<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED JANUARY 25, 1997

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM_____________TO______________

                        COMMISSION FILE NUMBER: 33-63372

                         PUEBLO XTRA INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S>                                                           <C>
                  DELAWARE                                                 65-0415593
--------------------------------------------                  ------------------------------------

      (STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER IDENTIFICATION NO.)
       INCORPORATION OR ORGANIZATION)

           1300 N.W. 22ND STREET
           POMPANO BEACH, FLORIDA                                            33069
--------------------------------------------                  ------------------------------------
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                 (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 977-2500

        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 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. [X]

      NO VOTING STOCK OF THE REGISTRANT IS HELD BY NON-AFFILIATES OF THE
                                 REGISTRANT.

NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, $ .10 PAR VALUE, OUTSTANDING
AS OF APRIL 1, 1997 -- 200.




<PAGE>   2


                                     PART I.


ITEM 1.           BUSINESS

GENERAL

         Pueblo Xtra International, Inc. (the "Company") is a Delaware holding
company that owns all of the common stock of Pueblo International, Inc., a
Delaware company (together with its subsidiaries, "Pueblo"). Pueblo, which was
founded in 1955 with the opening of the first mainland-style supermarkets in
Puerto Rico, is the leading supermarket chain in the Commonwealth of Puerto Rico
and the Territory of the U.S. Virgin Islands. In addition, Pueblo is the leading
operator of video rental outlets in Puerto Rico and St. Thomas, U.S. Virgin
Islands through its exclusive franchise rights with Blockbuster Entertainment
Corporation ("BEC") and its in-supermarket video operations. The Company
believes it has developed significant name recognition, strong customer loyalty
and leading market shares due to the superior quality and large size of its
stores, the breadth and price competitiveness of its product offerings and its
extensive market coverage in prime locations. The Company currently operates 44
supermarkets in Puerto Rico and six supermarkets in the U.S. Virgin Islands. The
Company also currently operates 27 Blockbuster locations in Puerto Rico and two
Blockbuster locations in the U.S. Virgin Islands as the exclusive Blockbuster
franchisee for Puerto Rico and the U.S. Virgin Islands.

         On July 28, 1993, the Company acquired all of the outstanding shares of
common stock of Pueblo for an aggregate purchase price of $283.6 million plus
transaction costs (hereinafter referred to as the "Acquisition"). Pursuant to
the Acquisition, Pueblo became a wholly-owned subsidiary of the Company. The
shares were acquired from an investor group including affiliates of Metropolitan
Life Insurance Company, The First Boston Corporation and certain current and
former members of Pueblo management and its Board of Directors.

         The Acquisition has been accounted for under the purchase method
effective July 31, 1993. Reference is made to Note (3)--Acquisitions of the
notes to the Company's consolidated financial statements referenced in Part II,
Item 8 of this Form 10-K for further details of the Acquisition.






                                       -2-

<PAGE>   3



BUSINESS OF THE COMPANY

Supermarket Industry Overview

         The top three chains in the retail grocery industry in Puerto Rico
account for approximately one-half of total industry sales, with the remainder
divided among smaller chains and numerous independent operations. Total
supermarket chain sales in calendar year 1996 were approximately $3.1 billion, a
significant portion of which was attributable to the more densely populated
greater San Juan metropolitan area, where the larger chains are concentrated.
The grocery industry in less populated parts of the island is characterized by
smaller family-run operations with limited selection and less competitive
prices. No major U.S. supermarket chains have established operations in the
Puerto Rico grocery market, although a number of national general merchandise
chains have significant Puerto Rican operations. National warehouse clubs and
mass merchandisers, which have entered the Puerto Rico and U.S. Virgin Islands
markets since 1990 offering various bulk grocery and general merchandise items,
have increased pricing pressures on grocery retailers including the Company.

Puerto Rico

         The Company operates two complementary supermarket formats:
conventional Pueblo supermarkets which emphasize service, variety and high
quality products at competitive prices, and Xtra supermarkets which are
typically larger stores emphasizing everyday low prices. In Puerto Rico, the
Company currently operates 14 Pueblo stores and 30 Xtra stores and has a grocery
retailing market share of approximately 29%. In addition, the Company estimates
that is has a 34% market share in the greater San Juan metropolitan area, the
most densely populated region of Puerto Rico, with more than one-third of the
island's 3.7 million residents. In fiscal 1997 in Puerto Rico, Pueblo stores
averaged approximately 28,286 gross sq. ft. and generated an average of
approximately $942 of sales per selling sq. ft., while Xtra stores averaged
approximately 45,900 gross sq. ft. and generated an average of approximately
$673 of sales per selling sq. ft. Since the Acquisition, the Company has
constructed five new Xtra stores, remodeled ten existing supermarkets and
converted five Pueblo stores into Xtra stores in Puerto Rico.

U.S. Virgin Islands

         In fiscal 1997, the six Pueblo stores in the U.S. Virgin Islands
averaged 32,500 gross sq. ft. and generated an average of approximately $752
sales per selling sq. ft. The Company has an estimated U.S. Virgin Islands
grocery retailing market share of approximately 50%. Since the Acquisition, the
Company has added one new supermarket and remodeled five existing supermarkets
in the U.S. Virgin Islands.

Video Operations

         The Company has been the exclusive franchisee of Blockbuster locations
in Puerto Rico since 1989 and in the U.S. Virgin Islands since 1993 and
currently operates 29 Blockbuster locations in Puerto Rico and the U.S. Virgin
Islands. In Puerto Rico, the Company operates five in-store Blockbuster outlets
and 22 free-standing Blockbuster stores, the majority of which are adjacent to
its supermarkets. In the U.S. Virgin Islands, the Company operates one in-store
Blockbuster outlet and one free-standing Blockbuster store. The Company's
free-standing Blockbuster stores average approximately 6,000 gross sq. ft.,
while the Company's in-store Blockbuster outlets average approximately 4,200
gross sq. ft. In addition, the Company currently operates 14 video outlets in
its supermarkets under the name Pueblo Video Clubs, all of which it intends to
convert into in-store Blockbuster outlets. In order to increase customer
traffic in its supermarkets, the Company's typical in-store Blockbuster outlet
has a separate entrance but its principal exit leads into the supermarket. In
addition, the Company is able to take advantage of cross-marketing
opportunities with its supermarket operations, including promotional video
rental and merchandising offers.
                                                                                
                                       -3-

<PAGE>   4


         The Company's Blockbuster operations are currently the only major video
chain operating in Puerto Rico and the U.S. Virgin Islands. Each location
carries an average of approximately 10,000 tapes dedicated to video rental. Each
location also offers for sale a selection of recorded and blank video tapes,
accessories and snack food products. Since each Blockbuster location is
typically larger than its competitors, it provides greater depth and breadth in
selections. For promotions of its Blockbuster operations, the Company primarily
utilizes print, radio, billboards and in-store signage, and also benefits from
Blockbuster's television advertising. BEC also provides extensive product and
support services to the Company. These include, among other things, site
selection review, packaging of the initial rental inventory and providing
computer hardware and software.

         The Company's successful development of the Blockbuster franchise has
been the result of its ability to leverage its knowledge of Puerto Rico and
existing market and retailing expertise. The Company's knowledge of real estate
and its existing portfolio of desirable supermarket locations has enabled its
Blockbuster division to obtain attractive, high traffic locations. The Company
will continue to evaluate expansion opportunities in its markets.

         The Company's Development Agreements with Blockbuster Entertainment
Corporation, now known as Blockbuster Entertainment, Inc. ("BEC") provide for
the Company's exclusive right to open Blockbuster locations in Puerto Rico and
the U.S. Virgin Islands during the term of such agreements.  The Development
Agreements require the Company to open a certain number of Blockbuster
locations in Puerto Rico by December 1999 and in the U.S. Virgin Islands by
April 1997.  In 1996, the Company amended its Development Agreements to allow
the necessary flexibility to develop smaller store formats.  Each Blockbuster
location is subject to a Franchise Agreement with BEC that provides the right
for such location to conduct Blockbuster operations for a 20-year period so
long as the terms of such Franchise Agreement are complied with.  The Company
has fulfilled its development quota in the U.S. Virgin Islands and plans to
fulfill its December 1999 development quota in Puerto Rico by the end of the
first quarter of fiscal 1998 and otherwise believes it is in full compliance
with its obligations under the Development Agreements.  The Company is
currently in discussions with BEC to establish new development quotas.


Disposal of Florida Retail Operations

         On January 16, 1996, the Company announced its decision to discontinue
its retail operations in Florida (the "Florida Disposal"). The announcement was
made as part of the Company's restructuring plans whereby the Company will exit
the underperforming Florida retail market and place more emphasis on the
strength of its operations in Puerto Rico and the U.S. Virgin Islands. The
Florida Disposal includes the disposal of all eight Xtra stores and one
warehouse and distribution center, whether by sale or abandonment, which was
completed in the first quarter of fiscal year 1997. As of the date of this
filing, one owned location and the lease rights to a second location have been
sold.

         The Florida Disposal has been accounted for as a disposal of part of a
line of business effective December 30, 1995. See Note (2)--Unusual Charges of
the notes to the Company's consolidated financial statements referenced in Part
II, Item 8 of this Form 10-K for further details of the Florida Disposal.

Store Composition

         The Company currently has store locations in 23 of the 39 markets in
Puerto Rico with populations of over 30,000 people. The Company believes there
are selected new store expansion opportunities in Puerto Rico, particularly in
markets outside greater San Juan.

         Since the Acquisition, the Company has made capital expenditures of
approximately $56.2 million in its supermarket operations in Puerto Rico and the
U.S. Virgin Islands, including the opening of five new Xtra stores, the addition
of one new Pueblo store, the remodeling of 15 existing stores and the conversion
of five Pueblo stores into Xtra stores. In the same period, the Company has made
capital expenditures totalling approximately $5.2 million in its Blockbuster
operations. The history of store openings, closings and remodelings, beginning
with fiscal 1993, is set forth in the table below:




                                       -4-

<PAGE>   5


<TABLE>
<CAPTION>


                                                                        Fiscal Year
                                                  --------------------------------------------------------
                                                    1993        1994        1995        1996        1997
                                                  ---------   ---------   --------    --------    --------
<S>                                                      <C>         <C>        <C>         <C>         <C>
Stores in Operation:
   At beginning of year........................          65          74         76          79          82
   Stores opened:
      Supermarkets.............................           2           4          2           4           -
      Blockbuster video stores.................           8           3          1           -           5
   Stores closed:
      Puerto Rico..............................           1           2          -           1           2
      Florida..................................           -           3          -           -           8
                                                  ---------   ---------   --------    --------    --------
   At end of year..............................          74          76         79          82          77
                                                  =========   =========   ========    ========    ========
   Remodels and/or conversions.................           8           8          6           1           9

   Store Composition at Year-End:
      Xtra superstores.........................          29          29         31          34          30
      Pueblo supermarkets......................          26          26         26          26          20
      Blockbuster video stores (1).............          19          21         22          22          27
      By location:
         Puerto Rico...........................          59          62         65          67          70
         Florida...............................          10           8          8           8           -
         U.S. Virgin Islands...................           5           6          6           7           7
</TABLE>

--------------

(1)      Subsequent to fiscal 1997, the Company opened two additional locations
         and currently operates a total of 29 Blockbuster locations.

Supermarket Purchasing and Distribution

         The Company's buying staff actively purchase products from
distributors, as well as directly from the producer or manufacturer. The Company
generally controls shipping from the point of purchase in an effort to reduce
costs and control delivery times. During fiscal 1997, the Company bought
approximately 45% of its total dollar volume of product purchases directly from
manufacturers and is seeking to increase this percentage to reduce costs and to
obtain superior payment terms. Moreover, the Company is renegotiating existing
direct buying arrangements with certain manufacturers for the same purpose and
will also seek to increase utilization of its excess warehouse capacity to take
advantage of bulk purchase discounts.

         The Company owns a 300,000 square foot full-line warehouse and
distribution center in greater San Juan. The only facility of its type on the
island with both refrigerated and freezer capacity, the San Juan warehouse has
capacity to store approximately 1.5 million cases of assorted products, and acts
as the Company's central distribution center for the island. The warehouse is
equipped with a computerized tracking system which is fully integrated with the
Company's purchasing, inventory management and shipping systems. This system
enables the Company to make rapid procurement decisions, optimize inventory
levels and increase labor productivity. In fiscal 1997, this facility provided
approximately 59% of the goods (measured by purchase cost) supplied to the
Company's stores in Puerto Rico.

Supermarket Merchandising

General

         The Company's merchandising strategies, which are differentiated by
division and store type, integrate one-stop shopping convenience, premium
quality products, attractive pricing and effective advertising and promotions.
At Pueblo supermarkets in Puerto Rico and the U.S. Virgin Islands, the Company's


                                       -5-

<PAGE>   6



merchandising strategy focuses on offering premium quality products with
attractive pricing, excellent selection, superior customer service and special
buying opportunities. The Company's Xtra superstores combine the merchandising
features of Pueblo supermarkets with everyday low prices. The Company reinforces
its merchandising strategies with friendly and efficient service, effective
promotional programs, in-store activities, and both brand name and high quality
private label product offerings.

Product Offerings

         With approximately 23,000 stock keeping units ("SKU"), management
believes the Company's Pueblo and Xtra stores offer the greatest product variety
within their market areas, as its competitors generally lack the sales volume,
store size and procurement efficiencies to stock and merchandise the wide
variety of products and services offered by the Company. The Company believes
that the convenience and quality of its specialty department products contribute
to customer satisfaction.

         The following table sets forth the mix of products sold in the
Company's supermarkets for the fiscal years indicated:

<TABLE>
<CAPTION>

                                                                      Fiscal Year Ended
                                                     ---------------------------------------------------
                                                      January 28,     January 27,      January 25,
                                                         1995             1996            1997
                                                     -------------   --------------   -------------
<S>                                                     <C>              <C>             <C>   
PRODUCT CATEGORY
 Grocery...........................................      46.2%            46.5%           46.9%
 Health/Beauty Care/General Merchandise............       5.8              6.3             6.2
 Dairy.............................................      15.9             16.1            16.4
 Meat/Seafood......................................      17.2             16.4            16.0
 Produce...........................................       9.8              9.4             9.3
 Deli/Bakery.......................................       4.4              4.6             4.5
 Video Club........................................       0.7              0.7             0.7
                                                     --------        ---------        --------
             Total.................................     100.0%           100.0%          100.0%
                                                     ========        =========        ========
</TABLE>


Pricing

         As the largest grocery operator in its markets, the Company is able to
take advantage of volume purchase discounts and shipping efficiencies in order
to offer competitive pricing at its Pueblo supermarkets, as well as everyday low
pricing at its Xtra superstores. Pueblo and Xtra supermarkets utilize weekly
circulars to emphasize special offers. The Company's "Family Pack" program
offers bulk sizes of high volume products typically priced equal to or lower
than prices offered by warehouse club stores.

Private Label

        An important element of Pueblo's reputation for high quality and
excellent value, and Xtra's reputation for everyday low prices, is the
utilization of Food Club private label products through the Company's
membership with Topco Associates, Inc. ("Topco"). Topco's private label program
offers its members over 4,000 food and non-food items. Topco products are sold
under the Food Club, World Classic, Top Frost, Top Crest, Top Care, Top Fresh
and Mega labels in the grocery, frozen food, dairy, fresh meat, poultry and
health and beauty care departments. The high quality and attractive pricing of
the Food Club program have made it widely accepted by the Company's customers
as an alternative to national brands. Approximately 17% of the Company's fiscal
1997 grocery item sales were of Topco products. Topco's private label program
allows the Company to pass on substantial savings to customers, while
maintaining a reputation for superior quality. The low cost of Topco products
enables the Company to earn above average margins compared to national brands
despite the lower prices offered to customers. The Company intends to continue
to expand its sales of profitable Food Club private label products to
price-conscious consumers through its arrangement with Topco. The Company also
intends to develop its own private label products aimed at price points below
the Topco products.
        

                                       -6-

<PAGE>   7




Category Management

         The Company is currently in the process of implementing a category
management system designed to combine traditional buying, reordering and pricing
functions under the leadership of corporate level category merchandisers. The
system will also allow the Company to assign direct profit management to the
individuals responsible for a product category. The Company believes that such a
system will improve sales, optimize inventory levels, reduce purchase costs and
thereby enhance gross profit and operating profit margins. The Company
anticipates completion of the program's implementation in fiscal 1998.

Advertising and Promotion

         The Company primarily utilizes newspaper, radio, television and
in-store advertising in both Puerto Rico and the U.S. Virgin Islands. The
Company's grocery operations run multi-page newspaper inserts and page
full-color shoppers. The Company advertises on television primarily through
trailers on vendor-sponsored advertisements. In fiscal 1997, the Company
launched a major advertising campaign. This campaign presents both the Pueblo
and Xtra format in a single advertisement promoting special offers at both store
formats. This market strategy stresses the different store formats yet serves to
reduce advertising costs.

         All advertising is created and designed through the Company's
wholly-owned advertising agency, CaribAd (Adteam). Adteam, based in Puerto Rico,
develops promotional programs for all of the Company's markets, thereby
providing it with cost advantages over its competitors. In addition, Adteam has
other clients in Puerto Rico, generating incremental income for the Company.

Competition

         The grocery retailing business is highly competitive. Competition is
based primarily on price, quality of goods and service, convenience and product
mix. The number and type of competitors and the degree of competition
experienced by individual stores, vary by location.

         The Company competes with local food chains such as Supermercados
Amigo, Grande Supermarkets, and Plaza Extra, as well as numerous independent
operations throughout Puerto Rico and the U.S. Virgin Islands. In addition,
several warehouse clubs and mass merchants, such as Sam's Warehouse clubs,
Wal-Mart, Kmart and Walgreens, have opened locations in Puerto Rico and the U.S.
Virgin Islands. Despite these competitive challenges, the Company continues to
maintain its position as market share leader in each of its respective markets.

         Although the Company's Blockbuster operations constitute the only major
video chain in Puerto Rico and the U.S. Virgin Islands, they compete with
numerous local, independent video retailers. In addition, the Company's
Blockbuster video stores compete against television, cable, satellite
broadcasting, movie theaters and other forms of entertainment.

Management Information Systems

         The Company believes that high levels of automation and technology are
essential to its operations and has invested considerable resources in computer
hardware, systems applications and networking capabilities. These systems
integrate all major aspects of the Company's business, including the monitoring
of store sales, inventory control, merchandise planning, labor utilization,
distribution and financial reporting.

         All of the Company's stores are equipped with state-of-the-art point of
sale terminals with full price look-up capabilities that capture sales at the
time of transaction down to the SKU level through the use of bar-code scanners.
These scanners facilitate customer check-out and provide valuable stock-
replenishment


                                       -7-

<PAGE>   8



information for buyers and real-time financial information used by management to
provide greater control on a line-item basis in determining true store-by-store
costs. To provide the best service possible, the Company has installed a labor
scheduling system that schedules the optimal staffing based on sales, customer
traffic and defined service objectives. The Company's management information
systems at its Blockbuster operations are state-of-the-art systems which are
licensed to the Company by BEC. The conversion of the Company's financial
systems to handle the year 2000 is expected to be completed by May 1997. Other
system conversions are expected to be completed by the end of calendar 1998 for
year 2000 compatibility.

Employees

         As of January 25, 1997, the Company had approximately 8,000 employees
(full- and part-time) of whom approximately 6,700 were employed at the
supermarket level, 600 at the corporate offices and distribution center and 700
by the Blockbuster division. Approximately 65% of the Company's supermarket
employees are employed on a part-time basis. Approximately 5,600 store employees
are represented by a non-affiliated collective bargaining organization under a
contract expiring in 1999. The Company considers its relations with its
employees to be good.

         As part of the Company's effort to reduce labor costs, the Company has
changed labor scheduling practices, reduced the handling of products and
improved stock room operations. This enabled the Company to eliminate 440 store
employees in its Puerto Rico supermarkets in January 1997, reducing annual labor
costs by approximately $9.0 million.

Trademarks, Tradenames and Service Marks

         The Company owns certain trademarks, tradenames and service marks used
in its business. The Company believes that its trademarks, tradenames, and
service marks, including Pueblo and Xtra, are valuable assets due to the fact
that brand name recognition and logos are important considerations in the
Company's consumers' markets. As a franchisee, the Company has exclusive rights
to use the Blockbuster trademark in its specified franchise territories.

Regulation

         Compliance by the Company with federal, state and local environmental
protection laws has not had, and is not expected to have, a material effect on
capital expenditures, earnings or the competitive position of the Company.



                                       -8-

<PAGE>   9



ITEM 2.           PROPERTIES

         The following table sets forth information as of January 25, 1997 with
respect to the owned and leased stores and support facilities used by Pueblo in
its business:

<TABLE>
<CAPTION>

                                                 Owned (1)                  Leased                   Total
                                           ----------------------   ----------------------   ----------------------
                                            No.     Gross Sq. Ft.    No.     Gross Sq. Ft.    No.     Gross Sq. Ft.
                                           ----   ---------------   ----   ---------------   ----   ---------------
<S>                                           <C>         <C>         <C>        <C>           <C>        <C>      
Pueblo supermarkets:
  Puerto Rico...........................      2            91,000     12           305,000     14           396,000
  U.S. Virgin Islands...................      3           112,000      3            83,000      6           195,000
Xtra superstores:
  Puerto Rico...........................      7           359,000     23         1,018,000     30         1,377,000
Blockbuster video stores................      5            31,000     22           114,000     27           145,000
Warehouse and distribution facilities...      1           300,000      1            13,000      2           313,000
</TABLE>

------------

(1)      Four of the owned stores include land leases: three Xtra stores in
         Puerto Rico, and one Pueblo store in the U.S. Virgin Islands.

         The Company also owns the shopping centers at three of its store
locations in Puerto Rico.

         The majority of the Company's supermarket operations are conducted on
leased premises which have initial terms generally ranging from 20 to 25 years.
The lease terms typically contain renewal options allowing the Company to extend
the lease term in five to ten year increments. The leases provide for fixed
monthly rental payments subject to various periodic adjustments. The leases
often require the Company to pay certain expenses related to the premises such
as insurance, taxes and maintenance. See Note (6)--Leases and Leasehold
Interests of the notes to the Company's consolidated financial statements
referenced in Part II, Item 8 of this Form 10-K. The Company does not anticipate
any difficulties in renewing its leases as they expire.

        The construction of owned facilities is financed principally with
internally generated funds. All owned properties of Pueblo are pledged as
collateral (by a pledge of the assets of the Company's subsidiaries) under the
Company's existing bank credit agreement, dated as of July 21, 1993 (the
"Existing Bank Credit Agreement") with a syndicate of banks entered into in
connection with the Acquisition. See Note (5)--Debt of the notes to the
Company's consolidated financial statements referenced in Part II, Item 8 of
this Form 10-K. Pueblo contemplates entering into an amended bank credit
agreement (the "New Bank Credit Agreement") in connection with its proposed
refinancing plan.  See Item 7-Management Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.

         The Company has discontinued its operations in Florida, as described
more fully in Note (2)--Unusual Charges of the notes to the Company's
consolidated financial statements referenced in Part II, Item 8 of this Form
10-K, and has closed all eight of its Xtra stores located in Florida during
fiscal 1997. The Company has sold one owned Xtra location and the lease rights
to a second location. The Company is seeking to dispose of its remaining Florida
retailing assets.

         The Company owns its corporate offices located in San Juan, Puerto
Rico, and leases its administrative offices located in Pompano Beach, Florida.

         The Company believes that its properties are adequately maintained and
sufficient for its business needs.

ITEM 3.           LEGAL PROCEEDINGS

         The Company is a party to a number of legal proceedings involving 
claims for money damages arising in the ordinary course of conducting its
business which are either covered by insurance or are within the Company's
self-insurance program, and in a number of other proceedings which, except as
set forth below, are not deemed material. The Company's management does not
believe that the ultimate resolution of any of these matters could have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
      

                                       -9-

<PAGE>   10




         Pueblo has been party to various lawsuits alleging a fraud engaged in
by Premium Sales Corp., Plaza Trading Corporation and Windsor Wholesale Company
and numerous of their related subsidiaries ("Premium") in which damages
totalling approximately $300 million (plus treble damages, punitive damages
and/or attorneys' fees) were claimed against each defendant. Premium was
ostensibly engaged in the business of "brokering" or "diverting" groceries
throughout the United States and various foreign countries from 1988 until its
official bankruptcy in 1993. Following the Premium bankruptcy, the Receiver and
Bankruptcy Trustee sued numerous grocers, including Pueblo, claiming that the
grocers were liable for Premium's losses, and a class action was filed against
Pueblo and other defendants on behalf of the investors in the funding entities
which lost monies in the Premium fraud. All litigation against Pueblo has been
settled for an amount which, taking into account all litigation costs and
settlement costs, is within the $5.3 million of reserves established from fiscal
years 1994 through 1997 for such purpose. The settlement received preliminary
court approval on February 11, 1997. The Company's legal counsel has advised
that it expects the settlement to receive final approval at a final fairness
hearing scheduled for May 7, 1997.


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the quarter ended January 25, 1997.



                                      -10-

<PAGE>   11



                                    PART II.


ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                  SHAREHOLDER MATTERS

Market Information

         There is no established public trading market for the Company's common
equity.

Holders

         The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc., a
Delaware holding company ("Holdings") which in turn is beneficially owned by a
trust for the benefit of the family of Gustavo Cisneros, and a trust for the
benefit of the family of Ricardo Cisneros (the "Principal Shareholders"), with
each trust having an approximate 50% indirect beneficial interest in Holdings.
Messrs. Gustavo and Ricardo Cisneros disclaim beneficial ownership of such
shares.

Dividends

         No cash dividends have been declared on the common stock since the
Company's inception. Certain restrictive covenants in the Existing Bank Credit
Agreement impose limitations on the declaration or payment of dividends by the
Company. Additionally, dividend payments by Pueblo to the Company are
restricted under the terms of the Existing Bank Credit Agreement. The Existing
Bank Credit Agreement, however, provides that so long as no default or event of
default (as defined in the Credit Facility) exists, or would exist as a result,
Pueblo is permitted to pay cash dividends to the Company in an aggregate amount
necessary to pay interest on the 10-year, 9 1/2% senior notes (issued in
connection with the Acquisition) then due and payable in accordance with the
terms thereof. Similar restrictions on dividends will be included in the New
Bank Credit Agreement.




                                      -11-

<PAGE>   12



ITEM 6.           SELECTED FINANCIAL DATA
                  (Dollars in thousands, except per selling square foot amounts)
<TABLE>
<CAPTION>

                                                                    Fiscal Year Ended (1)
                                    ----------------------------------------------------------------------------- 
                                     January 30,     January 29,      January 28,     January 27,    January 25,
                                        1993 (2)       1994 (3)          1995            1996           1997
-----------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>            <C>        
Operating Statement Data
 Net sales                            $ 1,251,726    $ 1,199,123    $ 1,166,955    $ 1,145,370    $ 1,020,056
 Cost of goods sold                       948,568        903,850        871,136        848,490        760,329
                                      -----------    -----------    -----------    -----------    -----------
      Gross profit                        303,158        295,273        295,819        296,880        259,727
 Selling, general and admin-
   istrative expenses (4)                 232,202        230,266        229,197        240,219        213,485
 Depreciation and
   amortization                            29,649         37,650         43,865         43,669         41,128
 Unusual charges (5)                           --             --             --         32,161          4,160
                                      -----------    -----------    -----------    -----------    -----------
      Operating profit (loss)              41,307         27,357         22,757        (19,169)           954
 Transaction costs                             --        (11,217)            --             --             --
 Sundry, net                                 (278)           (66)           (35)           (52)           122
 Interest expense-debt and
   capital lease obligations              (14,193)       (22,255)       (32,809)       (34,221)       (30,458)
 Interest and investment
   income, net                              1,146            620            656            875            276
 Income tax (expense)
   benefit                                (12,060)        (1,208)         4,790         20,210          9,535
                                      -----------    -----------    -----------    -----------    -----------
 Income (loss) before
   cumulative effect of a
   change in accounting
   principle                               15,922         (6,769)        (4,641)       (32,357)       (19,571)
 Cumulative effect of a
   change in accounting
   principle                                   --         (2,982)            --             --          2,653
                                      -----------    -----------    -----------    -----------    -----------
 Net income (loss)                    $    15,922    $    (9,751)   $    (4,641)   $   (32,357)   $   (16,918)
                                      ===========    ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>

                                                                     AS OF (1)
                                    ------------------------------------------------------------------------------
                                       January 30,     January 29,      January 28,     January 27,   January 25,
                                           1993           1994             1995            1996          1997
------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>            <C>        
Balance Sheet Data
 Cash and cash equivalents (6)        $     7,838    $     5,471    $    15,680    $     6,928    $    12,148
 Working capital (deficit)                 (8,478)       (26,873)       (11,534)       (31,125)       (56,217)
 Property and equipment, net              168,395        224,605        207,935        166,283        150,915
 Total assets                             300,012        619,625        602,695        573,383        522,740
 Total debt and capital
    lease obligations                     123,686        347,124        329,855        308,497        295,204
 Stockholders' equity                      48,074         66,897         77,256         44,899         32,981

</TABLE>




                                      -12-

<PAGE>   13


<TABLE>
<CAPTION>

                                                     Fiscal Year Ended (1)
                             ------------------------------------------------------------------------------
                               January 30,     January 29,     January 28,     January 27,    January 25,
                                1993 (2)        1994 (3)           1995           1996            1997
-----------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>             <C>             <C>            <C>     
Certain Financial Ratios
   And Other Data
EBITDA (7)                          $ 70,956        $ 65,007        $ 66,622        $ 56,661       $ 50,391
Capital expenditures                  22,472          23,493          16,401          22,334         14,455
EBITDA margin (7)                        5.7%            5.4%            5.7%            4.9%           4.9%
Debt to EBITDA                          1.74            5.34            4.95            5.44           5.86
</TABLE>

<TABLE>
<CAPTION>

                                                                            Fiscal Year (1)
                                                     -----------------------------------------------------------------
                                                      1993 (2)      1994 (3)       1995          1996          1997
                                                     -----------------------------------------------------------------
<S>                                                  <C>           <C>           <C>           <C>           <C>      
Pueblo And Xtra Store Data:
Puerto Rico
  Number of stores (at fiscal year-end)                     40            42            44            46            44
  Average sales per store (8)                        $  21,091     $  20,776     $  20,263     $  20,212     $  19,672
  Average selling square footage                        26,818        26,601        26,729        27,536        27,591
  Average sales per selling square foot (8)          $     786     $     781     $     758     $     731     $     722
  Total sales                                          850,139       860,190       874,019       877,603       886,765
  Same store sales % change                                9.2%         (0.9)%        (1.3)%        (2.8)%        (2.6)%
U.S. Virgin Islands
  Number of stores (at fiscal year-end)                      5             5             5             6             6
  Average sales per store (8)                        $  19,220     $  19,003     $  15,619     $  14,960     $  15,110
  Average selling square footage                        20,724        20,724        20,724        20,104        20,104
  Average sales per selling square foot (8)          $     927     $     917     $     754     $     744     $     752
  Total sales                                           97,970        95,014        78,097        76,813        90,659
  Same store sales % change                                0.9%         (1.2)%       (17.8)%        (3.3)%         7.0%
Florida (9)
  Number of stores (at fiscal year-end)                     10             8             8             8            --
  Average sales per store (8)                        $  28,230     $  25,226     $  23,481     $  21,518            --
  Average selling square footage                        52,075        50,398        50,398        50,398            --
  Average sales per selling square foot (8)          $     542     $     501     $     466     $     427            --
  Total sales                                          286,853       220,730       187,845       159,659            --
  Same store sales % change                               (4.4)%       (14.7)%       (11.6)%          --            --
Blockbuster Store Data:
  Number of stores (at fiscal year-end)                     19            21            22            22            27
  Average sales per store (8)                        $   1,206     $   1,123     $   1,254     $   1,443     $   1,588
  Average weekly sales                                     452           467           535           608           794
  Total sales                                           16,763        23,189        26,994        31,295        35,938
  Same store sales % change                               (3.5)%        (8.1)%        10.9%         14.0%         10.5%
</TABLE>

----------------

(1)      Operating activity for the 26 weeks ended January 29, 1994 and for the
         fiscal years 1995, 1996 and 1997 are representative of the Company
         subsequent to the Acquisition. All other operating activity pertains to
         Pueblo prior to the Acquisition.
(2)      Fiscal 1993 was a 53-week year.







                                      -13-

<PAGE>   14



(3)      Represents the combined results of operations for the 26-week period
         ended July 31, 1993 of the Company's predecessor prior to the
         Acquisition and the 26-week period ended January 29, 1994 of the
         Company. The results for each 26-week period are as follows:

<TABLE>
<CAPTION>


                                                                        26 Weeks Ended           26 Weeks Ended
                                                                        July 31, 1993           January 29, 1994
                                                                   -----------------------    -----------------------
<S>                                                                      <C>                        <C>        
Net sales .........................................................      $ 612,454                  $ 586,669  

Gross profit ......................................................        150,961                    144,312  

Selling, general and administrative expenses ......................        117,738                    112,528  

Depreciation and amortization .....................................         15,745                     21,905  

Operating profit ..................................................         17,478                      9,879  

Transaction costs .................................................         11,217                         --  

Interest expense, net .............................................          5,533                     16,102  

Income tax expense, (benefit) .....................................          2,858                     (1,650) 

Net income (loss) .................................................         (5,148)                    (4,603) 

EBITDA ............................................................         33,223                     31,784  
</TABLE>

(4)      Selling, general and administrative expenses for fiscal years 1996 and
         1997 include certain expenses and charges related to the implementation
         of the Company's strategic initiatives and other matters. See
         "Management's Discussion and Analysis of Financial Conditions and
         Results of Operations -General".
(5)      The Company recorded unusual charges of approximately $30 million in
         fiscal 1996 and $4.2 million in fiscal 1997 as a result of the
         Company's exit from the Florida market and an unusual charge of $2.2
         million in fiscal 1996 as a result of the Company's restructuring of
         its Puerto Rico operations.
(6)      Highly liquid investments purchased with a maturity of three months or
         less are considered cash equivalents.
(7)      EBITDA represents income (loss) before interest, income taxes, sundry,
         depreciation and amortization, transaction costs, and unusual charges.
         In fiscal 1997, income taxes included $1.5 million representing the tax
         effect of the cumulative effect of a change in accounting principle
         relating to the adoption of SFAS No. 121 during such fiscal year. See
         Note (1)--Significant Accountiing Policies of the notes to the
         Company's consolidated financial statements included in Part II, Item 8
         of this Form 10-K. EBITDA is not intended to represent cash flow from
         operations as defined by generally accepted accounting principles and
         should not be considered as an alternative to net income (loss) as an
         indication of the Company's operating performance or to cash flows as a
         measure of liquidity. EBITDA is included as it is the basis upon which
         the Company assesses its financial performance. EBITDA margin
         represents EBITDA divided by net sales.
(8)      Beginning in 1996, average sales are weighted for the period of time
         stores are open during the year.
(9)      All Xtra stores in Florida were closed in the first quarter of fiscal
         1997.








                                      -14-

<PAGE>   15




ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

GENERAL

         The Company was organized in 1993 to acquire Pueblo in the Acquisition.
In connection with the Acquisition, the Company incurred significant
indebtedness and recorded significant goodwill. Following the Acquisition, the
Company continued an existing operating strategy designed to significantly
expand its supermarket penetration through new supermarket openings in Puerto
Rico and Florida and new Blockbuster locations in Puerto Rico. The number of the
Company's supermarkets in Puerto Rico and the U.S. Virgin Islands grew from 46
to 50 and the number of the Company's Blockbuster locations (including
conversions) grew from 20 to 27, in each case measured from the Acquisition
through the end of fiscal 1997. In addition, the Company added one new
supermarket in Florida after the Acquisition which was subsequently closed in
fiscal 1997, as described below. From the Acquisition through fiscal 1997, the
Company made capital expenditures totalling $67.1 million, of which $61.3
million related to Puerto Rico and the U.S. Virgin Islands. The Company's focus
on new supermarket development rather than supermarket operations, as well as
the effects of increased competition, resulted in a decline in total sales, same
store sales, and consolidated operating results.

         Throughout this time period, the Company's markets have been affected
by an increasing level of competition from local supermarket chains, independent
supermarkets, warehouse club stores, discount drug stores and convenience
stores. Warehouse club stores and mass merchandisers, which have entered the
Puerto Rico and U.S. Virgin Islands markets since 1990 offering various bulk
grocery and general merchandise items, have increased pricing pressures on
grocery retailers including the Company. In addition, low inflation in food
prices in recent years has made it difficult for the Company and other grocery
store operators to increase prices and has intensified the competitive
environment by causing such retailers to emphasize promotional activities and
discount pricing to maintain or gain market share. The South Florida market, in
particular, has been characterized by intense competition that negatively
affected the performance of the Company's stores in that market through fiscal
1996.

         In October 1995, William T. Keon, III was named President and Chief
Executive Officer of the Company. Following his arrival at the Company, Mr. Keon
conducted a thorough review of the Company's operating business practices and
its financial performance. As a result of such review, the Company determined in
January 1996 to discontinue its retail operations in the competitive Florida
market in order to focus on its core markets where it has a stronger competitive
position and greater profit opportunities. In the spring of 1996, management
also began to take several other actions designed to improve the financial
performance of the Company, including the conversion of five Pueblo stores to
the Xtra format, the closing of two underperforming Xtra stores in Puerto Rico,
an increase in the Company's advertising expenditures in Puerto Rico, and the
conversion of six Pueblo Video Clubs into in-store Blockbuster outlets.

         In the summer of 1996, in conjunction with implementation of a 
revised business strategy, the Company retained a retail industry
consulting firm to assist management in analyzing the Company's operating
practices. One result of such analysis was the reorganization of labor
scheduling practices, which enabled the Company to eliminate 440 store employees
in January 1997 and reduce annual labor costs by approximately $9.0 million. It
is management's belief that the decision to exit the Florida market, together
with the actions which the Company began to take in the spring of 1996 and the
implementation of its revised business strategy, has begun to contribute, and
should continue to contribute, toward improved operating results.

         Other strategic measures being undertaken by the Company include: (i)
continual evaluation of Pueblo store formats relative to the markets they serve
for potential future conversions to Xtra stores; (ii) continued conversion of
its remaining Pueblo Video Clubs to Blockbuster outlets and the opening of
additional free-standing Blockbuster stores; (iii) other interior store changes
to increase customer traffic, such as in-store banking and in-store fast food 
restaurants for select locations; (iv) selective development of new
supermarkets in attractive markets, particularly in the interior of Puerto
Rico; (v) continued implementation of new store operating procedures and
practices to enhance productivity and reduce labor costs; (vi) improving
procurement and distribution practices in order to improve gross margins;
(vii) implementation of a category management system and expansion of its sales
of private label products; (viii) continuing a more effective advertising
program emphasizing the Company's price competitiveness and (ix) maintenance of
an ongoing program to recruit managers trained in United States mainland
supermarket retailing practices and establishment of performance-based
compensation programs. The Company believes that these strategic measures will 
be an effective means of improving sales by increasing customer traffic in its 
supermarkets.



                                      -16-

<PAGE>   16

         In connection with the strategic initiatives begun in January 1996, the
Company has incurred a number of unusual charges and other items that have
adversely affected the Company's operating profit, including the following items
which aggregated $36.1 million in fiscal 1996 and $12.3 million in fiscal 1997.
The Company recorded unusual charges of approximately $30.0 million in fiscal
1996 and $4.2 million in fiscal 1997 as a result of the Company's exit from the
Florida market, and an unusual charge of $2.2 million in fiscal 1996 as a result
of the Company's restructuring of its Puerto Rico operations. See Note
(2)--Unusual Charges of the notes to the Company's consolidated financial
statements included in Part II, Item 8 of this Form 10-K. Other items which
adversely affected the Company's operating profit and were related to the
implementation of the Company's strategic initiatives including the following,
which aggregated $3.9 million in fiscal 1996 and $8.1 million in fiscal 1997. In
fiscal 1996, an adjustment to the net realizable value of certain non-operating
real property in Puerto Rico caused a charge of $3.9 million. In fiscal 1997, as
a result of the adoption of SFAS No. 121, the Company recognized operating
losses of $4.1 million (or $2.7 million net of deferred taxes) from the closed
Florida operations, as discussed below. See Note (1)--Significant Accounting
Policies of the notes to the Company's consolidated financial statements
included in Part II, Item 8 of this Form 10-K. In addition, in fiscal 1997, the
elimination of 440 store employees resulted in a charge of approximately $1.1
million in severance costs and the closing of two Puerto Rico stores resulted in
a $2.9 million charge.


RESULTS OF OPERATIONS

Adjustments for Florida Closing

         In fiscal 1996, the Company determined to discontinue its retail
operations in Florida. The effective date of the Florida closing was December
30, 1995. All eight of the Xtra stores in Florida were closed in the first
quarter of fiscal 1997. The following table presents selected comparative
operating data of the Company for the three fiscal years ended January 25, 1997
after excluding the Florida retail division (the "Continuing Business"):





                                      -17-

<PAGE>   17

<TABLE>
<CAPTION>



                                                                         Year Ended           Year Ended          Year Ended
                                                                         January 28,          January 27,         January 25,
                                                                             1995                1996                 1997
                                                                       ----------------     ---------------     ----------------
<S>                                                                        <C>                 <C>                <C>              
Selected Operating Results of the Puerto Rico and U.S. Virgin                                                                      
    Islands Operations: (dollars in thousands)                                                                                     

Net sales                                                                  $979,110            $985,711           $1,013,363       

Gross profit                                                                250,810             259,508              259,291       

Selling, general and administrative expenses                                186,861             201,402              208,900       

EBITDA (1)                                                                   63,949              58,106               50,391       

Depreciation and amortization                                                38,418              39,075               41,128       

Operating profit                                                             25,531              16,748                9,263       

Selected Operating Results of the Puerto Rico and U.S. Virgin                                                                      
    Islands Operations: (as a percentage of sales)                                                                                 

Gross profit                                                                   25.6%               26.3%                25.6%      

Selling, general and administrative expenses                                   19.1                20.4                 20.6       

EBITDA (1)                                                                      6.5                 5.9                  5.0       

Operating profit                                                                2.6                 1.7                  0.9       
</TABLE>

------------

(1)      EBITDA represents income (loss) before interest, income taxes, sundry,
         depreciation and amortization and unusual charges. EBITDA is not
         intended to represent cash flow from operations as defined by generally
         accepted accounting principles and should not be considered as an
         alternative to net income (loss) as an indication of the Company's
         operating performance or to cash flows as a measure of liquidity.
         EBITDA is included as it is the basis upon which the Company assesses
         its financial performance.

FISCAL 1997 VS. FISCAL 1996

         As of January 25, 1997, the Company operated a total of 50 supermarkets
and 27 Blockbuster locations in Puerto Rico and the U.S. Virgin Islands. During
fiscal 1997, the Company closed all eight of its Xtra stores and its
distribution facility in Florida as part of the disposal of the Company's
Florida retail operations. For further details of the Florida closing, see Note
(2)--Unusual Charges of the notes to the Company's consolidated financial
statements included in Part II, Item 8 of this Form 10-K. In addition, in fiscal
1997, the Company closed two underperforming Xtra stores in Puerto Rico,
converted five Pueblo stores to Xtra stores in Puerto Rico, and converted four
Pueblo Video Clubs into in-store Blockbuster outlets in Puerto Rico.

         Fiscal 1997 net sales decreased by $125.3 million or 10.9% from
$1,145.4 million in the prior year to $1,020.1 million. A primary factor in the
overall sales reduction was the closing of the Florida retail operations, which
had sales of $6.7 million and $159.7 million in fiscal 1997 and fiscal 1996,
respectively. Net sales from the Continuing Business increased by $27.7 million
or 2.8% in fiscal 1997 over fiscal 1996. Of this increase, 83% was attributable
to supermarket sales and 17% was attributable to Blockbuster operations. In
fiscal 1997, same store sales, or sales for stores open in comparable 52-week
periods for the Continuing Business, decreased by 1.4%, as compared to a same
store sales decline for the Continuing Business of 2.4% in fiscal 1996. This
decline reflected a same store sales decrease for the year of 2.6% in the
Company's Puerto Rico supermarket operations (which represent approximately
87.5% of the Company's total sales) as competition continued to adversely affect
the operating division's sales performance. However, the Company's Puerto Rico
supermarket operations experienced an increase in same store sales of 3.4% in
the fourth quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996.
U.S. Virgin Islands supermarket operations experienced a same store sales
increase for fiscal 1997 of 7.0%. Blockbuster operations experienced a same
store sales increase for fiscal 1997 of 10.5%.


                                      -18-

<PAGE>   18



         Gross profit margin in fiscal 1997, as a percentage of sales, was 25.5%
or 0.4% below the 25.9% in the prior year. Gross margin for the Continuing
Business decreased 0.7% from 26.3% in fiscal 1996 to 25.6% in fiscal 1997. The
primary factor in this decline was the 4.7% decline in the meat department gross
margin from the prior year in the Puerto Rico supermarkets. The decline in meat
margins was principally the result of a reduction in prices due, in part, to
competition, partially offset by a reduction in shrinkage in the meat
department. The decrease in gross margin was partially offset by improved
margins in the Blockbuster operations.

         Selling, general and administrative expenses decreased from the prior
year amount of $240.2 million to $213.5 million, or 11.1%, primarily as a result
of the closing of the Florida operations. Selling, general and administrative
expenses, as a percentage of sales, was 20.9% in fiscal 1997, which was
comparable to that of fiscal 1996. Selling, general and administrative expenses
from the Continuing Business increased from $201.4 million to $208.9 million, or
as a percentage of sales, increased 0.2% from 20.4% in fiscal 1996 to 20.6% in
fiscal 1997. Major factors contributing to the increase were (a) a $2.9 million
charge for the closing of two Xtra stores in Puerto Rico, (b) a $2.7 million
increase in advertising expenditures for the Continuing Business, (c) $1.9
million in consulting fees arising from an ongoing project to improve
supermarket operations in Puerto Rico and (d) $1.1 million in severance costs
recorded in connection with the elimination of 440 store employees in Puerto
Rico.

         Depreciation and amortization decreased $2.6 million from $43.7 million
in fiscal 1996 to $41.1 million in fiscal 1997, primarily as a result of the
closing of the Florida operations. Depreciation and amortization from the
Continuing Business increased $2.0 million from $39.1 million in fiscal 1996 to
$41.1 million in fiscal 1997. The increase was due mainly to the full year of
depreciation on fiscal 1996 capital expenditures of $21.8 million. In addition,
the Company recorded an additional $600,000 in depreciation related to a change
in estimated life of its shopping carts.

         Interest expense, net of interest and investment income, of $30.1
million decreased by $3.2 million, or 9.5%, as compared to fiscal 1996. This
decrease is primarily due to a reduction in interest on capital lease
obligations resulting from the Florida closing combined with lower interest
rates and principal amortization on the term loans under the Existing Bank
Credit Agreement, dated as of July 21, 1993 (the "Existing Bank Credit
Agreement"), partially offset by increased short-term borrowing during fiscal
1997.

         In fiscal 1996, the Company, under then applicable accounting
principles, recorded an unusual charge of $30.0 million, including estimated
operating losses for the phase-out period in fiscal 1997 related to the
discontinued Florida operations. In fiscal 1997, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Pursuant to the requirements of this statement, the
Company's results of operations in fiscal 1997 included operations of the
Florida stores for the phase-out period in fiscal 1997. The recognition of these
operations negatively affected the Company's operating profit by $4.1 million in
fiscal 1997. Furthermore, in accordance with SFAS No. 121, the Company recorded
the cumulative effect of a change in accounting principle of $2.7 million (net
of deferred income taxes of $1.5 million), the effect of which was to offset the
Florida operating losses recorded in fiscal 1997, as described above. See Note
(1)--Significant Accounting Policies and Note (2)--Unusual Charges of the notes
to the Company's consolidated financial statements included in Part II, Item 8
of this Form 10-K. In addition, the Company recorded $4.2 million in unusual
charges in fiscal 1997 to write down assets from the Florida operations in order
to reflect a revised estimate of the fair value of the remaining properties held
for sale.

         The decrease in the income tax benefit of $10.7 million was primarily
the result of the tax effects of the $30.0 million charge for the Florida
disposal that was recorded in fiscal 1996.

         Results for fiscal 1997 were a net loss of $16.9 million, as compared
to a net loss of $32.4 million for fiscal 1996.



                                      -19-

<PAGE>   19



FISCAL 1996 VS. FISCAL 1995

         As of January 27, 1996, the Company operated 60 supermarkets and 22
Blockbuster locations throughout Puerto Rico, the U.S. Virgin Islands and
Florida. During fiscal 1996, the Company closed one small Pueblo store and
opened three new Xtra stores in Puerto Rico. In addition, the Company opened one
new Pueblo store, which it purchased from a competitor, in the U.S. Virgin
Islands.

         Net sales decreased by $21.6 million, or 1.8%, in comparison to the
prior year. Sales of approximately $12.5 million related to Florida retail
operations subsequent to December 30, 1995 (the effective date of closing for
accounting purposes) are included in unusual charges in the consolidated
statement of operations for fiscal 1996. Additionally, sales derived from fiscal
1996 new store openings were $18.2 million. Same store sales, or sales for
stores open in comparable 52-week periods, decreased by 3.3%. This reflects the
effects of increased competition as same store sales decreases were experienced
in all supermarket operating divisions. The Puerto Rico supermarket operations,
the major contributor to total company sales (with approximately 77.0% of the
total), reflected a same store sales decrease for the year of 2.8%. The effects
of competitors' new store openings in the U.S. Virgin Islands were fully cycled
during the fourth quarter of fiscal 1996 as indicated by a same store sales
increase of 3.8% in the U.S. Virgin Islands for the 12-week period ended January
27, 1996, although such same store sales decreased 3.3% for the entire fiscal
year. Fiscal 1996 Blockbuster video operations experienced a same store sales
increase of 14.0% over the prior year.

         Although the Company's operations in the U.S. Virgin Islands were
hindered by Hurricane Marilyn, there were no material net losses in property due
to the adequacy of insurance coverage maintained by the Company. Most stores
were re-opened (with temporary repairs) within a few days of being hit by the
hurricane to ensure that residents could get the necessary food and supplies.

         Gross profit margin, as a percentage of sales, was 0.6% greater than
that of the prior year primarily due to a reduction in retail shrink and
selective price increases.

         Selling, general and administrative expenses, as a percentage of sales,
increased by 1.3% for fiscal 1996 principally due to higher direct store selling
expenses. Major factors contributing to the increase were (a) higher labor costs
partly caused by selected increases in customer service levels in Puerto Rico as
well as costs associated with the implementation of the frequent shopping
program in Florida through December 30, 1995, the effective closing date of the
Florida operating division, (b) increased advertising and legal costs, (c)
higher repairs and maintenance combined with the fixed nature of certain store
expenses such as rent and utilities and (d) an adjustment to net realizable
value for certain non-operating property in Puerto Rico in the amount of $3.9
million.

         Depreciation and amortization for fiscal 1996 was comparable to that of
fiscal 1995.

         Interest expense of $33.3 million, net of interest and investment
income, increased by $1.2 million, or 3.7%, primarily due to bank financing fees
incurred during the fiscal year.

         During fiscal 1996, the Company recorded unusual charges of $32.2
million consisting of approximately $30.0 million resulting from the Florida
closing and $2.2 million for restructuring in Puerto Rico operations. Included
in the $30.0 million loss from the Florida closing are estimated operating
losses during the phase-out period, a reduction of related assets to their
estimated realizable value, the recognition of net future lease obligations,
employee termination benefits for Florida operations and other store closing
costs. See Note (2)--Unusual Charge of the notes to the Company's consolidated
financial statements included in Part II, Item 8 of this Form 10-K.

         The increase in the income tax benefit of $15.4 million was primarily
the result of the tax effects of the Florida closing, the majority of which is
deferred.


                                      -20-

<PAGE>   20



         Net results for fiscal 1996 reflect a net loss of $32.4 million as
compared to a net loss of $4.6 million for fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

         Liquidity for the Company's operational needs has historically been
provided by cash flow from operations, along with funds available under the
Existing Bank Credit Agreement. The Company believes that the consummation of
the Refinancing Plan described will enhance the Company's liquidity resources.
         
         The Company is pursuing a refinancing plan (the "Refinancing Plan")
designed to enhance its liquidity resources and to give its increased operating
and financial flexibility.  The Company intends to enter into a purchase
agreement with investment banks to issue and sell $85 million principal amount
of 9 1/2% Series B Senior Notes Due 2003 (the "Notes"), the terms of which will
be substantially identical to those of the Company's $180 million principal
amount of 9 1/2% Senior Notes Due 2003 (the "Existing Notes"), which were
issued in 1993 in connection with the Acquisition.  The Company intends to use
the net proceeds of the Notes to repay the senior secured indebtedness
outstanding under the Existing Bank Credit Agreement.  In connection with the
Refinancing Plan, the Company and Pueblo are entering into the New Bank Credit
Agreement which will provide for a $65.0 million revolving credit facility and
less restrictive covenants compared to the Existing Bank Credit Agreement. 
After the issuance of standby letters of credit in the amount of $23.3 million,
Pueblo will have borrowing availability on a revolving basis of $41.7 million
under the New Bank Credit Agreement.  In connection with the consummation of
the Refinancing Plan, the Company intends to satisfy $10 million of
indebtedness payable to a related part by transferring its interest in two real
estate properties from its closed Florida operations to such related party. 
The Company believes that the completion of the Refinancing Plan will provide
the Company with extended debt maturities, increased liquidity and less
restrictive financial covenants, which will give it increased operating and
financial flexibility.

         Cash provided by operating activities was $14.8 million, $24.1 million,
and $27.8 million in fiscal 1997, fiscal 1996, and fiscal 1995, respectively.
The major factor contributing to the reduction in net cash provided by operating
activities for fiscal 1997 was net cash outlays totalling $17.0 million related
to the Florida closing (excluding proceeds from the sale of certain fixed assets
from the Florida retail operations).

         Net cash used in investing activities was $1.4 million, $21.8 million,
and $15.7 million in fiscal years 1997, 1996, and 1995, respectively. The $20.4
million reduction in cash used in investing activities pertains primarily to
$11.8 million received in fiscal 1997 for the sale of two Xtra stores and
certain store equipment in Florida as part of the Florida closing, coupled with
a net $7.4 million reduction in expenditures from the capital program. Total
capital expenditures, net of proceeds from disposals, were $14.4 million, $21.8
million, and $15.7 million during fiscal years 1997, 1996, and 1995,
respectively.

         Working capital during fiscal 1997 decreased $25.1 million from a
deficit of $31.1 million at the end of fiscal 1996 to a deficit of $56.2 million
at the end of fiscal 1997. A decrease in assets held for sale and deferred
income taxes, and the inclusion of notes payable to a related party in current
liabilities, contributed to the decrease in working capital.

         As of January 25, 1997, the Company had borrowings outstanding under
the Existing Bank Credit Agreement consisting of $63.0 million in term loans and
$16.0 million in revolving loans. The Company amended the Existing Bank Credit
Agreement as of January 25, 1997 to increase the revolving facility by $10.0
million and to amend certain restrictive covenants in order to permit the
Company to maintain its compliance with such covenants. The Company has
classified as non-current $9.0 million under the revolving credit facility as a
result of its intent to maintain this obligation on a long-term basis. The
borrowings outstanding under the Existing Banking Credit Agreement mature on
July 31, 2000. The term loans under the Existing Bank Credit Agreement are
reduced over the term of the facility on a graduated basis in accordance with
the credit agreement. Included in the $79.0 million outstanding under the
Existing Bank Credit Agreement as of January 25, 1997 are principal payments
aggregating $10.7 million due under the term loans in the succeeding 12-month
period. Management anticipates that the principal payments will be financed by
operations.

        Subsequent to January 25, 1997, the Company began negotiating with the
Bank Syndicate to restructure the borrowings outstanding under the Existing
Bank Credit Agreement and has begun to explore alternative sources of finances
that will give it increased operating and financial flexibility.

         Outstanding borrowings with a governmental agency of Puerto Rico from
the issuance of industrial revenue bonds were $17.5 million as of January 25,
1997, including $7.5 million of principal payments due in the current fiscal
year. Management anticipates that the principal payments will be financed by
operations.

         The Company's general liability and certain of its workers compensation
insurance programs are self-insured. The Company maintains insurance coverage
for claims in excess of $250,000. The current portion of the reserve,
representing amounts expected to be paid in the next fiscal year, is $6.7
million as of January 25, 1997 and is anticipated to be funded with cash
provided by operating activities.

        Capital expenditures for fiscal 1998 are expected to be approximately
$11.1 million. This capital program, which is subject to continuing change and
review, includes the conversion of ten Pueblo Video Clubs to in-store
Blockbuster outlets, the opening of three new Blockbuster stores, and the
remodeling of certain existing locations.
   


                                      -21-

<PAGE>   21




         Since the Acquisition, Holdings and its affiliates have supplemented
the Company's capital resources. In April 1996, the Company received a
contribution of $5.0 million from Holdings, which it used to reduce amounts
outstanding under the Existing Bank Credit Agreement. In addition, on October
18, 1996, Holdings provided $10.0 million in additional funds to the Company in
return for a non-interest bearing redeemable note payable to a related party.
This $10.0 million in additional funds was used to reduce amounts outstanding
under the Existing Bank Credit Agreement. In connection with the consummation of
the Refinancing Plan, the Company intends to satisfy this indebtedness by
transferring its interest in two real estate properties from its closed Florida
operations to Holdings.  The Company believes such properties have a fair market
value of no more than $10.0 million.

         The Company believes that the cash flows generated by its normal
business operations together with its available revolving credit facility will
be adequate for its liquidity and capital resource needs.

Quarterly Financial Data


        The following table sets forth interim financial data as reported in
previous filings as well as adjusted interim financial data due to the effects
of the adoption of SFAS No. 121 at the beginning of fiscal year 1997:

<TABLE>
<CAPTION>
                                                                        Unaudited
                                        -------------------------------------------------------------------------------------------
                                        16 Weeks       16 Weeks         28 Weeks        28 Weeks        40 Weeks        40 Weeks
                                        Ended           Ended           Ended           Ended           Ended           Ended
                                        May 18,         May 18,         August 10,      August 10,      November 2,     November 2,
                                        1996            1996            1996            1996            1996            1996
                                        As Reported    Adjusted       As Reported       Adjusted      As Reported      Adjusted     
                                        -------------------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>             <C>             <C>             <C>
Operating Statement Data
  Net Sales                             310,368         317,060         536,376         543,068         765,008         771,700

  Costs of goods sold                   230,301         236,557         396,006         402,262         567,631         573,887
                                        -------         -------         -------         -------         -------         -------  
     GROSS PROFIT                        80,067          80,503         140,370         140,806         197,377         197,813

  OPERATING EXPENSES
  Selling, general and
   administrative expenses               62,291          66,876         107,628         112,213         155,613         160,198
  Depreciation and amortization          12,003          12,003          21,048          21,048          30,153          30,153
                                        -------         -------         -------         -------         -------         -------  
      OPERATING PROFIT                    5,773           1,624          11,694           7,545          11,611           7,462

  Sunday, net                               (43)            (43)            (56)            (56)            (67)            (67)
                                        -------         -------         -------         -------         -------         -------  
       INCOME BEFORE
       INTEREST, INCOME
       TAXES, AND
       CUMULATIVE EFFECT
       OF A CHANGE IN
       ACCOUNTING
       PRINCIPLE                          5,730           1,581          11,638           7,489          11,544           7,395

  Interest expense on debt               (9,096)         (9,096)        (16,016)        (16,016)        (22,830)        (22,830)
  Interest expense on capital lease        (356)           (356)           (614)           (614)           (866)           (866)
    obligations
  Interest and investment income,
    net                                      51              51              91             91              127             127
                                        -------         -------         -------         -------         -------         -------  
       LOSS BEFORE INCOME
       TAXES AND
       CUMULATIVE EFFECT
       OF A CHANGE IN
       PRINCIPLE                         (3,671)         (7,820)         (4,901)         (9,050)        (12,025)        (16,174)

  Income tax benefit                        651           2,147             797           2,293           3,269           4,765
                                        -------         -------         -------         -------         -------         -------  
       LOSS BEFORE
        CUMULATIVE EFFECT
        OF A CHANGE IN
        ACCOUNTING PRINCIPLE             (3,020)         (5,673)         (4,104)         (6,757)         (8,756)        (11,409)

 Cumulative effect of a change in
   accounting principle, met of
     deferred income taxes of
        $1,496                               --           2,653              --           2,653              --           2,653 
                                        -------         -------         -------         -------         -------         -------  

       Net LOSS                          (3,020)         (3,020)         (4,104)         (4,104)         (8,756)         (8,756)
                                        =======         =======         =======         =======         =======         =======  
</TABLE>



IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

         The inflation rate for food prices continues to be lower than the
overall increase in the U.S. Consumer Price Index. The Company's primary costs,
products and labor, usually increase with inflation. Increases in inventory
costs can typically be passed on to the customer. Other cost increases must by
recovered through operating efficiencies and improved gross margins. Currency in
Puerto Rico and the U.S. Virgin Islands is the U.S. dollar. As such, the Company
has no exposure to foreign currency fluctuations.

FORWARD LOOKING STATEMENTS

         Certain of the matters discussed under the captions "Business," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Form 10-K contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, concerning the Company's operations, economic performance and
financial condition, including, among other things, the Company's business
strategy.  These statements are based on the Company's expectations and are
subject to various risks and uncertainties. Actual results could differ
materially from those anticipated due to a number of factors, including but not
limited to the Company's substantial indebtedness and high degree of leverage,
which will continue after consummation of the Refinancing Plan (including
limiting effects on ability to obtain additional financing and trade credit, to
apply operating cash flow for purposes in addition to debt service, to respond
to price competition in economic downturns and to dispose of assets pledged to
secure such indebtedness or to freely use proceeds of any dispositions), the
Company's ability to continue to attract, retain and integrate into its
management structure  qualified senior managers, the Company's limited
geographic markets, competitive conditions in the markets in which the Company
operates and buying patterns of consumers and the Company's successful
implementation of its business strategy and successful consummation of the
Refinancing Plan.

                                      -22-


<PAGE>   22



ITEM 8.           FINANCIAL STATEMENTS

         Information called for by this item is set forth in the Company's
consolidated financial statements and supplementary data contained in this
report. Specific consolidated financial statements can be found at the pages
listed in the following index:

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                               PAGE
                                                                                                               ----

<S>                                                                                                            <C>
Independent Auditors' Report ..................................................................................F-1

Consolidated Balance Sheets as of January 25, 1997
   and January 27, 1996........................................................................................F-2

Fiscal years ended January 25, 1997, January 27, 
   1996, and January 28, 1995:

         Consolidated Statements of Operations.................................................................F-4

         Consolidated Statements of Cash Flows.................................................................F-5

         Consolidated Statements of Stockholder's Equity.......................................................F-6

Notes to Consolidated Financial Statements.....................................................................F-7
</TABLE>

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

        There have been no disagreements with the Company's accountants on
accounting and financial disclosure during the applicable periods.




                                      -23-


<PAGE>   23



                                    PART III.

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The following is a list (as of April 1, 1997) of the names of the
directors and executive officers of the Company, their respective ages and their
respective positions with the Company. The terms of the directors and executive
officers of the Company expire annually upon the holding of the annual meeting
of stockholders.

Directors
---------

<TABLE>
<CAPTION>

Name                                         Age     Position
----                                         ---     --------

<S>                                          <C>     <C>                                                        
Gustavo A. Cisneros..........................51      Chairman of the Board; Member of the Executive Committee


William T. Keon, III.........................50      Director; President and Chief Executive Officer; Chairman
                                                      of the Executive Committee; Chairman of the Audit and Risk 
                                                      Committee; Member of the Compensation and Benefits Committee

David L. Aston...............................50      Director; Executive Vice President; President of Puerto Rico 
                                                      Food Retail Division

Steven I. Bandel.............................43      Director; Member of the Executive Committee; Chairman of 
                                                      the Compensation and Benefits Committee

Alejandro Rivera.............................54      Director; Member of the Audit and Risk Committee; Member of 
                                                      the Compensation and Benefits Committee

Cristina Pieretti............................45      Director


Executive Officers
------------------

William T. Keon, III.........................50      President and Chief Executive Officer

David L. Aston...............................50      Executive Vice President; President of Puerto Rico
                                                      Food Retail Division

Lawrence Elias...............................54      Senior Vice President, Management Information
                                                      Systems

Filiberto Berrios............................51      Senior Vice President; President of Blockbuster
                                                      Division
</TABLE>

        Gustavo A. Cisneros has been the Chairman of the Board of the Company
since its inception (July 28, 1993). He was appointed to the Executive Committee
in October 1995. Since prior to 1992, he has been a direct or indirect
beneficial owner of interests in and a director of certain companies that own or
are engaged in a number of diverse commercial enterprises in Venezuela, the
United States, Brazil, Chile and Mexico (the "Cisneros Group"), including the
Company. He is a member of the board of directors of Univision Communications,
Inc., Evenflo & Spalding Holdings Corporations and RSL Communications, Inc.




                                      -24-


<PAGE>   24



         William T. Keon, III has been a Director of the Company since October
1995. He assumed the position of President and Chief Executive Officer and was
appointed Chairman of the Executive Committee and Audit and Risk Committee also
in October 1993. He is also a member of the Compensation and Benefits Committee.
Since January 1983, Mr. Keon has served in senior managerial roles in the
Cisneros Group. 

         David L. Aston joined the Company in March 1997 as a Director,
Executive Vice President and President of the Puerto Rico Food Retail Division.
From June 1993 until the time he joined the Company, Mr. Aston served as
president of Waldbaums and Superfresh Foods, units of the A&P Company, a
supermarket chain in the New York area. Prior to June 1993, he served as Vice
President of Merchandising and Operations for the Kroger Company.

         Steven I. Bandel has been a Director of the Company since the
Acquisition. He was appointed to the Executive Committee during October 1995.
Since prior to 1992, he has been actively involved in the operations and
management of certain companies in the Cisneros Group, other than a period from
February 1990 to May 1992 during which he acted as a partner in a Venezuelan
investment banking firm.

         Alejandro Rivera has been a Director of the Company since April 1,
1997. He was previously a Director of the Company since the Acquisition until
June 30, 1995. Since 1976, he has been actively involved in the operations and
management of certain companies in the Cisneros Group. Mr. Rivera is also an
Alternate Director of Univision Communications, Inc. Mr. Rivera is a member of
the Audit and Risk Committee and of the Compensation and Benefits Committee.

         Cristina Pieretti was appointed a Director in March 1997. During most
of the last seven years, she has been actively involved in operations of
companies in the Cisneros Group in areas related to consumer goods, retailing
and telecommunications, other than a period from March 1995 to February 1996
during which she acted as a partner in a consulting firm.

         Lawrence Elias has served as Senior Vice President of Management
Information Systems of the Company since September 1993. He joined the Company
in March 1988 as Vice President of Management Information Systems and was
promoted to Senior Vice President in September 1993.

         Filiberto Berrios has held a variety of positions with the Company
since 1965, most recently as Vice President and General Manager of the
Blockbuster Division. In March 1997, he was promoted to Senior Vice President
and President of the Blockbuster Division.




                                      -25-


<PAGE>   25



ITEM 11.          EXECUTIVE COMPENSATION

         The following table sets forth the cash compensation paid or
distributed by the Company through January 25, 1997 to, or accrued through such
date for the account of the current Chief Executive Officer as well as each of
the three executive officers of the Company serving at January 25, 1997 and the
executive officer terminating during fiscal 1997 (who would have been reportable
except for his termination from the Company) for their services in all
capacities to the Company.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>


                                                           Annual Compensation
                                         -------------------------------------------------------
                                                                                       Other
                 Name                                                                 Annual          All Other
                 and                                                                  Compen-          Compen-
              Principal                  Fiscal        Salary          Bonus          sation            sation
               Position                   Year          ($)             ($)             ($)              ($)
--------------------------------------   -------    ------------    -----------    -------------   ----------------

<S>                                       <C>            <C>            <C>           <C>                <C>          
William T. Keon, III,                     1997           107,778         94,100                -          6,056 (5)
   President and Chief Executive          1996           125,000              -                -                  -
   Officer                                1995                 -              -                -                  -

Jeffrey P. Freimark,
   Executive Vice President;
   Chief Financial Officer;               1997           260,000         71,345                -         11,911 (5)
   Assistant Secretary and                1996           250,000         16,735       31,978 (1)         10,014 (5)
   Treasurer (Resigned 2/28/97)           1995           240,000         18,400                -          8,562 (5)

Edwin Perez,
   Executive Vice President;              1997           248,558        112,980                -          4,500 (4)
   President, Puerto Rico                 1996                 _              _                _                  _
   Division (Resigned 3/19/97)            1995                 _              _                _                  _

Marc P. Applebaum,
   Former Senior Vice President,          1997           160,000          8,210       18,389 (2)          5,292 (5)
   Finance and Control; Assistant         1996           155,000          6,685                -          4,978 (5)
   Treasurer (through 10/11/96)           1995           148,000         28,462                -          5,289 (5)

Lawrence Elias,
   Senior Vice President,                 1997           143,000          7,338                -          5,474 (5)
   Management Information                 1996           135,500          5,477       14,448 (3)          5,298 (5)
   Systems                                1995           130,000          6,038       14,135 (3)          4,853 (5)
</TABLE>

------------


(1)      Includes costs related to the reimbursement of executive medical
         expenses of $19,990 and an automobile allowance in the amount of
         $10,168.

(2)      Includes costs related to the reimbursement of executive medical
         expenses of $9,369 and an automobile allowance in the amount of $7,200.




                                      -26-


<PAGE>   26



(3)      Includes costs related to the reimbursement of executive medical
         expenses of $7,870 and $8,223 in fiscal 1996 and fiscal 1995,
         respectively. Also includes automobile allowances in the amounts of
         $4,758 and $4,092 in fiscal 1996 and fiscal 1995, respectively.

(4)      Amount represents the employer contributions from the Pueblo
         International, Inc. Salaried Employees' Discretionary Contribution Plan
         which covers eligible salaried associates in Puerto Rico and the U.S.
         Virgin Islands divisions.

(5)      Amount represents the Company matching contribution to an elective
         non-qualified deferred compensation plan maintained by the Company.



                               PENSION PLAN TABLES

         The Company sponsors two defined benefit plans. The Pueblo
International, Inc. Employees' Retirement Plan (the "Retirement Plan") is
tax-qualified under the Internal Revenue Code and covers all full-time and
certain part-time employees of the Company over age 21 with one year of service.
It provides an annual benefit equal to 1% of the average annual compensation
over a five-year period per year of service. The Supplemental Executive
Retirement Plan (the "SERP") is non-qualified and covers all officers of the
Company and its subsidiaries. It provides an annual benefit equal to 3% of the
average compensation over a five-year period per year of service (up to 20
years). Full vesting for the Retirement Plan and the SERP occurs upon completion
of five years of service. The following tables give the estimated annual benefit
payable upon retirement for participants in the Retirement Plan and the SERP.
The SERP benefits are offset by the Retirement Plan benefits and by 100% of
social security benefits. These offsets are reflected in the benefits shown in
the SERP table. The Company does not sponsor any other defined benefit or
actuarial plans.

  TABLE 1.                  RETIREMENT PLAN

<TABLE>
<CAPTION>

                              5            10           15            20            25          30          35
<C>                         <C>          <C>          <C>           <C>           <C>         <C>         <C>   
125,000                     6,250        12,500       18,750        25,000        31,250      37,500      43,750
150,000                     7,500        15,000       22,500        30,000        37,500      45,000      52,500
175,000                     8,000        16,000       24,000        32,000        40,000      48,000      56,000
</TABLE>


                                      -27-


<PAGE>   27


  TABLE 2.                  SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

<TABLE>
<CAPTION>
                                 5            10          15            20           25            30           35
<C>                              <C>          <C>         <C>          <C>           <C>           <C>          <C>    
125,000                               0        9,580       22,080        34,580       28,330        22,080       15,830
150,000                               0       14,580       29,580        44,580       37,080        29,580       22,080
175,000                           2,830       21,080       39,330        59,580       49,580        41,580       33,580
200,000                           6,580       28,580       50,580        72,580       64,580        56,580       48,580
225,000                          10,330       36,080       61,830        87,580       79,580        71,580       63,580
250,000                          14,080       43,580       73,080       102,580       94,580        86,580       78,580
275,000                          17,830       51,080       84,330       117,580      109,580       101,580       93,580
300,000                          21,580       58,580       95,580       132,580      124,580       116,580      108,580
325,000                          25,330       66,080      106,830       147,580      139,580       131,580      123,580
350,000                          29,080       73,580      118,080       162,580      154,580       146,580      138,580
375,000                          32,830       81,080      129,330       177,580      169,580       161,580      153,580
400,000                          36,580       88,580      140,580       192,580      184,580       176,580      168,580
425,000                          40,330       96,080      151,830       207,580      199,580       191,580      183,580
450,000                          44,080      103,580      163,080       222,580      214,580       206,580      198,580
475,000                          47,830      111,080      174,330       237,580      229,580       221,580      213,580
500,000                          51,580      118,580      185,580       252,580      244,580       236,580      228,580
</TABLE>

         Compensation covered by the qualified Retirement Plan is equal to the
total compensation (excluding compensation attributable to the redemption of
stock options resulting from the Transaction) paid to an employee during a plan
year prior to any reduction under a salary reduction agreement entered into by
the employee pursuant to a plan maintained by the employer which qualifies under
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), or
pursuant to a plan maintained by the employer which qualifies under Section 125
of the Code. Compensation in excess of $160,000 shall be disregarded, provided,
however, that such $160,000 limitation shall be adjusted at the same time and in
such manner as the maximum compensation limit is adjusted under Section
401(a)(17) of the Code.

         Compensation covered by the non-qualified Supplemental Executive
Retirement Plan is the same as the qualified Retirement Plan, except that the
$160,000 limit is not applicable.

        The estimated years of credited service and age, respectively, for
purposes of calculating benefits through January 25, 1997 for Mr. Keon is three
and 50, respectively, for Mr. Freimark is 10 and 42, respectively, for Mr. Perez
is one and 43, respectively, for Mr. Applebaum is three and 41, respectively,
and for Mr. Elias is nine and 54 respectively. The benefits provided by both the
Retirement Plan and the SERP are on a straight-life annuity basis, as are the
examples in the Retirement Plan table.

DIRECTOR COMPENSATION

        Directors who are not employees of the Company or associated with
companies in the Cisneros Group are paid a fee of $18,000 per year for serving
on the Board of Directors, $1,250 for each board meeting attended and $1,250 for
each committee meeting attended with a limit of one committee meeting paid per
day. All directors are also reimbursed for their usual and customary expenses
incurred in attending all board and committee meetings. During fiscal year 1997,
the Company had no outside directors.

EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS

         On March 1, 1997, Edwin Perez resigned as President of the Puerto Rico
division and resigned as an officer and board member of any related
corporations. In accordance with his employment agreement dated February 28,
1996, Mr. Perez will be paid $275,000 in separation pay.





                                      -28-


<PAGE>   28



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Messrs. Keon, Freimark, Bandel, Rivera and Paul L. Whiting served as
members of the Compensation and Benefits Committee of the Board of Directors of
the Company during all or a portion of the fiscal year ended January 25, 1997.
Messrs. Keon and Freimark also served as officers of the Company during the
fiscal year ended January 25, 1997.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

a)       Security Ownership of Certain Beneficial Owners

         As discussed in Part II, Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters, the Company is a wholly-owned subsidiary
of Holdings.

         The following table sets forth certain information regarding the
beneficial ownership of more than 5% of the common stock of Holdings as of April
1, 1997. By virtue of its ownership of the Holdings common stock, the following
entity may be deemed to own a corresponding percentage of the Company's common
stock.
<TABLE>
<CAPTION>

                                                                   Shares
                                                             Beneficially Owned
                                                      ----------------------------------
              Name and Address                           Number               Percent
--------------------------------------------          -------------        -------------
<S>                                                        <C>                 <C> 
Bothwell Corporation
c/o Finser Corporation
     550 Biltmore Way, 9th Floor
     Coral Gables, FL 33134                                996                 99.6
</TABLE>


         The shares of Holdings described above are beneficially owned by the
Principal Shareholders by virtue of their indirect ownership of the entity
listed above. The principal business address of the Principal Shareholders is
Paseo Enrique Eraso, Centro Commercial Paseo Las Mercedes, Caracas, Venezuela.

(b)      Security Ownership of Management

         As of April 1, 1997, the executive officers and the management of the
Company have no beneficial ownership of Holdings. The following table sets forth
certain information regarding beneficial ownership of Holdings by the principal
shareholders as described above. By virtue of their ownership of the common
stock of Holdings, the following may be deemed to own a corresponding percentage
of the equity of the Company.

<TABLE>
<CAPTION>

                                                               Common Shares
                                                            Beneficially Owned
                                                     ---------------------------------
                  Name                                 Number               Percent
-----------------------------------------            -----------         -------------
<S>                                                          <C>                  <C> 
Current Directors and Executive
Officers as a group (1)                                      996                  99.6
</TABLE>





                                      -29-


<PAGE>   29


-------------------

(1)      Includes common and preferred stock beneficially owned by the Principal
         Shareholders.


(c)      Changes in Control

        The borrowings outstanding under the Existing Bank Credit Agreement are
collateralized by a pledge of the assets of the Company's subsidiaries, by the
capital stock of, and intercompany notes issued by, the Company's subsidiaries
and by the capital stock of the Company.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        On April 18, 1996, Holdings contributed additional capital of $5.0
million which, under the terms of the Existing Bank Credit Agreement, as
amended in April 1996, was used to reduce the Company's term loans under the
Existing Bank Credit Agreement. In addition, Holdings provided $10.0 million in
additional funds to the Company on October 18, 1996 in return for a
non-interest-bearing redeemable note payable to a related party (the "Holdings
Note"). The Holdings Note matures after the expiration of the Existing Bank
Credit Agreement and can be redeemed earlier subject to the Company meeting
various performance and financial criteria. Proceeds from the Holdings Note
were used to reduce the Company's term loans under the Existing Bank Credit
Agreement in accordance with terms set forth in the Existing Bank Credit
Agreement, as amended. In connection with the consummation of the Refinancing
Plan, the Company intends to satisfy this indebtedness by transferring its
interest in two real estate properties from its closed Florida operations to
Holdings.  The Company believes such properties have a fair market value of no
more than $10.0 million.

        During April 1994, the Company received additional capital of $15.0
million from Holdings. Concurrent with the capital contribution, the Company
loaned $10.0 million to Spalding & Evenflo. This loan, which had an interest
rate of 4.4%, was repaid by Spalding & Evenflo in two equal installments during
July and September 1994. Under the terms of the Existing Bank Credit Agreement,
as amended, the Company used $15.0 million to reduce amounts outstanding under
its term loan credit facilities and revolving credit facility, including a $5.0
million prepayment on the fiscal 1996 amortization of the term loans.

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (A) Documents filed as part of this report:

             (1) Consolidated Financial Statements

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Located in Item 8 hereto)

                 Independent Auditors' Report

                 Consolidated Balance Sheets as of January 25, 1997 
                 and January 27, 1996

                 Fiscal years ended January 25, 1997, January 27, 1996, and
                 January 28, 1995

                           Consolidated Statements of Operations
                           Consolidated Statements of Cash Flows
                           Consolidated Statements of Stockholders' Equity

                 Notes to Consolidated Financial Statements






                                      -30-


<PAGE>   30


                                                                Location in
(2) Consolidated Financial Statement Schedules:                 this report
                                                                -----------

    Independent Auditors' Report........................................S-1

    Schedule II - Valuation
      and Qualifying Accounts...........................................S-2

(3) Exhibits









                                      -31-
<PAGE>   31



                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

                                                                                   Sequentially
  Exhibit No.                       Description of Exhibit                         Numbered Page
----------------         ---------------------------------------------        ----------------------
      <S>                <C>                                                  <C>
      3.1                Restated Certificate of Incorporation of
                         the Company (incorporated by
                         reference to Exhibit 3.1 to Registrant's
                         Registration Statement No. 33-63372
                         on Form S-1)

      3.2                Amended and Restated By-laws of the
                         Company (incorporated by reference to
                         Exhibit 3.2 to Registrant's Registration
                         Statement No. 33-63372 on Form S-1)

      4.1                Specimen Note for Registrant's 9 1/2%
                         Senior Notes due 2003 (included in
                         Exhibit 4.2)*

      4.2                Indenture dated as of July 28, 1993
                         between Registrant and United States
                         Trust Company of New York, as
                         Trustee*

      10.1               Credit Agreement among the
                         Registrant, Pueblo Merger
                         Corporation, Pueblo International,
                         Inc., Xtra Super Food Centers, Inc.,
                         various lending institutions, The Chase
                         Manhattan Bank, N.A. and Scotiabank
                         de Puerto Rico, as Co-Managing
                         Agents and Scotiabank de Puerto Rico,
                         as Administrative Agent (the "Bank
                         Credit Agreement")*

      10.2               First Amendment, dated as of August
                         2, 1993, of the Bank Credit
                         Agreement*

      10.3               Second Amendment, dated as of
                         December 15, 1993, to the Bank Credit
                         Agreement (incorporated by reference
                         to Exhibit 10.1 to Registrant's
                         Quarterly Report on Form 10-Q for the
                         quarter ended November 6, 1993)

      10.4               Third Amendment, dated as of January
                         31, 1994 (effective as of November 5,
                         1993), to the Bank Credit Agreement*

</TABLE>



                                      -32-

<PAGE>   32

<TABLE>
<CAPTION>


                                                                                   Sequentially
  Exhibit No.                       Description of Exhibit                         Numbered Page
----------------         ---------------------------------------------        ----------------------
     <S>                 <C>                                                       <C>
     10.6                Stock Purchase Agreement, dated as of
                         May 5, 1993, by and among the
                         Company, Pueblo and the Selling
                         Stockholders (as defined therein)
                         (incorporated by reference to Exhibit
                         2.1 to Registrant's Registration
                         Statement No. 33-63372 on Form S-1)
              
     10.7                Support Letter Agreement, from E&S
                         Holdings, Inc. to Pueblo (incorporated
                         by reference to Exhibit 2.2 to
                         Registrant's Registration Statement No.
                         33-63372 on Form S-1)
              
     10.8                Support Letter Agreement, from Met
                         Life and First Boston to the Company
                         (incorporated by reference to Exhibit
                         2.3 to Registrant's Registration
                         Statement No. 33-63372 on Form S-1)
              
     10.9                Underwriting Agreement dated July 21,
                         1993 between Registrant and Morgan
                         Stanley & Co., Incorporated as
                         Underwriter*

     10.10               Supply Agreement with Malone and
                         Hyde dated July 11, 1990 (incorporated
                         by reference to Exhibit 10.2 to
                         Registrant's Registration Statement No.
                         33-63372 on Form S-1)

     10.11               Membership correspondence
                         concerning Topco Associates, Inc.
                         (incorporated by reference to Exhibit
                         10.3 to Registrant's Registration
                         Statement No. 33-63372 on Form S-1)

     10.12               Mortgage Notes dated June 6, and 10,
                         1986 Due Fiscal 1997 (incorporated by
                         reference to Exhibit 10.4 to
                         Registrant's Registration Statement No.
                         33-63372 on Form S-1)
</TABLE>



                                      -33-

<PAGE>   33

<TABLE>
<CAPTION>


                                                                                   Sequentially
  Exhibit No.                       Description of Exhibit                         Numbered Page
----------------         ---------------------------------------------        ----------------------
     <S>                 <C>                                                       <C>
     10.13               Agreement between The Chase
                         Manhattan Bank (National
                         Association)(the "Bank"), Puerto Rico
                         Industrial, Medical and Environmental
                         Pollution Control Facilities Financing
                         Authority (the "Authority") and the
                         Registrant; Trust Agreement between
                         the Authority and Banco Popular de
                         Puerto Rico, as Trustee; Guarantee and
                         Contingent Purchase Agreement
                         between the Registrant and the Bank;
                         Loan Agreement between the Authority
                         and the Registrant; Tender Agent
                         Agreement among the Authority;
                         Banco Popular de Puerto Rico as
                         Trustee; Remarketing Agreement
                         between Chase Manhattan Capital
                         Markets Corporation and the
                         Registrant; each dated October 1,
                         1985, relating to a $5,000,000
                         financing in October 1985 (substantially
                         identical documents were executed for
                         an additional $5,000,000 financing in
                         November 1985 and $7,500,000 in
                         December 1985) (incorporated by
                         reference herein as filed with Pueblo's
                         Registration Statement No. 1-6376 on
                         Form S-2 dated January 23, 1986)

     10.17               Promissory Note, dated March 31,
                         1994, between Spalding & Evenflo
                         Companies, Inc. and Pueblo Xtra
                         International, Inc., as payee*

     10.18               Interest rate cap agreement between the
                         Chase Manhattan Bank, N.A. and
                         Pueblo Xtra International, Inc. dated
                         June 14, 1994**

     10.19               Interest rate cap agreement between
                         The Bank of Nova Scotia and Pueblo
                         International, Inc. dated June 14,
                         1994**

     10.20               Executed Fourth Amendment, dated as
                         of April 8, 1994, to the Bank Credit
                         Agreement (incorporated by reference
                         to Exhibit 10.1 to Registrant's
                         Quarterly Report on Form 10-Q for the
                         quarter ended May 21, 1994)

</TABLE>


                                      -34-

<PAGE>   34


<TABLE>
<CAPTION>

                                                                                   Sequentially
  Exhibit No.                       Description of Exhibit                         Numbered Page
----------------         ---------------------------------------------        ----------------------
     <S>                 <C>                                                    <C>
     10.21               Executed Fifth Amendment, dated as of
                         August 11, 1995, to the Bank Credit
                         Agreement (incorporated by reference
                         to Exhibit 10.1 to Registrant's
                         Quarterly Report on Form 10-Q for the
                         quarter ended November 4, 1995)

     10.22               Executed Sixth Amendment, dated as
                         of November 3, 1995, to the Bank
                         Credit Agreement (incorporated by
                         reference to Exhibit 10.2 to
                         Registrant's Quarterly Report on Form
                         10-Q for the quarter ended November
                         4, 1995)

     10.23               Employment Agreement, dated
                         February 28, 1996, between Pueblo
                         International, Inc. and Edwin Perez***

     10.24               Agreement, dated March 1, 1996,
                         between Pueblo International, Inc. and
                         Hector G. Quinones***

     10.25               Executed Seventh Amendment, dated
                         as of January 26, 1996, to the Bank
                         Credit Agreement***

     10.26               Acquisition Agreement, dated June 13,
                         1995, between Grand Union
                         Supermarkets of the Virgin Islands,
                         Inc. and Xtra Super Food Centers,
                         Inc.***

     10.27               Letter Agreement Amendment, dated
                         September 21, 1995, to the Acquisition
                         Agreement***

     10.28               Amendment, dated November 13,
                         1995, to the Acquisition Agreement***

     10.29               Receipt and Agreement by PXC&M
                         Holdings, Inc. from Bothwell
                         Corporation dated October 18, 1996
                         (incorporated by reference to Exhibit
                         10.1 to Registrant's Quarterly Report
                         on Form 10-Q for the quarter ended
                         November 2, 1996)

</TABLE>


                                      -35-

<PAGE>   35


<TABLE>
<CAPTION>

                                                                                   Sequentially
  Exhibit No.                       Description of Exhibit                         Numbered Page
----------------         ---------------------------------------------        ----------------------
     <S>                 <C>                                                      <C>
     10.30               Receipt and Agreement by Pueblo Xtra
                         International,  Inc. from PXC&M
                         Holdings, Inc. dated October 18, 1996
                         (incorporated by reference to Exhibit
                         10.2 to Registrant's Quarterly Report
                         on Form 10-Q for the quarter ended
                         November 2, 1996)

     10.31               Consent executed by Scotiabank de
                         Puerto Rico, as Administrative Agent,
                         dated October 18, 1996 (incorporated
                         by reference to Exhibit 10.3 to
                         Registrant's Quarterly Report on Form
                         10-Q for the quarter ended November
                         2, 1996)

     10.32               Eighth Amendment, dated as of
                         November 1, 1996, to the Credit
                         Agreement among Pueblo Xtra
                         International, Inc., Pueblo
                         International, Inc., Xtra Super Food
                         Centers, Inc., various lending
                         institutions, The Chase Manhattan
                         Bank, N.A. and Scotiabank de Puerto
                         Rico, as Administrative Agent
                         (incorporated by reference to Exhibit
                         10.4 to Registrant's Quarterly Report
                         on Form 10-Q for the quarter ended
                         November 2, 1996)

     10.33               Ninth Amendment, dated as of January
                         25, 1997, to the Credit Agreement
                         among Pueblo Xtra International, Inc.,
                         Pueblo International, Inc., Xtra Super
                         Food Centers, Inc., various lending
                         institutions, The Chase Manhattan
                         Bank, N.A. and Scotiabank de Puerto
                         Rico, as Administrative Agent

     21.1                Subsidiaries of the Company

     27.1                Financial Data Schedule (for SEC use only).

</TABLE>






                                      -36-

<PAGE>   36



*        Previously filed and incorporated by reference to corresponding
         exhibits in the Company's Form 10-K for fiscal year ended January 29,
         1994.

**       Previously filed and incorporated by reference to corresponding
         exhibits in the Company's Form 10-K for fiscal year ended January 28,
         1995.

***      Previously filed and incorporated by reference to corresponding
         exhibits in the Company's Form 10-K for fiscal year ended January 27,
         1996.

         (B)   Reports on Form 8-K

                  None




                                      -37-

<PAGE>   37



SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT


         No annual report to security holders covering the Registrant's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has, as
of the date hereof, been sent to security holders by the Registrant. If such
report or proxy material is to be furnished to security holders subsequent to
the filing of the annual report of this Form 10-K, the Registrant will furnish
copies of such material to the Commission when it is sent to the security
holders.





                                      -38-

<PAGE>   38



                                   SIGNATURES


         Pursuant to the requirement 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.

                                          PUEBLO XTRA INTERNATIONAL, INC.
                                                      (Registrant)

                                    By: /s/ Daniel Cammarata
                                       ----------------------------------------
                                        Daniel Cammarata
                                        Controller and Chief Accounting Officer




Dated April 23, 1997

         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.


<TABLE>
<CAPTION>

SIGNATURE                                   TITLE                                                         DATE
---------                                   -----                                                         ----
<S>                                         <C>                                                           <C>
/s/ Gustavo A. Cisneros                     Chairman of the Board; Member of the                          April 23, 1997
-------------------------------             Executive Committee  
Gustavo A. Cisneros                                              
                                     
/s/ William T. Keon, III                    Director; President; Chief Executive                          April 23, 1997
-------------------------------             Officer; Chairman of the Executive          
William T. Keon, III                        Committee; Chairman of the Audit and Risk   
                                            Committee; Member of the Compensation       
                                            and Benefits Committee                      
                                                                                        
                                     
/s/ David L. Aston                          Director; Executive Vice President;                           April 23, 1997
-------------------------------             President of Puerto Rico Food Retail  
David L. Aston                              Division                              
                                                                                  
                                     
/s/ Steven I. Bandel                        Director; Member of the Executive                             April 23, 1997
-------------------------------             Committee; Chairman of the Compensation    
Steven I. Bandel                            and Benefits Committee                     
                                                                                       
                                     
/s/ Alejandro Rivera                        Director; Member of the Audit and Risk                        April 23, 1997
-------------------------------             Committee; Member of the Compensation  
Alejandro Rivera                            and Benefits Committee                 
                                                                                   
                                     
/s/ Cristina Pieretti                       Director                                                      April 23, 1997
------------------------------- 
Cristina Pieretti                    
</TABLE>                             



                                      -39-

<PAGE>   39
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholder of
  Pueblo Xtra International, Inc.
San Juan, Puerto Rico
Pompano Beach, Florida

         We have audited the accompanying consolidated balance sheets of Pueblo
Xtra International, Inc. and Subsidiaries as of January 25, 1997 and January 27,
1996, and the related consolidated statements of operations, cash flows and
stockholder's equity for each of the three years in the period ended January 25,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pueblo Xtra International,
Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended January 25, 1997 in conformity with generally accepted
accounting principles.

         As discussed in Note 1 to the consolidated financial statements,
effective January 28, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".

DELOITTE & TOUCHE LLP
Certified Public Accountants

Miami, Florida
April 3, 1997   



                                      F-1
<PAGE>   40


                           CONSOLIDATED BALANCE SHEETS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                       January 25,  January 27,
                                                                          1997         1996
                                                                       ----------------------
<S>                                                                    <C>           <C>     
ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                         $ 12,148      $  6,998
     Marketable securities (market value of $89
         at January 25, 1997 and $888 at January 27, 1996)                   89           888
     Accounts receivable                                                  4,443        10,071
     Inventories                                                         59,503        67,237
     Assets held for sale                                                13,804        26,000
     Prepaid expenses                                                    10,428        10,670
     Deferred income taxes                                                3,316         9,215
                                                                       --------      --------
     TOTAL CURRENT ASSETS                                               103,731       131,079
                                                                       --------      --------

PROPERTY AND EQUIPMENT
     Land and improvements                                               18,278        18,116
     Buildings and improvements                                          62,388        60,766
     Furniture, fixtures and equipment                                   98,138        95,591
     Leasehold improvements                                              35,408        31,617
     Construction in progress                                             4,253         4,139
                                                                       --------      --------

                                                                        218,465       210,229
     Less accumulated depreciation and amortization                      77,289        55,505
                                                                       --------      --------

                                                                        141,176       154,724
     Property under capital leases, net                                   9,739        11,559
                                                                       --------      --------

     TOTAL PROPERTY AND EQUIPMENT, NET                                  150,915       166,283

GOODWILL, net of accumulated amortization of $18,050 at
     January 25, 1997 and $13,018 at January 27, 1996                   183,668       188,700
DEFERRED INCOME TAXES                                                    12,923        10,272
TRADENAMES                                                               31,570        32,436
DEFERRED CHARGES AND OTHER ASSETS                                        39,933        44,613
                                                                       --------      --------

     TOTAL ASSETS                                                      $522,740      $573,383
                                                                       ========      ========
</TABLE>










   The accompanying notes are an integral part of these financial statements.

                                      F-2
<PAGE>   41

                           CONSOLIDATED BALANCE SHEETS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                      January 25,    January 27,
                                                                         1997           1996
                                                                       -------------------------
<S>                                                                    <C>           <C>     
LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
     Accounts payable                                                  $ 74,951      $ 65,112
     Accrued expenses                                                    36,054        52,610
     Salaries, wages and benefits payable                                11,563        14,315
     Short-term borrowing                                                 7,000            --
     Notes payable to a related party                                    10,000            --
     Income taxes payable                                                   110            94
     Current installments of long-term debt                              18,250        29,214
     Current obligations under capital leases                               617           859
     Deferred income taxes                                                1,403            --
                                                                       --------      --------

     TOTAL CURRENT LIABILITIES                                          159,948       162,204


LONG-TERM DEBT, net of current portion                                   71,227        89,477
NOTES PAYABLE                                                           180,000       180,000
CAPITAL LEASE OBLIGATIONS, net of current portion                         8,110         8,947
RESERVE FOR SELF-INSURANCE CLAIMS                                        12,201        12,862
DEFERRED INCOME TAXES                                                    22,921        35,335
OTHER LIABILITIES AND DEFERRED CREDITS                                   35,352        39,659
                                                                       --------      --------

     TOTAL LIABILITIES                                                  489,759       528,484
                                                                       --------      --------

COMMITMENTS AND CONTINGENCIES                                                --            --

STOCKHOLDER'S EQUITY
     Common stock, $.10 par value; 200 shares authorized
         and issued                                                          --            --
     Additional paid-in capital                                          91,500        86,500
     Accumulated deficit                                                (58,519)      (41,601)
                                                                       --------      --------

     TOTAL STOCKHOLDER'S EQUITY                                          32,981        44,899
                                                                       --------      --------

     TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                        $522,740      $573,383
                                                                       ========      ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.



                                     F-3
<PAGE>   42
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                              Fiscal                  Fiscal               Fiscal
                                                               1997                    1996                 1995
                                                          --------------         --------------        ----------------
<S>                                                       <C>                    <C>                   <C>            
Net sales                                                 $    1,020,056         $    1,145,370        $      1,166,955
Cost of goods sold                                               760,329                848,490                 871,136
                                                          --------------         --------------        ----------------

     GROSS PROFIT                                                259,727                296,880                 295,819
                                                          --------------         --------------        ----------------

OPERATING EXPENSES
Selling, general and administrative
     expenses                                                    213,485                240,219                 229,197
Depreciation and amortization                                     41,128                 43,669                  43,865
Unusual charges                                                    4,160                 32,161                       -
                                                          --------------         --------------        ----------------
     OPERATING PROFIT (LOSS)                                         954                (19,169)                 22,757

Sundry, net                                                          122                    (52)                    (35)
                                                          --------------         --------------        ----------------


     INCOME (LOSS) BEFORE INTEREST,
         INCOME TAXES AND
         CUMULATIVE EFFECT OF A
         CHANGE IN ACCOUNTING
         PRINCIPLE                                                 1,076                (19,221)                 22,722

Interest expense on debt                                         (29,306)               (32,002)                (30,358)
Interest expense on capital lease
     obligations                                                  (1,152)                (2,219)                 (2,451)
Interest and investment income, net                                  276                    875                     656
                                                          --------------         --------------        ----------------


     LOSS BEFORE INCOME TAXES
         AND CUMULATIVE EFFECT
         OF A CHANGE IN ACCOUNTING
         PRINCIPLE                                               (29,106)               (52,567)                 (9,431)

Income tax benefit                                                 9,535                 20,210                   4,790
                                                          --------------         --------------        ----------------

     LOSS BEFORE CUMULATIVE EFFECT
         OF A CHANGE IN ACCOUNTING
         PRINCIPLE                                               (19,571)               (32,357)                 (4,641)

Cumulative effect of a change in accounting
      principle, net of deferred income taxes of $1,496            2,653                      -                       -
                                                          --------------         --------------        ----------------

                NET LOSS                                  $      (16,918)        $      (32,357)       $         (4,641)
                                                          ==============         ==============        ================
</TABLE>









   The accompanying notes are an integral part of these financial statements.



                                     F-4
<PAGE>   43
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>




                                                                                                 Fiscal       Fiscal         Fiscal
                                                                                                  1997         1996          1995
                                                                                                 ------       ------         ------
<S>                                                                                            <C>           <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                                      $(16,918)     $(32,357)     $ (4,641)
 Adjustments to reconcile net loss to net cash provided        
    by operating activities, net of effects of disposal of                               
    Florida retail operations:                                                           
    Cumulative effect of a change in accounting principle                                        (2,653)           --            --
    Unusual charges                                                                               4,160        31,889            --
    Depreciation and amortization of property and equipment                                      25,528        29,818        29,278
    Amortization of intangible and other assets                                                  15,600        14,181        14,587
    Deferred income taxes                                                                        (9,259)      (19,145)       (7,639)
    Loss on disposal of property and equipment, net                                               2,395         4,794           783
    Decrease  (increase) in deferred charges, goodwill, and other assets                          2,401         2,755         2,101
    Increase (decrease) in reserve for self-insurance claims                                        896        (3,611)       (1,130)
    Increase (decrease) in other liabilities and deferred credits                                   161        (3,540)         (366)
    Changes in operating assets and liabilities:                                         
     Decrease (increase) in accounts receivable                                                   2,621        (3,406)          223
     Decrease (increase) in inventories                                                          (3,995)       (4,267)          538
     Decrease (increase) in prepaid expenses                                                        278         1,212          (411)
     Increase (decrease) in accounts payable and accrued expenses                                 6,427         7,887        (4,850)
     Increase (decrease) in income taxes payable                                                    (20)       (2,145)         (680)
                                                                                               --------      --------      --------
                                                                                                 27,622        24,065        27,793
     Decrease attributable to disposal of Florida retail operations                             (12,810)           --            --
                                                                                               --------      --------      --------

                Net cash provided by operating activities                                        14,812        24,065        27,793
                                                                                               --------      --------      --------


CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment                                                            (14,455)      (20,769)      (14,649)
 Proceeds from disposal of property and equipment                                                    59           502           694
 Purchase of leasehold interests                                                                     --        (1,565)       (1,752)
 Purchases of marketable securities                                                                (223)           --            --
 Proceeds from sales of marketable securities                                                     1,415            --            --
 Proceeds from disposal of Florida retail operations                                             11,840            --            --
 Issuance of note receivable from a related party                                                    --            --       (10,000)
 Proceeds from note receivable from a related party                                                  --            --        10,000
                                                                                               --------      --------      --------

                Net cash used in investing activities                                            (1,364)      (21,832)      (15,707)
                                                                                               --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase in note payable to bank syndicate                                                   7,000            --         8,000
 Net decrease in note payable to bank syndicate                                                      --            --        (8,000)
 Principal payments on long-term debt                                                           (29,214)       (9,614)      (15,582)
 Principal payments on capital lease obligations                                                 (1,084)       (1,301)       (1,295)
 Proceeds from capital contribution                                                               5,000            --        15,000
 Proceeds from notes payable to a related party                                                  10,000            --            --
                                                                                               --------      --------      --------

                Net cash used in financing activities                                            (8,298)      (10,915)       (1,877)
                                                                                               --------      --------      --------

Net increase (decrease) in cash and cash equivalents                                              5,150        (8,682)       10,209

Cash and cash equivalents at beginning of period                                                  6,998        15,680         5,471
                                                                                               --------      --------      --------

Cash and cash equivalents at end of period                                                     $ 12,148      $  6,998      $ 15,680
                                                                                               ========      ========      ========
</TABLE>







   The accompanying notes are an integral part of these financial statements.


                                      F-5
<PAGE>   44

                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>





                                                            Additional                          Total
                                            Common           Paid-in         Accumulated     Stockholder's
                                             Stock           Capital          Deficit          Equity
                                           --------         --------         --------         -------
<S>                                        <C>              <C>              <C>              <C>    
Balance at January 29, 1994                $     --         $ 71,500         $ (4,603)        $66,897

     Capital contribution                                     15,000                           15,000
     Net loss for the year                                                     (4,641)         (4,641)
                                           --------         --------         --------         -------
Balance at January 28, 1995                $     --         $ 86,500         $ (9,244)        $77,256

     Net loss for the year                                                    (32,357)        (32,357)
                                           --------         --------         --------         -------
Balance at January 27, 1996                $     --         $ 86,500         $(41,601)        $44,899

     Capital contribution                                      5,000                            5,000
     Net loss for the year                                                    (16,918)        (16,918)
                                           --------         --------         --------         -------
Balance at January 25, 1997                $     --         $ 91,500         $(58,519)        $32,981
                                           ========         ========         ========         =======
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                      F-6
<PAGE>   45
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

         The consolidated financial statements include the accounts of Pueblo
Xtra International, Inc. and its wholly-owned subsidiaries (the "Company"). The
Company operated retail supermarkets and video rental locations in Puerto Rico
and the U.S. Virgin Islands during fiscal 1997. Intercompany accounts and
transactions are eliminated in consolidation.

         The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the last Saturday in January. Accordingly, fiscal year
1997 ended on January 25, 1997, fiscal 1996 ended on January 27, 1996, and
fiscal 1995 ended on January 28, 1995. All fiscal years comprised 52 weeks.

Cash and Cash Equivalents

         Highly liquid investments purchased with a maturity of three months or
less are considered cash equivalents.

Marketable Securities

         Marketable securities consist of U.S. Government or agency issues with
the majority of the maturities occurring within the next 12 months. These
investments in debt securities are classified as held-to-maturity and measured
at amortized cost as it is both the Company's positive intent and ability to
hold the investments to maturity.

Inventories

         Inventories held for sale are stated at the lower of cost or market.
The cost of inventories held for sale is determined, depending on the nature of
the product, either by the last-in, first-out (LIFO) method or by the first-in,
first-out (FIFO) method. Videocassette rental inventories are recorded at cost,
net of accumulated amortization. Videocassettes held for rental are amortized
over 12 months on a straight-line basis.

Property and Equipment

         Property and equipment, including expenditures for remodeling and
improvements, are carried at cost. Routine maintenance, repairs and minor
betterments are charged to operations as incurred. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets or, in relation to leasehold improvements and property under capital
leases, over the lesser of the asset's useful life or the lease term, not to
exceed 20 years. Estimated useful lives are 20 years for buildings and
improvements, 5 to 12 years for furniture, fixtures and equipment, 4 years for
automotive equipment and 3 years for computer hardware and software.

         Upon the sale, retirement or other disposition of assets, the related
cost and accumulated depreciation or amortization are eliminated from the
accounts. Any resulting gains or losses from disposals are included in the
consolidated statements of operations.



                                      F-7

<PAGE>   46


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill and Other Intangibles

         Goodwill represents the excess of cost over the estimated fair value of
the net tangible and other intangible assets acquired in connection with the
transaction described in Note (3)--Acquisitions. Goodwill and other intangibles
are being amortized using the straight-line method over periods not exceeding 40
years. The Company periodically evaluates the carrying amount of goodwill and
other intangibles to recognize and measure the possible impairment of these
assets. Based on the recoverability from cash flows method (which includes
evaluating the probability that estimated undiscounted cash flows from related
operations will be less than the carrying amount of goodwill and other
long-lived assets), the Company believes there is no impairment to goodwill and
other intangibles.

Self-Insurance

         The Company's general liability and certain of its workers compensation
insurance programs are self-insured. The reserve for self-insurance claims is
based upon an annual review by the Company and its independent actuary of claims
filed and claims incurred but not yet reported. Due to inherent uncertainties in
the estimation process, it is at least reasonably possible that the Company's
estimate of the reserve for self-insurance claims could change in the near term.
The liability for self-insurance is not discounted. Individual self-insured
losses are limited to $250,000 per occurrence for general liability and certain
workers compensation. The Company maintains insurance coverage for claims in
excess of $250,000. The current portion of the reserve, representing the amounts
expected to be paid in the next fiscal year, were $6.7 million and $7.7 million
at January 25, 1997 and January 27, 1996, respectively, and are included in the
consolidated balance sheets as accrued expenses.

Pre-Opening Expenses

         Store pre-opening expenses are charged to operations in the month the
stores are opened.

Advertising Expenses

         Advertising expenses are charged to operations as they are incurred.
During fiscal 1997, fiscal 1996, and fiscal 1995, advertising expenses were
$11.0 million, $11.4 million, and $10.8 million, respectively.

Interest Rate Instruments

         The Company is a party to an interest rate swap agreement and interest
rate cap agreements to limit its exposure to increases in market interest rates.

         The interest rate swap agreement (the "Swap") involves the exchange of
fixed and floating rate interest payment obligations over the life of the
agreement without exchange of the underlying notional principal amount. The
differential to be paid or received is recognized as an adjustment to the
reserve established in purchase accounting as a result of the transaction
described in Note (3)--Acquisitions. Prior to the acquisition, the differential
was charged to interest expense.



                                      F-8

<PAGE>   47


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         The interest rate cap agreements are three-year contracts entered into
with two banks in the credit facility syndicate discussed more fully in Note
(5)--Debt. Under the terms of the agreements, interest costs on the underlying
notional principal amount will not exceed a specified amount on a cumulative
basis over a three-year period. The premium paid for the agreements is included
in the consolidated balance sheets as deferred charges and other assets and is
being amortized over the life of the agreements.

Postemployment Benefits

         The Company has a policy which provides severance benefits to its
salaried employees. However, the Company cannot reasonably estimate
postemployment benefits, including severance benefits, on an ongoing basis,
these costs are charged to expense only when the probability of payment and the
amount of such payment can be reasonably determined.

Income Taxes

         The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires deferred tax assets and liabilities to be determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates currently in effect.

Earnings Per Common Share

         The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc.
("Holdings") with a total of 200 shares of common stock issued and outstanding.
Earnings per share is not meaningful to the presentation of the consolidated
financial statements and is therefore excluded.

Use of Estimates

         The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.



                                      F-9

<PAGE>   48



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting Change

         In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for the long-lived assets and certain identifiable
intangibles to be disposed of. Long-lived assets and certain identifiable
intangibles to be held and used by an entity are required to be reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the assets. Long-lived assets and
certain identifiable intangibles to be disposed of are required to be reported
generally at the lower of the carrying amount or fair value less cost to sell.
Pursuant to the requirements of SFAS No. 121, in the year the Company adopts
SFAS No. 121, assets to be disposed of are to be recorded at the lower of
carrying amount or fair value less cost to sell. Upon adoption of SFAS No. 121
at the beginning of fiscal 1997 (the "Adoption Date"), the Company recorded a
cumulative effect of a change in accounting principle of $2.7 million, net of
deferred income taxes of $1.5 million, to record assets held for disposal at
fair value as of the Adoption Date. Such adjustment represents the phase-out of
operations of the closed Florida stores in fiscal 1997 that were included in
unusual charges in fiscal 1996 (see Note 2).

Reclassifications

         Certain amounts in the prior year's consolidated financial statements
and related notes have been reclassified to conform to the current year's
presentation.

NOTE 2 -- UNUSUAL CHARGES

         During January 1996, management implemented several strategic measures.
These measures included the disposal of the Company's Florida retail operations
(the "Florida Disposal") and a restructuring of certain operating functions. As
a result of these measures, the Company recorded approximately $32.2 million in
unusual charges. Of this amount, approximately $30.0 million was recorded in
accordance with APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of a Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
No. 30"), related to the decision to exit the Florida retail market (the "Loss
from Florida Disposal"). In addition, the Company recorded costs for
postemployment benefits, including severance pay, under existing benefit
arrangements.

         The Florida Disposal included the closing of all eight Xtra units
(three of which are owned) and a warehouse and distribution center in Florida,
whether by sale or abandonment, which was completed in the first quarter of
fiscal 1997. In fiscal 1997, the Company sold one location and the lease rights
to another location. The Company is currently negotiating the sale of certain
other locations. In addition, the Company has sold the equipment within all its
stores.

        During fiscal 1997, the Company recorded an additional $4.2 million in
unusual charges to write down assets from the Florida operations. This
adjustment was made to reflect a revision in the estimated fair value of the
remaining properties held for sale. After this adjustment and the sale of
certain properties, $10.0 million, relating to the Florida Disposal, is
included in assets held for sale at January 25, 1997 pursuant to their
anticipated sale in the near term.
         

                                      F-10


<PAGE>   49


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 2 -- UNUSUAL CHARGES  (CONTINUED)


         Included in the $30.0 million loss from the Florida Disposal recorded
in fiscal 1996 were estimated operating losses during the phase-out period, a
reduction of related assets to their estimated realizable value, the recognition
of net future lease obligations, employee termination benefits for Florida
operations and other closing costs. With the adoption of SFAS No. 121, the
Company recorded an additional operating loss in fiscal 1997 of $4.1 million for
the phase-out of operations subsequent to January 27, 1996. Such amount, net of
taxes, was offset by the cumulative effect of a change in accounting principle
recorded in fiscal 1997 (see Note 1).

         The Florida operating division reported sales of $6.7 million, $159.7
million, and $187.8 million for fiscal 1997, fiscal 1996, and fiscal 1995,
respectively. The total assets and liabilities of the Florida operating division
as of January 25, 1997 were $51.5 million and $55.0 million, respectively, and
$77.6 million and $83.0 million, respectively, as of January 27, 1996.

         Unusual charges include management's best estimates of the amounts
expected to be realized in the near term. However, the amounts the Company will
ultimately realize could differ from those estimates.

NOTE 3 -- ACQUISITIONS

         On July 28, 1993, the Company acquired all of the outstanding shares of
the common stock of Pueblo International, Inc. and subsidiaries for an aggregate
purchase price of $283.6 million plus transaction costs (hereinafter referred to
as the "Transaction"). The shares were acquired from an investor group including
affiliates of Metropolitan Life Insurance Company, The First Boston Corporation
and certain current and former members of the Company's management and its Board
of Directors.

         The Transaction was financed with $71.5 million of equity, the issuance
of $180.0 million in 10-year, 9 1/2% senior notes and $130.0 million borrowed by
subsidiaries of the Company under a new credit facility. See Note (5)--Debt for
further details of the senior notes and the new credit facility. Concurrent with
the Transaction, previously existing bank debt of $19.3 million and senior
subordinated notes of $48.6 million were satisfied.

         The Transaction has been accounted for as a purchase effective July 31,
1993. Accordingly, the costs of the Transaction were allocated to the assets
acquired and liabilities assumed. The excess of the aggregate purchase price
over the fair market value of net assets acquired of approximately $210.2
million was recognized as goodwill and is being amortized over 40 years.

NOTE 4 -- INVENTORIES

         The cost of approximately 76% and 78% of total inventories at January
25, 1997 and January 27, 1996, respectively, is determined by the LIFO method.
The excess of current cost over inventories valued by the LIFO method was
$1,980,000 and $1,570,000 as of January 25, 1997 and January 27, 1996,
respectively.


                                      F-11


<PAGE>   50


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 5 -- DEBT

         Total debt consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                    January 25,     January 27,
                                                       1997            1996
                                                     --------        --------
<S>                                                  <C>             <C>     
Note payable to a related party                      $ 10,000        $      0

Payable to a bank syndicate under term
   loan credit facilities                              62,977          85,977

Payable to a bank syndicate under a revolving
   credit facility                                     16,000           9,000

Senior notes due 2003                                 180,000         180,000

Payable to a Puerto Rico governmental agency           17,500          17,500

10% mortgage notes, payable in monthly
   installments with a balloon payment due
   in fiscal 1997                                           0           6,214
                                                     --------        --------
                                                      286,477         298,691
Less current installments                              35,250          29,214
                                                     --------        --------
                                                     $251,227        $269,477
                                                     ========        ========
</TABLE>

         The Transaction described in Note (3)--Acquisitions was financed by the
issuance of $180.0 million in senior notes (the "Senior Notes") and a credit
facility consisting of $115.0 million in term loans and a maximum of $60.0
million in revolving loans (the "Credit Facility") entered into by subsidiaries
of the Company and a syndicate of banks led by The Chase Manhattan Bank
(National Association) and Scotiabank de Puerto Rico ("Bank Syndicate"). The
Credit Facility matures on July 31, 2000.

         The term loans of the Credit Facility are reduced over the term of the
facility on a graduated basis in accordance with the credit agreement. Principal
payments aggregating $10.8 million are due under the term loans of the Credit
Facility in the succeeding 12-month period. Of the $60.0 million revolving
facility, $16.0 million remains outstanding at January 25, 1997 and $23.3
million is utilized in the form of standby letters of credit. The Company pays a
fee of .50% per annum on unused commitments under the $60.0 million revolving
facility. The Company has classified as non-current $9.0 million under the
revolving Credit Facility as a result of its intent to maintain this obligation
on a long-term basis. Interest on the Credit Facility fluctuates based on the
availability of Section 936 funds in Puerto Rico, Euroloan rates and the prime
rate. The weighted average interest rate on the Credit Facility, which
approximates that of short-term borrowings under the revolving facility, was
8.57% and 8.82% during fiscal 1997 and fiscal 1996, respectively.

         During fiscal 1997 and subsequent thereafter, the Credit Facility has
been amended with the last amendment effective as of January 25, 1997. In
accordance with the amendments, the sole shareholder of the Company, Holdings,
contributed $5.0 million in additional capital to the Company on April 18, 1996.
In addition, Holdings provided $10.0 million in additional funds to the Company
on October 18, 1996 in return for a non-interest-bearing redeemable note
payable to a related party (the "Holdings Note"). The Holdings Note matures
after the expiration of the Credit Facility and can be redeemed earlier subject
to the Company meeting various performance and financial criteria. The proceeds
of these two transactions were used to immediately reduce the Company's term
loans under the Credit Facility. The terms of these amendments also required
that the maximum amount available under the revolving loans of the Credit
Facility be reduced from $60.0 million to $49.3 million, which is comprised of
$26.0 million in revolving loans and a maximum of $23.3 million utilized in the
form of standby letters of credit. The amendments also provide for certain
revised financial covenant requirements. In addition, the amendments require
the Company to pay additional fees on the last business day of each calendar
month from April 1997 through December 1997 equal to 1/9 of 1 1/2% of the
revolving commitment and term loans outstanding as of each respective date for
certain Bank Syndicate members.
    


                                     F-12

<PAGE>   51

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 5 -- DEBT (CONTINUED)


         The Credit Facility is collateralized by a pledge of the assets of the
Company, by the capital stock of, and intercompany notes issued by, the
Company's subsidiaries and by the capital stock of the Company. The Company is
required, under the terms of the Credit Facility, to meet certain financial
covenants which include minimum consolidated net worth levels, interest and
fixed charges coverage ratios and minimum EBITDA (as defined in the credit
agreement). The agreement also contains certain restrictions on additional
indebtedness, capital expenditures and the declaration and payment of dividends.

         Subsequent to January 25, 1997, the Company began negotiations with the
Bank Syndicate to restructure the Credit Facility and has begun to explore
alternative sources of finances.

         The Senior Notes, which mature on August 1, 2003, are general unsecured
obligations of the Company subordinate in right of payment to all existing and
future liabilities (including, without limitation, obligations under the Credit
Facility) of its subsidiaries. The Senior Notes may be called by the holders of
the notes at 101% in the event of a change in control of the Company (as defined
in the indenture). The Senior Notes are senior to all future subordinated
indebtedness which the Company may from time to time incur. The Senior Notes
bear interest at 9.50% per annum which is payable semi-annually on February 1st
and August 1st. Terms of the Senior Notes include covenants which restrict the
Company and its subsidiaries from engaging in certain activities and
transactions.

         Outstanding borrowings with a governmental agency of the Commonwealth
of Puerto Rico are $17.5 million from the issuance of industrial revenue bonds.
The bonds, which bear interest at variable rates based on an index of tax-exempt
borrowing, have a weighted average interest rate of 4.08% and 4.00% at January
25, 1997 and January 27, 1996, respectively. Principal payments are due in
fiscal 1998 ($7.5 million) and fiscal 2001 ($10.0 million), which correspond to
the maturity dates of the bonds. Payment of the bonds is guaranteed by standby
letters of credit totaling $17.9 million, issued under the $60.0 million
revolving credit facility discussed above.

         The Company is a party to a collateralized Swap to reduce its exposure
to increases in interest rates on the loans payable to the Puerto Rico
governmental agency. Under the terms of the Swap, the Company pays a fixed rate
of 5.29% on the $17,500,000 notional principal amount and receives a variable
rate of interest based on an index of tax-exempt borrowing. Net interest
payments under the Swap were $325,000, $249,000, and $420,000, for fiscal 1997,
fiscal 1996, and fiscal 1995, respectively. The Swap expires in fiscal 1998 and
is collateralized bythe Company's pledge of marketable securities in an amount



                                     F-13

<PAGE>   52


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES






NOTE 5 -- DEBT (CONTINUED)

(reset quarterly) sufficient to offset the market risk, not to exceed
$4,130,000. The required collateral balance of $27,000 as of January 25, 1997 is
included with deferred charges and other assets in the accompanying consolidated
balance sheet. During fiscal 1995, the Company entered into a three-year
interest rate cap transaction with two banks in its Credit Facility syndicate as
a means of managing the cost of the floating rate debt under the Credit
Facility. Under the terms of the interest rate cap agreements, interest costs on
a notional principal amount of $35.0 million will not exceed approximately $7.4
million during the succeeding three-year period. Total cash requirements under
the agreements included the payment of a premium totalling $455,000 which is
being amortized over the term of the agreements and is included in the
consolidated statements of operations. The interest rate cap agreements expire
in fiscal 1998. Counterparties to the interest rate swap and cap agreements are
major financial institutions. Credit loss from counterparty nonperformance is
not anticipated.

         Annual maturities of the Company's debt are as follows (in thousands):
<TABLE>
<CAPTION>

                                                 Amount
                                                 ------

                    <S>                        <C>     
                    1998                       $ 35,250
                    1999                         20,000
                    2000                         21,500
                    2001                         29,727
                    2002                              0
                    2003 and thereafter         180,000
                                               --------
                    Total                      $286,477
                                               ========
</TABLE>



         Total interest paid on debt, net of interest capitalized, was $34.5
million, $28.7 million, and $26.9 million for fiscal 1997, fiscal 1996, and
fiscal 1995, respectively. Interest payable as of January 25, 1997 and January
27, 1996 was $695,000 and $9.9 million, respectively.

NOTE 6 -- LEASES AND LEASEHOLD INTERESTS

         The Company conducts the major part of its operations on leased
premises which have initial terms generally ranging from 20 to 25 years.
Substantially, all leases contain renewal options which extend the lease terms
in increments of 5 to 10 years. The Company also has certain equipment leases
which have terms of up to five years. Realty and equipment leases generally
require the Company to pay operating expenses such as insurance, taxes and
maintenance. Certain store leases provide for percentage rentals based upon
sales above specified levels.

         The Company leases retail space to tenants in certain of its owned and
leased properties. The lease terms generally range from two to five years.



                                     F-14


<PAGE>   53


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 6 -- LEASES AND LEASEHOLD INTERESTS (CONTINUED)

         The major classes of property recorded under capital leases are as
follows (in thousands):
<TABLE>
<CAPTION>


                                              January 25,    January 27,
                                                 1997           1996
                                               ---------      ---------
          <S>                                  <C>            <C>    
          Real estate                          $12,295        $14,464
          Machinery and equipment                   90            424
                                               -------        -------
                                                12,385         14,888
          Less accumulated amortization          2,646          3,329
                                               -------        -------
                                               $ 9,739        $11,559
                                               =======        =======
</TABLE>

         Amortization of assets recorded under capital leases is included with
depreciation and amortization expense in the consolidated statement of
operations.

         As a result of the Florida Disposal discussed further in Note
(2)--Unusual Charges, the Company eliminated the net property recorded under
capital leases of $7.2 million and the related capital lease obligations of
$10.3 million for the Florida retail operations as of December 30, 1995.

         Minimum rentals under non-cancelable leases at January 25, 1997 are as
follows (in thousands):

<TABLE>
<CAPTION>

                                                     Capital       Operating       Operating
                                                     Leases         Leases          Leases
                                                   (As Lessee)    (As Lessee)     (As Lessor)
                                                   -----------    -----------     -----------
          <S>                                       <C>             <C>             <C>   
          1998                                      $  1,775        $ 10,608        $  967
          1999                                         1,640          10,208           801
          2000                                         1,524           9,375           712
          2001                                         1,523           8,729           436
          2002                                         1,455           8,126           286
          2003 and thereafter                          9,739          77,629           780
                                                    --------        --------        ------
                                                      17,656        $124,675        $3,982
          Less executory costs                           147                              
                                                    --------
             Net minimum lease payments               17,509                              
          Less amount representing interest            8,782                              
                                                    --------
          Present value of net minimum lease
             payments under capital lease           $  8,727                              
                                                    ========
          Total minimum sublease rentals to
             be received in the future              $  1,040        $  5,512              
                                                    ========        ========
</TABLE>

        Additionally, the Company is committed to future minimum payments under
leases which it has entered into for stores not opened as of January 25, 1997
totaling $54.5 million over a 20- to 25-year period. Payment on these leases
will commence with occupancy.




                                     F-15
<PAGE>   54


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 6 -- LEASES AND LEASEHOLD INTERESTS (CONTINUED)

         Rent expense and the related contingent rentals under operating leases
were $11,899,000 and $567,000 for fiscal 1997, respectively, $12,636,000 and
$645,000 for fiscal 1996, respectively, and $12,008,000 and $658,000 for fiscal
1995, respectively.

         Contingent rentals under capital leases, which are directly related to
sales, were $289,000 for fiscal 1997, $331,000 for fiscal 1996, and $387,000 for
fiscal 1995. Interest paid on capital lease obligations was $1,152,000 for
fiscal 1997, $2,286,000 for fiscal 1996, and $2,455,000 for fiscal 1995.

         Sublease rental income for operating and capital leases was $1,881,000
for fiscal 1997, $1,854,000 for fiscal 1996, and $1,747,000 for fiscal 1995.

NOTE 7 -- STOCKHOLDER'S EQUITY

         Authorized common stock of the Company consists of 200 shares of $.10
par value, all of which are issued and outstanding and held by Holdings as of
January 25, 1997 and January 27, 1996.

         During April 1994, the Company received additional capital of $15.0
million from its parent company, Holdings. Under the terms of the Credit
Facility, as amended, the Company used $15.0 million to reduce the amounts
outstanding under its term loan credit facilities and revolving credit facility,
including a $5.0 million prepayment on the fiscal 1996 principal amortization of
the term loans.

         During April 1996, the Company received additional capital of $5.0
million from its parent company, Holdings, which it used to reduce the amounts
outstanding under its term Credit Facility.

NOTE 8 -- INCOME TAXES

         As described in Note (1)--Significant Accounting Policies, the
Company's method of accounting for income taxes is the liability method as
required by SFAS No. 109.

         The components of income tax expense (benefit) are as follows (in
thousands):

<TABLE>
<CAPTION>


                           Fiscal           Fiscal           Fiscal
                            1997             1996             1995
                          --------         --------         -------

          <S>             <C>              <C>              <C>    
          Current         $   (276)        $ (1,065)        $ 2,849
          Deferred          (9,259)         (19,145)         (7,639)
                          --------         --------         -------
                          $ (9,535)        $(20,210)        $(4,790)
                          ========         ========         =======




                                     F-16
</TABLE>








<PAGE>   55


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 8 -- INCOME TAXES (CONTINUED)

         The significant components of the net deferred tax liabilities are as
follows (in thousands):

<TABLE>
<CAPTION>

                                                          January 25,      January 27,
                                                             1997             1996
                                                          -----------      -----------
          <S>                                              <C>              <C>     
          Deferred tax assets:
             Reserve for self-insurance claims             $  8,128         $  8,964
             Employee benefit plans                           6,793            7,293
             Property and equipment                           7,144            3,007
             Reserve for closed stores                        4,116            9,427
             Accrued expenses and other liabilities
               and deferred credits                           4,125            4,672
             Other operating loss and tax credit
               carryforwards                                 12,437            2,832
             All other                                        1,277            3,397
                                                           --------         --------
                   Total deferred tax assets               $ 44,020         $ 39,592
                                                           --------         --------

          Deferred tax liabilities:
             Property and equipment                        $(24,057)        $(25,640)
             Tradenames                                     (12,619)         (12,986)
             Operating leases                                (7,517)          (8,057)
             Inventories                                     (4,274)          (4,108)
             Other assets                                    (2,313)          (2,807)
             Accrued expenses and other liabilities
               and deferred credits                          (1,046)          (1,555)
                                                           --------         --------
                   Total deferred tax liabilities          $(51,826)        $(55,153)
                                                           --------         --------
             Valuation allowance for deferred
                tax assets                                     (279)            (287)
                                                           --------         --------
                   Net deferred tax liabilities            $ (8,085)        $(15,848)
                                                           ========         ========
</TABLE>

         SFAS No. 109 requires a valuation allowance against deferred tax assets
if, based on the weight of the available evidence, it is more likely than not
that some or all of the deferred tax assets may not be realized.



                                     F-17
<PAGE>   56


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 8 -- INCOME TAXES (CONTINUED)

         A reconciliation of the difference between actual income tax benefit
and income taxes computed at U.S. Federal statutory tax rates is as follows (in
thousands):

<TABLE>
<CAPTION>
                                     Fiscal            Fiscal          Fiscal
                                      1997              1996            1995
                                     --------         --------         -------
<S>                                  <C>              <C>              <C>     
U.S. Federal statutory rate
   applied to pretax loss            $(10,187)        $(18,398)        $(3,288)

Effect of varying rates
   applicable in other taxing
   jurisdictions                         (992)          (1,052)           (785)
Amortization of goodwill                1,761            1,834           2,133
State and local taxes                     708             (775)             58

Effect of rate changes in
   other taxing jurisdictions              --               --          (3,034)
All others, net                          (825)          (1,819)            126
                                     --------         --------         -------
Income tax benefit                   $ (9,535)        $(20,210)        $(4,790)
                                     ========         ========         =======
</TABLE>

         As of January 25, 1997, the Company has unused net operating loss
carryforwards of $18,000,000 and $8,000,000 available to offset future taxable
income in Puerto Rico and the United States through fiscal years 2004 and 2011,
respectively.

         The Company also has unused investment tax credits of approximately
$811,000 available to offset future U.S. income tax liabilities. Such investment
tax credits expire as follows: 1999 - $97,000; 2000 - $20,000; 2001 - $674,000;
and 2002 - $20,000. Utilization of the investment tax credit carryforward may be
limited each year.

         Total income taxes paid were $496,600 for fiscal 1997, $1,286,000 for
fiscal 1996, and $1,886,000 for fiscal 1995.

NOTE 9 -- RETIREMENT BENEFITS

         The Company has a non-contributory defined benefit plan (the
"Retirement Plan") covering substantially all full-time and certain part-time
associates. Retirement Plan benefits are based on years of service and a base
level of compensation. The Company funds Retirement Plan costs in accordance
with the requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
Retirement Plan assets consist primarily of stocks, bonds and U.S. Government
securities. Full vesting for the Retirement Plan occurs upon the completion of
five years of service.



                                     F-18


<PAGE>   57


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES





NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)

         Net pension cost under the Retirement Plan includes the following
components (in thousands):

<TABLE>
<CAPTION>

                                           Fiscal           Fiscal          Fiscal
                                            1997             1996             1995
                                           -------         -------         -------
<S>                                        <C>             <C>             <C>    
Service cost - benefits
   earned during the period                $ 1,556         $ 1,893         $ 2,120
Interest cost on projected
   benefit obligation                        1,512           1,466           1,419
Expected return on plan
   assets                                   (1,121)           (994)         (1,118)
Net amortization and
   deferrals                                   (97)             (7)             (7)
                                           -------         -------         -------
     NET PENSION COST                      $ 1,850         $ 2,358         $ 2,414
                                           =======         =======         =======
</TABLE>

         The average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the net periodic
pension cost for the Retirement Plan are 7.5% and 5.0%, respectively, for fiscal
years 1997, 1996 and 1995. The average expected long-term rate of return on plan
assets is 9.0% for the three-year period.

         The funded status and amounts recognized in the Company's consolidated
balance sheets for the Retirement Plan are as follows (in thousands):

<TABLE>
<CAPTION>

                                                     January 25,       January 27,
                                                        1997              1996
                                                     ----------        ----------
<S>                                                    <C>              <C>     
Actuarial present value of benefit obligations:
   Accumulated benefit obligation, including
      vested benefits of $15,143 at January 25,
      1997 and $14,005 at January 27, 1996             $ 16,540         $ 15,793
                                                       ========         ========

Plan assets at fair value                              $ 12,080         $ 12,251
Projected benefit obligation
   for service rendered to date                         (20,449)         (20,396)
                                                       --------         --------

       FUNDED STATUS                                     (8,369)          (8,145)

Unrecognized net gain                                    (1,267)          (3,459)
Unrecognized prior service cost                             (79)             (99)
                                                       --------         --------
    NET PENSION LIABILITY                              $ (9,715)        $(11,703)
                                                       ========         ========

</TABLE>



                                     F-19
<PAGE>   58


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)

         The Company maintains a Supplemental Executive Retirement Plan (the
"Supplemental Plan") for its officers under which the Company will pay, from
general corporate funds, a supplemental pension equal to the difference between
the annual amount of pension calculated under the Supplemental Plan and the
amount the participant will receive under the Retirement Plan. Effective January
1, 1992, the Board of Directors amended the Supplemental Plan in order to
conform various provisions and definitions with those of the Retirement Plan.
The pension benefit calculation under the Supplemental Plan is limited to a
total of 20 years employment and is based on a specified percentage of the
average annual compensation received for the five highest consecutive years
during a participant's last 10 years of service, reduced by the participant's
annual Retirement Plan and social security benefits. Full vesting for the
Supplemental Plan occurs upon the completion of five years of service.

         Net pension cost under the Supplemental Plan includes the following
components (in thousands):

<TABLE>
<CAPTION>

                                  Fiscal        Fiscal        Fiscal
                                   1997          1996          1995
                                  ------        ------        -----
<S>                                <C>           <C>           <C> 
Service cost - benefits
   earned during the period        $  98         $ 116         $268
Interest cost on projected
   benefit obligation                328           284          340
Net amortization and
   deferrals                         (68)          (99)           7
                                   -----         -----         ----
       NET PENSION COST            $ 358         $ 301         $615
                                   =====         =====         ====

</TABLE>

         The average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the net periodic
pension cost for the Supplemental Plan are 7.5% and 5.0%, respectively, for
fiscal years 1997, 1996 and 1995.

         The funded status and amounts recognized in the Company's consolidated
balance sheets for the Supplemental Plan are as follows (in thousands):

<TABLE>
<CAPTION>
                                                    nuary 25,     January 27,
                                                     1997            1996
                                                    -------       ---------
<S>                                                 <C>             <C>    
Actuarial present value of benefit obligations:     
   Accumulated benefit obligation, including        
      vested benefits of $3,664 at January 25,      
      1997 and $3,639 at January 27, 1996           $ 3,681         $ 3,674
                                                    =======         =======
Projected benefit obligation                        
   for service rendered to date                     $(4,384)        $(4,475)
                                                    -------         -------
      FUNDED STATUS                                  (4,384)         (4,475)
Unrecognized net gain                                (1,433)         (1,272)
Unrecognized prior service cost                          50              57
                                                    -------         -------
      NET PENSION LIABILITY                         $(5,767)        $(5,690)
                                                    =======         =======

</TABLE>



                                     F-20
<PAGE>   59
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES


NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)

         The Company has a non-contributory defined contribution plan covering
its eligible associates in Puerto Rico and the U.S. Virgin Islands.
Contributions to this plan are at the discretion of the Board of Directors. The
Company also has a contributory thrift savings plan in which it matches eligible
contributions made by participating eligible associates in the United States.
Expenses related to these plans, which are recognized in the year the cost is
incurred, were $728,000 for fiscal 1997, $862,000 for fiscal 1996 and $774,000
for fiscal 1995.

NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.

Cash and Cash Equivalents

         The carrying amount of cash and cash equivalents approximates fair
value due to the short maturity of these instruments.

Marketable Securities

         Due to the nature and maturities of the underlying securities in the
portfolio, the carrying amount of marketable securities approximates fair value.
The carrying and fair value amounts include securities which the Company
classifies as marketable securities in the accompanying consolidated balance
sheets, as well as securities held as collateral for the Swap which are included
in the consolidated balance sheets as deferred charges and other assets.

Debt

         The fair value of the Company's indebtedness, excluding the Senior
Notes, is estimated based on quoted market prices for similar instruments. The
fair value of the Senior Notes is determined based on market quotes.

Interest Rate Instruments

         The fair value of the Swap and interest rate cap agreements used for
hedging purposes is the amount the Company would pay to terminate these
agreements as of the balance sheet dates, taking into account current interest
rates.




                                     F-21
<PAGE>   60


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES




NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         The estimated fair value of the Company's financial instruments are as
follows (in thousands):

<TABLE>
<CAPTION>

                                                     January 25, 1997                              January 27, 1996
                                           --------------------------------             ----------------------------------       
                                               Carrying            Fair                      Carrying            Fair            
                                                Amount            Value                       Amount             Value           
                                           --------------    --------------             ----------------   ---------------       
<S>                                            <C>               <C>                          <C>               <C>              
Cash and cash equivalents                      $   12,148        $   12,148                   $    6,998        $    6,998       
Marketable securities                                 115               115                        1,245             1,245       
Debt                                             (286,477)         (275,776)                    (298,691)         (289,853)      
Interest rate swap                                                                                                               
   agreement                                            -               (27)                        (138)             (357)      
Interest rate cap agreements                           57                 -                          210                 1       
</TABLE>                                                               


NOTE 11 -- CONCENTRATIONS OF CREDIT RISK

         Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and the interest rate instruments (described in Note
(5)--Debt). The Company places its temporary cash investments with highly-rated
financial institutions in investment grade short-term debt instruments.
Marketable securities consist exclusively of obligations issued or guaranteed by
the United States of America or its agencies and mutual funds in which the
underlying securities are obligations of the United States of America.

NOTE 12 -- CONTINGENCIES

         At January 25, 1997, the Company is party to various lawsuits arising
in the ordinary course of business. Additionally, the Company is also a
defendant, together with other companies, including those in the grocery
industry, in two legal actions pending in the United States District Court.
These lawsuits allege that diverting companies, collectively known as Premium
Sales, which are presently in bankruptcy, were engaged in fraudulent activities
and that Pueblo and other grocers are liable for their investors' losses. The
losses claimed against each of the defendants in these lawsuits, including
Pueblo, are alleged to be approximately $300 million (plus treble damages,
punitive damages and/or attorney fees). Pueblo's alleged liability is solely
based on the claim that one of its former employees confirmed the validity of
certain allegedly false grocery diverting transactions. The Company contested
vigorously such claims. On October 25, 1996, a settlement was reached between
the Company and the Plaintiffs. The settlement was preliminarily approved on
February 11, 1997. A final fairness hearing has been scheduled for May 7, 1997.
The amount of the settlement is fully reserved by the Company as of January 25,
1997.



                                     F-22
<PAGE>   61


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
Pueblo Xtra International, Inc.
San Juan, Puerto Rico
Pompano Beach, Florida

We have audited the consolidated financial statements of Pueblo Xtra
International, Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996
and for each of the three years in the period ended January 25, 1997; such
report is included elsewhere in this Form 10-K. Our audit also included the
consolidated financial statement schedule of Pueblo Xtra International, Inc. and
Subsidiaries as of January 25, 1997 and January 27, 1996, and for each of the
three years in the period ended January 25, 1997, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP
----------------------------
Deloitte & Touche LLP

Miami, Florida
April 3, 1997













                                      S-1
<PAGE>   62
                                                                     SCHEDULE II

                PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                     FOR THE FISCAL YEARS ENDED JANUARY 25,
                           1997, JANUARY 27, 1996, AND
                                JANUARY 28, 1995
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>


                                           BALANCE AT              ADDITIONS                                         BALANCE
                                           BEGINNING               CHARGED TO                                         AT END
                                            OF YEAR/               COSTS AND                                         OF YEAR/
          DESCRIPTION                        PERIOD                 EXPENSES              DEDUCTIONS (1)            PERIOD (2)
--------------------------------        ----------------        ----------------       --------------------       --------------
<S>                                             <C>                      <C>                       <C>                  <C>     
FISCAL 1997
Reserves not deducted
   from assets:
   Reserve for self-
      insurance claims ..........               $ 20,537                 $ 6,934                   $  8,542             $ 18,929
FISCAL 1996
Reserves not deducted
   from assets:
   Reserve for self-
      insurance claims ..........               $ 22,636                 $ 9,066                   $ 11,165             $ 20,537
FISCAL 1995
Reserves not deducted
   from assets:
   Reserve for self-
      insurance claims ..........               $ 23,373                 $ 8,715                   $  9,452             $ 22,636

</TABLE>

-----------------

(1) Amounts consist primarily of payments on claims.

(2) Amounts represent both the current and long-term portions.











                                      S-2