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 25, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21700 Barton Road
Colton, California 92324
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO.
--- ---
As of April 26, 2001, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock.
2
STATER BROS. HOLDINGS INC.
MARCH 25, 2001
INDEX
PAGE
----
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 24, 2000
AND MARCH 25, 2001 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 26, 2000 AND MARCH 25, 2001 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
MARCH 26, 2000 AND MARCH 25, 2001 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED
MARCH 26, 2000 AND MARCH 25, 2001 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
SEPT. 24, MAR. 25,
2000 2001
--------- --------
Current assets
Cash and cash equivalents ....................... $ 62,631 $ 66,119
Lease guarantee escrow .......................... 13,180 --
Receivables ..................................... 28,181 31,288
Income tax receivables .......................... 263 --
Inventories ..................................... 165,332 163,741
Prepaid expenses ................................ 5,337 8,982
Deferred income taxes ........................... 10,776 10,776
Properties held for sale ........................ 3,863 3,852
-------- --------
Total current assets ............................... 289,563 284,758
Investment in unconsolidated affiliate ............. 11,082 12,040
Property and equipment
Land ............................................ 47,574 47,574
Buildings and improvements ...................... 169,584 176,691
Store fixtures and equipment .................... 172,465 181,801
Property subject to capital leases .............. 25,261 24,424
-------- --------
414,884 430,490
Less accumulated depreciation and amortization .. 144,370 156,040
-------- --------
270,514 274,450
Deferred income taxes .............................. 3,676 1,469
Deferred debt issuance costs, net .................. 14,569 13,329
Other assets ....................................... 5,884 6,349
-------- --------
24,129 21,147
Total assets ....................................... $595,288 $592,395
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
4
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
SEPT. 24, MAR. 25,
2000 2001
--------- ---------
Current liabilities
Accounts payable .............................................. $ 100,777 $ 96,511
Accrued payroll and related expenses .......................... 35,385 39,000
Other accrued liabilities ..................................... 34,637 35,444
Current portion of capital lease obligations and long-term debt 6,994 1,706
--------- ---------
Total current liabilities ........................................ 177,793 172,661
Long-term debt, less current portion ............................. 439,000 439,000
Capital lease obligations, less current portion .................. 13,679 12,771
Long-term portion of self-insurance and other reserves ........... 9,875 9,875
Other long-term liabilities ...................................... 4,195 4,160
--------- ---------
Total liabilities ................................................ 644,542 638,467
Stockholders' equity (deficit)
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0 .......................... -- --
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 ..................... 1 1
Additional paid-in capital .................................... 12,715 12,715
Retained earnings (deficit) ................................... (61,970) (58,788)
--------- ---------
Total stockholders' equity (deficit) ............................. (49,254) (46,072)
--------- ---------
Total liabilities and stockholders' equity (deficit) ............. $ 595,288 $ 592,395
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
26 Weeks Ended
-----------------------------
MAR. 26, MAR. 25,
2000 2001
----------- -----------
Sales ............................................. $ 1,204,454 $ 1,237,154
Cost of goods sold ................................ 911,941 923,592
----------- -----------
Gross profit ...................................... 292,513 313,562
Operating expenses:
Selling, general and administrative expenses ... 266,067 271,542
Depreciation and amortization .................. 12,331 13,908
Acquisition integration expenses ............... 4,594 --
----------- -----------
Total operating expenses .......................... 282,992 285,450
----------- -----------
Operating profit .................................. 9,521 28,112
Interest income ................................... 1,705 1,904
Interest expense .................................. (27,130) (25,659)
Equity in earnings from unconsolidated affiliate .. 480 958
Other income (loss) - net ......................... (1) 79
----------- -----------
Income (loss) before income taxes (benefit) ....... (15,425) 5,394
Income taxes (benefit) ............................ (6,324) 2,212
----------- -----------
Net income (loss) ................................. $ (9,101) $ 3,182
=========== ===========
Earnings (loss) per share ......................... $ (182.02) $ 63.64
=========== ===========
Average common shares outstanding ................. 50,000 50,000
=========== ===========
Shares outstanding at end of period ............... 50,000 50,000
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
6
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
13 Weeks Ended
-------------------------
MAR. 26, MAR. 25,
2000 2001
--------- ---------
Sales ............................................. $ 607,286 $ 612,305
Cost of goods sold ................................ 470,595 456,635
--------- ---------
Gross profit ...................................... 136,691 155,670
Operating expenses:
Selling, general and administrative expenses ... 132,504 135,010
Depreciation and amortization .................. 6,317 6,980
Acquisition integration expenses ............... 3,926 --
--------- ---------
Total operating expenses .......................... 142,747 141,990
--------- ---------
Operating profit (loss) ........................... (6,056) 13,680
Interest income ................................... 710 924
Interest expense .................................. (13,559) (12,771)
Equity in earnings from unconsolidated affiliate .. 341 476
Other income (loss) - net ......................... -- (4)
--------- ---------
Income (loss) before income taxes (benefit) ....... (18,564) 2,305
Income taxes (benefit) ............................ (7,611) 945
--------- ---------
Net income (loss) ................................. $ (10,953) $ 1,360
========= =========
Earnings (loss) per share ......................... $ (219.06) $ 27.20
========= =========
Average common shares outstanding ................. 50,000 50,000
========= =========
Shares outstanding at end of period ............... 50,000 50,000
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
7
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
26 Weeks Ended
-------- --------
MAR. 26, MAR. 25,
2000 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (9,101) $ 3,182
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ..................................... 12,331 13,908
Provision for deferred income taxes ............................... -- 2,207
(Gain) loss on disposals of assets ................................ 2 (79)
Net undistributed gain in investment in unconsolidated affiliate .. (480) (958)
Changes in operating assets and liabilities:
Decrease in lease guarantee escrow .............................. -- 13,180
Increase in receivables ......................................... (4,157) (3,107)
Decrease in income tax receivables .............................. -- 263
(Increase) decrease in inventories .............................. (16,014) 1,591
Increase in prepaid expenses .................................... (4,444) (3,645)
(Increase) decrease in other assets ............................. (1,616) 765
Decrease in accounts payable .................................... (4,880) (4,266)
Increase in accrued liabilities and long-term
portion of self-insurance reserves ............................ 394 4,387
-------- --------
Net cash provided by (used in) operating activities .................. (27,965) 27,428
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ................................... (28,729) (17,967)
Proceeds from sale of property and equipment and properties
held for sale ...................................................... -- 223
-------- --------
Net cash used in investing activities ................................ (28,729) (17,744)
-------- --------
FINANCING ACTIVITIES:
Principal payments on long-term debt ................................. -- (5,048)
Principal payments on capital lease obligations ...................... (963) (1,148)
-------- --------
Net cash used in financing activities ................................ (963) (6,196)
-------- --------
Net increase (decrease) in cash and cash equivalents ................. (57,657) 3,488
Cash and cash equivalents at beginning of period ..................... 93,352 62,631
-------- --------
Cash and cash equivalents at end of period ........................... $ 35,695 $ 66,119
======== ========
Interest paid ........................................................ $ 27,055 $ 25,107
Income taxes paid .................................................... $ -- $ 5
See accompanying notes to unaudited consolidated financial statements.
7
8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2001
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of September 24, 2000 and March 25, 2001 and
the results of its operations and cash flows for the twenty-six weeks ended
March 26, 2000 and March 25, 2001. These consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's latest annual report filed on Form 10-K. The
operating results for the twenty-six weeks ended March 25, 2001 are not
necessarily indicative of the results of operations for a full year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the twenty-six weeks ended March 26,
2000 and March 25, 2001 consists of the following:
26 Weeks Ended
------------------------------
Mar. 26, 2000 Mar. 25, 2001
------------- -------------
(In thousands)
Federal income taxes (benefit) .. $(4,960) $1,735
State income taxes (benefit) .... (1,364) 477
------- ------
$(6,324) $2,212
======= ======
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 $480,000 and $958,000 for the twenty-six weeks ended March 26, 2000 and March
25, 2001, respectively. The Company is a significant customer of Santee, which
supplies the Company with a substantial portion of its fluid milk and dairy
products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
26 Weeks Ended
------------------------------
Mar. 26, 2000 Mar. 25, 2001
------------- -------------
(In thousands)
Current assets ........... $ 14,614 $19,216
Non-current assets ....... 103,182 97,328
Current liabilities ...... 22,404 23,148
Non-current liabilities .. 75,356 69,316
Shareholder's equity ..... 20,036 24,080
Sales .................... 89,272 93,529
Gross profit ............. 13,976 14,556
Net income ............... $ 838 $ 1,916
8
9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2001
NOTE 4 - USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
9
10
STATER BROS. HOLDINGS INC.
MARCH 25, 2001
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OWNERSHIP OF THE COMPANY
La Cadena Investments is the sole shareholder of the Company and holds
all of the shares of the Company's Class A Common Stock which are
entitled to 1.1 votes per share. La Cadena Investments is a California
General Partnership whose partners include Jack H. Brown, Chairman of
the Board, President and Chief Executive Officer of the Company and two
other members of senior management of the Company. Jack H. Brown has a
majority interest in La Cadena and is the managing general partner with
the power to vote the shares of the Company held by La Cadena.
ACQUISITION
On May 7, 1999, Stater Bros. entered into an agreement with Albertson's,
Inc. ("Albertson's") to purchase 43 supermarkets and one future store
site in Stater Bros.' existing and contiguous market areas. The stores
were formerly operated by Albertson's or Lucky Stores and were divested
in connection with the merger of Albertson's and American Store Company,
the parent of Lucky Stores. The purchase price was $94.4 million for
land, buildings and equipment, $39.6 million for inventories on hand at
closing, and the assumption of $13.3 million of capitalized lease
obligations. The supermarkets were acquired sequentially over a
twenty-four day period, which began on August 9, 1999. Each acquired
store was reopened under the Stater Bros. name within two days of its
acquisition and was fully integrated into the Stater Bros. operating
systems.
LEASE GUARANTEE ESCROW
As of September 24, 2000, a portion of the Company's lease obligations
were guaranteed by Petrolane Incorporated ("Petrolane") or its
successor. The leases guaranteed by Petrolane had initial terms of 20
years and expired in 2003. Lease payments for the properties subject to
the Petrolane guarantees were approximately $10.0 million per year.
Under the terms of the agreement related to the Company's acquisition of
Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater
Bros. Markets was required to make annual deposits into a lease
guarantee escrow account. In addition, 10 shares of Stater Bros. Markets
$11.00 Cumulative Redeemable Preferred Stock due 2003 were held by
Petrolane in connection with the lease guarantees.
During the first quarter of fiscal 2001, Stater Bros. Markets redeemed
all 10 outstanding shares of its $11.00 Cumulative Redeemable Preferred
Stock due 2003 from Texas Eastern Corporation, Petrolane's assignee of
such preferred stock. The Petrolane lease guarantees were terminated in
exchange for a $400,000 fee and a letter of credit was issued in favor
of Texas Eastern to secure a portion of the remaining lease payments
through 2003. As part of these transactions, the lease guarantee escrow
account was terminated and the $13.2 million in such account was
released to Stater Bros. Markets. All of the store leases that had been
guaranteed by Petrolane were extended for an additional five years
following expiration of their respective initial terms in 2003.
10
11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and twenty-six weeks
ended March 25, 2001 and March 26, 2000.
Thirteen Weeks Twenty-Six Weeks
------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 25.42 22.51 25.34 24.29
Operating expenses:
Selling, general and
administrative expense 22.05 21.82 21.95 22.09
Depreciation and amortization 1.14 1.04 1.12 1.02
Acquisition integration expenses -- .65 -- .39
Operating profit (loss) 2.23 (1.00) 2.27 .79
Interest income .15 .12 .15 .14
Interest expense (2.09) (2.23) (2.07) (2.25)
Equity in unconsolidated affiliate .08 .06 .08 .04
Other income (loss) - (net) -- -- .01 --
Net income (loss) before
income taxes (benefit) .37% (3.05)% .44% (1.28)%
Total sales for the thirteen weeks ended March 25, 2001, the second
quarter of fiscal 2001, increased 0.8% and amounted to $612.3 million
compared to $607.3 million for the same period in the prior year. Total
sales for the twenty-six weeks ended March 25, 2001, increased 2.7% and
amounted to $1.237 billion compared to $1.204 billion for the same
period in the prior year. The increase in total sales in the second
quarter of fiscal 2001 and fiscal year to date of 2001 was due primarily
to favorable customer response to the Company's marketing plan, which
emphasizes high quality, large product selections and customer service.
Like store sales increased 0.8% and 2.7% for the thirteen week and
twenty-six week periods ended March 25, 2001, respectively. The timing
of the Christmas holiday makes sales comparisons between quarters
difficult. Christmas day, which is the only day the stores are closed,
fell in the second quarter this year, but was in the first quarter last
year. Therefore, the only valid comparison would be on a year to date
basis. The Company operated 155 supermarkets at March 25, 2001 and March
26, 2000.
Gross profit for the thirteen weeks ended March 25, 2001, amounted to
$155.7 million or 25.42% of sales compared to $136.7 million or 22.51%
of sales in the same period of the prior year. The increase in gross
profit, as a percentage of sales, in the second quarter of 2001 was due
to a return to the normal operations after an aggressive marketing
program was implemented, during the second quarter fiscal 2000, in
conjunction with the Company's grand reopening of service meat and
expanded produce departments in most of the newly acquired supermarkets.
Gross profit for the twenty-six weeks ended March 25, 2001, amounted to
$313.6 million or 25.34% of sales compared to $292.5 million or 24.29%
of sales in the same period of the prior year. The increase in the
fiscal year to date of 2001 gross profit, as a percent of sales, was due
to several factors including the continued expanded selections of
perishable products, an emphasis on private label brand products and the
Company's general merchandise expansion program.
11
12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and acquisition integration expenses. For
the thirteen weeks ended March 25, 2001, selling, general and
administrative expenses amounted to $135.0 million or 22.05% of sales
compared to $132.5 million or 21.82% of sales for the thirteen weeks
ended March 26, 2000. For the twenty-six weeks ended March 25, 2001,
selling, general and administrative expenses amounted to $271.5 million
or 21.95% of sales compared to $266.1 million or 22.09% of sales for the
twenty-six weeks ended March 26, 2000. The increase in selling, general
and administrative expenses as a percentage of sales during the quarter
reflects the effect of increased utility costs implemented within the
state of California in January 2001. The Company believes it has taken
actions to minimize the effects of these increases in the future;
however, the full financial impact of current and future increases in
utility costs cannot be determined and may be significant.
Depreciation and amortization expenses amounted to $7.0 million and
$13.9 million for the second quarter and year to date periods ended
March 25, 2001, respectively. Depreciation and amortization expenses
amounted to $6.3 million and $12.3 million for the quarter and year to
date periods of the prior year. The increase in depreciation and
amortization expense in fiscal 2001 was primarily due to the increase in
fixed assets, much of which was related to the remodels of the newly
acquired stores.
Acquisition integration expenses amounted to $3.9 million and $4.6
million for the quarter and fiscal year to date period ended March 26,
2000 and were related to the acquisition of the 43 supermarkets. There
were no acquisition integration expenses for the quarter or fiscal year
to date period ended March 25, 2001. Acquisition integration expenses
consisted of salaries and wages and non-recurring advertising expenses
incurred during the integration of the supermarkets and the grand
re-openings of service meat departments in most of the acquired
supermarkets.
Operating profit for the second quarter of 2001 amounted to $13.7
million or 2.23% of sales compared to an operating loss of $6.1 million
or 1.00% of sales for the second quarter of 2000. Operating profit for
the fiscal year to date of 2001 amounted to $28.1 million or 2.27% of
sales compared to an operating profit of $9.5 million or 0.79% of sales
for the fiscal year to date of 2000.
Interest expense amounted to $12.8 million for the second quarter of
2001 compared to $13.6 million for the second quarter of 2000. For the
fiscal year to date of 2001 and 2000, interest expense amounted to $25.7
million and $27.1 million, respectively. The decrease in interest
expense was primarily due to the redemption (in the third quarter of
fiscal 2000) of $11 million of the 10.75% Senior Notes due 2006, the
maturity and redemption of the remaining $5 million of the 11.00% Notes
(in the second quarter of fiscal 2001) and the capitalization of
interest expense attributed to the construction of a replacement store.
The Company's equity in earnings from unconsolidated affiliate, amounted
to $476,000 for the second quarter of fiscal 2001 compared to $341,000
in the second quarter of the prior year. For the fiscal year to date
periods of 2001 and 2000, the Company's equity in earnings from
unconsolidated affiliate amounted to $958,000 and $480,000,
respectively.
Results before income taxes amounted to income of $2.3 million and a
loss of $18.6 million for the second quarter of 2001 and 2000,
respectively. Results before income taxes amounted to income of $5.4
million and a loss of $15.4 million for the twenty-
12
13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
six weeks year to date periods of 2001 and 2000, respectively.
Net income for the second quarter amounted to $1.4 million and a net
loss of $11.0 million for 2001 and 2000, respectively. Net income for
the fiscal year to date periods amounted to $3.2 million and a net loss
of $9.1 million for 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements
through funds provided by operations and through borrowings from
short-term revolving credit facilities. The Company's credit agreement
became effective August 6, 1999 and expires in August 2002, and consists
of a revolving loan facility for working capital of $50.0 million, all
of which was available at March 25, 2001, and a letter of credit
facility with a maximum availability of $25.0 million, of which $8.2
million was available at March 25, 2001. The letter of credit facility
is maintained pursuant to the Company's workers' compensation and
general liability self-insurance requirements.
Working capital amounted to $112.1 million at March 25, 2001 and $111.8
million at September 24, 2000, and the Company's current ratios were
1.65:1, and 1.63:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
The net cash provided by operating activities in the twenty-six weeks
ended March 25, 2001 amounted to $27.4 million compared to net cash used
in operating activities of $28.0 million for the twenty-six weeks ended
March 26, 2000. Fluctuations in net cash provided by or used in
operating activities are not unusual in the industry. Cash provided by
operating activities in fiscal 2001 of $27.4 million consisted of an
increase in prepaid expenses of $3.6 million, an increase in accounts
receivable of $3.1 million, a decrease in accounts payable of $4.3
million, an increase in accrued liabilities and long-term portion of
self-insurance reserves of $4.4 million and a decrease in lease
guarantee escrow of $13.2 million.
Net cash used in investing activities for the twenty-six weeks ended
March 25, 2001, amounted to $17.7 million compared to $28.7 million for
the twenty-six weeks ended March 26, 2000. The difference in net cash
used in investing activities between the comparable periods is due to
the Company's capital expenditures during such periods, net of proceeds
from asset dispositions. Capital expenditures amounted to $18.0 million
in the fiscal year to date of 2001 compared to $28.7 million in the
fiscal year to date of 2000. The higher level of capital expenditures in
the prior year was due primarily to additional remodeling expenditures
in the 43 acquired supermarkets.
Net cash used by financing activities amounted to $6.2 million and
$963,000 for the twenty-six weeks ended March 25, 2001 and March 26,
2000, respectively, and consisted of payments on the Company's
capitalized lease obligations and principal payments on long-term debt.
THE CREDIT FACILITIES
Stater Bros.' principal operating subsidiary, Stater Bros. Markets,
signed a credit facility with Bank of America N.A. on August 6, 1999.
The credit facility provides for (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
13
14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of inventory, obligations incurred in connection with the construction
of stores, workmen's compensation insurance obligations and security for
current rent obligations. The availability of the loans and letters of
credit are subject to certain sub-limits and other borrowing
restrictions.
Indebtedness of Stater Bros. Markets under the credit facility is
guaranteed by Stater Bros. Development, Inc., a subsidiary of the
Company, and any subsidiaries that Stater Bros. Markets or Stater Bros.
Development, Inc. acquires or forms after the date of the new credit
facility.
Loans under the credit facility bear interest at a rate based upon
either (i) the "Base Rate" (defined as the higher of (a) the rate of
interest publicly announced by Bank of America as its "reference rate"
or (b) the federal funds effective rate from time to time plus 0.50%),
plus 1.00%, or (ii) the "Offshore Rate" (defined as the rate (adjusted
for statutory reserve requirements for eurocurrency liabilities) at
which eurodollar deposits for one, two, three or six months (as selected
by Stater Bros. Markets) are offered to Bank of America in the
inter-bank eurodollar market), plus 2.25%. The revolving loan facility
will cease to be available and will be payable in full on August 6,
2002. Letters under the credit facility can be issued until August 6,
2002 and all letters of credit must expire no later than August 6, 2003.
The loans under the revolving loan facility must be repaid for a period
of ten consecutive days semi-annually.
Loans under the revolving loan facility may be repaid and re-borrowed.
The loans under the revolving loan facility may be prepaid at any time
without penalty, subject to certain minimums and payment of any breakage
and re-deployment costs in the case of loans based on the offshore rate.
The commitments under the credit facility may be reduced by Stater Bros.
Markets. Stater Bros. Markets will be required to pay a commitment fee
equal to 0.25% per annum on the actual daily unused portion of the
revolving loan facility and the letter of credit facility, payable
quarterly in arrears. For purposes of that fee, commercial letters of
credit will not constitute outstanding standby letters of credit issued
under the letter of credit facility equal to 1.25% per annum on the face
amount of such letters of credit, and will be required to pay standard
fees charged by Bank of America with respect to the issuance,
negotiation, and amendment of commercial letter of credit issued under
the letter of credit facility.
Availability of the loans and letters of credit facility is subject to a
monthly borrowing test based on inventory. The credit facility requires
Stater Bros. Markets to meet certain financial tests, including minimum
net worth and minimum EBITDA tests. The credit facility contains
covenants which, among other things, will limit indebtedness, liens,
guarantee obligations, mergers, consolidations, liquidations and
dissolutions, asset sales, leases, investments, loans and advances,
transactions with affiliates, sale and leasebacks, other matters
customarily restricted in such agreements and modifications to the
holding company status of Stater Bros.
The credit facility also contains covenants that apply to Stater Bros.
Holdings Inc., and Stater Bros. Holdings Inc. is a party to the credit
facility for purposes of these covenants. These covenants, among other
things, limit dividends and other payments in respect of Stater Bros.
Holdings Inc.'s capital stock, prepayments and redemptions 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.
14
15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 25, 2001, for purposes of the credit facility with Bank of
America, Stater Bros. Markets was in compliance with all restrictive
covenants and exceeded the minimum net worth covenant by approximately
$95.9 million and exceeded minimum inventory coverage by approximately
$56.8 million. The minimum EBITDA (as defined) covenant measurement
period begins (as amended) in the quarter ending June 25, 2000, and
requires an annualized minimum EBITDA of $75.0 million. As of March 25,
2001, Stater Bros. Markets exceeded minimum annualized EBITDA by
approximately $12.7 million.
The Company was in compliance with all restrictive covenants for the
purpose of the credit facility with Bank of America.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1999, with the United
Food and Commercial Workers Union. The Company's collective bargaining
agreement with the International Brotherhood of Teamsters was renewed in
1998 and expires in September 2002. Management believes it has good
relations with its employees.
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the
impact of inflation on the operations of the Company has been moderate.
As inflation has increased expenses, the Company has recovered, to the
extent permitted by competition, the increase in expenses by increasing
prices over time. However, the economic and competitive environment in
Southern California continues to challenge the Company to become more
cost efficient as its ability to recover increases in expenses through
price increases is diminished. The future results of operations of the
Company will depend upon the ability of the Company to adapt to the
current economic environment as well as the current competitive
conditions.
The Company conducts business in one industry segment, the operation of
retail food supermarkets, which offer for sale to the public most
merchandise typically found in supermarkets. The supermarket industry is
highly competitive and is characterized by low profit margins. The
Company's primary competitors include Vons, Albertson's, Ralphs and a
number of independent supermarket operators. Competitive factors
typically include the price, quality and selection of products offered
for sale, customer service, and the convenience and location of retail
facilities. The Company monitors competitive activity and Senior
Management regularly reviews the Company's marketing and business
strategy and periodically adjusts them to adapt to changes in the
Company's primary trading area.
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
15
16
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be
made by the Company) includes statements that are forward-looking, such
as statements relating to plans for future activities. Such
forward-looking information involves important risks and uncertainties
that could significantly affect results in the future and, accordingly,
such results may differ from those expressed in any forward-looking
statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to
domestic economic conditions, seasonal and weather fluctuations,
expansion and other activities of competitors, changes in federal or
state laws and the administration of such laws and the general condition
of the economy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
16
17
STATER BROS. HOLDINGS INC.
MARCH 25, 2001
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in the
ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending legal
actions and claims will not have a material adverse effect on the
Company's consolidated financial position or its results of
operations.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Form 10-K for the fiscal
year ended September 24, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
EXHIBIT NO. DESCRIPTION
----------- -----------
11 Calculation of Earnings Per Common Share.
Copies of Exhibits listed herein can be obtained by writing and
requesting such Exhibits from: Corporate Secretary, P. O. Box 150,
Colton, California 92324.
(b) Reports on Form 8-K
None
17
18
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 1, 2001 /s/ Jack H. Brown
----------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: May 1, 2001 /s/ Phillip J. Smith
----------------------------------
Phillip J. Smith
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
18