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 June 29, 2003


o		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 .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X .

As of August 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 for the 39 Weeks Ended
		CONSOLIDATED STATEMENTS OF INCOME for the 13 Weeks Ended
		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 5. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

STATER BROS. HOLDINGS INC.
JUNE 29, 2003

INDEX


PART I	FINANCIAL INFORMATION (Unaudited)	Page

Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of September 29, 2002 and June 29, 2003		3
	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 30, 2002 and June 29, 2003		5
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 30, 2002 and June 29, 2003		6
	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 30, 2002 and June 29, 2003		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		19
Item 4.	Controls and Procedures		20
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		21
Item 2.	Changes in Securities and Use of Proceeds		21
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits and Reports on Form 8-K		22
SIGNATURES			23

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

ASSETS


		Sept. 29,		June 29,
		2002		2003

Current assets
	Cash and cash equivalents	$	81,043	$	118,478
	Receivables		26,500		25,367
	Income tax receivables		7,061		1,212
	Inventories		175,404		170,258
	Prepaid expenses		7,860		8,926
	Deferred income taxes		15,281		15,281

Total current assets			313,149		339,522
Investment in unconsolidated affiliate			15,580		16,776
Property and equipment
	Land		50,930		50,930
	Buildings and improvements		191,514		197,970
	Store fixtures and equipment		212,741		233,252
	Property subject to capital leases		24,670		24,670

			479,855		506,822
	Less accumulated depreciation and amortization		194,039		209,420

			285,816		297,402
Deferred debt issuance costs, net			13,936		11,349
Other assets			5,649		5,512

			19,585		16,861

Total assets		$	634,130	$	670,561

See accompanying notes to unaudited consolidated financial statements

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

LIABILITIES AND STOCKHOLDER’S DEFICIT


			Sept. 29,			June 29,
			2002			2003

Current liabilities
	Accounts payable		$	104,166		$	111,652
	Accrued payroll and related expenses			41,567			42,528
	Other accrued liabilities			46,656			57,909
	Current portion of capital lease obligations			1,117			1,049

Total current liabilities				193,506			213,138
Deferred income taxes, long-term				6,500			6,500
Long-term debt				458,750			458,750
Capital lease obligations, less current portion				10,981			10,190
Long-term portion of self-insurance and other reserves				23,855			30,055
Other long-term liabilities				14,659			18,521

Total liabilities				708,251			737,154
Stockholder’s 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	)		(76,333	)

Total stockholder’s deficit				(74,121	)		(66,593	)

Total liabilities and stockholder’s deficit			$	634,130		$	670,561

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)


		39 Weeks Ended

		June 30,			June 29,
		2002			2003

Sales		$	1,989,579		$	2,046,776
Cost of goods sold			1,463,461			1,488,105

Gross profit			526,118			558,671
Operating expenses:
	Selling, general and administrative expenses		447,052			482,420
	Depreciation and amortization		23,160			25,237

Total operating expenses			470,212			507,657

Operating profit			55,906			51,014
Interest income			1,345			770
Interest expense			(39,441	)		(39,898	)
Equity in earnings from unconsolidated affiliate			2,555			1,196
Other expenses — net			(1,488	)		(756	)

Income before income taxes			18,877			12,326
Income taxes			7,740			4,798

Net income		$	11,137		$	7,528

Earnings per share		$	257.88		$	196.55

Average common shares outstanding			43,186			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

		June 30,			June 29,
		2002			2003

Sales		$	672,779		$	688,071
Cost of goods sold			495,637			499,788

Gross profit			177,142			188,283
Operating expenses:
	Selling, general and administrative expenses		151,459			165,325
	Depreciation and amortization		7,976			8,788

Total operating expenses			159,435			174,113

Operating profit			17,707			14,170
Interest income			319			244
Interest expense			(13,444	)		(13,339	)
Equity in earnings from unconsolidated affiliate			532			217
Other expenses — net			(179	)		(129	)

Income before income taxes			4,935			1,163
Income taxes			2,024			394

Net income		$	2,911		$	769

Earnings per share		$	76.00		$	20.08

Average common shares outstanding			38,301			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)


			39 Weeks Ended

			June 30,			June 29,
			2002			2003

Operating activities:
Net income			$	11,137		$	7,528
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			23,160			25,237
	Provision for deferred income taxes			(1,813	)		—
	Loss on disposals of assets			1,489			756
	Net undistributed gain in investment in unconsolidated affiliate			(2,555	)		(1,196	)
	Changes in operating assets and liabilities:
		(Increase) decrease in receivables		(3,465	)		1,133
		(Increase) decrease in income tax receivables		(905	)		5,849
		(Increase) decrease in inventories		(4,049	)		5,146
		Increase in prepaid expenses		(898	)		(1,071	)
		Decrease in other assets		1,621			2,724
		Increase in accounts payable		6,811			7,486
		Increase in accrued liabilities, long-term portion of self-insurance reserves and other liabilities		21,205			22,276

Net cash provided by operating activities				51,738			75,868

Investing activities:
Purchase of property and equipment				(31,032	)		(37,659	)
Proceeds from sale of property and equipment				76			85

Net cash used in investing activities				(30,956	)		(37,574	)

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				(1,104	)		(859	)

Net cash used in financing activities				(30,887	)		(859	)

Net increase (decrease) in cash and cash equivalents				(10,105	)		37,435
Cash and cash equivalents at beginning of period				101,636			81,043

Cash and cash equivalents at end of period			$	91,531		$	118,478

Interest paid			$	25,351		$	25,519
Income taxes paid			$	10,459		$	750

See accompanying notes to unaudited consolidated financial statements

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 29, 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 June 29, 2003 and the results of its operations and cash flows for the thirty-nine and thirteen weeks ended June 30, 2002 and June 29, 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 thirty-nine and thirteen weeks ended June 29, 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 thirty-nine weeks ended June 30, 2002 and June 29, 2003 consists of the following:


	39 Weeks Ended

	June 30, 2002			June 29, 2003

	(In thousands)
Current
Federal income taxes	$	7,155		$	3,694
State income taxes		2,398			1,104

		9,553			4,798
Deferred
Federal income taxes		(1,084	)		—
State income taxes		(729	)		—

		(1,813	)		—

	$	7,740		$	4,798

Note 3 — Unconsolidated Affiliate

The Company owns 50% of Santee Dairies LLC. Through its wholly owned subsidiary, Santee Dairies, Inc. (“Santee”), it operates a fluid milk processing plant located in City of Industry, California, and the Company is not the controlling stockholder. Accordingly, the Company accounts for its investment in Santee Dairies LLC using the equity method of accounting and recognized income of $2.6 million and $1.2 million for the thirty-nine weeks ended June 30, 2002 and June 29, 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.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 29, 2003

Note 3 — Unconsolidated Affiliate (contd.)

Summary of unaudited financial information for Santee Dairies LLC is as follows:


	39 Weeks Ended

	June 30, 2002			June 29, 2003

	(In thousands)
Current assets		$	23,214	$	24,081
Non-current assets			92,388		90,477
Current liabilities			21,331		22,864
Non-current liabilities			63,666		58,262






Shareholders’ equity			30,605		33,432
Sales			138,614		128,505
Gross profit			23,018		21,434
Net income		$	5,109	$	2,392

Note 4 — Reclassifications

Certain amounts in the prior period have b

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