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

                                   ---------
                                   FORM 10-K
                                   ---------

(MARK ONE)  [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED FEBRUARY 1, 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 0-6544

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

                                 BRUNO'S, INC.
             (Exact name of registrant as specified in its charter)

            ALABAMA                                 63-0411801
(State or other jurisdiction of                (I.R.S. Employer
incorporation of organization)               Identification No.)

                800 LAKESHORE PARKWAY, BIRMINGHAM, ALABAMA 35211
                    (Address of principal executive office)

                                  205-940-9400
              (Registrant's telephone number including area code)

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                  COMMON STOCK
                                 $.01 Par Value


     Indicate by check mark whether Bruno's, Inc. (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, 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 the Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate market value of the voting stock held by non-affiliates
(assuming solely for the purpose of this calculation that directors and officers
are affiliates) of Bruno's, Inc. as of April 18, 1997 was approximately
$49,500,000.

     The number of shares of Common Stock outstanding as of April 18, 1997 was
approximately 25,297,149.

                      DOCUMENTS INCORPORATED BY REFERENCE
     Part III of this report incorporates information from the definitive proxy
statement relating to the Annual Meeting of Stockholders of Bruno's, Inc. to be
held on July 10, 1997.

================================================================================




<PAGE>   2




                                     PART I

ITEM 1.  BUSINESS

     Bruno's, Inc. (the "Company") is a leading supermarket operator in the
Southeastern United States and is the largest supermarket operator in the State
of Alabama. The Company, which was incorporated in Alabama on April 1, 1959,
currently operates 218 supermarkets, including 123 in Alabama, 50 in Georgia, 20
in Tennessee, 17 in Florida, and eight in Mississippi. The Company's
supermarkets are currently operated under several different names and formats,
including Bruno's, Food World, FoodMax, Food Fair, Piggly Wiggly, and Seessel's.
The Company operates approximately 17 "Supercenter" stores, which offer an
expanded mix of general merchandise products as well as one-stop shopping
conveniences such as pharmacies, banks, photography departments and optical
centers.

     On August 18, 1995, Crimson Acquisition Corp. was merged into and with the
Company (the "Merger").  Since the date of the Merger, Crimson Associates, L.P.
and KKR Partners, II, L.P. (the "Partnerships") have owned 20,833,333 shares of
the Company's Common Stock (the "Common Stock").  The shares owned by the
Partnerships represent approximately 82.4% of the outstanding shares of Common
Stock as of April 18, 1997.  The Partnerships also own warrants under which
they have the right to purchase an additional 10,000,000 shares of Common
Stock.  The partnerships were organized and are controlled by Kohlberg Kravis
Roberts & Co., L.P. ("KKR").

     In December 1995, the Company changed its fiscal year from a 52-week or
53-week period ending on the Saturday closest to June 30 to a 52-week or 53-week
period ending on the Saturday closest to January 31. In order to implement this
change, the Company had a 30-week fiscal year beginning on July 1, 1995 and
ending on January 27, 1996 (the "Transition Period").

     During the fiscal year ended February 1, 1997, the Company developed and
completed a divestiture program under which the Company closed its distribution
center located in Vidalia, Georgia and sold or closed 47 stores, including 37
stores in Georgia, five stores in South Carolina, two stores in Florida, two
stores in Alabama, and one store in Mississippi. In addition, the Company in
December 1996 acquired Seessel Holdings, Inc., which owns and operates eight
supermarkets in Memphis, Tennessee and two supermarkets in Northern Mississippi.


STORE FORMATS

     The Company operates stores under three different formats, each of which
addresses a different market segment. The formats utilized by the Company are
described below.




                                       1
<PAGE>   3



     VALUE FORMAT. The Company's value stores are designed to attract value
conscious customers through a combination of low prices, good customer service,
and a broad range of product offerings. Approximately 111 of the Company's 218
stores are operated under the value format. Six of the value stores are
Supercenters. The Company's value stores are operated under the names Food World
and FoodMax.

     Food World. The Company operates 79 stores under the Food World name. These
stores are typically high volume stores designed to appeal to a broad range of
customers. With a primary emphasis on value, these stores offer low pricing
along with an extensive variety of name-brand merchandise and specialty
departments. Food World stores are promoted through television, newspaper, and
radio advertising. The Company's Food World stores average approximately 44,000
in total square feet.

     FoodMax. The Company operates 32 stores under the FoodMax name. These
stores are large with an open design, warehouse-style ceilings, and expanded
perishable departments. These stores emphasize low prices and an extensive
product selection while achieving low overhead through reduced staffing. The
Company's FoodMax stores average approximately 52,000 in total square feet.

     COMBINATION FORMAT. The Company's combination format consists of
approximately 54 stores, including 10 Supercenter stores, operating under the
names Bruno's and Seessel's. These stores generally have a substantial breadth
and depth of product offerings and are widely regarded as the quality and
service leaders in the markets in which they are located. The combination stores
typically contain expanded produce, bakery, delicatessen, and gourmet foods not
generally found in conventional supermarkets, a variety of health and beauty
care products normally found in large drug stores, and a wide range of general
merchandise items. These stores average approximately 51,000 in total square
feet and are generally located in suburban markets.

     NEIGHBORHOOD FORMAT. The Company's neighborhood format consists of
approximately 53 stores operating primarily under the names Piggly Wiggly and
Food Fair. The neighborhood stores are generally smaller than the Company's
other supermarkets and emphasize friendly service and promotional pricing. For
its neighborhood stores, which are generally located in small- to medium-sized
towns and suburban neighborhoods, the Company advertises primarily through
direct mail and weekly advertised specials.

     Piggly Wiggly. The Company's Piggly Wiggly stores are located in small- to
medium-sized towns in central and southern Georgia. These stores average
approximately 34,000 in total square feet and are promoted primarily through
weekly advertised specials.

     Food Fair. Food Fair stores, like Piggly Wiggly, are designed to operate
with lower overhead and competitive pricing in suburban neighborhoods and towns
that will not support the volume necessary for a large supermarket. All of the
Company's Food Fair stores are located in Alabama, and these stores average
approximately 29,000 in total square feet.



                                       2
<PAGE>   4

STORE DEVELOPMENT

     The Company continuously evaluates its existing markets and potential new
markets for their ability to support new or expanded stores. The Company
combines market research and its in-depth knowledge of the Southeast region in
evaluating market opportunities. In an effort to determine the sales potential
for a proposed store site, the Company evaluates population shifts, zoning
changes, traffic patterns, new construction and the proximity of the stores
operated by its competitors. The Company is continuously seeking to identify
suitable sites for new stores. The Company also continuously evaluates its
existing stores in an effort to identify stores to be relocated or remodeled.

     The following table sets forth additional information concerning changes in
the Company's store base for the fiscal years ended July 2, 1994 and July 1,
1995, the Transition Period, and the fiscal year ended February 1, 1997:


<TABLE>
<CAPTION>
                                             Fiscal    Fiscal    Transition   Fiscal
                                              Year      Year       Period      Year
                                            -----------------------------------------
                                              1994      1995        1996       1996
                                            -----------------------------------------
<S>                                         <C>       <C>         <C>            <C>
Beginning of period.......................  257       257         252            254
Opened....................................    8         6           3              2
Acquired..................................    0         0           0             10
Closed or Sold............................    8        11           1             48
                                            ---       ---         ---            ---
End of period.............................  257       252         254            218
                                            ===       ===         ===            ===

Remodels..................................   39        15           3             13
</TABLE>

ADVERTISING AND PROMOTION

     The Company's advertising and promotions are specifically tailored to each
of its store formats. For value stores, the Company's promotions emphasize
consistently low prices, and this image is reinforced through television and
radio advertising. The combination format is typically promoted through
television and radio advertising and through newspapers and newspaper inserts
with an emphasis placed on quality produce and perishables and superior service
at competitive prices. Combination stores also promote new products through
in-store demonstrations and samples. For its neighborhood stores, which are
generally located in small- to medium-sized towns and suburban neighborhoods,
the Company advertises primarily through direct mail. In addition, to enhance
its name recognition and image, the Company sponsors a number of regional and
local events.



                                       3
<PAGE>   5




PRIVATE LABEL PROGRAM

     The Company offers approximately 1,400 items through its private label
program. These items traditionally have been offered by the Company under the
Staff (dry groceries), Four Winds Farm (dairy and perishables), Pharm (health
and beauty care products), and Bay Harbor (frozen seafood) brand names. During
the fiscal year ended February 1, 1997, the Company introduced approximately 200
new private label products under the Bruno's name and approximately 70 new
private label products under the name Southern Homes. Gross margins on private
label goods are higher than on national brands. Private label products are
available at each of the Company's different formats, with a higher
concentration in the value and neighborhood stores. The Company plans to
continue expanding its private label program by introducing new labels featuring
quality products and contemporary packaging.


COMPETITION

     The supermarket industry is highly competitive and is characterized by
narrow profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, warehouse club stores, and supercenters operated by mass merchandisers
featuring food, drug and retail sections in one store. In addition to food
retailers, other retailers such as discount stores, drug stores and department
stores are increasing their selection of food products. Supermarket chains
compete based upon convenience of store location, price, service, cleanliness,
store condition, product variety and product quality. In addition to emphasizing
all of these traditional competitive factors, the Company attempts to gain an
advantage over its competitors by operating its stores under different formats
and by selecting the most appropriate format for each store based on the
characteristics of the market area in which the store is located. The Company
actively monitors its competitors' prices and adjusts its pricing and marketing
strategies as management deems appropriate in light of existing market
conditions.

     In recent years, the Company has faced increased competitive pressure in
all of its markets, including Alabama where the Company has historically been
the single largest supermarket chain. The Company's principal competitors
include Wal-Mart, Winn Dixie, Bi-Lo, Delchamps, Kroger, Publix, and Food Lion.
During 1996, the Company's competitors opened a significant number of new stores
in market areas served by the Company. Many of the Company's competitors have
significantly greater financial resources than the Company.


PURCHASING, WAREHOUSING AND DISTRIBUTION

     The Company has traditionally purchased merchandise from a large number of
third party suppliers. The Company has utilized many category management
techniques, including contract buying and, most recently, a continuous
replenishment system, which provides for automatic daily product replenishment
for certain products in its distribution center based on inventory level
changes.



                                       4
<PAGE>   6



     The Company previously operated two primary distribution facilities, one
located in Birmingham, Alabama and one located in Vidalia, Georgia. During 1996,
the Company closed its distribution center located in Vidalia, Georgia. As a
result, the Company now operates only one distribution facility located in
Birmingham, Alabama. The Birmingham distribution facility consists of 1.4
million square feet and provides the Company with integrated warehousing and
distribution capacity. The Company owns its Birmingham distribution facility
subject to an arrangement with a local industrial development agency.

     Each store submits orders to the Company's distribution facility through a
centralized processing system, and merchandise is normally received by the
stores the next day. Merchandise is delivered from the distribution facility
through a leased fleet of 120 tractors, 149 refrigerated trailers, and 123 dry
trailers. Virtually all of the Company's stores are located within a 300-mile
radius of the Birmingham distribution facility. The Company believes that its
existing distribution capacity will be sufficient to support its store growth
strategy over the next several years.


EMPLOYEE AND LABOR RELATIONS

     The Company is one of the leading private employers in Alabama. As of
February 1, 1997, the Company employed approximately 25,000 persons, of whom
approximately 48% were full-time employees and approximately 52% were part-time
employees. Approximately 23,500 of the Company's employees are assigned to
supermarkets, approximately 1,200 work in the Company's distribution facility,
and approximately 300 are employed in the Company's business office.
Approximately 90% of the Company's employees are paid on an hourly basis, and
the remaining employees are salaried. The Company currently employs, on average,
approximately 107 employees in each store.

     Approximately 76% of the Company's employees are represented by unions
under various collective bargaining agreements. The Company is currently a party
to a number of separate collective bargaining agreements with affiliates of
either the United Food and Commercial Workers Union or the Retail, Wholesale and
Department Store International Union. The agreements are generally negotiated in
three- or four-year cycles. Pursuant to the collective bargaining agreements,
the Company contributes to various union-sponsored multi-employer pension plans.
In general, the Company believes that its relationships with its employees are
good.

     The Company has an incentive compensation plan covering its key management
employees. Incentive compensation for store operations managers is based upon
the profitability of the operations within the scope of their management
responsibility.


                                       5
<PAGE>   7

TRADE NAMES, SERVICE MARKS, TRADEMARKS AND FRANCHISES

     The Company uses a variety of trade names, service marks and trademarks.
Except for "Bruno's," "Food World," "FoodMax," "Piggly Wiggly," "Food Fair," and
"Seessel's," the Company does not believe any of such trade names, service marks
or trademarks are material to its business.

     The Company and Piggly Wiggly Company are parties to a franchise agreement
under which the Company has the right to operate stores under the "Piggly
Wiggly" name in certain areas of central and southern Georgia. The Company does
not have the right to use the "Piggly Wiggly" name in any market areas except
for those specified in the franchise agreement.


ENVIRONMENTAL MATTERS

     The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the cost of cleaning up and for certain damages resulting from past spills
or other releases of hazardous materials. The Company believes that it currently
conducts its operations, and in the past has operated its business, in
substantial compliance with applicable environmental laws and regulations. From
time to time, the operations of the Company may result in noncompliance with or
liability for cleanup pursuant to environmental laws and regulations. The
Company does not believe that any such noncompliance or liability under current
environmental laws and regulations would have a material adverse effect on its
results of operations and financial condition.

     The Company has not incurred material capital expenditures for
environmental controls during the previous three years, nor does the Company
anticipate incurring such expenditures during the current fiscal year or the
succeeding fiscal year.


GOVERNMENTAL REGULATIONS

     The Company is subject to regulation by a variety of governmental agencies,
including, but not limited to, the United States Food & Drug Administration, the
United States Department of Agriculture, and other federal, state and local
agencies.


ITEM 2.  PROPERTIES

     The Company operates a total of 218 supermarkets, of which 123 are located
in Alabama, 50 in Georgia, 17 in Florida, 20 in Tennessee, and eight in
Mississippi. In addition, the Company operates nine liquor stores located
adjacent to Food World stores in Florida.



                                       6
<PAGE>   8


The table below shows the stores operated by the Company and the average square
footage for each store:


<TABLE>
<CAPTION>
                                                        Number       Average
                                                       of Stores  Square Footage
                                                       ---------  --------------
     <S>                                                 <C>         <C>

     Value Format:
        Food World                                        79          44,000
        FoodMax                                           32          52,000
                                                         ---
        Subtotal                                         111
     Combination Format:
        Bruno's                                           43          52,000
        Seessel's                                         10          47,000
        Other                                              1          32,000
                                                         ---
        Subtotal                                          54
     Neighborhood Format:
        Piggly Wiggly                                     21          34,000
        Food Fair                                         30          29,000
        Other                                              2          41,000
                                                         ---
        Subtotal                                          53
        Total                                            218
                                                         ===
</TABLE>

     The Company owns the real property on which 68 of its 218 supermarkets are
located. In addition, the real property on which five stores are located is
owned by a joint venture between the Company and Metropolitan Life Insurance
Company. The joint venture leases such stores back to the Company. The Company
also owns a number of sites that can be used for future store and warehouse
development, as well as certain non-operating real estate assets.

     The Company leases the property on which 150 of its 218 stores are located
under standard commercial leases which generally obligate the Company to pay its
proportionate share of real estate taxes, common area maintenance charges and
insurance costs. In addition, such leases generally provide for the Company to
pay a base monthly rent plus additional rent based on a percentage of sales when
sales from the store exceed a certain dollar amount. Generally these leases are
long-term, with one or more renewal options. SEE "LONG-TERM LEASES" IN NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The Company owns the fixtures and equipment
in each leased location and has made various leasehold improvements to the store
sites.

     The Company operates a warehouse, distribution center and office complex
consisting of approximately 1,375,000 square feet located in the Oxmoor West
Industrial Park in Birmingham, Alabama. The property on which this complex is
located consists of approximately 200 acres, including approximately 100 acres
of currently undeveloped land. The Company owns this property subject to certain
arrangements with the Industrial



                                       7
<PAGE>   9

Development Board of the City of Birmingham. The Company also owns, subject to
a similar industrial development authority arrangement, a warehouse and
distribution center consisting of approximately 686,000 square feet located on
a 90-acre site in Vidalia, Georgia. The Company closed this distribution center
in 1996. The distribution center is currently vacant and is listed for sale by
the Company.

     The Company's properties are well maintained and are in good operating
condition and are suitable and adequate for operating the Company's business.


ITEM 3.  LEGAL PROCEEDINGS

     In 1991, the Company received a favorable termination letter with respect
to the termination of the employee pension plan of a supermarket chain acquired
by the Company in 1989. Pursuant to the termination, distributions were made to
all of the participants in the employee pension plan. After all the benefit
liabilities were paid, the remaining plan assets of approximately $2.7 million
were transferred to the Company as a reversion of excess pension assets. On June
15, 1992, the Company received a letter from the Pension Benefit Guaranty
Corporation ("PBGC") contending that inappropriate actuarial assumptions were
used to determine the value of the benefits distributed and that additional
distributions must be made to numerous former participants in the plan. In
August 1994, the Company filed a lawsuit in the U.S. District Court for the
Northern District of Alabama challenging the PBGC's determination. In April
1995, the District Court ruled against the Company and in favor of the PBGC. The
Company appealed the District Court's ruling to the U.S. Court of Appeals for
the Eleventh Circuit, which also ruled against the Company. The Company is
currently making additional distributions to the former participants in the
plan. An amount necessary to cover the additional distributions was reserved by
the Company in its consolidated financial statements for the Transition Period.

     In addition, the Company is a party to various legal and taxing authority
proceedings incidental to its business. In the opinion of management, these
proceedings will not have a material adverse affect on the financial position or
results of operations of the Company.


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

     No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended February 1, 1997.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

     Each of the executive officers of the Company as of the date hereof was
elected to serve until the next annual meeting of the Board of Directors of the
Company or until his or her successor is elected and qualified:



                                       8
<PAGE>   10

<TABLE>
<CAPTION>

                                                                      Position
Name               Age  Office                                       Held Since
----               ---  ------                                      ------------

<S>                <C>  <C>                                         <C>
William J. Bolton  50   Chairman of the Board and Chief Executive   August 1995
                           Officer
David B. Clark     44   Executive Vice President - Merchandising    January 1997
                           Executive Vice President and Chief
James J. Hagan     38   Financial Officer                           January 1997
John Butler        48   Senior Vice President - Operations          March 1997
Walter M. Grant    52   Senior Vice President, General Counsel      June 1996
                           and Secretary
Laura Hayden       39   Senior Vice President - Human Resources     July 1996
</TABLE>

     Mr. Bolton was elected to the position of Chairman of the Board and Chief
Executive Officer of the Company in August 1995. Mr. Bolton served as President
of Jewel Food Stores from 1991 to August 1995 and as Chief Operating Officer
Markets of American Stores Company from April 1995 to August 1995.

     Mr. Clark was elected to the office of Executive Vice President -
Merchandising in January 1997.  Between November 1995 and January 1997, Mr.
Clark served as the Company's Senior Vice President - Operations.  Mr. Clark
served as Executive Vice President - Merchandising and Operations, of Cub Food
Stores, a division of Super Valu, Inc., from January 1992 to November 1995.

     Mr. Hagan was elected Executive Vice President and Chief Financial Officer
of the Company in January 1997. He served as Senior Vice President and Chief
Financial Officer of the Company from May 1996 to January 1997. Mr. Hagan served
in various positions with Revco D.S., Inc. between May 1987 and May 1996,
including Executive Vice President of Finance and Chief Financial Officer from
August 1995 until May 1996, Senior Vice President of Real Estate and Development
from July 1993 until August 1995, and Vice President and Treasurer from August
1988 until July 1993.

     In March 1997, Mr. Butler was elected to the office of Senior Vice
President - Operations of the Company.  Prior to joining the Company, Mr.
Butler was employed by H.E. Butt Grocery Company for approximately 15 years.
He served as Vice President - Store Operations, Central Texas Division, of H.E.
Butt Grocery Company from 1992 through 1996.

     Mr. Grant was elected to the office of Senior Vice President, General
Counsel and Secretary of the Company in June 1996.  He served as Senior Vice
President, General Counsel and Secretary of The Actava Group Inc. (formerly
named Fuqua Industries, Inc.) from July 1993 through June 1996 and as Senior
Vice President and General Counsel for the North American operations of Smith &
Nephew plc, an international health care company, from



                                       9
<PAGE>   11


October 1991 through June 1993.  Prior to October 1991, Mr. Grant served as
Vice President, General Counsel and Secretary of Contel Corporation, a
telecommunications company.

     Ms. Hayden was elected to the office of Senior Vice President - Human
Resources of the Company in July 1996.  Prior to joining the Company, Ms.
Hayden was employed for 16 years by various divisions or subsidiaries of
PepsiCo., Inc.  She served as Vice President - Human Resources (Headquarters)
of Frito Lay, Inc. from January 1996 until July 1996, as Vice President - Human
Resources for the Central Division of Frito Lay, Inc. from June 1994 until
January 1996, as Vice President - Human Resources for the Eastern Division of
Frito Lay, Inc. from January 1993 until June 1994, and as Senior Director of
Human Resources for the South Division of Pizza Hut, Inc. from April 1989 until
January 1993.





                                       10
<PAGE>   12



                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Until August 18, 1995, the date of the Merger, shares of the Company's
Common Stock were traded on the NASDAQ National Market System under the symbol
BRNO. The following table sets forth, by fiscal quarter, the high and low sales
prices, rounded to the nearest eighth, reported by the NASDAQ National Market
System with respect to sales of the Common Stock for the periods indicated prior
to August 18, 1995.


<TABLE>
<CAPTION>
                                    For Fiscal Year
                                   Ended July 1, 1995
                                   ------------------

                                High               Low
                                ----               ---
     <S>                       <C>                 <C>
     First Quarter              9 1/4                7
     Second Quarter            10 1/4              7 7/8
     Third Quarter             10 3/16             9 1/4
     Fourth Quarter            12 1/4              9 1/4
</TABLE>

<TABLE>
<CAPTION>

                                For Transition Period
                                ---------------------

                                High               Low
                                ----               ---

     <S>                       <C>                 <C>
     July 1, 1995              11 7/8             11 5/8
     to August 18, 1995
</TABLE>

     Since August 18, 1995, the Company's Common Stock has been traded in the
over-the-counter market, in the "pink sheets" published by the National
Quotation Bureau, and has been listed on the OTC Bulletin Board under the symbol
BRNO. The market for the Company's Common Stock must be characterized as a
limited market due to the relatively low trading volume and the small number of
brokerage firms acting as market makers. The following table sets forth, for the
periods indicated, certain information with respect to the high and low bid
quotations for the Common Stock as reported by a market maker for the Company's
Common Stock. The quotations represent inter-dealer quotations without retail
markups, markdowns or commissions and may not represent actual transactions. No
assurances can be given that the prices for the Company's Common Stock will be
maintained at their present levels.


<TABLE>
<CAPTION>
                                              For Transition Period
                                              ---------------------

                                           High Bid              Low Bid
                                           --------              -------
<S>                                         <C>                    <C>
August 19, 1995 to                                              
September 23, 1995                          11 3/4                 10
</TABLE>



                                       11
<PAGE>   13

<TABLE>
<CAPTION>

                                           For Transition Period
                                           ---------------------

                                         High Bid           Low Bid
                                         --------           -------
<S>                                       <C>                 <C>
Eighteen-week period
from September 23, 1995 to
January 27, 1996                          11 3/8              10
</TABLE>

<TABLE>
<CAPTION>
                                     For Fiscal Year Ended February 1, 1997
                                     --------------------------------------

                                           High Bid            Low Bid
                                           --------            -------
<S>                                        <C>                 <C>
                                                               
First Quarter                                12                 9 7/8
Second Quarter                             14 1/16             11 7/8
Third Quarter                              14 5/8              13 3/8
Fourth Quarter                             17 1/4              14 3/8
</TABLE>

     As of April 18, 1997, there were approximately 25,297,149 shares of the
Company's Common Stock issued and outstanding held by approximately 4,150
holders of record, including shares held of record by brokerage firms and
clearing corporations on behalf of their customers.

     During its fiscal year ended July 1, 1995, the Company paid a quarterly
cash dividend on the Common Stock in the amount of $.065 per share. The Company
suspended the payment of dividends on the Common Stock upon consummation of the
Merger, and the Company does not contemplate the declaration of dividends on the
Common Stock in the foreseeable future. The Company's debt agreements, including
the Company's 10 1/2% Senior Subordinated Notes due 2005 and the credit facility
entered into by the Company in connection with the Merger, restrict the payment
of dividends on the Common Stock.




                                       12
<PAGE>   14

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                  BRUNO'S, INC. AND SUBSIDIARIES
                                                                 
                                                      SELECTED FINANCIAL DATA
                                    (Amounts in Thousands, Except Share and Per Share Amounts)

                                                                         FISCAL YEAR ENDED
                                           -------------------------------------------------------------------------------------
                                                         JANUARY 27,
                                           FEBRUARY 1,      1996            JULY 1,       JULY 2,      JULY 3,        JUNE 27,
                                              1997       (52 WEEKS)          1995          1994          1993           1992
                                           (53 WEEKS)    (UNAUDITED)      (52 WEEKS)    (52 WEEKS)    (53 WEEKS)     (52 WEEKS)
                                           ------------  -----------     -----------   ------------   ----------     -----------
<S>                                        <C>            <C>            <C>           <C>            <C>            <C>
SELECTED INCOME STATEMENT DATA:
  Net Sales ............................   $ 2,899,044    $ 2,891,076    $ 2,869,569   $ 2,834,688    $ 2,872,327    $ 2,657,846
                                           -----------    -----------    -----------   -----------    -----------    -----------
  Cost and expenses:
    Cost of products sold ..............     2,202,753      2,224,975      2,196,556     2,185,587      2,242,455      2,067,560
    Store operating, selling
       and administrative
       expenses ........................       548,210        583,149        544,936       512,063        489,950        439,713
    Merger Expenses ....................          --           29,610           --            --             --             --
    Loss on divestiture of stores ......        88,588           --             --            --             --             --
    Depreciation and amortization ......        55,911         57,328         54,031        52,343         48,718         44,261
    Interest expense, net ..............        83,794         51,645         20,784        15,925         17,817         10,777
    Writedown of securities ............          --             --             --            --             --            3,393
    Impairment of long-lived assets ....          --           35,411           --            --             --            5,000
                                           -----------    -----------    -----------   -----------    -----------    -----------
                                             2,979,256      2,982,118      2,816,307     2,765,918      2,798,940      2,570,704
                                           -----------    -----------    -----------   -----------    -----------    -----------
    Income (loss) from continuing
       operations before income taxes
       (benefit) and extraordinary item        (80,212)       (91,042)        53,262        68,770         73,387         87,142
    Provision for income taxes (benefit)       (30,697)       (20,107)        19,920        28,189         26,493         30,776
                                           -----------    -----------    -----------   -----------    -----------    -----------
       Income (loss) from continuing
         operations before
         extraordinary item ............       (49,515)       (70,935)        33,342        40,581         46,894         56,366
                                           -----------    -----------    -----------   -----------    -----------    -----------
    Discontinued operations, net:
       Loss on disposal ................          --             --             --            --             --           (8,550)
       Loss from operations ............          --             --             --            --             --           (4,400)
                                           -----------    -----------    -----------   -----------    -----------    -----------
                                                  --             --             --            --             --          (12,950)
                                           -----------    -----------    -----------   -----------    -----------    -----------
    Extraordinary item, net ............        (1,674)        (4,902)          --          (3,288)                         --
                                           -----------    -----------    -----------   -----------    -----------    -----------
          Net income (loss) ............   $   (51,189)   $   (75,837)   $    33,342   $    37,293    $    46,894    $    43,416
                                           ===========    ===========    ===========   ===========    ===========    ===========
</TABLE>

                                       13
<PAGE>   15

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED
                                         ------------------------------------------------------------------------------------------
                                                          JANUARY 27,
                                          FEBRUARY 1,        1996            JULY 1,        JULY 2,        JULY 3,       JUNE 27,
                                             1997         (52 WEEKS)          1995           1994           1993          1992
                                          (53 WEEKS)      (UNAUDITED)      (52 WEEKS)     (52 WEEKS)     (53 WEEKS)     (52 WEEKS)
                                         -------------   -------------   ------------   -------------   ------------   ------------
<S>                                      <C>             <C>             <C>            <C>             <C>            <C>

 Earnings (loss) per common share:
   Income (loss) from
     continuing operations
     before extraordinary item .......   $      (1.97)   $      (1.31)   $       0.43   $       0.52    $       0.60   $       0.69
   Discontinued operations, net ......           0.00            0.00            0.00           0.00            0.00          (0.16)
   Extraordinary item, net ...........          (0.06)          (0.09)           0.00          (0.04)           0.00           0.00
                                         ============    ============    ============   ============    ============   ============
     Net income (loss) ...............   $      (2.03)   $      (1.40)   $       0.43   $       0.48    $       0.60   $       0.53
                                         ============    ============    ============   ============    ============   ============

  Cash dividends per common share ....   $       --      $       --      $       0.26   $       0.24    $       0.22   $       0.20
                                         ============    ============    ============   ============    ============   ============

 Weighted average number of common and
    equivalent shares outstanding ....     25,183,559      54,139,503      77,571,000     78,088,000      78,717,000     81,874,000
                                         ============    ============    ============   ============    ============   ============


SELECTED BALANCE SHEET DATA:
 Cash and cash equivalents ...........   $      4,908    $     57,387    $     25,916   $     30,259    $     20,093   $     19,507
 Working Capital .....................           (816)         65,713         141,420        174,392         117,510        110,968
 Property and equipment, net .........        466,997         491,664         516,374        540,139         543,877        467,824
 Total assets ........................        791,431         873,149         895,641        927,208         916,923        834,683
 Long-term debt and capitalized
   lease obligations .................        826,137         852,186         219,561        296,460         269,046        172,190
  Shareholders' investment
   (deficiency in net assets) ........       (330,149)       (281,343)        429,814        421,354         402,667        422,443
</TABLE>


                                       14
<PAGE>   16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Amounts in Thousands)

RESULTS OF OPERATIONS
     The following income statement information for the fiscal year ended
February 1, 1997 and the fifty-two week period ended January 27, 1996 is
presented in connection with Management's Discussion and Analysis of Financial
Condition and Results of Operations:


<TABLE>
<CAPTION>
                              =====================================================================================================
                                                           February 1, 1997                                       January 27, 1996
                                                             (53 weeks)                                              (52 weeks)
                              -------------------------------------------------------------  ------------------  ------------------
                                     Operating             Divested                                                  (Unaudited)
                                      Stores               Stores              Seessel's         Total Company     Total Company
                              --------------------  -------------------  ------------------  ------------------  ------------------
                                Amount       %        Amount      %        Amount      %       Amount      %       Amount      %
                              ----------   ------    --------   ------     -------   ------  ----------  ------  ----------  ------
<S>                           <C>          <C>       <C>        <C>        <C>       <C>     <C>         <C>     <C>         <C>
Net sales                     $2,644,530   100.00%   $224,613   100.00%    $29,901   100.00% $2,899,044  100.00% $2,891,076  100.00%
Cost of products sold          2,013,178    76.13     168,555    75.04      21,020    70.30   2,202,753   75.98   2,224,975   76.96
                              ----------   ------    --------   ------     -------   ------  ----------  ------  ----------  ------
Gross profit                     631,352    23.87      56,058    24.96       8,881    29.70     696,291   24.02     666,101   23.04

Store operating, selling,
 and administrative expenses     484,011    18.30      56,675    25.23       7,524    25.16     548,210   18.91     583,149   20.17
                              ----------   ------    --------   ------     -------   ------  ----------  ------  ----------  ------
EBITDA (as defined)              147,341     5.57        (617)   (0.27)      1,357     4.54     148,081    5.11      82,952    2.87

Loss on divestiture
  of stores                            0     0.00      88,588    39.44           0     0.00      88,588    3.06           0    0.00
Merger Expenses                        0     0.00           0     0.00           0     0.00           0    0.00      29,610    1.02
Impairment of
 long-lived assets                     0     0.00           0     0.00           0     0.00           0    0.00      35,411    1.22
Depreciation and
 amortization                     49,282     1.86       5,810     2.59         819     2.74      55,911    1.93      57,328    1.98
                              ----------   ------    --------   ------     -------   ------  ----------  ------  ----------  ------
Operating income (loss)       $   98,059     3.71%   $(95,015)  (42.30%)   $   538     1.80% $    3,582    0.12% $  (39,397) (1.36%)
                              ==========   ======    ========   ======     =======   ======  ==========  ======  ==========  ======
</TABLE>

<TABLE>
<CAPTION>
                                         UNAUDITED PRO FORMA INCOME STATEMENT INFORMATION*
                                 ==============================================================
                                                        February 1, 1997
                                                           (52 weeks)
                                 --------------------------------------------------------------
                                         Bruno's             Seessel's       Total Company
                                 --------------------   ------------------ --------------------
                                   Amount       %       Amount       %       Amount       %
                                 ----------   ------    --------   ------  ----------   ------
<S>                              <C>          <C>       <C>        <C>     <C>          <C>
Net sales                        $2,594,633   100.00%   $181,648   100.00% $2,776,281   100.00%
Cost of products sold             1,975,193    76.13     128,234    70.59   2,103,427    75.76
                                 ----------   ------    --------   ------  ----------   ------
Gross profit                        619,440    23.87      53,414    29.41     672,854    24.24

Store operating, selling,
 and administrative expenses        474,879    18.30      43,972    24.21     518,851    18.69
                                 ----------   ------    --------   ------  ----------   ------
EBITDA (as defined)                 144,561     5.57       9,442     5.20     154,003     5.55

Depreciation and amortization        48,352     1.86       5,933     3.27      54,285     1.96
                                 ----------   ------    --------   ------  ----------   ------

Operating income (loss)          $   96,209     3.71%   $  3,509     1.93% $   99,718     3.59%
                                 ==========   ======    ========   ======  ==========   ======
</TABLE>


* Represents income statement information of the operating stores for the
fifty-two weeks ended February 1, 1997 plus the results of Seessel Holdings,
weeks ended February 1, 1997 presented as if Seessel's had been acquired on
January 28, 1996.



                                       15
<PAGE>   17



GENERAL

         As of February 1, 1997, the Company operated a chain of 218 
supermarkets and combination food and drug stores. The Company also operated
nine retail liquor stores located in the Florida panhandle. In December 1995,
the Company changed its fiscal year to a fifty-two or fifty-three week year
ending on the Saturday closest to January 31 from a fifty-two or fifty-three
week year ending on the Saturday closest to June 30. Due to the change in year
end, the consolidated statements of operations include the fifty-three week
fiscal year ended February 1, 1997, the thirty week period ended January 27,
1996, footnote disclosure of the unaudited fifty-two week period ended January
27, 1996 (for comparative purposes), and the fiscal years ended July 1, 1995
and July 2, 1994.

         During the fiscal year ended February 1, 1997, the Company developed
and completed a divestiture program (the "Divestiture Program") under which the
Company closed its distribution center located in Vidalia, Georgia and sold or
closed 47 stores, including 37 stores in Georgia, five stores in South Carolina,
two stores in Florida, two stores in Alabama, and one store in Mississippi. In
addition, the Company in December 1996 acquired Seessel Holdings, Inc., which
owns and operates eight supermarkets in Memphis, Tennessee and two supermarkets
in Northern Mississippi . See "Divestiture Program" and "Seessel's Acquisition"
in Notes to Consolidated Financial Statements.

COMPARISON OF OPERATIONS FOR THE FIFTY-THREE WEEK PERIOD 
ENDED FEBRUARY 1, 1997 TO THE FIFTY-TWO WEEK PERIOD 
ENDED JANUARY 27, 1996 (UNAUDITED)

NET SALES

         Net Sales increased 0.28% to $2.899 billion for the fifty-three week
fiscal year ended February 1, 1997 compared to $2.891 billion for the fifty-two
week period ended January 27, 1996. Same store sales decreased 1.23% due to
increased competitive activity in the Company's trade areas. The Company's store
count decreased from 254 at January 27, 1996 to 218 at February 1, 1997. The
change in store count primarily resulted from the Divestiture Program and the
acquisition of Seessel Holdings, Inc.

GROSS PROFIT

         Gross Profit increased as a percentage of net sales from 23.04% to
24.02%. The increase was due to improved buying and pricing practices resulting
from the implementation of a new distribution center ordering system and an
unusual charge of $7.8 million in the prior period resulting from a refinement
in the Company's inventory valuation methodology based on additional
information. Excluding the unusual charge, the gross profit percentage in the
prior period would have been 23.31%.

STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES

         Store operating, selling and administrative expenses decreased to
$548.2 million, or 18.91% of net sales, in the current fiscal year from $583.1
million, or 20.17% of net sales, in the prior period. The decrease is
attributable to the following nonrecurring items in the prior period: (i) an
increase in the Company's estimated liability for self insurance claims of $37.2
million based on the initial use of actuarial assumptions, (ii) a $5.1 million
write off of a deposit made in 1992 for three proposed stores which will not be
developed, (iii) the accrual of $2.7 million as a result of the Company's loss
of a court appeal related to a claim by the Pension Benefit Guaranty



                                       16
<PAGE>   18

Corporation concerning the termination of an employee pension plan in 1989, (iv)
an increase in the accrual related to future lease and other obligations on
closed stores of $3.4 million reflecting a change in management's assumptions
with respect to anticipated future lease income plus an additional closed store,
(v) a $2.5 million write off of leasehold improvements and equipment determined
to have no value in stores which have been remodeled, (vi) the write off of a
$1.8 million deposit made by the Company for medical benefits under a union plan
which, upon execution of the related union contract in November 1995, was
determined not to have benefit beyond the current period, and (vii)
miscellaneous charges of $1.8 million. Excluding these charges (a total of $54.5
million), store operating, selling and administrative expenses would have
increased 3.71% from $528.6 million in the prior period to $548.2 million in the
current fiscal year due to costs associated with increased promotional
activities.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA)

         EBITDA was $148.1 million in the current fiscal year compared to $82.9
million in the prior period. The Company considers certain amounts described
above under the headings Gross Profit and Store Operating, Selling and
Administrative Expenses to be unusual charges to operations during the prior
period. Excluding these items (a total of $62.3 million), the Company would have
had EBITDA of $145.2 million during the period ended January 27, 1996.

MERGER EXPENSES

         On August 18, 1995, Crimson Acquisition Corp. was merged into and with
the Company (the "Merger"). Expenses related to the Merger of $29.6 million were
incurred in the period ended January 27, 1996. These expenses consisted
primarily of professional and advisory fees as well as payments to certain
former Company officers, other employees and directors pursuant to employment
and option agreements.

DEPRECIATION AND AMORTIZATION

         Depreciation and amortization for the fiscal year ended February 1,
1997 decreased as a percentage of sales as compared to the period ended January
27, 1996. The decrease was due to the Company changing its estimate of the
depreciable lives of certain technology equipment in the period ended January
27, 1996, resulting in an additional charge to depreciation of $3.0 million.

INTEREST EXPENSE, NET

         Net interest expense increased 62.25% to $83.8 million in the fiscal
year ended February 1, 1997 as compared to $51.6 million in the period ended
January 27, 1996. The increase is attributable to financing incurred in
connection with the Merger and the 53rd week in the current year.

LOSS ON DIVESTITURE OF STORES

         During the fiscal year ended February 1, 1997, management evaluated the
Company's market strategy, geographic positioning and store level return on
assets. As a result of this evaluation, the Company developed the Divestiture
Program during the third quarter of the fiscal year which called for the sale or
closure of the Company's distribution center in Vidalia, Georgia and 47 stores.
The 47 stores consisted of 33 Piggly Wiggly stores in Georgia, nine FoodMax
stores in Georgia and South Carolina, two Food World stores in Florida, one Food
World store in Mississippi, one Food World store in Alabama, and one Food Fair
store in Alabama.



                                       17
<PAGE>   19

         As of February 1, 1997, the Divestiture Program had been completed. The
Company sold 29 stores to various purchasers and received proceeds of $20.1
million ($12.5 million for fixed assets and $7.6 million for counted inventory).
The remaining 18 stores and the Vidalia Distribution Center were closed.

         The accompanying statement of operations for the fiscal year ended
February 1, 1997 includes a charge of $88.6 million for costs associated with
the Divestiture Program. This amount consists of a $55.0 million loss on the
disposal of fixed assets and intangibles (of which $5.6 million was applied to
goodwill), $18.5 million in future rental payments, $8.4 million in inventory
markdowns and $6.7 million in severance costs, professional fees and other
miscellaneous expenses.

IMPAIRMENT OF LONG-LIVED ASSETS

         At January 27, 1996, the Company elected to adopt early the provisions
of Statement of Financial Accounting Standard No. 121, which resulted in a
review of its operating assets for impairment at the individual store level
using a future cash flow and market value approach. For those store level assets
where the remaining net book value exceeded the sum of estimated future
operating cash flows, an impairment loss of $32.1 million (of which $19.0
million was goodwill) was recognized for the excess of net book value over
estimated fair value. Other impairment charges of $3.3 million were recognized
primarily relating to an idle warehouse facility and certain land held for
investment, resulting in a total impairment charge of $35.4 million.

LOSS BEFORE INCOME TAXES (BENEFIT) AND EXTRAORDINARY ITEMS

         In the fiscal year ended February 1, 1997, the Company had a loss
before income tax benefit and extraordinary items of $80.2 million compared to a
loss before income taxes and extraordinary items of $91.0 million in the period
ended January 27, 1996. The Company considers certain amounts described above
under the headings Gross Profit, Store Operating, Selling and Administrative
Expenses, Merger Expenses, Depreciation and Amortization, Loss on Divestiture of
Stores, and Impairment of Long-Lived Assets to be unusual charges to operations.
Excluding these items (a total of $88.6 million for the fiscal year ended
February 1, 1997 and $130.3 million for the period ended January 27, 1996), the
Company would have had income before income taxes and extraordinary items of
$8.4 million for the current fiscal year compared to $39.3 million in the prior
period. The decrease in income before income taxes (benefit) and extraordinary
items is attributable to the increase in interest expense in the current fiscal
year resulting from the Merger.

INCOME TAXES

         The Company realized a tax benefit of $30.7 million in the fiscal year
ended February 1, 1997 compared to a tax benefit of $20.1 million in the period
ended January 27, 1996. The effective tax rate was 38% and 23% for the fiscal
year ended February 1, 1997 and the period ended January 27, 1996, respectively.
The difference in the effective tax rates is primarily a result of the write-off
of goodwill of $19.0 million and Merger related transaction costs of $13.6
million which are not deductible for tax purposes in the period ended January
27, 1996.

EXTRAORDINARY ITEM, NET

         In the fiscal year ended February 1, 1997, the Company prepaid $65.0
million in principal on its $475.0 million term loan facility entered into in
connection with the Merger. As a result of this prepayment, the related debt
issuance costs of $1.7 million (net of tax of $1.0 million) were written off. In
the period ended January 27, 1996, the Company wrote off debt issuance costs
related to the early extinguishment of private placement debt and terminated an




                                       18
<PAGE>   20

interest rate swap agreement, resulting in a $3.7 million loss (net of tax of
$2.3 million). Additionally, in January 1996 the Company prepaid $41.0 million
principal amount of its $475.0 million term loan facility, resulting in the
write off of $1.2 million (net of tax of $0.7 million) of debt issuance costs.


COMPARISON OF OPERATIONS FOR THE FIFTY-TWO WEEK PERIOD ENDED JULY 1,1995 TO THE
FIFTY-TWO WEEK PERIOD ENDED JULY 2, 1994

NET SALES

         Net sales increased 1.2% to $2.870 billion for the fifty-two week
fiscal year ended July 1, 1995 compared to $2.835 billion for the fifty-two week
fiscal year ended July 2, 1994. The net sales increase was primarily due to the
Company's focus on remodeling its existing stores and increasing its emphasis on
customer service.

GROSS PROFIT

         Gross profit as a percentage of net sales increased 0.6% between fiscal
1994 and 1995. The increase in gross profit was primarily due to an increased
sales mix of higher margin perishable and general merchandise products. This
improvement was a direct result of the Company's development and emphasis on its
larger format stores which carry a greater percentage of these products.

STORE OPERATING, SELLING, AND ADMINISTRATIVE EXPENSES

         On May 18, 1995, the Company announced that it had reviewed the
methodology it used to estimate required balance sheet reserves for self-insured
workers' compensation and general liability claims. The Company had historically
followed the guidance in Statement of Financial Accounting Standards ("SFAS")
No. 5 and SFAS No. 112 to account for exposures under its workers' compensation,
general liability and medical self-insurance programs. This guidance requires
accrual of the best estimate of probable liabilities within a range of loss
estimates. In applying this accounting principle, the Company had consistently
utilized case estimates of probable liabilities prepared by experienced parties
using all available claims data as to the extent of losses and related costs.
The Company believed that this practice was consistent with the method used by
many other companies. Because (a) the number of stores and employees had
remained flat from fiscal 1992 through fiscal 1995, (b) annual cash payments
under these plans had only increased approximately 6% from fiscal 1993 through
fiscal 1995 (an average of 3% per year), and (c) the number of outstanding
claims had also remained relatively flat, the Company did not believe a complete
actuarial study was either necessary or cost beneficial. Consequently,
actuarially-based computations were previously not performed. During May 1995,
in connection with the Merger, affiliates of Kohlberg Kravis Roberts & Co.
("KKR") independently obtained actuarially-based estimates of the Company's
liabilities for workers' compensation and general liability self-insurance
exposures which were substantially higher than the Company's case estimates.
After a review of these estimates and consultation with its advisors, the
Company determined that these actuarial techniques provided better estimates
than those which had previously been used by the Company. The Company then
computed new estimated reserve requirements using actuarial techniques, and, in
accordance with its policy and SFAS No. 5 and SFAS No. 112, recorded an
adjustment to increase these self-insurance reserves by approximately $22.2
million (approximately $13.8 million net of income taxes) as a change in
accounting estimate in the third fiscal quarter ended April 8, 1995.
Approximately $19.2 million of the $22.2 million charge relating to this change
in accounting estimate was of a nonrecurring nature.



                                       19
<PAGE>   21



         Excluding the self-insurance reserve adjustment, store operating,
selling and administrative expenses as a percentage of net sales increased by
0.1% from fiscal 1994 to fiscal 1995. The increase as a percentage of net sales
was primarily due to the higher operating costs associated with the increasing
number of larger format stores. These larger stores employ additional personnel
and have higher operating costs, particularly in their expanded service-oriented
departments.

DEPRECIATION AND AMORTIZATION

         Depreciation and amortization as a percentage of net sales remained
relatively constant during fiscal 1994 and 1995.

INTEREST EXPENSE, NET

         The increase in net interest expense during fiscal 1995 compared to
fiscal 1994 is due to an increase in interest rates which affected the Company's
borrowings, including its net interest position on an $80.0 million notional
interest rate swap.

INCOME TAXES

         The Company's effective income tax rate decreased from 41% for fiscal
1994 to 37% for fiscal 1995. The higher effective tax rate for fiscal 1994
relates to an additional tax provision of $2.2 million to retroactively restate
income tax liabilities to reflect the change in federal income tax rates
mandated by the Omnibus Budget Reconciliation Act of 1993.

EXTRAORDINARY ITEM

         In the first quarter of fiscal 1994, the Company redeemed its $143.0
million 6.5% Convertible Subordinated Debentures at a conversion price above par
value. The redemption of the Debentures resulted in an extraordinary loss of
$3.3 million, net of the applicable income tax benefit of $2.0 million.


UNAUDITED PRO FORMA INCOME STATEMENT INFORMATION 

         The unaudited pro forma income statement information presents the 
results of the Company as if the Divestiture Program and the Seessel's 
Acquisition had both occurred on January 28, 1996, and as if the fiscal year 
ended February 1, 1997 had been a fifty-two week year. The results of Seessel's
represent, in all material respects, their internally reported results for the
fifty-two week period ended February 1, 1997 except for depreciation and 
amortization which has been adjusted to reflect the post acquisition annualized
expense.

LIQUIDITY AND CAPITAL RESOURCES

         In December 1995, the Company elected to change its fiscal year end to
the Saturday closest to January 31, from the Saturday closest to June 30 to be
consistent with the predominant practice in the Company's industry. The change
of fiscal year resulted in a transition period of thirty weeks beginning July 2,
1995 and ending January 27, 1996.

         Historically, the Company has funded working capital requirements,
capital expenditures and other cash requirements primarily through cash flows
from operating activities. Cash flows from operating activities were $78.6
million for the fiscal year ended February 1, 1997 compared to $97.9 million,
$125.7 million and $86.9 million for the thirty week transition period ended
January 27, 1996, and the fiscal years ended July 1, 1995 and July 2, 1994,
respectively. The





                                       20
<PAGE>   22

reduction in store count and the closure of the Vidalia Distribution Center
pursuant to the Divestiture Program resulted in a reduction in inventory of
$33.8 million to $181.8 million at February 1, 1997 from $215.6 million at
January 27, 1996. Accounts payable as a percentage of inventories was 82.3% at
February 1, 1997, as compared to 77.6% at January 27, 1996. During the fiscal
year ended February 1, 1997, the Company utilized existing cash balances and
cash flows from operating activities to prepay $65.0 million in principal on its
term loan facility prior to the scheduled maturity date.

         The Company believes that operating cash flows will be sufficient to
fund store expansion and working capital needs. If the Company needs additional
operating cash, however, it has $78.8 million of a $125.0 million revolving
credit facility available.

         Investing activities utilized $95.7 million in cash during the fiscal
year ended February 1, 1997 compared to a net use of $25.5 million and $26.0
million for the thirty-week period ended January 27, 1996 and the fifty-two week
fiscal year ended July 1, 1995, respectively. The current fiscal year amount is
related to the acquisition of the stock of Seessel Holdings, Inc. for $47.0
million, excluding direct acquisition costs, and additions of property and
equipment. The Company continues to evaluate opportunities to expand through
opening new stores or acquiring existing stores. If internally available cash,
cash generated from operations and short-term borrowings are not sufficient to
fund future expansion, the Company may need to incur additional long-term
financing for such expansion. There can be no assurances that such financing
will be available to the Company on acceptable terms.

         The Company had long-term debt at February 1, 1997 consisting of a
$369.0 million term loan facility, $400.0 million in senior subordinated notes,
and $44.5 million in outstanding direct borrowings under its revolving credit
facility. The term loan facility consists of $210.0 million of Tranche A term
loans, $71.0 million of Tranche B term loans, $66.0 million of Tranche C term
loans and $22.0 million of Tranche D term loans. The term loans mature at
various increments through the fiscal year ending in January 2006, while the
revolving credit facility matures in total in the fiscal year ending in January
2003 and the senior subordinated notes mature in total in the fiscal year ending
in January 2006. The primary uses of cash during the period ended February 1,
1997 were the acquisition of Seessel Holdings, Inc. for $62.0 million ,
excluding direct acquisition costs, ($47.0 million for the purchase of stock and
$15.0 million for the repayment of all outstanding debt) and the prepayment of
debt in the amount of $65.0 million.

         The Company's present capital plans call for total expenditures of
approximately $65.0 million in the fiscal year ended January 31, 1998. These
plans are subject to change from time to time and the actual amount spent may
vary materially from the amount presented above. The Company had no material
commitments in connection with these planned capital expenditures at February 1,
1997.



                                       21
<PAGE>   23
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         BRUNO'S, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    FEBRUARY 1, 1997 AND JANUARY 27, 1996
                   (Amounts in Thousands, Except Share and
                              Per Share Amounts)


<TABLE>
<CAPTION>

                                               FEBRUARY 1,    JANUARY 27,
                   ASSETS                          1997          1996
----------------------------------------       -----------    -----------
CURRENT ASSETS:

   <S>                                          <C>             <C>     
   Cash and cash equivalents ...........        $  4,908        $ 57,387
   Receivables .........................          20,480          25,294
   Inventories .........................         181,786         215,589
   Prepaid expenses ....................          10,468          11,225
   Refundable income taxes .............           1,373              --
   Deferred income taxes ...............          14,534           6,733
                                                --------        --------
      Total Current Assets .............         233,549         316,228
                                                --------        --------






PROPERTY AND EQUIPMENT, NET ............         466,997         491,664
                                                --------        --------





NON-CURRENT ASSETS:


   Deferred debt issuance costs, net ...          29,874          36,919
   Goodwill, net .......................          50,824          11,823
   Franchise rights, net ...............           3,161           9,274
   Investment in joint venture .........           3,646           3,642
   Other, net ..........................           3,380           3,596
                                                --------        --------


      Total Non-current Assets .........          90,885          65,254
                                                --------        --------


         TOTAL ASSETS ..................        $791,431        $873,146
                                                ========        ========




        LIABILITIES AND SHAREHOLDERS'          FEBRUARY 1,     JANUARY 27,
                 INVESTMENT                       1997            1996
----------------------------------------        --------        --------
CURRENT LIABILITIES:
   Current maturites of long-term debt
       and capitalized lease obligations        $  2,491        $  1,938
    Accounts payable ...................         149,614         167,283
    Accrued payroll and related expenses          20,360          17,975
    Self-insurance reserves ............           8,058           9,200
    Closed store accrual ...............           5,373           8,600
    Other accrued expenses .............          25,839          19,786
    Accrued interest ...................          22,630          25,733
                                                --------        --------
       Total Current Liabilities .......         234,365         250,515
                                                --------        --------

NON-CURRENT LIABILITIES:
    Long-term debt .....................         813,722         834,223
    Capitalized lease obligations ......          12,415          17,963
    Deferred income taxes ..............           6,742          21,082
    Self-insurance reserves ............          25,518          29,947
    Closed store accrual ...............          20,217              --
    Other non-current liabiities .......           8,601             759
                                                --------        --------
       Total Non-current Liabilities ...         887,215         903,974
                                                --------        --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT
   (DEFICIENCY IN NET ASSETS):
Common stock, $.01 par value,
   60,000,000 shares authorized; 25,333,607
   (1997), and 25,007,015 (1996) issued and
   outstanding .........................             253             250
Paid-in capital ........................        (587,624)       (592,096)
Retained earnings ......................         259,314         310,503
Shareholder's notes receivable .........          (2,092)             --
                                                --------        --------
   Total shareholders' investment
     (deficiency in net assets) .......         (330,149)       (281,343)
                                                --------        --------
   TOTAL LIABILITIES AND
     SHAREHOLDERS' INVESTMENT
     (DEFICIENCY IN NET ASSETS) ........        $791,431        $873,146
                                                ========        ========
</TABLE>



                 See notes to consolidated financial statements.


                                       22
<PAGE>   24



                         BRUNO'S, INC, AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      FOR THE FISCAL YEAR ENDED FEBRUARY 1,
                       1997, THE THIRTY WEEK PERIOD ENDED
                     JANUARY 27, 1996, AND THE FISCAL YEARS
                      ENDED JULY 1, 1995, AND JULY 2, 1994

           (Amounts in Thousands, Except Share and Per Share Amounts)

<TABLE>
<CAPTION>
                                                  FEBRUARY 1,        JANUARY 27,         JULY 1,          JULY 2,
                                                     1997               1996              1995             1994
                                                  (53 WEEKS)         (30 WEEKS)        (52 WEEKS)       (52 WEEKS)
                                                 -------------      ------------      ------------    --------------

<S>                                               <C>               <C>               <C>              <C>         
NET SALES ...................................     $  2,899,044      $  1,674,659      $  2,869,569     $  2,834,688
                                                  ------------      ------------      ------------     ------------
COST AND EXPENSES:
   Cost of products sold ....................        2,202,753         1,291,847         2,196,556        2,185,587
   Store operating, selling, and
    administrative expenses .................          548,210           339,367           544,936          512,063
   Merger expenses ..........................               --            29,610                --               --
   Loss on divestiture of stores ............           88,588                --                --               --
   Depreciation and amortization ............           55,911            35,453            54,031           52,343
   Interest expense, net ....................           83,794            42,149            20,784           15,925
   Impairment of long-lived assets ..........               --            35,411                --               --
                                                  ------------      ------------      ------------     ------------
                                                     2,979,256         1,773,837         2,816,307        2,765,918
                                                  ------------      ------------      ------------     ------------
   Income (loss) before income taxes
    (benefit) and extraordinary item ........          (80,212)          (99,178)           53,262           68,770

PROVISION (BENEFIT) FOR INCOME TAXES ........          (30,697)          (22,879)           19,920           28,189
                                                  ------------      ------------      ------------     ------------
   Income (loss) before extraordinary
    item ....................................          (49,515)          (76,299)           33,342           40,581

EXTRAORDINARY ITEM, NET .....................           (1,674)           (4,902)               --           (3,288)
                                                  ------------      ------------      ------------     ------------
NET INCOME (LOSS) ...........................     $    (51,189)     $    (81,201)     $     33,342     $     37,293
                                                  ============      ============      ============     ============

EARNINGS (LOSS) PER COMMON SHARE:
   Income (loss) before extraordinary
    item ....................................     $      (1.97)     $      (2.06)     $       0.43     $       0.52
   Extraordinary item, net ..................            (0.06)            (0.13)             0.00            (0.04)
                                                  ============      ============      ============     ============
   Net Income (loss) ........................     $      (2.03)     $      (2.19)     $       0.43     $       0.48
                                                  ============      ============      ============     ============


   Weighted average number of common
    shares outstanding ......................       25,183,559        37,006,175        77,571,000       78,088,000
                                                  ============      ============      ============     ============

</TABLE>

                 See notes to consolidated financial statements.



                                       23
<PAGE>   25

                         BRUNO'S, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (DEFICIENCY IN NET ASSETS)

           FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997, THE THIRTY WEEK
         PERIOD ENDED JANUARY 27, 1996, AND THE FISCAL YEARS ENDED JULY
                            1, 1995, AND JULY 2, 1994

           (Amounts in Thousands, Except Share and Per Share Amounts)



<TABLE>
<CAPTION>
                                                     COMMON STOCK
                                            -------------------------------
                                                NUMBER                           PAID-IN           RETAINED
                                               OF SHARES         AMOUNT          CAPITAL           EARNINGS
                                            ---------------   -------------  ----------------   --------------

<S>                                            <C>             <C>              <C>              <C>        
BALANCE, JULY 3, 1993                          78,047,341      $       780      $    42,072      $   360,022

     Net income                                        --               --               --           37,293
     Cash dividends ($.24 per share)                   --               --               --          (18,741)
     Stock bonus and option plan activity          43,100                1              (73)              --
                                              -----------      -----------      -----------      -----------
BALANCE, JULY 2, 1994                          78,090,441              781           41,999          378,574
                                              -----------      -----------      -----------      -----------

     Net income                                        --               --               --           33,342
     Stock bonus and option plan activity           7,900               --                9               --
     Cash dividends ($.26 per share)                   --               --               --          (20,212)
     Repurchase of common stock                        --               --               --               --
                                              -----------      -----------      -----------      -----------
BALANCE, JULY 1, 1995                          78,098,341              781           42,008          391,704
                                              -----------      -----------      -----------      -----------

     Net loss                                          --               --               --          (81,201)
     Redemption of common stock               (73,329,659)            (733)        (879,223)              --
     Sale of common stock                      20,833,333              208          249,792               --
     Retirement of treasury stock                (595,000)              (6)          (4,673)              --
                                              -----------      -----------      -----------      -----------
BALANCE, JANUARY 27, 1996                      25,007,015              250         (592,096)         310,503
                                              -----------      -----------      -----------      -----------

     Net loss                                          --               --               --          (51,189)
     Issuance of common stock to officers
       and other executives                       326,592                3            4,472               --
                                              ===========      ===========      ===========      ===========
BALANCE, FEBRUARY 1, 1997                      25,333,607      $       253      $  (587,624)     $   259,314
                                              ===========      ===========      ===========      ===========
</TABLE>

<TABLE>
<CAPTION>

                                                                                     TREASURY STOCK
                                                                                  ---------------------
                                                 SHAREHOLDER'S       DEFERRED      NUMBER
                                                NOTES RECEIVABLE   COMPENSATION   OF SHARES      AMOUNT
                                                ----------------   ------------   ---------     --------

<S>                                                 <C>            <C>            <C>            <C>    
BALANCE, JULY 3, 1993                               $      --      $     (207)           --      $    --

     Net income                                            --             --             --           --
     Cash dividends ($.24 per share)                       --             --             --           --
     Stock bonus and option plan activity                  --            207             --           --
                                                    ---------      ---------      ---------      -------
BALANCE, JULY 2, 1994                               $      --      $      --             --           --
                                                    ---------      ---------      ---------      -------
                                                                                  
     Net income                                                                          --           --
     Stock bonus and option plan activity                  --                            --           --
     Cash dividends ($.26 per share)                                                     --           --
     Repurchase of common stock                            --                       595,020       (4,679)
                                                    ---------                     ---------      -------
BALANCE, JULY 1, 1995                                      --                       595,020       (4,679)
                                                    ---------                     ---------      -------
                                                                                  
     Net loss                                                                            --           --
     Redemption of common stock                            --                            --           --
     Sale of common stock                                  --                            --           --
     Retirement of treasury stock                          --                      (595,020)       4,679
                                                    ---------                     =========      =======
BALANCE, JANUARY 27, 1996                                  --                            --      $    --
                                                    ---------                     =========      =======

     Net loss                                              --                                           
     Issuance of common stock to officers                               
       and other executives                            (2,092)
                                                    =========
BALANCE, FEBRUARY 1, 1997                           $  (2,092)
                                                    =========
</TABLE>


                 See notes to consolidated financial statements.



                                       24
<PAGE>   26

                         BRUNO'S, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

      FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997, THE THIRTY WEEK PERIOD
       ENDED JANUARY 27, 1996, AND THE FISCAL YEARS ENDED JULY 1, 1995,
                               AND JULY 2, 1994

                            (Amounts in Thousands)
<TABLE>
<CAPTION>
                                                                     FEBRUARY 1,    JANUARY 27,       JULY 1,       JULY 2,
                                                                         1997           1996           1995           1994
                                                                      (53 WEEKS)     (30 WEEKS)     (52 WEEKS)     (52 WEEKS)
                                                                     -----------     ----------     ----------     ---------
<S>                                                                   <C>            <C>            <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ............................................     $ (51,189)     $ (81,201)     $  33,342      $  37,293
                                                                      ---------      ---------      ---------      ---------
   Adjustments to reconcile net income (loss) to
     net cash provided by operating
     activities:
     Extraordinary item, net ....................................         1,674          4,902             --          3,288
     Depreciation and amortization ..............................        60,256         37,522         54,031         52,343
     Deferred income taxes ......................................       (28,939)       (26,492)        (8,867)         4,132
     Amortization of deferred compensation ......................            --             --             --             15
     Provision (credit) to value inventories at LIFO cost .......          (430)         1,641            242           (588)
     Compensation expense related to sale of stock ..............           440             --             --             --
     Provision for bad debts ....................................         3,371          7,659             --             --
     Increase (decrease) in self-insurance reserve  .............        (5,571)        15,000         21,701           (212)
     Increase (decrease) in closed store accrual
      before loss on divestiture ................................        (6,607)         3,400          2,996            857
     (Gain) loss on sale of property, net .......................           641           (727)        (2,781)           872
     Loss on divestiture ........................................        88,588
     Impairment of long-lived assets ............................            --         35,411             --             --
     (Increase) decrease in assets, net of effects
        of acquisition:
        Receivables .............................................         3,880          2,307          4,645         (9,467)
        Inventories .............................................        24,905         32,536          5,039          4,780
        Prepaid expenses ........................................         1,752         (1,698)          (290)        (1,340)
        Other noncurrent assets .................................           238          3,118            208           (521)
     Increase (decrease) in liabilities, net of
        effects of acquisition:
        Accounts payable ........................................       (27,927)        52,622          5,949         (8,040)
        Accrued income taxes ....................................          (863)          (513)         1,096          1,462
        Accrued payroll and related expenses ....................          (307)        (2,721)         2,139            536
        Other accrued expenses ..................................        14,737         15,166          5,814          1,401
        Deferred compensation ...................................            --             --            399             55
                                                                      ---------      ---------      ---------      ---------
          Total adjustments .....................................       129,838        179,133         92,321         49,573
                                                                      ---------      ---------      ---------      ---------
          Net cash provided by operating activities .............        78,649         97,932        125,663         86,866
                                                                      ---------      ---------      ---------      ---------
</TABLE>


                                       25
<PAGE>   27

<TABLE>
<CAPTION>
                                                                      FEBRUARY 1,     JANUARY 27,      JULY 1,       JULY 2,
                                                                         1997            1996           1995          1994
                                                                       (53 WEEKS)     (30 WEEKS)     (52 WEEKS)    (52 WEEKS)
                                                                      ----------      -----------    ----------    ----------
<S>                                                                   <C>            <C>            <C>            <C>      
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of property ...............................         1,327            911         28,805         16,079
   Acquisition, net of cash acquired ............................       (47,479)            --             --             --
   Proceeds from sale of property due to divestiture ............        12,460
   Capital expenditures .........................................       (62,012)       (26,437)       (54,838)       (63,989)
                                                                      ---------      ---------      ---------      ---------
          Net cash used in investing activities .................       (95,704)       (25,526)       (26,033)       (47,910)
                                                                      ---------      ---------      ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Borrowings (repayments) under line of credit, net ............        44,500             --             --        (35,000)
   Proceeds from issuance of long-term debt .....................            --        875,000             --        200,000
   Debt issuance costs ..........................................            --        (39,900)            --             --
   Reduction of long-term debt and
    capitalized lease obligations ...............................        (1,891)      (205,079)       (79,091)      (171,627)
   Redemption of common stock ...................................            --       (879,956)            --             --
   Proceeds from sale of common stock ...........................         1,943        250,000             --             --
   Seessel's debt repayment .....................................       (14,976)
   Payments for early extinguishment of debt ....................       (65,000)       (41,000)            --         (3,542)
   Proceeds from exercise of stock options ......................            --             --              9            120
   Dividends paid ...............................................            --             --        (20,212)       (18,741)
   Repurchase of common stock ...................................            --             --         (4,679)            --
                                                                      ---------      ---------      ---------      ---------
          Net cash used in
           financing activities .................................       (35,424)       (40,935)      (103,973)       (28,790)
                                                                      ---------      ---------      ---------      ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............       (52,479)        31,471         (4,343)        10,166

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................        57,387         25,916         30,259         20,093
                                                                      =========      =========      =========      =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................     $   4,908      $  57,387      $  25,916      $  30,259
                                                                      =========      =========      =========      =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
   Cash paid (received) during the period for:
     Interest ...................................................     $  79,450      $  28,403      $  18,993      $  19,605
     Income taxes, net of refunds ...............................          (879)          (648)        27,558         22,595

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING
    Noncash compensation under stock plans ......................     $      --      $      --      $     --       $    (192)
    Shareholder's notes receivable issued
    under stock sale ............................................     $  (2,092)     $      --      $     --       $      --
</TABLE>


                 See notes to consolidated financial statements.



                                       26
<PAGE>   28



                         BRUNO'S, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997, THE THIRTY WEEK PERIOD ENDED
                  JANUARY 27, 1996, AND THE FISCAL YEARS ENDED
                         JULY 1, 1995 AND JULY 2, 1994.

           (Amounts in Thousands, Except Share and Per Share Amounts)


1.    ORGANIZATION

         Bruno's, Inc. and its subsidiaries (the "Company") operate a chain of
supermarkets located in Alabama, Florida, Tennessee, Mississippi and Georgia.
The Company's supermarkets operate under three principal formats, each addressed
to a different market segment: value stores, combination stores and neighborhood
stores. The Company services its supermarkets through a distribution facility in
Birmingham, Alabama. The Company's headquarters are in Birmingham, Alabama.


2.    MERGER ACTIVITIES

         On August 18, 1995, an affiliate of Kohlberg Kravis Roberts & Co.
("KKR") was merged into and with the Company (the "Merger"). Expenses related to
the Merger were recorded in the period ended January 27, 1996. These expenses
consisted primarily of professional and advisory fees as well as payments to
certain former Company officers, other employees and directors pursuant to
employment and option agreements.

         As a result of the Merger, affiliates of KKR own approximately 82.4%
of the outstanding shares of the Company's common stock, and 10 million warrants
(the "Warrant") to purchase up to an additional 10 million shares of common
stock in the aggregate at an exercise price of $12.00 per share, subject to
certain adjustments. Each Warrant is exercisable in whole or in part for a ten
year period following the Merger and, upon exercise, may be exchanged, at the
option of the holder, for either (i) such number of shares of Company common
stock for which the Warrant is then exercisable upon payment by the holder to
the Company of the aggregate exercise price or (ii) that number of shares of
Company common stock having a value equal to the difference between the "fair
market value" at the time of exercise of such number of shares of common stock
for which the Warrant is then exercisable and the aggregate exercise price. If
the Warrants had been exercised in full by the payment of the aggregate cash
exercise price immediately after the Merger, affiliates of KKR would hold
approximately 88% of the shares of the Company's common stock outstanding.

         The Merger was primarily financed by the proceeds of term loans ($475.0
million), debt securities ($400.0 million), an equity contribution by an
affiliate of KKR ($250.0 million) and the application of a portion of the 
Company's cash balances. These proceeds were applied to redeem common stock 
($880.0 million), repay historical debt ($200.0 million) and terminate an 
interest swap agreement ($5.6 million), and to pay debt issuance costs ($39.9 
million) and Merger expenses ($29.6 million). In accordance with the Merger 
Agreement, the Company paid KKR a fee of $15.0 million on the closing date. 
The Company pays KKR an annual fee of $1.0 million for management, consulting 
and financial services provided to the Company ($0.5 million, including 
expenses, of which was paid by the Company during the period ended January 27, 
1996). Merger expenses include the settlement by the Company of all outstanding
stock options in cash and the expense associated with the Company's employment 
continuity and deferred compensation agreements becoming fully vested as a 
result of the Merger ($12.7 million).


                                       27
<PAGE>   29


3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements of the Company include its
accounts and the accounts of all wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

COMPARABLE TRANSITIONAL PERIOD FINANCIAL DATA

         In December 1995, the Company elected to change its fiscal year end to
the Saturday closest to January 31, from the Saturday closest to June 30 to be
consistent with the predominant practice in the Company's industry. The change
of fiscal year resulted in a transition period of thirty weeks beginning July 2,
1995 and ending January 27, 1996. Presented below is the financial data for the
year ended February 1, 1997 and the comparable unaudited fifty-two week period
ended January 27, 1996 (amounts in thousands).
<TABLE>
<CAPTION>

                                                                FEBRUARY 1, 1997  JANUARY 27, 1996
                                                                   (53 WEEKS)        (52 WEEKS)
                                                                ----------------  ----------------
                                                                                      (UNAUDITED)

<S>                                                               <C>               <C>        
Net Sales ..................................................      $ 2,899,044       $ 2,891,076
Cost of products sold ......................................        2,202,753         2,224,975
Gross profit ...............................................          696,291           666,101
Store operating, selling and administrative expenses .......          548,210           583,149
Merger expenses ............................................                0            29,610
Loss on divestiture of stores ..............................           88,588                 0
Depreciation and amortization ..............................           55,911            57,328
Interest expense, net ......................................           83,794            51,645
Impairment of long-lived assets ............................                0            35,411

Loss before income taxes ...................................          (80,212)          (91,042)
Benefit for income taxes ...................................          (30,697)          (20,107)
Extraordinary item, net ....................................           (1,674)           (4,902)
------------------------------------------------------------      -----------       ----------- 

Net loss ...................................................      $   (51,189)      $   (75,837)
                                                                  ===========       ===========

Net loss per share .........................................      $     (2.03)      $     (1.40)
</TABLE>

CASH EQUIVALENTS

         The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

INVENTORIES

         Substantially all inventories are valued at the lower of cost using the
last-in, first-out ("LIFO") method or market. Under the first-in, first-out
("FIFO") cost method of accounting, inventories would have been $8.9 million
higher than reported for the fiscal year ended February 1, 1997 and the period
ended January 27, 1996.

PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost. Depreciation is provided
on a straight-line basis over the estimated service lives of depreciable assets.
Assets leased under capital leases and leasehold improvements are amortized
using the straight line method over the lesser of the




                                       28
<PAGE>   30

lease term or the
estimated useful lives of the related assets. The Company uses the following
periods for depreciating and amortizing property and equipment:

<TABLE>
                   <S>                                         <C>        
                   Buildings...........................        10-40 years
                   Equipment...........................         3-10 years
                   Leasehold improvements..............        10-20 years
</TABLE>

         During the period ended January 27, 1996, the Company changed its
estimate of the depreciable lives of certain technology equipment from ten to
five years, resulting in a $3.0 million additional charge to depreciation
expense.

         Maintenance and repairs are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the property accounts are relieved of costs
and accumulated depreciation and any resulting gain or loss is credited or
charged to income.

         Leasehold interests represent the excess of current rental values over
the present value of net minimum lease payments on favorable leases acquired and
are being amortized on a straight-line basis over the remaining lives of the
related leases.

IMPAIRMENT OF LONG-LIVED ASSETS

         During the period ended January 27, 1996, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. Total impairment losses of $35.4 million have been recognized by the
Company, including $32.1 million resulting from the adoption of this statement.
The impaired assets primarily consist of real property and leasehold
improvements at the store level and goodwill identified with certain of these
store assets previously acquired in a business combination accounted for under
the purchase method. For these stores, the Company estimated future cash flows
on an undiscounted basis and identified those stores where such cash flows were
less than the carrying value of the stores' assets. The write-down to fair value
was based on management's estimate of the amount that could be realized from the
sale of these assets in a current transaction between willing parties.

         Approximately $19.0 million of the impairment loss recognized under
this statement has been reflected as a reduction of goodwill identified with
certain of the impaired store assets. The remaining impairment loss is reflected
as a reduction of the applicable real property and leasehold improvements. The
Company previously evaluated these operating assets for possible impairment
based upon aggregate asset values by store format.

         Other impairment charges totaling $3.3 million were recognized based on
write-downs to estimated fair value, primarily relating to an idle warehouse
facility and certain land held for investment.

INTANGIBLES

      The Company's intangibles are as follows:

      -     Franchise rights (which are reflected net of accumulated
            amortization of $3.0 million and $2.7 million at February 1, 1997
            and January 27, 1996, respectively) represent amounts assigned to a
            franchise with Piggly Wiggly Corporation and are being amortized on
            a straight-line basis over 40 years (amortization of $0.2 million
            for the fiscal year ended February 1, 1997, $0.2 million for the
            thirty week period ended January 27, 1996, and $0.3 million for each
            of the two fiscal years in the period ended July 1, 1995).



                                       29
<PAGE>   31

      -     Goodwill (which is reflected net of accumulated amortization of
            $28.7 million and $28.2 million at February 1, 1997 and January 27,
            1996, respectively) represents amounts incurred in the acquisitions
            of Piggly Wiggly Southern, which is being amortized on a
            straight-line basis over 40 years; and Seessel's, which is being
            amortized on a straight-line basis over 20 years (amortization of
            $0.6 million for the fiscal year ended February 1, 1997, $0.6
            million for the thirty week period ended January 27, 1996, and $1.0
            million for each of the two fiscal years in the period ended July 1,
            1995).

      -     Debt issuance costs (which are reflected net of accumulated
            amortization of $11.0 million and $4.0 million at February 1, 1997
            and January 27, 1996, respectively) represent costs incurred in
            issuing the Company's current credit facility and Senior
            Subordinated Notes (1996) and a private placement loan which was
            satisfied in connection with the Merger (1995 and 1994). These costs
            are being amortized using the interest method over the respective
            lives of the debt. Amortization was $4.3 million for the fiscal year
            ended February 1, 1997 and $2.1 million for the thirty week period
            ended January 27, 1996. Amortization was immaterial for the years
            ended July 1, 1995 and July 2, 1994.

         The Company periodically reviews goodwill and franchise rights to
assess recoverability, and impairments are recognized in operating results if a
permanent diminution in value occurs.

INVESTMENT IN JOINT VENTURE

         The Company maintains a 50% interest in a joint venture with a major
life insurance company. The real property on which five of the Company's stores
are located is owned by the joint venture and leased to the Company. The
Company's investment in this joint venture ($3.6 million at February 1, 1997 and
January 27, 1996) is accounted for on the equity method and taxable income or
loss is allocated directly to the joint venture partners.  Results of
operations for this joint venture were not significant for any of the periods
presented.

SELF INSURANCE ACCRUALS

         The Company is substantially self-insured with respect to general
liability, workers' compensation and non-union employee medical claims.
Stop-loss insurance coverage is maintained in amounts determined to be adequate
by management. Prior to the third quarter of the fiscal year ended July 1, 1995,
the Company utilized case estimates of probable liabilities prepared by
experienced parties using all available claims data as to the extent of losses
and related costs to estimate required balance sheet reserves for such claims.
As of the third quarter of the fiscal year ended July 1, 1995, the Company began
using actuarial estimation techniques to evaluate its accrual for such claims
and recorded an adjustment to increase these self-insurance reserves by
approximately $22.2 million as a change in accounting estimate. During the
thirty week period ended January 27, 1996, management revised its estimate of
the self-insurance reserve and, accordingly, increased this reserve by $15.0
million. At February 1, 1997, and January 27, 1996, the self-insurance reserves
were discounted at 5%, the estimated risk free borrowing rate. Although
considerable variability is inherent in such estimates, management believes that
the self-insurance reserves are adequate. These estimates are continually
reviewed by management and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations.

         A summary of the related amounts charged to expense and claims paid is
as follows:
<TABLE>
<CAPTION>

                                          EXPENSE         CLAIMS PAID
                                        -----------     ---------------
         <S>                              <C>              <C>    
         Period ended:
         February 1, 1997                 $27,137          $31,940
         January 27, 1996                  33,338           18,338
         July 1, 1995                      49,500           27,900
         July 2, 1994                      26,600           26,800
</TABLE>




                                       30
<PAGE>   32

CLOSED STORE EXPENSE

         Upon the decision to close a store, the Company accrues estimated
future costs, if any, which may include lease payments or other costs of holding
the facility, net of estimated future income. In the fiscal year ended February
1, 1997, the Company increased the closed store accrual by $17.0 million. The
increase represents the present value (discounted at the Company's incremental
borrowing rate) of estimated future expenses of the 18 stores and Distribution
Center that were closed pursuant to the Divestiture Program (see Note 10) offset
by the payment of continuing obligations for previously closed facilities. In
the thirty week period ended January 27, 1996, the Company revised this accrual
to reflect lower anticipated future income on certain stores based on the
Company's most recent experience. The effect of this change in estimate was to
increase the closed store accrual by approximately $2.6 million. In addition,
during the period ended January 27, 1996, the Company accrued a charge of $0.8
million for an additional store closed during the period.

ADVERTISING EXPENSE

         The Company generally expenses advertising costs as incurred. 
Advertising expenses for the fiscal year ended February 1, 1997, the thirty week
period January 27, 1996, and the fiscal years ended July 1, 1995, and July 2,
1994 were $37.6 million, $21.2 million, $31.3 million and $34.8 million,
respectively.

INCOME TAXES

         The Company accounts for income taxes using an asset and liability
method which generally requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statements and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse.
In addition, the asset and liability method requires the adjustment of
previously deferred income taxes for changes in tax rates.

ACCOUNTING FOR STOCK-BASED COMPENSATION

         Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, provides an option either to continue the Company's
current method of accounting for stock-based compensation in accordance with APB
No. 25, Accounting for Stock Issued to Employees, or to adopt the fair value
method of accounting which would require the Company to expense, over the
service or vesting period, the fair value of employee stock-based compensation
at the date of grant. The Company has elected to continue to account for such
plans under the provisions of APB No. 25. The pro forma disclosures of net
income per share as if the Company had adopted the new recognition criteria
required by FAS No. 123 are presented in Note 7.

EARNINGS (LOSS) PER COMMON SHARE

         Earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period. Outstanding stock options and warrants are common stock equivalents but
are excluded from earnings (loss) per common share computations as their effect
is either not material or antidilutive.

         The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which supersedes APB
Opinion No. 15, Earnings per Share, for periods ending after December 15, 1997
including interim periods. Because of the antidilutive effect of common stock
equivalents, "basic" and "diluted" earnings per share under FAS No. 128 would be
identical to earnings per share presented in the financial statements.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         In preparing disclosures about the fair value of financial instruments,
the Company has assumed that the carrying amount approximates fair value for
cash and cash equivalents, receivables, short-term borrowings, accounts payable
and certain accrued expenses because of




                                       31
<PAGE>   33

the short maturities of those instruments, and for the self-insurance and closed
store reserves which are presented on a discounted basis. The fair values of
long-term debt instruments and financial derivatives are based upon quoted
market values (if applicable), or the current interest rate environment and
remaining term to maturity.

DERIVATIVES

         As part of its interest rate management strategy, in order to hedge or
mitigate identifiable economic risks, the Company entered into an interest rate
collar arrangement during the fiscal year ended February 1, 1997, on $150.0
million in outstanding debt through May 18, 1999. Under this agreement, the
Company's interest rate on the notional amount will fluctuate when the three
month Libor rate is between 5.64% and 8.59%. If at any settlement date, the
three month Libor rate exceeds 8.59%, the Company's base interest rate is capped
and the Company receives the net difference; if at any settlement date, three
month Libor is below 5.64%, the Company must pay the net difference to its
counterparty. The fair market value of this interest rate collar at fiscal year
ended February 1, 1997 was ($0.4) million. Until August 1995, the Company
maintained an interest rate swap agreement as discussed in Note 6. Under this
interest rate swap the Company agreed with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
Amounts receivable and payable under the interest rate swap agreement were
accrued as interest income and interest expense, respectively.

ACCOUNTING ESTIMATES

         The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from these estimates.

RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
current period presentation.


 4.   PROPERTY AND EQUIPMENT, NET

         Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
                                                                     FEBRUARY 1,     JANUARY 27, 
                                                                        1997             1996
                                                                    ------------     ------------

           <S>                                                      <C>              <C>        
           Land.................................................    $    61,585      $    60,914
           Buildings............................................        218,908          218,281
           Equipment............................................        403,946          445,479
           Construction in progress.............................          8,045           13,816
                                                                    ------------     -----------
                                                                        692,484          738,490
           Less accumulated depreciation........................        273,580          301,805
                                                                    -----------      -----------
                                                                        418,904          436,685
           Leasehold improvements, net..........................         29,240           32,452
           Investment in property under capital leases, net.....          7,754           11,710
           Leasehold interests, net.............................         11,099           10,817
                                                                    -----------      -----------
                                                                    $   466,997      $   491,664
                                                                    ===========      ===========
</TABLE>


                                       32
<PAGE>   34



 5.   INCOME TAXES

         The provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
                                                  FEBRUARY 1,   JANUARY 27,     JULY 1,       JULY 2,
                                                    1997           1996          1995          1994
                                                  (53 WEEKS)    (30 WEEKS)    (52 WEEKS)    (52 WEEKS)
                                                 ------------   -----------   ----------    ---------
<S>                                                <C>           <C>           <C>           <C>     
Current:
   Federal ...................................     $  1,619      $  1,030      $ 26,001      $ 19,896
   State .....................................       (4,403)         (509)        2,786         2,146
                                                   --------      --------      --------      --------
                                                     (2,784)          521        28,787        22,042
                                                   --------      --------      --------      --------

Deferred:
   Accelerated depreciation ..................      (12,037)       (7,391)        1,327         2,110
   Effect of change in enacted
      federal tax rate .......................           --            --            --         1,874
   Net operating loss carryforward ...........       (9,341)      (12,943)           --            --
   Accrual differences .......................       (4,102)       (6,382)      (10,525)          (16)
   Franchise rights ..........................       (2,323)           --            --            --
   Other items, net ..........................       (1,136)          224           331           164
                                                   --------      --------     ---------      --------
                                                    (28,939)      (26,492)       (8,867)        4,132
                                                   --------      --------     ---------      --------

Income tax benefit on
   Extraordinary item ........................        1,026         3,092             0         2,015
                                                   --------      --------     ---------      --------
                                                   $(30,697)     $(22,879)    $  19,920      $ 28,189
                                                   ========      ========     =========      ========
</TABLE>


         The differences in the federal statutory rate applied to income (loss)
before income taxes and the total provision (benefit) are as follows:


<TABLE>
<CAPTION>
                                -------------------------------------------------------------------------------
                                    FEBRUARY 1,           JANUARY 27,               JULY 1,          JULY 2,
                                       1997                  1996                    1995             1994
                                    (53 WEEKS)            (30 WEEKS)              (52 WEEKS)       (52 WEEKS)
                                 -----------------    -----------------     ------------------   --------------
                                   Amount      %        Amount      %        Amount       %       Amount     %
                                 ---------   -----    ---------   ----      --------      -      --------   ---

<S>                              <C>         <C>      <C>          <C>      <C>          <C>     <C>         <C>
Statutory rate ..............    $(28,075)   (35)%    $(34,712)    (35)%    $ 18,642     35%     $ 24,070    35%
Effect of:
  State income taxes, net of
     federal tax benefits ...      (2,406)    (3)       (2,975)     (3)        1,810      3         1,394     2
  Goodwill ..................          --     --         7,448       8            --     --            --    --
  Non-deductible transaction
     costs ..................          --     --         5,151       5            --     --            --    --
  Change in enacted tax rate           --     --            --      --            --     --         2,224     3
  Other, net ................        (216)    (0)        2,209       2          (532)    (1)          501     1
                                 --------   ----      --------    ----      --------     --      --------    --

Effective rate ..............    $(30,697)   (38)%    $(22,879)    (23)%    $ 19,920     37%     $ 28,189    41%
                                 ========   ====      ========    ====      ========     ==      ========    ==
</TABLE>


         The increase in the effective rate for the fiscal year ending July 2,
1994 is due to the Omnibus Budget Reconciliation Act of 1993 which increased the
maximum corporate federal income tax rate to 35% effective January 1, 1994.

         Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:



                                       33
<PAGE>   35
<TABLE>
<CAPTION>

                                                       FEBRUARY 1,     JANUARY 27,
                                                           1997          1996
                                                       -----------     -----------
<S>                                                      <C>            <C>     
Deferred tax assets:
   Accruals .......................................      $ 25,631       $ 21,411
   Capital leases .................................        10,833         10,868
   Capital loss carryover .........................           450            544
   Net operating loss carryforward ................        30,629         12,943
   Deferred compensation ..........................           738             19
   Other items ....................................         1,662            715
                                                         --------       --------
                                                           69,943         46,500
   Valuation allowance ............................        (8,345)            --
                                                         --------       --------
       Total deferred tax asset ...................        61,598         46,500
                                                         --------       --------
Deferred tax liabilities:
   Property and equipment .........................       (43,835)       (51,516)
   Joint ventures .................................        (2,340)        (2,426)
   Inventories ....................................        (1,366)        (2,541)
   Franchise rights ...............................        (1,201)        (3,524)
   Other items ....................................        (5,064)          (842)
                                                         --------       -------- 
       Total deferred tax liability  ..............       (53,806)       (60,849)
                                                         --------       -------- 
Net deferred tax asset (liability) ................      $  7,792       $(14,349)
                                                         ========       ========
</TABLE>

         In assessing the realization of deferred tax assets, management
considers the likelihood that the deferred tax assets will be realized through
future taxable income. Based upon projections over the periods in which deferred
tax assets are deductible, management believes it is more likely than not the
Company will realize a substantial portion of these deferred tax assets. The
Company has net operating loss carryforwards of $80.6 million which expire
beginning in 2005.

         Related to the acquisition of Seessel Holdings, Inc. (see Note 11), the
Company allocated $8.3 million of the purchase price to a valuation allowance
against a deferred tax asset on net operating loss carryforwards. This valuation
allowance was established because, in the opinion of management, it is more
likely than not the deferred tax asset will not be realized. This allocation had
no impact on the Company's consolidated statement of operations for the fiscal
year ended February 1, 1997.

 6.   SHORT-TERM BORROWINGS AND LONG-TERM DEBT

         In connection with the Merger, the Company entered into a Credit
Facility (the "Credit Facility") which provides for a revolving credit facility
of $125.0 million (the "Revolving Credit Facility") and a term loan facility
(the "Term Loan Facility"). The Company had $44.5 million outstanding under the
Revolving Credit Facility as of February 1, 1997, which is due in the fiscal
year ending in January 2003. No borrowings occurred under the Revolving Credit
Facility during the period ended January 27, 1996.

         The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>

                                                  FEBRUARY 1, 1997       JANUARY 27, 1996
                                                  ----------------       -----------------

<S>                                                   <C>                    <C>     
Term Loan Facility..............................      $369,000               $434,000
Senior Subordinated Notes.......................       400,000                400,000
Revolving Credit Facility.......................        44,500
Other borrowings................................           482                    546
                                                      --------               --------
                                                       813,982                834,546
Less current maturities.........................           260                    323
                                                      --------               --------
                                                      $813,722               $834,223
                                                      ========               ========
</TABLE>


                                       34
<PAGE>   36

         The Term Loan Facility consists of a series of tranche term loans
bearing interest at either the prime rate plus 1.25% to 3.00%, or the eurodollar
rate plus 2.25% to 4.00% (depending on the tranche series), as elected by the
Company, at the beginning of an interest rate period (as defined). The interest
rate for the Revolving Credit Facility and the Tranche A series term loan may be
reduced if the Company satisfies certain financial performance criteria as
defined in the credit agreements. At February 1, 1997, the interest rate on the
individual tranche term loans ranged from 7.688% to 9.625%. Scheduled debt
reductions on the Term Loan Facility at various dates begin February 1999 and
mature February 2005.

         The Company incurs commitment fees of 0.5% on the unused portion of the
Revolving Credit Facility.

         The Credit Facility contains certain restrictive covenants which, among
other things, require the Company to maintain (i) a consolidated total debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio
of 6.30 to 1.00 or less (such ratio decreases over the term of the Credit
Facility), (ii) a consolidated EBITDA to consolidated interest expense ratio of
1.65 to 1.00 or greater (such ratio increases over the term of the Credit
Facility) and (iii) a consolidated fixed charge coverage ratio of 1.40 to 1.00
or greater (such ratio increases over the term of the Credit Facility). In
calculating compliance with these covenants, EBITDA excludes the amount of
certain noncash and nonrecurring charges. The covenants of the Credit Facility
also limit capital expenditures, dividends and certain other debt payments of
the Company.

         The Senior Subordinated Notes bear interest at 10.5% and are due on
August 1, 2005. These Notes are subordinated to the Term Loan Facility and any
amounts outstanding under the Revolving Credit Facility. Interest is payable on
February 1 and August 1 of each year. At any time prior to August 1, 1998, at
the option of the Company, up to 40% of the outstanding aggregate face amount of
the Senior Subordinated Notes may be redeemed at a redemption price of 110.50%
using the proceeds of certain equity issuances. Beginning August 1, 2000, the
Senior Subordinated Notes will be subject to redemption at the option of the
Company in whole or in part, with proper notice at the redemption prices set
forth below plus accrued interest.
<TABLE>
<CAPTION>
                                                   Percentage of
               Twelve month period                   Principal
               beginning August 1,                    Amount
            --------------------------           -----------------

               <S>                                    <C>    
                      2000                            105.25%
                      2001                            103.50
                      2002                            101.75
               2003 and thereafter                    100.00

</TABLE>

         The Senior Subordinated Notes contain certain restrictive covenants
which, among other things, limit the Company's ability to incur additional
indebtedness and pay dividends or distributions or make investments.

         Future principal payments for long-term debt are as follows:
<TABLE>
<CAPTION>

               Fiscal Years Ending:
             --------------------------

                    <S>                                <C>
                       1998                                  260
                       1999                                   92
                       2000                               40,065
                       2001                               60,065
                       2002                               77,000
                    thereafter                           636,500
                                                       ---------
                                                       $ 813,982
                                                       =========
</TABLE>


                                       35
<PAGE>   37

         In connection with the early extinguishment of $200.0 million of debt
in August 1995, the Company terminated an interest rate swap agreement,
resulting in a $5.6 million loss. The Company also wrote off related debt
acquisition costs of $0.5 million. These amounts are included in the
extraordinary loss, net of applicable taxes, in the consolidated statement of
operations for the thirty week period ended January 27, 1996.

         In the fiscal year ended February 1, 1997, the Company prepaid $65.0
million in principal amount under the Term Loan Facility. As a result, $2.7
million of related debt issuance costs were written off due to the early
extinguishment of this debt. In January 1996, the Company prepaid $41.0 million
in principal amount under the Term Loan Facility, resulting in the write off of
$1.9 million of related debt issuance costs. These amounts, net of applicable
taxes, are included as extraordinary losses in the consolidated statements of
operations for the fiscal year ended February 1, 1997 and the period ended
January 27, 1996.

         At February 1, 1997 and January 27, 1996, the fair value of the Senior
Subordinated Notes (as determined by quoted market price) was $418.3 million and
$394.0 million, respectively. The fair value of the Term Loan and Revolving
Credit Facilities is estimated to be equal to their carrying values because the
loans periodically reprice to current market interest rates.

         In the first quarter of fiscal 1994, the Company redeemed $142.8
million of 6.5% Convertible Subordinated Debentures at 103.9% of face value in
accordance with the terms of the related indenture. The redemption was financed
with the proceeds of a $200.0 million private placement loan. This redemption 
resulted in a loss of $3.3 million (net of applicable income tax benefit of 
$2.0 million) which is classified as an extraordinary item in the accompanying 
consolidated statement of income for the fiscal year ending July 2, 1994.


7.    STOCK PLANS

         Prior to the Merger, the Company maintained both noncompensatory and
compensatory stock option plans whereby options were granted at either a price
equal to the fair market value of the stock at the date of grant
(noncompensatory stock options) or at a price significantly under the fair
market value of the stock at the date of grant (compensatory stock options). For
compensatory stock options, compensation expense was recorded to reflect the
difference in the market value and the option price at the date of grant. In
connection with the Merger, all outstanding stock options were settled by the
Company in cash and these plans were terminated. See Note 2 entitled "Merger
Activities".

         During the fiscal year ended February 1, 1997, the Company adopted the
1996 Stock Purchase and Option Plan for Key Employees of Bruno's, Inc. and
Subsidiaries (the "1996 Plan"). The 1996 Plan authorizes grants of stock or
stock options covering 2,050,000 shares of the Company's common stock. Grants or
awards under the 1996 Plan may take the form of purchased stock, restricted
stock, incentive or non-qualified stock options, or other types of rights
specified in the 1996 Plan. During the fiscal year ended February 1, 1997, the
Company granted stock options under the 1996 Plan, all of which were
non-qualified options. One half of the stock options granted were "Time Options"
and one half were "Performance Options." Time Options vest 20% per year over a
five-year period, while Performance Options vest 20% per year on August 18
following a year in which certain annual and cumulative cash flow targets have
been achieved, subject to "catch-up vesting" for unmet target years upon the
attainment of cash flow targets in future years. All Performance Options fully
vest after seven years from the date of grant regardless of whether the Company
has met the specified performance targets. With certain exceptions which can
accelerate expiration, the options are granted for a term of 10 years.

         Grants or awards under the 1996 Plan are made at prices determined by
the Board of Directors. All options granted under the 1996 Plan during the
fiscal year ended February 1, 1997





                                       36
<PAGE>   38

have an exercise price of $12.00 per share. The option transactions during the
fiscal year ended February 1, 1997 are described below:

<TABLE>
<CAPTION>
                                                        Shares
                                                   ----------------

        <S>                                            <C>
        Balance, January 27, 1996                           0
          Options granted                              872,499
          Options forfeited                            (20,832)
                                                      --------
        Balance, February 1, 1997                      851,667
</TABLE>

         The weighted average fair value at the date of grant was $3.34 for the
Time Options and $2.51 for the Performance Options. The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 5.68%; no expected dividends; expected life of 3 years; and
expected volatility of 25%. The Performance Options are valued assuming a 75%
probability of achieving required targets. At February 1, 1997, options
covering 76,187 shares were exercisable at a price of $12.00 per share.

         In addition to granting stock options under the 1996 Plan, the Company,
during the fiscal year ended February 1, 1997, also sold shares of common stock
under the 1996 Plan to key executives and certain members of management. Certain
of the shares were sold at less than fair market value resulting in a
compensation expense of $0.4 million. As consideration, the Company accepted
payment of cash or a combination of cash and notes receivable from the
purchasers. The notes receivable bear interest at rates ranging from 5.65% to
6.53%. At February 1, 1997, the Company held notes receivable from stockholders
in the aggregate amount of $2.1 million. These notes receivable are shown as a
reduction of shareholder investment in the consolidated balance sheet.

         The Company accounts for the 1996 Plan in accordance with Accounting
Principles Board Opinion No. 25. If the compensation cost for the 1996 Plan had
been determined consistent with Statement of Financial Accounting Standards No.
123, "Accounting for Stock - Based Compensation" (SFAS 123), the impact on the
Company's net loss and loss per share for the year would have been
insignificant.


8.    EMPLOYEE BENEFIT PLANS

         All of the Company's union employees are covered by two
union-sponsored, collectively-bargained, multi-employer pension plans.
Contributions to these plans are determined in accordance with the provisions of
labor contracts and generally are based on the number of man hours worked.

         The Company maintains a profit sharing retirement plan for nonunion
employees. Matching contributions are made for employee voluntary contributions
up to a specified limit with additional contributions made at the Company's
discretion.

         The Company had deferred compensation agreements with certain of its
former officers whereby the individuals or their beneficiaries were provided
specific amounts of annual retirement benefits for a period of 15 years
following retirement. All benefits payable under these agreements became fully
vested and were substantially paid out in connection with the Merger during the
period ended January 27, 1996.

         The expense applicable to the above plans is as follows:



                                       37
<PAGE>   39



<TABLE>
<CAPTION>
                                                           Profit Sharing
                                                           Retirement Plan
                                               ----------------------------------------     ------------------
                                                                                                Deferred
                                 Union               Matching            Discretionary       Compensation 
                                 Plans           Contributions          Contributions              Plan
                            ---------------    -------------------     ----------------     ------------------
<S>                             <C>                  <C>                    <C>                  <C>   
Period Ended:
   February 1, 1997......       $4,309               $1,453                 $    0               $    0
   January 27, 1996......        2,446                  832                      0                5,072
   July 1, 1995..........        4,308                1,330                      0                  399
   July 2, 1994..........        4,089                1,494                  1,750                   55
</TABLE>


         The Company maintains certain incentive compensation plans for store
management, officers, and other key employees which is paid annually based on
achievement of established goals.

         Prior to the Merger, the Company maintained employment continuity
agreements with certain key employees which provided for benefits to be paid to
these employees in the event employment with the Company was terminated in
connection with a change in control. The Merger resulted in the recognition of
the expense associated with these agreements ($3.1 million) for the period ended
January 27, 1996.

         At February 1, 1997, approximately 76% of the Company's employees were
affiliated with unions and 14% of these employees were covered by union
contracts which expire within one year.


9.    LONG-TERM LEASES

         The Company has a number of leases in effect for store properties and
delivery equipment. The initial terms of the real property leases will expire
within the next 25 years; however, most of the leases have options providing for
additional lease terms ranging from 5 to 25 years at terms substantially the
same as the initial terms. It is expected that real property leases will be
renewed upon expiration. The leases for delivery equipment are primarily for a
duration of five to ten years and it is expected that most will be replaced by
leases on similar equipment.

         The Company has entered into lease and guaranty agreements with various
Industrial Development Boards in order to fund construction of certain warehouse
and office additions. Upon issuance, each bond issue was purchased in its
entirety by the Company. Thus, the outstanding bonds ($43.8 million at February
1, 1997 and $53.0 million at January 27, 1996) and the related investment by the
Company, together with the related interest expense and interest income,
respectively, are excluded from the accompanying consolidated financial
statements.

         In addition to fixed minimum rentals, many of the Company's leases
require contingent rental payments. Contingent rentals for real property are
based on a percentage of sales. Contingent rentals for delivery equipment are
based on the number of miles driven.

         Presented below is an analysis of the property under capital leases and
the related lease obligations included in the accompanying consolidated balance
sheets:




                                       38
<PAGE>   40
<TABLE>
<CAPTION>

                                                                     February 1,             January 27,
                                                                        1997                    1996
                                                                 -------------------     -------------------
<S>                                                                    <C>                     <C>    
Property under capital leases:
   Real property..........................................             $21,141                 $34,428

   Less accumulated amortization..........................              13,387                  22,718
                                                                       -------                 -------
                                                                       $ 7,754                 $11,710
                                                                       =======                 =======
Capitalized lease obligations (interest 
   at 8% to 18%):
   Current................................................               2,231                $ 1,615
   Noncurrent.............................................              12,415                 17,963
                                                                       -------                -------
                                                                       $14,646                $19,578
                                                                       =======                =======
</TABLE>


         A schedule by years of future minimum lease payments required under
capital leases (together with the present value of the lease payments) and
operating leases (net of sublease rentals) having initial or remaining
noncancelable lease terms in excess of one year as of February 1, 1997, is as
follows:

<TABLE>
<CAPTION>
                                                   OPERATING LEASES
                                           ---------------------------------
                                                               DELIVERY           CAPITAL
                                              STORES           EQUIPMENT          LEASES
                                           -------------    ----------------    ------------
<S>                                           <C>                <C>               <C>    
Fiscal year:
   1998                                       $ 38,220           $ 4,761           $ 3,614
   1999                                         37,305             3,324             3,614
   2000                                         35,937             3,152             3,614
   2001                                         35,159             2,728             3,614
   2002                                         34,472             1,909             1,638
Subsequent years                               261,822             4,139             3,975
                                              --------           -------           -------
Total minimum lease payments                  $442,915           $20,013            20,069
                                              ========           =======                  
Less estimated interest                                                              5,423
                                                                                   -------
Present value of net future minimum
  lease payments                                                                   $14,646
                                                                                   =======
</TABLE>

         Contingent rentals for the preceding capital leases and rental expense
for the operating leases are as follows:
<TABLE>
<CAPTION>
                                                     FEBRUARY 1,    JANUARY 27,   JULY 1,      JULY 2,
                                                        1997          1996         1995         1994
                                                     (53 WEEKS)     (30 WEEKS)  (52 WEEKS)    (52 WEEKS)
                                                    ------------    ----------  ----------    --------

<S>                                                    <C>          <C>          <C>          <C>    
Contingent rentals on capital leases ............      $   221      $   291      $   291      $   338
                                                       =======      =======      =======      =======

Rental expense on operating leases:
  Real property:
     Minimum rentals ............................      $42,143      $22,197      $39,511      $34,586
     Contingent rentals .........................          542          558          625          842
  Equipment:
     Minimum rentals ............................        6,204        4,463        4,902        5,514
     Contingent rentals .........................        5,692        3,218        6,287        5,478
                                                       -------      -------      -------      -------
                                                       $54,581      $30,436      $ 51,325     $46,420
                                                       =======      =======      ========     =======
</TABLE>

         The capitalized lease obligation of store properties leased under
capital leases from a joint venture in which the Company maintains a 50%
ownership interest was approximately $4.7 million, $12.4 million and $12.9
million at February 1, 1997, January 27, 1996 and July 1,1995, respectively.


                                       39
<PAGE>   41

10.   DIVESTITURE PROGRAM

         During the fiscal year ended February 1, 1997, management evaluated the
Company's market strategy, geographic positioning and store level return on
assets. As a result of this evaluation, the Company developed the Divestiture
Program during the third quarter of the fiscal year which called for the sale or
closure of the Company's distribution center in Vidalia, Georgia and 47 stores.
The 47 stores consisted of 33 Piggly Wiggly stores in Georgia, nine FoodMax
stores in Georgia and South Carolina, two Food World stores in Florida, one Food
World store in Mississippi, one Food World store in Alabama, and one Food Fair
store in Alabama.

         As of February 1, 1997, the Divestiture Program had been completed. The
Company sold 29 stores to various purchasers and received proceeds of $20.1
million ($12.5 million for fixed assets and $7.6 million for counted inventory).
The remaining 18 stores and the Vidalia Distribution Center were closed.

         The accompanying statements of operations for the fiscal year ended
February 1, 1997 include a charge of $88.6 million for costs associated with the
Divestiture Program. The $88.6 million consists of a $55.0 million loss on the
divestiture of fixed assets and intangibles (of which $5.6 million was applied
to goodwill), $18.5 million in future rental payments, $8.4 million in inventory
markdowns and $6.7 million in severance costs, professional fees and other
miscellaneous expenses.

11.  SEESSEL'S ACQUISITION

         On December 10, 1996, the Company acquired all of the outstanding stock
of Seessel Holdings, Inc. ("Seessel's) for $50.4 million in cash including
direct acquisition costs.

         This acquisition was accounted for using the purchase method and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition
date. The excess of consideration paid over the estimated fair value of the net
assets acquired was recorded as goodwill. Goodwill is being amortized over a
twenty year period using the straight-line method. Deferred income taxes were
established for the difference in basis between financial and tax reporting of
these assets and liabilities at the acquisition date. The consolidated statement
of operations for the fiscal year ended February 1, 1997 includes the results of
Seessel's operations from the acquisition date forward.

         The allocated fair value of assets acquired and liabilities assumed is
summarized as follows:

<TABLE>
            <S>                                                                    <C>     
            Cash......................................................             $  2,965
            Other Current Assets......................................                9,785
            Property, Plant and Equipment.............................               31,319
            Goodwill                                                                 41,089
            Current Liabilities.......................................              (12,940)
            Deferred Income Taxes, net of valuation allowance.........               (6,798)
            Notes Payable, immediately repaid.........................              (14,976)
                                                                                   --------
                                                                                   $ 50,444
                                                                                   ========
</TABLE>

         Included in direct acquisition costs are advisory fees of $0.8 million
paid to KKR.

         The following pro forma consolidated results of operations for the
fifty-two week periods ended February 1,1997 and January 27, 1996 have been
prepared as though the acquisition had occurred on January 29, 1995. The pro
forma results reflect the performance of all operations of the Company including
the stores divested during the fourth quarter of the fiscal year ended February
1, 1997 (see Note 10). The pro forma results have been prepared for comparative




                                       40
<PAGE>   42


purposes only and do not purport to be indicative of the results of operations
that would have been achieved had the acquisition taken place as of January 29,
1995 or in the future.

<TABLE>
<CAPTION>

                                                       FEBRUARY 1, 1997     JANUARY 27, 1996
                                                           (52 WEEKS)         (52 WEEKS)
                                                       -------------------------------------
                                                                   (Unaudited)

        <S>                                               <C>                    <C>       
        Net sales............................             $2,996,656             $3,055,243
        Net loss.............................                (47,784)               (69,676)
        Net loss per share...................                  (1.90)                 (1.29)
</TABLE>


12.  COMMITMENTS AND CONTINGENCIES

LITIGATION

         In 1991, the Company received a favorable termination letter with
respect to the termination of the employee pension plan of a supermarket chain
acquired by the Company in 1989. Pursuant to that termination, distributions
were made to all participants of that employee pension plan. After all of the
benefit liabilities were paid, remaining assets of approximately $2.7 million
were transferred to the Company as a reversion of excess pension assets. On June
15, 1992, the Company received a letter from the Pension Benefit Guaranty
Corporation ("PBGC") contending that inappropriate actuarial assumptions were
used to determine the value of the benefits distributed and that additional
distributions must be made to numerous former participants in the plan. In
August 1994, the Company filed suit in the U.S. District Court for the Northern
District of Alabama challenging the PBGC's determination. In April 1995, the
District Court entered summary judgment against the Company and in favor of the
PBGC. The Company appealed the District Court's ruling to the U.S. Court of
Appeals for the Eleventh Circuit, which ruled against the Company. The Company
is currently making additional distributions to the former participants in the
plan. An amount necessary to cover the additional distributions was reserved by
the Company during the fiscal year ended January 27, 1996.

         In addition, the Company is a party to various legal and taxing
authority proceedings incidental to its business. In the opinion of management,
the ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Company.

STORE EXPANSION

         The Company's store expansion activities are primarily accomplished
through the lease of facilities or the acquisition of sites and
self-construction. Commitments involving facilities under construction at
February 1, 1997 were approximately $16.7 million.



                                       41
<PAGE>   43



                          INDEPENDENT AUDITORS' REPORT


To the Stockholders of Bruno's, Inc.:

         We have audited the accompanying consolidated balance sheets of
Bruno's, Inc. and Subsidiaries as of February 1, 1997 and January 27, 1996, and
the related consolidated statements of operations, shareholders' investment
(deficiency in net assets), and cash flows for the fiscal year ended February 1,
1997 and the thirty weeks ended January 27, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bruno's,
Inc. and Subsidiaries as of February 1, 1997 and January 27, 1996, and the
results of their operations and their cash flows for the fiscal year ended
February 1,1997 and for the thirty weeks ended January 27, 1996 in conformity
with generally accepted accounting principles.


                                      /s/ Deloitte & Touche LLP

Birmingham, Alabama
April 11, 1997



                                       42
<PAGE>   44


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Bruno's, Inc.:

         We have audited the accompanying consolidated statements of operations
of BRUNO'S INC. (an Alabama corporation) AND SUBSIDIARIES for the fiscal years 
ended July 1, 1995 and July 2, 1994, and the related consolidated statements of
shareholders' investment (deficiencies in net assets) and cash flows for the 
fiscal years ended July 1, 1995 and July 2, 1994. These financial statements 
are the responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those 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 make 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, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Bruno's, Inc. and Subsidiaries for the fiscal years ended July 1, 1995 and July
2, 1994 in conformity with generally accepted accounting principles.


                                           /s/  Arthur Andersen LLP

Birmingham, Alabama
August 18, 1995


                                       43
<PAGE>   45


                         BRUNO'S, INC. AND SUBSIDIARIES
                                        .
                       UNAUDITED QUARTERLY FINANCIAL DATA

           FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997, THE THIRTY WEEK
                         PERIOD ENDED JANUARY 27, 1996,
                     AND THE FISCAL YEAR ENDED JULY 1, 1995

<TABLE>
<CAPTION>
                                                   FISCAL YEAR ENDED FEBRUARY 1, 1997 (53 WEEKS)
                                   -----------------------------------------------------------------------------------

                                        FIRST        SECOND              THIRD            FOURTH
                                      13 WEEKS      13 WEEKS           13 WEEKS          14 WEEKS          TOTAL
                                   ------------   ------------       -------------   --------------    ------------

<S>                                <C>            <C>                <C>                <C>             <C>        
NET SALES .....................    $   732,721    $   719,775        $   694,223        $   752,325     $ 2,899,044
GROSS PROFIT ..................        178,597        173,057            163,397            181,240         696,291
INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEM ...........          4,190          1,393            (61,140)(1)          6,042         (49,515)
NET INCOME (LOSS) .............          4,190            731(2)         (61,653)(2)          5,543         (51,189)
INCOME (LOSS) PER COMMON SHARE:
  Income (loss) before
  extraordinary item ..........    $      0.17    $      0.06        $     (2.43)(1)    $      0.23     $     (1.97)
  Net income (loss) ...........           0.17           0.03(2)           (2.45)(2)    $      0.22           (2.03)
</TABLE>

<TABLE>
<CAPTION>

                                                                               TRANSITIONAL PERIOD ENDED
                                                                              JANUARY 27, 1996 (30 WEEKS)
                                                         ----------------------------------------------------------------------

                                                                FIRST                    SECOND
                                                              12 WEEKS                  18 WEEKS                  TOTAL
                                                         --------------------     ----------------------   --------------------

<S>                                                           <C>                      <C>                     <C>       
NET SALES............................................         $655,180                 $1,019,479              $1,674,659
GROSS PROFIT.........................................          146,583                    236,229                 382,812
LOSS BEFORE EXTRAORDIARY ITEM........................          (22,234)(3)                (54,065)(4)             (76,299)
NET LOSS ............................................          (25,976)(5)                (55,225)(5)             (81,201)
LOSS PER COMMON SHARE:...............................
  Loss before extraordinary item.....................         $  (0.40)(3)             $    (1.66)(4)          $    (2.06)
  Net loss...........................................            (0.47)(5)                  (1.72)(5)               (2.19)
</TABLE>





                                       44
<PAGE>   46



<TABLE>
<CAPTION>
                                                                        FISCAL YEAR ENDED
                                                                     JULY 1, 1995 (52 WEEKS)
                                           ---------------------------------------------------------------------------------------

                                              FIRST          SECOND              THIRD             FOURTH
                                            12 WEEKS        14 WEEKS            14 WEEKS          12 WEEKS             TOTAL
                                           -----------  ----------------   ------------------  ---------------    ----------------

<S>                                         <C>             <C>                <C>                 <C>               <C>       
NET SALES..............................     $653,621        $784,120           $763,274            $668,554          $2,869,569
GROSS PROFIT...........................      156,045         185,126            175,028             156,814             673,013
NET INCOME (LOSS)......................       11,532          14,070             (4,575)(6)          12,315              33,342
EARNINGS PER COMMON SHARE:.............
  Net income (loss)....................     $   0.15        $   0.18            $ (0.06)(6)        $   0.16          $     0.43
</TABLE>

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

(1)  Includes a charge of $88,588 for costs associated with the Divestiture
     Program.
(2)  During the second and third quarter of the fiscal year ended February 1,
     1997, the Company recognized extraordinary losses on the early
     extinguishment of debt of $662 ($0.03 per share) and $1,175 ($0.02 per
     share), respectively, net of applicable taxes.
(3)  Includes merger expenses of $29,610 ($23,510 net of applicable tax
     benefit), which the Company believes represent unusual charges to
     operations. In addition, the Company's operations were adversely affected
     by the Company recognizing a lower level of vendor allowances in the 1996
     period and by certain non-recurring product costs.
(4)  Includes the effect of certain amounts which the Company considers to be
     unusual charges to operations, including (i) a refinement in the Company's
     inventory valuation methodology based on additional available information,
     (ii) the Company increasing its estimated liability for self insurance
     claims by $15,000 due to a revised management estimate, (iii) a $5,135
     write off of a deposit made in 1992 for three proposed stores which were
     not developed and which the Company has concluded will not be applied to
     the development of future stores, (iv) the accrual of $2,700 as a result of
     the Company losing a court appeal related to a claim by the Pension Benefit
     Guaranty Corporation concerning the termination of an employee pension plan
     in 1989, (v) an increase in the accrual related to future lease and other
     obligations on closed stores of $2,626 reflecting a change in management's
     assumptions with respect to anticipated future lease income, (vi) a $2,500
     write off of leasehold improvements and equipment recently determined to
     have no value in stores which have been remodeled, (vii) the write off of a
     $1,800 deposit made by the Company for medical benefits under a union plan
     which, upon execution of the related union contract in November 1995, was
     determined not to have benefit beyond the current period, (viii) a $3,000
     charge to depreciation related to a change in estimated depreciable lives
     of certain technology equipment, (ix) and impairment loss of $35,411
     related to the early adoption of Statement of Financial Accounting Standard
     No. 121 and other impairment charges, and (x) miscellaneous charges of
     $1,827. These charges total $77,861. In addition, the Company's operations
     were adversely affected by the Company recognizing a lower level of vendor
     allowances in the 1996 period as compared to the 1995 period.
(5)  During the 12 week and 18 week periods of the transitional period ended
     January 27, 1996, the Company recognized extraordinary losses on the early
     extinguishment of debt of $3,742 ($.07 per share) and $1,160 ($.06 per
     share), net of the applicable tax benefits.
(6)  In the third quarter of the fiscal year ended July 1, 1995, the Company
     completed an actuarially based evaluation of self insurance reserves for
     workers' compensation and general liability claims. Based on this
     evaluation, an adjustment to increase recorded reserves by $22,178 ($13,750
     net of income taxes) was recorded as a change in accounting estimate.




                                       45
<PAGE>   47



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


         On September 28, 1995, the Company dismissed Arthur Andersen LLP as its
independent accountants. The reports of Arthur Andersen LLP on the financial
statements for the fiscal years ended July 1, 1995 and July 2, 1994 contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle. The Company's Audit
Committee participated in and approved the decision to change independent
accountants.

         In connection with its audit for the fiscal years ended July 1, 1995
and July 2, 1995 and through September 28, 1995, there have been no
disagreements with Arthur Andersen LLP on any matter of accounting principle or
practice, financial statements disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused them to make reference in their report on the financial statements
for such years.

         The Company requested that Arthur Andersen LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statements.
A copy of such letter, dated September 28, 1995, was filed as Exhibit 16 to the
Company's Transition Report on Form 10-K, dated January 27, 1996.

         The Company engaged Deloitte & Touche LLP as its new independent
accountants and tax advisors as of September 28, 1995. During the fiscal years
ended July 1, 1995 and July 2, 1995 and through September 28, 1995, the Company
has not consulted with Deloitte & Touche LLP on items which (1) were or should
have been subject to SAS 50 or (2) concerned the subject matter of a
disagreement or reportable event with the former auditor (as described in
Regulation S-K Item 304(a)(2)).




                                       46
<PAGE>   48



                                    PART III

     The information required to be included in Part III of this Annual Report
on Form 10-K is incorporated by reference to the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders.


                                    PART IV


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


FINANCIAL STATEMENTS

     The following consolidated financial statements of Bruno's, Inc. and
subsidiaries are included in Item 8:

     Consolidated Balance Sheets as of February 1, 1997 and January 27, 1996.

     Consolidated Statements of Operations for the Fiscal Year Ended February
     1, 1997, the Transition Period Ended January 27, 1996 and the Fiscal
     Years Ended July 1, 1995 and July 2, 1994.

     Consolidated Statements of Shareholders' Investment (Deficiency in Net
     Assets) for the Fiscal Year Ended February 1, 1997, the Transition Period
     Ended January 27, 1996 and the Fiscal Years Ended July 1, 1995 and July 2,
     1994.

     Consolidated Statements of Cash Flows for the Fiscal Year ended February
     1, 1997, the Transition Period Ended January 27, 1996 and the Fiscal Years
     Ended July 1, 1995 and July 2, 1994.

     Notes to Consolidated Financial Statements.

     Reports of Independent Public Accountants.

     Unaudited Quarterly Financial Data.


SCHEDULES TO FINANCIAL STATEMENTS

     None



                                       47
<PAGE>   49

EXHIBITS

     The following is an index of the exhibits included in this Annual Report on
Form 10-K or incorporated herein by reference:


<TABLE>
<CAPTION>
 Designation of
Exhibit in this
Form 10-K Report                     Description of Exhibits
----------------                     -----------------------
      <S>         <C>

       2          Agreement and Plan of Merger dated as of April 20, 1995
                  between Crimson Acquisition Corp. and the Company, as amended
                  on May 18, 1995 (incorporated by reference to Exhibit 10.1 to
                  the Current Report on Form 8-K dated April 27, 1995 and
                  Exhibit 10.1 to the Current Report on Form 8-K/A dated May
                  18, 1995).

      3.1         Amended and Restated Articles of Incorporation of the Company
                  (incorporated by referenced to Exhibit 3.1 to the Company's
                  Annual Report on Form 10-K, dated July 1, 1995).

      3.2         By-Laws of the Company (incorporated by reference to Exhibit
                  3.2 to the Company's Annual Report on Form 10-K, dated July 1,
                  1995).

      4.1         Indenture, dated as of August 18, 1995, between the Company
                  and Marine Midland Bank, as Trustee (incorporated by reference
                  to Exhibit 4.2 to the Current Report on Form 8-K/A dated
                  August 24, 1995).

      4.2         First Supplemental Indenture, dated as of August 18, 1995,
                  between the Company and Marine Midland Bank, as Trustee,
                  relating to the issuance and sale of $400,000,000 aggregate
                  principal amount of 10-1/2% Senior Subordinated Notes due 2005
                  (incorporated by reference to Exhibit 4.7 to the Current
                  Report on Form 8-K/A dated August 24, 1995).

      4.3         Warrant, dated August 18, 1995, to purchase 9,917,400 shares
                  of Common Stock of the Company (incorporated by reference to
                  Exhibit 4.3 to the Company's Annual Report on Form 10-K, dated
                  July 1, 1995).

      4.4         Warrant, dated August 18, 1995, to purchase 82,600 shares of
                  Common Stock of the Company (incorporated by reference to
                  Exhibit 4.4 to the Company's Annual Report on Form 10-K,
                  dated July 1, 1995).
</TABLE>


                                       48
<PAGE>   50

<TABLE>
      <S>         <C>                            
       4.5        Registration Rights Agreement, dated August 18, 1995, among
                  Crimson Acquisition Corp., Crimson Associates, L.P. ("Crimson
                  Associates") and KKR Partners II, L.P. ("KKR Partners II")
                  (incorporated by reference to Exhibit 4.5 to the Company's
                  Annual Report on Form 10-K, dated July 1, 1995).

      10.1        Credit Agreement, dated as of August 18, 1995, among the
                  Company, the several lenders from time to time parties thereto
                  and Chemical Bank, as Administrative Agent (incorporated by
                  reference to Exhibit 10.1 to the Current Report on Form 8-K/A
                  dated August 24, 1995).

      10.2        Amended and Restated Group Term Life Insurance Plan of
                  Bruno's, Inc., dated March 15, 1984 (incorporated by reference
                  to Exhibit 10(b) of the Company's Annual Report on Form 10-K,
                  dated August 27, 1985).

      10.3        Joint Venture Agreement for PM Associates between SSS
                  Enterprises, Inc. and Metropolitan Life Insurance Company
                  (incorporated by reference to Exhibit 10.2 to Form S-1 (No.
                  33-12239) of Piggly Wiggly Southern, Inc.).

      10.4        Employment and Deferred Compensation Agreement, dated July 22,
                  1994, between the Company and Ronald G. Bruno (incorporated by
                  reference to Exhibit 10(h) to the Company's Annual Report on
                  Form 10-K, dated September 29, 1994).

      10.5        Employment and Deferred Compensation Agreement, dated July 22,
                  1994, between the Company and Paul F. Garrison (incorporated
                  by reference to Exhibit 10(i) to the Company's Annual Report
                  on Form 10-K, dated September 29, 1994).

      10.6        Employment and Deferred Compensation Agreement, dated July 22,
                  1994, between the Company and Glenn J. Griffin (incorporated
                  by reference to Exhibit 10(j) to the Company's Annual Report
                  on Form 10-K, dated September 29, 1994).

      10.7        Employment and Deferred Compensation Agreement, dated July 22,
                  1994, between the Company and Kenneth J. Bruno (incorporated
                  by reference to Exhibit 10(k) to the Company's Annual Report
                  on Form 10-K, dated September 29, 1994).
</TABLE>


                                       49
<PAGE>   51

<TABLE>
     <S>          <C>                            
     10.8         Employment and Deferred Compensation Agreement, dated July 22,
                  1994, between the Company and R. Michael Conley (incorporated
                  by reference to Exhibit 10(l) to the Company's Annual Report
                  on Form 10-K, dated September 29, 1994).

     10.9         Employment Continuity Agreement, dated July 22, 1994, between
                  the Company and Ronald G. Bruno (incorporated by reference to
                  Exhibit 10(m) to the Company's Annual Report on Form 10-K,
                  dated September 29, 1994).

     10.10        Employment Continuity Agreement, dated July 22, 1994, between
                  the Company and Paul F. Garrison (incorporated by reference to
                  Exhibit 10(n) to the Company's Annual Report on Form 10-K,
                  dated September 29, 1994).

     10.11        Employment Continuity Agreement, dated July 22, 1994, between
                  the Company and Glenn J. Griffin (incorporated by reference to
                  Exhibit 10(o) to the Company's Annual Report on Form 10-K,
                  dated September 29, 1994).

     10.12        Employment Continuity Agreement, dated July 22, 1994, between
                  the Company and Kenneth J. Bruno (incorporated by reference to
                  Exhibit 10(p) to the Company's Annual Report on Form 10-K,
                  dated September 29, 1994).

     10.13        Employment Continuity Agreement, dated July 22, 1994, between
                  the Company and R. Michael Conley (incorporated by reference
                  to Exhibit 10(q) to the Company's Annual Report on Form 10-K,
                  dated September 29, 1994).

     10.14        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated June 9, 1995, by and between the Company and
                  Ronald G. Bruno (incorporated by reference to Exhibit 10.1 to
                  the Current Report on Form 8-K dated June 22, 1995).

     10.15        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated June 9, 1995, by and between the Company and
                  Paul F. Garrison (incorporated by reference to Exhibit 10.2 to
                  the Current Report on Form 8-K dated June 22, 1995).

     10.16        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated June 9, 1995, by and between the Company and
                  Glenn J. Griffin (incorporated by
</TABLE>



                                       50
<PAGE>   52
<TABLE>
     <S>          <C>                            
                  reference to Exhibit 10.3 to the Current Report on Form 8-K 
                  dated June 22, 1995).

     10.17        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated June 9, 1995, by and between the Company and
                  Kenneth J. Bruno (incorporated by reference to Exhibit 10.4 to
                  the Current Report on Form 8-K dated June 22, 1995).

     10.18        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated June 9, 1995, by and between the Company and
                  R. Michael Conley (incorporated by reference to Exhibit 10.5
                  to the Current Report on Form 8-K dated June 22, 1995).

     10.19        Amendment to Employment Continuity Agreement, dated June 9,
                  1995, by and between the Company and Ronald G. Bruno
                  (incorporated by reference to Exhibit 10.6 to the Current
                  Report on Form 8-K dated June 22, 1995).

     10.20        Amendment to Employment Continuity Agreement, dated June 9,
                  1995, by and between the Company and Paul F. Garrison
                  (incorporated by reference to Exhibit 10.7 to the Current
                  Report on Form 8-K dated June 22, 1995).

     10.21        Amendment to Employment Continuity Agreement, dated June 9,
                  1995, by and between the Company and Glenn J. Griffin
                  (incorporated by reference to Exhibit 10.8 to the Current
                  Report on Form 8-K dated June 22, 1995).

     10.22        Amendment to Employment Continuity Agreement, dated June 9,
                  1995, by and between the Company and Kenneth J. Bruno
                  (incorporated by reference to Exhibit 10.9 to the Current
                  Report on Form 8-K dated June 22, 1995).

     10.23        Amendment to Employment Continuity Agreement, dated June 9,
                  1995, by and between the Company and R. Michael Conley
                  (incorporated by reference to Exhibit 10.10 to the Current
                  Report on Form 8-K dated June 22, 1995).

     10.24        Employment Agreement, dated August 21, 1995, between the
                  Company and William J. Bolton (incorporated by reference to
                  Exhibit 10.29 to the Company's Annual Report on Form 10-K,
                  dated July 1, 1995).
</TABLE>


                                       51
<PAGE>   53
<TABLE>
     <S>          <C>                            
     10.25        Employment Agreement, dated February 6, 1996, between the
                  Company and David Clark (incorporated by reference to Exhibit
                  10.29 to the Company's Transition Report on Form 10-K, dated
                  January 27, 1996).

     10.26        Employment Agreement, dated January 20, 1996, between the
                  Company and Michael F. Heintzman (incorporated by reference to
                  Exhibit 10.30 to the Company's Transition Report on Form 10-K,
                  dated January 27, 1996).

     10.27        Employment Agreement, dated December 18, 1995, between the
                  Company and Lisa R. Kranc (incorporated by reference to
                  Exhibit 10.31 to the Company's Transition Report on Form
                  10-K, dated January 27, 1996).

     10.28        1996 Stock Purchase and Option Plan for Key Employees of
                  Bruno's, Inc. and Subsidiaries (incorporated by reference to
                  Exhibit 10.32 to the Company's Report on Form 10-Q, dated
                  July 27, 1996).

     10.29        Management Stockholder's Agreement, dated as of February 15,
                  1996, between the Company and William J. Bolton (incorporated
                  by reference to Exhibit 10.33 to the Company's Transition
                  Report on Form 10-K, dated January 27, 1996).

     10.30        Non-Qualified Stock Option Agreement, dated as of February 15,
                  1996, between the Company and William J. Bolton (incorporated
                  by reference to Exhibit 10.34 to the Company's Transition
                  Report on Form 10-K, dated January 27, 1996).

     10.31        Schedule of Terms of Management Stockholder's Agreements and
                  Non-Qualified Stock Option Agreements executed by David Clark,
                  Michael F. Heintzman and Lisa R. Kranc (incorporated by
                  reference to Exhibit 10.35 to the Company's Transition Report
                  on Form 10-K, dated January 27, 1996).

     10.32        Employment Agreement, dated September 12, 1996, between the
                  Company and Walter M. Grant (incorporated by reference to
                  Exhibit 10.36 to the Company's Report on Form 10-Q, dated
                  October 26, 1996).

     10.33        Employment Agreement, dated September 12, 1996, between the
                  Company and James J. Hagan (incorporated by reference to
                  Exhibit 10.37 to the Company's Report on Form 10-Q, dated
                  October 26, 1996).
</TABLE>


                                       52
<PAGE>   54
<TABLE>
     <S>          <C>                            
     10.34        Employment Agreement, dated September 12, 1996, between the
                  Company and Laura Hayden (incorporated by reference to Exhibit
                  10.38 to the Company's Report on Form 10-Q, dated October 26,
                  1996).

     10.35        Form of Management Stockholder's Agreement, dated September
                  30, 1996, between the Company and each of Walter M. Grant,
                  James J. Hagan and Laura Hayden (incorporated by reference to
                  Exhibit 10.39 to the Company's Report on Form 10-Q, dated
                  October 26, 1996).

     10.36        Form of Non-Qualified Stock Option Agreement, dated September
                  30, 1996, between the Company and each of Walter M. Grant,
                  James J. Hagan and Laura Hayden (incorporated by reference to
                  Exhibit 10.40 to the Company's Report on Form 10-Q, dated
                  October 26, 1996).

     10.37        Schedule of Terms of Management Stockholder's Agreements and
                  Non-Qualified Stock Option Agreements executed by each of
                  Walter M. Grant, James J. Hagan and Laura Hayden
                  (incorporated by reference to Exhibit 10.41 to the Company's
                  Report on Form 10-Q, dated October 26, 1996).

     10.38        Amendment to 1994 Employment and Deferred Compensation
                  Agreement, dated November 15, 1996, by and between the
                  Company and R. Michael Conley.

     10.39        Employment Agreement, dated February 6, 1997, between the
                  Company and John Butler.

     10.40        Schedule of Terms of Management Stockholder's Agreement and
                  Non-Qualified Stock Option Agreement executed by John Butler.

     10.41        Letter Agreement, dated March 11, 1997, between the Company
                  and Michael F. Heintzman.

     10.42        Stock Repurchase Agreement, dated March 11, 1997, between the
                  Company and Michael F. Heintzman.

     10.43        Letter Agreement, dated April 4, 1997, between the Company
                  and Lisa R. Kranc.
</TABLE>



                                       53
<PAGE>   55
<TABLE>
      <S>         <C>                            
      10.44       Stock Repurchase Agreement, dated April 4, 1997, between the
                  Company and Lisa R. Kranc.

      16          Letter regarding change in independent accountants 
                  (incorporated by reference to Exhibit 16 to the Company's
                  Transition Report on Form 10-K, dated January 27, 1996).

      21          List of Subsidiaries (incorporated by reference to Exhibit 22
                  to the Company's Annual Report on Form 10-K, dated July 1,
                  1995).

      23.1        Consent of Deloitte & Touche L.L.P.

      23.2        Consent of Arthur Andersen L.L.P.

      27          Financial Data Schedule (for SEC for use only)
</TABLE>


REPORTS ON FORM 8-K

     The Company did not file any Reports on Form 8-K during the period from
October 27, 1996 through February 1, 1997.






                                       54
<PAGE>   56


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Bruno's, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                        BRUNO'S, INC.                      
                                        (Registrant)                       
                                                                           
                                        By  /s/      William J. Bolton     
                                            ------------------------------ 
                                            William J. Bolton,             
                                            Chairman of the Board and      
                                            Chief Executive Officer        
                                            (Principal Executive Officer)  
                                                                           
                                        By  /s/     James J. Hagan         
                                            --------------------------     
                                            James J. Hagan                 
                                            Executive Vice President and   
                                            Chief Financial Officer        
                                            (Principal Financial Officer)  
                                                                           
                                        
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
         Signature                         Capacity                      Date
         ---------                         --------                      ----
<S>                          <C>                                    <C>
/s/     William J. Bolton    Director, Chairman of
---------------------------  the Board and Chief Executive Officer                
(William J. Bolton)          (Principal Executive Officer)          April 28, 1997
                                                                                  
                             
/s/     Henry R. Kravis      Director                               April 28, 1997
---------------------------  
(Henry R. Kravis)

/s/     George R. Roberts    Director                               April 28, 1997
---------------------------  
(George R. Roberts)

/s/     Paul E. Raether      Director                               April 28, 1997
---------------------------  
(Paul E. Raether)

/s/     James H. Green, Jr.  Director                               April 28, 1997
---------------------------  
(James H. Greene, Jr.)

/s/     Nils P. Brous        Director                               April 28, 1997
---------------------------  
(Nils P. Brous)

/s/     Ronald G. Bruno      Director                               April 28, 1997
---------------------------  
(Ronald G. Bruno)

/s/     James J. Hagan       Executive Vice President and
---------------------------  Chief Financial Officer                              
(James J. Hagan)             (Principal Financial Officer)          April 28, 1997
                                                                                  
</TABLE>                     




                                       55
<PAGE>   57



                                 BRUNO'S, INC.

                           Annual Report on Form 10-K
                    (For Fiscal Year Ended February 1, 1997)

                               INDEX OF EXHIBITS



<TABLE>
<CAPTION>
Exhibit Number                Description
--------------                -----------
    <S>         <C>
    10.38       Amendment to 1994 Employment and Deferred Compensation
                Agreement, dated November 15, 1996, by and between the Company
                and R. Michael Conley.

    10.39       Employment Agreement, dated February 6, 1997, between the
                Company and John Butler.

    10.40       Schedule of Terms of Management Stockholder's Agreement and
                Non-Qualified Stock Option Agreement executed by John Butler.

    10.41       Letter Agreement, dated March 11, 1997, between the Company and
                Michael F. Heintzman.

    10.42       Stock Repurchase Agreement, dated March 11, 1997, between the
                Company and Michael F. Heintzman.

    10.43       Letter Agreement, dated April 4, 1997, between the Company and
                Lisa R. Kranc.

    10.44       Stock Repurchase Agreement, dated April 4, 1997, between the
                Company and Lisa R. Kranc.

    23.1        Consent of Deloitte & Touche L.L.P.

    23.2        Consent of Arthur Andersen L.L.P.

    27          Financial Data Schedule (for SEC use only)
</TABLE>