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 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
21700 Barton Road
Colton, California 92324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceeding 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 18, 1997, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock
1
2
STATER BROS. HOLDINGS INC.
MARCH 30, 1997
INDEX
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 29, 1996
and March 30, 1997 3
Consolidated Statements of Income (Unaudited) for the 26 weeks ended
March 24, 1996 and March 30, 1997 5
Consolidated Statements of Income (Unaudited) for the 13 weeks ended
March 24, 1996 and March 30, 1997 6
Consolidated Statements of Cash Flows (Unaudited) for the 26 weeks
ended March 24, 1996 and March 30, 1997 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
3
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
SEPT. 29, MAR. 30,
1996 1997
-------- --------
Current Assets
Cash and cash equivalents .................... $ 45,279 $ 41,065
Receivables .................................. 19,009 17,979
Inventories .................................. 117,372 115,797
Prepaid expenses ............................. 3,357 6,449
Deferred income taxes ........................ 4,710 4,710
Properties held for sale ..................... 1,787 1,771
-------- --------
Total current assets ............................ 191,514 187,771
Investment in unconsolidated affiliate .......... 7,626 12,047
Property and equipment
Land ......................................... 18,688 14,603
Buildings and improvements ................... 89,856 81,260
Store fixtures and equipment ................. 78,570 82,601
Property subject to capital leases ........... 14,368 14,368
-------- --------
201,482 192,832
Less accumulated depreciation and amortization 87,267 90,896
-------- --------
114,215 101,936
Deferred income taxes ........................... 5,295 7,382
Deferred debt issuance cost, net ................ 5,221 4,630
Lease guarantee escrow .......................... 6,701 7,825
Other assets .................................... 7,722 7,352
-------- --------
Total assets .................................... $338,294 $328,943
======== ========
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
SEPT. 29, MAR. 30,
1996 1997
--------- ---------
Current Liabilities
Accounts payable ...................................... $ 79,271 $ 63,461
Accrued payroll and related expenses .................. 23,981 23,652
Other accrued liabilities ............................. 23,607 25,032
Current portion of capital lease obligations .......... 1,182 1,180
--------- ---------
Total current liabilities ................................ 128,041 113,325
Long-term debt ........................................... 165,000 165,000
Capital lease obligations, less current portion .......... 6,917 6,340
Long-term portion of self-insurance reserves.............. 10,332 9,475
Other long-term liabilities .............................. 2,526 4,408
10.5% Cumulative Series B Preferred Stock:
(stated value $100 per share)
Authorized shares - 693,650
Issued and outstanding shares - 693,650 ............ 69,365 69,365
Stockholders' equity 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 deficit ...................................... (41,953) (37,036)
Less option to acquire stock .......................... (14,650) (14,650)
--------- ---------
Total stockholders' equity ............................... (43,887) (38,970)
--------- ---------
Total liabilities and stockholders' equity ............... $ 338,294 $ 328,943
========= =========
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. 24, MAR. 30,
1996 1997
--------- ---------
Sales ................................................. $ 814,963 $ 864,822
Cost of goods sold .................................... 629,154 666,301
--------- ---------
Gross profit .......................................... 185,809 198,521
Operating expenses
Selling, general and administrative expenses ....... 155,616 167,152
Depreciation and amortization ...................... 6,162 6,561
Consulting fees .................................... 750 750
--------- ---------
Total operating expenses .............................. 162,528 174,463
--------- ---------
Operating profit ...................................... 23,281 24,058
Interest income ....................................... 707 995
Interest expense ...................................... (9,924) (9,979)
Equity in earnings (loss) from unconsolidated affiliate (548) (579)
Other income (loss) - net ............................. (176) (3)
--------- ---------
Income before income taxes ............................ 13,340 14,492
Income taxes .......................................... 5,402 5,943
--------- ---------
Net income ............................................ $ 7,938 $ 8,549
Less preferred dividends .............................. 339 3,632
--------- ---------
Earnings available to common shareholders ............. $ 7,599 $ 4,917
========= =========
Earnings per common share ............................. $ 79.71 $ 98.34
Average common shares outstanding ..................... 95,330 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. 24, MAR. 30,
1996 1997
--------- ---------
Sales ................................................. $ 406,223 $ 431,422
Cost of goods sold .................................... 312,675 333,727
--------- ---------
Gross profit .......................................... 93,548 97,695
Operating expenses
Selling, general and administrative expenses ....... 77,803 82,056
Depreciation and amortization ...................... 3,104 3,286
Consulting fees .................................... 375 375
--------- ---------
Total operating expenses .............................. 81,282 85,717
--------- ---------
Operating profit ...................................... 12,266 11,978
Interest income ....................................... 449 526
Interest expense ...................................... (4,966) (4,984)
Equity in earnings (loss) from unconsolidated affiliate (276) (136)
Other income (loss) - net ............................. (178) (3)
--------- ---------
Income before income taxes ............................ 7,295 7,381
Income taxes .......................................... 2,954 3,027
--------- ---------
Net income ............................................ $ 4,341 $ 4,354
Less preferred dividends .............................. 339 1,816
--------- ---------
Earnings available to common shareholders ............. $ 4,002 $ 2,538
========= =========
Earnings per common share ............................. $ 44.14 $ 50.76
Average common shares outstanding ..................... 90,659 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. 24, MAR. 30,
1996 1997
-------- --------
OPERATING ACTIVITIES:
Net income ................................................. $ 7,938 $ 8,549
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 6,162 6,561
Provision for deferred income taxes ..................... -- (2,087)
Gain (loss) on disposals of assets ...................... 176 3
Net undistributed loss in investment in unconsolidated
affiliate .................................................. 548 579
Changes in operating assets and liabilities:
(Increase) decrease in receivables ..................... (1,417) 1,030
(Increase) decrease in inventories ..................... (922) 1,575
(Increase) decrease in prepaid expenses ................ (825) (3,092)
(Increase) decrease in other assets .................... 859 (725)
Increase (decrease) in accounts payable ................ (7,625) (15,810)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves .................... 2,221 (406)
-------- --------
Net cash (used by) provided by operating activities ........ 7,115 (3,823)
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ..................... -- (5,000)
Purchase of property and equipment ......................... (8,704) (7,192)
Proceeds from sale of property and equipment and properties
held for sale ............................................. 18,565 16,010
-------- --------
Net cash (used by) provided by investing activities ........ 9,861 3,818
-------- --------
FINANCING ACTIVITIES:
Dividends paid or accrued on preferred stock................ (339) (3,632)
Redemption of common stock ................................. (69,365) --
Issuance of preferred stock ................................ 69,365 --
Principal payments on capital lease obligations (532) (577)
-------- --------
Net cash (used by) financing activities .................... (871) (4,209)
-------- --------
Net increase (decrease) in cash and cash equivalents ....... 16,105 (4,214)
Cash and cash equivalents at beginning of period ........... 26,308 45,279
-------- --------
Cash and cash equivalents at end of period ................. $ 42,413 $ 41,065
======== ========
Interest paid .............................................. $ 9,703 $ 9,466
Income taxes paid .......................................... $ 3,775 $ 3,225
See accompanying notes to unaudited consolidated financial statements.
7
8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 30, 1997
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 March 24, 1996 and March 30, 1997 and the
results of its operations and cash flows for the twenty-six weeks ended March
24, 1996 and March 30, 1997. 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 30, 1997 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 24,
1996 and March 30, 1997 consists of the following:
26 Weeks Ended
--------------
Mar. 24, 1996 Mar. 30, 1997
------------- -------------
(In thousands)
Federal Income Taxes $4,635 $4,594
State Income Taxes 767 1,349
------ ------
$5,402 $5,943
====== ======
NOTE 3 - CONVERSION OF COMMON STOCK
Effective March 8, 1996, the Company converted the Company's 50,000 shares
of Common Stock held by Craig Corporation ("Craig") into 693,650 shares of the
Company's Series B Preferred Stock. The Series B Preferred Stock is redeemable
by the Company in whole but not in part for $69.4 million plus accrued and
unpaid dividends. The holders of the Series B Preferred Stock can, beginning in
the year 2009, cause the Company to redeem such Preferred Stock. Dividends on
the Preferred Stock are paid quarterly in arrears at the rate of 10.5 per annum
through September 2002, and beginning in October 2002, will increase to 12% per
annum and will increase by 100 basis points per year thereafter to a maximum
rate of 15% per annum.
NOTE 4 - UNCONSOLIDATED AFFILIATE
Prior to November 1996, and since 1986, Stater Bros. Markets, a wholly
owned subsidiary of the Company, owned 49.6% of Santee Dairies, Inc., ("Santee")
an operator of a fluid milk processing plant located in Los Angeles, California.
In November 1996 and for approximately $200,000, Stater Bros. Markets increased
its ownership in Santee to 50%, but is not the controlling shareholder.
Additionally, during the quarter ended December 29, 1996, Stater Bros. Markets
acquired Preferred Stock issued by Santee for an aggregate amount of $4.8
million. It is not anticipated that Santee will issue dividends on either its
Preferred Stock or Common Stock in the foreseeable future. Santee is not a
significant subsidiary of Stater Bros. Markets or the Company, and accordingly
the Company accounts for its investment in Santee Dairies Inc. using the equity
method of accounting. The Company recognized undistributed losses from its
investment in Santee Dairies, Inc. of $136,000 and $276,000 for the thirteen
weeks ended March 30, 1997 and March 24, 1996, respectively. For the twenty-six
weeks year to date, the Company recognized losses of $579,000 and $548,000 for
1997 and 1996, respectively.
8
9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 30, 1997
NOTE 5 - CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing March 8, 1994, Craig will
render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company will pay Craig $1.5
million per year, payable quarterly during the term of the Consulting Agreement.
The Company will have the right to terminate its obligations under the
Consulting Agreement in the event it exercises its option to redeem the Series B
Preferred Stock prior to the expiration of the Consulting Agreement.
Additionally, in accordance with the terms of the Consulting Agreement, Craig
has agreed not to engage in any business that competes with the Company in any
of the five counties in which the Company operates until the end of the
five-year period of the Consulting Agreement. The Company paid Craig $5.0
million on March 8, 1994 which is amortized to earnings over the five-year term
of the covenant not to compete included in the Consulting Agreement.
NOTE 6 - RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
NOTE 7 - 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 8 - ADOPTION OF ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which the
Company adopted at the beginning of fiscal year 1997. Management believes that
the adoption of SFAS 121 will not have a material adverse effect on the
Company's financial position or its results of operations for fiscal 1997.
9
10
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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
which are listed and trade on the American Stock Exchange.
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into in March 1994, as
part of the Recapitalization between the Company and Craig, the Company
exercised its right to convert all of the Common Stock held by Craig
Corporation into 693,650 shares of 10.5% Series B Preferred Stock. The
redemption value of the Series B Preferred Stock is $100 per share for
an aggregate value of $69,365,000. Dividends on the Series B Preferred
Stock are due quarterly in arrears.
Effective March 8, 1996, La Cadena became the sole Common Shareholder
of the Company and holds all of the shares of 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 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.
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 24, 1996 and March 30, 1997.
Thirteen Weeks Twenty-Six Weeks
---------------- -----------------
1996 1997 1996 1997
------ ------ ------ ------
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.03 22.64 22.80 22.96
Selling, general and
administrative expense 19.16 19.02 19.09 19.33
Depreciation and amortization .76 .76 .76
.76
Consulting fees .09 .09 .09 .09
Other (income)(net) -- (.09) -- (.05)
Interest expense 1.22 1.15 1.22 1.15
Earnings before income taxes 1.80% 1.71% 1.64% 1.68%
10
11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Total sales for the thirteen weeks ended March 30, 1997 increased 6.2%
and amounted to $431.4 million compared to $406.2 million for the like
period in 1996. Total sales for the twenty-six weeks year to date ended
March 30, 1997 increased 6.1% and amounted to $864.8 million compared
to $815.0 million for the same period in 1996. Like store sales
increased 6.2% for the quarter and increased 6.1% for the year to date
period. The Company operated 110 supermarkets at March 30, 1997 and at
March 24, 1996. The increase in sales in the first and second quarters
of 1997 compared to the like periods of 1996 is due to many factors,
including the very favorable customer response to the Company's 60th
Anniversary Marketing Program, slight improvements in the Southern
California economy and favorable customer response to the Company's
1996 merchandising expansion and upgrading program which included
expanded product offerings in the deli, bakery, frozen foods and dairy
departments and the continuing introduction of fresh cut flowers and
prepackaged vegetables into 83 of the Company's 110 supermarkets.
Gross profits for the thirteen weeks ended March 30, 1997, amounted to
$97.7 million or 22.64% of sales compared to $93.6 million or 23.03% of
sales in the same period of the prior year. During the quarter ended
Marci 30, 1997, the Company continued to introduce higher gross margin
products into its supermarkets, such as prepackaged gourmet vegetables
and fresh cut flowers. For the twenty-six week year to date period,
gross profits increased to $198.5 million or 22.96% of sales compared
to $185.8 million or 22.80% of sales in the prior year. The increase in
gross profits for the year to date period is due to increased
efficiencies in the Company's warehousing and transportation
departments and the introduction of higher gross margin products, such
as prepackaged gourmet vegetables and fresh cut flowers and a decrease
in competitive activity when compared to the prior year.
Operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses and consulting fees.
For the thirteen weeks ended March 30, 1997, selling, general and
administrative expenses amounted to $82.1 million or 19.02% of sales
compared to $77.8 million or 19.16% of sales for the like period of the
prior year. For the year to date period, selling, general and
administrative expenses amounted to $167.2 million or 19.33% of sales
compared to $155.6 million or 19.09% of sales for the like period of
the prior year. The increase in selling, general and administrative
expenses in 1997 when compared to 1996 is due to the incremental costs
and expenses incurred to operate at the higher level of sales, the
increase in net rent expenses from the sale and leaseback of five
supermarkets in January 1996 and an additional four supermarkets in
October 1996, and the suspension of employer contributions to an
over-funded collective bargaining benefits trust in the first and
second quarters of fiscal 1996.
11
12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Selling, general and administrative expenses in fiscal 1997 include
increases in rent expenses, net of reductions in depreciation expenses,
from the sale and leaseback of five supermarkets in January 1996 and an
additional four supermarkets in October 1996 of approximately $580,000
in the first quarter of fiscal 1997 and approximately $400,000 in the
second quarter of fiscal 1997. Selling, general and administrative
expenses for the thirteen and twenty-six weeks ended March 24, 1996
reflect reductions in expenses for employer contributions to a
collective bargaining benefits trust of $2.5 million for the quarter
and $3.8 million year to date. Such collective bargaining health care
benefits trust was over-funded and employer monthly contributions to
the trust were suspended for the months of December 1995 and January
1996.
Depreciation and amortization expenses amounted to $3.3 million and
$6.6 million for the second quarter and year to date periods ended
March 30, 1997, respectively. Depreciation and amortization expense
amounted to $3.1 million and $6.2 million for the quarter and year to
date periods of the prior year. Depreciation and amortization includes
amortization of a prepaid five-year covenant not to compete between the
Company and Craig which became effective as of March 8, 1994.
In conjunction with the March 1994 Recapitalization Transaction, the
Company entered into a five-year consulting and covenant not to compete
agreement (the "Consulting Agreement") with Craig Corporation. The
Consulting Agreement provided for a prepayment of $5.0 million, which
is amortized to expense over the five-year term of the covenant not to
compete. The Consulting Agreement also provides for annual consulting
payments of $1.5 million, paid quarterly in arrears. The requirement to
make annual consulting payments may, at the election of the Company, be
terminated if the Company redeems the 10.5% Series B Preferred Stock
prior to the expiration date of the Consulting Agreement. Accordingly,
amortization of the prepaid covenant not to compete amounted to
$250,000 and $500,000, respectively, for the thirteen and twenty-six
weeks ended March 30, 1997 and March 24, 1996 and is included in
depreciation and amortization expense. Additionally, annual consulting
fees paid or accrued to the benefit of Craig amounted to $375,000 for
the thirteen weeks and $750,000, for the twenty-six weeks ended March
30, 1997 and March 24, 1996, respectively.
Operating profits for the second quarter of 1997 amounted to $12.0
million or 2.78% of sales, compared to $12.3 million or 3.02% of sales
in the second quarter of 1996. Operating profits for the twenty-six
weeks year to date ended March 30, 1997, amounted to $24.1 million or
2.78% of sales, compared to $23.3 million or 2.86% of sales for the
like period in 1996.
Interest expense amounted to $5.0 million for the second quarters of
1997 and 1996. For the year to date periods of 1997 and 1996, interest
expense amounted to $10.0 million. Interest expense in the second
quarter and year to date periods of 1997 and 1996, includes
amortization of $295,000 and $590,000, respectively, from fees and
expenses incurred to acquire debt.
12
13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Income before income taxes amounted to $7.4 million and $7.3 million
for the second quarters of 1997 and 1996, respectively, and amounted to
$14.5 million and $13.3 million for the year to date periods of 1997
and 1996, respectively.
Net income for the second quarters of 1997 and 1996 amounted to $4.4
million or 1.01% of sales and $4.3 million or 1.07% of sales,
respectively, and for the year to date periods for 1997 and 1996,
amounted to $8.5 million or .99% of sales and $7.9 million or .97% of
sales, 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 short-term Bank Credit Agreement is between a bank and Stater
Bros. Markets, a wholly owned subsidiary of the Company and consists of
revolving credit facilities for working capital purposes of $15.0
million, all of which was available at March 30, 1997, and a $25.0
million standby letter of credit facility, of which $11.3 million was
available at March 30, 1997, maintained qursuant to its worker's
compensation and general liability self-insurance requirements. The
Bank Credit Agreement expires on June 1, 1998.
Working capital amounted to $74.4 million at March 30, 1997 and $63.5
million at September 29, 1996 and the Company's current ratios were
1.66:1, and 1.50:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
The net cash used by operating activities for the twenty-six weeks
ended March 30, 1997 amounted to $3.8 million and consisted of
reductions in accounts payable net of decreases in inventories, and the
deferred tax benefits arising from the October 1996 sale and leaseback
transaction. As of September 29, 1996, the Company had increased its
inventory and related accounts payable in anticipation of the
implementation of the Company's 60th Anniversary Marketing Program in
the first quarter of fiscal 1997. Accordingly, as of March 30, 1997,
the Company's investment in inventories and related accounts payable
are reflected at more traditional balances. The increase in the
deferred tax benefit of $2.1 million was due primarily to the timing
difference between tax and book requirements for recognizing the gain
and resulting tax liability from the October 1996 sale and leaseback
transaction.
Net cash provided by investing activities for the twenty-six weeks
ended March 30, 1997, amounted to $3.8 million compared to $9.9 million
in fiscal 1996. The difference in net cash provided by investing
activities between the comparable periods is due to the Company's
capital expenditures during such periods, net of proceeds from asset
dispositions and additional investment in Santee Dairies. Capital
expenditures for the twenty-six week periods amounted to $7.2 million
in 1997 compared to $8.7 million in 1996. During
13
14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
the twenty-six weeks ended March 30, 1997, the Company remodeled seven
supermarkets. Capital expenditures for fiscal 1997 were financed from
cash provided by the October 1996 sale and leaseback transaction.
Capital expenditures for fiscal 1997 are estimated to be approximately
$25.0 million and will include expenditures incurred to construct two
new supermarkets which are estimated to open in early fiscal 1998.
In October 1996, the Company completed a sale and leaseback transaction
with an unrelated third party for four of the Company's supermarkets.
The net proceeds from the sale of the four supermarkets amounted to
approximately $16.0 million, which approximated fair market value. The
Company entered into leases for the four supermarkets with initial
terms of 20 years and with options available to the Company which
extend the lease terms up to an additional 20 years. The Company
believes the rents due under the leases approximate fair market rents.
The gains from the sale of the supermarkets were approximately $2.5
million and will be deferred and amortized into income over the initial
term of the leases. As a result of the additional rent expenses, net of
reductions in depreciation expense, due on the four supermarkets,
operating expenses for the 52-week 1997 fiscal year will increase by
approximately $1.2 million.
In November 1996 and for approximately $200,000, the Company increased
its ownership in Santee to 50%. Santee provides the Company with a
significant amount of the fluid milk products offered for sale in the
Company's supermarkets. Additionally, during the first quarter of
fiscal 1997, the Company acquired approximately $4.8 million worth of
the Preferred Stock of Santee. Hughes Supermarkets, located in
Irwindale, California, retained a 50% ownership in Santee and acquired
a like amount of the Preferred Stock of Santee. Santee operates a fluid
milk processing plant in Los Angeles, California and is constructing a
new fluid milk and other fluid dairy products processing plant in the
City of Industry, California. Mr. Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of Stater Bros. Markets also
serves as Chairman of the Board and Chief Executive Officer of Santee.
Santee will, for the foreseeable future, provide the Company's
supermarkets with a supply of high quality fluid milk and other dairy
products.
Net cash used by financing activities amounted to $4.2 million and
$871,000 for 1997 and 1996, respectively, and consisted of payments on
the Company's capitalized lease obligations and the accretion or
payment of dividends on the Company's 10.5% Series B Preferred Stock.
Such preferred stock dividends are due quarterly and the requirement to
make such dividend payments on the Company's preferred stock commenced
in March 1996. At the request of the holder of the Series B Preferred
Stock the Company will defer dividend payments on the Preferred Stock
until approximately July 15, 1997. Accordingly, the Company has
deferred dividend payments on the Series B Preferred Stock and as of
March 30, 1997, dividends of $2.0 million have been accrued and remain
unpaid. The Company has adequate cash on hand to pay such dividends.
14
15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
The Company is subject to certain covenants associated with its 11%
Senior Notes due 2001 and covenants included in the Bank Credit
Agreement between a bank and Stater Bros. Markets, a wholly owned
subsidiary of the Company. As of March 30, 1997, 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.
The Company believes that cash flow from operations and proceeds from
borrowings, including lease financings, and funds available under the
short-term revolving credit facility will be adequate to meet the
Company's currently identifiable working capital requirements.
THE BANK FACILITIES
Stater Bros. Markets, the Company's operating subsidiary, and Bank of
America National Trust and Savings Association (the "Bank") entered
into a Credit Agreement in March 1994, as amended and effective June 1,
1996, 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, all of which was available at March 30,
1997 and a revolving letter of credit facility (the "LC Facility") with
a maximum availability of $25.0 million (collectively, the "Bank
Facilities"). As of March 30, 1997, approximately $11.3 million of the
LC Facility was available to the Company. The Bank Credit Agreement
expires on June 1, 1998.
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 $145.0 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 for at least 5 calendar days each month.
As of March 30, 1997, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive covenants and had (i) a
current ratio of 1.76:1, (ii) tangible net worth and debt subordinated
to the Bank of $199.7 million; (iii) a ratio of total liabilities to
tangible net worth and debt subordinated to the Bank of 0.63:1 and (iv)
a fixed charge coverage ratio (as defined in the Bank Facilities) of
1.48:1. If for any reason Stater Bros.
15
16
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
THE BANK FACILITIES (CONTD.)
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 Bank Facilities or, in certain situations, the prohibition of
payments 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.
THE PREFERRED STOCK CONVERSION
In March 1994, the Company acquired, for $14.7 million, an option to
purchase all, but not less than all, shares of the Common Stock held by
Craig for a cash purchase price of $60.0 million plus an adjustment
factor equal to 8.833% per annum from March 8, 1994 to March 8, 1996,
compounded annually and $69,365,000 thereafter.
The Option Agreement also included an option available to the Company
to convert the Company's 50,000 shares of 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, the Company exercised its option to convert
the Company's 50,000 shares of Common Stock held by Craig Corporation
into 693,650 shares of the Company's Series B Preferred Stock. The
Series B Preferred Stock is redeemable by the Company in whole but not
in part for $69.4 million plus accrued and unpaid dividends. The
holders of the Series B Preferred Stock can, beginning in the year
2009, cause the Company to redeem such Preferred Stock. Dividends on
the Preferred Stock will be paid quarterly in arrears at the rate of
10.5% per annum through September 2002, and beginning in October 2002,
will increase to 12% per annum and will increase by 100 basis points
per year thereafter to a maximum rate of 15% per annum.
LABOR RELATIONS
The Company and other major supermarket employers in Southern
California negotiated a four-year contract, beginning October 1995,
with the United Food and Commercial Workers Union. The Company's
collective bargaining agreement with the International Brotherhood of
Teamsters was renewed for four years in September 1994. Management
believes it has good relations with its employees.
16
17
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS
121), which the Company adopted at the beginning of fiscal year 1997.
Management believes that the adoption of SFAS 121 will not have a
material adverse effect on the Company's financial position or its
results of operations for fiscal 1997.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this report are forward looking
statements. Such forward looking statements are subject to risks,
uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied. Potential
uncertainties and risks include, but are not limited to, changes in the
economic environment in the Company's market areas and changes in the
competitive environment. Due to risks and uncertainties, actual results
may differ from any future performance discussed in the Company's
filings with the Securities and Exchange Commission.
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 routine
legal actions and claims will not have a material adverse effect on the
Company's consolidated financial position.
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 Annual Report on Form
10-K for the fiscal year ended September 29, 1996.
ITEM 2. CHANGES IN SECURITIES
At the request of the holder of the 10.5% Cumulative Series B Preferred
Stock the Company will defer dividend payments on the Preferred Stock
until approximately July 15, 1997. Accordingly, the Company has
deferred dividend payments on the Series B Preferred Stock and as of
March 30, 1997, $2.0 million of dividends on the 10.5% Cumulative
Series B Preferred Stock have been accrued and remain unpaid.
17
18
STATER BROS. HOLDINGS INC.
MARCH 30, 1997
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
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
18
19
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 12, 1997 /s/ Jack H. Brown
----------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: May 12, 1997 /s/ Dennis N. Beal
-----------------------
Dennis N. Beal
Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
19