date of 2000 compared to $18.2 million in the
fiscal year to date of 1999. During the fiscal year to date of 2000,
capital expenditures of $19.0 million were incurred to fund projects
related to the acquisition of the 43 supermarkets and related warehouse
expansions. Additional capital expenditures were used to acquire land
for a store site, fund the remaining Year 2000 projects as well as to
fund normal maintenance capital expenditures.
Net cash used by financing activities amounted to $963,000 and $641,000
for the twenty-six weeks ended March 26, 2000, and March 28, 1999,
respectively, and consisted of payments on the Company's capitalized
lease obligations.
THE CREDIT FACILITIES
Stater Bros.' principal operating subsidiary, Stater Bros. Markets,
signed a new credit facility with Bank of America N.A. on August 6,
1999. The credit facility provides for (i) a $50.0 million three-year
revolving loan facility and (ii) a $25.0 million three-year letter of
credit facility. Borrowings under the revolving loan facility are
unsecured and expected to be used for certain working capital and
corporate purposes. Letters of credit under the letter of credit
facility are expected to be used to support the purchase of inventory,
obligations incurred in connection with the construction of stores, and
workmen's compensation insurance obligations. The availability of the
loans and letters of credit are subject to certain sub-limits and other
borrowing restrictions.
Indebtedness of Stater Bros. Markets under the credit facility is
guaranteed by Stater Bros. Development, Inc., a subsidiary of the
Company, and any subsidiaries that Stater Bros. Markets or Stater Bros.
Development, Inc. acquires or forms after the date of the new credit
facility.
Loans under the credit facility bear interest at a rate based upon
either (i) the "Base Rate" (defined as the higher of (a) the rate of
interest publicly announced by Bank of America as its "reference rate"
and (b) the federal funds effective rate from time to
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
time plus 0.50%), plus 1.00%, or (ii) the "Offshore Rate" (defined as
the rate (adjusted for statutory reserve requirements for eurocurrency
liabilities) at which eurodollar deposits for one, two, three or six
months (as selected by Stater Bros. Markets) are offered to Bank of
America in the inter-bank eurodollar market), plus 2.25%. The loans
under the revolving loan facility must be repaid for a period of ten
consecutive days semi-annually.
The credit facility requires Stater Bros. Markets to meet certain
financial tests, including minimum net worth and minimum EBITDA tests.
The credit facility contains covenants which, among other things, will
limit indebtedness, liens, guarantee obligations, mergers,
consolidations, liquidations and dissolutions, asset sales, leases,
investments, loans and advances, transactions with affiliates, sale and
leasebacks, other matters customarily restricted in such agreements and
modifications to the holding company status of Stater Bros.
The credit facility also contains covenants that apply to Stater Bros.
Holdings Inc., and Stater Bros. Holdings Inc. is a party to the new
credit facility for purposes of these covenants. These covenants, among
other things, limit dividends and other payments in respect of Stater
Bros. Holdings Inc.'s capital stock, prepayments and redemptions of the
exchange notes and other debt, and limit indebtedness, investments,
loans and advances by Stater Bros. Holdings Inc. The credit facility
requires Stater Bros. Holdings Inc. and Stater Bros. Markets to comply
with certain covenants intended to ensure that their legal identities
remain separate.
The credit facility contains customary events of default, including
payment defaults; material inaccuracies in representations and
warranties; covenant defaults; cross-defaults to certain other
indebtedness; certain bankruptcy events; certain ERISA events; judgment;
defaults; invalidity of any guaranty; failure of Jack H. Brown to be
Chairman of the Board and Chief Executive Officer of Stater Bros.
Markets; and change of control.
As of March 26, 2000, for purposes of the credit facility with Bank of
America, Stater Bros. Markets was not in compliance with all of the
restrictive covenants. The Company exceeded the minimum net worth
covenant by approximately $101.0 million, but did not meet the minimum
EBITDA (as defined) covenant test on the first measurement period which
began in the quarter ending March 26, 2000, and required an annualized
minimum EBITDA of $75.0 million. The Company obtained a waiver from Bank
of America for the minimum EBITDA covenant for the quarter ending March
26, 2000.
The Company is also subject to certain covenants associated with its 11%
Senior Notes due 2001 and its 10.75% Senior Notes due 2006. As of March
26, 2000, the Company was in compliance with all such covenants.
However, there can be no assurance that the Company will be able to
achieve the expected operating results or implement the capital
expenditure strategy upon which future compliance with such covenants is
based.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1999, with the United
Food and Commercial Workers Union. The Company's collective bargaining
agreement with the International Brotherhood of Teamsters was renewed in
1998 and expires in September 2002. Management believes it has good
relations with its employees.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
The Company successfully achieved compliance with the Year 2000
requirements and Year 2000 related issues had no material adverse effect
on the Company's results of operations, liquidity or financial
condition. However, no assurance can be given that unforeseen problems
may not occur in the future that may have material adverse effect on the
Company's results of operations, liquidity or financial condition.
The Company's costs required to achieve Year 2000 compliance such as
replace or modify Information Systems, including scheduled replacements
of in-store Point of Sale equipment, was approximately $8.5 million, of
which $7.0 million was capitalized and $1.5 million was expensed.
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the
impact of inflation on the operations of the Company has been moderate.
As inflation has increased expenses, the Company has recovered, to the
extent permitted by competition, the increase in expenses by increasing
prices over time. However, the economic and competitive environment in
Southern California continues to challenge the Company to become more
cost efficient as its ability to recover increases in expenses through
price increases is diminished. The future results of operations of the
Company will depend upon the ability of the Company to adapt to the
current economic environment as well as the current competitive
conditions.
The Company conducts business in one industry segment, the operation of
retail food supermarkets, which offer for sale to the public most
merchandise typically found in supermarkets. The supermarket industry is
highly competitive and is characterized by low profit margins. The
Company's primary competitors include Vons, Albertson's, Ralphs and a
number of independent supermarket operators. Competitive factors
typically include the price, quality and selection of products offered
for sale, customer service, and the convenience and location of retail
facilities. The Company monitors competitive activity and Senior
Management regularly reviews the Company's marketing and business
strategy and periodically adjusts them to adapt to changes in the
Company's primary trading area.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information contained in
the Company's filings with the Securities and Exchange Commission (as
well as information included in oral statements or other written
statements made or to be made by the Company) includes statements that
are forward-looking, such as statements relating to plans for future
activities. Such forward-looking information involves important risks
and uncertainties that could significantly affect results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, those relating
to domestic economic conditions, seasonal and weather fluctuations,
expansion and other activities of competitors, changes in federal or
state laws and the administration of such laws and the general condition
of the economy.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
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STATER BROS. HOLDINGS INC.
MARCH 26, 2000
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in the
ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending legal
actions and claims will not have a material adverse effect on the
Company's consolidated financial position or its results of operations.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Form 10-K for the fiscal
year ended September 26, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During May 2000, Stater Bros. Holdings Inc. purchased $10.0 million
principal amount of its 10.75% Senior Notes due 2006 in the open market
for the aggregate purchase price of $8.0 million plus accrued interest.
The Company may, in the future, make additional purchases, although
there can be no assurance that the Company will do so.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
EXHIBIT NO. DESCRIPTION
----------- -----------
11 Calculation of Earnings Per Common Share.
27 Financial Data Schedule
Copies of Exhibits listed herein can be obtained by writing and
requesting such Exhibits from: Corporate Secretary, P. O. Box 150,
Colton, California 92324.
(b) Reports on Form 8-K
None
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STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 9, 2000 /s/ Jack H. Brown
------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: May 9, 2000 /s/ Phillip J. Smith
------------------------------------
Phillip J. Smith
Vice President and Controller
(Chief Accounting Officer)
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