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EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INC | v58548exv32w1.htm |
EX-31.1 - EX-31.1 - STATER BROS HOLDINGS INC | v58548exv31w1.htm |
EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INC | v58548exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 26, 2010
OR
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.) | |
301 S. Tippecanoe Avenue San Bernardino, California |
92408 | |
(Address of principal executive offices) | (Zip Code) | |
Registrants telephone number, including area code | (909) 733-5000 |
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 þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes þ No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller Reporting Company o. | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ.
As of February 8, 2011, there were issued and outstanding
34,552 shares of the registrants Class A Common Stock.
34,552 shares of the registrants Class A Common Stock.
STATER BROS. HOLDINGS INC.
December 26, 2010
December 26, 2010
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(In thousands)
ASSETS
Sept. 26, | Dec. 26, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 325,005 | $ | 218,179 | ||||
Restricted cash |
3,121 | 3,121 | ||||||
Receivables, net of allowance of $1,219 and $1,231 |
35,614 | 42,132 | ||||||
Income tax receivables |
| 190 | ||||||
Inventories |
203,702 | 237,065 | ||||||
Prepaid expenses |
12,678 | 13,240 | ||||||
Deferred income taxes |
27,428 | 25,413 | ||||||
Current portion of long-term receivable |
16,001 | 16,001 | ||||||
Total current assets |
623,549 | 555,341 | ||||||
Property and equipment |
||||||||
Land |
97,770 | 100,671 | ||||||
Buildings and improvements |
559,500 | 562,693 | ||||||
Store fixtures and equipment |
438,306 | 439,243 | ||||||
Property subject to capital leases |
9,983 | 9,983 | ||||||
1,105,559 | 1,112,590 | |||||||
Less accumulated depreciation and amortization |
461,495 | 474,290 | ||||||
644,064 | 638,300 | |||||||
Deferred income taxes, long-term |
38,272 | 39,929 | ||||||
Deferred debt issuance cost, net |
8,074 | 12,510 | ||||||
Other assets |
8,828 | 8,828 | ||||||
55,174 | 61,267 | |||||||
Total assets |
$ | 1,322,787 | $ | 1,254,908 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts)
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS EQUITY
Sept. 26, | Dec. 26, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 135,642 | $ | 168,122 | ||||
Accrued payroll and related expenses |
85,404 | 86,200 | ||||||
Accrued interest |
21,845 | 6,234 | ||||||
Other accrued liabilities |
40,196 | 35,705 | ||||||
Accrued income taxes |
527 | | ||||||
Current portion of capital lease obligations |
1,562 | 1,625 | ||||||
Current portion of long-term debt |
132,250 | 50,549 | ||||||
Total current liabilities |
417,426 | 348,435 | ||||||
Capital lease obligations, less current portion |
2,206 | 1,776 | ||||||
Long-term debt, less current portion |
677,750 | 679,562 | ||||||
Long-term portion of self-insurance and other reserves |
40,565 | 45,145 | ||||||
Long-term deferred benefits |
75,634 | 74,091 | ||||||
Other long-term liabilities |
36,073 | 36,502 | ||||||
Total liabilities |
1,249,654 | 1,185,511 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
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 - 34,552 |
| | ||||||
Additional paid-in capital |
8,786 | 8,786 | ||||||
Accumulated other comprehensive loss |
(18,926 | ) | (18,926 | ) | ||||
Retained earnings |
83,273 | 79,537 | ||||||
Total stockholders equity |
73,133 | 69,397 | ||||||
Total liabilities and stockholders equity |
$ | 1,322,787 | $ | 1,254,908 | ||||
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Unaudited)
(In thousands, except per share and share amounts)
13 Weeks Ended | ||||||||
Dec. 27, | Dec. 26, | |||||||
2009 | 2010 | |||||||
Sales |
$ | 923,864 | $ | 899,037 | ||||
Cost of goods sold |
685,714 | 660,264 | ||||||
Gross profit |
238,150 | 238,773 | ||||||
Operating expenses |
||||||||
Selling, general and administrative expenses |
205,288 | 203,518 | ||||||
Gain on sale of dairy assets |
(7,950 | ) | | |||||
Depreciation and amortization |
12,666 | 12,444 | ||||||
Total operating expenses |
210,004 | 215,962 | ||||||
Operating profit |
28,146 | 22,811 | ||||||
Interest income |
59 | 259 | ||||||
Interest expense |
(17,189 | ) | (19,198 | ) | ||||
Interest expense related to debt purchase |
| (1,775 | ) | |||||
Other expenses, net |
(11 | ) | (92 | ) | ||||
Income before income taxes |
11,005 | 2,005 | ||||||
Income taxes |
4,294 | 741 | ||||||
Net income |
$ | 6,711 | $ | 1,264 | ||||
Earnings per average common share outstanding |
$ | 190.91 | $ | 36.58 | ||||
Average common shares outstanding |
35,152 | 34,552 | ||||||
Shares outstanding at end of period |
35,152 | 34,552 | ||||||
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
13 Weeks Ended | ||||||||
Dec. 27, | Dec. 26, | |||||||
2009 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 6,711 | $ | 1,264 | ||||
Adjustments
to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
15,528 | 15,297 | ||||||
Amortization of debt issuance costs |
803 | 4,007 | ||||||
Premium on early retirement of debt |
| 1,775 | ||||||
(Increase) decrease in deferred income taxes |
(6,205 | ) | 358 | |||||
Gain on sale of dairy assets |
(7,950 | ) | | |||||
Loss on disposals of assets |
13 | 92 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in receivables |
(4,945 | ) | (6,518 | ) | ||||
(Increase) decrease in income tax receivables |
4,049 | (190 | ) | |||||
Increase in inventories |
(24,905 | ) | (33,363 | ) | ||||
Increase in prepaid expenses |
(2,122 | ) | (562 | ) | ||||
Decrease in assets held for sale |
215 | | ||||||
Decrease in other assets |
796 | | ||||||
Increase in accounts payable |
3,917 | 26,009 | ||||||
Increase (decrease) in income taxes payable |
6,450 | (527 | ) | |||||
Increase in liabilities held of sale |
1,014 | | ||||||
Decrease in other accrued liabilities |
(17,789 | ) | (21,081 | ) | ||||
Increase in long-term reserves |
2,430 | 3,466 | ||||||
Net cash used in operating activities |
(21,990 | ) | (9,973 | ) | ||||
Financing activities: |
||||||||
Proceeds from issuance of long-term debt |
| 400,000 | ||||||
Debt issuance cost |
| (6,972 | ) | |||||
Principal payments on long-term debt |
| (479,889 | ) | |||||
Principal payments on capital lease obligations |
(315 | ) | (367 | ) | ||||
Dividend paid |
(5,000 | ) | | |||||
Net cash used in financing activities |
(5,315 | ) | (87,228 | ) | ||||
Investing activities: |
||||||||
Proceeds from sale of dairy assets, net of fees |
84,294 | | ||||||
Purchase of property and equipment |
(11,666 | ) | (9,766 | ) | ||||
Proceeds from sale of property and equipment |
10 | 141 | ||||||
Net cash provided by (used in) investing activities |
72,638 | (9,625 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
45,333 | (106,826 | ) | |||||
Cash and cash equivalents at beginning of period |
196,914 | 325,005 | ||||||
Cash and cash equivalents at end of period |
$ | 242,247 | $ | 218,179 | ||||
Interest paid |
$ | 32,588 | $ | 30,803 | ||||
Income taxes paid |
$ | | $ | 1,100 |
See accompanying notes to unaudited consolidated financial statements.
6
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
(Unaudited)
DECEMBER 26, 2010
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the thirteen weeks ended December 26, 2010 are not necessarily indicative of the
results that may be experienced for the year ending September 25, 2011.
The consolidated balance sheet at September 26, 2010 has been derived from the audited
consolidated financial statements at that date, but does not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Companys report on Form 10-K for the year ended September 26, 2010.
Note 2 Principles of Consolidation
The unaudited consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Stater Bros. Markets (Markets) and Stater Bros. Development, Inc.
(Development), and Markets wholly-owned subsidiaries, Super Rx, Inc. (Super Rx) and SBM
Dairies, Inc. (Dairies). All significant inter-company transactions have been eliminated in
consolidation.
Note 3 Subsequent Events
The Company has evaluated the impact of subsequent events and determined that, other than the
call on January 14, 2011 of all of its remaining outstanding $525.0 million 8.125% Senior Notes in
the amount of $45.1 million and a dividend payment of $5.0 million on December 28, 2010, it did not
have any subsequent events that needed to be disclosed in its consolidated financial statements.
Note 4 Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles 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 5 Income Taxes
The Company establishes deferred tax liabilities for anticipated tax timing differences where
payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately
expected to be paid, and the amounts may be adjusted over time as additional information becomes
known.
The Company does not have any material tax positions that did not meet a
more-likely-than-not recognition threshold. As such, the Company has not recorded any
liabilities for uncertain tax positions. During the thirteen weeks ended December 26, 2010, there
were no material changes to the amount of uncertain tax positions.
The Company recognizes interest and penalties related to income tax deficiencies or
assessments by taxing authorities for any underpayment of income taxes separately from income tax
expenses as either interest expense or other operating expenses.
For federal tax purposes, the Company is subject to review of its fiscal 2007 through fiscal
2010 tax returns. During the first quarter of fiscal 2011, the State of California Franchise Tax
Board (FTB) concluded their audit of the Companys fiscal 2007 state return and made no
significant changes to the Companys reported taxes. For state tax purposes, the Company is
subject to review of its fiscal 2008 through fiscal 2010 state tax returns. The Company has been
notified that the FTB intends to audit its
fiscal 2008 and fiscal 2009 state tax returns. To date,
the FTB has only made a request to schedule the audit for those years.
7
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
Note 6 Retirement Plans
The Company has a Noncontributory Defined Benefit Pension Plan (the Plan) covering
substantially all non-union employees. The Plan provides for benefits based on an employees
compensation during the eligibility period while employed with the Company. The Companys funding
policy for the Plan is to contribute annually at a rate that is intended to provide sufficient
assets to meet future benefit payment requirements. Market value of Plan assets is calculated
using fair market values as provided by a third-party trustee. The Plans investments include
cash, which earns interest, and governmental securities and corporate bonds and securities.
The following table provides the components of net periodic pension expense:
Dec. 27, | Dec. 26, | |||||||
2009 | 2010 | |||||||
(in thousands) | ||||||||
Expected return on assets |
$ | (866 | ) | $ | (971 | ) | ||
Service cost |
826 | 944 | ||||||
Interest cost |
1,001 | 1,072 | ||||||
Amortization of prior service cost |
(1 | ) | 1 | |||||
Amortization of recognized losses |
349 | 392 | ||||||
Net pension expense |
$ | 1,309 | $ | 1,438 | ||||
Actuarial assumptions used to determine
net pension expense were: |
||||||||
Discount rate |
5.50 | % | 5.00 | % | ||||
Rate of increase in compensation levels |
3.00 | % | 3.00 | % | ||||
Expected long-term rate of return on assets |
6.50 | % | 6.50 | % |
The Company made approximately $0.6 million of contributions to the Plan in the thirteen weeks
ended December 26, 2010 and the Company expects to contribute an additional $2.0 million during the
remainder of fiscal 2011.
Note 7 Asset Sale
On October 11, 2009, the Company sold substantially all of the assets of Dairies to
subsidiaries of Dean Foods (Dean Foods) for $88.0 million in cash, subject to a working capital
adjustment, and the assumption by Dean Foods of certain liabilities including substantially all of
Dairies current liabilities, which included accounts payable. In the second quarter of fiscal
2010, the purchase price was adjusted upward by approximately $1.5 million due to an adjustment
made for working capital. Dairies assets which were sold consisted primarily of accounts
receivable, inventory and property and equipment. The Company incurred approximately $3.8 million
in transaction and other fees related to the transaction and recognized a gain, net of tax, of
approximately $5.6 million. The pre-tax gain from the sale of Dairies assets is included in Gain
on sale of dairy assets within the unaudited consolidated statements of income. Dairies retained
responsibility for all workers compensation claims through the date of the transaction.
Also on October 11, 2009, the Company entered into a ten year Product Purchase Agreement (the
PPA) with Dean Foods to purchase substantially all of its milk products sold in its supermarkets
from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing.
As of October 11, 2009, the Company ceased all dairy manufacturing operations.
8
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
Note 8 New Debt Issuance and Early Extinguishment of Debt
Issuance of New Notes
On November 29, 2010, the Company issued $255.0 million in aggregate principal amount of
7.375% Senior Notes due November 15, 2018 (the New Notes) in a private offering. The New Notes
are unregistered and unsecured obligations of the Company. The Company incurred approximately $6.4
million of debt issuance costs related to the issuance of the New Notes of which $5.4 million was
paid as of December 26, 2010. These costs will be amortized to interest expense over the term of
the New Notes.
Issuance of New Credit Facility
On November 29, 2010, the Company entered into a new $245.0 million senior secured credit
facility (the Credit Facility) with Bank of America, N.A., as administrative agent and a lender.
Lenders under the Credit Facility consist of a consortium of banks. The Credit Facility consists
of a four-year $145.0 million term loan (the Term Loan) and a $100.0 million revolving credit
facility (the Revolving Credit Facility). The Credit Facility replaced the Companys existing
$100.0 million credit facility. The Credit Facility is secured by substantially all of the
Companys personal property excluding certain intangible assets consisting of trademarks and shares
of capital stock. The Credit Facility is guaranteed by the Company, Development, Super Rx and
Dairies.
The Term Loan bears interest at Eurodollar Rate plus 2.50% or the Base rate plus 1.50% (as
defined in the Credit Facility) and the interest under the Term Loan is payable quarterly in
arrears and includes mandatory quarterly principal payments of 5.0% in each of the first two years
of the agreement and 10.0% in each of the years three and four of the agreement. The Term Loan
also includes additional mandatory principal payments on the Term Loan based on a percentage of
excess cash flow as defined in the Credit Facility. The Term Loan is due November 29, 2014 with
any remaining outstanding principal amounts under the Term Loan due as of that date. The security
held under the Credit Facility is held until the Term Loan is paid in full. The Company incurred
approximately $2.0 million of debt issuance cost related to the Term Loan of which approximately
$1.5 million was paid as of December 26, 2010. These costs will be amortized to interest expense
over the term of the Term Loan.
As of December 26, 2010, the Companys interest rates on the Term Loan were based on the
Eurodollar Rate and consisted of a ninety day rate of approximately 2.800% on approximately $5.4
million of outstanding principal amount and a twelve month rate of approximately 3.287% on
approximately $139.6 million.
Subject to certain restrictions, the entire amount of the Revolving Credit Facility may be
used for loans, letters of credit or a combination thereof. Borrowing under the Revolving Credit
Facility are secured and will be used for working capital, certain capital expenditures and other
general corporate purposes. Letters of credit issued under the Revolving Credit Facility are
expected to be used for workers compensation insurance obligations and may be used for new store
construction and certain other corporate purposes. The availability of the loans and letters of
credit is subject to certain borrowing restrictions.
Loans under the Revolving Credit Facility bear interest at a rate based upon either (i) the
Base Rate (defined as the higher of (a) the federal funds rate plus 0.50% and (b) the Bank of
America prime rate), plus 1.50%, or (ii) the Eurodollar Rate (defined as the British Bankers
Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), plus
2.50%. For Eurodollar Rate loans, the Company will be entitled to select interest periods of one,
two , three, six, nine or twelve months, subject to availability.
9
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
Note 8 New Debt Issuance and Early Extinguishment of Debt (contd.)
Issuance of New Credit Facility (contd.)
The Credit Facility requires the Company to meet certain financial tests, including minimum net
worth and the maintenance of minimum earnings levels. The Credit Facility contains covenants
which, among other things, limit the ability of the Company and its subsidiaries to (i) incur
indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations,
liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates,
(iii) make restricted payments and (iv) make certain amendments to the Indentures governing the
8.125% Senior Notes, 7.375% Senior Notes and 7.75% Senior Notes (Notes Indentures). Markets and
the Companys other direct and indirect subsidiaries are not limited in their ability to transfer
assets in the form of loans, advances or cash dividends to the Company. As of December 26, 2010,
the Company was in compliance with all restrictive covenants under the Credit Facility.
The Company had no short-term borrowings outstanding under the Revolving Credit Facility as of
December 26, 2010 and the Company did not incur any short-term borrowings under the Revolving
Credit Facility during the quarter ended December 26, 2010.
Early Extinguishment of Debt
The Company used the proceeds from the New Notes and the new Term Loan and cash on hand to
purchase and early retire all of its $525.0 million 8.125% Senior Notes due June 15, 2012 (Retired
Notes). On November 29, 2010, the Company paid approximately $479.2 million to purchase and make
a tender payment on approximately $477.5 million outstanding balance of Retired Notes that had been
validly tendered as of that date. The payment included a tender premium of approximately $1.8
million that has been recorded under Interest expense related to debt purchase in the Companys
consolidated financial statements. On December 13, 2010, the Company paid approximately $2.4
million to purchase approximately $2.4 million of outstanding Retired Notes that had been tendered
as of that date. In the first quarter of fiscal 2011, the Company recorded to Interest expense
approximately $3.3 million in unamortized deferred offering costs related to the Retired Notes.
Subsequent to December 26, 2010, the Company, on January 14, 2011, called all remaining outstanding
Retired Notes and paid approximately $45.1 million to retire the remaining notes. In the second
quarter of fiscal 2011, the Company will record approximately $0.3 million to interest expense for
the remaining unamortized deferred offering costs on the Retired Notes called on January 14, 2011.
Note 9 Subsidiary Guarantee
As of December 26, 2010, the Company had $285.0 million of 7.75% Senior Notes due April 15,
2015, $255.0 million of unregistered 7.375% Senior Notes due November 15, 2018 and $45.1 million of
Retired Notes, collectively (the Notes).
The Notes are guaranteed by the Companys subsidiaries Markets and Development, and the
Companys indirect subsidiaries Super Rx, and Dairies (each a subsidiary guarantor, and
collectively, the subsidiary guarantors). Condensed consolidating financial information with
respect to the subsidiary guarantors is not provided because the Company has no independent assets
or operations, the subsidiary guarantees are full and unconditional and joint and several and there
are no subsidiaries of the Company other than the subsidiary guarantors.
The Company called and retired the remaining $45.1 million of Retired Notes on January 14,
2011.
10
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
Note 10 Litigation Matters
In the ordinary course of business, the Company is party to various legal actions which it
believes are incidental to the operation of its business and the business of 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 it
is currently a party will not have a material adverse effect upon its results of operations or its
consolidated financial condition.
In December 2008, an action by Dennis M. OConnor, et al. was filed in the Los Angeles
Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking
individual and potential class action monetary damages for time spent by non-exempt hourly paid
employees for changing into and out of sanitary uniforms. On September 23, 2010 following
mediation, the case was settled. Under the settlement agreement, the settlement amount will be
paid pursuant to procedures for filing and approval of claims for members of the certified class
with a portion of any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount
was recorded in the Companys consolidated financial statements for the fiscal year ended September
26, 2010.
Note 11 Long-Term Receivable
The Company has approximately $16.0 million due from the Inland Valley Development Agency (the
IVDA) for tax increment reimbursement related to the construction of the Companys Distribution
Center. In fiscal 2010, $17.7 million which represented the net present value of the future tax
increments was converted to a cash payment of approximately $1.7 million and a note of $16.0
million from the IVDA which was due December 31, 2010. The IVDA requested and the Company granted
an extension of the due date on the IVDA note to March 31, 2011. The IVDA note bears an annual
interest rate of 5.0%.
Note 12 Dividend
On November 17, 2009, the Company paid a $5.0 million dividend to La Cadena Investments (La
Cadena), the sole shareholder of the Company. On December 20, 2010, the Company declared a $5.0
million dividend to La Cadena. Subsequent to December 26, 2010, the dividend was paid on December
28, 2010.
After the Companys $5.0 million dividend payment on December 28, 2010 and taking into
consideration its financial results as of December 26, 2010, the Company had the ability to make
restricted payments, including dividends, of $33.7 million.
11
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010
Note 13 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.
Current Portion of Long-Term Receivable
Although market quotes for the fair value of the Companys long-term receivable are not
readily available, the Company valued its long-term receivable based on a discounted cash flow
approach applying a discount rate that approximates long-term market rates.
Long-Term Debt and Capital Lease Obligations
The fair value of the 8.125% Senior Notes, the 7.75% Senior Notes and the 7.375% Senior Notes
are based on quoted market prices. Although market quotes for the fair value of the Companys Term
Loan and capitalized lease obligations are not readily available, the Company believes the stated
value approximates fair value.
The estimated fair values of the Companys financial instruments are as follows:
As of | ||||||||
December 26, 2010 | ||||||||
(In thousands) | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
Cash and cash equivalents |
$ | 218,179 | $ | 218,179 | ||||
Receivables |
$ | 42,322 | $ | 42,322 | ||||
Current portion of long-term receivable |
$ | 16,001 | $ | 16,001 | ||||
Capital lease obligations |
$ | 3,401 | $ | 3,401 | ||||
Long-term debt |
$ | 730,111 | $ | 734,649 |
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I FINANCIAL INFORMATION (contd.)
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CRITICAL ACCOUNTING POLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and
fairly our operating results and financial position, and we apply those accounting policies in a
consistent manner. Our critical accounting policies are summarized in our report on Form 10-K for
the year ended September 26, 2010.
Our discussion and analysis of financial condition and results of operations are based upon our
unaudited consolidated financial statements prepared in accordance with U.S. generally accepted
accounting principles. The preparation of the financial statements requires the use of estimates
and judgments on the part of management. We base our estimates on our historical experience
combined with managements understanding of current facts and circumstances.
SIGNIFICANT ACCOUNTING POLICIES
There are certain accounting policies that we have adopted that may differ from policies of
other companies within our industry and other companies as a whole. Such differences in the
treatment of these policies may be important to the readers of our report on Form 10-Q and our
unaudited consolidated financial statements contained herein. For further information regarding
our accounting policies, refer to the significant accounting policies included in the notes to the
unaudited consolidated financial statements contained herein and in our report on Form 10-K for the
year ended September 26, 2010.
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OWNERSHIP OF THE COMPANY
La Cadena Investments (La Cadena), a California general partnership whose sole voting
partner is the Jack H. Brown Revocable Trust, holds all of our issued and outstanding capital
stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of
the Company, is the Managing General Partner of La Cadena with the power to vote the shares of
our capital stock held by La Cadena on all matters, including with respect to the election of
our Board of Directors, and any other matters requiring shareholder approval.
AVAILABLE INFORMATION
We file quarterly and annual reports electronically with the Security and Exchange Commission
(SEC) under forms 10-Q and 10-K and we file current reports on form 8-K and amendments to these
reports. The SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC. These
electronic files can be found at the SECs website at http://www.sec.gov. The public may
read and copy any of our reports filed with the SEC at the SECs Public Reference Room at 100 F
Street, NE., Washington, DC 20549. The public may obtain information on the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
EXECUTIVE OVERVIEW
We are the largest privately owned supermarket chain in Southern California. Our revenues are
generated primarily from retail sales through our supermarkets. Our success is a result of our
marketing strategy of offering everyday low prices while providing our customers with friendly and
outstanding service on each of their visits to our stores which has been a seventy-five year Stater
Bros. tradition.
As a result of the continued decline of the economy in our primary marketing area, we anticipate
that our fiscal 2011 sales will be lower than our fiscal 2010 sales. Our strategy in the near term
is to retain customer counts during these challenging economic times by continuing to provide
exceptional customer service and provide value to our customers on their purchases from our
supermarkets.
Our marketing area of Southern California continues to be highly competitive and in flux. With the
current economic conditions, our marketing area has seen job losses and business closures which has
put and will continue to put pressure on our gross margin as we endeavor to retain our customer
base. We anticipate continued competitive pressures from big box format competitors including
Walmart, Costco, Target and Winco and from our traditional grocery format competitors Vons,
Albertsons and Ralphs and from independent supermarket operators.
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales and Cost of Goods Sold
Fiscal Period Ended | Change | |||||||||||||||
Dec. 27, | Dec. 26, | 2011 to 2010 | ||||||||||||||
(in thousands) | 2009 | 2010 | Dollar | % | ||||||||||||
Sales |
$ | 923,864 | $ | 899,037 | $ | (24,827 | ) | (2.69 | )% | |||||||
Gross Profit |
$ | 238,150 | $ | 238,773 | $ | 623 | 0.26 | % | ||||||||
as a % of sales |
25.78 | % | 26.56 | % |
Sales
Sales in our supermarkets decreased 2.31% or $21.3 million for the first quarter of fiscal 2011
compared to the same period in fiscal 2010. Prior to our sale of our Dairy operations in October
2009, the Dairy had fiscal 2010 sales of $3.5 million that are not present in our fiscal 2011
sales.
Like Store Sales
We calculate like store sales by comparing year-to-year sales for stores that are opened in both
years. For stores that were not opened for the entire previous year period, we only include the
current years weekly sales that correspond to the weeks the stores were opened in the previous
year period. For stores that have been closed, we only include the prior years weekly sales that
correspond to the weeks the stores were opened in the current year. Replacement store sales are
included in like store sales. We have had no new store openings nor any store closures in either
fiscal 2010 or fiscal 2011.
Like store sales are affected by various factors including, but not limited to, inflation,
deflation, promotional discounting, customer traffic, buying trends, pricing pressures from
competitors and competitive openings and closings.
Like store sales decreased $21.3 million or 2.31% from the first quarter of fiscal 2010.
15
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Gross Profit
Gross profit margin, as a percentage of sales, in the first quarter of fiscal 2011 increased 0.78%
to 26.56% from 25.78% in fiscal 2010. The increase in our first quarter margin is attributed to a
special produce promotion that occurred during a portion of the first quarter of fiscal 2010 that
was not present in fiscal 2011 and to more focused promotional efforts in fiscal 2011. During the
first quarter of fiscal 2011, we have begun to see increased prices in commodity prices of oils,
sugar, coffee and other commodity pricing and we expect to see additional price increases in the
products we sell. We anticipate that the current economic conditions and continued competitive
pressures will limit our ability to pass on price increases which will put pressure on our gross
margin in the foreseeable future.
Operating Expenses and Operating Profit
Fiscal Period Ended | Change | |||||||||||||||
Dec. 27, | Dec. 26, | 2011 to 2010 | ||||||||||||||
(in thousands) | 2009 | 2010 | Dollar | % | ||||||||||||
Operating Expenses: |
||||||||||||||||
Selling, general and |
||||||||||||||||
administrative expenses |
$ | 205,288 | $ | 203,518 | $ | (1,770 | ) | (0.86 | )% | |||||||
as a % of sales |
22.22 | % | 22.64 | % | ||||||||||||
Gain on sale of assets |
$ | (7,950 | ) | $ | | $ | 7,950 | | ||||||||
as a % of sales |
(0.86 | )% | 0.00 | % | ||||||||||||
Depreciation and amortization |
$ | 12,666 | $ | 12,444 | $ | (222 | ) | (1.75 | )% | |||||||
as a % of sales |
1.37 | % | 1.38 | % | ||||||||||||
Operating profit |
$ | 28,146 | $ | 22,811 | $ | (5,335 | ) | (18.95 | )% | |||||||
as a % of sales |
3.05 | % | 2.54 | % |
Selling, General and Administrative Expenses
The increase, as a percentage of sales, in selling, general and administrative expenses in the
first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 is due primarily to
increases, as a percentage of sales, in payroll related expenses. Our payroll cost, as a
percentage of sales, increased 0.59% and includes increases in union insurance cost of 0.55%, as a
percentage of sales.
The amount of salaries, wages and administrative costs associated with the purchase of our products
included in selling, general and administrative expenses for the first quarters of fiscal 2011 and
fiscal 2010 is $299,000 and $314,000, respectively.
Gain on Sale of Dairy Assets
Gain on sale of dairy assets, in fiscal 2010, comprises approximately $8.0 million of pre-tax gain
from the sale of our dairy assets. The Dairy transaction is described in Note 7 Asset Sale to
our unaudited consolidated financial statements contained herein.
Depreciation and Amortization
Depreciation and amortization expense in the first quarter of fiscal 2011 was comparable to fiscal
2010. Included in both the first quarters of fiscal 2011 and fiscal 2010 cost of goods sold is
$2.9 million of depreciation and amortization related to our warehousing and distribution
activities.
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Interest Income
Interest income was $259,000 and $59,000 for the first quarters of fiscal 2011 and fiscal 2010,
respectively.
Interest Expense
Interest expense was $19.2 million for the first quarter of fiscal 2011 and $17.2 million in the
first quarter of fiscal 2010. Interest expense for the first quarter of fiscal 2011 includes
approximately $3.3 million from the write-off of unamortized deferred offering costs from the early
retirement of approximately $479.9 million of our $525.0 million 8.125% Senior Notes with the
remaining outstanding portion being retired on January 14, 2011. With our reduction in outstanding
debt of approximately $125.0 million and the lower interest rates on our new long-term debt, we
anticipate we will incur less interest expense in fiscal 2011 than in fiscal 2010.
Interest Expense Related to Debt Purchase
In the first quarter of fiscal 2011, we paid approximately $1.8 million in tender premium related
to our tender offer to early redeem a significant portion of our $525.0 million 8.125% Senior
Notes.
Income Before Income Taxes
Income before income taxes amounted to $2.0 million and $11.0 million in the first quarters of
fiscal 2011 and fiscal 2010, respectively.
Income Taxes
Income taxes amounted to $0.7 million and $4.3 million in the first quarters of fiscal 2011 and
fiscal 2010, respectively. Our effective tax rate was 37.0% and 39.0% for the first quarters of
fiscal 2011 and fiscal 2010, respectively. The lower effective rate for fiscal 2011 is due
primarily to tax credits being applied against lower taxable income in the current year versus the
prior year.
Net Income
Net income for the first quarter of fiscal 2011 amounted to $1.3 million compared to $6.7 million
in the first quarter of fiscal 2010.
LIQUIDITY AND CAPITAL RESOURCES
We historically fund our daily cash flow requirements through funds provided by operations.
We have the ability to borrow under our short-term revolving credit facility. Our credit facility
expires in November 2014 and includes a revolving credit facility for working capital and letters
of credit of $100.0 million. The letters of credit are maintained pursuant to our workers
compensation and general liability self-insurance requirements.
As of December 26, 2010, we had approximately $49.8 million of outstanding letters of credit and we
had approximately $50.2 million available under the revolving credit facility.
We had no short-term borrowings outstanding under our revolving credit facility as of December 26,
2010. We did not incur any short-term borrowings under our revolving credit facility in the first
quarter of fiscal 2011.
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
The following table sets forth our contractual cash obligations and commercial commitments as
of December 26, 2010.
Contractual Cash Obligations | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
8.125% Senior Notes called January 2011 |
||||||||||||||||||||
Principal |
$ | 45,111 | $ | 45,111 | $ | | $ | | $ | | ||||||||||
Interest |
295 | 295 | | | | |||||||||||||||
45,406 | 45,406 | | | | ||||||||||||||||
Term Loan due November 2014 (1) |
||||||||||||||||||||
Principal |
145,000 | 5,438 | 19,938 | 119,624 | | |||||||||||||||
Interest |
17,073 | 4,752 | 8,654 | 3,667 | | |||||||||||||||
162,073 | 10,190 | 28,592 | 123,291 | | ||||||||||||||||
7.75% Senior Notes due April 2015 |
||||||||||||||||||||
Principal |
285,000 | | | 285,000 | | |||||||||||||||
Interest |
99,394 | 22,088 | 44,175 | 33,131 | | |||||||||||||||
384,394 | 22,088 | 44,175 | 318,131 | | ||||||||||||||||
7.375% Senior Notes due November 2018 |
||||||||||||||||||||
Principal |
255,000 | | | | 255,000 | |||||||||||||||
Interest |
149,720 | 18,075 | 37,613 | 37,613 | 56,419 | |||||||||||||||
404,720 | 18,075 | 37,613 | 37,613 | 311,419 | ||||||||||||||||
Capital lease obligations (2) |
||||||||||||||||||||
Principal |
3,401 | 1,625 | 1,649 | 127 | | |||||||||||||||
Interest |
834 | 470 | 359 | 5 | | |||||||||||||||
4,235 | 2,095 | 2,008 | 132 | | ||||||||||||||||
Operating leases (2) |
343,615 | 38,284 | 67,171 | 51,940 | 186,220 | |||||||||||||||
Total contractual cash obligations |
$ | 1,344,443 | $ | 126,735 | $ | 179,559 | $ | 531,107 | $ | 507,042 | ||||||||||
Other Commercial Commitments | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Standby letters of credit (3) |
$ | 49,762 | $ | 49,762 | $ | | $ | | $ | | ||||||||||
Total other commercial commitments |
$ | 49,762 | $ | 49,762 | $ | | $ | | $ | | ||||||||||
(1) | As of December 26, 2010, interest on our Term Loan is based on the Eurodollar Rate plus 2.50% and consisted of a ninety day rate of 2.800% on approximately $5.4 million and a twelve month rate of 3.287% on approximately $139.6 million. For purposes of contractual cash obligations shown here, we have assumed the December 26, 2010 90 day and twelve month interest rates for the respective assumed short-term and long-term portions of our Term Loan. |
(footnotes continued on following page) |
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
(2) | We lease the majority of our retail stores. We have subleased our former headquarters building and certain former distribution facilities located in Colton, California under an initial 15 year term for an amount equal to our lease payment. For purposes of contractual cash obligations shown here, minimum lease payments on this lease are shown without sub-lease offsets. Certain of our operating leases provide for minimum annual payments that change over the primary term of the lease. For purposes of contractual cash obligations shown here, contractual step increases or decreases are shown in the period they are due. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options. | |
(3) | Standby letters of credit are committed as security for workers compensation obligations. Outstanding letters of credit expire between February 2011 and December 2011. |
Working capital amounted to $206.9 million at December 26, 2010 and $206.1 million at
September 26, 2010, and our current ratios were 1.59:1 and 1.49:1, respectively. Fluctuations in
working capital and current ratios are not unusual in our industry.
Net cash used in operating activities for the thirteen weeks ended December 26, 2010 was $10.0
million and was $22.0 million for the thirteen weeks ended December 27, 2009. Significant uses of
cash for operating activities in the first quarter of fiscal 2011 included increases in inventory
levels, to meet holiday sales demand as well as additional forward buys in anticipation of price
increases, and a decrease in accrued interest due to the timing of interest payments. Uses of
cash were partially offset by an increase in accounts payable.
In the first quarter of fiscal 2011, we had cash used in financing activities of $87.2 million
which resulted from the early retirement of $479.9 million of our $525.0 million 8.125% Senior
Notes offset by new debt issuance of $400.0 million comprised of $255.0 million 7.375% Senior Notes
due 2018 and our $145.0 million Term Loan due 2014.
After taking into consideration our $5.0 million dividend payment on December 28, 2010 and based on
our financial results as of December 26, 2010, we had the ability and right to pay a restricted
payment, including dividends, of up to $33.7 million.
We believe that operating cash flows and current cash reserves will be sufficient to meet our
currently identified operating needs and scheduled capital expenditures. However, we may elect to
fund some capital expenditures through capital leases, operating leases or debt financing. There
can be no assurance that such debt and lease financing will be available to us in the future.
Labor Relations
Our collective bargaining agreements with the UFCW were renewed in March 2007 and extend
through March 2011. Our collective bargaining agreement with the International Brotherhood of
Teamsters was renewed in October 2010 and expires in September 2015. We believe we have good
relations with our employees.
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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Certain information contained in our 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 us) 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 Holdings.
These risks and uncertainties include, but are not limited to, those relating to domestic economic
conditions, seasonal and weather fluctuations, labor unrest, 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.
20
Table of Contents
STATER BROS. HOLDINGS INC.
DECEMBER 26, 2010
DECEMBER 26, 2010
PART I FINANCIAL INFORMATION (contd.)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to interest rate risk on our fixed interest rate debt obligations. Our fixed rate debt
obligations are comprised of our Term Loan, our 7.75% Senior Notes due April 2015, our 7.375%
Senior Notes due November 2018 and capital lease obligations. In general, the fair value of fixed
rate debt will increase as the market rate of interest decreases and will decrease as the market
rate of interest increases. While interest rate changes will impact the market value risk of our
bonds, such changes in the market value of our bonds do not affect our earnings or cash flows. Our
earnings and our cash flows may be affected to the extent the interest rate on our Term Loan
changes at each interest rate renewal period. We have not engaged in any interest rate swap
agreements, derivative financial instruments or other type of financial transactions to manage
interest rate risk.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of December 26, 2010.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of December 26, 2010. There were no
material changes in our internal control over financial reporting during the first quarter of
fiscal 2011.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are party to various legal actions which we believe are
incidental to the operation of our business and the business of our subsidiaries. We record an
appropriate provision when the occurrence of loss is probable and can be reasonably estimated. We
believe that the outcome of such legal proceedings to which we are currently a party will not have
a material adverse effect upon our results of operations or our consolidated financial condition.
In December 2008, an action by Dennis M. OConnor, et al. was filed in the Los Angeles Superior
Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual
and potential class action monetary damages for time spent by non-exempt hourly paid employees for
changing into and out of sanitary uniforms. On September 23, 2010, following mediation the case
was settled. Under the settlement agreement, the settlement amount will be paid pursuant to
procedures for filing and approval of claims for members of the certified class with a portion of
any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount has been recorded
in our consolidated financial statements for our fiscal year ended September 26, 2010.
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STATER BROS. HOLDINGS INC.
DECEMBER 26, 2010
DECEMBER 26, 2010
Item 1A.
RISK FACTORS
The supermarket industry is highly competitive and generally characterized by narrow profit
margins. We compete with various types of retailers, including local, regional and national
supermarket retailers, convenience stores, retail drug chains, national general merchandisers and
discount retailers, membership clubs, warehouse stores and independent and specialty grocers. Our
primary traditional grocery format competitors include Vons, Albertsons, Ralphs, and a number of
independent supermarket operators. We also face competition from restaurants and fast food chains
as household food expenditures are directed to the purchase of food prepared outside the home.
Our principal competitors include traditional grocery format operators; big box format retailers,
including Walmart, Target, Costco and Winco and regional markets which compete with us on the basis
of location, quality of products, service, price, product variety and store condition. Our
competitors maintain market share through high levels of promotional activities and discount
pricing, which creates a difficult environment in which to consistently increase year-over-year
sales gains. We expect our competitors to continue to apply pricing and other competitive
pressures as they expand the number of their stores in our market area and as they continue to take
steps to both maintain and grow their customer counts.
We face competitive pressure from existing competitors and from smaller format stores such as
convenience stores, drug stores and discount stores that carry traditional grocery format items.
Some of our competitors have greater resources than us and are not unionized resulting in lower
labor cost. These competitors could use their resources to take measures which could adversely
affect our competitive position.
Our marketing area in Southern California continues to be highly competitive and in flux. Our
market changes frequently as competitors open and close supermarket locations and introduce new
pricing strategies. We anticipate increased competition from big box format retailers, our
traditional grocery format competitors and other smaller format competitors.
Our performance is affected by inflation and deflation. In recent periods, we have experienced
increases in transportation costs and the cost of products we sell in our stores. Our costs
fluctuate for increases and decreases in commodities such as fuel, plastic and other product
categories. As inflation has increased expenses, we have 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 us to become more cost
efficient as our ability to recover increases in expenses through price increases is diminished.
Our future results of operations will depend upon our ability to adapt to the current economic
environment as well as the current competitive conditions.
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STATER BROS. HOLDINGS INC.
DECEMBER 26, 2010
DECEMBER 26, 2010
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None |
Item 3. DEFAULTS UPON SENIOR SECURITIES
None |
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None |
Item 5. OTHER INFORMATION
None |
Item 6. EXHIBITS
(a) | Exhibits |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act. |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act. |
32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: February 8, 2011 | /s/ Jack H. Brown | |||
Jack H. Brown | ||||
Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) |
Date: February 8, 2011 | /s/ Phillip J. Smith | |||
Phillip J. Smith | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
24