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EX-12.1 - EX-12.1 - STATER BROS HOLDINGS INC | v58081exv12w1.htm |
EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INC | v58081exv32w1.htm |
EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INC | v58081exv31w2.htm |
EX-31.1 - EX-31.1 - STATER BROS HOLDINGS INC | v58081exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: September 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 | (IRS Employer Identification No.) | |
organization) |
301 S. Tippecanoe Avenue | ||
San Bernardino, California | 92408 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (909) 733-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes o No þ.
If this report is an annual or transition report, indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Yes o No þ.
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o 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. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ.
No voting stock of the registrant is held by non-affiliates of the registrant.
Number of shares of the registrants Common Stock, $.01 par value, outstanding as of
December 15, 2010Class A Common Stock 34,552 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
FORM 10-K
TABLE OF CONTENTS
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Item 1A | 8 | |||||||
Item 1B | 9 | |||||||
Item 2 | 9 | |||||||
Item 3 | 10 | |||||||
Item 4 | 10 | |||||||
Item 5 | 11 | |||||||
Item 6 | 11 | |||||||
Item 7 | 13 | |||||||
Item 7A | 24 | |||||||
Item 8 | 25 | |||||||
Item 9 | 25 | |||||||
Item 9A | 25 | |||||||
Item 9B | 26 | |||||||
Item 10 | 27 | |||||||
Item 11 | 29 | |||||||
Item 12 | 38 | |||||||
Item 13 | 39 | |||||||
Item 14 | 39 | |||||||
Item 15 | 40 | |||||||
44 | ||||||||
EX-12.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
2
Table of Contents
PART I
Item 1. | Business |
General
Stater Bros. Holdings Inc. (Holdings or the Company) through its wholly-owned subsidiary,
Stater Bros. Markets (Markets), operates a supermarket chain of 167 stores located throughout
Southern California. We provide our customers with high quality grocery, health and general
merchandise products at every day low prices while providing the highest level of customer service.
All of our stores have expanded selection of produce and full-service meat departments, 155 have
service deli departments, 88 have bakery departments, 84 have full-service seafood departments and
27 have pharmacies. We believe our service departments, along with our high level of customer
service, creates a shopping experience that maintains customer loyalty and distinguishes us from
other supermarket chains. The legal entity for our in-store pharmacies is Super Rx, Inc. (Super
Rx), a wholly-owned subsidiary of Markets. Stater Bros. Development, Inc. (Development) a
wholly-owned subsidiary of the Company is general contractor for all of our new store construction
and store remodels. Prior to October 11, 2009, most of the milk products offered in our stores
were manufactured by SBM Dairies, Inc. (Dairies), a wholly-owned subsidiary of Markets. Dairies
operated under the name Heartland Farms. In addition to providing Markets with its milk products,
Dairies sold milk and juice products to a variety of third party companies and organizations. On
October 11, 2009, we sold substantially all of the assets of Dairies to subsidiaries of Dean Foods,
Inc. (Dean Foods) (the Dairy Transaction) and entered into a ten year product purchase
agreement (the PPA) to purchase substantially all of our milk products from Dean Foods and we
discontinued all dairy manufacturing operations as of that date and we have changed the legal name
of Dairies from Santee Dairies, Inc. to SBM Dairies, Inc.
Holdings was incorporated in Delaware in 1989 and has, through Markets and its predecessor
companies, operated supermarkets in Southern California since 1936 when the first Stater Bros.
Market opened in Yucaipa, California. The total square footage of our supermarkets is
approximately 5.8 million square feet including approximately 4.1 million square feet of selling
area. We have constructed most of our supermarkets through Development and it acts as general
contractor for all new store construction and store remodels. We have grown our business through
construction of new stores and through a strategic acquisition.
We utilize a centralized Distribution Center that provides our supermarkets with approximately 78%
of the volume of the merchandise we offer for sale. Our Distribution Center, located on the former
Norton Air Force base in San Bernardino, California (Norton) encompasses approximately 2.4
million square feet and includes our corporate offices.
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.
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 Holdings, 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.
3
Table of Contents
Item 1. | Business (contd.) |
Store Profile and Locations
Our supermarkets have well-established locations with fixed rent payments in most locations. In
addition, we believe our existing supermarkets are well maintained and generally require capital
expenditures only for customary maintenance. An average supermarket is approximately 34,000 square
feet, while newly constructed supermarkets range from approximately 40,000 square feet to 46,000
square feet. Because of the close proximity of our Distribution Center to our store locations, we
operate our supermarkets with minimal back-room storage space. Our supermarkets utilize an average
of approximately 71% of total square feet as retail selling space. Generally, all of our
supermarkets are similarly designed and stocked which allows our customers to easily find items in
any of our supermarkets.
Substantially all of our 167 supermarkets are located in neighborhood shopping centers in
well-populated residential areas. We endeavor to locate our supermarkets in growing areas that
will be convenient to potential customers and will accommodate future supermarket expansion.
We operated 167 supermarkets at both September 26, 2010 and September 27, 2009 and 165
supermarkets at September 28, 2008.
Our supermarkets had approximately 5.8 million total square feet at September 26, 2010 and
September 27, 2009 and approximately 5.6 million total square feet at September 28, 2008.
Store Expansion and Remodeling
Our marketing area comprises the Southern California counties of San Bernardino, Riverside, Orange,
Los Angeles, San Diego and Kern. We expand our customer base through construction of new stores
and by improving, remodeling and expanding existing stores. We intend to continue to expand our
existing supermarket operations by enlarging and remodeling existing supermarkets and constructing
new supermarkets. We may also make strategic acquisitions of existing supermarkets, if such
opportunities arise.
We actively pursue the acquisition of sites for new supermarkets. In an effort to determine sales
potential, we carefully research and analyze new supermarket sites for population shifts, zoning
changes, traffic patterns, nearby new construction and competitive locations. We work with
developers to attain our criteria for potential supermarket sites and to insure adequate parking
and a complementary co-tenant mix.
We monitor sales and profitability of our operations on a store-by-store basis and remodel or
replace stores in light of their performance and our assessment of their future potential.
Approximately 53% of our supermarkets have been either newly constructed or remodeled within the
last five years. The capital expenditure for a minor remodel ranges between $250,000 and
$1,000,000 and typically includes new fixtures and may include a change in decor. The capital
expenditure for a major remodel exceeds $1,000,000 and typically involves more extensive
refurbishment of the stores interior and may include the addition of one or more specialty service
departments such as a service deli, bakery or full-service seafood. Expansions entail enlargement
of the store building and typically include breaking through an exterior wall. The primary
objective of a remodel or expansion is to improve the attractiveness of the supermarket, increase
sales of higher margin product categories and, where feasible, to increase selling area.
4
Table of Contents
Item 1. | Business (contd.) |
Store Expansion and Remodeling (contd.)
The following table sets forth certain statistical information with respect to our supermarket
openings, closings and remodels for the periods indicated.
Fiscal Years Ended | ||||||||||||||||||||
Sept. 24, | Sept. 30, | Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
Number of supermarkets: |
||||||||||||||||||||
Opened |
3 | 3 | 1 | 3 | | |||||||||||||||
Closed |
(2 | ) | (1 | ) | | (1 | ) | | ||||||||||||
Total at end of year |
162 | 164 | 165 | 167 | 167 | |||||||||||||||
Minor remodel |
34 | 6 | 3 | 3 | 2 | |||||||||||||||
Major remodel |
14 | 12 | 10 | 9 | 4 |
We continually review plans for major and minor remodels, expansions and new construction to take
advantage of market opportunities. We finance our new store construction primarily from cash
provided by operating activities and we may also use short-term borrowings under our credit
facilities. Long-term financing of new stores generally will be obtained through either sale and
leaseback transactions or secured long-term financings. However, no assurances can be made as to
the availability of such financings.
Corporate Offices and Distribution Center
Our corporate office and Distribution Center encompass approximately 2.4 million square feet.
Based on sales volume, approximately 78% of the products offered for sale in our supermarkets are
received through our Distribution Center.
On average, our stores are located 41 miles from our Distribution Center. Most of our supermarkets
can be reached without using the most congested portions of the Southern California freeway system.
Our transportation fleet consists of modern well-maintained vehicles. As of September 26, 2010, we
operated approximately 124 tractors, 27 of which we owned and 97 we leased. We operated 494
trailers all of which we owned.
5
Table of Contents
Item 1. | Business (contd.) |
Purchasing and Marketing
To provide our customers with the best overall supermarket value in our primary marketing areas, we
use an Aggressive Everyday Low Price (AEDLP) format. We supplement our everyday low price
structure with chain-wide temporary price reductions (Stater Savers) on selected food and
non-food merchandise. The geographic location of our supermarkets allows us to reach our target
consumers through a variety of media and we aggressively advertise our everyday low prices through
local and regional newspapers, direct mail and printed circulars as well as extensive
advertisements on radio and television.
A key component of our business strategy is to provide our customers with a variety of quality
brand-name merchandise as well as alternative selections of high-quality private label merchandise.
To meet the needs of customers, our supermarkets are stocked with approximately 40,000 items. We
place particular emphasis on the freshness and quality of our meat and produce merchandise and
maintain high standards for these perishables by distributing the merchandise through our
Distribution Center.
Retail Operations
Our supermarkets are well maintained, have adequate off-street parking and open between 6:00 a.m.
and 7:00 a.m. and close between 10:00 p.m. and 12:00 a.m., seven days a week. We are closed on
Christmas Day and have limited hours on Thanksgiving Day. Because we operate our supermarkets
under similar formats, we believe we are able to achieve certain operating economies.
Store Management. Each of our supermarkets is managed by a store manager and an assistant manager,
each of whom receives a base salary and may receive a bonus based on their individual supermarkets
overall performance and on meeting other established criteria. The store manager and assistant
manager are supported by department and other store management who have the training and skills
necessary to provide proper customer service, operate the store and manage personnel in each
department. Each of our stores has individual department managers for grocery, meat, produce, and
where applicable, bakery, service deli and full-service seafood. Departmental managers are hourly
employees and may receive an annual bonus based on meeting established criteria. Store managers
report to one of eight district managers, each of whom is responsible for an average of 21
supermarkets. District managers report to one of three Regional Vice Presidents.
Customer Service. We consider customer service and customer confidence to be critical to the
success of our business strategy. Our strategy, to provide courteous and efficient customer
service, is a focus of our Senior Management team and is implemented by employees at all levels of
our Company. Each store is staffed with a customer service manager who coordinates all customer
service issues in the store. We maintain an intensive checker training school to train prospective
checkers and to provide a refresher program for existing checkers. All of our supermarkets have
express checkout lanes and offer carry-out service.
6
Table of Contents
Item 1. | Business (contd.) |
Employees
We have approximately 16,300 employees. Of which approximately 800 are management and
administrative employees and 15,500 are hourly union employees. Substantially all of our hourly
employees are members of either the United Food and Commercial Workers (UFCW) or International
Brotherhood of Teamsters (Teamsters) labor unions and are represented by several different
collective bargaining agreements.
The UFCWs collective bargaining agreements were renewed in March 2007 and expire in March 2011.
Markets Teamsters collective bargaining agreement was renewed in October 2010 and expires in
September 2015.
We value our employees and believe our relationships with them are good and that employee loyalty
and enthusiasm are key elements of our operating performance.
Competition
We operate in a highly competitive industry characterized by narrow profit margins. Competitive
factors include price, quality and variety of products, customer service, and store location and
condition. We believe our competitive strengths include our specialty service departments,
everyday low prices, breadth of product selection, high product quality, one-stop shopping
convenience, attention to customer service, convenient store locations, a long history of community
involvement and established long-term customer base in Southern California.
Given the wide assortment of products we offer, we compete with various types of retailers,
including local, regional and national supermarket chains, convenience stores, retail drug stores,
national general merchandisers and discount retailers, membership clubs and warehouse stores. Our
primary traditional grocery format competitors include Vons a division of Safeway, Albertsons a
division of SuperValu, Ralphs a division of Kroger, and a number of independent supermarket
operators. We, and our traditional format grocery competitors, also face competitive pressures
from big box format retailers including Walmart, Target, Costco and Winco.
We expect our competition to continue to apply pricing and other competitive pressures as they
strive to grow their market share in our market area and as they continue to take steps to both
maintain and grow their customer counts. We believe that our everyday low prices, breadth of
product offering, which includes approximately 40,000 items offered for sale in our stores,
specialty service departments and long-term customer relationships will enable us to compete
effectively in this increasingly competitive environment.
7
Table of Contents
Item 1. | Business (contd.) |
Financial Information about Segments
We have two operating segments: Markets and Super Rx. Markets and Super Rx provide retail grocery,
general merchandise and pharmaceutical products to customers through our supermarkets. As Markets
and Super Rx have similar customers, regulatory requirements and delivery methods to customers, we
aggregate Markets and Super Rx into a single reportable segment and as such we do not provide
separate segment reporting.
Government Regulation
We are subject to regulation by a variety of governmental authorities, including federal, state and
local agencies that regulate trade practices, building standards, labor, health, safety and
environmental matters. We are also subject to oversight by government agencies that regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, tobacco products, milk and other
agricultural products and other food items.
Environmental
We incurred approximately $211,000 in environmental remediation costs over the past three years.
Remediation costs were approximately $96,000 in fiscal 2008, $61,000 in fiscal 2009 and $54,000 in
fiscal 2010. We believe that any such future remediation costs will not have a material adverse
effect on our financial condition or our results of operations.
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.
8
Table of Contents
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
We own our corporate offices and Distribution Center located at Norton. The following schedule
presents the square footage by major classification within our corporate offices and Distribution
Center as of September 26, 2010.
Square | ||||
Classification | Feet | |||
Grocery |
1,078,000 | |||
Refrigerated |
664,000 | |||
Distribution support |
418,000 | |||
Bread |
46,000 | |||
Administrative offices |
176,000 | |||
Total |
2,382,000 | |||
As of September 26, 2010, we owned 48 of our supermarkets and leased the remaining 119
supermarkets. We believe our supermarkets are well maintained and adequately meet the expectations
of our customers. We operate 167 supermarkets in the Southern California counties of San
Bernardino, Riverside, Orange, Los Angeles, San Diego and Kern. The following schedule reflects
our store count by size and county, and the number of stores that were either leased or owned by us
as of September 26, 2010.
Total Square Feet | ||||||||||||||||||||||||||||||||
No. of Stores | Under | 25,000- | 30,000- | 35,000- | Over | |||||||||||||||||||||||||||
County | Total | Owned | Leased | 25,000 | 29,999 | 34,999 | 40,000 | 40,000 | ||||||||||||||||||||||||
San Bernardino |
52 | 13 | 39 | 5 | 16 | 5 | 14 | 12 | ||||||||||||||||||||||||
Riverside |
47 | 11 | 36 | 9 | 13 | 3 | 5 | 17 | ||||||||||||||||||||||||
Orange |
30 | 11 | 19 | 4 | 13 | 1 | 4 | 8 | ||||||||||||||||||||||||
Los Angeles |
25 | 8 | 17 | 3 | 7 | 1 | 3 | 11 | ||||||||||||||||||||||||
San Diego |
11 | 5 | 6 | | 1 | | 2 | 8 | ||||||||||||||||||||||||
Kern |
2 | | 2 | | | 1 | 1 | | ||||||||||||||||||||||||
Total |
167 | 48 | 119 | 21 | 50 | 11 | 29 | 56 | ||||||||||||||||||||||||
The total square footage of our supermarkets is approximately 5.8 million square feet, of which
approximately 4.1 million square feet is selling area.
9
Table of Contents
Item 3. | 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.
Item 4. | Submission of Matters to a Vote of Security Holders |
None
10
Table of Contents
PART II
Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a) Market Information
There is no established public trading market for Holdings common equity.
(b) Holders
Authorized | Outstanding | |||||||
Common Stock |
100,000 | 0 | ||||||
Class A Common Stock |
100,000 | 34,552 |
La Cadena holds 34,552 shares, or 100% of Holdings outstanding Class A Common Stock.
(c) Dividends
As
of September 26, 2010, we had the ability and right to pay restricted payments, including dividends, of up to $38.0 million.
Dividends of $5.0 million were paid in each of the fiscal years of 2010 and 2008.
Item 6. | Selected Financial Data |
The following table sets forth historical financial data derived from the audited consolidated
financial statements of Holdings as of and for the fiscal years ended September 24, 2006, September
30, 2007, September 28, 2008, September 27, 2009 and September 26, 2010. The information set forth
below should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our Audited Consolidated Financial Statements and related
notes thereto contained elsewhere herein. The information included in Other Operating and
Financial Data and Store Data is unaudited.
Fiscal Year Ended | ||||||||||||||||||||
Sept. 24, (5) | Sept. 30, (5) | Sept. 28, (5) | Sept. 27, (5) | Sept. 26, (5) | ||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Statement of Earnings Data: |
||||||||||||||||||||
Sales |
$ | 3,508,794 | $ | 3,674,427 | $ | 3,741,254 | $ | 3,766,040 | $ | 3,606,839 | ||||||||||
Cost of goods sold |
2,578,435 | 2,674,563 | 2,743,074 | 2,764,004 | 2,636,891 | |||||||||||||||
Gross profit |
930,359 | 999,864 | 998,180 | 1,002,036 | 969,948 | |||||||||||||||
Selling, general and administrative
expenses |
790,756 | 818,863 | 829,697 | 827,192 | 819,698 | |||||||||||||||
Gain on sale of dairy assets |
| | | | (9,396 | ) | ||||||||||||||
Depreciation and amortization |
46,642 | 48,715 | 52,987 | 53,536 | 50,822 | |||||||||||||||
Total operating expenses |
837,398 | 867,578 | 882,684 | 880,728 | 861,124 | |||||||||||||||
Operating profit |
92,961 | 132,286 | 115,496 | 121,308 | 108,824 | |||||||||||||||
Interest and other income |
8,288 | 13,927 | 8,598 | 1,194 | 863 | |||||||||||||||
Interest expense |
(57,238 | ) | (59,586 | ) | (57,464 | ) | (68,252 | ) | (68,516 | ) | ||||||||||
Interest expense related to purchase
of debt |
| (3,953 | ) | | | | ||||||||||||||
Income before income taxes |
44,011 | 82,674 | 66,630 | 54,250 | 41,171 | |||||||||||||||
Income taxes |
17,945 | 33,279 | 26,000 | 19,481 | 16,587 | |||||||||||||||
Net income |
$ | 26,066 | $ | 49,395 | $ | 40,630 | $ | 34,769 | $ | 24,584 | ||||||||||
Earnings per average common shares
outstanding |
$ | 697.21 | $ | 1,356.19 | $ | 1,136.03 | $ | 989.10 | $ | 708.33 | ||||||||||
11
Table of Contents
Item 6. | Selected Financial Data (contd.) |
Fiscal Year Ended | ||||||||||||||||||||
Sept. 24,(5) | Sept. 30,(5) | Sept. 28,(5) | Sept. 27,(5) | Sept. 26,(5) | ||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Balance Sheet Data (end of fiscal year):(1) |
||||||||||||||||||||
Working capital |
$ | 303,397 | $ | 304,407 | $ | 234,032 | $ | 274,353 | $ | 206,123 | ||||||||||
Total assets |
1,057,585 | 1,269,825 | 1,276,227 | 1,314,735 | 1,322,787 | |||||||||||||||
Long-term debt |
700,000 | 810,000 | 810,000 | 810,000 | 677,750 | |||||||||||||||
Long-term capitalized lease obligations |
7,245 | 6,252 | 5,104 | 3,768 | 2,206 | |||||||||||||||
Other long-term liabilities |
80,084 | 113,005 | 113,100 | 144,228 | 152,272 | |||||||||||||||
Common stockholders equity (deficit) |
(11,079 | ) | 9,279 | 40,506 | 63,755 | 73,133 | ||||||||||||||
Dividends paid per share, Class A
common stock |
$ | 135.52 | $ | 139.78 | $ | 142.24 | $ | | $ | 144.71 | ||||||||||
Cash Flow Data:(1) |
||||||||||||||||||||
Cash provided by operating activities |
90,656 | 171,507 | 57,466 | 122,410 | 87,101 | |||||||||||||||
Cash provided by (used in)
financing activities |
(24,598 | ) | 81,901 | (14,230 | ) | (1,149 | ) | (14,336 | ) | |||||||||||
Cash provided by (used in) investing activities |
(127,508 | ) | (174,740 | ) | (175,837 | ) | (63,498 | ) | 55,326 | |||||||||||
Other Operating and Financial Data: |
||||||||||||||||||||
Sales increases (decreases): |
||||||||||||||||||||
Total sales |
4.0 | % | 4.7 | % | 1.8 | % | 0.7 | % | (4.2 | )% | ||||||||||
Like stores sales (comparable
52-weeks)(2) |
1.5 | % | 1.7 | % | 2.5 | % | 0.0 | % | (2.4 | )% | ||||||||||
Operating profit |
$ | 92,961 | $ | 132,286 | $ | 115,496 | $ | 121,308 | $ | 108,824 | ||||||||||
Fixed charge coverage ratio(3) |
2.74 | 3.02 | 2.96 | 2.95 | 2.63 | |||||||||||||||
Gross profit as a percentage of sales |
26.52 | % | 27.21 | % | 26.68 | % | 26.61 | % | 26.89 | % | ||||||||||
Selling, general and administrative
expenses as a percentage of sales |
22.54 | % | 22.29 | % | 22.18 | % | 21.96 | % | 22.72 | % | ||||||||||
Store Data:(4) |
||||||||||||||||||||
Number of stores (at end of fiscal year) |
162 | 164 | 165 | 167 | 167 | |||||||||||||||
Average sales per store (000s) |
$ | 20,937 | $ | 21,860 | $ | 21,961 | $ | 21,945 | $ | 21,375 | ||||||||||
Average store size: |
||||||||||||||||||||
Total square feet |
33,778 | 34,028 | 34,178 | 34,405 | 34,497 | |||||||||||||||
Selling square feet |
24,028 | 24,165 | 24,237 | 24,340 | 24,386 | |||||||||||||||
Total square feet (at end of
fiscal year) (000s) |
5,491 | 5,599 | 5,644 | 5,761 | 5,761 | |||||||||||||||
Total selling square feet (at end of
fiscal year) (000s) |
3,904 | 3,972 | 4,001 | 4,072 | 4,072 | |||||||||||||||
Sales per average square foot |
$ | 620 | $ | 642 | $ | 643 | $ | 638 | $ | 620 | ||||||||||
Sales per average selling square foot |
$ | 871 | $ | 905 | $ | 906 | $ | 902 | $ | 877 |
(1) | Certain balance sheet and corresponding cash flow line items for prior periods have been reclassified to conform with current presentation related to the Dairy Transaction and the presentation of such assets and liabilities as held for sale. |
(footnotes continued on following page) |
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Item 6. | Selected Financial Data (contd.) |
(2) | 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, we only use the current years weekly sales that correspond to the weeks the stores were open in the previous year. For replacement store sales, we include sales for the entire year in the like store sales calculation. For stores that were closed during the year, we only include prior year sales that correspond to the week the stores were opened in the current year. |
(3) | Fixed charge coverage ratio is calculated based on definitions from the indentures to our Senior Notes. Exhibit 12.1 included in this Form 10-K shows the calculation of the fixed charge coverage ratio. |
(4) | Average sales per store, sales per total square feet and sales per selling square feet are calculated by prorating the number of stores, total square feet and selling square feet by the period of time the store was opened, for new stores, or the period of time the expanded square footage was in service, for expanded stores. |
(5) | Fiscal years 2006, 2008, 2009 and 2010 were 52-week years while fiscal 2007 was a 53-week year. |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon our
Audited 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 our understanding of current facts and circumstances. We believe that the following
critical accounting policies are the most important to our financial statement presentation and
require the most difficult, subjective and complex judgments on the part of management.
Self-Insurance Reserves
We are primarily self-insured, subject to certain retention levels for workers compensation,
automobile and general liability costs. We are covered by umbrella insurance policies for
catastrophic events. We record our self-insurance liability based on claims filed and an estimate
of claims incurred but not yet reported. The estimates used by us are based on our historical
experiences as well as current facts and circumstances. We use third party actuarial analysis in
making our estimates. Actuarial projections and our 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 compensation benefits structure. We discounted our workers compensation, automobile
and general liability insurance reserves at a discount rate of 6.25% for fiscal 2008, 5.50% for
fiscal 2009 and 5.00% for fiscal 2010. The analysis of self-insurance liability is sensitive to
the rate used to discount the anticipated future cash flows for the workers compensation,
automobile and general liability insurance reserves. For fiscal 2010, if a rate of 4.00% was used
to discount the reserves, the reserves for self insurance would have been $1.8 million higher than
the reserves calculated at a 5.00% discount rate. If a rate of 6.00% was used in fiscal 2010 to
discount the reserves, the reserves for self insurance would have been $1.7 million lower than the
reserves calculated at a 5.00% discount rate.
Employee Benefit Plans
The determination of our obligation and expense for pension benefits is dependent, in part, on our
selection of certain assumptions used by our actuaries in calculating these amounts. These
assumptions are disclosed in Note 7 Retirement Plans in the accompanying Notes to the Audited
Consolidated Financial Statements contained herein and include, among other things, the discount
rate, the expected long-term rate of return on plan assets and the rate of compensation changes.
In accordance with U.S. generally accepted accounting principles, actual results that differ from
our assumptions are accumulated and amortized over future periods and, therefore, affect recognized
expense and the recorded obligation in such future periods. While we believe our assumptions are
appropriate, significant differences in our actual experience or significant changes in the
assumptions may materially affect our pension obligations and expense for pension benefits.
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Critical Accounting Policies (contd.)
Employee Benefit Plans (contd.)
For fiscal 2010, the discount rate used to calculate the net periodic pension cost was 5.00%. If
the rate used to discount the net periodic pension cost was 4.00%, net periodic pension cost would
have been $1.0 million higher than the cost calculated at a 5.00% discount rate. If the rate used
to calculate the net periodic pension cost was 6.00%, net periodic pension cost would have been
$0.8 million lower than the cost calculated at the 5.00% discount rate.
We also contribute to various multi-employer defined contribution retirement plans for all of our
employees represented by labor unions. We are required to make contributions to these plans in
amounts established under collective bargaining agreements, generally based on the number of hours
worked. Pension expenses for these plans are recognized as contributions are funded. While we
expect contributions to these plans to continue to increase over time, the amount of increase or
decrease will depend upon the outcome of collective bargaining, actions taken by trustees and the
actual return on assets held in these plans. For these reasons, it is not practicable for us to
determine the amount by which multi-employer pension contributions will increase or decrease.
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect
at the balance sheet date to differences between the book basis and the tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to reverse.
Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the
period that includes the enactment date. Significant accounting judgment is required in
determining the provision for income taxes and related accruals and deferred tax assets and
liabilities. In the ordinary course of business, there are transactions and calculations where the
ultimate tax outcome is uncertain. Judgment is needed to determine if the recognition threshold is
met to recognize the tax position taken or if a liability is needed to record an unrecognized tax
liability. We are subject to periodic audits and examinations by the Internal Revenue Service and
other state and local taxing authorities. Although we believe that our estimates are reasonable,
actual results could differ from these estimates.
Significant Accounting Policies
In addition to the critical accounting policies disclosed above, there are certain accounting
policies that we have adopted that may differ from policies of other companies within the
supermarket industry. Such differences in the treatment of these policies may be important to the
readers of our Form 10-K and our Audited Consolidated Financial Statements contained herein. For
further information regarding our accounting policies, refer to Note 1 The Company and Summary
of Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements
contained herein.
14
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Ownership of the Company
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 Holdings, 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.
Executive Overview
On October 11, 2009, we sold substantially all of the assets of Dairies to subsidiaries of Dean
Foods for $88.0 million in cash and assumption 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 upwards by approximately $1.5 million due to an adjustment
for working capital. Dairies assets which were sold consisted primarily of accounts receivable,
inventory and property and equipment. Also on October 11, 2009, we entered into the PPA with Dean
Foods to purchase substantially all fluid milk products sold in our supermarkets from Dean Foods.
The purchase prices under the PPA are deemed to approximate market pricing. We incurred
approximately $3.8 million in fees related to the Dairy Transaction and recognized a gain, net of
tax, of approximately $5.6 million. We retained responsibility for all workers compensation
claims of Dairies employees for events occurring through the transaction date. As of October 11,
2009, the Company ceased all dairy manufacturing operations.
As a result of the Dairy Transaction and the continued decline in the current economy, our net
sales were lower in fiscal 2010 than in fiscal 2009. Our strategy in the near term is to retain
customer counts during these tough 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
will put further pressure on our gross margin as we endeavor to retain our customer base. For the
foreseeable future, 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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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Results of Operations
Sales and Gross Profit (in thousands)
Change | ||||||||||||||||||||||||||||
Fiscal Year Ended | 2009 to | 2010 to | ||||||||||||||||||||||||||
Sept. 28, | Sept. 27, | Sept. 26, | 2008 | 2009 | ||||||||||||||||||||||||
2008 | 2009 | 2010 | Dollar | % | Dollar | % | ||||||||||||||||||||||
Sales |
$ | 3,741,254 | $ | 3,766,040 | $ | 3,606,839 | $ | 24,786 | 0.66 | % | $ | (159,201 | ) | (4.23 | )% | |||||||||||||
Gross Profit |
$ | 998,180 | $ | 1,002,036 | $ | 969,948 | $ | 3,856 | 0.39 | % | $ | (32,088 | ) | (3.20 | )% | |||||||||||||
as a % of sales |
26.68 | % | 26.61 | % | 26.89 | % |
Sales
Overall, our sales were down $159.2 million in fiscal 2010 versus fiscal 2009. $93.2 million of
the decrease in our sales was due to the lost sales from Dairies as a result of the Dairy
Transaction. Sales in our supermarkets decreased $66.0 million primarily due to the continued
downturn in the economy in our primary marketing areas.
The increase in fiscal 2009 sales over fiscal 2008 is primarily the result of opening new stores in
fiscal 2008 and fiscal 2009.
Like Store Sales
Our like store sales have been adversely affected by the downturn in our local economy and by
continued competitive pressures. For the foreseeable future, we anticipate that our like store
sales will continue to be challenged as we believe that unemployment in our marketing area will
continue to be high and competitive pressures will continue.
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 periods, we only include the
current years weekly sales that correspond to the weeks the stores were opened in the previous
year. 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 and
replaced store sales are included in like store sales.
Like store sales are affected by various factors including, but not limited to, inflation and
deflation, promotional discounting, customer traffic, buying trends, pricing pressures from
competitors and competitive openings and closings.
Like store sales decreased $89.9 million or 2.45% in fiscal 2010 compared to fiscal 2009. Newly
opened stores that were not opened for the full year of fiscal 2009 added $25.0 million to our
sales in fiscal 2010. We closed a store in fiscal 2009 which reduced fiscal 2010 sales by
approximately $1.2 million.
Like store sales increased $1.5 million or 0.04% in fiscal 2009 over fiscal 2008. We opened three
new stores and closed one store in fiscal 2009. The new stores opened in fiscal 2009 added
approximately $30.5 million to fiscal 2009 sales. In addition, we estimate that a store opened
during fiscal 2008 added approximately $8.2 million to fiscal 2009 sales for the weeks it was not
opened in fiscal 2008. While the newly opened stores increased sales in fiscal 2009, we estimate
that these stores drew approximately $15.9 million of their sales from existing stores. The store
closed in fiscal 2009 reduced sales by approximately $12.2 million.
16
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Results of Operations (contd.)
Gross Profit
The increase in our gross profit margin in fiscal 2010 over fiscal 2009 is primarily due to our
suspension in November 2009 of a special produce discounting program which we started in June 2009
and continued until November 2009. Also, during the fourth quarter of fiscal 2010, we consciously
focused our promotion dollars to specific product categories.
The decrease in gross margin in fiscal 2009 compared to fiscal 2008 is the result of increased
competitive pricing pressures in our marketing area and the result of our efforts, in the current
economic environment, to keep prices low in order to retain customers.
Operating Expenses and Income (in thousands)
Fiscal Year Ended | Change | |||||||||||||||||||||||||||
Sept. 28, | Sept. 27, | Sept. 26, | 2009 to | 2010 to | ||||||||||||||||||||||||
2008 | 2009 | 2010 | 2008 | 2009 | ||||||||||||||||||||||||
Dollar | % | Dollar | % | |||||||||||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||||||
Selling, general and
administrative
expenses |
$ | 829,697 | $ | 827,192 | $ | 819,698 | $ | (2,505 | ) | (0.30 | )% | $ | (7,494 | ) | (0.91 | )% | ||||||||||||
as a % of sales |
22.17 | % | 21.97 | % | 22.73 | % | ||||||||||||||||||||||
Gain on sale of assets |
| | $ | (9,396 | ) | | | $ | (9,396 | ) | | |||||||||||||||||
as a % of sales |
| | (0.26 | )% | ||||||||||||||||||||||||
Depreciation and amortization |
$ | 52,987 | $ | 53,536 | $ | 50,822 | $ | 549 | 1.04 | % | $ | (2,714 | ) | (5.07 | )% | |||||||||||||
as a % of sales |
1.42 | % | 1.42 | % | 1.41 | % | ||||||||||||||||||||||
Operating profit |
$ | 115,496 | $ | 121,308 | $ | 108,824 | $ | 5,812 | 5.03 | % | $ | (12,484 | ) | (10.29 | )% | |||||||||||||
as a % of sales |
3.09 | % | 3.22 | % | 3.02 | % |
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses, as a percentage of sales, is
attributed primarily to increases, as a percentage of sales, in payroll related costs and to a
settlement of an employment related lawsuit for Dairies. Payroll related expenses, as a percentage
of sales, increased 0.72% and was primarily comprised of increases of 0.39%, as a percentage of
sales, in union insurance benefits and an increase in workers compensation expense, as a percentage
of sales, of 0.14% of sales. Union insurance increased approximately $11.6 million over fiscal
2009 primarily as a result of higher insurance rates under our UFCW contracts. Workers
compensation expense increased approximately $4.2 million over fiscal 2009 due to increases in our
self insurance reserves. In fiscal 2010, we settled a lawsuit related to a class action employment
claim. See Item 3 Legal Proceedings for further discussion of the claim.
The decrease in selling, general and administrative expenses, as a percentage of sales, in fiscal
2009 versus fiscal 2008 is attributed to several factors. We reduced, as a percentage of sales,
professional and legal expenses by 0.10% primarily from the reduction in information technology
consultants and reduction in the amount of work needed for financial reporting compliance. We
reduced the cost and amount of our print advertising which reduced our advertising expense, as a
percentage of sales, by 0.05%. In fiscal 2008, we incurred costs associated with the relocation of
our distribution operations to our Distribution Center at Norton that were not present in fiscal
2009 and represented a savings compared to fiscal 2008 of 0.07%, 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 was $1.2 million in each of the fiscal
years 2010, 2009 and 2008.
17
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Results of Operations (contd.)
Gain on Sale of Assets
The pretax gain from the Dairy Transaction was approximately $9.4 million.
Depreciation and Amortization
Depreciation expense was $50.8 million, $53.5 million and $53.0 million in fiscal 2010, 2009 and
2008, respectively. The reduction in depreciation in fiscal 2010 is primarily due to the Dairy
Transaction. Included in cost of goods sold is depreciation expense related to our warehousing and
distribution activities of $11.3 million, $14.6 million and $14.0 million in fiscal years 2010,
2009 and 2008, respectively. Our fiscal 2009 and 2008 cost of goods sold included depreciation
from our dairy operations.
Interest Income
Interest income was $0.4 million, $0.5 million and $5.7 million in fiscal years 2010, 2009 and
2008, respectively. Interest income has decreased year-over-year as the interest rate realized on
our short-term investments has decreased.
Interest Expense
Interest expense amounted to $68.5 million, $68.3 million and $57.5 million for the 2010, 2009 and
2008 fiscal years, respectively. Interest capitalized during construction projects, which reduces
interest expense, was $0.5 million and $11.3 million in fiscal years 2009 and 2008, respectively.
We had no capitalized interest in fiscal 2010 as we didnt have any new store construction. The
change in capitalized interest in fiscal 2009 over fiscal 2008 is primarily attributed to the
timing of construction of our corporate offices and Distribution Center.
Income Before Income Taxes
Income before income taxes amounted to $41.2 million, $54.3 million and $66.6 million in fiscal
2010, 2009 and 2008, respectively.
Income Taxes
Income taxes amounted to $16.6 million, $19.5 million and $26.0 million in fiscal 2010, 2009 and
2008, respectively. Our effective tax rate was 40.3%, 35.9% and 39.0% for fiscal years 2010, 2009
and 2008, respectively. The reduced effective tax rate in fiscal 2009 compared to fiscal 2010 and
fiscal 2008 was due primarily to a previously unrecognized tax benefit associated with Dairies
being able to be taken in fiscal 2009 that was not present in fiscal 2010 and 2008.
Net Income
Net income for fiscal 2010 amounted to $24.6 million, compared to $34.8 million in fiscal 2009 and
$40.6 million in fiscal 2008.
18
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
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 which consists of a
revolving loan facility for working capital and letters of credit of $100 million. The letter of
credit facility is maintained pursuant to our workers compensation and general liability
self-insurance requirements.
As of September 26, 2010, we had $49.8 million of outstanding letters of credit and we had $50.2
million available under our credit facility.
We had no short-term borrowings outstanding as of September 26, 2010 and we did not incur any
short-term borrowings during fiscal 2010.
Working capital amounted to $206.1 million at September 26, 2010 and $274.4 million at September
27, 2009. Our current ratios were 1.49:1 and 1.94:1 at September 26, 2010 and September 27, 2009,
respectively. Our working capital and current ratio were affected in fiscal year 2010 by our
decision to early extinguish our $525.0 million Senior Notes due 2012. $132.3 million of our
previously classified long-term debt has been classified as current on our September 26, 2010
consolidated balance sheet. Fluctuations in working capital and current ratios are not unusual in
our industry.
Net cash provided by operating activities for fiscal 2010 was $87.1 million compared to $122.4
million for fiscal 2009 and $57.5 million for fiscal 2008. Significant sources of cash from
operating activities in fiscal 2010 included our net income adjustment for non-cash depreciation
and amortization and an increase in accrued liabilities offset in part by a decrease in accounts
payable. We received approximately $85.8 million, after fees, from the Dairy Transaction. During
fiscal 2010, we expended $33.8 million in capital expenditures.
Significant sources of cash from operating activities in fiscal 2009, included our net income
adjustment for non-cash depreciation and amortization, increases in our pension liability and
decreases in inventory levels. In fiscal 2009, we recognized $11.5 million, net of tax of $7.9
million, in other comprehensive loss from actual losses in our pension and medical plan benefits.
Our inventory levels decreased in fiscal 2009 due to the timing of inventory purchases. During
fiscal 2009, we expended $77.0 million in capital expenditures.
We believe that capital expenditures for fiscal 2011 will be approximately $52.3 million and we
expect to finance the expenditures from cash on-hand and from cash from operating activities. The
following table sets forth the major components of expected fiscal 2011 capital expenditures.
Expected Capital Expenditures Fiscal 2011 | ||||
(In thousands) | ||||
New store construction |
$ | 15,458 | ||
Store remodels |
13,872 | |||
MIS equipment and software |
8,573 | |||
Store equipment |
11,984 | |||
Distribution equipment |
1,776 | |||
Transportation equipment |
621 | |||
$ | 52,284 | |||
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.
19
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Existing Credit Facility
On May 4, 2010, the Company and Markets entered into the Third Amended and Restated Credit
Agreement with Bank of America, N.A. (Bank of America), as sole and exclusive administrative
agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a
principal amount of up to $100 million (the Credit Facility), which replaced the Companys
previous credit facility.
The Credit Facility is guaranteed by all of the Companys existing and future material
subsidiaries, including Development and the Companys indirect subsidiary Super Rx. Subject to
certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of
credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and may be
used for working capital, certain capital expenditures and other general corporate purposes.
Letters of credit issued under the letter of credit facility are expected to be used to support
obligations incurred in connection with the construction of stores and workers compensation
insurance obligations. The availability of the loans and letters of credit is subject to certain
borrowing restrictions.
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 prime rate), plus 1.00%, or (ii) the Eurodollar
Rate (defined as the British Bankers Association LIBOR Rate for deposits in dollars, adjusted for
the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Eurodollar Rate Loans,
the Eurodollar Rate will apply for periods, as selected by the Company, of one, two, three or six
months (but in any event not later than the maturity date of the Credit Facility).
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,
and (iii) make restricted payments. Markets is not limited in its ability to transfer assets in
the form of loans, advances or cash dividends to the Company. The Credit Facility also contains
covenants that apply to the Company and its subsidiaries, and the Company is a party to the Credit
Facility for purposes of these covenants. These covenants, among other things, limit the ability
of the Company and its subsidiaries to incur indebtedness, make restricted payments, enter into
transactions with affiliates, and make certain amendments to the Indentures governing the 8.125%
Senior Notes and the 7.75% Senior Notes (Notes Indentures).
As of September 26, 2010, the Company was in compliance with all restrictive covenants under the
Credit Facility. However, there can be no assurance that the Company will be able to achieve the
expected operating results or implement the capital expenditure strategy upon which future
compliance with such covenants is based.
New Credit Facility
On November 29, 2010, we entered into a new $245 million senior secured credit facility (the New
Credit Facility) with Bank of America, N.A., as administrative agent and a lender. The New Credit
Facility consists of a four-year $145 million term loan (the Term Loan) and a $100 million
revolving credit facility (the New Revolving Credit Facility). The New Credit Facility replaced
our existing $100 million credit facility as of November 29, 2010. The New 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 New Credit Facility is guaranteed by the Company,
Development, Super Rx and Dairies.
20
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
New Credit Facility (contd.)
The Term Loan bears interest at Eurodollar Rate plus 2.50% or the Base rate plus 1.50% (as defined
in the New Credit Facility) and the interest 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
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 New 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 New Credit Facility is held
until the Term Loan is paid in full. We incurred $2.1 million of debt issuance cost related to the
Term Loan which will be amortized over the term of the Term Loan.
Subject to certain restrictions, the entire amount of the New Revolving Credit Facility may be used
for loans, letters of credit, or a combination thereof. Borrowings under the New 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 letter of 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 New 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, we will be entitled to select interest periods of one, two,
three, six, nine or twelve months, subject to availability.
The loans under the New Revolving Credit 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 Eurodollar rate. We may reduce the commitments under the New Revolving Credit
Facility. We 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 New Revolving Credit Facility are subject to a
fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in arrears.
We 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.
The New Revolving Credit Facility requires us to meet minimum shareholders equity and EBITDA
tests. The New Revolving Credit Facility contains covenants which, among other things, limit our
ability 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, (iv) enter into transactions with affiliates and
(v) make amendments to the Indenture governing our Senior Notes. Markets and our other
subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or
cash dividends to us.
The New Revolving 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; and change of control.
Our $49.8 million of outstanding letters of credit continue to be issued and outstanding under the
New Revolving Credit Facility.
The New Revolving Credit Facility will cease to be available and will be payable in full on
November 29, 2014.
21
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Labor Relations
The UFCWs collective bargaining agreements were renewed in March 2007 and expire in March 2011.
The Teamsters collective bargaining agreement was renewed in October 2010 and expires in September
2015.
We value our employees and believe our relationship with them is good and that employee loyalty and
enthusiasm are key elements of our operating performance.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than stand-by letters of credit, as discussed
under the caption Liquidity and Capital Resources in Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operations of this report and operating leases as disclosed
in Note 5 Leases in the Notes to the Audited Consolidated Financial Statements contained
herein, that would have or are reasonably likely to have material current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Tabular Disclosure of Contractual Cash Obligations
The following table sets forth our contractual cash obligations and commercial
commitments as of September 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 due 2012 (1) |
||||||||||||||||||||
Principal |
$ | 525,000 | $ | | $ | 525,000 | $ | | $ | | ||||||||||
Interest |
85,312 | 42,656 | 42,656 | | | |||||||||||||||
610,312 | 42,656 | 567,656 | | | ||||||||||||||||
7.75% Senior Notes due 2015 |
||||||||||||||||||||
Principal |
285,000 | | | 285,000 | | |||||||||||||||
Interest |
110,438 | 22,088 | 44,175 | 44,175 | | |||||||||||||||
395,438 | 22,088 | 44,175 | 329,175 | | ||||||||||||||||
Capital lease obligations (2) |
||||||||||||||||||||
Principal |
3,768 | 1,562 | 1,906 | 300 | | |||||||||||||||
Interest |
989 | 533 | 440 | 16 | | |||||||||||||||
4,757 | 2,095 | 2,346 | 316 | | ||||||||||||||||
Operating leases (2) |
350,226 | 38,568 | 68,631 | 52,274 | 190,753 | |||||||||||||||
Total contractual cash obligations |
$ | 1,360,733 | $ | 105,407 | $ | 682,808 | $ | 381,765 | $ | 190,753 | ||||||||||
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) | The maturity and interest payment shown here on our 8.125% Senior Notes due 2012 (the Old Notes) reflects the contractual due date of June 15, 2012. On November 29, 2010, we early redeemed approximately $477.5 million of the Old Notes and on January 14, 2011 we will call all remaining outstanding Old Notes. See Note 2 New Debt and Early Extinguishment of Debt to our Audited Consolidated Financial Statements contained elsewhere herein. | |
(2) | We lease the majority of our retail stores. We have subleased our former headquarters buildings and certain former distribution facilities located in Colton, California under an initial 15 year term for an amount equal to our lease payments. For purposes of contractual cash obligation shown here, minimum lease payments on this lease are shown without sub-lease offset. 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) | Letters of credit are committed as security for workers compensation. Outstanding letters of credit expire between December 2010 and October 2011. Outstanding letters of credit continue to be issued and outstanding under our New Revolving Credit Facility. |
23
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) |
Cautionary Statement
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.
Item 7A. 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 the 8.125% Senior Notes, the 7.75% Senior Notes 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 do not affect our earnings or
cash flows. The fair values of the 8.125% Senior Notes and the 7.75% Senior Notes are based upon
quoted market prices. Although quoted market prices are not readily available on our capital lease
obligations, we believe that stated values approximate the fair value of these obligations. We
have not engaged in any interest rate swap agreements, derivative financial instruments or other
type of financial transactions to manage interest rate risk. The following table provides the
future principal cash flows and weighted-average interest rates expected on our fixed rate debt
obligations. The fair value shown here is based upon the quoted market price of the 8.125% Senior
Notes and the 7.75% Senior Notes and the stated value of our capital leases as of September 26,
2010. The maturity dates and average interest rates below reflect the contractual due date on our
8.125% Senior Notes of June 15, 2012 and does not reflect our early redemption of debt which took
place on November 29, 2010 and the expected call of the remaining outstanding balance of our 8.125%
Senior Notes on January 14, 2011. See Note 2 New Debt Issuance and Early Extinguishment of
Debt to our Audited Consolidated Financial Statements contained elsewhere herein.
Expected Year of Maturity | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Fair | ||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Value | ||||||||||||||||||||||
Long-term debt and
capital lease obligations |
$ | 1,562 | $ | 526,107 | $ | 799 | $ | 300 | $ | 285,000 | $ | | $ | 819,413 | ||||||||||||||
Average interest rate |
8.03 | % | 7.99 | % | 7.78 | % | 7.75 | % | 7.75 | % | 0.00 | % |
24
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Item 8. Financial Statements and Supplementary Data
Information called for by this item is set forth in Holdings Audited Consolidated Financial
Statements and supplementary data contained in this report. Specific financial statements and
supplementary data can be found on the pages listed in the following index.
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page Number | ||||
F-2 | ||||
F-3 | ||||
Fiscal years ended September 28, 2008, September 27, 2009 and
September 26, 2010: |
||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the costs and benefits of such controls and procedures. Based on
that evaluation our Chief Executive Officer and our Chief Financial Officer, we concluded that the
Companys disclosure controls and procedures were effective as of September 26, 2010.
Changes in Internal Controls Over Financial Reporting
During the fourth quarter ended September 26, 2010, there were no changes in our internal control
over financial reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
25
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Item 9A. Controls and Procedures (contd.)
Managements Report on Internal Control Over financial Reporting
Management of the Company, including our Chief Executive Officer and our Chief Financial Officer,
is responsible for the preparation and integrity of the consolidated financial statements appearing
in our annual report on Form 10-K. The financial statements were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and, accordingly, include
certain amounts based on our best judgments and estimates.
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Our Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements and even when determined to be effective, can only provide reasonable
assurance with respect to financial statement preparation and presentation. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The Company, under the supervision and with the participation of our Chief Executive Officer and
our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the criteria in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included
review of the documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this evaluation.
Based on our assessment, management concluded that the Company maintained effective internal
control over financial reporting as of September 26, 2010.
Item 9B. Other Information
None
26
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PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the named executive officers and
directors of Holdings, their ages and principal occupations for at least the past five years.
Directors of Holdings each serve for a term of one year, or until their successors are elected.
The officers serve at the discretion of the Board of Directors of Holdings.
Name | Age | Position | ||||
Jack H. Brown
|
72 | Chairman of the Board, President and Chief Executive Officer | ||||
Phillip J. Smith
|
63 | Executive Vice President and Chief Financial Officer | ||||
James W. Lee
|
59 | President and Chief Operating Officer of Markets | ||||
Dennis L. McIntyre
|
50 | Executive Vice President of Marketing of Markets | ||||
George A. Frahm
|
57 | Executive Vice President of Retail Operations and Administration of Markets | ||||
Bruce D. Varner
|
74 | Director and Secretary | ||||
Thomas W. Field, Jr.
|
77 | Vice Chairman of the Board of Directors | ||||
Ronald G. Skipper
|
70 | Director |
Background of Directors and Executive Officers
Jack H. Brown has been President and Chief Executive Officer of Holdings or its predecessor
companies since June 1981 and Chairman of the Board since 1989. From September 1978 to June 1981,
Mr. Brown served as President of Pantry Food Markets, Inc. and American Community Stores
Corporation, Inc., both wholly-owned subsidiaries of Cullum Companies, Inc., a publicly held
corporation. From 1972 to 1978, Mr. Brown served as Corporate Vice President of Marsh
Supermarkets, Inc., a publicly held corporation. Mr. Brown has been employed in various capacities
in the supermarket industry for 57 years. Mr. Browns Trust is the sole owner of La Cadena.
Phillip J. Smith was promoted to Executive Vice President and Chief Financial Officer in
February 2006. He was Senior Vice President and Chief Financial Officer from November 2000 to
February 2006 and was Vice President and Controller of Markets from April 1998 until November 2000.
Mr. Smith joined Markets in 1987 as Controller. Mr. Smith has approximately 35 years experience
in the supermarket industry. Prior to joining Markets, Mr. Smith was employed by Market Basket
Foodstores as Vice President and Chief Financial Officer from 1985 to 1987. From 1975 until 1985,
Mr. Smith was employed by various divisions of Cullum Companies, Inc., a publicly held corporation,
in various financial capacities.
James W. Lee joined Markets in August 2002 as Group Senior Vice President of Retail Operations
and was promoted to Executive Vice President of Retail Operations and Administration in January
2006. Mr. Lee was promoted to President and Chief Operating Officer of Markets effective September
30, 2006. Mr. Lee has over 36 years experience in the supermarket industry. Prior to joining
Markets, Mr. Lee was employed with Wild Oats Markets, Inc. between 1997 and 2001 as Chief Operating
Officer. Mr. Lee was employed in various operating capacities, including Vice President, Retail,
with Ralphs Grocery Company, a division of Kroger Co., from 1972 until 1996.
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Table of Contents
Item 10. Directors and Executive Officers of the Registrant (contd.)
Background of Directors and Executive Officers (contd.)
Dennis L. McIntyre has been Executive Vice President of Marketing of Markets since December
2007. Mr. McIntyre has served Markets for 33 years in various capacities including Courtesy Clerk,
Assistant Manager, Buyer, Assistant Vice President of Marketing from 1994 until 1999, Vice
President of Marketing from 1999 to 2000, Senior Vice President of Marketing from 2000 to 2002 and
Group Senior Vice President of Marketing of Markets from 2002 to 2007.
George A. Frahm has been Executive Vice President of Retail Operations and Administration of
Markets since December 2007. Mr. Frahm has served Markets for 34 years in various capacities
including Courtesy Clerk and progressed through a range of retail store and district supervision
positions. Mr. Frahm was Vice President of Labor Relations from 1996 until 2001, Senior Vice
President of Administration from 2001 to March 2006, Group Senior Vice President of Administration
from March 2006 to September 2006 and Group Senior Vice President of Retail Operations and
Administration of Markets from 2006 to 2007.
Bruce D. Varner has been a Director of Markets since September 1985 and a Director of Holdings
since May 1989. Since February 1997, Mr. Varner has been a partner in the law firm of Varner &
Brandt LLP. From 1967 to February 1997, Mr. Varner was a partner in the law firm of Gresham,
Varner, Savage, Nolan & Tilden. Mr. Varner specializes in business and corporate matters. Mr.
Varner and the law firm of Varner & Brandt LLP have performed legal services in the past for us and
we expect such services to continue in the future.
Thomas W. Field, Jr. has been Vice Chairman of the Board of Directors of Holdings since May
1998 and a Director of Holdings since 1994. Mr. Field has been President of Field and Associates
since 1989. From 1988 to 1989, Mr. Field was Chairman of the Board, President and Chief Executive
Officer of McKesson Corporation and was its President since 1984, and President and Chief Executive
Officer from 1986 to 1988. Mr. Field was President of American Stores Company from 1981 to 1984
and was President of Alpha Beta Company from 1976 to 1984. Mr. Field was a Director of American
Stores Company from 1979 to 1984. Mr. Field is a nationally recognized and highly regarded
supermarket executive and he has served as a director of the Campbell Soup Company. Mr. Field has
held various positions in the Supermarket Industry for over 50 years.
Ronald G. Skipper has been a Director of Holdings since April 2007. Mr. Skipper is an
attorney and has practiced law for over 42 years in San Bernardino, California where he has resided
for over 57 years. Mr. Skipper specializes in litigation matters. Mr. Skipper serves as a
Director for Pacific Premier Bank and has been its Chairman of the Board for the past twelve years.
Director Compensation
Annual compensation for non-employee Directors is comprised of an annual retainer and meeting fees.
Annual Board Retainer
Directors receive an annual cash retainer of $50,000 per year.
Meeting Fees
Directors receive a fee of $500 for attending each Board meeting and an additional fee of $500 per
committee meeting attended.
28
Table of Contents
Item 10. Directors and Executive Officers of the Registrant (contd.)
Director Compensation For fiscal Year 2010
Director | Meeting | |||||||||||
Name | Fees | Fees | Total | |||||||||
Thomas W. Field, Jr. |
$ | 50,000 | $ | 4,000 | $ | 54,000 | ||||||
Bruce D. Varner |
$ | 50,000 | $ | 4,000 | $ | 54,000 | ||||||
Ronald G. Skipper |
$ | 50,000 | $ | 4,000 | $ | 54,000 |
Jack H. Brown, our Chairman and Chief Executive Officer, is not included in this table because
he is an employee of the Company. Mr. Browns compensation is shown in the Summary Compensation
Table under Item 11 Executive Compensation.
Item 11. Executive Compensation
Compensation Discussion and Analysis
The Compensation Committee of the Board of Directors has the primary responsibility for
establishing the compensation paid to our executive officers, including the named executive
officers identified in the Summary Compensation table below. This includes base salary, bonus
awards, employment agreements, deferred compensation and all other compensation. The Compensation
Committee is comprised of Thomas W. Field, Jr., and Bruce D. Varner.
The primary objective of our executive compensation program is to attract, motivate and retain
executive officers of outstanding ability. All of the named executive officers with the exception
of Mr. Brown have been granted substantial units in our deferred compensation plan and thus have a
direct interest in our long-term net profit growth. In light of this participation, there is less
need to directly relate salaries and bonuses for the named executive officers to our long-term
performance.
Neither management nor the Compensation Committee currently engages any consultant related to
executive or director compensation matters. In setting compensation levels, the Compensation
Committee considers the overall level of responsibility and performance of the individual
executive, our financial performance and other achievements during the most recently completed
fiscal year, overall economic conditions, competitive operating conditions and recommendations by
the Chief Executive Officer. The Compensation Committee subjectively utilizes the above factors in
setting compensation for the named executive officers.
Our executive compensation for the named executive officers includes the following components:
base salary, annual bonus plan, deferred compensation awards, retirement benefits, employment
agreements and other benefits.
29
Table of Contents
Item 11. Executive Compensation (contd.)
Compensation Discussion and Analysis (contd.)
Salary
Named executive officers are paid a base salary with annual increases at the discretion of the
Compensation Committee and the approval of our Board of Directors. In addition to the items
outlined above and our financial performance, individual factors are also considered in setting
base salaries, including the executives experience, achievements, leadership and value to us.
There were no raises given to the named executive officers in fiscal 2010.
Bonus
Our executive compensation program includes an annual non-equity incentive cash bonus designed to
reward the named executive officers for individual performance and for our overall success. These
amounts are recommended subjectively by the Compensation Committee based on the criteria outlined
above. The bonuses recommended by the Compensation Committee and approved by the Board of
Directors in fiscal 2008 were based on our improved levels of net income and sales. Although the
annual bonus award is not targeted as a percentage of the named executive officers base salary,
the bonus awards in fiscal 2008 ranged from 19% to 92% of base salary. There will be no annual
bonuses paid to the named executive officers for fiscal 2009 and 2010.
Deferred Compensation
We maintain a deferred compensation plan to provide additional retention incentives to certain
employees of Markets whose performance is considered especially critical to our business. Units in
the deferred compensation plan may be granted to a new class of employees, to promoted employees or
as additional incentive to existing plan participants. All units have a stated value of $20, and
appreciate as described below. Newly granted units vest over 5 years. With the exception of Mr.
Brown, all of the named executive officers have been granted units in the deferred compensation
plan. Units of the deferred compensation plan can only be redeemed when a participant reaches
normal retirement age, becomes permanently totally disabled or to the beneficiary upon the death of
the recipient. Subject to vesting provisions of the plan, units are paid in cash either (i) in a
lump sum upon a change in control of Holdings; or (ii) if sooner, in either a lump sum or
installments (with interest) over a five-year period (as we may determine) following termination of
the participants employment by reason of retirement, permanent total disability or death. The
deferred compensation plan allows for a one-time payment of up to 50% of the stated value of the
unit for units that are fully vested. In the event of a change in control, units of the deferred
compensation plan will become fully vested and can be redeemed. During the participants
employment the value of the units increase or decrease in accordance with our net profits. Units
for fully vested participants who separate from the Company prior to normal retirement age
appreciate at the 12-month Treasury Average rate and can be redeemed when the participant reaches
normal retirement age. If a participant voluntarily terminates his or her employment, or is
terminated for cause, any awards not fully vested under the plan will be forfeited and no payment
will be made. During fiscal 2010, the units in this plan appreciated by 40% of stated value. The
units for the above named executives increased by a total of $1.5 million.
Retirement Benefits
We maintain a defined benefit and a defined contribution plan for our non-union employees. The
named executive officers participate in both of these plans. Additional details regarding pension
plan benefits can be found in the Pension Plan Table and the accompanying narrative description
that follows this discussion and analysis.
30
Table of Contents
Item 11. Executive Compensation (contd.)
Compensation Discussion and Analysis (contd.)
Other Benefits
Our group health, dental, vision and life insurance plans are available to non-union eligible
full-time and part-time employees. These plans do not discriminate in favor of the named executive
officers. Non-employee Directors of our Board of Directors do not participate in these plans.
Employment and Severance Agreements
In June of 2000, Markets entered into Employment Agreements (Agreements) with Messrs. Brown,
Smith, McIntyre and Frahm. In August of 2002, a similar agreement was entered into with Mr. Lee.
Under each of the Agreements, the employee is employed to serve as an officer of Markets and with
certain exceptions the Agreements prohibit the employee from employment in any other business
except for a parent or subsidiary of Markets. Mr. Browns Agreement has an original term of five
(5) years which is automatically renewed on July 1 of each year for a five (5) year term. Mr.
Smiths, Mr. McIntyres, Mr. Lees and Mr. Frahms Agreements have an original term of three (3)
years, which is automatically renewed for an additional term of three (3) years unless sooner
terminated. Each Agreement provides for annual base compensation at the employees current level
with annual increases plus employee benefits and incentive bonus calculated in accordance with a
formula based on Markets earnings. Each of the Agreements may be terminated by Markets with cause
and by either party without cause upon ninety (90) days written notice with the exception of Mr.
Browns. Mr. Browns agreement requires 180 days written notice. If the employment is terminated
without cause, the employees compensation continues through the expiration of the term of the
Agreement then in effect, except in the event of termination by Mr. Brown or by the Board of
Directors with the consent of Mr. Brown. If the named executive officer is terminated as a result
of a change of control, he is entitled to receive all salary, bonuses and benefits provided under
his Agreement for the original term.
Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed the
analysis with management. Based on its review and discussions with management, the Compensation
Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis
be included in our annual report on Form 10-K. The report is provided by the following members,
who comprise the committee.
31
Table of Contents
Item 11. | Executive Compensation (contd.) |
SUMMARY COMPENSATION TABLE
Change in | ||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||
Non-qual. | ||||||||||||||||||||||||
Def. Comp | All Other | |||||||||||||||||||||||
Name & Principal Position | Year | Salary | Bonus (1) | Earnings (2) | Compensation (3) | Total | ||||||||||||||||||
Jack H. Brown Chairman, President and |
2010 | $ | 1,901,527 | $ | | $ | 109,987 | $ | 52,000 | $ | 2,054,514 | |||||||||||||
Chief Executive Officer |
2009 | $ | 1,901,365 | $ | | $ | 227,755 | $ | 51,500 | $ | 2,180,620 | |||||||||||||
2008 | $ | 1,847,233 | $ | 1,700,000 | $ | (108,506 | ) | $ | 51,000 | $ | 3,489,727 | |||||||||||||
Phillip J. Smith Executive Vice President and |
2010 | $ | 356,848 | $ | | $ | 803,950 | $ | | $ | 1,160,798 | |||||||||||||
Chief Financial Officer |
2009 | $ | 356,715 | $ | | $ | 1,187,697 | $ | | $ | 1,544,412 | |||||||||||||
2008 | $ | 346,160 | $ | 100,000 | $ | 977,318 | $ | | $ | 1,423,478 | ||||||||||||||
James W. Lee President and Chief Operating |
2010 | $ | 406,178 | $ | | $ | 539,962 | $ | | $ | 946,140 | |||||||||||||
Officer of Markets |
2009 | $ | 406,301 | $ | | $ | 766,141 | $ | | $ | 1,172,442 | |||||||||||||
2008 | $ | 400,169 | $ | 100,000 | $ | 672,738 | $ | | $ | 1,172,907 | ||||||||||||||
Dennis L. McIntyre Executive Vice President of |
2010 | $ | 358,172 | $ | | $ | 429,100 | $ | | $ | 787,272 | |||||||||||||
Marketing of Markets |
2009 | $ | 358,730 | $ | | $ | 641,236 | $ | | $ | 999,966 | |||||||||||||
2008 | $ | 347,529 | $ | 85,000 | $ | 480,960 | $ | | $ | 913,489 | ||||||||||||||
George A. Frahm Executive Vice President of Retail |
2010 | $ | 302,568 | $ | | $ | 375,318 | $ | | $ | 677,886 | |||||||||||||
Operations and Administration of Markets |
2009 | $ | 302,581 | $ | | $ | 565,773 | $ | | $ | 868,354 | |||||||||||||
2008 | $ | 292,283 | $ | 55,000 | $ | 384,169 | $ | | $ | 731,452 |
(1) | There will be no annual bonuses paid to the named executive officers for fiscal 2010. | |
(2) | The amount shown represents the change in pension value and change in nonqualified deferred compensation during fiscal 2010, fiscal 2009 and fiscal year 2008, respectively. | |
(3) | The value of perquisites and other benefits is only included here if the aggregate amount of such compensation for a named executive officer is greater than $10,000. Mr. Brown is a Director of Holdings and amount shown is the Director fees paid during fiscal 2010 of $52,000, fiscal 2009 of $51,500 and fiscal year 2008 of $51,000. |
32
Table of Contents
Item 11. | Executive Compensation (contd.) |
PENSION BENEFITS AT SEPTEMBER 26, 2010
Number of | Present Value | Payments | |||||||||||||||
Years of | of Accum | During Last | |||||||||||||||
Name | Plan Name | Credited Service | Benefit | Fiscal Year | |||||||||||||
Jack H. Brown Chairman, President and |
Pension Plan for | ||||||||||||||||
Chief Executive Officer |
Salaried Employees | 29 | $ | 1,596,200 | $ | | |||||||||||
Phillip J. Smith Executive Vice President and |
Pension Plan for | ||||||||||||||||
Chief Financial Officer |
Salaried Employees | 24 | $ | 718,991 | $ | | |||||||||||
James W. Lee President and Chief Operating |
Pension Plan for | ||||||||||||||||
Officer of Markets |
Salaried Employees | 8 | $ | 246,763 | $ | | |||||||||||
Dennis L. McIntyre Executive Vice President of |
Pension Plan for | ||||||||||||||||
Marketing of Markets |
Salaried Employees | 33 | $ | 311,172 | $ | | |||||||||||
George A. Frahm Executive Vice President of Retail |
Pension Plan for | ||||||||||||||||
Operations and Administration of Markets |
Salaried Employees | 34 | $ | 473,178 | $ | |
33
Table of Contents
Item 11. | Executive Compensation (contd.) |
NONQUALIFIED DEFERRED COMPENSATION FOR FY2010
Executive | Registrant | Aggregate | Aggregate | Aggregate | ||||||||||||||||
Contributions in | Contributions in | Earnings in | Withdrawals | Balance at | ||||||||||||||||
Name | Last FY | Last FY (1) | Last FY | /Distributions (2) | Last FYE (3) | |||||||||||||||
Jack H. Brown Chairman, President and Chief Executive Officer |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Phillip J. Smith Executive Vice President and Chief Financial Officer |
$ | | $ | 691,894 | $ | | $ | 300,000 | $ | 5,939,263 | ||||||||||
James W. Lee President and Chief Operating Officer of Markets |
$ | | $ | 477,353 | $ | | $ | 250,000 | $ | 4,317,236 | ||||||||||
Dennis L. McIntyre Executive Vice President of Marketing of Markets |
$ | | $ | 361,083 | $ | | $ | 250,000 | $ | 3,714,947 | ||||||||||
George A. Frahm Executive Vice President of Retail Operations and Administration of Markets |
$ | | $ | 286,812 | $ | | $ | 150,000 | $ | 2,617,161 |
(1) | These amounts represent the Companys contribution in fiscal year 2010 to the named executive officers deferred compensation. This includes 20% vesting for units awarded prior to fiscal year 2010 to Mr. Lee, Mr. Smith, Mr. McIntyre and Mr. Frahm and appreciation of 40.1% for all units. | |
(2) | These amounts represent the one-time withdrawals of half the stated value of some of the vested units in the deferred compensation plan. The stated value of each unit is $20. | |
(3) | The aggregate balance represents each named executive officers deferred compensation balance as of September 26, 2010. This balance represents the vested portion of all units plus appreciation, less any withdrawals. |
34
Table of Contents
Item 11. | Executive Compensation (contd.) |
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The tables below reflect the amount of compensation that would be paid to each of the named
executive officers in the event of termination of such executives employment under different
circumstances. The
amounts shown assume that such termination was effective as of the last day of the last completed
fiscal year, and thus includes amounts earned through such time and are estimates of the amounts
that would be paid out to the executives upon their termination. The actual amounts to be paid out
can only be determined at the time of such executives separation.
CHANGE IN CONTROL | |||||||||||||||||||||
TERMINATION | Deferred | Health & | |||||||||||||||||||
Severance Pay | Salary & Bonus | Compensation | Welfare | ||||||||||||||||||
Name & Principal Position | (1) | (2) | (3) | (4) | Total | ||||||||||||||||
Jack H. Brown |
|||||||||||||||||||||
Chairman, President and Chief Executive Officer |
$ | 438,814 | $ | 10,887,936 | $ | | $ | 74,276 | $ | 10,962,212 | |||||||||||
Phillip J. Smith |
|||||||||||||||||||||
Executive Vice President and
Chief Financial Officer |
$ | 82,350 | $ | 1,181,167 | $ | 6,269,263 | $ | 28,368 | $ | 7,478,798 | |||||||||||
James W. Lee |
|||||||||||||||||||||
President and Chief Operating
Officer of Markets |
$ | 93,733 | $ | 1,344,449 | $ | 4,549,236 | $ | 28,368 | $ | 5,922,053 | |||||||||||
Dennis L. McIntyre |
|||||||||||||||||||||
Executive Vice President of
Marketing of Markets |
$ | 82,655 | $ | 1,185,549 | $ | 3,894,947 | $ | 44,565 | $ | 5,125,061 | |||||||||||
George A. Frahm |
|||||||||||||||||||||
Executive Vice President of Retail
Operations and Administration of Markets |
$ | 69,823 | $ | 1,001,500 | $ | 2,759,161 | $ | 28,368 | $ | 3,789,029 |
(1) | Termination of employment by Mr. Brown or by the Board of Directors with the consent of Mr. Brown entitles named executive officers to two weeks of severance pay for every year of service to Markets, up to a maximum of twelve weeks. Severance Pay outlined above represents 12 weeks of pay for Messrs. Brown, Smith, Lee, McIntyre and Frahm. | |
(2) | In accordance with each named executive officers employment and severance agreements, the salary and bonus payable with a change in control represents the sum of five times the base salary and five times the incentive bonus for Mr. Brown and the sum of three times the base salary and three times the incentive bonus for Messrs. Smith, Lee, McIntyre and Frahm with an estimated increase of 10% per year. | |
(3) | At a change in control, the named executive officer is entitled to the full vested value and appreciation of all deferred compensation, less any withdrawals. The amounts above reflect values as of September 26, 2010. | |
(4) | Represents continued group health benefits (medical, dental and vision) for the executives and current dependents for a period of up to 5 years for Mr. Brown and 3 years for Messrs. Smith, Lee, McIntyre and Frahm. |
35
Table of Contents
Item 11. | Executive Compensation (contd.) |
Stock Options and SARs
None
Pension Plan
Our Pension Plan for Salaried Employees (the Pension Plan) is a non-contributory, defined benefit
plan which applies to all salaried employees who have completed one year of qualified service,
including Directors who are employees. For each year of credited service, the annual pension to
which an employee is entitled under the Pension Plan upon normal retirement at age 65 is an amount
equal to three quarters of one percent of the employees compensation for each year up to the
social security wage base, plus 2.15 percent of the employees compensation for each year in excess
of the social security wage base. The named executive officers have the following years of
credited service under the Pension Plan as of September 26, 2010: Jack H. Brown 29 years, Phillip
J. Smith 24 years, James W. Lee 8 years, Dennis L. McIntyre 33 years and George A. Frahm
34 years.
The amounts shown in the following table are estimated annual retirement benefits under the Pension
Plan (assuming payments are made on the normal life annuity and not under any of the various
survivor forms of benefits) based upon retirement at age 65, after various years of service at
selected salary levels. Benefits under the Pension Plan do not become fully vested until the
employee has five years of credited service with Markets. The Internal Revenue Code of 1986, as
amended, places certain limitations on pension benefits that can be paid from a tax-qualified
pension plan and trust, as well as the compensation that may be taken into account in determining
such benefits. Such limitations are not reflected in the table below. The maximum annual benefit
for 2010 retirees with ten or more years of service at retirement is $195,000. The maximum annual
compensation that may be considered for 2010 retirees is $245,000.
Pension Plan Table
Years of Service | ||||||||||||||||||||||
Remuneration | 15 | 20 | 25 | 30 | 35 | |||||||||||||||||
$ | 50,000 | $ | 5,625 | $ | 7,500 | $ | 9,375 | $ | 11,250 | $ | 13,125 | |||||||||||
75,000 | 10,328 | 13,770 | 17,213 | 20,655 | 24,098 | |||||||||||||||||
100,000 | 18,390 | 24,520 | 30,650 | 36,780 | 42,910 | |||||||||||||||||
125,000 | 26,453 | 35,270 | 44,088 | 52,905 | 61,723 | |||||||||||||||||
150,000 | 34,515 | 46,020 | 57,525 | 69,030 | 80,535 | |||||||||||||||||
175,000 | 42,578 | 56,770 | 70,963 | 85,155 | 99,348 | |||||||||||||||||
200,000 | 50,640 | 67,520 | 84,400 | 101,280 | 118,160 | |||||||||||||||||
225,000 | 58,703 | 78,270 | 97,838 | 117,405 | 136,973 | |||||||||||||||||
245,000 | 65,153 | 86,870 | 108,588 | 130,305 | 152,023 |
Employment Agreements
Markets has employment agreements with Messrs. Brown, Lee, Smith, McIntyre and Frahm as described
previously. In addition, Markets has entered into employment contracts with 30 additional key
members of Management. Mr. Brown has the right to terminate any member of management.
Markets severance policies generally provide for two weeks of severance pay to full-time,
non-bargaining unit employees for every year of service to Markets, up to a maximum of twelve
weeks.
36
Table of Contents
Item 11. | Executive Compensation (contd.) |
Deferred Compensation Plan
We maintain a deferred compensation plan to provide additional incentive compensation to certain
employees of Markets whose performance is considered especially critical to our business. Under
the plan, grants may be made by the Compensation Committee and Board of Directors to persons
recommended by the Chairman of the Board or Chief Executive Officer. Mr. Brown is not eligible to
receive awards. Awards under the plan are for units that have an assigned value. The value of the
units awarded under the plan will increase or decrease in accordance with net profits of Holdings.
Subject to vesting provisions of the plan, units are paid in cash either (i) in a lump sum upon a
change in control of Holdings; or (ii) if sooner, in either a lump sum or installments (with
interest) over a five-year period (as we may determine) following termination of the participants
employment by reason of retirement, permanent total disability or death. Awards under the plan
vest after five years, except that upon a participants early retirement, permanent total
disability or death, awards are considered partially vested at the rate of 20% for each year of
employment following the grant. If a participant voluntarily terminates his or her employment, or
is terminated for cause, any awards not fully vested under the plan will be forfeited and no
payment will be made.
Payments pursuant to units awarded under the plan are based upon the value of a unit at the last
fiscal month-end date prior to the date of retirement, permanent total disability or death, except
that if such date occurs within two years of the grant the amount of payment, per unit, is limited
to the appreciated value of the units during the period plus the amount vested to that date. Upon
a change of control, the payment on all units is equal to the full value of the units. The
deferred compensation plan allows a one-time payment of up to 50% of the stated value of the unit
for units that are fully vested. The stated value of each unit is $20. The election for the
one-time payment can be made, at the discretion of the plan beneficiary, annually each October if
the election has not been previously made. As of September 27, 2009 and September 26, 2010, there
were 899,600 and 889,600 units outstanding, respectively.
Board of Directors
The Board had two standing committees during fiscal 2010.
The Audit Committee recommends the appointment or removal of Holdings independent auditors,
reviews the scope and results of the independent audit of Holdings, reviews audit fees and reviews
changes in accounting policies that have a significant effect on Holdings financial statements.
The Audit Committee members are Mr. Field, Mr. Varner and Mr. Skipper. Mr. Field is the
Chairperson of the Audit Committee and is the Audit Committees Financial Expert and is an
independent member of the Board.
The Compensation Committee approves compensation and annual performance bonuses paid to the Chief
Executive Officer and our Senior Management. The Compensation Committee members are Mr. Varner and
Mr. Field. Mr. Varner is the Chairperson of the Compensation Committee.
Code of Ethics
We have adopted a Financial Code of Ethics which has been signed by the CEO, CFO, Controllers and
other key personnel. A copy of the Code of Ethics was provided as an exhibit to our fiscal 2004
Report on Form 10-K.
37
Table of Contents
Item 12. | Security Ownership of Certain Beneficial Owners and Management and |
Related Stockholder Matters
The following table sets forth, as of December 16, 2010, the number and percentage of outstanding
shares of Class A Common Stock beneficially owned by (a) each person known by Holdings to
beneficially own more than 5% of such stock, (b) each Director of Holdings, (c) each of the named
executive officers, and (d) all Directors and named executive officers of Holdings as a group:
Shares of | ||||||||
Class A | Percentage of | |||||||
Common Stock | Class A | |||||||
Name and Address of | Beneficially | Common Stock | ||||||
Beneficial Owner | Owned | Outstanding | ||||||
La Cadena(1)
|
34,552 | 100 | % | |||||
Jack H. Brown(1)(2)
|
34,552 | 100 | % | |||||
Phillip J. Smith(2)
|
| | ||||||
James W. Lee(2)
|
| | ||||||
Dennis L. McIntyre(2) |
| | ||||||
George A. Frahm(2) |
| | ||||||
Thomas W. Field, Jr.(2)
|
| | ||||||
Bruce D. Varner(2)
|
| | ||||||
Ronald G. Skipper(2)
|
| | ||||||
All Directors and executive officers
as a group (8 persons)(1)
|
34,552 | 100 | % |
(1) | The 34,552 outstanding shares of Holdings Class A Common Stock are owned by La Cadena and may be deemed to be beneficially owned by the partners of La Cadena. The sole equity partner of La Cadena is The Jack H. Brown Revocable Trust. Mr. Browns Trust has the sole voting interest and Mr. Brown is the Managing General Partner of La Cadena with the power to vote the shares of Holdings owned by La Cadena on all matters. The address of La Cadena is 3750 University Avenue, Suite 610, Riverside, California 92501. | |
(2) | The address of Messrs. Brown, Smith, Lee, McIntyre, Frahm, Field, Varner and Skipper is c/o Stater Bros. at 301 S. Tippecanoe Avenue, San Bernardino, California 92408. |
Change of Control Arrangements
None
38
Table of Contents
Item 13. | Certain Relationships and Related Transactions |
Mr. Bruce D. Varner and the law firm of Varner & Brandt LLP, of which Mr. Varner is the Senior
Partner, have performed legal services in the past for Holdings and its subsidiaries. The total
cost of such legal services incurred by us was $2.8 million, $1.8 million and $2.4 million in
fiscal 2008, 2009 and 2010, respectively. In addition, Mr. Varner was paid Director fees of
$54,000 in each of the fiscal years 2008, 2009 and 2010. We believe that the terms and costs of
such legal services provided by Mr. Varner and the law firm of Varner & Brandt LLP were at least as
fair to us as could have been obtained from unaffiliated law firms. We expect such services to
continue in the future.
On both September 25, 2008 and November 17, 2009, we paid a $5.0 million dividend to La Cadena.
The 34,552 outstanding shares of Holdings Class A Common Stock are owned by La Cadena and may be
deemed to be beneficially owned by the partner of La Cadena. The sole partner of La Cadena is The
Jack H. Brown Revocable Trust. Mr. Browns Trust has the sole interest and Mr. Brown is the
Managing General Partner of La Cadena with the power to vote the shares of Holdings owned by La
Cadena on all matters.
Item 14. | Independent Registered Public Accounting Firm Fees and Services |
Audit Fees
Ernst & Young LLP fees for audit services aggregated $839,000 in fiscal 2010 and $695,000 in fiscal
2009 for services associated with the annual audit of Holdings and Markets and reviews of Holdings
quarterly reports on Form 10-Q.
Audit Related Fees
Ernst & Young LLP billed us in aggregate $2,000 in fiscal 2010 for online subscriptions and $2,000
in fiscal 2009 for online subscriptions
Tax Fees
Ernst & Young LLP billed us in aggregate $34,000 in fiscal 2010 and $38,000 in fiscal 2009 for tax
compliance, tax advice and tax planning services.
All Other Fees
Ernst & Young LLP billed us an aggregate of $55,000 in fiscal 2010 related to LAMBRA tax credits
and a review of the Dairy Transaction and an aggregate of $125,000 in fiscal 2009 related LAMBRA
tax credits and a review of the Dairy Transaction.
39
Table of Contents
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) | Document list |
(1) | Financial Statements | ||
See Financial Statement Index included in Item 8 of Part II of this Form 10-K. | |||
(2) | Financial Statement Schedules | ||
The Financial Statement Schedules required by Item 15(d) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore, have been omitted. | |||
(3) | Exhibits | ||
Exhibits as required by Item 15(c) are as follows: |
EXHIBIT NO. | DESCRIPTION | |
3.1 (1)
|
Certificate of Incorporation of Stater Bros. Holdings Inc. | |
3.2 (1)
|
By-Laws of Stater Bros. Holdings Inc. | |
3.3 (1)
|
Articles of Incorporation of Stater Bros. Markets | |
3.4 (1)
|
By-Laws of Stater Bros. Markets | |
3.5 (1)
|
Articles of Incorporation of Stater Bros. Development, Inc. | |
3.6 (1)
|
By-Laws of Stater Bros. Development, Inc. | |
3.7 (1)
|
Articles of Incorporation of Santee Dairies, Inc | |
3.8 (1)
|
By-Laws of Santee Dairies, Inc. | |
3.9 (2)
|
Articles of Incorporation of Super Rx, Inc. | |
3.10 (2)
|
By-Laws of Super Rx, Inc. | |
4.1 (1)
|
Indenture dated as of June 17, 2004 among Stater Bros. Holdings Inc. as Issuer, Stater Bros. Markets, Stater Bros. Development, Inc. and Santee Dairies Inc., as Guarantors, and The Bank of New York, as Trustee | |
4.2 (1)
|
Specimen Form of Fixed Rate Global Note | |
4.3 (3)
|
Supplemental Indenture dated as of April 16, 2007 among Stater Bros. Holdings Inc., Stater Bros. Markets, Santee Dairies, Inc., Stater Bros. Development, Inc., Super Rx, Inc. and The Bank of New York Trust Company, N.A. (as successor in interest to The Bank of New York), as Trustee | |
4.4 (4)
|
Indenture dated as of April 18, 2007, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development Inc., Super Rx, Inc., Santee Dairies, Inc. and The Bank of New York Trust Company, N.A. |
40
Table of Contents
Item 15. | Exhibits and Financial Statement Schedules (contd.) |
(a)(3) Exhibits (contd.) |
EXHIBIT NO. | DESCRIPTION | |
4.5 (4)
|
Registration Rights Agreement, dated as of April 18, 2007, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., Super Rx, Inc., Santee Dairies, Inc. and Banc of America Securities LLC | |
4.6 (4)
|
Restricted 144A Global Note | |
4.7 (4)
|
Restricted Temporary Regulations S Global Note | |
4.8 (12)
|
Indenture dated as of November 29, 2010, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., Super Rx, Inc and SBM Dairies, Inc. and the Bank of New York Mellon Trust Company, N.A., the Trustee. | |
4.9 (12)
|
Second Supplemental Indenture dated November 26, 2010 between Stater Bros. Holdings Inc. and the Bank of New York Mellon Trust Company, N.A., Trustee. | |
5.1 (11)
|
Opinion of Gibson, Dunn & Crutcher LLP | |
10.1 (5)
|
Amended and restated Sublease Agreement dated June 1, 1983, between Wren Leasing Corp., as Lessor, and Stater Bros. Markets, as Lessee | |
10.2 (6)
|
Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Jack H. Brown | |
10.3 (7)
|
Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Phillip J. Smith | |
10.4 (8)
|
Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Dennis L. McIntyre | |
10.6 (8)
|
Employment contract dated August 1, 2002 by and between Stater Bros. Markets and James W. Lee | |
10.7 (11)
|
Employment contract dated May 16, 2000 by and between Stater Bros. Markets and George A. Frahm | |
10.8 (11)
|
Amendment to employment contract dated July 1, 2000 by and between Stater Bros. Markets and George A. Frahm | |
10.9 (9)
|
Owner Participation Agreement, dated as of April 14, 2004 between Stater Bros. Markets and the Inland Valley Development Agency | |
10.10 (9)
|
Development Parcel Disposition Agreement, dated as of June 16, 2004 between Stater Bros. Markets and Hillwood/San Bernardino, LLC | |
10.11 (10)
|
Amendment No. 1 to Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated September 30, 2005 | |
10.12 (4)
|
Second Amended and Restated Credit Agreement, dated as of April 16, 2007, by and among Stater Bros. Markets, Stater Bros. Holdings Inc., and Bank of America, N.A. | |
10.13 (4)
|
Second Amended and Restated Business Loan Agreement (Receivables) dated as of April 16, 2007, by and among Santee Dairies, Inc., as Borrower, Bank of America, N.A., as Lender, and Stater Bros. Markets, as guarantor. | |
10.14 (11)
|
Subsidiary Guaranty entered into as of April 16, 2007 by Stater Bros. Holdings Inc., Stater Bros. Development, Inc., Santee Dairies, Inc. and Super Rx, Inc. | |
10.15 (11)
|
Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated December 18, 2002 |
41
Table of Contents
Item 15. | Exhibits and Financial Statement Schedules (contd.) |
(a)(3) Exhibits (contd.) |
EXHIBIT NO. | DESCRIPTION | |
10.16 (11)
|
Amendment No. 2 to amended and restated Stater Bros. Holdings Inc. Phantom Stock Plan dated May 15, 2006 | |
10.17 (12)
|
Registration Rights Agreement dated as of November 29, 2010, among Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., SBM Dairies, Inc., Super Rx, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. | |
10.18 (12)
|
Fourth Amended and Restated Credit Agreement dated as of November 29, 2010 by and among Stater Bros. Markets, Stater Bros. Holdings Inc., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Suntrust Robinson Humphrey, Inc., Suntrust Bank, Rabobank International, New York Branch. | |
12.1 (13)
|
Computation of ratio of earnings to fixed charges. | |
14.1 (11)
|
Copy of Key Personnel Code of Ethics. | |
21.1 (1)
|
Subsidiaries of Stater Bros. Holdings Inc. | |
21.2 (2)
|
Subsidiaries of Stater Bros. Markets | |
31.1 (13)
|
Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002. | |
31.2 (13)
|
Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002. | |
32.1 (13)
|
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. |
(1) | Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-118436 dated August 27, 2004, as amended | |
(2) | Previously filed with the Securities and Exchange Commission as an exhibit to the Annual report on Form 10-K for the fiscal year ended September 25, 2005 | |
(3) | Previously filed with the Securities and Exchange Commission as an exhibit to the Current Report on form 8-K dated April 17, 2007 | |
(4) | Previously filed with the Securities and Exchange Commission as an exhibit to the Current Report on Form 8-K dated April 20, 2007 | |
(5) | Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-77296 dated July 21, 1994 | |
(6) | Previous filed with the Securities and Exchange Commission as exhibits to Registrants Quarterly report on Form 10-Q dated June 25, 2000 and filed on August 9, 2000 | |
(7) | Previously filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 24, 2000 | |
(8) | Previously filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 29, 2002 |
42
Table of Contents
Item 15. | Exhibits and Financial Statement Schedules (contd.) |
(a)(3) Exhibits (contd.) |
(9) | Incorporated by reference to Exhibit 10.35 to the Quarterly Report on Form 10-Q for the quarter ended June 27, 2004 | |
(10) | Previously filed with the Securities and Exchange Commission as an exhibit to the Annual Report on Form 10-K for the fiscal year ended September 25, 2005 | |
(11) | Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-0350671 dated July 24, 2007 | |
(12) | Previously filed with the Securities and Exchange Commission as exhibits to the Current Report on Form 8-K dated November 26, 2010 | |
(13) | Filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 26, 2010 |
43
Table of Contents
STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 2010
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 2010
FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
December 15, 2010 Date |
Stater Bros. Holdings Inc. |
||||
By: | /s/ Jack H. Brown | ||||
Jack H. Brown | |||||
Chairman of the Board, President and Chief Executive Officer |
|||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature | Title | Date | ||
/s/ Jack H. Brown
|
Chairman of the Board, President and Chief Executive Officer and Director (Principal Executive Officer) |
December 15, 2010 | ||
/s/ Thomas W. Field, Jr.
|
Vice Chairman of the Board and Director | December 15, 2010 | ||
/s/ Ronald G. Skipper
|
Director | December 15, 2010 | ||
/s/ Bruce D. Varner
|
Secretary and Director | December 15, 2010 | ||
/s/ Phillip J. Smith
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
December 15, 2010 |
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number | ||
F-2 | ||
F-3 | ||
Fiscal years ended September 28, 2008, September 27, 2009
and September 26, 2010: |
||
F-5 | ||
F-6 | ||
F-7 | ||
F-8 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Stater Bros. Holdings Inc.
Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. as
of September 27, 2009 and September 26, 2010, and the related consolidated statements of income,
stockholders equity, and cash flows for the 52-week periods ended September 28, 2008, September
27, 2009 and September 26, 2010. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Stater Bros. Holdings Inc. at September 27, 2009
and September 26, 2010, and the consolidated results of its operations and its cash flows for the
52-week periods ended September 28, 2008, September 27, 2009 and September 26, 2010, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
December 15, 2010
December 15, 2010
F-2
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept. 27, | Sept. 26, | |||||||
2009 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 196,914 | $ | 325,005 | ||||
Restricted cash |
3,121 | 3,121 | ||||||
Receivables, net of allowance of $759 and $1,219 |
36,671 | 35,614 | ||||||
Income tax receivables |
4,049 | | ||||||
Inventories |
212,856 | 203,702 | ||||||
Prepaid expenses |
9,330 | 12,678 | ||||||
Deferred income taxes |
20,479 | 27,428 | ||||||
Assets held for sale |
83,617 | | ||||||
Current portion of long-term receivable |
| 16,001 | ||||||
Note receivable, current portion |
300 | | ||||||
Total current assets |
567,337 | 623,549 | ||||||
Property and equipment |
||||||||
Land |
97,430 | 97,770 | ||||||
Buildings and improvements |
544,440 | 559,500 | ||||||
Store fixtures and equipment |
428,431 | 438,306 | ||||||
Property subject to capital leases |
9,983 | 9,983 | ||||||
1,080,284 | 1,105,559 | |||||||
Less accumulated depreciation and amortization |
408,791 | 461,495 | ||||||
671,493 | 644,064 | |||||||
Deferred income taxes, long-term |
36,014 | 38,272 | ||||||
Deferred debt issuance costs, net |
11,276 | 8,074 | ||||||
Note receivable, less current portion |
493 | | ||||||
Long-term receivable, less current portion |
18,867 | | ||||||
Other assets |
9,255 | 8,828 | ||||||
75,905 | 55,174 | |||||||
Total assets |
$ | 1,314,735 | $ | 1,322,787 | ||||
See accompanying notes to consolidated financial statements.
F-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)
Sept. 27, | Sept. 26, | |||||||
2009 | 2010 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 153,083 | $ | 135,642 | ||||
Accrued payroll and related expenses |
76,717 | 85,404 | ||||||
Accrued interest |
22,025 | 21,845 | ||||||
Other accrued liabilities |
34,189 | 40,196 | ||||||
Accrued income taxes |
| 527 | ||||||
Liabilities held for sale |
5,634 | | ||||||
Current portion of capital lease obligations |
1,336 | 1,562 | ||||||
Current portion of long-term debt |
| 132,250 | ||||||
Total current liabilities |
292,984 | 417,426 | ||||||
Long-term debt, less current portion |
810,000 | 677,750 | ||||||
Capital lease obligations, less current portion |
3,768 | 2,206 | ||||||
Long-term portion of self-insurance and other reserves |
36,227 | 40,565 | ||||||
Long-term deferred benefits |
77,396 | 75,634 | ||||||
Other long-term liabilities |
30,605 | 36,073 | ||||||
Total liabilities |
1,250,980 | 1,249,654 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common Stock, $.01 par value: |
||||||||
Authorized shares 100,000 |
||||||||
Issued and outstanding shares 0 in 2009 and 2010 |
| | ||||||
Class A Common Stock, $.01 par value: |
||||||||
Authorized shares 100,000 |
||||||||
Issued and outstanding shares 35,152 in 2009
and 34,552 in 2010 |
| | ||||||
Additional paid-in capital |
8,939 | 8,786 | ||||||
Accumulated other comprehensive loss |
(16,720 | ) | (18,926 | ) | ||||
Retained earnings |
71,536 | 83,273 | ||||||
Total stockholders equity |
63,755 | 73,133 | ||||||
Total liabilities and stockholders equity |
$ | 1,314,735 | $ | 1,322,787 | ||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
Fiscal Year Ended | ||||||||||||
Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
Sales |
$ | 3,741,254 | $ | 3,766,040 | $ | 3,606,839 | ||||||
Cost of goods sold |
2,743,074 | 2,764,004 | 2,636,891 | |||||||||
Gross profit |
998,180 | 1,002,036 | 969,948 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative expenses |
829,697 | 827,192 | 819,698 | |||||||||
Gain on sale of dairy assets |
| | (9,396 | ) | ||||||||
Depreciation and amortization |
52,987 | 53,536 | 50,822 | |||||||||
Total operating expenses |
882,684 | 880,728 | 861,124 | |||||||||
Operating profit |
115,496 | 121,308 | 108,824 | |||||||||
Interest income |
5,735 | 471 | 366 | |||||||||
Interest expense |
(57,464 | ) | (68,252 | ) | (68,516 | ) | ||||||
Other income, net |
2,863 | 723 | 497 | |||||||||
Income before income taxes |
66,630 | 54,250 | 41,171 | |||||||||
Income taxes |
26,000 | 19,481 | 16,587 | |||||||||
Net income |
$ | 40,630 | $ | 34,769 | $ | 24,584 | ||||||
Earnings per average common shares outstanding |
$ | 1,136.03 | $ | 989.10 | $ | 708.33 | ||||||
Dividends per common share outstanding at end of year |
$ | 142.24 | $ | | $ | 144.71 | ||||||
Average common shares outstanding |
35,765 | 35,152 | 34,707 | |||||||||
Common shares outstanding at end of year |
35,152 | 35,152 | 34,552 | |||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended | ||||||||||||
Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 40,630 | $ | 34,769 | $ | 24,584 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
66,960 | 68,179 | 62,090 | |||||||||
Amortization of debt issuance costs |
3,193 | 3,202 | 3,202 | |||||||||
Deferred income taxes |
695 | (1,686 | ) | (9,207 | ) | |||||||
Gain on sale of dairy assets |
| | (9,396 | ) | ||||||||
Gain on disposals of assets |
(1,918 | ) | (543 | ) | (495 | ) | ||||||
Changes in operating assets and liabilities: |
||||||||||||
Decrease in restricted cash |
2,500 | 2,500 | | |||||||||
(Increase) decrease in receivables |
1,907 | (6,071 | ) | 1,057 | ||||||||
(Increase) decrease in income tax receivables |
(4,727 | ) | 587 | 4,049 | ||||||||
(Increase) decrease in inventories |
(31,435 | ) | 17,362 | 9,154 | ||||||||
(Increase) decrease in prepaid expenses |
1,717 | (723 | ) | (3,348 | ) | |||||||
(Increase) decrease in assets held for sale |
(2,159 | ) | 372 | 215 | ||||||||
(Increase) decrease in other assets |
10 | (426 | ) | 744 | ||||||||
Decrease in accounts payable |
(17,795 | ) | (1,200 | ) | (17,441 | ) | ||||||
Increase (decrease) in accrued income taxes |
(4,636 | ) | | 527 | ||||||||
Increase (decrease) in liabilities held for sale |
(2,624 | ) | (10,252 | ) | 1,014 | |||||||
Increase (decrease) in other accrued liabilities |
1,216 | (3,268 | ) | 14,514 | ||||||||
Increase in long-term reserves |
3,932 | 19,608 | 5,838 | |||||||||
Net cash provided by operating activities |
57,466 | 122,410 | 87,101 | |||||||||
Financing activities: |
||||||||||||
Dividends paid |
(5,000 | ) | | (5,000 | ) | |||||||
Stock redemption |
(8,240 | ) | | (8,000 | ) | |||||||
Principal payments on capital lease obligations |
(990 | ) | (1,149 | ) | (1,336 | ) | ||||||
Net cash used in financing activities |
(14,230 | ) | (1,149 | ) | (14,336 | ) | ||||||
Investing activities: |
||||||||||||
(Increase) decrease in store reimbursement |
(9,427 | ) | 9,914 | | ||||||||
(Increase) decrease in note receivable |
| (793 | ) | 793 | ||||||||
Decrease in long-term receivable |
| 3,361 | 1,740 | |||||||||
Proceeds from sale of dairy assets, net of fees |
| | 85,833 | |||||||||
Purchase of property and equipment |
(168,886 | ) | (76,970 | ) | (33,750 | ) | ||||||
Proceeds from sale of property and equipment |
2,476 | 990 | 710 | |||||||||
Net cash provided by (used in) investing activities |
(175,837 | ) | (63,498 | ) | 55,326 | |||||||
Net increase (decrease) in cash and cash equivalents |
(132,601 | ) | 57,763 | 128,091 | ||||||||
Cash and cash equivalents at beginning of period |
271,752 | 139,151 | 196,914 | |||||||||
Cash and cash equivalents at end of period |
$ | 139,151 | $ | 196,914 | $ | 325,005 | ||||||
Interest paid |
$ | 65,707 | $ | 65,723 | $ | 65,510 | ||||||
Income taxes paid |
$ | 39,300 | $ | 19,425 | $ | 19,700 | ||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands except shares)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands except shares)
Accumulated | Comp- | |||||||||||||||||||||||||||||||
Class A | Additional | Other Comp- | Total | rehensive | ||||||||||||||||||||||||||||
Common | Common Stock | Paid-in | rehensive | Retained | Stockholders | Income | ||||||||||||||||||||||||||
Stock | Shares | Amount | Capital | Gain (Loss) | Earnings | Equity | (Loss) | |||||||||||||||||||||||||
Balance at September 30, 2007 |
| 35,770 | $ | | $ | 9,096 | $ | (9,037 | ) | $ | 9,220 | $ | 9,279 | |||||||||||||||||||
Net income for 52 weeks ended
September 28, 2008 |
| | | | | 40,630 | 40,630 | $ | 40,630 | |||||||||||||||||||||||
Minimum
pension liability adjustment
(net of tax of $2,638) |
| | | | 3,837 | | 3,837 | 3,837 | ||||||||||||||||||||||||
Dividend paid |
| | | | | (5,000 | ) | (5,000 | ) | | ||||||||||||||||||||||
Stock redemption |
| (618 | ) | | (157 | ) | | (8,083 | ) | (8,240 | ) | | ||||||||||||||||||||
Balance at September 28, 2008 |
| 35,152 | | 8,939 | (5,200 | ) | 36,767 | 40,506 | $ | 44,467 | ||||||||||||||||||||||
Net income for 52 weeks ended
September 27, 2009 |
| | | | | 34,769 | 34,769 | $ | 34,769 | |||||||||||||||||||||||
Minimum pension
liability adjustment
(net of tax of $7,922) |
| | | | (11,520 | ) | | (11,520 | ) | (11,520 | ) | |||||||||||||||||||||
Balance at September 27, 2009 |
| 35,152 | | 8,939 | (16,720 | ) | 71,536 | 63,755 | $ | 23,249 | ||||||||||||||||||||||
Net income for 52 weeks ended
September 26, 2010 |
| | | | | 24,584 | 24,584 | $ | 24,584 | |||||||||||||||||||||||
Minimum pension
liability adjustment
(net of tax of $1,517) |
| | | | (2,206 | ) | | (2,206 | ) | (2,206 | ) | |||||||||||||||||||||
Dividend paid |
| | | | | (5,000 | ) | (5,000 | ) | | ||||||||||||||||||||||
Stock Redemption |
| (600 | ) | | (153 | ) | | (7,847 | ) | (8,000 | ) | | ||||||||||||||||||||
Balance at September 26, 2010 |
| 34,552 | $ | | $ | 8,786 | $ | (18,926 | ) | $ | 83,273 | $ | 73,133 | $ | 22,378 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2010
Note 1 The Company and Summary of Significant Accounting Policies
Description of Business
Stater Bros. Holdings Inc. (the Company) is engaged primarily in the operation of retail
supermarkets. As of September 26, 2010, the Company operated 167 retail grocery supermarkets under
the name Stater Bros. Markets. The Companys supermarkets are located in the Southern California
counties of San Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern. The Company and
its predecessor companies have operated retail grocery stores under the Stater Bros. Markets name
in Southern California since 1936.
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 the Companys 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.
Principles of Consolidation and Subsequent Events
The 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). During fiscal year 2010, the Company changed the legal name of Dairies from Santee
Dairies, Inc. to SBM Dairies, Inc. All significant inter-company transactions have been eliminated
in consolidation. The Company has evaluated the impact of subsequent events and determined that,
other than its debt refinancing as disclosed in Note 2 New Debt Issuance and Early
Extinguishment of Debt, it did not have any subsequent events that needed to be disclosed in its
consolidated financial statements.
Reclassifications
Certain line items in the prior periods balance sheet and cash flow statements have been
reclassified to conform to the current presentation related to Dairies asset sale, accrued
interest and accrued payroll and related expenses. Substantially all of the assets and certain
liabilities of Dairies had been classified as Held for Sale prior to their disposal on October
11, 2009 as described in Note 15 Asset Sale in the notes to these consolidated financial
statements.
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 these
estimates.
Fiscal Year
The Companys fiscal year ends on the last Sunday in September.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their fair value, and
consist primarily of overnight repurchase agreements, certificates of deposit and money market
funds with maturities of less than three months when purchased.
Restricted Cash
Restricted cash represents cash that has been set aside as collateral on certain workers
compensation and general liability self-insurance reserves. Interest earned on the restricted cash
is controlled by the Company and is included in cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
F-8
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 1 The Company and Summary of Significant Accounting Policies (contd.)
Receivables
Receivables represent amounts expected to be received during the next operating cycle of the
Company, net of allowance for doubtful accounts. The Company provides specific reserves for
accounts deemed to be uncollectible and provides general reserves based on historical experiences.
The carrying amount reported in the balance sheet for receivables approximates their fair value.
Long-Lived Assets
The Company reviews the recoverability of its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
If the estimated future, undiscounted cash flows from the use of an asset are less than its
carrying value, a write-down is recorded to reduce the related asset to estimated fair value.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized, principally on the
straight-line basis, over the estimated useful lives of the assets. Leasehold improvements placed
in service at the commencement of the lease are amortized over the lesser of their economic useful
lives or the initial term of the lease. Other leasehold improvements are amortized over the lesser
of their economic useful lives or the remaining lease term including any option period that is
reasonably assured of being exercised. Assets under capital leases are amortized over the lesser
of their estimated economic useful life or the initial lease term.
The estimated economic lives are as follows:
Range | Most Prevalent | |||||||
Buildings and improvements |
5 - 40 Years | 20 Years | ||||||
Store furniture and equipment |
3 - 10 Years | 8 Years | ||||||
Property subject to capital leases |
Life of Lease | 20 Years |
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized and amortized to
interest expense over the terms of the applicable debt agreements.
Deferred Compensation Plan
The Company maintains the Stater Bros Holdings Inc. Phantom Stock Plan (the deferred
compensation plan). It is the Companys policy to expense awarded units under the deferred
compensation plan to the extent that they vest and appreciate during the accounting period.
Self-Insurance Reserves
The Company is primarily self-insured, subject to certain retention levels for workers
compensation, automobile and general liability costs. The Company is covered by umbrella
insurance policies for catastrophic events. 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 Companys historical experiences as well as current
facts and circumstances. The Company uses third party actuarial analysis in making its estimates.
Actuarial projections and the Companys 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
compensation benefits structure. The Company discounted its workers compensation, automobile and
general liability insurance reserves at a discount rate of 5.50% in fiscal 2009 and 5.00% in fiscal
2010. The Company is self-insured, subject to certain retention levels, for health care costs of
eligible non-bargaining unit employees. Such health care reserves are not discounted.
Income Taxes
The Company provides for deferred income taxes as timing differences arise between income and
expenses recorded for financial and income tax reporting purposes. The Company records a valuation
allowance to reflect the estimated amount of deferred tax assets that more-likely-than-not will not
be realized.
F-9
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 1 The Company and Summary of Significant Accounting Policies (contd.)
Revenue Recognition
The Company recognizes revenue from the sale of its products at the point of sale to the
customer. Sales are recognized net of any promotional discounts given to the customer.
Prescription sales are recognized when prescriptions are adjudicated by the third party insurer and
when co-payment is received. The Company recognizes a liability when
Stater Bros. gift cards
(gift cards) are sold and recognizes sales revenue when the gift cards are used to purchase its
products. Gift cards do not have an expiration date and gift card balances do not reduce because
of inactivity or time. The Company does not charge service fees on the gift cards. Gift cards
whose likelihood of redemption is deemed to be remote, due primarily to periods of inactivity, are
recognized into income.
Cost of Goods Sold
Included in cost of goods sold are direct product purchase costs, all in-bound freight costs,
all direct receiving and inspection costs, all quality assurance costs, all warehousing costs and
all costs associated with transporting goods from the Companys distribution center to its stores,
net of earned vendor rebates and allowances. The Company recognizes, as a reduction to cost of
goods sold, certain rebates and allowances (allowances) from its vendors as the allowances are
earned. Allowances are earned by promoting certain products or by purchasing specified amounts of
product. The Company records a liability for allowance funds that have been received but not yet
earned. Included as a reduction in cost of goods sold for fiscal 2008, 2009 and 2010 is $5.8
million, $4.6 million and $2.9 million, respectively, of advertising costs in excess of the fair
value of the co-operative advertising.
Selling, General and Administrative Expenses
Included in selling, general and administrative expenses are all store operation costs which
include all store labor costs associated with receiving, displaying and selling the Companys
products at the store level; all advertising costs, net of the portion of co-operative advertising
allowances directly related to the fair value of the advertising; certain salary, wages and
administrative costs associated with the purchasing of the Companys products and all security,
management information services, accounting and corporate management costs.
As noted under Cost of Goods Sold, the Company includes all purchasing and distribution
costs to deliver the product for sale to its stores in cost of goods sold, except for certain
salary, wages and administrative costs associated with the purchasing of its products. The amount
of salary, wages and administrative costs associated with the purchase of its products included in
selling, general and administrative costs was $1.2 million in each fiscal year 2008, 2009 and 2010.
Vendor Rebates and Allowances
The Company receives certain allowances from its vendors that relate to the purchase and
promotion of certain products. All allowances, except for advertising allowances described under
Advertising Allowances, are recognized as a reduction in cost of goods sold as the performance is
completed and inventory sold. Allowances, such as slotting fees, which are tied to the promotion
of certain products are recognized as reductions in cost of goods sold as the Company meets the
required performance criteria. Allowances that are based upon purchase or sales volumes are
recognized as reductions in cost of goods sold as the products are sold. The Company receives
lump-sum payments from vendors for the promotion or purchase of products over multi-year periods.
The Company records a liability for unearned allowances and recognizes, as a reduction in cost of
goods sold, these allowances over time as the criteria of these contracts are met.
Advertising
The Companys advertising costs, net of vendor allowances for co-operative advertising, are
recognized in the period the advertising is incurred and are included in selling, general and
administrative expenses. Advertising costs, net of vendor allowances, were $23.7 million, $22.2
million and $20.4 million in fiscal 2008, 2009 and 2010, respectively.
F-10
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 1 The Company and Summary of Significant Accounting Policies (contd.)
Advertising Allowances
A significant portion of the Companys advertising expenditures is in the form of twice weekly
print advertisements. The Company distributes its print ads through inserts in local newspapers,
in direct mailers and as handouts distributed in its stores. The Company receives co-operative
advertising allowances from vendors for advertising specific vendor products over specific periods
of time. The Company recognized the portion of co-operative advertising allowances directly
related to the fair value of advertising as a reduction in advertising costs. The Company
analyzes, on a monthly basis, the direct out-of-pocket costs for printing and distributing its
print ads. Using the number of ads in a typical twice weekly advertisement, the actual direct
costs of an individual advertisement is determined. The cost determined is deemed to be the fair
value of advertising. The amount of co-operative advertising allowance recognized as a reduction
in advertising expense was $4.4 million in fiscal 2008, $2.6 million in fiscal 2009 and $1.6
million in fiscal 2010. The amount of advertising costs in excess of the fair value of advertising
is recorded as a reduction in cost of goods sold.
Leases
Certain of the Companys operating leases provide for minimum annual payments that change over
the life of the lease. The aggregate minimum annual payments are expensed on the straight-line
basis over the minimum lease term. The Company recognizes a deferred rent liability for minimum
step rents when the amount of rent expense exceeds the actual lease payments and it reduces the
deferred rent liability when the actual lease payments exceeds the amount of straight-line rent
expense. Rent holidays and tenant improvement allowances for store remodels are amortized on the
straight-line basis over the initial term of the lease and any option period that is reasonably
assured of being exercised.
Note 2 New Debt Issuance and Early Extinguishment of Debt
Issuance of New Notes
On November 29, 2010, the Company completed the sale of $255 million in aggregate principal
amount of 7 3/8% Senior Notes due November 15, 2018 (the New Notes) in a private offering.
The New Notes are unregistered and unsecured obligations of the Company and are guaranteed by
Markets and Development and the Companys indirect subsidiaries, Dairies and Super Rx. The Company
incurred $6.4 million of debt issuance costs related to the issuance of the 7 3/8% Senior Notes,
which will be amortized over the term of the New Notes to interest expense.
Issuance of New Credit Facility
On November 29, 2010, the Company entered into a new $245 million senior secured credit
facility (the New Credit Facility) with Bank of America, N.A., as administrative agent and a
lender. The New Credit Facility consists of a four-year $145 million term loan (the Term Loan)
and a $100 million revolving credit facility (the New Revolving Credit Facility). The New Credit
Facility replaced the Companys existing $100 million credit facility as of November 29, 2010. The
New 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 New 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 New Credit Facility) and the interest 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 year 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 New 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
New Credit Facility is held until the Term Loan is paid in full. The Company incurred $2.1 million
of debt issuance cost related to the Term Loan which will be amortized over the term of the Term
Loan.
F-11
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 2 New Debt Issuance and Early Extinguishment of Debt (contd.)
Issuance of New Credit Facility (contdl)
Subject to certain restrictions, the entire amount of the New Revolving Credit Facility may be
used for loans, letters of credit, or a combination thereof. Borrowings under the New 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 letter of 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 New 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.
The terms and provisions relating to covenants, including restricted payments, and events of
defaults under the New Revolving Credit Facility are consistent with those of the existing credit
facility.
The Companys $49.8 million of outstanding letters of credit continue to be issued and
outstanding under the New Revolving Credit Facility.
The New Revolving Credit Facility will cease to be available and will be payable in full on
November 29, 2014.
Early Extinguishment of Debt
On November 29, 2010, the Company used the proceeds from the New Notes and the New Term Loan
and cash on hand to make a payment of $496.9 million to purchase and make tender payments on
approximately $477.5 million of outstanding principal of its $525 million outstanding aggregate
principal amount of 8.125% Senior Notes due 2012 (the Old Notes) that were validly tendered as of
November 26, 2010. The tender payment included a consent fee of $10 per $1,000 of the Old Notes
tendered. The Company will record $1.8 million as interest expense related to debt purchase for
the consent fee paid on the Old Notes that were validly tendered. The Company also paid $17.7
million of accrued interest related to the tendered Old Notes. On December 13, 2010, the Company completed its tender
offer on the Old Notes and made a payment of $2.4 million to redeem $2.4 million of
Old Notes that were validly tendered. Also the Company paid $0.1 million of accrued interest on these tendered Notes.
In connection with the Old Notes that were tendered and purchased, the Company will expense
approximately $3.2 million of unamortized deferred offering costs related to the Old Notes in the
first quarter of fiscal 2011.
On November 29, 2010, the Company issued a call notice to early redeem and retire all of the
remaining approximately $47.5 million outstanding Old Notes. The call date for redemption of the
remaining outstanding Old Notes is January 14, 2011.
As a result of the early extinguishment of debt, $132.3 million of previously long-term debt
has been classified as current portion of long-term debt on the September 26, 2010 consolidated
balance sheet.
F-12
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 3 Debt
Long-term debt consisted of the following:
Fiscal Year Ended | ||||||||
Sept. 27, | Sept. 26, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
8.125% Senior Notes due 2012 |
$ | 525,000 | $ | 525,000 | ||||
7.75% Senior Notes due 2015 |
285,000 | 285,000 | ||||||
810,000 | 810,000 | |||||||
Less current portion of
long-term debt |
| 132,250 | ||||||
Long-term debt, less
current portion |
$ | 810,000 | $ | 677,750 | ||||
Interest on the 8.125% Senior Notes due June 2012 (the 8.125% Senior Notes), is payable
semi-annually in arrears on June 15 and December 15. Principal on the 8.125% Senior Notes is due
in fiscal 2012.
Interest on the 7.75% Senior Notes is payable semi-annually in arrears on April 15 and October
15. Principal on the 7.75% Senior Notes is due in fiscal 2015.
Interest capitalized during fiscal 2008 and 2009 amounted to $11.3 million and $0.5 million,
respectively. There was no capitalized interest in fiscal 2010. Interest expense incurred, before
the effect of capitalized interest, amounted to $68.8 million in both fiscal years 2008 and 2009
and amounted to $68.5 million in fiscal year 2010.
The Company is subject to certain covenants associated with its 8.125% Senior Notes and its
7.75% Senior Notes. As of September 26, 2010, the Company was in compliance with all such
covenants.
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.
F-13
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 4 Credit Facilities
On May 4, 2010, the Company and Markets entered into the Third Amended and Restated Credit
Agreement with Bank of America, N.A. (Bank of America), as sole and exclusive administrative
agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a
principal amount of up to $100 million (the Credit Facility), which replaced the Companys
previous credit facility.
The Credit Facility is guaranteed by all of the Companys existing and future material
subsidiaries, including Development and the Companys indirect subsidiary Super Rx. Subject to
certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of
credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and may be
used for working capital, certain capital expenditures and other general corporate purposes.
Letters of credit issued under the letter of credit facility are expected to be used to support
obligations incurred in connection with the construction of stores and workers compensation
insurance obligations. The availability of the loans and letters of credit is subject to certain
borrowing restrictions.
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 prime rate), plus 1.00%, or (ii) the Eurodollar
Rate (defined as the British Bankers Association LIBOR Rate for deposits in dollars, adjusted for
the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Eurodollar Rate Loans,
the Eurodollar Rate will apply for periods, as selected by the Company, of one, two, three or six
months (but in any event not later than the maturity date of the Credit Facility).
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,
and (iii) make restricted payments. Markets is not limited in its ability to transfer assets in
the form of loans, advances or cash dividends to the Company. The Credit Facility also contains
covenants that apply to the Company and its subsidiaries, and the Company is a party to the Credit
Facility for purposes of these covenants. These covenants, among other things, limit the ability
of the Company and its subsidiaries to incur indebtedness, make restricted payments, enter into
transactions with affiliates, and make certain amendments to the Indentures governing the 8.125%
Senior Notes and the 7.75% Senior Notes (Notes Indentures).
As of September 26, 2010, the Company had $49.8 million of outstanding letters of credit and
it had $50.2 million available under the Credit Facility and the Company was in compliance with all
restrictive covenants under the Credit Facility. However, there can be no assurance that the
Company will be able to achieve the expected operating results or implement the capital expenditure
strategy upon which future compliance with such covenants is based.
The Company had no short-term borrowings outstanding as of September 26, 2010 and the Company
did not incur any short-term borrowings during the fiscal year ended September 26, 2010.
F-14
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 5 Leases
The Company leases the majority of its retail stores. Certain of the operating leases provide
for minimum annual payments that change over the life of the lease. The Company expenses rental
costs that are incurred during new store construction in the period incurred.
The aggregate minimum annual lease payments are expensed on the straight-line basis over the
minimum lease term. The Company recognizes a deferred rent liability for minimum step rents when
the amount of rent expense exceeds the actual lease payment and it reduces the deferred rent
liability when the actual lease payment exceeds the amount of straight line rent expense. Rent
holidays and tenant improvement allowances for store remodels are amortized on the straight-line
basis over the initial term of the lease and any option period that is reasonably assured of being
exercised. Certain of the Companys operating leases are subject to contingent rent based upon the
sales volume of the store subject to the lease. The Company accrues for contingent rent when the
amount of contingent rent exceeds minimum lease payments. Primary lease terms range from 3 to 55
years and substantially all leases provide for renewal options.
Following is a summary of future minimum lease payments as of September 26, 2010:
Operating | ||||||||||||
Leases | Noncancelable | |||||||||||
Capital | Minimum | Sublease | ||||||||||
Leases | Payments | Income | ||||||||||
(In thousands) | ||||||||||||
2011 |
$ | 2,095 | $ | 38,568 | $ | 5,242 | ||||||
2012 |
1,403 | 35,528 | 4,151 | |||||||||
2013 |
943 | 33,103 | 3,724 | |||||||||
2014 |
316 | 27,065 | 2,878 | |||||||||
2015 |
| 25,209 | 2,506 | |||||||||
Thereafter |
| 190,753 | 18,795 | |||||||||
Total minimum lease payments |
4,757 | $ | 350,226 | $ | 37,296 | |||||||
Less amounts representing interest |
989 | |||||||||||
Present value of minimum lease
payments |
3,768 | |||||||||||
Less current portion |
1,562 | |||||||||||
Long-term portion |
$ | 2,206 | ||||||||||
F-15
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 5 Leases (contd.)
Rental expense and sublease income were as follows:
Fiscal Year Ended | ||||||||||||
Sept. 28, 2008 | Sept. 27, 2009 | Sept. 26, 2010 | ||||||||||
(In thousands) | ||||||||||||
Minimum rentals |
$ | 33,454 | $ | 30,326 | $ | 29,087 | ||||||
Rentals based on sales |
$ | 15,020 | $ | 16,210 | $ | 16,221 | ||||||
Sublease income |
$ | 2,235 | $ | 4,919 | $ | 5,586 |
The Company has a fifteen year sublease with a third party (the sublessee) ending in May
2023, which contains three, five year lease options, for the lease of the Companys former
headquarters building and certain former distribution facilities located in Colton, California (the
Former Facilities). The current lease on the Former Facilities contains multiple lease options
that gives the Company the right to control the property through May 2038. The sublessee assumed
all lease payments and other liabilities under the lease. The Companys lease payments on the
Former Facilities are included in the Operating leases minimum payments and the sublessee lease
payments are included in Noncancelable sublease income in the schedule above.
Note 6 Income Taxes
The provision for income taxes consisted of the following:
Sept. 28, 2008 | Sept. 27, 2009 | Sept. 26, 2010 | ||||||||||
(in thousands) | ||||||||||||
Current |
||||||||||||
Federal |
$ | 23,756 | $ | 16,302 | $ | 18,816 | ||||||
State |
6,095 | 3,710 | 5,460 | |||||||||
29,851 | 20,012 | 24,276 | ||||||||||
Deferred |
||||||||||||
Federal |
(2,826 | ) | (152 | ) | (5,827 | ) | ||||||
State |
(1,025 | ) | (379 | ) | (1,862 | ) | ||||||
(3,851 | ) | (531 | ) | (7,689 | ) | |||||||
Income tax expense |
$ | 26,000 | $ | 19,481 | $ | 16,587 | ||||||
A reconciliation of the provision for income taxes to amounts computed at the federal statutory rate is as follows: | ||||||||||||
Sept. 28, 2008 | Sept. 27, 2009 | Sept. 26, 2010 | ||||||||||
Federal statutory income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State franchise tax rate, net of federal
income tax benefit |
5.8 | 5.8 | 5.8 | |||||||||
Tax credits |
(2.3 | ) | (2.2 | ) | (1.2 | ) | ||||||
Other |
0.5 | (2.7 | ) | 0.7 | ||||||||
Effective tax rate |
39.0 | % | 35.9 | % | 40.3 | % | ||||||
F-16
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 6 Income Taxes (contd.)
Components of deferred income taxes are as follows:
Sept. 27, 2009 | Sept. 26, 2010 | |||||||
(In thousands) | ||||||||
Deferred income tax assets: |
||||||||
Self-insurance reserves |
$ | 25,252 | $ | 27,756 | ||||
Deferred compensation |
31,504 | 34,209 | ||||||
Payroll liabilities |
20,447 | 24,123 | ||||||
State franchise tax |
1,377 | 1,860 | ||||||
Inventories |
2,217 | 2,033 | ||||||
Income deferred for book purposes |
2,602 | 2,074 | ||||||
Tax credits and operating loss carry forwards |
2,561 | 180 | ||||||
Other, net |
1,708 | 1,881 | ||||||
Total deferred income tax assets |
87,668 | 94,116 | ||||||
Deferred income tax liabilities: |
||||||||
Property and equipment |
(28,920 | ) | (26,133 | ) | ||||
Other assets |
(2,255 | ) | (2,283 | ) | ||||
Total deferred income tax liabilities |
(31,175 | ) | (28,416 | ) | ||||
Net deferred income tax assets |
$ | 56,493 | $ | 65,700 | ||||
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 fiscal 2010, there have been 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 on its fiscal 2007 through fiscal
2010 tax returns. During fiscal 2010, the State of California Franchise Tax Board (FTB)
concluded their review of the Companys fiscal 2006 state return and made no changes to the
Companys reported taxes. For state tax purposes, the Company is subject to review by the FTB of
its fiscal 2007 through fiscal 2010 tax returns.
F-17
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans
Pension and Medical Plans
The Company has a Noncontributory Defined Benefit Pension Plan (the Pension 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 this plan is to contribute annually at a rate that is intended to provide sufficient
assets to meet future benefit payment requirements.
The Company also maintains an Early Retiree Medical Premium Reimbursement Plan (the Medical
Plan) to provide reimbursement for medical insurance premiums for employees who retire before
their Social Security retirement age. The maximum benefit under the plan is $500 per month per
retired employee for a maximum of 120 months.
Amounts recognized in accumulated other comprehensive income/loss for the qualified defined pension
plan:
Pension Plan | Medical Plan | |||||||||||||||||||||||
Sept. 28, | Sept. 27, | Sept. 26, | Sept. 28, | Sept. 27, | Sept. 26, | |||||||||||||||||||
2008 | 2009 | 2010 | 2008 | 2009 | 2010 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Prior service cost |
$ | 2 | $ | 2 | $ | 2 | $ | (78 | ) | $ | (78 | ) | $ | (78 | ) | |||||||||
Net actuarial gain/(loss) |
(6,269 | ) | 19,258 | 3,653 | $ | (130 | ) | $ | 260 | $ | 143 | |||||||||||||
Total recognized in accumulated other
comprehensive gain/(loss), before tax |
$ | (6,267 | ) | $ | 19,260 | $ | 3,655 | $ | (208 | ) | $ | 182 | $ | 65 | ||||||||||
F-18
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans (contd.)
Pension and Medical Plans (contd.)
The following tables provide a reconciliation of the changes in the pension plans benefit
obligation and fair value of assets for fiscal years ending and a statement of the funded status as
of the fiscal years ended September 27, 2009 and September 26, 2010:
Pension Plan | Medical Plan | |||||||||||||||
Sept. 27, | Sept. 26, | Sept. 27, | Sept. 26, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Change in benefit obligation: |
||||||||||||||||
Beginning balance |
$ | 52,850 | $ | 76,104 | $ | 1,364 | $ | 1,698 | ||||||||
Service cost |
2,294 | 3,302 | 34 | 47 | ||||||||||||
Interest cost |
3,857 | 4,002 | 98 | 91 | ||||||||||||
Actuarial loss |
18,318 | 6,551 | 260 | 157 | ||||||||||||
Benefit payments |
(1,215 | ) | (1,651 | ) | (58 | ) | (65 | ) | ||||||||
Ending balance |
$ | 76,104 | $ | 88,308 | $ | 1,698 | $ | 1,928 | ||||||||
Change in fair value of plan assets: |
||||||||||||||||
Beginning balance |
$ | 47,997 | $ | 53,280 | $ | | $ | | ||||||||
Actual return on plan assets |
2,064 | 4,964 | | | ||||||||||||
Employer contributions |
4,434 | 3,160 | 58 | 65 | ||||||||||||
Benefit payments |
(1,215 | ) | (1,651 | ) | (58 | ) | (65 | ) | ||||||||
Ending balance |
$ | 53,280 | $ | 59,753 | $ | | $ | | ||||||||
Funded status: |
||||||||||||||||
Fair value of plan assets |
$ | 53,280 | $ | 59,753 | $ | | $ | | ||||||||
Projected benefit obligation |
76,104 | 88,308 | 1,698 | 1,928 | ||||||||||||
Under funded |
$ | (22,824 | ) | $ | (28,555 | ) | $ | (1,698 | ) | $ | (1,928 | ) | ||||
Market related value of plan assets is calculated using fair market value, as provided by a
third-party trustee. The plans investments include cash, which earns interest, governmental
securities and corporate bonds and securities.
F-19
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans (contd.)
Pension Plan
The following table provides the components of fiscal 2008, 2009 and 2010 net pension expense:
Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Expected return on assets |
$ | (3,076 | ) | $ | (3,201 | ) | $ | (3,463 | ) | |||
Service cost |
2,632 | 2,294 | 3,302 | |||||||||
Interest cost |
3,504 | 3,857 | 4,002 | |||||||||
Amortization of prior service cost |
(2 | ) | (2 | ) | (2 | ) | ||||||
Amortization of recognized losses |
584 | 197 | 1,397 | |||||||||
Net pension expense |
$ | 3,642 | $ | 3,145 | $ | 5,236 | ||||||
Actuarial assumptions used to determine net pension expense were: | ||||||||||||
Discount rate |
6.25 | % | 7.50 | % | 5.50 | % | ||||||
Rate of increase in compensation levels |
3.00 | % | 3.00 | % | 3.00 | % | ||||||
Expected long-term rate of return on
assets |
6.50 | % | 6.50 | % | 6.50 | % | ||||||
Actuarial assumptions used to determine year-end projected benefit obligation were: | ||||||||||||
Weighted-average discount rate |
7.50 | % | 5.50 | % | 5.00 | % | ||||||
Weighted-average rate of compensation increase |
3.00 | % | 3.00 | % | 3.00 | % |
Expenses recognized for the Pension Plan were $4.0 million, $3.6 million and $5.7 million in
fiscal years 2008, 2009 and 2010, respectively. Pension expenses included trustee and
administrative expenses for the Pension Plan of $0.3 million, $0.4 million and $0.4 million in
fiscal years 2008, 2009 and 2010, respectively.
The Company has adopted and implemented an investment policy for the defined benefit pension
plan that incorporates a strategic long-term asset allocation mix designed to meet the Companys
long-term pension requirements. This asset allocation policy is reviewed annually and, on a
regular basis, actual allocations are rebalanced to the prevailing targets. As of September 26,
2010, the strategic target asset allocation is 67% fixed income and 33% equity. The following
table summarizes actual allocations for the Companys plan at the end of fiscal 2009 and fiscal
2010:
Sept. 27, | Sept. 26, | |||||||
2009 | 2010 | |||||||
(in thousands) | ||||||||
Asset category: |
||||||||
Fixed income |
$ | 37,053 | $ | 41,924 | ||||
Equity |
14,537 | 16,204 | ||||||
Cash and accrued income |
1,690 | 1,625 | ||||||
Total |
$ | 53,280 | $ | 59,753 | ||||
F-20
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans (contd.)
Pension Plan (contd.)
As of September 26, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||
Assets/Liabilities | Observable Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Asset category: |
||||||||||||||||
Fixed income |
$ | 11,644 | $ | 30,280 | $ | | $ | 41,924 | ||||||||
Equity: |
||||||||||||||||
Small cap enhanced core
fund |
| | 2,575 | 2,575 | ||||||||||||
Mid cap enhanced core fund |
| | 3,927 | 3,927 | ||||||||||||
Large cap enhanced core
fund |
| | 9,702 | 9,702 | ||||||||||||
Cash and accrued income |
1,625 | | | 1,625 | ||||||||||||
$ | 13,269 | $ | 30,280 | $ | 16,204 | $ | 59,753 | |||||||||
The above table sets forth by level, within the fair value hierarchy, the Pension Plans
assets at fair value. The Company was unable to obtain the information necessary to prepare a
reconciliation of the beginning and ending balances for investments
classified as Level 3.
Generally accepted accounting principals (GAAP) establishes a fair value hierarchy that
priorities the inputs used to measure fair value. The three levels of the fair value hierarchy
defined in the standards are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities;
Level 2 Pricing inputs are other than quoted prices in active markets included in Level 1,
which are either directly or indirectly observable;
Level 3 Unobservable pricing inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
F-21
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans (contd.)
Pension Plan (contd.)
The investment policy is for the fund to earn long-term investment returns in excess of
inflation, which is at least equal to the actuarial discount rate used to calculate the plans
liability. The protection of principal is the focus of the investment policy.
The Company expects to contribute approximately $2.6 million to its defined benefit pension
plan during fiscal 2011.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are
expected to be paid:
Pension | ||||
Benefits | ||||
(in thousands) | ||||
2011 |
$ | 2,933 | ||
2012 |
$ | 3,538 | ||
2013 |
$ | 4,317 | ||
2014 |
$ | 3,966 | ||
2015 |
$ | 4,211 | ||
2016 - 2020 |
$ | 27,908 |
Medical Plan
The following table provides the components of fiscal 2008, 2009 and 2010 net periodic benefit
costs:
Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Service cost |
$ | 41 | $ | 34 | $ | 47 | ||||||
Interest cost |
88 | 98 | 91 | |||||||||
Amortization of prior service cost |
78 | 78 | 78 | |||||||||
Amortization of recognized losses |
7 | | 13 | |||||||||
Net periodic benefit costs |
$ | 214 | $ | 210 | $ | 229 | ||||||
Actuarial assumptions used to determine net periodic benefit costs were: | ||||||||||||
Discount rate |
6.25 | % | 7.50 | % | 5.50 | % | ||||||
Actuarial assumptions used to determine year-end projected benefit obligation were: | ||||||||||||
Weighted-average discount rate |
7.50 | % | 5.50 | % | 4.50 | % |
F-22
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 Retirement Plans (contd.)
Medical Plan (contd.)
Expenses recognized for the medical plan were $0.2 million in each fiscal year 2008, 2009 and
2010.
The Company expects to contribute approximately $0.1 million to the medical plan during fiscal
2011.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are
expected to be paid:
Medical | ||||
Benefits | ||||
(in thousands) | ||||
2011 |
$ | 106 | ||
2012 |
$ | 122 | ||
2013 |
$ | 137 | ||
2014 |
$ | 139 | ||
2015 |
$ | 129 | ||
2016 - 2020 |
$ | 686 |
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan covering
substantially all non-union employees. Union employees may participate if their collective
bargaining agreement specifically provides for their inclusion. The Company may contribute up to
7.5% of total compensation paid or accrued during the year to each plan participant subject to
limitations imposed by the Internal Revenue Code. The Company recognized expenses for this plan in
the amount of $1.2 million in fiscal 2008, $1.0 million in fiscal 2009 and $0.5 million in fiscal
2010.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement plans in accordance
with the provisions of the various labor agreements that govern the plans. Contributions to these
plans are generally based on the number of hours worked. Information for these plans as to vested
and non-vested accumulated benefits and net assets available for benefits is not available.
The Companys expense for these retirement plans and health and welfare plans consisted of the
following:
Sept. 28, | Sept. 27, | Sept. 26, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Multi-Employer Pension Plans |
$ | 40,508 | $ | 40,294 | $ | 37,567 | ||||||
Multi-Employer Health and Welfare |
71,342 | 73,459 | 83,437 | |||||||||
Total Multi-Employer Benefits |
$ | 111,850 | $ | 113,753 | $ | 121,004 | ||||||
The Companys employer contributions fluctuate as a result of changes to employer
contributions outlined in collective bargaining agreements.
F-23
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 8 Labor Relations
The Companys collective bargaining agreements with the UFCW were renewed in March 2007 and
extends through March 2011. The Companys collective bargaining agreement with the International
Brotherhood of Teamsters was renewed in October 2010 and expires in September 2015. Substantially
all of our employees are covered by collective bargaining agreements.
Note 9 Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity of these
instruments.
Receivables
The carrying amount approximates fair value because of the short-term maturity of these
instruments.
Long-Term Receivable, Current Portion
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 and the 7.75% Senior Notes, are based on quoted
market prices. Although market quotes for the fair value of the Companys 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 | ||||||||
September 26, 2010 | ||||||||
(In thousands) | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
Cash and cash equivalents |
$ | 325,005 | $ | 325,005 | ||||
Receivables |
$ | 35,614 | $ | 35,614 | ||||
Long-term receivable, current portion |
$ | 16,001 | $ | 16,001 | ||||
Long-term debt |
$ | 810,000 | $ | 819,413 | ||||
Capitalized lease obligations |
$ | 3,768 | $ | 3,768 |
F-24
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
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 has been recorded in
the Companys consolidated financial statements.
Note 11 Long-Term Receivable
During the second quarter of fiscal 2010, Markets entered into the Comprehensive Tri-Party
Termination Infrastructure Reimbursement Agreement (the Termination Agreement) with the Inland
Valley Development Agency (the IVDA) and Hillwood/San Bernardino, LLC (Hillwood) to terminate
commitments with Hillwood under certain obligations and settle outstanding financial issues among
the parties arising from several agreements previously entered into with Hillwood and the IVDA in
connection with the development of the Distribution Center. As part of the Termination Agreement,
the amount previously due from the IVDA for tax increment reimbursement related to the construction
of the Distribution Center was negotiated downward from
$18.9 million to $17.7 million. The $17.7 million
receivable was classified as a current asset and the $1.2 million adjustment out of long-term
receivable was recorded to Building and improvements in the Companys June 27, 2010 consolidated
balance sheet. Under the Termination Agreement, Markets paid approximately $0.7 million to
Hillwood as reimbursement for shared improvement costs and any further financial commitments
between Markets and Hillwood were terminated. The $0.7 million reimbursement was recorded to
Buildings and improvements in the Companys consolidated balance sheet.
F-25
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 12 Deferred Compensation Plan
The Company maintains a deferred compensation plan for certain executives of Markets. Mr.
Jack H. Brown is not eligible to receive awards. Awards under the plan are for units that have an
assigned value. Awards under the plan vest after five years, except that upon a participants
early retirement, permanent total disability or death, awards are considered partially vested at
the rate of 20% for each year of employment following the grant. If a participant voluntarily
terminates his or her employment, or is terminated for cause, any awards not fully vested under the
plan will terminate and no payment will be made. As of September 27, 2009 and September 26, 2010,
there were 899,600 and 889,600 units outstanding, respectively. The Company recognized an expense
for the plan of $12.1 million, $11.0 million and $7.9 million in 2008, 2009 and 2010, respectively.
Note 13 Related Party Transactions
On both September 25, 2008 and November 17, 2009, the Company paid a $5.0 million
dividend to La Cadena.
The Company paid legal fees of $2.8 million, $1.8 million and $2.4 million in fiscal 2008,
2009 and 2010, respectively, to the law firm of Varner & Brandt LLP. Mr. Bruce D. Varner is the
Senior Partner of Varner & Brandt LLP and is also a director of the Company. Mr. Varner received
director fees of $54,000 in each fiscal year 2008, 2009 and 2010.
Note 14 Stock Redemption
On September 25, 2008, the Company redeemed 618 shares of its Class A Common Stock for
$8.2 million. The redemption was for shares distributed to the Moseley Trust by La Cadena.
On December 28, 2009, the Company redeemed 600 shares of its Class A Common Stock for $8.0
million. The redemption was for shares distributed to the Moseley Trust by La Cadena.
As of September 26, 2010, the Company had the ability under the Credit Facility to make
restricted payments, including dividends of up to $38.0 million.
Note 15 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 assumption 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 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.
Markets and Super Rx have similar customers, regulatory requirements and delivery methods to
customers and are included together as one reportable segment. Prior to the Dairy Transaction,
Dairies was a separate reportable segment of the Company. As operating activities of Dairies have
ceased and operating results from September 28, 2009 to October 11, 2009 are
not material to the overall financial statements of the Company taken as a whole, the Company no
longer has separate reportable segments to disclose.
F-26
Table of Contents
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 16 Quarterly Results (unaudited)
Quarterly results for fiscal 2008, 2009 and 2010 are as follows (in thousands except share and
per share amounts):
Average | ||||||||||||||||||||||||
Gross | Operating | Net | Shares | Earnings | ||||||||||||||||||||
Sales | Profit | Profit | Income | Outstanding | Per Share | |||||||||||||||||||
Fiscal 2008 Quarters |
||||||||||||||||||||||||
13 weeks ended 12/30/07 |
$ | 943,030 | $ | 244,429 | $ | 27,203 | $ | 10,751 | 35,770 | $ | 300.56 | |||||||||||||
13 weeks ended 03/30/08 |
925,361 | 256,278 | 34,581 | 13,531 | 35,770 | 378.28 | ||||||||||||||||||
13 weeks ended 06/29/08 |
932,668 | 249,221 | 28,372 | 9,179 | 35,770 | 256.61 | ||||||||||||||||||
13 weeks ended 09/28/08 |
940,195 | 248,252 | 25,340 | 7,169 | 35,750 | 200.53 | ||||||||||||||||||
$ | 3,741,254 | $ | 998,180 | $ | 115,496 | $ | 40,630 | 35,765 | $ | 1,136.03 | ||||||||||||||
Fiscal 2009 Quarters |
||||||||||||||||||||||||
13 weeks ended 12/28/08 |
$ | 959,253 | $ | 246,862 | $ | 22,498 | $ | 3,541 | 35,152 | $ | 100.73 | |||||||||||||
13 weeks ended 03/29/09 |
930,996 | 255,826 | 35,962 | 11,121 | 35,152 | 316.37 | ||||||||||||||||||
13 weeks ended 06/28/09 |
928,641 | 254,216 | 37,793 | 15,142 | 35,152 | 430.76 | ||||||||||||||||||
13 weeks ended 09/27/09 |
947,150 | 245,132 | 25,055 | 4,965 | 35,152 | 141.24 | ||||||||||||||||||
$ | 3,766,040 | $ | 1,002,036 | $ | 121,308 | $ | 34,769 | 35,152 | $ | 989.10 | ||||||||||||||
Fiscal 2010 Quarters |
||||||||||||||||||||||||
13 weeks ended 12/27/09 |
$ | 923,864 | $ | 238,150 | $ | 28,146 | $ | 6,711 | 35,152 | $ | 190.91 | |||||||||||||
13 weeks ended 03/28/10 |
885,537 | 236,445 | 27,085 | 5,967 | 34,572 | 172.60 | ||||||||||||||||||
13 weeks ended 06/27/10 |
900,044 | 245,657 | 27,474 | 5,982 | 34,552 | 173.13 | ||||||||||||||||||
13 weeks ended 09/26/10 |
897,394 | 249,696 | 26,119 | 5,924 | 34,552 | 171.45 | ||||||||||||||||||
$ | 3,606,839 | $ | 969,948 | $ | 108,824 | $ | 24,584 | 34,707 | $ | 708.33 | ||||||||||||||
F-27