10-K 1 d235577d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: September 25, 2011

OR

 

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

For the transition from              to             

Commission file number 001-13222

 

 

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware   33-0350671

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

301 S. Tippecanoe Avenue

San Bernardino, California

  92408
(Address of principal executive offices)   (Zip Code)

Registrant’s 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  ¨    No  x.

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  ¨    No  x.

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

Indicate by check mark 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 registrant’s 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  x    No  ¨.

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  x    No  ¨.

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x.

No voting stock of the registrant is held by non-affiliates of the registrant.

Number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of December 13, 2011 – Class A Common Stock – 33,837 shares.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 


Table of Contents

STATER BROS. HOLDINGS INC.

FORM 10-K

TABLE OF CONTENTS

 

         Page
Number
 
    PART I       

Item 1

 

Business

     3   

Item 1A

 

Risk Factors

     8   

Item 1B

 

Unresolved Staff Comments

     9   

Item 2

 

Properties

     9   

Item 3

 

Legal Proceedings

     10   

Item 4

 

Submission of Matters to a Vote of Security Holders

     10   
  PART II   

Item 5

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     11   

Item 6

 

Selected Financial Data

     11   

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13   

Item 7A

 

Quantitative and Qualitative Disclosure about Market Risk

     23   

Item 8

 

Financial Statements and Supplementary Data

     24   

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     24   

Item 9A

 

Controls and Procedures

     24   

Item 9B

 

Other Information

     25   
  PART III   

Item 10

 

Directors and Executive Officers of the Registrant

     26   

Item 11

 

Executive Compensation

     28   

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     37   

Item 13

 

Certain Relationships and Related Transactions

     38   

Item 14

 

Independent Registered Public Accounting Firm Fees and Services

     38   
  PART IV   

Item 15

 

Exhibits and Financial Statement Schedules

     39   
 

Signatures

     43   

 

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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 chain of 167 supermarkets located throughout Southern California. We provide our customers with high quality grocery, health and general merchandise products at everyday 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, 89 have bakery departments, 85 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 the general contractor for all of our new store construction and store remodels. Prior to October 11, 2009, most of the fluid 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 fluid 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 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 the 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 77% 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 SEC’s website at http://www.sec.gov. The public may read and copy any of our reports filed with the SEC at the SEC’s 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.

 

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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 35,000 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 September 25, 2011, September 26, 2010 and September 27, 2009.

Our supermarkets had approximately 5.8 million total square feet at September 25, 2011, September 26, 2010 and September 27, 2009.

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 as 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 35% 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 store’s 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.

 

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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. 30,
2007
    Sept. 28,
2008
     Sept. 27,
2009
    Sept. 26,
2010
     Sept. 25,
2011
 

Number of supermarkets:

            

Opened

     3        1         3        —           —     

Closed

     (1     —           (1     —           —     

Total at end of year

     164        165         167        167         167   

Minor remodel

     6        3         3        2         2   

Major remodel

     12        10         9        4         1   

In addition to the above information on our supermarket openings, closings and remodels we have also had store replacements. In fiscal 2011, we closed an older store in Grand Terrace, California and replaced it with a new store. In fiscal 2009, we replaced an older store in Ontario, California and replaced it with a new store in Chino, California both the old store and new store were within one mile of each other.

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 77% of the products offered for sale in our supermarkets are received through our Distribution Center.

Our stores are located an average of 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 25, 2011, we operated approximately 135 tractors, of which we owned four and leased the remaining 131. We operated 492 trailers, all of which we owned.

 

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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 products by distributing them through our Distribution Center.

Retail Operations

Our supermarkets are well maintained, have adequate off-street parking and open between 6:00 and 7:00 in the morning and close between 10:00 and 12:00 in the evening, seven days a week. We are closed on Christmas Day and have limited hours on Thanksgiving Day. Because we operate each of 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 supermarket’s 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 and produce, and where applicable for bakery, service deli and 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.

 

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Table of Contents
Item 1. Business (contd.)

 

Employees

We have approximately 16,500 employees of which approximately 800 are management and administrative employees and 15,700 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.

Our collective bargaining agreements with the UFCW were renewed in October 2011 and expire in March 2014. Our Teamsters’ collective bargaining agreements were renewed in October 2010 and expire 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 an 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 supermarket 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 supermarket format 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 $141,000 in environmental remediation costs over the past three years. Remediation costs were approximately $61,000 in fiscal 2009, $54,000 in fiscal 2010 and $26,000 in fiscal 2011. 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. All of whom compete with us on the basis of location, quality of products, service, price, product variety and store condition. Our primary traditional supermarket format competitors include Vons, Albertsons, Ralphs, and a number of independent supermarket operators and we face competition from “big box” format retailers which include Wal Mart, Target, Costco and Winco. We also compete with restaurants and fast food chains as household food expenditures are directed to the purchase of food prepared outside the home.

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 supermarket format items. Some of our competitors have greater resources than us and are not unionized which results in their having 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 marketing area changes frequently as competitors open and close supermarket locations and introduce new pricing strategies. We anticipate continued competition from “big box” format retailers, our traditional supermarket format competitors and other smaller format competitors.

Our performance is affected by inflation and deflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. Our costs fluctuate for increases and decreases in commodities such as fuel, plastic and other product categories. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

 

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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 of our Distribution Center and corporate offices as of September 25, 2011.

 

Classification

   Square Feet  

Distribution

     2,206,000   

Administrative offices

     176,000   
  

 

 

 

Total

     2,382,000   
  

 

 

 

As of September 25, 2011, we owned 49 of our supermarkets and leased the remaining 118 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 25, 2011.

 

     No. of Stores      Total Square Feet  

County

   Total      Owned      Leased      Under
25,000
     25,000-
29,999
     30,000-
34,999
     35,000-
40,000
     Over
40,000
 

San Bernardino

     52         14         38         5         15         5         14         13   

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         49         118         21         49         11         29         57   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. O’Connor, 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. The full settlement amount was recorded in our consolidated financial statements for our fiscal year ended September 26, 2010. During the third quarter of fiscal 2011, we paid the previously recorded settlement amount.

On November 5, 2010, an action by Diego De Jesus Martinez was filed in the Superior Court of the State of California for the County of Los Angeles against Markets (“Martinez Case”) seeking individual and potential class action monetary damages for alleged discrepancies between the actual time worked by certain employees and the amounts recorded on Markets’ time clock reports on payroll records. On October 26, 2011 following a mediation, the Martinez Case was settled subject to court approval of the settlement and the full settlement amount has been recorded in our consolidated financial statements for the fiscal year ended September 25, 2011.

 

Item 4. Submission of Matters to a Vote of Security Holders

None

 

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Table of Contents

PART II

 

Item 5. Market for the Registrant’s 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         33,837   

La Cadena holds 33,837 shares, or 100% of Holdings’ outstanding Class A Common Stock.

 

  (c) Dividends

As of September 25, 2011, we had the ability and right to pay restricted payments, including dividends, of up to $32.5 million.

Dividends of $5.0 million were paid in both fiscal 2010 and fiscal 2011.

 

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 30, 2007, September 28, 2008, September 27, 2009, September 26, 2010 and September 25, 2011. The information set forth below should be read in conjunction with “Management’s 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. 30, (4)     Sept. 28, (4)     Sept. 27, (4)     Sept. 26, (4)     Sept. 25, (4)  
    2007     2008     2009     2010     2011  
    (In thousands, except per share amounts)  

Statement of Earnings Data:

         

Sales

  $ 3,674,427      $ 3,741,254      $ 3,766,040      $ 3,606,839      $ 3,693,306   

Cost of goods sold

    2,674,563        2,743,074        2,764,004        2,636,891        2,702,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    999,864        998,180        1,002,036        969,948        990,892   

Selling, general and administrative expenses

    818,863        829,697        827,192        819,698        841,527   

Gain on sale of dairy assets

    —          —          —          (9,396     —     

Depreciation and amortization

    48,715        52,987        53,536        50,822        48,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    867,578        882,684        880,728        861,124        889,940   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    132,286        115,496        121,308        108,824        100,952   

Interest and other income

    13,927        8,598        1,194        863        790   

Interest expense

    (59,586     (57,464     (68,252     (68,516     (55,521

Interest expense related to purchase of debt

    (3,953     —          —          —          (1,775
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    82,674        66,630        54,250        41,171        44,446   

Income taxes

    33,279        26,000        19,481        16,587        18,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 49,395      $ 40,630      $ 34,769      $ 24,584      $ 26,290   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per average common shares outstanding

  $ 1,356.19      $ 1,136.03      $ 989.10      $ 708.33      $ 770.79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Item 6. Selected Financial Data (contd.)

 

    Fiscal Year Ended  
    Sept. 30,(4)     Sept. 28,(4)     Sept. 27,(4)     Sept. 26,(4)     Sept. 25,(4)  
    2007     2008     2009     2010     2011  
    (In thousands, except per share amounts)  

Balance Sheet Data (end of fiscal year):

         

Working capital

  $ 304,407      $ 234,032      $ 274,353      $ 206,123      $ 200,029   

Total assets

    1,269,825        1,276,227        1,314,735        1,322,787        1,232,767   

Long-term debt

    810,000        810,000        810,000        677,750        642,577   

Long-term capitalized lease obligations

    6,252        5,104        3,768        2,206        1,099   

Other long-term liabilities

    113,005        113,100        144,228        152,272        162,865   

Stockholder’s equity

    9,279        40,506        63,755        73,133        80,764   

Dividends paid per share, Class A common stock

  $ 139.78      $ 142.24      $ —        $ 144.71      $ 147.77   

Cash Flow Data:

         

Cash provided by operating activities

    171,507        57,466        122,410        87,101        91,821   

Cash provided by (used in) financing activities

    81,901        (14,230     (1,149     (14,336     (153,352

Cash provided by (used in) investing activities

    (174,740     (175,837     (63,498     55,326        (27,690

Other Operating and Financial Data:

         

Sales increases (decreases):

         

Total sales

    4.7     1.8     0.7     (4.2 )%      2.4

Like stores sales (comparable 52-weeks)(1)

    1.7     2.5     0.0     (2.4 )%      2.5

Operating profit

  $ 132,286      $ 115,496      $ 121,308      $ 108,824      $ 100,952   

Fixed charge coverage ratio(2)

    1.77        1.61        1.58        1.44        1.53   

Gross profit as a percentage of sales

    27.21     26.68     26.61     26.89     26.83

Selling, general and administrative expenses as a percentage of sales

    22.29     22.18     21.96     22.72     22.79

Store Data:(3)

         

Number of stores (at end of fiscal year)

    164        165        167        167        167   

Average sales per store (000’s)

  $ 21,860      $ 21,961      $ 21,945      $ 21,375      $ 21,912   

Average store size:

         

Total square feet

    34,028        34,178        34,405        34,497        34,507   

Selling square feet

    24,165        24,237        24,340        24,386        24,454   

Total square feet (at end of fiscal year) (000’s)

    5,599        5,644        5,761        5,761        5,779   

Total selling square feet (at end of fiscal year) (000’s)

    3,972        4,001        4,072        4,072        4,084   

Sales per average square foot

  $ 642      $ 643      $ 638      $ 620      $ 635   

Sales per average selling square foot

  $ 905      $ 906      $ 902      $ 877      $ 896   

 

(1) 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 year’s weekly sales that correspond to the weeks the stores were open in our previous year. For replacement store sales, we include sales for the entire year for both the replaced and the replacement store 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.

 

(footnotes continued on following page)

 

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Item 6. Selected Financial Data (contd.)

 

(2) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and amortization of previously capitalized interest. Fixed charges consist of interest expense whether expensed or capitalized, amortization of debt issuance costs and such portion of rental expense as can be deemed by management to be representative of the interest factor in the particular case. Exhibit 12.1 included in this Form 10-K shows the calculation of the fixed charge coverage ratio.
(3) 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.
(4) Fiscal years 2008, 2009, 2010 and 2011 were 52-week years while fiscal 2007 was a 53-week year.

 

Item 7. Management’s 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 5.50% for fiscal 2009, 5.00% for fiscal 2010 and 4.50% for fiscal 2011. 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 2011, if a rate of 3.50% was used to discount the reserves, the reserves for self insurance would have been $1.9 million higher than the reserves calculated at a 4.50% discount rate. If a rate of 5.50% was used in fiscal 2011 to discount the reserves, the reserves for self insurance would have been $1.8 million lower than the reserves calculated at a 4.50% 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 6 – 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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Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Critical Accounting Policies (contd.)

Employee Benefit Plans (contd.)

 

For fiscal 2011, the discount rate used to calculate the net periodic pension cost was 4.50%. If the rate used to discount the net periodic pension cost was 3.50%, net periodic pension cost would have been $0.9 million higher than the cost calculated at a 4.50% discount rate. If the rate used to calculate the net periodic pension cost was 5.50%, net periodic pension cost would have been $0.8 million lower than the cost calculated at the 4.50% 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.

 

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Item 7. Management’s 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

While we faced continued economic challenges due to the high unemployment in our marketing area and a stagnate economy, we were able to grow our net sales by 2.4% over the prior year net sales and our customer visits increased as well. We were able to do this by holding our retail prices against inflation to the extent possible and by focusing our promotional dollars to items we felt would drive traffic in the stores. In August 2011, we opened a replacement supermarket in Grand Terrace, California which replaced a smaller existing supermarket located near the replacement supermarket.

We remain committed, during these tough times, to a strategy of retaining customer counts by continuing to provide exceptional customer service and value to our customers on their purchases from our supermarkets.

Our marketing area of Southern California continues to be highly competitive with unemployment levels higher than the national average. These conditions will continue to put 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, from our traditional supermarket format competitors Vons, Albertsons and Ralphs and from independent supermarket operators.

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, we ceased all dairy manufacturing operations.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

 

Results of Operations

Sales and Gross Profit (in thousands)

 

     Fiscal Year Ended     Change  
                       2010 to
2009
    2011 to
2010
 
     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
     
           Dollar     %     Dollar      %  

Sales

   $ 3,766,040      $ 3,606,839      $ 3,693,306      $ (159,201     (4.23 )%    $ 86,467         2.40

Gross Profit

   $ 1,002,036      $ 969,948      $ 990,892      $ (32,088     (3.20 )%    $ 20,944         2.16

as a % of sales

     26.61     26.89     26.83         

Sales

Overall, our sales were $86.5 million higher in fiscal 2011 versus fiscal 2010. Fiscal 2010 sales included $3.5 million in sales from Dairies before the Dairy Transaction in October 2010. Sales in our supermarkets increased $90.0 million over the previous year.

$93.2 million of the decrease in fiscal 2010 versus fiscal 2009 sales is the result of lost sales from Dairies as a result of the Dairy Transaction. The remaining reduction in sales was from a reduction in like store sales in fiscal 2010 compared to fiscal 2009 of $89.9 million partially offset in part by sales from newly opened stores not included in like store sales.

Like Store Sales

We calculate like store sales by comparing year-to-year sales for stores that are opened in both years. For stores that were not opened for the entire previous year periods, we only include the current year’s 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 year’s weekly sales that correspond to the weeks the stores were opened in the current year. For replacement stores we include sales for the entire year for both the replaced and replacement store in our like store sales calculation.

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 increased $90.0 million or 2.50% in fiscal 2011 compared to fiscal 2010. We attribute the increase in like store sales to our marketing efforts which provided increased value to our customers. Like store sales decreased $89.9 million or 2.45% in fiscal 2010 over fiscal 2009.

Gross Profit

Our gross profit, as a percentage of sales, in 2011 compared to 2010 decreased somewhat as we held margin in order to retain and grow customer visits to our supermarkets.

The increase in our gross profit margin, as a percentage of sales, 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 promotional dollars to specific product categories.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

 

Operating Expenses and Income (in thousands)

 

     Fiscal Year Ended     Change  
     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
    2010 to
2009
    2011 to
2010
 
            
                       Dollar     %     Dollar     %  

Operating Expenses:

              

Selling, general and administrative expenses

   $ 827,192      $ 819,698      $ 841,527      $ (7,494     (0.91 )%    $ 21,829        2.66

as a % of sales

     21.97     22.72     22.79        

Gain on sale of assets

     —        $ (9,396   $ —          (9,396     —        $ 9,396        (100.00 )% 

as a % of sales

     —          (0.26 )%      —             

Depreciation and amortization

   $ 53,536      $ 50,822      $ 48,413      $ (2,714     (5.07 )%    $ (2,409     (4.74 )% 

as a % of sales

     1.42     1.41     1.31        

Operating profit

   $ 121,308      $ 108,824      $ 100,952      $ (12,484     (10.29 )%    $ (7,872     (7.23 )% 

as a % of sales

     3.22     3.02     2.73        

Selling, General and Administrative Expenses

Selling, general and administrative expenses, as a percentage of sales, in fiscal 2011 compared to fiscal 2010 are comparable at 22.79% versus 22.72%, respectively. We had contractual increases in union insurance of 0.40%, as a percentage of sales, an increase in transaction service costs of 0.07%, as a percentage of sales and a settlement of a lawsuit related to a class action labor claim (See “Item 3 – Legal Proceedings” for further discussion of this claim). These increases were partially offset by reductions in direct labor and other labor costs as well as reductions in our electric rates in fiscal 2011.

The increase in selling, general and administrative expenses, as a percentage of sales, in fiscal 2010 compared to fiscal 2009 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 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 fiscal year 2011, 2010 and 2009.

 

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Item 7. Management’s 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 in fiscal 2010 was approximately $9.4 million.

Depreciation and Amortization

Depreciation expense was $48.4 million, $50.8 million and $53.5 million in fiscal 2011, 2010 and 2009, respectively. The reduction in depreciation in fiscal 2011 compared to 2010 is due to more assets being fully depreciated. The sale of dairy assets in fiscal 2010 reduced depreciation expense when compared to fiscal 2009. Included in cost of goods sold is depreciation expense related to our warehousing and distribution activities of $11.2 million, $11.3 million and $14.6 million in fiscal years 2011, 2010 and 2009, respectively. Our fiscal 2009 cost of goods sold included depreciation from our dairy operations.

Interest Income

Interest income was $0.7 million, $0.4 million and $0.5 million in fiscal years 2011, 2010 and 2009, respectively.

Interest Expense

Interest expense amounted to $55.5 million, $68.5 million and $68.3 million for the 2011, 2010 and 2009 fiscal years, respectively. Included in interest expense for fiscal 2011 was an approximate $3.5 million write off of remaining deferred offering costs when we early retired our $525 million 8.25% Senior Notes due 2012. The reduction in interest expense in fiscal 2011 compared to fiscal 2010 is due to the reduction in long term debt of approximately $128.6 million and refinancing of the majority of our remaining outstanding debt at a lower overall interest rate. Interest capitalized during construction projects, which reduces interest expense, was $0.3 million and $0.5 million in fiscal years 2011 and 2009, respectively. We had no significant capitalized interest in fiscal 2010.

Interest Related to Debt Purchase

During fiscal 2011, we paid a tender premium of approximately $1.8 million related to our tender offer to early redeem a significant portion of our then outstanding $525.0 million 8.125% Senior Notes.

Income Before Income Taxes

Income before income taxes amounted to $44.4 million, $41.2 million and $54.3 million in fiscal 2011, 2010 and 2009, respectively.

Income Taxes

Income taxes amounted to $18.2 million, $16.6 million and $19.5 million in fiscal 2011, 2010 and 2009, respectively. Our effective tax rate was 40.8%, 40.3% and 35.9% for fiscal years 2011, 2010 and 2009, respectively. The increased effective tax rate in fiscal 2011 compared to fiscal 2010 is due to less tax credits being available and higher taxable income amount in the current year compared to the prior year. The reduced effective tax rate in fiscal 2009 compared to fiscal 2010 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.

Net Income

Net income for fiscal 2011 amounted to $26.3 million, compared to $24.6 million in fiscal 2010 and $34.8 million in fiscal 2009.

 

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Item 7. Management’s 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 25, 2011, we had $49.7 million of outstanding letters of credit and we had $50.3 million available under our credit facility.

We had no short-term borrowings outstanding as of September 25, 2011 and we did not incur any short-term borrowings during fiscal 2011.

Working capital amounted to $200.0 million at September 25, 2011 and $206.1 million at September 26, 2010. Our current ratios were 1.58:1 and 1.49:1 at September 25, 2011 and September 26, 2010, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for fiscal 2011 was $91.8 million compared to $87.1 million for fiscal 2010 and $122.4 million for fiscal 2009.

In fiscal 2011, we increased inventory by $27.4 million compared to fiscal 2010. The increase in inventory was primarily due to our decision to increase inventory levels on non-perishable items in order to mitigate some effects of inflation.

During fiscal 2011, we expended $44.3 million in capital expenditures which included the construction of a replacement store in Grand Terrace, California and the purchase of two former Albertsons stores that will be remodeled and open as replacements for existing Stater Bros.’ supermarkets in fiscal 2012.

In the first quarter of 2011, we issued $255.0 million of 7.375% Senior Notes due 2012 and a $145.0 million secured term loan due 2014. We used the proceeds from these issuances and cash on hand to early retire our $525.0 million 8.125% Senior Notes due 2012.

Significant sources of cash from operating activities in fiscal 2010, included our net income adjusted 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.

We believe that capital expenditures for fiscal 2012 will be approximately $52.0 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 2012 capital expenditures.

Expected Capital Expenditures Fiscal 2012

(In thousands)

 

New store construction

   $ 13,715   

Store remodels

     13,146   

MIS equipment and software

     7,791   

Store equipment

     14,300   

Distribution equipment

     1,509   

Transportation equipment

     1,558   
  

 

 

 
   $ 52,019   
  

 

 

 

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.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

 

Credit Facility

On November 29, 2010, we entered into a $245.0 million senior secured credit facility (the “Credit Facility”) with Bank of America, N.A., as administrative agent and a lender. The Credit Facility consists of a four-year $145.0 million term loan (the “Term Loan”) and a $100.0 million revolving credit facility (the “Revolving Credit Facility”). The Credit Facility replaced our existing $100.0 million credit facility as of November 29, 2010. The Credit Facility is secured by substantially all of the Company’s personal property excluding certain intangible assets consisting of trademarks and shares of capital stock. The Credit Facility is guaranteed by the Company, Development, Super Rx and Dairies.

The Term Loan bears interest at Eurodollar Rate plus 2.50% or the Base rate plus 1.50% (as defined in the Credit Facility) and the interest 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 Credit Facility. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the Credit Facility is held until the Term Loan is paid in full. We incurred $2.0 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 Revolving Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the 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 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.

Loans under the 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 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 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 Credit Facility requires us to meet minimum shareholder’s equity and EBITDA tests. The 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 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.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Credit Facility (contd.)

 

As of September 25, 2011, we had $49.7 million of outstanding letters of credit and had $50.3 million available under the credit facility.

As of September 25, 2011, we had $29.7 million of additional mandatory principal payments from excess cash flow as calculated under our Term Loan which is payable in our second quarter of fiscal 2012 and we have included this amount in “Current portion of long-term debt” in our consolidated balance sheets in the accompanying Audited Consolidated Financial Statements contained herein.

The Credit Facility will cease to be available and will be payable in full in November 2014.

Labor Relations

The UFCW’s collective bargaining agreements were renewed in October 2011 and expire in March 2014. The Teamsters’ collective bargaining agreements were renewed in October 2010 and expire 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and operating leases as disclosed in “Note 4 – 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. Management’s 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 25, 2011.

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000 $0,000,000
     Contractual Cash Obligations
(In thousands)
 
     Total      Less than
1 Year
     1-3 Years      4-5 Years      After
5 Years
 

Term Loan due November 2014 (1)

              

Principal

   $ 141,375       $ 38,798       $ 23,563       $ 79,014       $ —     

Interest

     11,448         4,999         5,378         1,071         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     152,823         43,797         28,941         80,085         —     

7.75% Senior Notes due April 2015

              

Principal

     285,000         —           —           285,000         —     

Interest

     88,350         22,088         44,175         22,087         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     373,350         22,088         44,175         307,087         —     

7.375% Senior Notes due November 2018

              

Principal

     255,000         —           —           —           255,000   

Interest

     141,047         18,806         37,613         37,613         47,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     396,047         18,806         37,613         37,613         302,015   

Capital lease obligations (2)

              

Principal

     2,206         1,107         1,099        
—  
  
     —     

Interest

     456         296         160         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,662         1,403         1,259         —           —     

Operating leases (2)

     348,635         38,730         66,519         53,021         190,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,273,517       $ 124,824       $ 178,507       $ 477,806       $ 492,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000 $0,000,000
     Other Commercial Commitments
(In thousands)
 
     Total      Less than
1 Year
     1-3 Years      4-5 Years      After
5 Years
 

Standby letters of credit (3)

   $        49,737       $      49,737       $       —         $       —         $       —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other commercial commitments

   $ 49,737       $ 49,737       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of September 25, 2011, interest on our Term Loan is based on the Eurodollar Rate plus 2.500% and consisted of a ninety day rate of 2.746% on approximately $1.8 million and a twelve month rate of 3.287% on approximately $139.6 million. For purposes of contractual cash obligations shown here, we have assumed the ninety day and twelve month interest rates as of September 25, 2011 for the respective assumed short-term and long-term portions of our Term Loan.
(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) Standby letters of credit are committed as security for workers’ compensation. Outstanding letters of credit expire between September 2011 and February 2012.

 

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Item 7. Management’s 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 our Term Loan (once 90 day and annual rates are chosen), our 7.75% Senior Notes due April 2015, our 7.375% Senior Notes due November 2018 and our capital lease obligations. In general, the fair value of fixed rate debt will increase as the market rate of interest decreases and will decrease as the market rate of interest increases. While interest rate changes will impact the market value risk of our bonds, such changes in the market value of our bonds do not affect our earnings or cash flows. Our earnings and our cash flows may be affected to the extent the interest rate on our Term Loan changes at each interest rate renewal period. We have not engaged in any interest rate swap agreements, derivative financial instruments or other type of financial transactions to manage interest rate risk.

 

     Expected Year of Maturity  
     (In thousands)  
     2012     2013     2014     2015     2016     Thereafter     Fair Value  

Long-term debt and capital lease obligations

   $ 39,905      $ 9,861      $ 14,800      $ 364,015      $ —        $ 255,000      $ 696,294   

Average interest rate

     6.78     6.93     6.90     7.38     7.38     7.37  

 

23


Table of Contents
Item 8. Financial Statements and Supplementary Data

Information called for by this item is set forth in our 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

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets at September 26, 2010 and September 25, 2011

   F-3

Fiscal years ended September 27, 2009, September 26, 2010 and September 25, 2011:

  

Consolidated Statements of Income

   F-5

Consolidated Statements of Cash Flows

   F-6

Consolidated Statements of Stockholder’s Equity

   F-7

Notes to Consolidated Financial Statements

   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 SEC’s 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 this evaluation by our Chief Executive Officer and our Chief Financial Officer, we concluded that the Company’s disclosure controls and procedures were effective as of September 25, 2011.

Changes in Internal Controls Over Financial Reporting

During the fourth quarter ended September 25, 2011, 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.

 

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Item 9A. Controls and Procedures (contd.)

 

Management’s 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 Company’s 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 25, 2011.

 

Item 9B. Other Information

None

 

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Table of Contents

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

   73   

Chairman of the Board, President and Chief Executive Officer

Phillip J. Smith

   64   

Executive Vice President and Chief Financial Officer

James W. Lee

   60   

President and Chief Operating Officer of Markets

Dennis L. McIntyre

   51   

Executive Vice President of Marketing of Markets

George A. Frahm

   58   

Executive Vice President of Retail Operations and Administration of Markets

Bruce D. Varner

   75   

Director and Secretary

Thomas W. Field, Jr.

   78   

Vice Chairman of the Board of Directors

Ronald G. Skipper

   71   

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 1986. 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 58 years. Mr. Brown’s 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 36 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 37 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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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 34 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 35 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 served as a director of the Campbell Soup Company. Mr. Field has held various positions in the Supermarket Industry for over 51 years.

Ronald G. Skipper has been a Director of Holdings since April 2007. Mr. Skipper is an attorney and has practiced law for over 43 years in San Bernardino, California where he has resided for over 58 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.

 

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Item 10. Directors and Executive Officers of the Registrant (contd.)

 

Director Compensation For fiscal Year 2011

 

Name

   Director
Fees
     Meeting
Fees
     Total  

Thomas W. Field, Jr.

   $ 50,000       $ 3,000       $ 53,000   

Bruce D. Varner

   $ 50,000       $ 3,000       $ 53,000   

Ronald G. Skipper

   $ 50,000       $ 3,000       $ 53,000   

Jack H. Brown, our Chairman and Chief Executive Officer, is not included in this table because he is an employee of the Company. Mr. Brown’s 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.

 

28


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 executive’s experience, achievements, leadership and value to us. There were no raises given to the named executive officers in fiscal 2011.

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. There will be no annual bonuses paid to the named executive officers for fiscal 2009, 2010 and 2011.

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 participant’s employment by reason of retirement, permanent total disability or death. In the event of a change in control, units of the deferred compensation plan will become fully vested and can be redeemed. During the participant’s 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 2011, the units in this plan appreciated by 39.7% of stated value. The units for the above named executives increased by a total of $2.4 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.

 

29


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. Brown’s 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. Smith’s, Mr. McIntyre’s, Mr. Lee’s and Mr. Frahm’s 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 employee’s current level with annual increases plus employee benefits and incentive bonus calculated in accordance with a formula based on Market’s 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. Brown’s. Mr. Brown’s agreement requires 180 days written notice. If the employment is terminated without cause, the employee’s 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.

 

30


Table of Contents
Item 11. Executive Compensation (contd.)

 

SUMMARY COMPENSATION TABLE

 

Name & Principal Position

   Year    Salary      Bonus (1)      Change in
Pension
Value and
Non-qual.
Def. Comp
Earnings (2)
     All Other
Compensation (3)
     Total  

Jack H. Brown
Chairman, President and Chief Executive Officer

                 
   2011    $ 1,901,232       $ —         $ 34,752       $ 51,000       $ 1,986,984   
   2010    $ 1,901,527       $ —         $ 100,987       $ 52,000       $ 2,054,514   
   2009    $ 1,901,365       $ —         $ 227,755       $ 51,500       $ 2,180,620   

Phillip J. Smith
Executive Vice President and Chief Financial Officer

                 
   2011    $ 356,401       $ —         $ 899,377       $ —         $ 1,255,778   
   2010    $ 356,848       $ —         $ 803,950       $ —         $ 1,160,798   
   2009    $ 356,715       $ —         $ 1,187,697       $ —         $ 1,544,412   

James W. Lee
President and Chief Operating Officer of Markets

                 
   2011    $ 406,732       $ —         $ 630,484       $ —         $ 1,037,216   
   2010    $ 406,178       $ —         $ 539,962       $ —         $ 946,140   
   2009    $ 406,301       $ —         $ 766,141       $ —         $ 1,172,442   

Dennis L. McIntyre
Executive Vice President of Marketing of Markets

                 
   2011    $ 357,879       $ —         $ 520,196       $ —         $ 878,075   
   2010    $ 358,172       $ —         $ 429,100       $ —         $ 787,272   
   2009    $ 358,730       $ —         $ 641,236       $ —         $ 999,966   

George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets

                 
   2011    $ 302,792       $ —         $ 460,419       $ —         $ 763,211   
   2010    $ 302,568       $ —         $ 375,318       $ —         $ 677,886   
   2009    $ 302,581       $ —         $ 565,773       $ —         $ 868,354   

 

(1) There will be no annual bonuses paid to the named executive officers for fiscal 2011.
(2) The amount shown represents the change in pension value and change in nonqualified deferred compensation during fiscal years 2011, 2010 and 2009, 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 2011 of $51,000, fiscal 2010 of $52,000 and fiscal year 2009 of $51,500.

 

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Table of Contents
Item 11. Executive Compensation (contd.)

 

PENSION BENEFITS AT SEPTEMBER 25, 2011

 

Name

  

Plan Name

   Number
of Years
of
Credited
Service
   Present Value
of Accum
Benefit
     Payments
During
Last Fiscal
Year
 

Jack H. Brown
Chairman, President and Chief Executive Officer

           
  

Pension Plan for Salaried Employees

        
      30    $ 1,630,952       $ 210,918   

Phillip J. Smith
Executive Vice President and Chief Financial Officer

           
  

Pension Plan for Salaried Employees

        
      25    $ 841,281       $ —     

James W. Lee
President and Chief Operating Officer of Markets

           
  

Pension Plan for Salaried Employees

        
      9    $ 319,524       $ —     

Dennis L. McIntyre
Executive Vice President of Marketing of Markets

           
  

Pension Plan for Salaried Employees

        
      34    $ 392,639       $ —     

George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets

           
  

Pension Plan for Salaried Employees

        
      35    $ 574,321       $ —     

 

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Table of Contents
Item 11. Executive Compensation (contd.)

 

NONQUALIFIED DEFERRED COMPENSATION FOR FY2011

 

Name

   Executive
Contributions
in Last FY
     Registrant
Contributions
in Last
FY (1)
     Aggregate
Earnings
in Last
FY
     Aggregate
Withdrawals/
Distributions (2)
     Aggregate
Balance at
Last FYE (3)
 

Jack H. Brown
Chairman, President and Chief Executive Officer

              
              
   $ —         $ —         $ —         $ —         $ —     

Phillip J. Smith
Executive Vice President and Chief Financial Officer

              
              
   $ —         $ 777,087       $ —         $ 300,000       $ 6,716,350   

James W. Lee
President and Chief Operating Officer of Markets

              
              
   $ —         $ 557,722       $ —         $ 250,000       $ 4,874,958   

Dennis L. McIntyre
Executive Vice President of Marketing of Markets

              
   $ —         $ 438,728       $ —         $ 250,000       $ 4,153,675   

George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets

              
              
   $ —         $ 359,276       $ —         $ 150,000       $ 2,976,437   

 

(1) These amounts represent the Company’s contribution in fiscal year 2011 to the named executive officer’s deferred compensation. This includes 20% vesting for units awarded prior to fiscal year 2011 to Mr. Lee, Mr. Smith, Mr. McIntyre and Mr. Frahm and appreciation of 39.7% 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 officer’s deferred compensation balance as of September 25, 2011. This balance represents the vested portion of all units plus appreciation, less any withdrawals.

 

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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 executive’s 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 executive’s separation.

 

     TERMINATION      CHANGE IN CONTROL  

Name & Principal Position

   Severance
Pay (1)
     Salary &
Bonus (2)
     Deferred
Compensation (3)
     Health &
Welfare (4)
     Total  

Jack H. Brown
Chairman, President and Chief Executive Officer

              
              
   $ 438,746       $ 11,607,210       $ —         $ 60,840       $ 11,668,050   

Phillip J. Smith
Executive Vice President and Chief Financial Officer

              
              
   $ 82,246       $ 1,179,687       $ 7,066,350       $ 36,504       $ 8,282,541   

James W. Lee
President and Chief Operating Officer of Markets

              
              
   $ 93,861       $ 1,346,284       $ 5,066,958       $ 36,504       $ 6,449,746   

Dennis L. McIntyre
Executive Vice President of Marketing of Markets

              
              
   $ 82,587       $ 1,184,578       $ 4,453,675       $ 57,287       $ 5,695,540   

George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets

              
              
   $ 69,875       $ 1,002,240       $ 3,238,437       $ 36,504       $ 4,277,181   

 

(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 officer’s 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 25, 2011.
(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.

 

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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 employee’s compensation for each year up to the social security wage base, plus 2.15 percent of the employee’s 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 25, 2011: Jack H. Brown - 30 years, Phillip J. Smith - 25 years, James W. Lee - 9 years, Dennis L. McIntyre - 34 years and George A. Frahm - 35 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 2011 retirees with ten or more years of service at retirement is $200,000. The maximum annual compensation that may be considered for 2011 retirees is $250,000.

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         9,887         13,182         16,478         19,773         23,069   
  100,000         17,949         23,932         29,915         35,898         41,881   
  125,000         26,012         34,682         43,353         52,023         60,694   
  150,000         34,074         45,432         56,790         68,148         79,506   
  175,000         42,137         56,182         70,228         84,273         98,319   
  200,000         50,199         66,932         83,665         100,398         117,131   
  225,000         58,262         77,682         97,103         116,523         135,944   
  250,000         66,324         88,432         110,540         132,648         154,756   

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 20 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.

 

35


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 participant’s employment by reason of retirement, permanent total disability or death. Awards under the plan vest after five years, except that upon a participant’s 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 stated value of each unit is $20. As of September 26, 2010 and September 25, 2011, there were 889,600 and 971,600 units outstanding, respectively.

Board of Directors

The Board had two standing committees during fiscal 2011.

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 Committee’s 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 the Registration Statement S-4 dated July 24, 2007.

 

36


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 13, 2011, 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:

 

Name and Address of Beneficial Owner

   Shares of
Class A
Common
Stock
Beneficially
Owned
     Percentage
of Class A
Common
Stock
Outstanding
 

La Cadena(1)

     33,837         100

Jack H. Brown(1)(2)

     33,837         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)

     33,837         100

 

(1) The 33,837 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. Brown’s 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

 

37


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 $1.8 million, $2.4 million and $2.5 million in fiscal 2009, 2010 and 2011, respectively. In addition, Mr. Varner was paid Director fees of $54,000 in each of the fiscal years 2009 and 2010 and $53,000 in fiscal 2011. 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 November 17, 2009 and December 28, 2010, we paid a $5.0 million dividend to La Cadena.

The 33,837 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. Brown’s 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 $928,000 in fiscal 2011 and $839,000 in fiscal 2010 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 each fiscal 2011 and fiscal 2010 for online subscriptions

Tax Fees

Ernst & Young LLP billed us in aggregate $34,000 in each fiscal 2011 and fiscal 2010 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.

 

38


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.

 

39


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

 

40


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.

10.19

 

(13)

   Amendment No. 3 to Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated May 15, 2006.

10.20

 

(13)

   Amendment No. 4 to Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated January 1, 2011.

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.

101.INS

  (13)    XBRL Instance Document.

101.SCH

  (13)    XBRL Taxonomy Extension Schema Document.

101.CAL

  (13)    XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

(13)

   XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

(13)

   XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

(13)

   XBRL Taxonomy Extension Presentation Linkbase Document.

 

(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 Registrant’s 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

 

41


Table of Contents
Item 15. Exhibits and Financial Statement Schedules (contd.)

 

  (a)(3) Exhibits (contd.)

 

(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
(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 25, 2011

 

42


Table of Contents

STATER BROS. HOLDINGS INC.

FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 2011

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 13, 2011              Stater Bros. Holdings Inc.
                      Date      
    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        

Jack H. Brown

  

Chairman of the Board, President and Chief Executive Officer and Director

(Principal Executive Officer)

  December 13, 2011
    

/s/    Thomas W. Field, Jr.        

Thomas W. Field, Jr.

   Vice Chairman of the Board and Director   December 13, 2011

/s/    Ronald G. Skipper        

Ronald G. Skipper

   Director   December 13, 2011

/s/    Bruce D. Varner        

Bruce D. Varner

   Secretary and Director   December 13, 2011

/s/    Phillip J. Smith        

Phillip J. Smith

  

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

  December 13, 2011
    

 

43


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page
Number

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets at September 26, 2010 and September 25, 2011

   F-3

Fiscal years ended September 27, 2009, September 26, 2010 and September 25, 2011:

  

Consolidated Statements of Income

   F-5

Consolidated Statements of Cash Flows

   F-6

Consolidated Statements of Stockholder’s Equity

   F-7

Notes to Consolidated Financial Statements

   F-8

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Stater Bros. Holdings Inc.

We have audited the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. as of September 26, 2010 and September 25, 2011, and the related consolidated statements of income, stockholder’s equity, and cash flows for the 52-week periods ended September 27, 2009, September 26, 2010 and September 25, 2011. These financial statements are the responsibility of the Company’s 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 Company’s 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 Company’s 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 26, 2010 and September 25, 2011, and the consolidated results of its operations and its cash flows for the 52-week periods ended September 27, 2009, September 26, 2010 and September 25, 2011, in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst &Young LLP

Irvine, California

December 13, 2011

 

F-2


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

 

     Sept. 26,
2010
     Sept. 25,
2011
 

Current assets

     

Cash and cash equivalents

   $ 325,005       $ 235,784   

Restricted cash

     3,121         3,121   

Receivables, net of allowance of $1,219 and $984

     35,614         32,166   

Inventories

     203,702         231,121   

Prepaid expenses

     12,678         11,705   

Deferred income taxes

     27,428         30,994   

Current portion of long-term receivable

     16,001         —     

Note receivable, current portion

     —           600   
  

 

 

    

 

 

 

Total current assets

     623,549         545,491   

Property and equipment

     

Land

     97,770         105,039   

Buildings and improvements

     559,500         573,625   

Store fixtures and equipment

     438,306         448,845   

Property subject to capital leases

     9,983         9,983   
  

 

 

    

 

 

 
     1,105,559         1,137,492   

Less accumulated depreciation and amortization

     461,495         512,069   
  

 

 

    

 

 

 
     644,064         625,423   

Deferred income taxes, long-term

     38,272         40,241   

Deferred debt issuance costs, net

     8,074         10,690   

Note receivable, less current portion

     —           2,165   

Other assets

     8,828         8,757   
  

 

 

    

 

 

 
     55,174         61,853   
  

 

 

    

 

 

 

Total assets

   $ 1,322,787       $ 1,232,767   
  

 

 

    

 

 

 

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)

LIABILITIES AND STOCKHOLDER’S EQUITY

 

     Sept. 26,
2010
    Sept. 25,
2011
 

Current liabilities

    

Accounts payable

   $ 135,642      $ 141,030   

Accrued payroll and related expenses

     85,404        106,023   

Accrued interest

     21,845        17,768   

Other accrued liabilities

     40,196        34,004   

Accrued income taxes

     527        6,732   

Current portion of capital lease obligations

     1,562        1,107   

Current portion of long-term debt

     132,250        38,798   
  

 

 

   

 

 

 

Total current liabilities

     417,426        345,462   

Long-term debt, less current portion

     677,750        642,577   

Capital lease obligations, less current portion

     2,206        1,099   

Long-term portion of self-insurance and other reserves

     40,565        41,553   

Long-term deferred benefits

     75,634        75,853   

Other long-term liabilities

     36,073        45,459   
  

 

 

   

 

 

 

Total liabilities

     1,249,654        1,152,003   

Commitments and contingencies

    

Stockholder’s equity

    

Common Stock, $.01 par value:

    

Authorized shares - 100,000

    

Issued and outstanding shares - 0 in 2010 and 2011

     —          —     

Class A Common Stock, $.01 par value:

    

Authorized shares - 100,000

    

Issued and outstanding shares - 34,552 in 2010 and 33,837 in 2011

     —          —     

Additional paid-in capital

     8,786        8,604   

Accumulated other comprehensive loss

     (18,926     (23,045

Retained earnings

     83,273        95,205   
  

 

 

   

 

 

 

Total stockholder’s equity

     73,133        80,764   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 1,322,787      $ 1,232,767   
  

 

 

   

 

 

 

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)

 

     Fiscal Year Ended  
     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 

Sales

   $ 3,766,040      $ 3,606,839      $ 3,693,306   

Cost of goods sold

     2,764,004        2,636,891        2,702,414   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,002,036        969,948        990,892   

Operating expenses:

      

Selling, general and administrative expenses

     827,192        819,698        841,527   

Gain on sale of dairy assets

     —          (9,396     —     

Depreciation and amortization

     53,536        50,822        48,413   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     880,728        861,124        889,940   
  

 

 

   

 

 

   

 

 

 

Operating profit

     121,308        108,824        100,952   

Interest income

     471        366        708   

Interest expense

     (68,252     (68,516     (55,521

Interest expense related to purchase of debt

     —          —          (1,775

Other income, net

     723        497        82   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     54,250        41,171        44,446   

Income taxes

     19,481        16,587        18,156   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 34,769      $ 24,584      $ 26,290   
  

 

 

   

 

 

   

 

 

 

Earnings per average common shares outstanding

   $ 989.10      $ 708.33      $ 770.79   
  

 

 

   

 

 

   

 

 

 

Dividends per common share outstanding at end of year

   $ —        $ 144.71      $ 147.77   
  

 

 

   

 

 

   

 

 

 

Average common shares outstanding

     35,152        34,707        34,108   
  

 

 

   

 

 

   

 

 

 

Common shares outstanding at end of year

     35,152        34,552        33,837   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-5


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Fiscal Year Ended  
     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 

Operating activities:

      

Net income

   $ 34,769      $ 24,584      $ 26,290   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     68,179        62,090        59,648   

Amortization of debt issuance costs

     3,202        3,202        6,009   

Premium paid on debt purchase

     —          —          1,775   

Deferred income taxes

     (1,686     (9,207     (5,535

Gain on sale of dairy assets

     —          (9,396     —     

Gain on disposals of assets

     (543     (495     (81

Changes in operating assets and liabilities:

      

Decrease in restricted cash

     2,500        —          —     

(Increase) decrease in receivables

     (6,071     1,057        3,448   

Decrease in income tax receivables

     587        4,049        —     

(Increase) decrease in inventories

     17,362        9,154        (27,419

(Increase) decrease in prepaid expenses

     (723     (3,348     973   

Decrease in assets held for sale

     372        215        —     

(Increase) decrease in other assets

     (426     744        71   

Increase (decrease) in accounts payable

     (1,200     (17,441     5,388   

Increase in accrued income taxes

     —          527        6,205   

Increase (decrease) in liabilities held for sale

     (10,252     1,014        —     

Increase (decrease) in other accrued liabilities

     (3,268     14,514        8,575   

Increase in long-term reserves

     19,608        5,838        6,474   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     122,410        87,101        91,821   
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Proceeds from issuance of long-term debt

     —          —          400,000   

Debt issuance costs

     —          —          (8,625

Principal payment on long-term debt

     —          —          (528,625

Principal payment on capital lease obligations

     (1,149     (1,336     (1,562

Dividends paid

     —          (5,000     (5,000

Stock redemption

     —          (8,000     (9,540
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (1,149     (14,336     (153,352
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Decrease in store reimbursement

     9,914        —          —     

(Increase) decrease in note receivable

     (793     793        253   

Collections on long-term receivable

     3,361        1,740        16,001   

Proceeds from sale of dairy assets, net of fees

     —          85,833        —     

Purchase of property and equipment

     (76,970     (33,750     (44,304

Proceeds from sale of property and equipment

     990        710        360   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (63,498     55,326        (27,690
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     57,763        128,091        (89,221

Cash and cash equivalents at beginning of period

     139,151        196,914        325,005   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 196,914      $ 325,005      $ 235,784   
  

 

 

   

 

 

   

 

 

 

Interest paid

   $ 65,723      $ 65,510      $ 44,294   

Income taxes paid

   $ 19,425      $ 19,700      $ 14,655   

See accompanying notes to consolidated financial statements.

 

 

F-6


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(In thousands except shares)

 

    Common
Stock
    Class A
Common Stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Gain (Loss)
    Retained
Earnings
    Total
Stockholder’s
Equity
    Comprehensive
Income (Loss)
 
      Shares     Amount            

Balance at September 28, 2008

    —          35,152      $ —        $ 8,939      $ (5,200   $ 36,767      $ 40,506     

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   
               

 

 

 

Net income for 52 weeks ended September 25, 2011

    —          —          —          —          —          26,290        26,290      $ 26,290   

Minimum pension liability adjustment (net of tax of $2,833)

    —          —          —          —          (4,119     —          (4,119     (4,119

Dividend paid

    —          —          —          —          —          (5,000     (5,000     —     

Stock Redemption

    —          (715     —          (182     —          (9,358     (9,540     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 25, 2011

    —          33,837      $ —        $ 8,604      $ (23,045   $ 95,205      $ 80,764      $ 22,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-7


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 25, 2011

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 25, 2011, the Company operated 167 retail grocery supermarkets under the name “Stater Bros. Markets.” The Company’s supermarkets are located in the Southern California counties of San Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern. The Company through its predecessor companies has 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 Company’s 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”). All significant inter-company transactions have been eliminated in consolidation. The Company has evaluated the impact of subsequent events and determined that other than the renewal of the United Food and Commercial Workers (the “UFCW”) bargaining agreements as disclosed in “Note 7 – Labor Relations” and the settlement of a litigation matter as disclosed in “Note 9 – Litigation Matters” it did not have any subsequent events that needed to be disclosed in its 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 Company’s 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.)

 

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 Company’s 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 Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. The Company discounted its workers’ compensation, automobile and general liability insurance reserves at a discount rate of 5.00% in fiscal 2010 and 4.50% in fiscal 2011. 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.)

 

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 Company’s 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 2009, 2010 and 2011 is $4.6 million, $2.9 million and $2.1 million, respectively, of advertising reimbursement 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 Company’s 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 Company’s 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 2009 and 2010 and 2011.

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 Company’s 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 $22.2 million, $20.4 million and $18.3 million in fiscal 2009, 2010 and 2011, respectively.

 

F-10


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 1 - The Company and Summary of Significant Accounting Policies (contd.)

 

Advertising Allowances

A significant portion of the Company’s 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 $2.6 million in fiscal 2009, $1.6 million in fiscal 2010 and $1.3 million in fiscal 2011. The amount of advertising reimbursement in excess of the fair value of advertising is recorded as a reduction in cost of goods sold.

Leases

Certain of the Company’s 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 $255.0 million in aggregate principal amount of 7.375% Senior Notes due November 15, 2018 (the “New Notes”) in a private offering. At the time of issuance, these were unregistered and are unsecured obligations of the Company. On September 20, 2011, the Company completed the exchange of the unregistered 7.375% Senior Notes for virtually identical registered $255.0 million 7.375% Senior Notes due November 15, 2018 collectively (the “7.375% Senior Notes”). The Company incurred approximately $6.6 million of debt issuance costs related to the issuance of the New Notes and registration of the 7.375% Senior Notes, which will be amortized over the term of the 7.375% Senior Notes.

Issuance of New Credit Facility

On November 29, 2010, the Company and Markets entered into a new $245.0 million senior secured credit facility (the “Credit Facility”) with Bank of America, N.A., as administrative agent and a lender. Lenders under the Credit Facility consist of a consortium of banks. The Credit Facility consists of a four-year $145.0 million term loan (the “Term Loan”) and a $100.0 million revolving credit facility (the “Revolving Credit Facility”). The Credit Facility replaced the Company’s existing $100.0 million credit facility. The Credit Facility is secured by substantially all of the Company’s personal property excluding certain intangible assets consisting of trademarks and shares of capital stock. The Credit Facility is guaranteed by the Company, its direct subsidiary Development and by its indirect subsidiaries Super Rx and Dairies.

The Term Loan bears interest at the Eurodollar Rate plus 2.50% or the Base Rate plus 1.50% (as defined in the Credit Facility) and the interest under the Term Loan is payable quarterly in arrears and includes mandatory quarterly principal payments of 5.0%, of the original outstanding balance, in each of the first two years of the agreement and 10.0%, of the original outstanding balance, in each of the years three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the Credit Facility. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the Credit Facility is held until the Term Loan is paid in full. The Company incurred approximately $2.0 million of debt issuance costs related to the Term Loan, which will be amortized to interest expense over the term of the Term Loan.

 

F-11


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 2 - New Debt Issuance and Early Extinguishment of Debt (contd.)

 

Issuance of New Credit Facility (contd.)

 

As of September 25, 2011, the interest rates on the Term Loan were based on the Eurodollar Rate and consisted of a ninety day rate of approximately 2.746% on approximately $1.8 million of outstanding principal amount and a twelve month rate of approximately 3.287% on approximately $139.6 million of outstanding principal amount.

Subject to certain restrictions, the entire amount of the Revolving Credit Facility may be used for loans, letters of credit or a combination thereof. Borrowing under the Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the Revolving Credit Facility are expected to be used for workers’ compensation insurance obligations and may be used for new store construction and certain other corporate purposes. The availability of the loans and letters of credit are subject to certain borrowing restrictions.

Loans under the Revolving Credit Facility bear interest at a rate based upon either (i) the “Base Rate” (defined as the higher of (a) the federal funds rate plus 0.50% and (b) the Bank of America “prime rate”), plus 1.50%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.50%. For Eurodollar Rate loans, the Company will be entitled to select interest periods of one, two, three, six, nine or twelve months, subject to availability.

The Credit Facility requires the Company and Markets to meet certain financial tests, including minimum net worth and the maintenance of minimum earnings levels. The Credit Facility contains covenants which, among other things, limit the ability of the Company and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, (iii) make restricted payments and (iv) make certain amendments to the Indentures governing the 7.375% Senior Notes and 7.75% Senior Notes (“Notes Indentures”). Markets and the Company’s other direct and indirect subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or cash dividends to the Company. As of September 25, 2011, the Company and Markets were in compliance with all restrictive covenants under the Credit Facility.

The Company had no short-term borrowings outstanding under the Revolving Credit Facility as of September 25, 2011 and the Company did not incur any short-term borrowings under the Revolving Credit Facility during the quarter ended September 25, 2011.

Early Extinguishment of Debt

The Company used the proceeds from the 7.375% Senior Notes and the Term Loan and cash on hand to purchase and retire early all of its $525.0 million 8.125% Senior Notes due June 15, 2012 (“Retired Notes”). On November 29, 2010, the Company paid approximately $479.2 million to purchase and make a tender payment on approximately $477.5 million outstanding balance of Retired Notes that had been validly tendered as of that date. The payment included a tender premium of approximately $1.8 million that has been recorded under “Interest expense related to purchase of debt” in the Company’s consolidated statements of income. On December 13, 2010, the Company paid approximately $2.4 million to purchase approximately $2.4 million of outstanding Retired Notes that had been tendered as of that date. On January 14, 2011, the Company called all remaining outstanding Retired Notes and paid approximately $45.1 million to retire the remaining notes. During the first two quarters of fiscal 2011, the Company recorded to “Interest expense” approximately $3.5 million in unamortized deferred offering costs related to the Retired Notes.

 

F-12


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 3 - Debt

Long-term debt consisted of the following:

 

     Sept. 26,
2010
     Sept. 25,
2011
 
     (In thousands)  

Unsecured 8.125% Senior Notes due 2012

   $ 525,000       $ —     

Unsecured 7.75% Senior Notes due 2015

     285,000         285,000   

Secured Term Loan due 2014

     —           141,375   

Unsecrued 7.375% Senior Notes due 2018

     —           255,000   
  

 

 

    

 

 

 
     810,000         681,375   

Less current portion of long-term debt

     132,250         38,798   
  

 

 

    

 

 

 

Long-term debt, less current portion

   $ 677,750       $ 642,577   
  

 

 

    

 

 

 

Interest on the 7.375% Senior Notes is payable semi-annually in arrears on May 15 and November 15. Principal on the 7.375% Senior Notes is due in fiscal 2018.

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 on the Term Loan is payable quarterly in arrears on the last day of March, June, September and December. Mandatory quarterly principal payments which total to annual payments of $9.1 million, $9.1 million, $14.5 million and $3.6 million are due in fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015, respectively. In addition, the Term Loan requires an additional payment of $29.7 million in fiscal 2012 as an excess cash payment as calculated under the Term Loan.

Interest capitalized during fiscal 2009 and 2011 amounted to $0.5 million and $0.3 million, respectively. There was no significant capitalized interest in fiscal 2010. Interest expense incurred, before the effect of capitalized interest, amounted to $68.8 million in fiscal year 2009, $68.5 in fiscal year 2010 and $57.6 million in fiscal year 2011.

The Company is subject to certain covenants associated with its 7.375% Senior Notes and its 7.75% Senior Notes. As of September 25, 2011, the Company was in compliance with all such covenants.

The Notes are guaranteed by the Company’s subsidiaries Markets and Development, and the Company’s 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.

 

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Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 4 - 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 Company’s 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 and noncancelable sublease income as of September 25, 2011:

 

     Capital
Leases
     Operating
Leases
Minimum
Payments
     Noncancelable
Sublease
Income
 
     (In thousands)  

2012

   $ 1,403       $ 38,730       $ 5,159   

2013

     943         36,317         4,614   

2014

     316         30,202         3,827   

2015

     —           28,344         3,160   

2016

     —           24,678         2,848   

Thereafter

     —           190,364         16,457   
  

 

 

    

 

 

    

 

 

 

Total minimum lease payments

     2,662       $ 348,635       $ 36,065   
     

 

 

    

 

 

 

Less amounts representing interest

     456         
  

 

 

       

Present value of minimum lease payments

     2,206         

Less current portion

     1,107         
  

 

 

       

Long-term portion

   $ 1,099         
  

 

 

       

 

F-14


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 4 - Leases (contd.)

 

Rental expense and sublease income were as follows:

 

     Fiscal Year Ended  
     Sept. 27,
2009
     Sept. 26,
2010
     Sept. 25,
2011
 
     (In thousands)  

Minimum rentals

   $ 30,326       $ 29,087       $ 28,850   

Rentals based on sales

   $ 16,210       $ 16,221       $ 16,558   

Sublease income

   $ 4,919       $ 5,586       $ 5,528   

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 Company’s 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 Company’s lease payments on the Former Facilities are included in the “Operating leases minimum payments” and the Sublessee’s lease payments are included in “Noncancelable sublease income” in the schedule above.

Note 5 - Income Taxes

The provision for income taxes consisted of the following:

 

     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 
     (In thousands)  

Current

      

Federal

   $ 16,302      $ 18,816      $ 15,589   

State

     3,710        5,460        5,270   
  

 

 

   

 

 

   

 

 

 
     20,012        24,276        20,859   
  

 

 

   

 

 

   

 

 

 

Deferred

      

Federal

     (152     (5,827     (1,573

State

     (379     (1,862     (1,130
  

 

 

   

 

 

   

 

 

 
     (531     (7,689     (2,703
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 19,481      $ 16,587      $ 18,156   
  

 

 

   

 

 

   

 

 

 

A reconciliation of the provision for income taxes to amounts computed at the federal statutory rate is as follows:

 

      Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 

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

     (2.2     (1.2     (0.7

Other

     (2.7     0.7        0.7   
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     35.9     40.3     40.8
  

 

 

   

 

 

   

 

 

 

 

F-15


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 5 - Income Taxes (contd.)

 

Components of deferred income taxes are as follows:

 

     Sept. 26,
2010
    Sept. 25,
2011
 
     (In thousands)  

Deferred income tax assets:

    

Self-insurance reserves

   $ 27,756      $ 28,805   

Deferred compensation

     34,209        35,108   

Payroll liabilities

     24,123        31,141   

State franchise tax

     1,860        1,837   

Inventories

     2,033        2,437   

Income deferred for book purposes

     2,074        1,503   

Tax credits and operating loss carry forwards

     180        —     

Other, net

     1,881        2,151   
  

 

 

   

 

 

 

Total deferred income tax assets

     94,116        102,982   

Deferred income tax liabilities:

    

Property and equipment

     (26,133     (29,436

Other assets

     (2,283     (2,311
  

 

 

   

 

 

 

Total deferred income tax liabilities

     (28,416     (31,747
  

 

 

   

 

 

 

Net deferred income tax assets

   $ 65,700      $ 71,235   
  

 

 

   

 

 

 

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 2011, 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 of its fiscal 2008 through fiscal 2011 tax returns. During the first quarter of fiscal 2011, the State of California’s Franchise Tax Board (the “FTB”) concluded their audit of the Company’s fiscal 2007 state return and made no significant changes to the Company’s reported taxes. For state tax purposes, the Company is subject to review of its fiscal 2008 through fiscal 2010 state tax returns. During the third quarter of fiscal 2011, the FTB began their audit of the Company’s fiscal 2008 and fiscal 2009 state tax returns. Nothing has come to the attention of the Company that would indicate any material findings by the FTB as a result of their audit.

 

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Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 6 - 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 employee’s compensation during the eligibility period while employed with the Company. The Company’s 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. 27,
2009
     Sept. 26,
2010
     Sept. 25,
2011
    Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 
     (In thousands)  

Prior service cost

   $ 2       $ 2       $ (2   $ (78   $ (78   $ (78

Net actuarial (gain)/loss

     19,258         3,653         6,965      $ 260      $ 143      $ 67   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in accumulated other comprehensive (income)/loss, before tax

   $ 19,260       $ 3,655       $ 6,963      $ 182      $ 65      $ (11
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 6 - Retirement Plans (contd.)

 

Pension and Medical Plans (contd.)

 

The following tables provide a reconciliation of the changes in the pension plan’s 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 26, 2010 and September 25, 2011:

 

     Pension Plan     Medical Plan  
     Sept. 26,
2010
    Sept. 25,
2011
    Sept. 26,
2010
    Sept. 25,
2011
 
     (In thousands)  

Change in benefit obligation:

        

Beginning balance

   $ 76,104      $ 88,308      $ 1,698      $ 1,928   

Service cost

     3,302        3,532        47        53   

Interest cost

     4,002        4,187        91        86   

Actuarial loss

     6,551        6,771        157        94   

Benefit payments

     (1,651     (2,616     (65     (84
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 88,308      $ 100,182      $ 1,928      $ 2,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of plan assets:

        

Beginning balance

   $ 53,280      $ 59,753      $ —        $ —     

Actual return on plan assets

     4,964        2,089        —          —     

Employer contributions

     3,160        2,661        65        84   

Benefit payments

     (1,651     (2,616     (65     (84
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 59,753      $ 61,887      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status:

        

Fair value of plan assets

   $ 59,753      $ 61,887      $ —        $ —     

Projected benefit obligation

     88,308        100,182        1,928        2,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Under funded

   $ (28,555   $ (38,295   $ (1,928   $ (2,077
  

 

 

   

 

 

   

 

 

   

 

 

 

Market related value of plan assets is calculated using fair market value, as provided by a third-party trustee. The plan’s investments include cash, which earns interest, governmental securities and corporate bonds and securities.

 

F-18


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 6 - Retirement Plans (contd.)

 

Pension Plan

The following table provides the components of fiscal 2009, 2010 and 2011 net pension expense:

 

     Sept. 27,
2009
    Sept. 26,
2010
    Sept. 25,
2011
 
     (In thousands)  

Expected return on assets

   $ (3,201   $ (3,463   $ (3,819

Service cost

     2,294        3,302        3,532   

Interest cost

     3,857        4,002        4,187   

Amortization of prior service cost

     (2     (2     2   

Amortization of recognized losses

     197        1,397        1,536   
  

 

 

   

 

 

   

 

 

 

Net pension expense

   $ 3,145      $ 5,236      $ 5,438   
  

 

 

   

 

 

   

 

 

 

Actuarial assumptions used to determine net pension expense were:

  

Discount rate

     7.50     5.50     5.00

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

     5.50     5.00     4.50

Weighted-average rate of compensation increase

     3.00     3.00     3.00

Expenses recognized for the Pension Plan were $3.6 million, $5.7 million and $6.0 million in fiscal years 2009, 2010 and 2011, respectively. Pension expenses included trustee and administrative expenses for the Pension Plan of $0.4 million, $0.4 million and $0.5 million in fiscal years 2009, 2010 and 2011, 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 Company’s 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 25, 2011, the strategic target asset allocation is 65% fixed income and 35% equity. The expected long-term rate of return on assets is based on the historical performance of governmental and corporate bonds and securities taking into consideration the allocation mix of the Pension Plan’s investments. The following tables summarize the fair market value, as provided by a third-party trustee, for the Company’s plan assets at the end of fiscal 2010 and fiscal 2011:

U.S. generally accepted accounting principals (“GAAP”) establishes a fair value hierarchy that prioritizes 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-19


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

 

Note 6 - Retirement Plans (contd.)