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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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
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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 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 July 25, 1997, there were issued and outstanding 50,000 shares of the
registrant's Class A Common Stock
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STATER BROS. HOLDINGS INC.
JUNE 29, 1997
INDEX
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 29, 1996
AND JUNE 29, 1997 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 39 WEEKS
ENDED JUNE 23, 1996 AND JUNE 29, 1997 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS
ENDED JUNE 23, 1996 AND JUNE 29, 1997 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
39 WEEKS ENDED JUNE 23, 1996 AND JUNE 29, 1997 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 24
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
SEPT. 29, JUNE 29,
1996 1997
-------- --------
Current Assets
Cash and cash equivalents......................... $ 45,279 $ 39,830
Receivables....................................... 19,009 19,410
Inventories....................................... 117,372 115,739
Prepaid expenses.................................. 3,357 5,000
Deferred income taxes............................. 4,710 4,710
Properties held for sale.......................... 1,787 1,348
-------- --------
Total current assets................................. 191,514 186,037
Investment in unconsolidated affiliate............... 7,626 11,503
Property and equipment
Land.............................................. 18,688 16,418
Buildings and improvements........................ 89,856 84,009
Store fixtures and equipment...................... 78,570 84,678
Property subject to capital leases................ 14,368 14,368
-------- --------
201,482 199,473
Less accumulated depreciation and amortization.... 87,267 93,452
-------- --------
114,215 106,021
Deferred income taxes................................ 5,295 7,381
Deferred debt issuance cost, net..................... 5,221 4,335
Lease guarantee escrow............................... 6,701 7,970
Other assets......................................... 7,722 7,196
-------- --------
Total assets......................................... $338,294 $330,443
======== ========
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
SEPT. 29, JUNE 29,
1996 1997
-------- --------
Current Liabilities
Accounts payable.................................... $ 79,271 $ 63,140
Accrued payroll and related expenses................ 23,981 23,597
Other accrued liabilities........................... 23,607 25,359
Current portion of capital lease obligations........ 1,182 1,180
-------- --------
Total current liabilities.............................. 128,041 113,276
Long-term debt......................................... 165,000 165,000
Capital lease obligations, less current portion........ 6,917 6,042
Long-term portion of self-insurance reserves........... 10,332 9,475
Other long-term liabilities............................ 2,526 3,992
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) (34,773)
Less option to acquire stock........................ (14,650) (14,650)
-------- --------
Total stockholders' equity............................. (43,887) (36,707)
-------- --------
Total liabilities and stockholders' equity............. $338,294 $330,443
======== ========
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)
39 Weeks Ended
----------------------
June 23, June 29,
1996 1997
---------- ----------
Sales.................................................. $1,244,312 $1,292,267
---------- ----------
Cost of goods sold..................................... 959,246 997,032
---------- ----------
Gross profit........................................... 285,066 295,235
Operating expenses
Selling, general and administrative expenses........ 239,252 248,683
Depreciation and amortization....................... 9,220 9,858
Consulting fees..................................... 1,125 1,125
---------- ----------
Total operating expenses............................... 249,597 259,666
---------- ----------
Operating profit....................................... 35,469 35,569
Interest income........................................ 1,309 1,733
Interest expense....................................... (14,943) (14,871)
Equity in earnings (loss) from unconsolidated affiliate (935) (1,123)
Other income (loss) - net.............................. (187) 96
---------- ----------
Income before income taxes............................. 20,713 21,404
Income taxes........................................... 8,390 8,777
---------- ----------
Net income............................................. $ 12,323 $ 12,627
Less preferred dividends............................... 2,155 5,448
---------- ----------
Earnings available to common shareholders.............. $ 10,168 $ 7,179
========== ==========
Earnings per common share.............................. $ 126.75 $ 143.58
========== ==========
Average common shares outstanding...................... 80,220 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
--------------------
June 23, June 29,
1996 1997
-------- --------
Sales.................................................. $429,349 $427,445
Cost of goods sold..................................... 330,092 330,731
-------- --------
Gross profit........................................... 99,257 96,714
Operating expenses
Selling, general and administrative expenses........ 83,636 81,531
Depreciation and amortization....................... 3,058 3,297
Consulting fees..................................... 375 375
-------- --------
Total operating expenses............................... 87,069 85,203
-------- --------
Operating profit....................................... 12,188 11,511
Interest income........................................ 602 738
Interest expense....................................... (5,019) (4,892)
Equity in earnings (loss) from unconsolidated affiliate (387) (544)
Other income (loss) - net.............................. (11) 99
-------- --------
Income before income taxes............................. 7,373 6,912
Income taxes........................................... 2,988 2,834
-------- --------
Net income............................................. $ 4,385 $ 4,078
Less preferred dividends............................... 1,816 1,816
-------- --------
Earnings available to common shareholders.............. $ 2,569 $ 2,262
======== ========
Earnings per common share.............................. $ 51.38 $ 45.24
======== ========
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)
39 Weeks Ended
-----------------------
June 23, June 29,
1996 1997
--------- ---------
OPERATING ACTIVITIES:
Net income ......................................... $ 12,323 $ 12,627
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 9,220 9,858
Provision for deferred income taxes ............. 2 (2,086)
(Gain) loss on disposals of assets .............. 187 (96)
Net undistributed loss in investment in
unconsolidated affiliate ...................... 935 1,123
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............. (2,584) (401)
(Increase) decrease in inventories ............. (1,642) 1,633
(Increase) decrease in prepaid expenses ........ (581) (1,643)
(Increase) decrease in other assets ............ 1,167 (741)
Increase (decrease) in accounts payable ........ (4,949) (16,131)
Increase (decrease) in accrued liabilities and
long-term portion of self-insurance reserves . 7,463 (493)
--------- ---------
Net cash (used by) provided by operating activities 21,541 3,650
--------- ---------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ............. -- (5,000)
Purchase of property and equipment ................. (13,658) (14,329)
Proceeds from sale of property and equipment and
properties held for sale .......................... 18,629 16,552
--------- ---------
Net cash (used by) provided by investing activities 4,971 (2,777)
--------- ---------
FINANCING ACTIVITIES:
Dividends paid or accrued on preferred stock ....... (2,155) (5,447)
Redemption of common stock ......................... (69,365) --
Issuance of preferred stock ........................ 69,365 --
Principal payments on capital lease obligations .... (806) (875)
--------- ---------
Net cash (used by) financing activities ............ (2,961) (6,322)
--------- ---------
Net increase (decrease) in cash and cash equivalents 23,551 (5,449)
Cash and cash equivalents at beginning of period ... 26,308 45,279
--------- ---------
Cash and cash equivalents at end of period ......... $ 49,859 $ 39,830
========= =========
Interest paid ...................................... $ 9,938 $ 9,629
Income taxes paid .................................. $ 7,175 $ 4,275
See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 29, 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 September 29, 1996 and June 29, 1997 and
the results of its operations and cash flows for the thirty-nine weeks ended
June 23, 1996 and June 29, 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 thirty-nine weeks ended June 29, 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 thirty-nine weeks ended June 23,
1996 and June 29, 1997 consists of the following:
39 Weeks Ended
-------------------------------
June 23, 1996 June 29, 1997
------------- -------------
(In thousands)
Federal Income Taxes $ 7,198 $ 6,785
State Income Taxes 1,192 1,992
-------- --------
$ 8,390 $ 8,777
======== ========
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. On July 24, 1997, the Company gave notice of
exercise of option to redeem all outstanding shares of the Company's Series B
Preferred Stock for approximately $74.0 million, including accrued and unpaid
dividends.
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. Subsequently, Stater Bros. Markets exchanged the Preferred Stock of
Santee Dairies, Inc. for Common Stock of Santee Dairies, Inc. It is not
anticipated that Santee will issue dividends on its 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
$544,000 and $387,000 for the thirteen weeks ended
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 29, 1997
NOTE 4 - UNCONSOLIDATED AFFILIATE (CONTD.)
June 29, 1997 and June 23, 1996, respectively. For the thirty-nine weeks year to
date, the Company recognized losses of $1,123,000 and $935,000 for 1997 and
1996, respectively.
On July 30, 1997, the Company exchanged its Common Stock in Santee
Dairies, Inc. for a 50% ownership in Santee LLC, at which time Santee Dairies,
Inc. became a wholly owned subsidiary of Santee LLC.
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 agreed to
render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company agreed to pay Craig $1.5
million per year, payable quarterly during the term of the Consulting Agreement.
On July 31, 1997, the Company gave notice to terminate its obligations under 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.
NOTE 9 - SUBSEQUENT EVENTS
In July 1997, the Company solicited and obtained the requisite consents
from the majority of the noteholders of the Company's 11% Senior Notes due 2001
which permitted the Company to amend the Indenture which governs its 11% Senior
Notes due 2001 as follows:
1) permit the Company to issue and sell up to $100 million
aggregate principal amount of its 9% Senior Subordinated Notes
due 2004, and to use a portion of the net proceeds from the
issuance of such notes to redeem all issued and outstanding
shares of the Company's Series B Preferred Stock, held by
Reading Australia PTY Limited ("Reading"),
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 29, 1997
NOTE 9 - SUBSEQUENT EVENTS (CONTD.)
2) designate Santee LLC and Santee Dairies, Inc., to the extent
such entities ever become Subsidiaries of the Company, as
Unrestricted Subsidiaries (as defined) which would not be
subject to certain significant covenants of the 11% Senior Note
Indenture,
3) permit the Company to make certain additional investments in
Santee LLC (including investments funded by La Cadena
Investments, a California general partnership which owns all of
the issued and outstanding Common Stock of the Company),
4) permit the Company to repay under limited circumstances
investments made by La Cadena in the Company to enable it to
increase its ownership interest in Santee LLC, and
5) make certain other amendments to the 11% Senior Note Indenture.
On July 24, 1997, the Company completed an offering for $100 million of
9% Senior Subordinated Notes due 2004 under Rule 144a of the Securities Act.
Proceeds from the offering were used or will be used to pay for consent
solicitation fees of approximately $5.0 million, fees and expenses related to
the offering of approximately $4.0 million, pay a financial advisory fee to La
Cadena of $2.0 million and to pay approximately $74.0 million to redeem all of
the outstanding shares of the Company's Series B Preferred Stock including
accrued and unpaid dividends.
On July 24, 1997, concurrently with the sale of the 9% Senior
Subordinated Notes due 2004, the Company gave notice of exercise of option to
redeem all outstanding shares of the Company's Series B Preferred Stock to
Reading Australia PTY Limited ("Reading") a majority owned indirect subsidiary
of Craig Corporation ("Craig"). On August 4, 1997, the Company deposited
approximately $74.0 million into an Escrow Account for the benefit of Reading
Australia PTY Limited, the amounts required to redeem the Series B Preferred
Stock and to pay accrued and unpaid dividends up to and including August 4,
1997.
On July 31, 1997, the Company gave notice to terminate a five-year
consulting agreement with Craig that was entered into in connection with the
1994 Recapitalization. Annual fees payable to Craig under the Consulting
Agreement were $1.5 million per year.
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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 an 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. On July 24, 1997, the Company gave
notice of exercise of option to redeem all outstanding shares of the
Company's Series B Preferred Stock to Reading Australia PTY Limited, a
majority owned indirect subsidiary of Craig.
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.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and thirty-nine weeks
ended June 23, 1996 and June 29, 1997.
Thirteen Weeks Thirty-Nine Weeks
----------------- -------------------
1996 1997 1996 1997
------ ------ ------ ------
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.12 22.63 22.91 22.85
Operating Expenses:
Selling, general and
administrative expense 19.48 19.07 19.23 19.24
Depreciation and amortization .71 .77 .74 .76
Consulting fees .09 .09 .09 .09
Operating profits 2.84 2.70 2.85 2.76
Interest Income .14 .17 .11 .13
Interest expense (1.17) (1.14) (1.20) (1.15)
Equity in (loss) from
unconsolidated affiliate (.09) (.13) (.08) (.09)
Other income (loss)-net -- .02 (.02) .01
Earnings before income taxes 1.72% 1.62% 1.66% 1.66%
Total sales for the thirteen weeks ended June 29, 1997 decreased .4% and
amounted to $427.4 million compared to $429.3 million for the like
period in 1996. Total sales for the thirty-nine weeks year to date ended
June 29, 1997 increased 3.9% and amounted to $1,292.3 million compared
to $1,244.3 million for the same period in 1996. Like store sales
decreased .4% for the quarter and increased 3.9% for the year to date
period. The Company operated 110 supermarkets at June 29, 1997 and at
June 23, 1996. The increase in sales in the thirty-nine weeks of 1997
compared to the like period of 1996 is due to many factors, including
the favorable customer response to the Company's 60th Anniversary
Marketing Program and slight improvements in the Southern California
economy. Sales also increased as a result of 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 the Company's supermarkets and a
decrease in competitive activity. Although comparisons of sales between
the third quarters of 1997 and 1996 are difficult, the slight decrease
in sales in the thirteen-week third quarter of fiscal 1997 can be
attributed to several items including the timing of the Easter holiday
and last year's departure of a competitor from the Southern California
market place. Sales from the Easter holiday were reported in the third
quarter of last year (the quarter ended June 23, 1996) and were reported
in the second quarter of this year (the quarter ended March 30, 1997).
Additionally, in the Company's second quarter of fiscal 1996, Smiths
Food & Drug ("Smith's") announced the termination of its Southern
California operations and began closing all of its supermarkets located
in Southern California. Approximately 15 Smith's competed with the
Company, of which five stores remain closed as of
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
August 1, 1997 and of the remaining ten stores that were closed and
subsequently reopened by competitors, three stores reopened late in the
Company's 1996 second quarter, two stores reopened in the 1996 third
quarter and one store reopened in the Company's fourth quarter of fiscal
1996. Management believes it has been successful in attracting and
retaining many of the previous Smith's customers to its supermarkets.
Management believes that like store sales increased approximately 1.0%
in the third quarter of 1997, after adjusting for the Easter holiday and
the increase in sales in 1996 as a result of the departure of Smith's.
Gross profits for the thirteen weeks ended June 29, 1997, amounted to
$96.7 million or 22.63% of sales compared to $99.3 million or 23.12% of
sales in the same period of the prior year. For the thirty-nine week
year to date period, gross profits increased to $295.2 million or 22.85%
of sales compared to $285.1 million or 22.91% of sales in the prior
year. The decrease in gross profits, as a percent of sales, for the
third quarter and year-to-date periods reflects the Company's commitment
to retain its existing customer base and to attract new customers as the
Southern California economy continues to improve and experiences
increases in population in the Company's primary trading areas, through
its marketing strategy of Every Day Low Prices.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses and consulting fees. For the
thirteen weeks ended June 29, 1997, selling, general and administrative
expenses amounted to $81.5 million or 19.07% of sales compared to $83.6
million or 19.48% of sales for the like period of the prior year. For
the year to date period, selling, general and administrative expenses
amounted to $248.7 million or 19.24% of sales compared to $239.3 million
or 19.23% 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.
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 $320,000
in the third quarter of fiscal 1997 and approximately $1.2 million in
the year to date period of fiscal 1997. Selling, general and
administrative expenses for the thirty-nine weeks ended June 23, 1996
reflect reductions in expenses for employer contributions to a
collective bargaining benefits trust of $3.8 million year to date. Such
collective bargaining health care benefits trust was overfunded and
employer monthly contributions to the trust were suspended for the
months of December 1995 and January 1996.
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STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTD.)
Depreciation and amortization expenses amounted to $3.3 million and $9.9
million for the third quarter and year to date periods ended June 29,
1997, respectively. Depreciation and amortization expense amounted to
$3.1 million and $9.2 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. Amortization of the prepaid covenant not to compete amounted to
$250,000 and $750,000, respectively, for the thirteen and thirty-nine
weeks ended June 29, 1997 and June 23, 1996 and is included in
depreciation and amortization expense.
The Consulting Agreement also provided for annual consulting payments of
$1.5 million, paid quarterly in arrears. Consulting fees paid or accrued
to the benefit of Craig amounted to $375,000 for the thirteen weeks and
$1,125,000, for the thirty-nine weeks ended June 29, 1997 and June 23,
1996, respectively. On July 31, 1997, the Company gave notice to
terminate the five-year Consulting Agreement with Craig.
Operating profits for the third quarter of 1997 amounted to $11.5
million or 2.70% of sales, compared to $12.2 million or 2.84% of sales
in the third quarter of 1996. Operating profits for the thirty-nine
weeks year to date ended June 29, 1997, amounted to $35.6 million or
2.76% of sales, compared to $35.5 million or 2.85% of sales for the like
period in 1996.
Interest expense amounted to $4.9 million for the third quarter of 1997
and $5.0 million for the like period of 1996. For the year to date
periods of 1997 and 1996, interest expense amounted to $14.9 million.
Interest expense in the third quarter and year to date periods of 1997
and 1996, includes amortization of $295,000 and $885,000, respectively,
from fees and expenses incurred to acquire debt.
Income before income taxes amounted to $6.9 million and $7.4 million for
the third quarters of 1997 and 1996, respectively, and amounted to $21.4
million and $20.7 million for the year to date periods of 1997 and 1996,
respectively.
Net income for the third quarters of 1997 and 1996 amounted to $4.1
million or .95% of sales and $4.4 million or 1.02% of sales,
respectively, and for the year to date periods for 1997 and 1996,
amounted to $12.6 million or .98% of sales and $12.3 million or .99% of
sales, respectively.
14
15
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 June 29, 1997, and a $25.0 million standby letter of
credit facility, of which $15.5 million was available at June 29, 1997,
maintained pursuant to its worker's compensation and general liability
self-insurance requirements. The Bank Credit Agreement expires on June
1, 1998. The Company intends to renew or replace its Bank Credit
Agreement with a three-year facility with terms and conditions
comparable, or better than the existing Bank Credit Agreement.
Working capital amounted to $72.8 million at June 29, 1997 and $63.5
million at September 29, 1996 and the Company's current ratios were
1.64:1, and 1.50:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
The net cash provided by operating activities for the thirty-nine weeks
ended June 29, 1997 amounted to $3.7 million and consisted of reductions
in accounts payable 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 June 29, 1997, the Company's investment in inventories and related
accounts payable were 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 gain
recognition and the resulting tax liability from the October 1996 sale
and leaseback transaction.
Net cash used by investing activities for the thirty-nine weeks ended
June 29, 1997, amounted to $2.8 million compared to $5.0 million
provided by investing activities in fiscal 1996. The difference 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
thirty-nine week periods amounted to $14.3 million in 1997 compared to
$13.7 million in 1996. During the thirty-nine weeks ended June 29, 1997,
the Company remodeled nine 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.
15
16
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 $1.1
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 Family Markets ("Hughes"), located in
Irwindale, California, retained a 50% ownership in Santee and acquired a
like amount of the Preferred Stock of Santee. Both the Company and
Hughes subsequently exchanged the Santee Preferred Stock for Common
Stock of Santee Dairies, Inc. 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 $6.3 million and $3.0
million 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 deferred dividend payments on the Preferred Stock until
approximately August 4, 1997. Accordingly, as of June 29, 1997,
dividends of $3.8 million have been accrued and remain unpaid. On July
24, 1997, the Company gave notice of exercise of option to redeem all
outstanding shares of the Company's Series B Preferred Stock to Reading
Australia PTY Limited, a majority owned indirect subsidiary of Craig.
16
17
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 June 29, 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 June 29,
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 June 29, 1997, approximately $15.5 million of the LC
Facility was available to the Company. The Bank Credit Agreement expires
on June 1, 1998. The Company intends to renew or replace its Bank Credit
Agreement with a three-year facility with terms and conditions at least
as favorable with the existing Bank Credit Agreement.
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,
permitted indebtedness 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.
17
18
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE BANK FACILITIES (CONTD.)
As of June 29, 1997, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive covenants and had (i) a
current ratio of 1.89:1, (ii) tangible net worth and debt subordinated
to the Bank of $211.4 million; (iii) a ratio of total liabilities to
tangible net worth and debt subordinated to the Bank of 0.55:1 and (iv)
a fixed charge coverage ratio (as defined in the Bank Facilities) of
1.48:1. If for any reason Stater Bros. Markets is unable to comply with
the terms of the Bank Facilities, including the covenants contained
therein, such noncompliance would result in an event of default under
the Bank Facilities, and could result in acceleration of the payment of
indebtedness then outstanding under 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
In March 1994, the Company acquired, for $14.7 million, 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. On 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. On July 24, 1997, the Company gave
notice of exercise of option to redeem all outstanding shares of the
Company's Series B Preferred Stock to Reading Australia PTY Limited, a
majority owned indirect subsidiary of Craig.
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.
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.
18
19
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING STANDARDS (CONTD.)
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.
SUBSEQUENT EVENTS
Solicitation of Consents:
In July 1997, the Company solicited and obtained the requisite consents
from the majority of the noteholders of the Company's 11% Senior Notes
due 2001 which permitted the Company to amend the Indenture which
governs its 11% Senior Notes due 2001 as follows:
1) permit the Company to issue and sell up to $100 million
aggregate principal amount of its 9% Senior subordinated Notes
due 2004, and to use a portion of the net proceeds from the
issuance of the 9% Senior Subordinated Notes to redeem all
outstanding shares of the Company's Series B Preferred Stock,
held by Reading Australia PTY Limited ("Reading"),
2) designate Santee LLC and Santee Dairies, Inc., to the extent
such entities ever become Subsidiaries of the Company, as
Unrestricted Subsidiaries (as defined) which would not be
subject to certain significant covenants of the 11% Senior Note
Indenture,
3) permit the Company to make certain additional investments in
Santee LLC (including investments funded by La Cadena),
4) permit the Company to repay under limited circumstances
investments made by La Cadena in the Company to enable it to
increase its ownership interest in Santee LLC, and
5) make certain other amendments to the 11% Senior Note Indenture.
Offering of $100 million of 9% Senior Subordinated Notes due 2004:
On July 24, 1997, the Company completed an offering for $100 million of
9% Senior Subordinated Notes due 2004 under Rule 144a of the Securities
Act. Proceeds from the offering were used or will be used to pay for
consent solicitation fees of approximately $5.0 million, fees and
expenses related to the offering of approximately $4.0 million, pay a
financial advisory fee to La Cadena of $2.0 million and to pay
approximately $74.0 million to redeem all of the outstanding shares of
the Company's Series B Preferred Stock including accrued and unpaid
dividends.
19
20
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUBSEQUENT EVENTS (CONTD.)
Redemption of Series B Preferred Stock:
On July 24, 1997, the Company gave notice of exercise of Option to
redeem all outstanding shares of the Company's Series B Preferred Stock
to Reading Australia PTY Limited, a majority owned indirect subsidiary
of Craig. On August 4, 1997, the Company deposited approximately $74.0
million into an Escrow Account for the benefit of Reading Australia PTY
Limited, to redeem the Series B Preferred Stock and to pay accrued and
unpaid dividends up to and including August 4, 1997.
Termination of Consulting Agreement
On July 31, 1997, the Company gave notice to terminate the five-year
Consulting Agreement with Craig that was entered into in connection with
the 1994 Recapitalization.
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.
20
21
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 deferred dividend payments on the 10.5% Preferred
Stock until approximately August 4, 1997. Accordingly, the Company had
deferred making dividend payments of $3.8 million on the Series B
Preferred Stock as of June 29, 1997.
In July 1997, the Company solicited and obtained the requisite consents
from the majority of the noteholders of the Company's 11% Senior Notes
due 2001 which permitted the Company to amend the Indenture which
governs its 11% Senior Notes due 2001 as follows:
1) permit the Company to issue and sell up to $100 million
aggregate principal amount of its 9% Senior subordinated Notes
due 2004, and to use a portion of the net proceeds from the
issuance of the 9% Senior Subordinated Notes to redeem all
outstanding shares of the Company's Series B Preferred Stock,
held by Reading Australia PTY Limited ("Reading"),
2) designate Santee LLC and Santee Dairies, Inc., to the extent
such entities ever become Subsidiaries of the Company, as
Unrestricted Subsidiaries (as defined) which would not be
subject to certain significant covenants of the 11% Senior Note
Indenture,
3) permit the Company to make certain additional investments in
Santee LLC (including investments funded by La Cadena),
4) permit the Company to repay under limited circumstances
investments made by La Cadena in the Company to enable it to
increase its ownership interest in Santee LLC, and
5) make certain other amendments to the 11% Senior Note Indenture.
21
22
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. CHANGES IN SECURITIES (CONTD.)
Offering of $100 million of 9% Senior Subordinated Notes due 2004:
On July 24, 1997, the Company completed an offering for $100 million of
9% Senior Subordinated Notes due 2004 under Rule 144a of the Securities
Act. Proceeds from the offering were used or will be used to pay for
consent solicitation fees of approximately $5.0 million, fees and
expenses related to the offering of approximately $4.0 million, pay a
financial advisory fee to La Cadena of $2.0 million and to pay
approximately $74.0 million to redeem all of the outstanding shares of
the Company's Series B Preferred Stock including accrued and unpaid
dividends
Redemption of Series B Preferred Stock:
On July 24, 1997, the Company gave notice of exercise of option to
redeem all outstanding shares of the Company's Series B Preferred Stock
to Reading Australia PTY Limited, a majority owned indirect subsidiary
of Craig. On August 4, 1997, the Company deposited approximately $74.0
million into an Escrow Account for the benefit of Reading Australia PTY
Limited, to redeem the Series B Preferred Stock and to pay accrued and
unpaid dividends up to and including August 4, 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
----------- -----------
4.1 First Supplemental Indenture, between the
Company and IBJ Schroder Bank & Trust Company,
as Trustee, for $165,000,000 11% Senior Notes
due 2001, dated as of July 22, 1997.
22
23
STATER BROS. HOLDINGS INC.
JUNE 29, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTD.)
(a) Exhibits
Exhibits are as follows:
EXHIBIT NO. DESCRIPTION
----------- -----------
4.2 Indenture between the Company and First Trust of
New York, as Trustee, for $100,000,000 9% Senior
Subordinated Notes due 2004, dated as of July
24, 1997.
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
23
24
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: August 11, 1997 /s/ Jack H. Brown
-------------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 11, 1997 /s/ Dennis N. Beal
-------------------------------------
Dennis N. Beal
Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
24