STATER BROS HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

For the transition from to

Commission file number 001-13222

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Delaware		33-0350671

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


21700 Barton Road Colton, California			92324

(Address of principal executive offices)			(Zip Code)


Registrant’s telephone number, including area code		(909) 783-5000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].

As of May 13, 2003, there were issued and outstanding
38,301 shares of the registrant’s Class A Common Stock.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 2.CHANGES IN SECURITIES AND USE OF PROCEEDS
	Item 3.DEFAULTS UPON SENIOR SECURITIES
	Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5.OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
CERTIFICATION
EXHIBIT 99.3

STATER BROS. HOLDINGS INC.
MARCH 30, 2003

INDEX


		Page

PART I.	FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of September 29, 2002
	and March 30, 2003		3
	Consolidated Statements of Income (Unaudited) for the 26 weeks ended
	March 31, 2002 and March 30, 2003		5
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended
	March 31, 2002 and March 30, 2003		6
	Consolidated Statements of Cash Flows (Unaudited) for the 26 weeks ended
	March 31, 2002 and March 30, 2003		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		18
Item 4.	Controls and Procedures		18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		19
Item 2.	Changes in Securities and Use of Proceeds		19
Item 3.	Defaults Upon Senior Securities		19
Item 4.	Submission of Matters to a Vote of Security Holders		19
Item 5.	Other Information		19
Item 6.	Exhibits and Reports on Form 8-K		19
SIGNATURES			20
CERTIFICATIONS			21

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS


		Sept. 29,		Mar. 30,
		2002		2003

Current assets
	Cash and cash equivalents	$	81,043	$	98,874
	Receivables		26,500		23,706
	Income tax receivables		7,061		857
	Inventories		175,404		169,715
	Prepaid expenses		7,860		9,425
	Deferred income taxes		15,281		15,281

Total current assets			313,149		317,858
Investment in unconsolidated affiliate			15,580		16,559
Property and equipment
	Land		50,930		50,930
	Buildings and improvements		191,514		197,204
	Store fixtures and equipment		212,741		225,261
	Property subject to capital leases		24,670		24,670

			479,855		498,065
	Less accumulated depreciation and amortization		194,039		204,668

			285,816		293,397
Deferred debt issuance costs, net			13,936		12,211
Other assets			5,649		5,704

			19,585		17,915

Total assets		$	634,130	$	645,729

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)

LIABILITIES AND STOCKHOLDERS’ DEFICIT


			Sept. 29,			Mar. 30,
			2002			2003

Current liabilities
	Accounts payable		$	104,166		$	103,255
	Accrued payroll and related expenses			41,567			42,821
	Other accrued liabilities			46,656			46,858
	Current portion of capital lease obligations			1,117			1,064

Total current liabilities				193,506			193,998
Deferred income taxes, long-term				6,500			6,500
Long-term debt				458,750			458,750
Capital lease obligations, less current portion				10,981			10,454
Long-term portion of self-insurance and other reserves				23,855			25,577
Other long-term liabilities				14,659			17,812

Total liabilities				708,251			713,091
Stockholders’ deficit
	Common Stock, $.01 par value:
		Authorized shares - 100,000
		Issued and outstanding shares - 0		—			—
	Class A Common Stock, $.01 par value:
		Authorized shares - 100,000
		Issued and outstanding shares - 38,301		—			—
	Additional paid-in capital			9,740			9,740
	Retained deficit			(83,861	)		(77,102	)

Total stockholders’ deficit				(74,121	)		(67,362	)

Total liabilities and stockholders’ deficit			$	634,130		$	645,729

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)


		26 Weeks Ended

		Mar. 31,			Mar. 30,
		2002			2003

Sales		$	1,316,800		$	1,358,705
Cost of goods sold			967,824			988,317

Gross profit			348,976			370,388
Operating expenses:
	Selling, general and administrative expenses		295,593			317,095
	Depreciation and amortization		15,184			16,449

Total operating expenses			310,777			333,544

Operating profit			38,199			36,844
Interest income			1,026			526
Interest expense			(25,997	)		(26,559	)
Equity in earnings from unconsolidated affiliate			2,023			979
Other expenses - net			(1,309	)		(627	)

Income before income taxes			13,942			11,163
Income taxes			5,716			4,404

Net income		$	8,226		$	6,759

Earnings per share		$	180.28		$	176.47

Average common shares outstanding			45,629			38,301

Shares outstanding at end of period			38,301			38,301

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)


		13 Weeks Ended

		Mar. 31,			Mar. 30,
		2002			2003

Sales		$	654,213		$	677,196
Cost of goods sold			481,400			490,424

Gross profit			172,813			186,772
Operating expenses:
	Selling, general and administrative expenses		145,657			159,072
	Depreciation and amortization		7,680			8,285

Total operating expenses			153,337			167,357

Operating profit			19,476			19,415
Interest income			322			254
Interest expense			(13,201	)		(13,301	)
Equity in earnings from unconsolidated affiliate			1,375			233
Other expenses - net			(695	)		(239	)

Income before income taxes			7,277			6,362
Income taxes			2,983			2,531

Net income		$	4,294		$	3,831

Earnings per share		$	104.08		$	100.02

Average common shares outstanding			41,258			38,301

Shares outstanding at end of period			38,301			38,301

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)


			26 Weeks Ended

			Mar. 31,			Mar. 30,
			2002			2003

Operating activities:
Net income			$	8,226		$	6,759
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			15,184			16,449
	Loss on disposals of assets			1,309			627
	Net undistributed gain in investment in unconsolidated affiliate			(2,023	)		(979	)
	Changes in operating assets and liabilities:
		(Increase) decrease in receivables		(874	)		2,794
		(Increase) decrease in income tax receivables		(323	)		6,204
		Decrease in inventories		4,416			5,689
		Increase in prepaid expenses		(1,963	)		(1,569	)
		Decrease in other assets		729			1,670
		Decrease in accounts payable		(9,666	)		(911	)
		Increase in accrued liabilities, long-term portion of self-insurance reserves and other liabilities		10,693			6,331

Net cash provided by operating activities				25,708			43,064

Investing activities:
Purchase of property and equipment				(22,208	)		(24,717	)
Proceeds from sale of property and equipment				50			64

Net cash used in investing activities				(22,158	)		(24,653	)

Financing activities:
Debt issuance cost				(5,033	)		—
Stock redemption				(20,000	)		—
Dividends paid				(4,500	)		—
Principal payments on long-term debt				(250	)		—
Principal payments on capital lease obligations				(762	)		(580	)

Net cash used in financing activities				(30,545	)		(580	)

Net increase (decrease) in cash and cash equivalents				(26,995	)		17,831
Cash and cash equivalents at beginning of period				101,636			81,043

Cash and cash equivalents at end of period			$	74,641		$	98,874

Interest paid			$	25,009		$	25,050
Income taxes paid			$	6,039		$	—

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 30, 2003

Note 1 - Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of Stater Bros. Holdings Inc. (the “Company”) and its subsidiaries as of September 29, 2002 and March 30, 2003 and the results of its operations and cash flows for the twenty-six and thirteen weeks ended March 31, 2002 and March 30, 2003. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s latest annual report filed on Form 10-K. The operating results for the twenty-six and thirteen weeks ended March 30, 2003 are not necessarily indicative of the results of operations for a full year.

Note 2 - Income Taxes

The provision for income taxes for the twenty-six weeks ended March 31, 2002 and March 30, 2003 consists of the following:


	26 Weeks Ended

	Mar. 31, 2002		Mar. 30, 2003

	(In thousands)
Federal income taxes	$	4,484	$	3,408
State income taxes		1,232		996

	$	5,716	$	4,404

Note 3 - Unconsolidated Affiliate

The Company owns 50% of Santee Dairies LLC. Through its wholly owned subsidiary, Santee Dairies, Inc. (“Santee”), it operates a fluid milk processing plant located in City of Industry, California, and the Company is not the controlling stockholder. Accordingly, the Company accounts for its investment in Santee using the equity method of accounting and recognized income of $2.0 million and $1.0 million for the twenty-six weeks ended March 31, 2002 and March 30, 2003, 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 is as follows:


	26 Weeks Ended

	Mar. 31, 2002		Mar. 30, 2003

	(In thousands)
Current assets	$	25,579	$	23,595
Non-current assets		93,330		90,887
Current liabilities		23,987		22,947
Non-current liabilities		65,383		58,253
Shareholder’s equity		29,539		33,282

Sales		94,295		86,990
Gross profit		15,344		14,729
Net income	$	4,043	$	1,959

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 30, 2003

Note 4 - Reclassifications

Certain amounts in the prior period have been reclassified to conform to the current period financial statements presentation.

Note 5 - Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 6 - Stock Redemption

During the second quarter of fiscal 2002, the Company obtained consent of the holders of its 10.75% Senior Notes due 2006 to make a distribution and payment to stockholders consisting of $25.0 million in cash and a subordinated note in the principal amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699 shares of the Company’s stock previously held by La Cadena Investments and made a cash payment of $20.0 million and executed a $20.0 million subordinated note due March 31, 2007 to a former partner of La Cadena Investments. The subordinated note bears interest at a rate of 5.0% per annum, payable semi-annually. On February 1, 2002, the Company paid a $4.5 million dividend to La Cadena Investments. Fees for consent of the holders of its 10.75% Senior Notes and fees and expenses of the transaction, including a $500,000 financial advisory service fee to La Cadena Investments, were approximately $5.0 million.

Note 7 – Redemption of Notes

During the second quarter of fiscal 2002, the Company redeemed $250,000 of its 10.75% Senior Notes due 2006. The Notes were restricted and unregistered. The Notes were redeemed for $250,000 plus accrued interest.

Note 8 – Long-Lived Assets

Financial Accounting Standards Board Statements No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets” became effective for the Company on September 30, 2002. This standard replaces SFAS

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