Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 30, 2002

OR

For the transition from ____ to ____

Commission file number 001-13222

STATER BROS. HOLDINGS INC.

Not Applicable

Table of Contents

STATER BROS. HOLDINGS INC.
JUNE 30, 2002

INDEX

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

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

ASSETS

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

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

LIABILITIES AND STOCKHOLDERS’ DEFICIT

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

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

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

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

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

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

See accompanying notes to unaudited consolidated financial statements.

7

Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2002

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 30, 2001 and June 30, 2002 and the results of its operations and cash flows for the thirty-nine and thirteen weeks ended June 24, 2001 and June 30, 2002. 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 30, 2002 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 24, 2001 and June 30, 2002 consists of the following:

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 $1.2 million and $2.6 million for the thirty-nine weeks ended June 24, 2001 and June 30, 2002, respectively. The Company is a significant customer of Santee, which supplies the Company with a substantial portion of its fluid milk and dairy products.

8

Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2002

Note 3 — Unconsolidated Affiliate (contd.)

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

Note 4 — 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 5 — 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 6 — 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.

9

Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2002

Note 7 — New Accounting Pronouncement

     Effective January 1, 2002, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which supersedes prior accounting standards concerning the financial accounting and reporting for the impairment or the disposal of long-lived assets and for the disposition of a segment of a business. The adoption of FAS 144 did not have an effect on the Company’s results of operations or financial condition and is effective for fiscal years beginning after December 15, 2001.

10

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART I — FINANCIAL INFORMATION (contd.)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of estimates and judgements on the part of management. The Company based its estimates on the Company’s historical experience combined with management’s understanding of current facts and circumstances. The Company believes that the following critical accounting policies are the most important to the Company’s financial statement presentation and require the most difficult, subjective and complex judgements on the part of management.

Vendor Rebates and Allowances

The Company receives certain rebates and allowances (“allowances”) from its vendors. The Company recognizes these allowances as a reduction in cost of goods sold as the allowances are earned. These allowances are earned by purchasing specified amounts of product or promoting certain products. The Company records a liability for funds that have been received but not yet earned.

Self-Insurance

The Company is primarily self-insured, subject to certain retention levels, for workers’ compensation, automobile and general liability costs. The Company records its self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates used by management are based on the Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in medical costs. The Company’s projections anticipate no change in the workers’ compensation benefits structure. In recent years, the Company and employers within the State of California as a whole have seen significant increases in the development severity of workers’ compensation claims. While the Company has factored these increases into its estimates of ultimate loss, no assurance can be given that future events will not require a change in these estimates. The Company discounts its workers’ compensation, automobile and general liability insurance reserves at a discount rate of approximately 7.5%.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Management believes that its inventory turns and inventory controls are sufficient and that reserves are not needed for excess, obsolete or discontinued inventory.

11

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Properties Held for Sale

Properties held for sale are stated at the lower of cost or estimated net realizable value and consist of land, buildings and equipment.

Investment in Affiliate

The Company owns 50% of Santee Dairies, LLC. The Company is not the controlling stockholder and accordingly accounts for its investment using the equity method of accounting.

Deferred Debt Issuance Costs

Direct costs incurred as a result of financing transactions are capitalized and amortized to expense over the terms of the applicable debt agreements.

Deferred Taxes

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 its deferred tax assets.

Phantom Stock Plan

It is the Company’s policy to expense phantom stock options to the extent that they vest and appreciate during the accounting period.

Environmental Matters

The Company recognizes environmental remediation costs as they are incurred. The Company believes that any future remediation costs will not have a material adverse effect on the financial condition or results of operations of the Company.

OWNERSHIP OF THE COMPANY

La Cadena Investments is 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 a former member of senior management of the Company. Jack H. Brown has a majority interest in La Cadena Investments and is the managing general partner with the power to vote the shares of the Company held by La Cadena Investments.

ACQUISITION

On May 7, 1999, Stater Bros. Markets entered into an agreement with Albertson’s, Inc. (“Albertson’s”) to purchase 43 supermarkets and one future store site in Stater Bros. Markets’ 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. Markets’ name within two days of its acquisition and was fully integrated into the Stater Bros. Markets’ operating systems.

12

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LEASE GUARANTEE ESCROW

As of September 24, 2000, a portion of the Company’s lease obligations were guaranteed by Petrolane Incorporated (“Petrolane”) or its successor. The leases guaranteed by Petrolane had initial terms of 20 years and were to expire in 2003. Lease payments for the properties subject to the Petrolane guarantees were 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 was required to make annual deposits into a lease guarantee escrow account. In addition, 10 shares of Stater Bros. Markets’ $11.00 Cumulative Redeemable Preferred Stock due 2003 were held by Petrolane in connection with the lease guarantees.

During the first quarter of fiscal 2001, Stater Bros. Markets redeemed all 10 outstanding shares of its $11.00 Cumulative Redeemable Preferred Stock due 2003 from Texas Eastern Corporation, Petrolane’s assignee of such preferred stock. The Petrolane lease guarantees were terminated in exchange for a $400,000 fee and a letter of credit was issued in favor of Texas Eastern to secure a portion of the remaining lease payments through 2003. 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. All of the store leases that had been guaranteed by Petrolane were extended for an additional five years following expiration of their respective initial terms in 2003.

RESULTS OF OPERATIONS

The following table sets forth certain income statement components expressed as a percent of sales for the thirteen and thirty-nine weeks ended June 30, 2002 and June 24, 2001.

13

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Total sales for the thirteen weeks ended June 30, 2002, the third quarter of fiscal 2002, increased 5.13% and amounted to $672.8 million compared to $639.9 million for the same period in the prior year. Total sales for the thirty-nine weeks ended June 30, 2002, increased 5.99% and amounted to $1.990 billion compared to $1.877 billion for the same period in the prior year. The increase in total sales in the third quarter of fiscal 2002 and fiscal year to date of 2002 was due primarily to favorable customer response to the Company’s marketing plan, which emphasizes high quality, large product selections and customer service. Like store sales increased 4.59% and 5.81% for the thirteen-week and thirty-nine week periods ended June 30, 2002, respectively. During the third quarter of fiscal 2002, the Company opened a new store located in Chino Hills, California. The Company operated 156 supermarkets at June 30, 2002 and 155 supermarkets at June 24, 2001.

Gross profit for the thirteen weeks ended June 30, 2002, amounted to $177.1 million or 26.33% of sales compared to $166.1 million or 25.96% of sales in the same period of the prior year. Gross profit for the thirty-nine weeks ended June 30, 2002, amounted to $526.1 million or 26.44% of sales compared to $479.7 million or 25.55% of sales in the same period of the prior year. The increase in gross profit, as a percentage of sales, in both the third quarter of 2002 and the fiscal year to date of 2002, was due primarily to an increase in the sales of higher margin items and the effect of price increases, implemented in the second half of fiscal 2001, to offset higher utility costs.

Operating expenses include selling, general and administrative expenses, and depreciation and amortization. For the thirteen weeks ended June 30, 2002, selling, general and administrative expenses amounted to $151.5 million or 22.51% of sales compared to $143.0 million or 22.35% of sales for the thirteen weeks ended June 24, 2001. For the thirty-nine weeks ended June 30, 2002, selling, general and administrative expenses amounted to $447.1 million or 22.47% of sales compared to $414.5 million or 22.08% of sales for the thirty-nine weeks ended June 24, 2001. The increase in selling, general and administrative expenses as a percentage of sales during the third quarter of fiscal 2002 and for the year to date of fiscal 2002, was due primarily to increases in payroll related expenses.

Depreciation and amortization expenses amounted to $8.0 million and $23.2 million for the third quarter and year to date periods ended June 30, 2002, respectively. Depreciation and amortization expenses amounted to $7.2 million and $21.1 million for the quarter and year to date periods of the prior year. The increase in depreciation and amortization expense in fiscal 2002 was primarily due to an increase in fixed assets.

Operating profit for the third quarter of 2002 amounted to $17.7 million or 2.63% of sales compared to $15.9 million or 2.49% of sales for the third quarter of 2001. Operating profit for the fiscal year to date of 2002 amounted to $55.9 million or 2.81% of sales compared to $44.1 million or 2.35% of sales for the fiscal year to date of 2001.

Interest expense amounted to $13.4 million for the third quarter of 2002 compared to $12.8 million for the third quarter of 2001. For the fiscal year to date of 2002 and 2001, interest expense amounted to $39.4 million and $38.5 million, respectively. The increase in interest expense over the prior year was primarily due to the issuance of a $20.0 million subordinated note in connection with the redemption of the Company’s stock.

14

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

The Company’s equity in earnings from unconsolidated affiliate, amounted to $532,000 for the third quarter of fiscal 2002 compared to $215,000 in the third quarter of the prior year. For the fiscal year to date periods of 2002 and 2001, the Company’s equity in earnings from unconsolidated affiliate amounted to $2.6 million and $1.2 million, respectively. The difference in equity in earnings from unconsolidated affiliate for the fiscal quarter 2002 over 2001 was due to increased margins at the affiliate. The increase in the year to date fiscal 2002 versus fiscal 2001 is due primarily to the revaluation, by the affiliate, of deferred tax benefits arising from past net operating losses.

Income before income taxes amounted to $4.9 million and $3.8 million for the third quarter of 2002 and 2001, respectively. Income before income taxes amounted to $18.9 million and $9.2 million for the year to date periods of 2002 and 2001, respectively.

Net income for the third quarter amounted to $2.9 million and $2.3 million for 2002 and 2001, respectively. Net income for the fiscal year to date periods amounted to $11.1 million and $5.5 million for 2002 and 2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. The Company’s credit agreement, as amended, became effective August 6, 1999 and expires in March 2003 and consists of a revolving loan facility for working capital of $50.0 million, and a letter of credit facility with a maximum availability of $25.0 million. The credit agreement was amended December 13, 2001, to include a $15.0 million letter of credit sublimit. As of June 30, 2002, the Company had $30.2 million of outstanding letters of credit and had $44.8 million available under the revolving loan facility. As of June 30, 2002, and for the thirty-nine weeks then ended, the Company had no outstanding balances and had not drawn down on the revolving loan facility. The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements and as security for current rent obligations.

15

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth the Company’s contractual cash obligations and commercial commitments as of June 30, 2002.

16

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $102.0 million at June 30, 2002 and $124.3 million at September 30, 2001, and the Company’s current ratios were 1.48:1, and 1.64:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash provided by operating activities in the thirty-nine weeks ended June 30, 2002 amounted to $51.7 million compared to $60.4 million for the thirty-nine weeks ended June 24, 2001. Fluctuations in net cash provided by operating activities is not unusual in the industry. Cash provided by operating activities in fiscal 2002 of $51.7 million consisted of depreciation of $23.2 million, an increase in accrued liabilities and self-insurance reserves of $21.2 million and an increase of $6.8 million in accounts payable offset by an increase in inventories of $4.0 million, an increase in receivables of $3.5 million and an increase in deferred income taxes of $1.8 million. Cash provided by operating activities in fiscal 2001 of $60.4 million consisted of an increase in accrued liabilities and self-insurance reserves of $23.6 million, depreciation of $21.1 million, a decrease in lease guarantee escrow of $13.2 million, a decrease in deferred income taxes of $3.8 million and a decrease in other assets of $2.0 million offset by an increase in accounts receivable of $5.8 million.

Net cash used in investing activities for the thirty-nine weeks ended June 30, 2002, amounted to $31.0 million compared to $25.0 million for the thirty-nine weeks ended June 24, 2001. The difference in net cash used in investing activities between the comparable periods is due to the Company’s capital expenditures during such periods, net of proceeds from asset disposals. Capital expenditures amounted to $31.0 million in the fiscal year to date of 2002 compared to $25.2 million in the fiscal year to date of 2001.

Net cash used by financing activities amounted to $30.9 million and $6.7 million for the thirty-nine weeks ended June 30, 2002 and June 24, 2001, respectively. The $30.9 million cash used in financing activities in fiscal 2002 included the redemption of 11,699 shares of the Company’s stock previously held by La Cadena Investments, for $20.0 million in cash and the issuance of a $20.0 million subordinated note, which bears interest at a rate of 5.0% per annum, payable semi-annually; $4.5 million for the payment of a dividend to La Cadena Investments; and fees of approximately $5.0 million for the 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. The Company redeemed $250,000 of its 10.75% Senior Notes due 2006 for $250,000 plus accrued interest. These Notes were restricted and unregistered. The remaining financing activities in the current and prior year were for principal payment of long-term debt and payments on capital lease obligations.

17

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities

The Company’s principal operating subsidiary, Stater Bros. Markets, signed a credit facility with Bank of America N.A. on August 6, 1999. The credit facility, as amended December 31, 2001, provides for (i) a $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility and (iii) a “Revolving Loan Commitment L/C Sublimit” which is defined as an amount equal to the lesser of (a) the Revolving Loan Commitment and (b) $15,000,000. The Revolving Loan Commitment L/C Sublimit is part of, and not in addition to, the Revolving Loan Commitment. 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, workers’ compensation insurance obligations and security for current rent obligations.

The availability of the loans and letters of credit are subject to certain sublimits and other borrowing restrictions.

Indebtedness of Stater Bros. Markets under the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of the Company, 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 federal funds rate plus 0.50% and (b) the rate of interest publicly announced by Bank of America as its “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.25%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive interest periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Stater Bros. Markets, of one, two, three or six months.

The revolving loan facility, as amended January 18, 2002, will cease to be available and will be payable in full on March 31, 2003. Letters of credit under the credit facility can be issued until March 31, 2003, and all letters of credit must expire no later than March 31, 2004. 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. Outstanding letters of credit under the credit facility are subject to a fee of 1.50% per annum on the face amount of such letters of credit, payable quarterly in arrears. The Company will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.

18

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit 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 the Company.

The credit facility also contains covenants that apply to the Company and the Company 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 the Company’s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by the Company.

The credit facility requires the Company 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 June 30, 2002, for purposes of the credit facility with Bank of America, the Company was in compliance with all restrictive covenants and exceeded the minimum net worth covenant by approximately $66.6 million and exceeded minimum inventory coverage by approximately $44.4 million. The minimum EBITDA (as defined) covenant measurement period began (as amended) in the quarter ending June 25, 2000, and requires an annualized minimum EBITDA, as amended January 18, 2002, of $85.0 million. As of June 30, 2002, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $22.2 million.

As of June 30, 2002, for purposes of the credit facility with Bank of America, the Company was in compliance with all restrictive covenants.

Labor Relations

The Company and other major supermarket employers in Southern California negotiated a four-year contract, beginning October 1999, and expiring in October 2003, 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.

19

Table of Contents

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the current competitive conditions.

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 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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Not Applicable.

20

Table of Contents

STATER BROS. HOLDINGS INC.
JUNE 30, 2002

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Various legal actions and claims are pending against the Company in the ordinary course of business. In the opinion of management and its general legal counsel, the ultimate resolution of such pending legal actions and claims will not have a material adverse effect on the Company’s consolidated financial position or its results of operations.

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Form 10-K for the fiscal year ended September 30, 2001.

Item 2.   CHANGES IN 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 AND REPORTS ON FORM 8-K

(a)

Exhibits

     None

(b)

Reports on Form 8-K

     None

21

Table of Contents

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.

22