ITEM 1. BUSINESS
GENERAL
Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros. Development, Inc., (collectively "Stater Bros." or the "Company") were founded in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The Company is a leading supermarket chain in Southern California and operates 155 supermarkets under the Stater Bros. Markets name.
The Company has grown, primarily by constructing supermarkets in its primary trading areas, through the enlargement of existing supermarkets and through a strategic acquisition in August 1999 of 43 supermarkets in Southern California. Stater Bros. supermarkets consist of approximately 5.1 million total square feet and approximately 3.7 million selling square feet. The Company's supermarkets offer its customers a high level of customer service, broad selections of grocery, meat, produce, liquor and general merchandise. All of the Company's supermarkets have full-service meat departments. Nearly all of the supermarkets have hot service delicatessens and hot service bakery departments. All of the Company's supermarkets have expanded selections of produce merchandise.
The Company utilizes a central warehouse and distribution facility which provides the Company's supermarkets with approximately 84% of the merchandise they offer for sale. The Company's warehouse and distribution facilities encompass approximately 1,358,000 square feet and include facilities for grocery, produce, meat, frozen foods, health and beauty aids and bakery products.
OWNERSHIP OF THE COMPANY
In August 1997, La Cadena Investments ("La Cadena") became the sole shareholder of the Company and holds all of the shares of the Company's Class A Common Stock which are entitled to 1.1 votes per share. La Cadena Investments is a California General Partnership whose partners include Jack H. Brown, Chairman of the Board, President and Chief Executive Officer of the Company and other members of senior management of the Company. Jack H. Brown has a majority interest in La Cadena and is the managing general partner with the power to vote the shares of the Company held by La Cadena.
ACQUISITION On May 7, 1999, Stater Bros. entered into an agreement with Albertson's, Inc. ("Albertson's") to purchase 43 supermarkets and one future store site (the "Acquisition") in Stater Bros.' existing and contiguous market areas. The stores were formerly operated by Albertson's or Lucky Stores and were divested in connection with the merger of Albertson's and American Store Company, the parent of Lucky Stores. The purchase price was $94.4 million for land, buildings and equipment, $39.6 million for inventories on hand at closing, and the assumption of $13.3 million of capitalized lease obligations. The supermarkets were acquired sequentially over a twenty-four day period which began on August 9, 1999. Each acquired store was reopened under the Stater Bros. name within two days of its acquisition and was fully integrated into the Stater Bros. operating systems.
ITEM 1. BUSINESS (CONTD.)
ACQUISITION (CONTD.)
The Acquisition was funded through an issue, in August 1999, of $450 million of 10.75% Senior Notes due 2006 (the "10.75% Notes") under Rule 144A of the Securities Act of 1933. Proceeds from the issuance were used to (a) retire all of the 9% Notes ($100.0 million), (b) retire substantially all of the 11% Notes ($159,952,000), (c) fund early redemption premiums of $18.7 million for both the 9% Notes and the 11% Notes, (d) acquire the assets of 43 supermarkets and one future store site for $134.0 million, (e) pay a fee to La Cadena for financial advisory services of $4.5 million, and (f) pay fees and expenses of the transaction. The remaining proceeds from the issue were used for general corporate purposes, including capital expenditures. Of the 10.75% Notes, $449,750,000 are registered securities and $250,000 are restricted and unregistered.
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the "Recapitalization") which transferred effective voting control of the Company to La Cadena, reclassified the Company's outstanding equity, provided for certain cash payments and distributions to Craig Corporation ("Craig"), previously a common shareholder of the Company, and provided the Company with an option to acquire Craig's remaining equity in Stater Bros. Holdings Inc. The Recapitalization Transaction was funded through an offering of $165.0 million of 11% Senior Notes due 2001 (the "11% Notes") under Rule 144A of the Securities Act of 1933, as amended. Proceeds from the 1994 Notes were used to (a) repay $75.5 million of 9.8% Senior Notes, together with prepayment premiums of $13.9 million, (b) repay outstanding bank loans and mortgages of approximately $12.0 million, (c) repay an outstanding capital expenditure revolving credit facility of $9.0 million, (d) fund a $5.0 million five-year consulting agreement and covenant not to compete with Craig, (e) fund a payment of $14.6 million to purchase an option to acquire Craig's remaining interest in the Company, (f) pay $20.0 million in dividends on the Company's Common Stock (held by Craig) and (g) pay fees and expenses associated with the Recapitalization. Substantially all of the 11% Notes ($159,952,000) were redeemed in August 1999.
CONVERSION AND REDEMPTION OF SERIES B PREFERRED STOCK
Effective March 8, 1996, pursuant to options available to the Company, the Company exercised its right to convert all of its outstanding shares of Common Stock (previously held by Craig) into 693,650 shares of its Series B Preferred Stock. The Series B Preferred Stock had a redemption value of approximately $69.4 million and paid dividends at the rate of 10.5% per annum. In August 1997, the Company redeemed all of the outstanding shares of its Series B Preferred Stock for $69.4 million plus accrued and unpaid dividends.
In July 1997, the Company issued $100.0 million of 9% Senior Subordinated Notes due 2004 (the "9% Notes") under Rule 144A of the Securities Act of 1933. Proceeds from the issuance of the 9% Notes were used as follows (a) $69.4 million to redeem the Series B Preferred Stock, (b) $4.6 million to pay accrued dividends due from the Series B Preferred Stock, (c) $4.9 million to obtain consents from the holders of the Company's 11% Senior Notes due 2001 to permit the issue of the 9% Notes, (d) pay fees and expenses of the transaction. The remaining proceeds from the issuance of the 9% Notes were used for general corporate purposes, including capital expenditures. The 9% Notes were redeemed in August 1999.
ITEM 1. BUSINESS (CONTD.)
BUSINESS STRATEGY
STORE PROFILE AND LOCATIONS
The Company's supermarkets have well-established locations and low overhead expenses, including fixed rent payments in most supermarkets. In addition, the Company believes that its existing supermarkets are well maintained and generally require capital expenditures only for customary maintenance. An average supermarket is approximately 32,900 square feet, while newly constructed supermarkets range from approximately 35,300 square feet to 43,200 square feet. Stater Bros. supermarkets typically utilize approximately 72% of total square feet for retail selling space. The Company operates its supermarkets with minimal back-room storage space because of the close proximity of its distribution facility to its store locations. Generally, all Stater Bros. supermarkets are similarly designed and stocked thereby allowing Stater Bros. customers to find items easily in any of the Company's supermarkets.
Substantially all of the Company's 155 supermarkets are located in neighborhood shopping centers in well-populated residential areas. The Company endeavors to locate its supermarkets in growing areas that will be convenient to potential customers and will accommodate future supermarket expansion.
Management actively pursues the acquisition of sites for new supermarkets. In an effort to determine sales potential, new supermarket sites are carefully researched and analyzed by management for population shifts, zoning changes, traffic patterns, nearby new construction and competitive locations. Stater Bros. works with developers to attain the Company's criteria for potential supermarket sites, and to insure adequate parking and a complementary co-tenant mix.
STORE EXPANSION AND REMODELING
The Company has historically focused its expansion in the Inland Empire and Orange County. Such expansion has been accomplished through improving and remodeling existing stores, constructing new supermarkets, and the acquisition of other supermarket operations. The number of supermarkets operated by the Company is 155 as of September 24, 2000. The Company intends to continue to expand its existing supermarket operations by enlarging and remodeling existing supermarkets and constructing new supermarkets. The Company may also make strategic acquisitions of existing supermarkets, if such opportunities arise.
The Company monitors sales and profitability of its operations on a store-by-store basis and enlarges, remodels or replaces stores in light of their performance and management's assessment of their future potential. Prior to the acquisition of the 43 supermarkets, approximately 55% of the Company's supermarkets have been either newly constructed or remodeled within the last five years. Minor remodels cost between $100,000 and $250,000 and typically include new fixtures, a change in decor, and the addition of one or more specialty service departments such as a delicatessen or bakery. Major remodels cost in excess of $250,000 and typically involve more extensive refurbishment of the store's interior and often increase the retail selling space per store. Expansions entail enlargement of the store building and typically includes breaking through an exterior wall. The primary objectives of remodelings and expansions are to improve the attractiveness of supermarkets, increase sales of higher margin product categories and, where feasible, to increase selling area. The Company conducts all of its new construction and most of its remodeling through its wholly-owned subsidiary, Stater Bros. Development, Inc., which serves as the general contractor for all Company construction projects.
ITEM 1. BUSINESS (CONTD.)
STORE EXPANSION AND REMODELING (CONTD.)
The following table sets forth certain statistical information with respect to the Company's supermarket expansion and remodeling for the periods indicated.
Beyond 2000, the Company plans to open approximately three to five new stores per year, based upon a number of factors, including customer demand, market conditions, profitability, costs of opening, and availability of financing for such new stores. The Company's plans with respect to major and minor remodels, expansion and new construction are reviewed continually and are revised, if appropriate, to take advantage of marketing opportunities. The Company finances its new store construction primarily from cash provided by operating activities and short-term borrowings under its credit facilities. Long-term financing of new stores generally will be obtained through either sale and leaseback transactions or secured long-term financings. However, no assurances can be made as to the availability of such financings.
WAREHOUSE AND DISTRIBUTION FACILITIES
The Company's warehouse and distribution facilities and administrative offices are located in Colton, California, and encompass approximately 1,358,000 square feet. The facilities include warehouses for grocery, produce and deli products, meats and meat deli products, frozen products, health and beauty aids and bakery merchandise. Management believes that its existing warehouse and distribution facilities are adequate to meet its current volume. Approximately 84% of the products offered for sale in the Company's supermarkets are processed through the Company's warehouse and distribution facilities.
The Company's warehouse and distribution facilities are centrally located and are an average distance of approximately 41 miles from its supermarkets. Most supermarkets can be reached without using the most congested portions of the Southern California freeway system.
The Company's transportation fleet consists of modern well-maintained vehicles. As of September 24, 2000, the Company operated approximately 140 tractors and 393 trailers, approximately 4% of which were leased by the Company. The Company also operates a repair terminal at the Colton distribution facility.
PURCHASING AND MARKETING
The Company uses an "Aggressive Everyday Low Price" ("AEDLP") format supported heavily by radio, TV, newspaper and direct mail advertising programs as an integral part of its purchasing and marketing strategy to provide its customers with the best overall supermarket value in its primary market areas. The Company supplements its everyday low price structure with chain-wide temporary price reductions ("Stater Savers") on selected food and non-food merchandise. The geographic location of the Company's supermarkets allows it to reach its target consumers through a variety of media and the Company aggressively advertises its everyday low prices through local and regional newspapers, direct mail and printed circulars as well as extensive advertisements on radio and television.
ITEM 1. BUSINESS (CONTD.)
PURCHASING AND MARKETING (CONTD.)
A key factor in the Company's business strategy is to provide its customers with a variety of quality brand-name merchandise as well as alternative selections of high-quality private label and generic brands of merchandise. To meet the needs of customers, most supermarkets are stocked with approximately 35,000 items. The Company places particular emphasis on the freshness and quality of its meat and produce merchandise and maintains high standards for these perishables by processing and distributing the merchandise through its perishable warehouses and distribution facilities.
RETAIL OPERATIONS
The Company's supermarkets are well maintained, have sufficient off-street parking and generally are open from 6:00 a.m. or 7:00 a.m. until 10:00 p.m. or 11:00 p.m., seven days a week, including all holidays with the exception of Christmas Day. Because Stater Bros. operates its supermarkets under similar formats, management believes it is able to achieve certain operating economies.
Store Management. Each supermarket is managed by a store manager and an assistant manager, each of whom receives a base salary and may receive a bonus based on the individual supermarket's overall performance and management of labor costs within the supermarket. The store manager and assistant manager are supported by their store management staff who have the training and skills necessary to provide proper customer service, operate the store and manage personnel in each department. Additionally, the store manager is supported by individual department managers for grocery, meat, produce, and where applicable, bakeries and delicatessens. Store managers report to one of nine district managers, each of whom is responsible for an average of 17 supermarkets. District managers report to one of three Regional Vice Presidents.
Customer Service. The Company considers customer service and customer confidence to be critical to the success of its business strategy. This strategy, to provide courteous and efficient customer service through specific programs and training, is a focus of the executive officers and is implemented at all levels of employees. The Company maintains an intensive checker training school to train prospective checkers and to provide a refresher program for existing checkers. All of the Company's supermarkets provide customers with purchase carry-out service and have express check-out lanes for purchases of 10 items or less.
SANTEE DAIRIES, LLC
Stater Bros. and Hughes Family Markets currently each own a 50% interest in Santee Dairies, LLC, and have jointly owned the Santee Dairies operation since 1986. Recently, through a series of transactions, The Kroger Co. became the indirect owner of Hughes, which it operates as Ralph's supermarkets. Santee Dairies operates one of the largest dairy plants in California and provides fluid milk products to Stater Bros., Ralph's, and other customers in Southern California. Santee Dairies processes, packages and distributes whole milk, low-fat and non-fat milk, as well as orange juice, fruit drinks and certain other cultured milk products under the Knudsen, Foremost and certain store brand names. Santee Dairies is the exclusive licensee of the Knudsen trademark from Kraft Foods, Inc. for fluid milk, juices and certain other cultured milk products in the Southern California market. In addition, Santee Dairies is the exclusive licensee for Foremost Farms USA, Cooperative of the Foremost trademark for fluid milk in Southern California. Santee Dairies also distributes Hershey chocolate milk under license. In calendar 1999, Santee Dairies processed approximately 57.1 million gallons of fluid products, including 47.0 million gallons of fluid milk. Total revenues in Santee Dairies' 52-week fiscal year ended January 1, 2000 were $167.4 million, of which approximately $86.8 million were sales to Stater Bros. and Ralph's. Santee Dairies also sells to unaffiliated supermarkets, independent food distributors, military bases and food service providers in Southern California.
ITEM 1. BUSINESS (CONTD.)
SANTEE DAIRIES, LLC (CONTD.)
In 1998 Santee Dairies moved to a new dairy plant in City of Industry, California (the "New Dairy"). The New Dairy increased Santee Dairies' capacity to process milk to approximately 250,000 to 350,000 gallons per day, with the ability to expand capacity to approximately 500,000 gallons per day. Plans for the New Dairy contemplated that, when operating at full capacity, the New Dairy would lower Santee Dairies' costs of producing fluid milk and other products. Until recently, the New Dairy had not achieved the planned operating efficiencies and Santee Dairies' costs of production had been higher than anticipated.
Stater Bros. and Santee Dairies are parties to a ten-year fluid milk purchase agreement entered into in August 1997. It requires that Stater Bros. purchase its requirements of fluid milk and certain other products, subject to a minimum volume each year equal to approximately 80% of the volume purchased during Stater Bros.' 1996 fiscal year. Prices under the agreement are calculated to cover Santee Dairies' direct and indirect costs of production, including financing costs. However, recoverable costs by Santee Dairies may not include under any circumstances amounts owing solely by reason of the acceleration of principal payments under any loan agreement to which Santee Dairies is a party. During 1998 and 1999, the prices paid by Stater Bros. pursuant to the fluid milk agreement were adversely affected by delays in completion of the New Dairy, cost overruns and lower production volumes than anticipated. Beginning in June 1998, Stater Bros. accepted and paid incremental prices of approximately $1.0 million per month to Santee Dairies as the result of its increased cost structure. In February 1999, incremental prices paid to Santee Dairies by Stater Bros. decreased to approximately $800,000 per month. In July 1999, the incremental prices paid to Santee Dairies decreased to approximately $400,000 per month and were eliminated during October 1999. Incremental prices paid for milk by Stater Bros. amounted to $48,000 in fiscal 2000, $9.4 million in fiscal 1999 and $4.3 million in fiscal 1998. Stater Bros. believes that future incremental pricing will not be necessary, however, no assurances can be given that Stater Bros. will not incur incremental prices in the future.
The Company accounts for its investment in Santee using the equity method of accounting.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems and point-of-sale scanning technology reduce the labor costs attributable to product pricing and customer check-out, and provide management with information that facilitates purchasing, receiving and management of inventory and accounts payable. The Company has point-of-sale scanning checkout technology in all of its stores. All stores use electronic systems for employee time and attendance records, inventory orderings, and labor scheduling, which assist store management in developing a more efficient and customer-sensitive work schedule.
During fiscal 1998, the Company installed in fifteen stores, NCR's new generation of electronic scan systems, the 7452 ACS Scan System, an additional fifty-nine systems were installed during fiscal 1999 and fifteen systems were installed during fiscal 2000. These new systems are more customer oriented, operate more efficiently and reduce the time required to check out customers.
The Company uses the Stater Express(R) system in all of the Company's supermarkets. Stater Express(R) is a combined supermarket technology platform that includes enhanced systems for check verification and acceptance and provides alternative pay choices such as most nationally recognized financial institution debit and credit cards. Stater Express(R) also provides each supermarket with the technology required to print in-store advertising signs and connects each supermarket to the Company's host computer which provides certain efficiencies in data transfers between the supermarkets and the Company's main office. The Company has obtained a federal service mark for the name "Stater Express".
ITEM 1. BUSINESS (CONTD.)
EMPLOYEES
The Company has approximately 12,100 employees, approximately 750 of whom are management and administrative employees and approximately 11,350 of whom are hourly employees. Approximately 72% of the Company's employees work part-time. Substantially all of the Company's hourly employees are members of either the United Food & Commercial Workers or International Brotherhood of Teamsters labor unions and are represented by several different collective bargaining agreements. The Company's collective bargaining agreements, with the United Food & Commercial Workers, which covers the largest number of employees, were renewed in October 1999 and expire in October 2003. The International Brotherhood of Teamsters agreement was renewed in September 1998 and expires in September 2002.
The Company values its employees and believes its relationship with them is good and that employee loyalty and enthusiasm are key elements of its operating performance.
COMPETITION
The Company operates in a highly competitive industry characterized by narrow profit margins. Competitive factors include price, quality and variety of products, customer service, and store location and condition. The Company believes that its competitive strengths include its specialty services, everyday low prices, breadth of product selection, high product quality, one-stop shopping convenience, attention to customer service, convenient store locations and a long history of community involvement.
Given the wide assortment of products it offers, the Company competes with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug stores, national general merchandisers and discount retailers, membership clubs and warehouse stores. The Company's primary competitors include Vons, Albertson's, Ralphs, and a number of independent supermarket operators.
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental authorities, including federal, state and local agencies that regulate trade practices, building standards, labor, health, safety and environmental matters and regulate the distribution and sale of alcoholic beverages, tobacco products, milk and other agricultural products and other food items.
ENVIRONMENTAL
Environmental remediation costs incurred over the past five years were approximately $891,000, in the aggregate, including remediation costs of approximately $174,000 in 1998, $101,000 in 1999 and $198,000 in 2000. Management believes that any such future remediation costs will not have a material adverse effect on the financial condition or results of operations of the Company.
During fiscal 1998, the Company removed all of its underground gasoline fuel storage tanks and remediated the surrounding soils, where necessary. The costs incurred in 1998 to remove the underground gasoline storage tanks and to remediate the surrounding soils amounted to approximately $84,000. The Company refuels its transportation equipment at several off-site locations which are owned and operated by an unrelated third party.
ITEM 1. BUSINESS (CONTD.)
YEAR 2000 COMPLIANCE
The Company successfully achieved compliance with the Year 2000 requirements and Year 2000 related issues had no material adverse effect on the Company's results of operations, liquidity or financial condition. However, no assurance can be given that unforeseen problems may not occur in the future that may have a material adverse effect on the Company's results of operations, liquidity or financial condition.
The Company's costs required to achieve Year 2000 compliance such as replace or modify Information Systems, including scheduled replacements of in-store Point of Sale equipment, was approximately $8.5 million, of which $7.0 million was capitalized and $1.5 million was expensed.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases its warehouse and distribution facilities located in Colton, California, and management believes that its warehouse and distribution facilities are well maintained and are adequate to meet its current volume.
The following schedule presents the Company's warehouse and distribution facilities by product classification and the size of each facility as of September 24, 2000.
As of September 24, 2000, the Company owned 45 of its supermarkets and leased the remaining 110 supermarkets. Management believes that its supermarkets are well maintained and adequately meet the expectations of its customers. The Company operates 155 supermarkets in the Southern California counties of San Bernardino, Riverside, Orange, Los Angeles, Kern and San Diego. The following schedule reflects the Company's store counts by size, county, and the number of stores that are either leased or owned as of September 24, 2000.
The total size of the Company's supermarkets is approximately 5,101,000 square feet, of which 3,653,000 is selling square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various legal actions which the Company believes are incidental to the operation of the business of the Company and its subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. The Company believes that the outcome of such legal proceedings to which the Company is currently a party will not have a material adverse effect upon its results of operations or its consolidated financial condition.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the State of California for the County of San Bernardino. The complaint filed by twelve employees sought damages alleging racial discrimination in the Company's employment practices. This case was settled during fiscal 2000 with the payment of damages to the plaintiffs without any admission of liability by Stater Bros. Markets, which payment has been accounted for in the Company's financial statements.
On September 21, 2000, Stater Bros. Markets was named as a defendant in two cases, Barnhart, et al vs. Stater Bros. Markets and Jenkins/Harvth, et al vs. Stater Bros. Markets, both filed in the Superior Court of the State of California for the County of San Bernardino. The complaints were purportedly filed on behalf of Stater Bros. Markets store managers and assistant store managers respectively alleging that such workers are non-exempt under California Wage Law and are therefore entitled to overtime wages. The Company believes the complaints are without merit and intends to vigorously defend these cases and does not believe that the outcome of these cases will result in any material adverse effect on the Company's results of operations or consolidated financial condition.
ENVIRONMENTAL MATTERS
Environmental remediation costs incurred during the last five years were approximately $891,000, in the aggregate, including remediation costs of approximately $174,000 in 1998, $101,000 in 1999, and $198,000 in 2000. Management believes that any such future remediation costs will not have a material adverse effect on the financial condition or results of operations of the Company.
During fiscal 1998, the Company removed all of its underground gasoline fuel storage tanks and remediated the surrounding soils, where necessary. The costs incurred in 1998 to remove the underground gasoline storage tanks and to remediate the surrounding soils amounted to approximately $84,000. The Company refuels its transportation equipment at several off-site locations which are owned and operated by an unrelated third party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
There is no established public trading market for the Company's common equity.
(b) Holders
La Cadena Investments holds 50,000 shares, or 100% of the Company's Class A Common Stock.
(c) Dividends
No dividends were paid in fiscal years 2000, 1999, and 1998 on the common equity of the Company and the Company does not intend to pay dividends on its common equity in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data derived from the audited financial statements of the Company as of and for the fiscal years ended September 29, 1996, September 28, 1997, September 27, 1998, September 26, 1999 and September 24, 2000. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements of the Company and related notes thereto contained elsewhere herein. The information included in "Other Operating and Financial Data" and "Store Data" is unaudited.
(FOOTNOTES ON FOLLOWING PAGE)
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
(1) Effective March 1994, the Company paid $1.5 million annually in consulting fees to Craig Corporation, subject to a certain five year Consulting Agreement entered into between the Company and Craig. The Company's agreement to pay Craig an annual consulting fee was terminated, at the election of the Company, in August 1997.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
(2) The extraordinary loss in 1999 represents the after-tax loss from the early extinguishment of debt.
(3) The extraordinary gain in 2000 represents the after-tax gain from the early extinguishment of debt.
(4) EBITDA represents earnings before extraordinary gain (loss), interest expense, depreciation and amortization and income tax expense. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA should not be used as an alternative to, or be construed as more meaningful than, operating profit or cash flows as an indicator of the Company's operating performance.
(5) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and the extraordinary loss, amortization of previously capitalized interest and undistributed earnings or loss from less than 50% owned subsidiaries and includes fixed charges. Fixed charges consist of interest expense whether expensed or capitalized, amortization of deferred debt expense, preferred stock dividends adjusted to represent pre-tax earnings requirements and such portion of rental expense as can be deemed by management to be representative of the interest factor in the particular case.
(6) The fiscal year 1996 was a 53-week year, whereas fiscal years 1997, 1998, 1999 and 2000 were 52-week years.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OWNERSHIP OF THE COMPANY
Effective August, 1997, La Cadena became the sole shareholder of the Company and holds all of the shares of the Company's Class A Common Stock which are entitled to 1.1 votes per share. La Cadena Investments is a California General Partnership whose partners include Jack H. Brown, Chairman of the Board, President and Chief Executive Officer of the Company and other members of senior management of the Company. Jack H. Brown has a majority interest in La Cadena and is the managing general partner with the power to vote the shares of the Company held by La Cadena.
ACQUISITION
Comparisons between fiscals 2000, 1999 and 1998 are difficult due to the acquisition of 43 supermarkets and one future store site in August 1999, expenses incurred to integrate the acquired supermarkets into the Company's retail operating and distribution systems and the issuance of $450.0 million of 10.75% Notes and related redemptions, together with early redemption premiums, of all the 9% Notes and substantially all the 11% Notes in August 1999. On May 7, 1999, the Company entered into an agreement with Albertson's to acquire 43 supermarkets and one future store site. The stores were formerly operated by Albertson's or Lucky Stores and were divested in connection with the merger of Albertson's and American Stores Company, the parent of Lucky Stores. The supermarkets were acquired sequentially over a twenty-four day period beginning August 9, 1999. The purchase price for the property, plant, equipment and inventories of 43 supermarkets and one future store site was approximately $134.0 million plus capital lease obligations assumed of $13.3 million and approximately $2.2 million of capitalized costs related to the transfer of ownership of the supermarkets. The acquisition was accounted for using the purchase method of accounting and the results of operations of the 43 supermarkets are included in the Company's consolidated results of operations from the acquisition date of each supermarket.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS
The following table sets forth certain income statement components expressed as a percent of sales for the fiscal years ended September 27, 1998, September 26, 1999 and September 24, 2000.
Total sales amounted to $2.418 billion in 2000 compared to $1.830 billion in 1999 and $1.726 billion in 1998. Like-store sales increased 1.9% (before erosion of like-store sales of 0.5% to newly acquired stores) in fiscal 2000, compared to an increase of 1.9% in fiscal 1999 and an decrease of 1.0% in fiscal 1998. The increase in total sales during fiscal 2000 is due to the acquisition of 43 supermarkets and the increase in like-store sales, after erosion, of 1.4%. The increase in like-store sales of 1.9% in fiscal 1999 was due to favorable customer response to the Company's 1999 marketing plan, which emphasized the Company's high quality and expanded product selections in the produce and other perishable departments and the completion of 10 major remodels. The decrease in like-store sales in fiscal 1998 was due to competitors re-opening supermarkets vacated by a competitor that terminated its California operations.
Gross profits increased to $598.6 million or 24.76% of sales in 2000 compared to $442.6 million or 24.18% of sales in 1999 and $402.6 million or 23.32% of sales in 1998. The increase in gross profits, as a percent of sales during the last three fiscal years was due to the introduction of higher gross margin products achieved through the Company's merchandising expansion and upgrading programs including significant investments in product display fixtures. During fiscal 2000, the Company had a major expansion in its general merchandise program, expanded its produce selection and added additional service meat and seafood cases. The Company adjusts its pricing strategy as necessary to retain its every day aggressive low price marketing position.
Operating expenses include selling, general and administrative expenses, depreciation and amortization and acquisition integration expenses. In fiscal year 2000, selling, general and administrative expenses amounted to $532.1 million or 22.01% of sales compared to $377.2 million or 20.61% of sales in 1999 and $353.1 million or 20.46% of sales in 1998. Selling, general and administrative expenses for fiscal 2000 increased over fiscal 1999 due to the acquisition of the 43 new stores. In addition, the Company experienced higher than expected labor costs in the first two quarters of the year due to the staffing and training of personnel for the new service meat departments in the newly acquired stores. Selling, general and administrative expenses for fiscal 1999 included expenses incurred to operate the additional 43 supermarkets acquired in August 1999, from increased labor costs due to contractual wage increases, from increased labor required to staff ten additional service deli departments and from additional labor in the Company's supermarkets required to support the 1999 marketing plan which emphasized
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
the perishable departments. Selling, general and administrative expenses for fiscal 1998 included expenses incurred to operate two additional supermarkets and non-recurring advertising expenses of approximately $2.1 million incurred in the second and third quarters to re-affirm the Company's strategy of Aggressive Every Day Low Price leadership in its primary marketing areas and to advertise the Company's successful No Club Card strategy.
Depreciation and amortization expenses amounted to $25.6 million in 2000 compared to $16.6 million in 1999 and $15.4 million in 1998. The increase in depreciation and amortization expenses in fiscal 2000 over fiscal 1999 and fiscal 1998 is due to the acquisition of the 43 new stores in fiscal 1999. Depreciation and amortization expenses include amortization of $438,000 in 1999 and $1.0 million in 1998, from a $5.0 million prepaid five-year covenant not to compete included in a Consulting Agreement between the Company and Craig, which became effective March 8, 1994 as part of the Recapitalization Transaction. Amortization of the covenant not to compete terminated in March 1999.
Acquisition integration expenses amounted to $4.6 million in fiscal 2000 and $5.6 million in fiscal 1999 and were related to the acquisition of 43 supermarkets acquired from Albertson's in August 1999. No additional Acquisition integration costs are anticipated. Acquisition integration expenses consisted of salaries and wages, uniforms, supplies and non-recurring advertising expenses incurred during the integration of the supermarkets.
Operating profits amounted to $36.3 million or 1.50% of sales in 2000 compared to $43.2 million or 2.36% of sales in 1999 and $34.1 million or 1.97% of sales in 1998.
Interest expense amounted to $53.7 million, $33.6 million and $30.2 million for the 2000, 1999 and 1998 fiscal years, respectively. The increase in interest expense in 2000 and 1999 was due to the issuance in August 1999 of $450.0 million of 10.75% Senior Notes due 2006 and reduced by the redemption of all of the 9% Notes and substantially all ($5.1 million remain outstanding) of the 11% Notes. Interest expense included amortization of fees and expenses incurred to acquire debt of $2.5 million in 2000 and $2.8 million in 1999 and 1998.
The equity in income from unconsolidated affiliate amounted to $1.5 million in fiscal 2000 compared to $1.1 million in 1999 and a loss of $2.9 million in 1998. The increase in income from unconsolidated affiliate in fiscal 2000 was due to increased volume and improved efficiencies by Santee Dairies LLC. The increase in earnings in fiscal 1999 over fiscal 1998 was due to incremental price increases paid by the two owners of Santee Dairies LLC (Hughes and Stater Bros. Markets) of $12.9 million compared to $5.6 million in 1998. Stater Bros. Markets and Hughes (the "Owners") are each parties to ten-year fluid milk purchasing agreements entered into in August 1997. The agreements require the Owners to each purchase their fluid milk and certain other products, subject to a minimum volume each year equal to approximately 80% of the volume purchased in 1996. Prices under the agreements are calculated to cover Santee's direct and indirect costs of production, including financing costs. However, recoverable costs by Santee may not include under any circumstances amounts owing solely by reason of acceleration of principal payments under any loan agreement to which Santee is a party. During 1998 and 1999, the prices paid by Stater Bros. Markets pursuant to the fluid milk agreement were adversely effected by delays in construction of the New Dairy, cost overruns and lower production volumes than anticipated. Beginning in June 1998, Stater Bros. accepted and paid incremental prices of approximately $1.0 million per month to Santee as a result of its increased cost structure. In February 1999, incremental prices paid to Santee by Stater Bros. decreased to approximately $800,000 per month and decreased to approximately $400,000 per month in July 1999. In October 1999, the incremental pricing structure was terminated, but no assurances can be given that Stater Bros. will not incur incremental prices in the future. In fiscal 2000, Stater Bros. paid
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
RESULTS OF OPERATIONS (CONTD.)
Santee approximately $48,000 in incremental prices compared to $9.4 million in fiscal 1999 and $4.3 million in fiscal 1998 and such amounts are included in Stater Bros.' cost of goods sold.
Income (loss) before income taxes (benefit) and extraordinary gain (loss) amounted to a $12.7 million loss in fiscal 2000, $13.7 million income and $4.0 million income for 1999 and 1998 fiscal years, respectively.
Income (loss) before extraordinary gain (loss) amounted to a $7.3 million loss in 2000, $8.3 million income in 1999 and $2.5 million income in 1998.
Extraordinary gain (loss) amounted to an extraordinary gain in fiscal 2000 of $1.1 million ($1.9 million less tax effect) from early extinguishment of $11.0 million of 10.75% Senior Notes due 2006, and an extraordinary loss in fiscal 1999 of $17.3 million ($28.5 million less tax effect) from the early extinguishment of all of the Company's 9% Notes and substantially all of the Company's 11% Notes.
Net loss, for fiscal 2000, amounted to $6.2 million, compared to a net loss of $9.0 million in 1999 and net income of $2.5 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements through funds generated from operations and from borrowings from short-term revolving credit facilities. The Company's credit agreement became effective August 6, 1999 and expires in August 2002, and consists of a revolving loan facility for working capital of $50.0 million, all of which was available at September 24, 2000 and a letter of credit facility with a maximum availability of $25.0 million, of which $15.0 million was available at September 24, 2000. The letter of credit facility is maintained pursuant to the Company's workers' compensation and general liability self-insurance requirements.
The Company had no short-term borrowings outstanding at the end of fiscal years 2000, 1999 and 1998, and the Company did not incur short-term borrowings during fiscal years 2000, 1999 and 1998.
Working capital amounted to $111.8 million at September 24, 2000, $130.9 million at September 26, 1999 and $90.7 million at September 27, 1998. The Company's current ratios were 1.63:1, 1.79:1 and 1.78:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.
Net cash provided by operating activities amounted to $15.4 million in 2000, $59.3 million in 1999 and $26.4 million in 1998. Fluctuations in operating assets and liabilities are not unusual in the industry. The change in cash provided by operating activities in fiscal 2000 compared to fiscal 1999 was due primarily to larger than normal increases in asset and liability accounts in 1999 due to the acquisition of the 43 new stores. Cash provided by operating activities in fiscal 2000 consisted of increases in inventories, accounts payable and accrued liabilities and decreases in accounts receivable and prepaid expenses. The increase in cash provided by operating activities in fiscal 1999, when compared to fiscal 1998, was due primarily to increases in accounts payable and accrued liabilities, net of increases in inventories and accounts receivable that relate, primarily, to the post acquisition operations of the August 1999 acquisition of 43 supermarkets. The change in net cash provided by operating activities in fiscal 1998 was due to fluctuations in inventory, accounts payable and accrued liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Net cash used in financing activities during fiscal 2000 amounted to $10.7 million and consisted of funds of $8.7 million used to retire $11.0 million of 10.75% Senior Notes due 2006 and principal payment on capital lease obligations of $1.9 million. Net cash provided by financing activities in fiscal 1999 amounted to $152.9 million and consisted of reductions in capital lease obligations of $1.3 million and an issuance of $450.0 million of 10.75% Senior Notes due 2006 in August 1999. Proceeds from the 10.75% Notes were used to fund the early redemption of all ($100.0 million) of the outstanding 9% Notes and substantially all ($159.9 million) of the outstanding 11% Notes, together with early redemption premiums of $18.7 million and to pay fees and expenses of the debt offering of approximately $17.l million, which includes a financial advisory fee paid to La Cadena of $4.5 million. Additionally, proceeds from the 10.75% Notes were used to acquire the assets of 43 supermarkets and one future store site for approximately $136.2 million and the remaining proceeds were used for general corporate purposes including capital expenditures. Net cash used in financing activities during fiscal 1998 amounted to $1.3 million and consisted of reductions in capitalized lease obligations.
Net cash used in investing activities during fiscal 2000 amounted to $35.4 million and consisted of the purchase of property and equipment of $38.2 million which included approximately $21.8 million to fund projects related to the acquisition of the 43 supermarkets and related warehouse expansion. Additional capital expenditures were used to acquire land for a store site, fund year 2000 projects, as well as fund normal maintenance capital expenditures. Proceeds from the sale of assets amounted to $2.8 million and consisted primarily from the sale of a store site in Colton, California. The Colton store site was leased backed by the Company under an operating lease. Net cash used in investing activities during fiscal 1999 amounted to $176.1 million and consisted of $136.2 million to acquire the assets of 43 supermarkets, one future store site and related capitalized asset acquisition costs in August 1999. Capital expenditures of $42.8 million includes $12.6 million in point of sale scan systems and related equipment and warehousing and material handling equipment which were purchased as a direct result of the acquisition of the 43 supermarkets and included approximately $3.3 million in equipment and software purchased to achieve Year 2000 compliance. During fiscal 1999, capital expenditures were also incurred to complete the construction of the new Loma Linda supermarket and to complete 7 minor and 10 major remodels. Proceeds from sales of assets amounted to $2.9 million and consisted primarily of reimbursements from the landlord for costs incurred by the Company to construct its new supermarket in Loma Linda, which opened in December 1998. Capital expenditures for fiscal 1999 were funded through proceeds from the reimbursed construction costs of the Loma Linda supermarket, cash flow from operations and from proceeds from the issuance of the 10.75% Notes. Net cash used in investing activities for fiscal 1998 amounted to $27.0 million. Capital expenditures amounted to $26.3 million in 1998 and included costs to complete construction and to open two supermarkets, to begin construction on a third supermarket (which opened in December 1998) and to complete five minor and six major remodels.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
The Company owns 50% of Santee Dairies, LLC. Hughes Family Markets ("Hughes"), located in Irwindale, California owns 50% of Santee Dairies, LLC. In May 1998, the Company increased its investment in Santee Dairies LLC by contributing $1.1 million into Santee's capital structure. Santee Dairies, Inc. is a wholly owned subsidiary of Santee Dairies LLC. Santee Dairies, Inc. operates a fluid milk processing plant in City of Industry, California. Santee provides the Company's supermarkets with a significant amount of high-quality fluid milk and other dairy products.
Management believes that cash capital expenditures for fiscal 2001 will be approximately $34.4 million.
Management believes that operating cash flow, supplemented by capital expenditures financings obtained through capital and operating leases, will be sufficient to meet the Company's currently identified operating needs and scheduled capital expenditures. However, there can be no assurance that such lease financings will be available to the Company.
The Company operated 155 supermarkets at September 24, 2000 and September 26, 1999 and operated 112 supermarkets at September 27, 1998.
The Company's supermarkets had approximately 5.1 million total square feet at September 24, 2000 and September 26, 1999 and had approximately 3.3 million total square feet at September 27, 1998.
CREDIT FACILITIES Stater Bros.' principal operating subsidiary, Stater Bros. Markets, signed a credit facility with Bank of America N.A. on August 6, 1999. The credit facility provides for (i) a $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility. Borrowings under the revolving loan facility are unsecured and are expected to be used for certain working capital and corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support the purchase of inventory, obligations incurred in connection with the construction of stores, and workers' compensation insurance obligations. The availability of the loans and letters of credit are subject to certain sub-limits and other borrowing restrictions.
Indebtedness of Stater Bros. Markets under the August 6, 1999 credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of Stater Bros., and any subsidiaries that Stater Bros. Markets or Stater Bros. Development, Inc. acquires or forms after the date of the credit facility.
Loans under the credit facility bear interest at a rate based upon either (i) the "Base Rate" (defined as the higher of (a) the rate of interest publicly announced by Bank of America as its "reference rate" and (b) the federal funds effective rate from time to time plus 0.50%), plus 1.00%, or (ii) the "Offshore Rate" (defined as the rate (adjusted for statutory reserve requirements for eurocurrency liabilities) at which eurodollar deposits for one, two, three or six months (as selected by Stater Bros. Markets) are offered to Bank of America in the inter-bank eurodollar market), plus 2.25%.
The revolving loan facility will cease to be available and will be payable in full on August 6, 2002. Letters of credit under the credit facility can be issued until August 6, 2002, and all letters of credit must expire not later than August 6, 2003. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
CREDIT FACILITIES (CONTD.)
Loans under the revolving loan facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the credit facility may be reduced by Stater Bros. Markets. Stater Bros. Markets will be required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. For purposes of that fee, commercial letters of credit will not constitute outstanding standby letters of credit issued under the letter of credit facility equal to 1.25% per annum on the face amount of such letters of credit, and will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letter of credit issued under the letter of credit facility.
Availability of the loans and letters of credit under the credit facility is subject to a monthly borrowing base test based on inventory. The credit facility requires Stater Bros. Markets to meet certain financial tests, including minimum net worth and minimum EBITDA tests. The credit facility contains covenants which, among other things, will limit indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, asset sales, leases, investments, loans and advances, transactions with affiliates, sale and leasebacks, other matters customarily restricted in such agreements and modifications to the holding company status of Stater Bros. Markets.
The credit facility also contains covenants that apply to Stater Bros. Holdings Inc., and Stater Bros. Holdings Inc. is a party to the credit facility for purposes of these covenants. These covenants, among other things, limit dividends and other payments in respect of Stater Bros. Holdings Inc.'s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by Stater Bros. Holdings Inc. The credit facility requires Stater Bros. Holdings Inc. and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal identities remain separate.
The credit facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgments; defaults; invalidity of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of control.
As of September 24, 2000, for purposes of the credit facility with Bank of America, Stater Bros. Markets was in compliance with all restrictive covenants and exceeded the minimum net worth covenant by approximately $100.0 million and exceeded minimum inventory coverage by approximately $64.4 million. The minimum EBITDA (as defined) covenant measurement period begins (as amended) in the quarter ending June 27, 2000, and requires an annualized minimum EBITDA of $75.0 million. As of September 24, 2000, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $10.3 million.
As of September 24, 2000, for the purposes of the credit facility with Bank of America, Stater Bros. Holdings Inc. was in compliance with all restrictive covenants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
CREDIT FACILITIES (CONTD.)
The Company is also subject to certain covenants associated with its 11% Senior Notes due 2001 and its 10.75% Senior Notes due 2006. As of September 24, 2000, the Company was in compliance with all such covenants. However, there can be no assurance that the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
LABOR RELATIONS
The Company and other major supermarket employers in Southern California negotiated a four-year contract, beginning October 1999, with the United Food and Commercial Workers Union. The Company's collective bargaining agreement with the International Brotherhood of Teamsters was renewed in 1998 and expires in September 2002. Management believes it has good relations with its employees.
YEAR 2000 COMPLIANCE
The Company successfully achieved compliance with the Year 2000 requirements and Year 2000 related issues had no material adverse effect on the Company's results of operations, liquidity or financial condition. However, no assurance can be given that unforeseen problems may not occur in the future that may have a material adverse effect on the Company's results of operations, liquidity or financial condition.
The Company's costs required to achieve Year 2000 compliance such as replace or modify Information Systems, including scheduled replacements of in-store Point of Sale equipment, was approximately $8.5 million, of which $7.0 million was capitalized and $1.5 million was expensed.
RECENT ACCOUNTING PRONOUNCEMENTS
During the Company's fiscal 2000, the Financial Accounting Standards Board issued or required the adoption of Statement of Financial Accounting Standards ("SFAS") No. 138 and No. 139. Adoption of SFAS No. 138 and No. 139 were either not applicable to the Company or were adopted by the Company in its fiscal 2000 and did not have a material effect on the Company's financial position or its results of operations in fiscal 2000.
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the impact of inflation on the operations of the Company has been moderate. As inflation has increased expenses, the Company has recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge the Company to become more cost efficient as its ability to recover increases in expenses through price increases is diminished. The future results of operations of the Company will depend upon the ability of the Company to adapt to the current economic environment as well as to the current competitive conditions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTD.)
EFFECT OF INFLATION AND COMPETITION (CONTD.)
The Company conducts business in one industry segment, the operation of retail food supermarkets, which offer for sale to the public most merchandise typically found in supermarkets. The supermarket industry is highly competitive and is characterized by low profit margins. The Company's primary competitors include Vons, Albertson's, Ralphs and a number of independent supermarket operators. Competitive factors typically include the price, quality and selection of products offered for sale, customer service, and the convenience and location of retail facilities. The Company monitors competitive activity and Senior Management regularly reviews the Company's marketing and business strategy and periodically adjusts them to adapt to changes in the Company's primary trading area.
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in the Company's filings with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) includes statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, expansion and other activities of competitors, changes in federal or state laws and the administration of such laws and the general condition of the economy.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the Company's financial statements and supplementary data contained in this report. Specific financial statements and supplementary data can be found on the pages listed in the following index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the current executive officers and directors of the Company, their ages and principal occupations for at least the past five years. Directors of the Company each serve for a term of one year, or until their successors are elected. The officers serve at the discretion of the Board of Directors of the Company.
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Jack H. Brown has been President and Chief Executive Officer of the Company since June 1981 and Chairman of the Board since 1986. From September 1978 to June 1981, Mr. Brown served as President of Pantry Food Markets, Inc. and American Community Stores Corporation, Inc., both wholly-owned subsidiaries of Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr. Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a publicly held corporation. Mr. Brown has been employed in various capacities in the supermarket industry for 48 years. Mr. Brown has a majority interest and is the managing general partner of La Cadena Investments.
Donald I. Baker has been Executive Vice President of the Company since October 1998. Mr. Baker joined the Company in November 1983 as Vice President-Warehouse and Transportation and was Group Senior Vice President-Administration from July 1996 to October 1998. From July 1992 to July 1996, Mr. Baker was Group Senior Vice President-Human Resources and Distribution. From August 1986 to July 1992, Mr. Baker was Senior Vice President-Human Resources and Distribution. Mr. Baker has approximately 34 years of experience in the supermarket industry. Prior to joining the Company, Mr. Baker was employed by American Community Stores Corporation, Inc., a subsidiary of Cullum Companies, Inc., a publicly held corporation, from 1972 to 1983 in various capacities including Vice President of Retail Operations, and was also employed by The Kroger Co. from 1966 to 1972.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTD.)
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS (CONTD.)
H. Harrison Lightfoot has been Group Senior Vice President-Development since May 1998 and was Group Senior Vice President-Retail Operations of the Company from June 1986 to May 1998. Mr. Lightfoot has served the Company for 46 years in various capacities, including store manager, buyer, general supervisor and Vice President. Mr. Lightfoot is a general partner of La Cadena Investments.
A. Gayle Paden has been Group Senior Vice President-Administration since May 1998 and was Group Senior Vice President-Distribution from July 1996 to May 1998. Mr. Paden joined the Company in 1986 as Group Senior Vice President-Administration and served in that capacity until July 1996. Mr. Paden was previously with Lucky Stores for 35 years where he served in various capacities, the most recent of which was President of the Southern California Food Division.
Phillip J. Smith has been Senior Vice President and Chief Financial Officer since November 2000, and was Vice President and Controller from April 1998 until November 2000. Mr. Smith joined the Company in 1987 as Controller. Mr. Smith has approximately 25 years experience in the supermarket industry. Prior to joining the Company, Mr. Smith was employed by Market Basket Foodstores as Vice President and Chief Financial Officer from 1985 to 1987. From 1975 until 1985, Mr. Smith was employed by various divisions of Cullum Companies, Inc., a publicly held corporation, in various financial capacities.
Bruce D. Varner has been a director of Stater Bros. Markets since September 1985 and director of Stater Bros. Holdings Inc. since May 1989. Since February 1997, Mr. Varner has been a partner in the law firm of Varner, Saleson & Dobler LLP. From 1967 to February 1997, Mr. Varner was a partner in the law firm of Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner specializes in business and corporate matters. Mr. Varner and the law firm of Varner, Saleson & Dobler LLP have performed legal services in the past for the Company and the Company expects such services to continue in the future.
Thomas W. Field, Jr. has been Vice Chairman of the Board of Directors of the Company since May 1998 and a Director of the Company since 1994. He has been President of Field and Associates since 1989. From 1988 to 1989, Mr. Field was Chairman of the Board, President and Chief Executive Officer of McKesson Corporation and was its President since 1984, and President and Chief Executive Officer from 1986 to 1988. Mr. Field was President of American Stores Company from 1981 to 1984 and was President of Alpha Beta Company from 1976 to 1984. Mr. Field was a Director of American Stores Company from 1979 to 1984. Mr. Field is a nationally recognized and highly regarded supermarket executive. Mr. Field has held various positions in the Supermarket Industry for over 41 years and serves as a Director for several companies including, Campbell Soup Company and Maxicare.
C. Dale Warman has been a director of the Company since 2000. He served the Fred Meyer Company for over 41 years. He served as a director of Fred Meyer from 1975 to 1990. He served as president of Fred Meyer Foods from 1982 to 1990. He served as executive vice president of Fred Meyer Inc. from 1981 to 1990. He was executive vice president of Allied Foods from 1972 to 1975. He served as a director of Big Bear Stores from 1987 to 1989 and as a director of Allied Stores from 1973 to 1975. He is considered one of the supermarket industry's outstanding executives.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered during the prior three fiscal years paid to the CEO and the four most highly compensated executive officers other than the CEO of the Company:
(1) The dollar value of perquisites and other personal benefits, if any, for each of the Named Executive Officers was less than the reporting thresholds established by the Securities and Exchange Commission.
(2) Amounts shown for the Named Executive Officers represent the Company's contributions to the Company's Profit Sharing Plan, a defined contribution plan, for the account of each Named Executive Officer. Plan participants become fully vested in the plan after seven years of service.
(3) Includes Mr. Brown's Director Fees for 1998, 1999 and 2000, which amounted to $26,000, $25,500, and $51,000, respectively.
(4) The Bonus reflected in 1999 for Mr. Brown includes a one-time bonus of $2,000,000 awarded in recognition of his expertise in acquiring 43 supermarkets from Albertson's and his expertise in handling the August 1999 offering of $450.0 million of 10.75% Senior Notes due 2006 and obtaining a $75.0 million credit facility.
(5) The Bonuses reflected in 1999, for Mr. Baker, Mr. Lightfoot, Mr. Paden and Mr. Smith include one-time Bonuses, based upon the Company's acquisition and successful integration of 43 Supermarkets from Albertson's and Lucky, in Southern California.
(6) The Board of Directors of Stater Bros. Holdings Inc. unanimously awarded Mr. Brown a one-time bonus in 2000 for successful integration of the 43 acquired supermarkets.
(7) Annual Bonuses to be paid to the Named Executive Officers for fiscal 2000 had neither been calculated nor awarded as of December 12, 2000, the latest practical date.
STOCK OPTIONS AND SARS
None
ITEM 11. EXECUTIVE COMPENSATION (CONTD.)
PENSION PLAN
The Company's Pension Plan for Salaried Employees (the "Pension Plan") is a non-contributory, defined benefit plan which applies to all salaried employees who have completed one year of qualified service, including directors who are employees. For each year of credited service, the annual pension to which an employee is entitled under the Pension Plan upon normal retirement at age 65 is an amount equal to three quarters of one percent of the employee's compensation for each year up to the social security wage base, plus 2.15 percent of the employee's compensation for each year in excess of the social security wage base. The Named Executive Officers have the following years of credited service under the Pension Plan as of September 24, 2000: Jack H. Brown - 19 years, H. Harrison Lightfoot - 46 years, A. Gayle Paden - 14 years, Donald I. Baker - 17 years and Phillip J. Smith - 13 years.
The amounts shown in the following table are estimated annual retirement benefits under the Pension Plan (assuming payments are made on the normal life annuity and not under any of the various survivor forms of benefits) based upon retirement at age 65, after various years of service at selected salary levels. Benefits under the Pension Plan do not become fully vested until the employee has five years of credited service with the Company. The Internal Revenue Code of 1986, as amended, places certain limitations on pension benefits that can be paid from a tax-qualified pension plan and trust, as well as the compensation that may be taken into account in determining such benefits. Such limitations are not reflected in the table below. The maximum annual benefit for 2000 retirees with ten or more years of service at retirement is $130,000. The maximum annual compensation that may be considered for 2000 retirees is $160,000.
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee of $50,000 plus $500 for each board meeting attended.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In June of 2000, the Company's principal operating subsidiary, Stater Bros. Markets, entered into Employment Agreements with Messrs. Brown, Baker, Lightfoot, Paden and Smith. Under each of the Agreements, the employee is employed to serve as an officer of the Company and with certain exceptions the Agreements prohibits the employee from employment in any other business except for a parent or subsidiary of the Company. Each of the Agreements may be terminated by the Company with cause and by either party without cause upon ninety (90) days written notice. If the employment is terminated without cause, the Employee's compensation continues through the expiration of the term of the Agreement then in effect except in the event of termination of
ITEM 11. EXECUTIVE COMPENSATION (CONTD.)
EMPLOYMENT AND SEVERANCE AGREEMENTS (CONTD.)
any of the Agreements of Messrs. Baker, Lightfoot, Paden and Smith by Mr. Brown or by the Board of Directors with the consent of Mr. Brown. If the employee is terminated as a result of a change of control, he is entitled to receive all salary and benefits provided under the Agreement for the original term notwithstanding termination of his employment. Each Agreement provides for annual base compensation at the employee's current level with annual increases plus employee benefits and incentive bonus calculated in accordance with a formula based on the Company's earnings. Mr. Brown's Agreement has an original term of five (5) years which is automatically renewed on July 1 of each year for a five (5) year term unless ninety (90) days notice of termination is given by either party. Mr. Baker's Agreement has an original term of four (4) years and unless sooner terminated is renewed automatically through April 20, 2006, the date of Mr. Baker's sixty-fifth (65th) birthday, the Company's normal retirement age. Mr. Lightfoot's and Mr. Paden's Agreements have terms ending on March 5, 2003 and November 6, 2001 respectively, the dates of their respective sixty-fifth (65) birthdays, the Company's normal retirement age. Mr. Smith's Agreement has an original term of three (3) years which is automatically renewed for an additional term of three (3) years unless sooner terminated.
In addition, the Company's operating entity, Stater Bros. Markets, entered into employment contracts with 44 additional members of Senior Management during fiscal 2000.
The Company's severance policies generally provide for two weeks of severance pay to full-time, non-bargaining unit employees for every year of service to the Company, up to a maximum of twelve weeks.
PHANTOM STOCK PLAN
Stater Bros. Holdings maintains a phantom stock plan to provide additional incentive compensation to certain executives of Stater Bros. Markets whose performance is considered especially critical to the Company's business. Under the plan, grants may be made by the Compensation Committee and Board of Directors to persons recommended by the Chairman of the Board or Chief Executive Officer. Existing stockholders and partners of La Cadena Investments are not eligible to receive awards. Awards under the plan are for units which have a value equal to a fraction of a share of Stater Bros. Holdings common stock. The value of the units awarded under the plan will increase or decrease in accordance with the value of the common stock. Subject to vesting provisions of the plan, units are paid in cash either (i) in a lump sum upon a change in control of the Company; or (ii) if sooner, in either a lump sum or installments (with interest) over a five-year period (as Stater Bros. Holdings may determine) following termination of the participant's employment by reason of retirement, permanent total disability or death. Awards under the plan vest after five years, except that upon a participant's early retirement, permanent total disability or death, awards are considered partially vested at the rate of 20% for each year of employment following the grant. If a participant voluntarily terminates his or her employment, or is terminated for cause, any unvested awards under the plan will terminate and no payment will be made thereunder.
Payments pursuant to units awarded under the plan are based upon the value of a share of common stock at the date of retirement, permanent total disability or death, except that if such date occurs within two years of the grant the amount of payment, per unit, is limited to the appreciated value of a share of stock during the period. Upon a change of control, the payment on all units is equal to the value of a fraction of a Stater Bros. Holdings common stock share.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 12, 2000, the number and percentage of outstanding shares of Class A Common Stock beneficially owned by (a) each person known by the Company to beneficially own more than 5% of such stock, (b) each director of the Company, (c) each of the Named Executive Officers, and (d) all directors and executive officers of the Company as a group:
- -------------
(1) The 50,000 outstanding shares of the Company's Class A Common Stock are owned by La Cadena Investments and may be deemed to be beneficially owned by the partners of La Cadena Investments. The general partners of La Cadena Investments are Jack H. Brown, Richard C. Moseley and H. Harrison Lightfoot. Mr. Brown has the majority interest and is the managing general partner of La Cadena Investments and has the power to vote the shares of the Company owned by La Cadena Investments on all matters. Certain La Cadena issues, such as the disposition of such shares of the Company, may require approval of 60% of the voting power of La Cadena Investments. Accordingly, Messrs. Brown, Moseley and Lightfoot may be deemed to have shared voting power or shared investment power with respect to the shares owned by La Cadena Investments, and such individuals therefore may be deemed to be the beneficial owners thereof. The address of La Cadena Investments is 3750 University Avenue, Suite 610, Riverside, California 92501.
(2) The address of Messrs. Brown, Lightfoot, Moseley, Paden, Baker, Smith, Varner, Field and Warman is c/o the Company at 21700 Barton Road, Colton, California 92324.
CHANGE OF CONTROL ARRANGEMENTS
None
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Bruce D. Varner and the law firm of Varner, Saleson & Dobler LLP, of which Mr. Varner is a partner, have performed legal services in the past for the Company. The total cost of such legal services incurred by the Company during fiscal 2000 was approximately $1.5 million. The Company believes that the terms and costs of such legal services provided by Mr. Varner and the law firm of Varner, Saleson & Dobler LLP were at least as fair to the Company as could have been obtained from unaffiliated law firms. The Company expects such services to continue in the future.
Prior to March 24, 1994, the Company's common stock was owned equally by La Cadena and Craig. In March 1994, the Company completed the 1994 Recapitalization, which transferred effective voting control of the Company to La Cadena, reclassified the Company's outstanding equity, provided for certain cash payments and distributions to Craig and provided the Company with an option to acquire Craig's remaining equity in the Company. The 1994 Recapitalization was funded through the offering of the 11% Senior Notes. The following paragraphs describe the 1994 Recapitalization.
The Company amended its Certificate of Incorporation to provide for two classes of common stock designated "Common Stock" and "Class A Common Stock", and two series of preferred stock designated "Series A Preferred Stock" and "Series B Preferred Stock." The then existing shares of outstanding common stock were classified as Common Stock, and holders of such stock were afforded the right to exchange all such shares into a like number of shares of Class A Common Stock. La Cadena exchanged its shares of Common Stock for shares of Class A Common Stock and Craig initially retained its shares of Common Stock (subject to the Company's right to convert such shares of Common Stock into shares of Series B Preferred Stock, and subject to the Company's option to acquire such shares of Common Stock, as described below). For a period of five years following the 1994 Recapitalization, each share of Class A Common Stock was entitled to 1.1 votes while each share of Common Stock was entitled to one vote, thereby giving La Cadena approximately 52% and Craig approximately 48% of the total voting power of the Company.
The Board of Directors of the Company declared a dividend of $400 per share on the Common Stock, payable to holders of record at the close of business on the day following the closing of the 1994 Recapitalization. As a result of the amendment of the Company's Certificate of Incorporation and the exchange by La Cadena of its shares of Common Stock for Class A Common Stock, the aggregate amount of the dividend on the Common Stock amounted to $20.0 million, and the entire dividend was paid to Craig.
Pursuant to the Option Agreement dated as of September 3, 1993 between the Company and Craig, as amended (the "Option Agreement"), the Company was given the right, at its option, for a period of two years from the 1994 Recapitalization, to convert the Common Stock into 693,650 shares of Series B Preferred Stock. The Company exercised the option effective March 8, 1996 and the Company subsequently redeemed the Series B Preferred Stock for $69.4 million in August 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)
The Company entered into a prepaid five year covenant not to compete and a consulting agreement with Craig, pursuant to which the Company paid Craig $5.0 million at the closing of the 1994 Recapitalization. Additionally, the Company had been paying an annual consulting fee of $1.5 million. The covenant not to compete and consulting arrangements with Craig were unique, based upon the confidential information available to Craig and its experience with, and relationship to the Company. Accordingly, the Company had no basis to determine whether comparable services could be obtained from unaffiliated third parties on similar or more favorable terms. On July 31, 1997, the Company gave notice to Craig to terminate the Consulting Agreement.
Pursuant to the Amendment to the Agreement of Stockholders of Stater Bros. Holdings Inc. dated as of September 3, 1993, the Agreement of Stockholders of Stater Bros. Holdings Inc. dated as of May 10, 1989 among the Company, La Cadena, Craig and an affiliate of Craig (as amended, the "Stockholders Agreement") was amended effective as of the 1994 Recapitalization closing to provide that, among other things: (a) the Stockholders Agreement may be terminated by any party upon exercise by the Company of its right to convert the Common Stock into the Series B Preferred Stock as described above, and (b) certain rights of the stockholders to purchase shares of Common Stock owned by other stockholders would be suspended until after the expiration of the Company's right to convert the Common Stock into the Series B Preferred Stock. Under the Stockholders Agreement, the Company and the holders of the Class A Common Stock and Common Stock were granted certain rights of first refusal with respect to transfers of such stock. The Stockholders Agreement was terminated effective October 15, 1996.
In June 1997, in connection with the Consent Solicitation, the Company retained La Cadena to provide financial advisory services for a fee of $2.0 million.
In August 1999, in connection with the $450.0 million debt offering, the redemption of all of the 9% Notes and substantially all of the 11% Notes and the acquisition of 43 supermarkets and one future store site from Albertson's, the Company retained La Cadena to provide financial advisory services for a fee of $4.5 million.
The 50,000 outstanding shares of the Company's Class A Common Stock are owned by La Cadena Investments and may be deemed to be beneficially owned by the partners of La Cadena Investments. The general partners of La Cadena are Jack H. Brown, Richard C. Moseley and H. Harrison Lightfoot. Mr. Brown has a majority interest and is the managing general partner. Mr. Brown is a director of the Company and Messrs. Brown and Lightfoot are Named Executive Officers of the Company. Mr. Brown has the power to vote the shares of the Company owned by La Cadena, except with respect to certain fundamental corporate changes of the Company, including the disposition of such shares. Accordingly, Messrs. Brown, Moseley and Lightfoot may be deemed to have shared voting power with respect to shares of the Company owned by La Cadena. Mr. Moseley served the Company for over 44 years and in many executive capacities, most recently and from September 1995 until his retirement from the Company in January 1996, Mr. Moseley served as Executive Vice President of the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document list
(1) Financial Statements See Financial Statement Index included in Item 8 of Part II of this Form 10-K.
(2) Financial Statement Schedules The Financial Statement Schedules required by Item 14(d) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore, have been omitted.
(3) Exhibits Exhibits as required by Item 14(c) are as follows:
EXHIBIT NO. DESCRIPTION ----------- -----------
1 (5) Purchase Agreement dated August 6, 1999 by and between Stater Bros. and Banc of America Securities LLC.
2.1 (5) Asset Purchase Agreement dated as of May 7, 1999, by and between Albertson's Inc., Stater Bros. Markets and Stater Bros.
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.2 (4) 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 (the "First Supplemental Indenture").
4.6 (5) Indenture dated as of August 6, 1999, between Stater Bros. and IBJ Whitehall Bank & Trust Company.
4.7 (5) Registration Rights Agreement dated as of August 6, 1999, by and between Stater Bros. and Banc of America Securities, LLC.
4.8 (5) Second Supplemental Indenture dated as of July 16, 1999 between Stater Bros. and IBJ Whitehall Bank & Trust Company, for the securities issued under the indenture dated as of March 8, 1994, as amended by the First Supplemental Indenture dated as of July 22, 1997.
5.0 (5) Opinion of Gibson, Dunn & Crutcher LLP
10.1 (1) Reclassification Agreement dated September 3, 1993, by and among the Company, Craig and La Cadena.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTD.)
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION ----------- -----------
10.2 (1) Amendment to Reclassification Agreement, dated January 12, 1994, by and among the Company, Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated May 10, 1989, by and among the Company, Craig and La Cadena.
10.4 (1) Amendment to Agreement of Stockholders dated September 3, 1993, by and among the Company, Craig, Craig Management, Inc. ("CMI") and La Cadena.
10.5 (1) Option Agreement dated September 3, 1993, by and between the Company and Craig.
10.6 (1) Amendment to Option Agreement dated January 12, 1994, by and between the Company and Craig.
10.7 (1) Consulting Agreement dated September 3, 1993, by and between the Company, Craig and CMI.
10.8 (1) Letter Agreement regarding Consulting Agreement, dated March 8,1994, by and between the Company, Craig and CMI.
10.9 (1) Second Amended and Restated Stock Agreement dated January 12, 1994, by and among the Company, Craig, CMI, La Cadena and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994, by and between the Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(a) (2) Amendment dated June 23, 1995 to the Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(b) (3) Amendment dated July 22, 1996 to the Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(c) (5) Credit Agreement dated as of August 6, 1999 by and among Stater Bros. Markets, Stater Bros. and Bank of America, N.A.
10.13 (1) Continuing Guaranty dated March 8, 1994, of Stater Bros. Development, Inc. in favor of Bank of America Trust and Savings Association.
10.15 (1) Subordination Agreement dated March 8, 1994, by and among the Company, Stater Bros. Markets and Bank of America Trust and Savings Association.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTD.)
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION ----------- -----------
10.16 (1) Amended and Restated Sublease Agreement dated June 1, 1983, between Wren Leasing Corp., as Lessor, and Stater Bros. Markets, as Lessee.
10.17 (1) Preferred Stock Agreement dated March 22, 1983, between Stater Bros. Markets and Petrolane Incorporated.
10.18 (1) Escrow Agreement dated September 19, 1985, by and among Stater Bros. Markets, Petrolane Incorporated and First Interstate Bank of California.
10.19 (5) Dealer Manager Agreement dated as of July 1, 1999, by and between Stater Bros. and Banc of America Securities LLC.
10.20 (6) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Jack H. Brown.
10.21.1 (7) Employment contract dated June 1, 2000, as amended, by and between Stater Bros. Markets and Donald I. Baker.
10.22.1 (7) Employment contract dated June 1, 2000, as amended, by and between Stater Bros. Markets and A. Gayle Paden.
10.23 (7) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and H. Harrison Lightfoot.
10.24 (7) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Phillip J. Smith
10.25 (7) Stater Bros. Holdings Inc. Phantom Stock Plan
11 Calculation of earnings per common share.
12 Computation of ratio of earnings to fixed charges.
21 (1) Subsidiaries of the Company.
24 (5) Powers of Attorney (included on signature pages of this Registration Statement on Form S-4)
25 (5) Form T-1 Statement of Eligibility and Qualification of IBJ Whitehall Bank & Trust Company, as Trustee.
27 Financial Data Schedule
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(1) Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-77296 dated July 21, 1994.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTD.)
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION ----------- -----------
(2) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q dated June 25, 1995 and filed on August 8, 1995.
(3) Previously filed with the Securities and Exchange Commission as exhibit 10.12(b) with the Annual Report on Form 10-K for the fiscal year ended September 29, 1996.
(4) Previously filed with the Securities and Exchange Commission as exhibits to the Registration Statement S-4, No. 333-34113 dated October 17, 1997.
(5) Previously filed with the Securities and Exchange Commission as exhibits to the Registration Statement S-4, No. 333-85723 dated September 13, 1999.
(6) Previously filed with the Securities and Exchange Commission as exhibits to Registrant's Quarterly Report on Form 10-Q dated June 25, 2000 and filed on August 9, 2000.
(7) Filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 24, 2000.
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
STATER BROS. HOLDINGS INC. FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 2000 FORM 10-K
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DECEMBER 12, 2000 STATER BROS. HOLDINGS INC. - ----------------------------- DATE
BY: /S/ JACK H. BROWN ----------------------------- JACK H. BROWN CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. and subsidiaries as of September 27, 1998, September 26, 1999 and September 24, 2000, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the 52-week periods then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stater Bros. Holdings Inc. and subsidiaries as of September 27, 1998, September 26, 1999 and September 24, 2000, and the consolidated results of their operations and their cash flows for each of the 52-week periods then ended, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP Riverside, California November 30, 2000
STATER BROS. HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (In thousands)
ASSETS
See accompanying notes to consolidated financial statements.
STATER BROS. HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (CONTD.) (In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
See accompanying notes to consolidated financial statements.
STATER BROS. HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share and share amounts)
See accompanying notes to consolidated financial statements.
STATER BROS. HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
STATER BROS. HOLDINGS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands)
See accompanying notes to consolidated financial statements.
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 24, 2000
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the operation of retail supermarkets. As of September 24, 2000, the Company operated 155 retail food supermarkets under the name "Stater Bros. Markets." The Company's supermarkets are located in Southern California's San Bernardino, Riverside, Los Angeles, Orange, Kern and San Diego counties. The Company and its predecessor companies have operated retail grocery stores under the "Stater Bros. Markets" name in the Inland Empire of Southern California since 1936.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stater Bros. Markets ("Markets") and Stater Bros. Development, Inc. All significant inter-company transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in September. The fiscal years ended September 27, 1998, September 26, 1999 and September 24, 2000 were 52-week years.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their fair value, and consist primarily of overnight repurchase agreements, certificates of deposit and money market funds with maturities of less than three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Receivables
Receivables represent amounts expected to be received during the next operating cycle of the Company. The carrying amount reported in the balance sheet for receivables approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current assets and are stated at the lower of cost or estimated net realizable value and consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized and amortized to interest expense over the terms of the applicable debt agreements.
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for workers' compensation, general and automobile liability claims. Actuaries assist the Company in developing reserve estimates for its self-insured liabilities. Such reserves are discounted at a rate approximating 10%. The Company is self-insured, subject to certain retention levels, for healthcare costs of eligible non-bargaining unit employees. Such healthcare reserves are not discounted.
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
Recent Accounting Pronouncements
During the Company's fiscal 2000, the Financial Accounting Standards Board issued or required the adoption of Statement of Financial Accounting Standards ("SFAS") No. 138 and No. 139. Adoption of SFAS No. 138 and No. 139 were either not applicable to the Company or were adopted by the Company in its fiscal 2000 and did not have a material effect on the Company's financial position or its results of operations in fiscal 2000.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized, principally on the straight-line method over the estimated useful lives of the assets, and for capitalized leases over the initial lease term or the estimated economic life of the asset.
The average economic lives are as follows:
Income Taxes
The Company provides for deferred income taxes as timing differences arise between income and expenses recorded for financial and income tax reporting purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and distribution costs.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NOTE 2 - DEBT
Long-term debt consisted of the following:
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 2 - DEBT (CONTD.)
As of September 24, 2000, principal payments amounting to $5.0 million are due in 2001. Interest on the 11% Senior Notes due 2001 is payable semi-annually on September 1 and March 1. Interest on the 10.75% Senior Notes due 2006 is payable semi-annually on February 15 and August 15. Principal on the 10.75% Senior Notes is due in the year 2006.
Interest capitalized during fiscal years 1998, 1999 and 2000 amounted to $224,000, $64,000 and $35,000 respectively. Interest expense incurred, before the effect of capitalized interest, during 1998, 1999 and 2000 amounted to $30,430,000, $33,694,000 and $53,715,000, respectively.
The Company did not have short-term borrowings outstanding at September 27, 1998, September 26, 1999 and September 24, 2000. The Company did not incur any short-term borrowings during fiscal years 1998, 1999 and 2000.
The Company is subject to certain covenants associated with its 11% Senior Notes due 2001 and with its 10.75% Senior Notes due 2006. As of September 24, 2000, the Company was in compliance with all such covenants.
NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 50% of Santee Dairies LLC. Through its wholly owned subsidiary, Santee Dairies, Inc. ("Santee"), it operated a fluid milk processing plant located in Los Angeles, California, and as of May 1, 1998, Santee moved its operations to a newly constructed fluid milk processing plant in City of Industry. The Company is not the controlling stockholder. Accordingly, the Company accounts for its investment in Santee Dairies LLC using the equity method of accounting and recognized a loss of $2,941,000 and income of $1,130,000 and $1,483,000 for fiscal years 1998, 1999 and 2000, respectively. The Company is a significant customer of Santee which supplies the Company with a substantial portion of its fluid milk and dairy products.
Summary of unaudited financial information for Santee Dairies LLC is as follows:
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 3 - UNCONSOLIDATED AFFILIATE (CONTD.)
The Company accepted and paid an incremental price in costs of product purchased from Santee of approximately $4.3 million for product delivered by Santee to the Company during the last eighteen weeks of fiscal 1998, $9.4 million in fiscal 1999 and $48,000 in fiscal 2000. The incremental price in cost of product is included in cost of goods sold of the Company. The incremental price in the cost of product purchased from Santee by the Company was discontinued in October 1999, however, no assurances can be provided that the incremental prices will remain discontinued.
NOTE 4 - BANK FACILITIES
Stater Bros.' principal operating subsidiary, Stater Bros. Markets, signed a credit facility with Bank of America N.A. on August 6, 1999. The credit facility provides for (i) a $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility. Borrowings under the revolving loan facility are unsecured and expected to be used for certain working capital and corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support the purchase of inventory, obligations incurred in connection with the construction of stores, and worker's compensation insurance obligations. The availability of the loans and letters of credit are subject to certain sub-limits and other borrowing restrictions.
Indebtedness of Stater Bros. Markets under the August 6, 1999 credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of Stater Bros., and any subsidiaries that Stater Bros. Markets or Stater Bros. Development, Inc. acquires or forms after the date of the credit facility.
Loans under the credit facility bear interest at a rate based upon either (i) the "Base Rate" (defined as the higher of (a) the rate of interest publicly announced by Bank of America as its "reference rate" and (b) the federal funds effective rate from time to time plus 0.50%), plus 1.00%, or (ii) the "Offshore Rate" (defined as the rate (adjusted for statutory reserve requirements for eurocurrency liabilities) at which eurodollar deposits for one, two, three or six months (as selected by Stater Bros. Markets) are offered to Bank of America in the inter-bank eurodollar market), plus 2.25%.
The revolving loan facility will cease to be available and will be payable in full on August 6, 2002. Letters of credit under the credit facility can be issued until August 6, 2002, and all letters of credit must expire not later than August 6, 2003. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.
Loans under the revolving loan facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the credit facility may be reduced by Stater Bros. Markets. Stater Bros. Markets will be required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. For purposes of that fee, commercial letters of credit will not constitute outstanding standby letters of credit issued under the letter of credit facility equal to 1.25% per annum on the face amount of such letters of credit, and will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letter of credit issued under the letter of credit facility.
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 4 - BANK FACILITIES (CONTD.)
Availability of the loans and letters of credit under the credit facility is subject to a monthly borrowing base test based on inventory. The credit facility requires Stater Bros. Markets to meet certain financial tests, including minimum net worth and minimum EBITDA tests. The credit facility contains covenants which, among other things, will limit indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, asset sales, leases, investments, loans and advances, transactions with affiliates, sale and leasebacks, other matters customarily restricted in such agreements and modifications to the holding company status of Stater Bros. Markets.
The credit facility also contains covenants that apply to Stater Bros. Holdings Inc., and Stater Bros. Holdings Inc. is a party to the credit facility for purposes of these covenants. These covenants, among other things, limit dividends and other payments in respect of Stater Bros. Holdings Inc.'s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by Stater Bros. Holdings Inc. The credit facility requires Stater Bros. Holdings Inc. and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal identities remain separate.
The credit facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment; defaults; invalidity of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of control.
As of September 24, 2000, for purposes of the credit facility with Bank of America, Stater Bros. Markets was in compliance with all restrictive covenants and exceeded the minimum net worth covenant by approximately $100.0 million and exceeded minimum inventory coverage by approximately $64.4 million. The minimum EBITDA (as defined) covenant measurement period begins (as amended) in the quarter ending June 27, 2000, and requires an annualized minimum EBITDA of $75.0 million. As of September 24, 2000, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $10.3 million.
As of September 24, 2000, for the purposes of the credit facility with Bank of America, Stater Bros. Holdings Inc. was in compliance with all restrictive covenants.
The Company is also subject to certain covenants associated with its 11% Senior Notes due 2001 and its 10.75% Senior Notes due 2006. As of September 24, 2000, the Company was in compliance with all such covenants. However, there can be no assurance that the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 5 - LEASES
The Company leases the majority of its retail stores, offices, warehouses and distribution facilities. Certain leases provide for additional rents based on sales. Primary lease terms range from 10 to 99 years and substantially all leases provide for renewal options.
A portion of the Company's lease obligations are guaranteed by Petrolane Incorporated ("Petrolane") or its successor (see Note 6). The leases guaranteed by Petrolane had initial terms of 20 years and expire in the year 2003. Lease payments for the properties subject to the Petrolane guarantees are approximately $10.0 million per year. Under the terms of the agreement related to the Company's acquisition of Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater Bros. Markets is required to make annual deposits into a lease guarantee escrow account. The amount of each annual deposit is to be based on (a) a percentage of sales of 20 supermarkets, as specified in the agreement, to the extent they exceed a defined base; and (b) a percentage of rents adjusted for increases in the Consumer Price Index for certain rental property, including the Company's office and warehouse complex. The Company deposited $1,113,000, $1,176,000 and $1,247,000 into the lease guarantee escrow account during fiscal years 1998, 1999 and 2000, respectively.
Upon termination of the leases, or the termination of the Petrolane lease guarantees, all amounts deposited into the lease guarantee escrow account, plus interest thereon, less any amounts disbursed, will be returned to the Company. At September 24, 2000, the lease guarantee escrow account had a cumulative balance of $13,180,000, compared to $11,280,000 and $9,629,000 as of September 26, 1999 and September 27, 1998, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to disburse funds from the amounts held in the lease guarantee escrow account for any amounts which Petrolane or its successor may be required to pay as guarantor of the lease obligations of Stater Bros. Markets.
Subsequent to year end, all of the store leases guaranteed by Petrolane were extended for additional five year terms following expiration of their respective initial terms in 2003 (the effect of these extensions are not reflected in the table below), and the Petrolane guarantees of these leases were terminated in exchange for a $400,000 fee. In addition, Stater Bros. Markets redeemed all outstanding shares of its $11.00 Cumulative Redeemable Preferred Stock due 2003 from Texas Eastern Corporation, Petrolane's assignee of such preferred stock (See Note 6). As part of these transactions, the lease guarantee escrow account was terminated and the $13.2 million in such account was released to Stater Bros. Markets
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 5 - LEASES (CONTD.)
Following is a summary of future minimum lease payments as of September 24, 2000:
Rental expense and sublease income were as follows:
Aggregate sublease income to be received subsequent to September 24, 2000 is approximately $3,382,000.
NOTE 6 - PREFERRED STOCK
As of September 24, 2000, Stater Bros. Markets has issued and outstanding 10 shares of its $11.00 Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and unpaid dividends. Dividends are accrued at the rate of $11.00 per share per annum. The preferred stock was issued in conjunction with a guarantee of Stater Bros. Markets lease obligations by Petrolane Incorporated or its successors (see Note 5). For as long as shares of the $11.00 Cumulative Redeemable Preferred Stock remain outstanding, Stater Bros. Markets is subject to certain covenants. The most restrictive covenant limits the amount of dividends that may be paid to amounts that may be legally paid under applicable state laws. At September 24, 2000, accumulated earnings available for dividend distributions were approximately $384.0 million. In the event of non-compliance by Stater Bros. Markets, the holders of the Stater Bros. Markets preferred stock may elect the Board of Directors of Stater Bros. Markets. At September 24, 2000, Stater Bros. Markets was in compliance with these covenants.
Subsequent to year end, the Company paid all cumulative deferred dividends and redeemed all outstanding $11.00 Cumulative Redeemable Preferred Stock due 2003 of Stater Bros. Markets (see Note 5).
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 7 - INCOME TAXES
The provision for income taxes (benefit) consisted of the following:
Federal and State income taxes benefit for fiscal year ended September 24, 2000 is exclusive of the income tax expense associated with the extraordinary gain from the early extinguishment of debt. Such Federal and State income tax expense in 2000 amounted to $605,000 and $168,000, respectively.
The current portion of Federal and State income taxes for fiscal year ended September 26, 1999 is exclusive of the tax benefits associated with the extraordinary loss from the early extinguishment of debt. Such Federal and State tax benefits in 1999 amounted to $9.9 million and $1.3 million, respectively.
A reconciliation of the provision for income taxes to amounts computed at the federal statutory rate is as follows:
Components of deferred income taxes are as follows:
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 7 - INCOME TAXES (CONTD.)
Although there can be no assurances as to future taxable income of the Company, the Company believes that its expectations of future taxable income, when combined with the income taxes paid in prior years, will be adequate to realize the deferred income tax assets.
NOTE 8 - RETIREMENT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan covering substantially all non-union employees. The plan provides for benefits based on an employee's compensation during the three years before retirement. The Company's funding policy for this plan is to contribute annually at a rate that is intended to provide sufficient assets to meet future benefit payment requirements.
Net periodic pension cost included the following components:
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 8 - RETIREMENT PLANS (CONTD.)
Pension Plan (contd.)
The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet at:
Expenses recognized for this retirement plan were $1,499,000, $2,166,000 and $1,678,000 in 1998, 1999 and 2000, respectively.
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan covering substantially all non-union employees. Union employees may participate if their collective bargaining agreement specifically provides for their inclusion. The Company may contribute up to 7.5% of total compensation paid or accrued during the year to each plan participant subject to limitations imposed by the Internal Revenue Code. The Company recognized expenses for this plan in the amount of $420,000, $419,000 and $425,000 in 1998, 1999 and 2000, respectively.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement plans in accordance with the provisions of the various labor agreements that govern the plans. Contributions to these plans are generally based on the number of hours worked. Information for these plans as to vested and non-vested accumulated benefits and net assets available for benefits is not available.
STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 8 - RETIREMENT PLANS (CONTD.)
Multi-Employer Plans (contd.)
The Company's expense for these retirement plans and health and welfare plans consisted of the following:
The Company's employer contributions fluctuate as a result of periodic resumptions and suspensions of employer contributions to collective bargaining trusts.
NOTE 9 - LABOR RELATIONS
The Company and other major supermarket employers in Southern California negotiated a four-year contract, beginning October 1999, with the United Food and Commercial Workers Union. The Company's collective bargaining agreement with the International Brotherhood of Teamsters was renewed in 1998 and expires in September 2002. Management believes it has good relations with its employees.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity of these instruments.
Receivables
The carrying amount approximates fair value because of the short-term maturity of these instruments.
Long-Term Debt
The fair value of the 11% Notes and the 10.75% Notes, is based on quoted market prices. Although market quotes for the fair value of the Company's capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.
STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTD.)
The estimated fair values of the Company's financial instruments are as follows:
NOTE 11 - LITIGATION MATTERS
In the ordinary course of its business, the Company is party to various legal actions which the Company believes are incidental to the operation of the business of the Company and its subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. The Company believes that the outcome of such legal proceedings to which the Company is currently a party will not have a material adverse effect upon its results of operations or its consolidated financial condition.
On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the State of California for the County of San Bernardino. The complaint filed by twelve employees sought damages alleging racial discrimination in the Company's employment practices. This case was settled during fiscal 2000 with the payment of damages to the plaintiffs without any admission of liability by Stater Bros. Markets, which payment has been accounted for in the Company's financial statements.
On September 21, 2000, Stater Bros. Markets was named as a defendant in two cases, Barnhart, et al vs. Stater Bros. Markets and Jenkins/Harvth, et al vs. Stater Bros. Markets, both filed in the Superior Court of the State of California for the County of San Bernardino. The complaints were purportedly filed on behalf of Stater Bros. Markets store managers and assistant store managers respectively alleging that such workers are non-exempt under California Wage Law and are therefore entitled to overtime wages. The Company believes the complaints are without merit and intends to vigorously defend these cases and does not believe that the outcome of these cases will result in any material adverse effect on the Company's results of operations or consolidated financial condition.
STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 12 - ACQUISITION
On May 7, 1999, the Company entered into an agreement with Albertson's to acquire 43 supermarkets and one future store site. The stores were formerly operated by Albertson's or Lucky Stores and were divested in connection with the merger of Albertson's and American Stores Company, the parent of Lucky Stores. The supermarkets were acquired sequentially over a twenty-four day period beginning August 9, 1999. The purchase price for the property, plant, equipment and inventories of 43 supermarkets and one future store site was approximately $134.0 million plus capital lease obligations assumed of $13.3 million and approximately $2.2 million of capitalized costs related to the transfer of ownership of the supermarkets. The acquisition was accounted for using the purchase method of accounting and the results of operations of the 43 supermarkets are included in the Company's fiscal 1999 consolidated results of operations from the acquisition date of each supermarket.
The following table provides unaudited pro forma financial data for the Company reflecting the completion of the Acquisition as if it occurred September 29, 1997. These unaudited pro forma results have been prepared for comparative purposes only and include certain pro forma adjustments. Such pro forma amounts are not necessarily indicative of what actual results of operations might have been or will be in the future. Pro forma results of operations for fiscal 1999 exclude an extraordinary loss of approximately $17.3 million ($28.5 million less tax effect of $11.2 million), related to the early extinguishment of debt. The acquisition has been included in the results of operation for all of fiscal 2000.
NOTE 13 - EXTRAORDINARY GAIN (LOSS)
In fiscal 2000, the Company incurred an extraordinary gain of $1.1 million ($1.9 million less tax effect) from early extinguishment of $11.0 million of 10.75% Senior Notes due 2006.
In connection with the Acquisition of the 43 supermarkets and one future store site in August 1999, the Company issued $450.0 million of 10.75% Senior Notes due 2006 under Rule 144A of the Securities Act of 1933. A portion of the proceeds from the issuance were used to retire all of the 9% Senior Subordinated Notes due 2004 and retire substantially all of the 11% Senior Notes due 2001. The Company incurred an extraordinary loss of $17.3 million ($28.5 million less tax effect) associated with the early extinguishment of such debt in fiscal 1999.
STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE 14 - QUARTERLY RESULTS (UNAUDITED)
Quarterly results for fiscal 1998, 1999 and 2000 are as follows: (In thousands)
(1) Reflects acquisition integration expenses of $4,594 ($2,646 net of tax) for fiscal 2000 and $5,590 ($3,390 net of tax) for fiscal 1999 in connection with the acquisition of supermarkets
(2) Reflects an extraordinary loss of $28,544 ($17,311 net of tax) in connection with the early extinguishment of debt.
(3) Reflects an extraordinary gain of $1,896 ($1,123 net of tax) in connection with the early extinguishment of debt.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- -----------
1 (5) Purchase Agreement dated August 6, 1999 by and between Stater Bros. and Banc of America Securities LLC.
2.1 (5) Asset Purchase Agreement dated as of May 7, 1999, by and between Albertson's Inc., Stater Bros. Markets and Stater Bros.
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.2 (4) 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 (the "First Supplemental Indenture").
4.6 (5) Indenture dated as of August 6, 1999, between Stater Bros. and IBJ Whitehall Bank & Trust Company.
4.7 (5) Registration Rights Agreement dated as of August 6, 1999, by and between Stater Bros. and Banc of America Securities, LLC.
4.8 (5) Second Supplemental Indenture dated as of July 16, 1999 between Stater Bros. and IBJ Whitehall Bank & Trust Company, for the securities issued under the indenture dated as of March 8, 1994, as amended by the First Supplemental Indenture dated as of July 22, 1997.
5.0 (5) Opinion of Gibson, Dunn & Crutcher LLP
10.1 (1) Reclassification Agreement dated September 3, 1993, by and among the Company, Craig and La Cadena.
EXHIBIT NO. DESCRIPTION ----------- -----------
10.2 (1) Amendment to Reclassification Agreement, dated January 12, 1994, by and among the Company, Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated May 10, 1989, by and among the Company, Craig and La Cadena.
10.4 (1) Amendment to Agreement of Stockholders dated September 3, 1993, by and among the Company, Craig, Craig Management, Inc. ("CMI") and La Cadena.
10.5 (1) Option Agreement dated September 3, 1993, by and between the Company and Craig.
10.6 (1) Amendment to Option Agreement dated January 12, 1994, by and between the Company and Craig.
10.7 (1) Consulting Agreement dated September 3, 1993, by and between the Company, Craig and CMI.
10.8 (1) Letter Agreement regarding Consulting Agreement, dated March 8,1994, by and between the Company, Craig and CMI.
10.9 (1) Second Amended and Restated Stock Agreement dated January 12, 1994, by and among the Company, Craig, CMI, La Cadena and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994, by and between the Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(a) (2) Amendment dated June 23, 1995 to the Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(b) (3) Amendment dated July 22, 1996 to the Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.12(c) (5) Credit Agreement dated as of August 6, 1999 by and among Stater Bros. Markets, Stater Bros. and Bank of America, N.A.
10.13 (1) Continuing Guaranty dated March 8, 1994, of Stater Bros. Development, Inc. in favor of Bank of America Trust and Savings Association.
10.15 (1) Subordination Agreement dated March 8, 1994, by and among the Company, Stater Bros. Markets and Bank of America Trust and Savings Association.
EXHIBIT NO. DESCRIPTION ----------- -----------
10.16 (1) Amended and Restated Sublease Agreement dated June 1, 1983, between Wren Leasing Corp., as Lessor, and Stater Bros. Markets, as Lessee.
10.17 (1) Preferred Stock Agreement dated March 22, 1983, between Stater Bros. Markets and Petrolane Incorporated.
10.18 (1) Escrow Agreement dated September 19, 1985, by and among Stater Bros. Markets, Petrolane Incorporated and First Interstate Bank of California.
10.19 (5) Dealer Manager Agreement dated as of July 1, 1999, by and between Stater Bros. and Banc of America Securities LLC.
10.20 (6) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Jack H. Brown.
10.21.1 (7) Employment contract dated June 1, 2000, as amended, by and between Stater Bros. Markets and Donald I. Baker.
10.22.1 (7) Employment contract dated June 1, 2000, as amended, by and between Stater Bros. Markets and A. Gayle Paden.
10.23 (7) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and H. Harrison Lightfoot.
10.24 (7) Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Phillip J. Smith
10.25 (7) Stater Bros. Holdings Inc. Phantom Stock Plan
11 Calculation of earnings per common share.
12 Computation of ratio of earnings to fixed charges.
21 (1) Subsidiaries of the Company.
24 (5) Powers of Attorney (included on signature pages of this Registration Statement on Form S-4)
25 (5) Form T-1 Statement of Eligibility and Qualification of IBJ Whitehall Bank & Trust Company, as Trustee.
27 Financial Data Schedule
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(1) Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-77296 dated July 21, 1994.
EXHIBIT NO. DESCRIPTION ----------- -----------
(2) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q dated June 25, 1995 and filed on August 8, 1995.
(3) Previously filed with the Securities and Exchange Commission as exhibit 10.12(b) with the Annual Report on Form 10-K for the fiscal year ended September 29, 1996.
(4) Previously filed with the Securities and Exchange Commission as exhibits to the Registration Statement S-4, No. 333-34113 dated October 17, 1997.
(5) Previously filed with the Securities and Exchange Commission as exhibits to the Registration Statement S-4, No. 333-85723 dated September 13, 1999.
(6) Previously filed with the Securities and Exchange Commission as exhibits to Registrant's Quarterly Report on Form 10-Q dated June 25, 2000 and filed on August 9, 2000.
(7) Filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 24, 2000.
Copies of Exhibits listed herein can be obtained by writing and requesting such Exhibits from: Corporate Secretary, P. O. Box 150, Colton, California 92324.