##### 



UNITED STATESSECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the quarterly period ended June 27, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the transition from ____ to ____ Commission file number 001-13222 STATER BROS. HOLDINGS INC.  Delaware
    
    33-0350671(State or other jurisdiction of incorporation or
organization)
    
    (I.R.S. Employer Identification No.)
 21700 Barton Road
Colton, California
    
    92324(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
    
    (909) 783-5000
 Not Applicable    Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X]   No [   ].Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2
of the Act). Yes [   ]   No [X]. As of August 11, 2004, there were issued and outstanding
38,301 shares of the registrants Class A Common Stock. 1




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STATER BROS. HOLDINGS INC.
 JUNE 27, 2004
 INDEX PagePart I
    
    FINANCIAL INFORMATION
    (Unaudited)Item 1.
    
    Financial StatementsConsolidated Balance Sheets
    as of September 28, 2003 and June 27, 2004
    (Unaudited)
    
    
    3Consolidated Balance Sheets
    of Income (Unaudited) for the 39 weeks ended June 29,
    2003 and June 27, 2004
    
    
    5Consolidated Statements of
    Operations (Unaudited) for the 13 weeks ended June 29,
    2003 and June 27, 2004
    
    
    6Consolidated Statements of
    Cash Flows (Unaudited) for the 39 weeks ended June 29,
    2003 and June 27, 2004
    
    
    7Notes to Consolidated
    Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion
    and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative
    Disclosure about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II
    
    Other
    InformationItem 1.
    
    Legal Proceedings
    
    
    28Item 2.
    
    Changes in Securities and
    Use of Proceeds
    
    
    28Item 3.
    
    Defaults Upon Senior
    Securities
    
    
    28Item 4.
    
    Submission of Matters to a
    Vote of Security Holders
    
    
    28Item 5.
    
    Other information
    
    
    28Item 6.
    
    Exhibits and Reports on
    Form 8-K
    
    
    29Signatures
    
    
    30 2




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PART I - FINANCIAL INFORMATION 
 Item 1. FINANCIAL STATEMENTS STATER BROS. HOLDINGS
INC. 
 CONSOLIDATED BALANCE SHEETS
 ASSETS Sept. 28,
    
    June 27,2003
    
    2004(Unaudited)Current assetsCash and cash equivalents
    
    $
    111,152
    
    
    $
    326,911Restricted cash
    
    
    
    
    
    
    20,000Receivables
    
    
    23,217
    
    
    
    36,277Income tax receivables
    
    
    4,354
    
    
    
    9,285Inventories
    
    
    172,267
    
    
    
    190,248Prepaid expenses
    
    
    6,962
    
    
    
    11,442Deferred income taxes
    
    
    14,793
    
    
    
    14,793Total current assets
    
    
    332,745
    
    
    
    608,956Investment in unconsolidated affiliate
    
    
    16,910
    
    
    
    Property and equipmentLand
    
    
    50,930
    
    
    
    68,120Buildings and improvements
    
    
    200,349
    
    
    
    250,659Store fixtures and equipment
    
    
    242,562
    
    
    
    327,230Property subject to capital leases
    
    
    24,670
    
    
    
    25,891518,511
    
    
    
    671,900Less accumulated depreciation and amortization
    
    
    216,366
    
    
    
    265,981302,145
    
    
    
    405,919Deferred debt issuance costs, net
    
    
    10,486
    
    
    
    22,722Other assets
    
    
    5,540
    
    
    
    6,28216,026
    
    
    
    29,004Total assets
    
    $
    667,826
    
    
    $
    1,043,879
 See accompanying notes to unaudited consolidated financial statements. 3




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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS(Continued)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS DEFICIT Sept. 28,
    
    June 27,2003
    
    2004(Unaudited)Current liabilitiesAccounts payable
    
    $
    112,458
    
    
    $
    146,785Accrued payroll and related expenses
    
    
    44,362
    
    
    
    55,976Other accrued liabilities
    
    
    50,352
    
    
    
    39,883Current portion of capital lease obligations and long term debt
    
    
    1,056
    
    
    
    42,250Total current liabilities
    
    
    208,228
    
    
    
    284,894Deferred income taxes
    
    
    6,708
    
    
    
    12,424Long-term debt
    
    
    458,750
    
    
    
    700,000Capital lease obligations, less current portion
    
    
    9,926
    
    
    
    9,823Long-term portion of self-insurance and other reserves
    
    
    27,941
    
    
    
    43,420Other long-term liabilities
    
    
    20,267
    
    
    
    43,163Total liabilities
    
    
    731,820
    
    
    
    1,093,724Stockholders deficitCommon Stock, $.01 par value:Authorized shares - 100,000Issued and outstanding shares - 0
    
    
    
    
    
    
    Class A Common Stock, $.01 par value:Authorized shares - 100,000Issued and outstanding shares - 38,301
    
    
    
    
    
    
    Additional paid-in capital
    
    
    9,740
    
    
    
    9,740Retained deficit
    
    
    (73,734
    )
    
    
    (59,585
    )Total stockholders deficit
    
    
    (63,994
    )
    
    
    (49,845
    )Total liabilities and stockholders deficit
    
    $
    667,826
    
    
    $
    1,043,879
 See accompanying notes to unaudited consolidated financial statements. 4




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STATER BROS. HOLDINGS
INC. 
 CONSOLIDATED STATEMENTS OF INCOME
 39 Weeks EndedJune 29,
    
    June 27,2003
    
    2004Sales
    
    $
    2,046,776
    
    
    $
    2,863,955Cost of goods sold
    
    
    1,484,710
    
    
    
    2,038,011Gross profit
    
    
    562,066
    
    
    
    825,944Operating expenses:Selling, general and administrative expenses
    
    
    491,437
    
    
    
    631,145Depreciation and amortization
    
    
    19,615
    
    
    
    23,331Total operating expenses
    
    
    511,052
    
    
    
    654,476Operating profit
    
    
    51,014
    
    
    
    171,468Interest income
    
    
    770
    
    
    
    1,005Interest expense
    
    
    (39,898
    )
    
    
    (39,416
    )Interest expense related to debt purchase
    
    
    
    
    
    
    (34,017
    )Equity in earnings from unconsolidated affiliate
    
    
    1,196
    
    
    
    929Other expenses  net
    
    
    (756
    )
    
    
    (1,017
    )Income before income taxes
    
    
    12,326
    
    
    
    98,952Income taxes
    
    
    4,798
    
    
    
    39,803Net income
    
    $
    7,528
    
    
    $
    59,149Earnings per share
    
    $
    196.55
    
    
    $
    1,544.32Dividends per share
    
    $
    
    
    
    $
    1,174.90Average common shares outstanding
    
    
    38,301
    
    
    
    38,301Shares outstanding at end of period
    
    
    38,301
    
    
    
    38,301
 See accompanying notes to unaudited consolidated financial statements. 5




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STATER BROS. HOLDINGS
INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 13 Weeks EndedJune 29,
    
    June 27,2003
    
    2004Sales
    
    $
    688,071
    
    
    $
    847,984Cost of goods sold
    
    
    498,838
    
    
    
    623,261Gross profit
    
    
    189,233
    
    
    
    224,723Operating expenses:Selling, general and administrative expenses
    
    
    168,194
    
    
    
    188,365Depreciation and amortization
    
    
    6,869
    
    
    
    8,145Total operating expenses
    
    
    175,063
    
    
    
    196,510Operating profit
    
    
    14,170
    
    
    
    28,213Interest income
    
    
    244
    
    
    
    157Interest expense
    
    
    (13,339
    )
    
    
    (13,103
    )Interest expense related to debt purchase
    
    
    
    
    
    
    (25,495
    )Equity in earnings from unconsolidated affiliate
    
    
    217
    
    
    
    Other expenses  net
    
    
    (129
    )
    
    
    (308
    )Income (loss) before income taxes (benefit)
    
    
    1,163
    
    
    
    (10,536
    )Income taxes (benefit)
    
    
    394
    
    
    
    (4,763
    )Net income (loss)
    
    $
    769
    
    
    $
    (5,773
    )Earnings (loss) per share
    
    $
    20.08
    
    
    $
    (150.73
    )Dividends per share
    
    $
    
    
    
    $
    1,174.90Average common shares outstanding
    
    
    38,301
    
    
    
    38,301Shares outstanding at end of period
    
    
    38,301
    
    
    
    38,301
 See accompanying notes to unaudited consolidated financial statements. 6




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STATER BROS. HOLDINGS
INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 39 Weeks EndedJune 29,
    
    June 27,2003
    
    2004Operating activities:Net income
    
    $
    7,528
    
    
    $
    59,149Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    25,237
    
    
    
    30,557Gain from litigation settlement
    
    
    
    
    
    
    (22,371
    )Deferred income taxes
    
    
    
    
    
    
    (707
    )Loss on disposals of assets
    
    
    756
    
    
    
    1,115Net undistributed gain in investment in unconsolidated affiliate
    
    
    (1,196
    )
    
    
    (929
    )Changes in operating assets and liabilities:Increase in restricted cash
    
    
    
    
    
    
    (20,000
    )Decrease in receivables
    
    
    1,133
    
    
    
    1,276(Increase) decrease in income tax receivables
    
    
    5,849
    
    
    
    (4,931
    )(Increase) decrease in inventories
    
    
    5,146
    
    
    
    (15,285
    )Increase in prepaid expenses
    
    
    (1,071
    )
    
    
    (3,311
    )Decrease in other assets
    
    
    2,724
    
    
    
    12,944Increase in accounts payable
    
    
    7,486
    
    
    
    26,693Increase in accrued liabilities, long-term portion
of self-insurance reserves and other liabilities
    
    
    22,276
    
    
    
    52,401Net cash provided by operating activities
    
    
    75,868
    
    
    
    116,601Investing activities:Purchase of property and equipment
    
    
    (37,659
    )
    
    
    (45,389
    )Proceeds from sale of property and equipment
    
    
    85
    
    
    
    124Net cash used in investing activities
    
    
    (37,574
    )
    
    
    (45,265
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    700,000Proceeds from equipment financing
    
    
    
    
    
    
    718Debt issuance costs
    
    
    
    
    
    
    (22,318
    )Amortization
of debt issuance costs related to debt purchase
    
    
    
    
    
    
    8,599Premium and fees paid on debt purchase
    
    
    
    
    
    
    (16,897
    )Make whole
payment on redemption of debt
    
    
    
    
    
    
    (8,521
    )Principal payments on long-term debt
    
    
    
    
    
    
    (471,300
    )Principal payments on capital lease obligations
    
    
    (859
    )
    
    
    (858
    )Payment of dividends
    
    
    
    
    
    
    (45,000
    )Net cash provided by (used in) financing activities
    
    
    (859
    )
    
    
    144,423Net increase in cash and cash equivalents
    
    
    37,435
    
    
    
    215,759Cash and cash equivalents at beginning of period
    
    
    81,043
    
    
    
    111,152Cash and cash equivalents at end of period
    
    $
    118,478
    
    
    $
    326,911Interest paid
    
    $
    25,519
    
    
    $
    66,505Income taxes paid
    
    $
    750
    
    
    $
    42,200
 See accompanying notes to unaudited consolidated financial statements. 7




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STATER BROS. HOLDINGS
INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   JUNE 27, 2004
 Note 1  Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the thirteen and
thirty-nine weeks ended June 27, 2004 are not necessarily indicative of the
results that may be expected for the year ending September 26, 2004. The consolidated balance sheet at September 28, 2003 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Companys report on Form 10-K for the
year ended September 28, 2003. Note 2  Reclassifications Certain amounts in the prior period have been reclassified to conform to
the current period financial statements presentation. Note 3  Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Note 4  Restricted Cash Restricted cash represents cash that has been contractually set aside as
collateral for certain workers compensation and general liability
self-insurance reserves. Interest earned on the restricted cash is controlled
by the Company and is included in cash and cash equivalents. 8




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)JUNE 27, 2004 Note 5  Retirement Plans The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employees compensation during the eligibility period while employed with
the Company. The Companys funding policy for this plan is to contribute
annually at a rate that is intended to provide sufficient assets to meet future
benefit payment requirements. Net periodic pension cost included the following components: 13 Weeks Ended
    
    39 Weeks EndedJune 29,
    
    June 27,
    
    June 29,
    
    June 27,2003
    
    2004
    
    2003
    
    2004(In thousands)Service cost  benefits earned during
the period
    
    $
    524
    
    
    $
    521
    
    
    $
    1,572
    
    
    $
    1,664Interest cost on projected benefit
obligation
    
    
    564
    
    
    
    641
    
    
    
    1,692
    
    
    
    1,867Actual return on assets
    
    
    (512
    )
    
    
    (462
    )
    
    
    (1,535
    )
    
    
    (1,458
    )Net amortization and deferral
    
    
    6
    
    
    
    7
    
    
    
    19
    
    
    
    20Recognized gains or losses
    
    
    117
    
    
    
    225
    
    
    
    350
    
    
    
    540Prior service cost recognized
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net periodic pension cost
    
    $
    699
    
    
    $
    931
    
    
    $
    2,097
    
    
    $
    2,632
 Note 6  Santee In 1997, in connection with the construction of a new dairy facility in
City of Industry, California, Stater Bros. Markets (Markets) and Hughes
Markets (Hughes), the owners of Santee Dairies, Inc. (Santee) contributed
the outstanding shares of Santee to a new entity Santee Dairies, LLC (SDL)
with each company owning 50% of SDL. Markets and Hughes each entered into
separate product purchase agreements (PPA) with Santee for the purchase of
fluid milk and other products. Financing for the new dairy was provided
through the issuance of $80 million Senior Secured 9.36% Notes due 2008
(Santee Notes). One of the covenants of the Santee Notes was a covenant that
required the payment of the outstanding Santee Notes in the event of change in
control of Santee. 9




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)JUNE 27, 2004 Note 6  Santee (contd.) Certain disagreements arose regarding the PPAs and other matters between
Markets and Ralphs, the parent company of Hughes, and Ralphs and Santee. In
order to settle the resulting litigation, Markets, Hughes, Santee and SDL
entered into three separate but interconnected agreements Settlement Agreement
and Release of all Claims, Dissolution and Transfer Agreement and
Assignment and Assumption Agreement all three agreements collectively known
as the Settlement Agreement. Under the Settlement Agreement, the Ralphs
Guaranty was terminated, a new purchase of products schedule for Ralphs was
established, Hughes agreed to pay $1,550,000 to Markets, SDL was dissolved and
the shares of Santee, previously held by SDL, were transferred equally to
Markets and Hughes. Concurrently with this transfer, Hughes immediately
transferred Hughes Santee shares to Santee for cancellation and retirement. Through the Settlement Agreement, Hughes relinquished its interest in
Santee to Markets. The consideration received by Markets under the Settlement
Agreement was $1,550,000 in cash and the value of the additional 50% ownership
interest in Santee. The value assigned to the additional 50% interest in
Santee is $21.8 million which was determined by management based upon the
present value of the most probable future cash flows. The Settlement
Agreements effective date was the close of business on February 6, 2004. In
the second quarter of fiscal 2004, the Company incurred legal fees of $500,000
related to the Settlement Agreement. In addition, the Company, through Santee,
made payments, aggregating $500,000, to four Directors of Santee who had been
named by Hughes as defendants in litigation settled by the Settlement
Agreement. Three of the four Directors are related parties to the Company.
The net consideration received by the Company under the Settlement Agreements
was $22.4 million which was recorded as a gain in the second quarter of fiscal
2004 in the Consolidated Statements of Income (unaudited) under the line item
Selling, general and administrative expenses. The following table is a condensed balance sheet that discloses the value
assigned to the Santee assets acquired and the liabilities assumed as a result
of the Settlement Agreement: Feb 6,
2004(in thousands)Current assets
    
    $
    13,246Property and equipment
    
    
    47,630Other long-term assets
    
    
    550Total assets acquired
    
    
    61,426Current liabilities
    
    
    14,005Long-term liabilities
    
    
    25,600Total liabilities assumed
    
    
    39,605Net assets acquired
    
    $
    21,821
 10




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)JUNE 27, 2004 Note 6  Santee (contd.) Previously, Markets accounted for Santee under the equity method of
accounting as Markets owned 50% of the stock and did not exercise control over
Santee. The dissolution of SDL and the retirement of the Hughes shares gave
Markets 100% direct ownership of Santee and caused a change in control of
Santee. The change in control triggered the early payment requirement of the
Santee Notes, which included a make whole provision. In order to finance the
payment of the Santee Notes and the make whole payment, Markets loaned Santee
$55.0 million. On February 6, 2004, Santee redeemed $53.5 million of Santee
Notes, all the notes outstanding, and paid a make whole fee of $8.5 million.
The make whole fee has been recorded as a component of interest expense in the
Consolidated Statements of Income (unaudited) of the Company. Santee has been included in the consolidated financial statements of the
Company as a wholly-owned subsidiary as of the effective date of the Settlement
Agreement. The following table provides supplemental pro forma results of
operations presented as though Santee had been consolidated as of the beginning
of the reporting periods. Condensed Pro Forma Results of Operations(in thousands, except per share amounts)13 Weeks Ended
    
    39 Weeks EndedJune 29,
    
    June 27,
    
    June 29,
    
    June 27,2003
    
    2004
    
    2003
    
    2004Sales
    
    $
    714,301
    
    
    $
    847,983
    
    
    $
    2,127,598
    
    
    $
    2,910,348Income (loss) before
income taxes (benefit)
    
    $
    1,669
    
    
    $
    (10,536
    )
    
    $
    14,761
    
    
    $
    100,873Net income (loss)
    
    $
    1,074
    
    
    $
    (5,773
    )
    
    $
    8,929
    
    
    $
    60,311Earnings (loss) per share
    
    $
    28.04
    
    
    $
    (150.73
    )
    
    $
    233.13
    
    
    $
    1,574.66
 Note 7  Issue of New Debt and Early Extinguishment of Debt On June 17, 2004, the Company issued $525.0 million of 8.125% Senior Notes
due June 15, 2012 and $175.0 million Floating Rate Senior Notes due June 15,
2010. Both the 8.125% Senior Notes and the Floating Rate Senior Notes are
unregistered. The interest rate on the Floating Rate Senior Notes as of June
27, 2004 was 5.06%. The Company incurred $22.3 million of debt issuance cost
related to the issuance of these notes which will be amortized over the term of
the respective notes. On June 17, 2004 the Company used part of the proceeds from the issuance
of these notes for the purchase of $397.8 million of the 10.75% Senior Notes
due August 2006,
the payment of $16.9 million for tender premium and fees on the purchased
10.75% Senior Notes, the early retirement of the $20.0 million 5.0%
Subordinated Note due March 2007 and to pay accrued interest on the purchased
10.75% Senior Notes and the retired 5.0% Subordinated Note. 11




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)JUNE 27, 2004 Note 7  Issue of New Debt and Early Extinguishment of Debt (contd.) On June 29, 2004, the Company advised the trustee of the 10.75% Senior
Notes that the Company has elected to redeem the remaining outstanding 10.75%
Notes on August 16, 2004 at a price of $1,026.875 per $1,000 plus accrued
interest. Note 8  Dividend Payment On June 17, 2004, the Company paid a $45.0 million dividend to La Cadena
Investments, the sole stockholder of the Company. Note 9  Corporate Office and Warehouse Facilities Markets is currently in negotiations to acquire approximately 160 acres
located on the former Norton Air Force Base in the City of San Bernardino,
California. Markets has reached an agreement with the Inland Valley
Development Agency (IVDA), which is the entity responsible for the
redevelopment of the former Norton Air Force Base, on an Owner Participation
Agreement. The IVDA owns approximately 93 acres of the project property and is
negotiating with another governmental agency for an additional 51 acres that
would be transferred to Markets or leased with a purchase option.
Additionally, Markets is negotiating the acquisition of four privately held
parcels consisting of approximately 16 acres. The agreement with the IVDA
requires Markets to acquire those parcels not owned by the IVDA, to relocate
all tenants and other business owners requiring relocation, to commit to
construct and complete the corporate and warehouse facilities and to obtain all
City of San Bernardino building permits and entitlements required for the
facility. Markets has reached an agreement with Hillwood/San Bernardino LLC
(Hillwood), the master developer of the former Norton Air Force Base for
infrastructure improvements. Under the Hillwood agreement, upon closing,
Markets will share costs associated with the infrastructure improvements for
water, sewer, streets and utilities which will be required by the City of San
Bernardino. Markets, after completion of the acquisition of the project
property, will secure its commitment with Hillwood for infrastructure
improvements by the posting of either cash or letters of credits in the amount
of $10.8 million. The agreements with the IVDA and Hillwood are contingent
upon Markets successfully negotiating the acquisition of all needed property. This site will be used to relocate and consolidate the Companys corporate
headquarters and all warehousing and distribution facilities to a single
integrated facility from the 13 warehouse buildings at 7 different locations
currently in use. This site is located within eight miles of the main
distribution facility in Colton and therefore there will be no change in the
average distance between the new facility and the retail supermarkets. The
facility will consist of approximately 2.1 million square feet and will include
the Companys corporate headquarters, truck maintenance and other support
facilities required for consolidation of all of its Southern
California retail grocery operations. The net projected cost
of the facility is approximately $200 million and completion of the
construction of the facility is planned for the fall of 2006. 12




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART I  FINANCIAL INFORMATION (contd.) 
 Item 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 CRITICAL ACCOUNTING POLICIESThe Companys discussion and analysis of financial condition and
results of operations are based upon the Companys unaudited
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of the financial statements requires the use of estimates
and judgements on the part of management. The Company based its
estimates on the Companys historical experience combined with
managements understanding of current facts and circumstances. The
Company believes that the following critical accounting policies are
the most important to the Companys consolidated financial statements
presentation and require the most difficult, subjective and complex
judgements on the part of management.Revenue RecognitionMarkets, the Companys principal operating entity, recognizes revenue
from the sale of its products at the point of sale to the customer.
Sales are recognized net of any discounts given to the customer.
Santee recognizes revenue as shipments are received by its customers.
Sales are recognized net of promotional discounts.Cost of Goods SoldIncluded in cost of goods sold are all manufacturing cost, direct
product purchase costs, except for certain salary, wages and
administration cost associated with the procurement of purchased
products; all in-bound freight costs; all direct receiving and
inspection costs; all quality assurance costs; all warehousing costs
and all costs associated with transporting goods from the Companys
warehouses to its stores, net of earned vendor rebates and allowances.
The Company recognizes, as a reduction to cost of goods sold, certain
rebates and allowances (allowances) from its vendors as the
allowances are earned. Allowances are earned by promoting certain
products or by purchasing specified amounts of product. The Company
records a liability for allowance funds that have been received but
not yet earned.Within the supermarket industry, there are a wide range of differences
in the disclosure of costs related to the purchasing and distribution
of products sold. Some companies include all of their purchasing and
distribution costs in cost of goods sold while others include a
portion of the costs in selling, general and administrative expenses.
Therefore, the Companys gross margins and selling, general and
administrative expenses may not be comparable to those of other
companies within the supermarket industry.Inter-Company EliminationsMarkets is a significant customer of Santee, which supplies Markets
with a significant portion of its fluid milk and dairy products.
Santee pays interest and principal
payments to Markets on a $55.0 million 5.25% Inter-Company Note due
2008. All inter-company transactions are eliminated in consolidation.
 13




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES (contd.)Selling, General and Administrative ExpensesIncluded in selling, general and administrative expenses are all store
operating costs which includes all store labor costs associated with
receiving, displaying and selling the Companys products at the store
level; all advertising costs, net of the portion of co-operative
advertising allowances directly related to the fair value of the
advertising; certain salary, wages and administrative costs associated
with the purchasing of the Companys products and all security,
management information services, accounting and corporate management
costs.As noted under Cost of Goods Sold, the Company includes all
purchasing and distribution costs to deliver the product for sale to
its stores in cost of goods sold, except for certain salary, wages and
administrative costs associated with the procurement of purchased
products. As certain salary, wages and administrative costs
associated with the purchase of the Companys products is included in
selling, general and administrative expenses, the Companys gross
margin and selling, general and administrative expenses may not be
comparable to companies who disclose these costs differently.Vendor Rebates and AllowancesThe Company receives certain allowances from its vendors that relate
to the purchase and promotion of certain products. All allowances,
except for advertising allowances described under Advertising
Allowances, are recognized as a reduction in cost of goods sold as
the performance is completed and inventory sold. Allowances, such as
slotting fees, which are tied to the promotion of certain products,
are recognized as reductions in cost of goods sold as the Company
meets the required performance criteria. Allowances that are based
upon purchase or sales volumes are recognized as reductions in cost of
goods sold as the products are sold. The Company receives lump-sum
payments from vendors for the promotion or purchase of products over
multi-year periods. The Company records a liability for unearned
allowances and recognizes, as a reduction in cost of goods sold, these
allowances over time as the criteria of these contracts are met.Advertising AllowancesThe Company receives co-operative advertising allowances from vendors
for advertising specific vendor products over specific periods of
time. The Company recognizes the portion of co-operative advertising
allowances directly related to the fair value of the advertising as a
reduction in advertising costs. A significant portion of the
Companys advertising expenditures is in the form of twice weekly
print advertisements. The Company distributes its print ads through
inserts in local newspapers, in direct mailers and as handouts
distributed in its stores. The Company analyzes, on a monthly basis,
the direct out-of-pocket costs for printing and distributing its print
ads. Using the number of ads in a typical twice weekly advertisement,
the actual direct cost of an individual advertisement is determined.
The cost determined is deemed to be the fair value of advertising.
The amount of co-operative advertising
allowances in excess of the direct fair value of the advertising is
recognized as a reduction in cost of goods sold.
 14




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES (contd.)AdvertisingThe Companys advertising costs, net of vendor allowances for
co-operative advertising, are recognized in the period the advertising
is incurred and are included in selling, general and administrative
expenses.LeasesCertain of the Companys operating leases provide for minimum annual
payments that change over the life of the lease. The aggregate
minimum annual payments are expensed on a straight-line basis over the
minimum lease term. The Company recognizes a liability for minimum
step rents when the amount of straight-line rent expense exceeds the
actual lease payment and it reduces the step rent liability when the
actual lease payment exceeds the amount of straight-line rent expense.Self-Insurance ReservesThe Company is primarily self-insured, subject to certain retention
levels for workers compensation, automobile and general liability
costs. The Company is covered by umbrella insurance policies for
catastrophic events. The Company records its self-insurance liability
based on the claims filed and an estimate of claims incurred but not
yet reported. The estimates used by management are based on the
Companys historical experiences as well as current facts and
circumstances. The Company uses third party actuarial analysis in
making its estimates. Actuarial projections and the Companys
estimate of ultimate losses are subject to a high degree of
variability. The variability in the projections and estimates are
subject to, but not limited to, such factors as judicial and
administrative rulings, legislative actions, and changes in
compensation benefits structure. In recent years, the Company and
employers within the State of California as a whole have seen
significant increases in the severity of workers compensation claims.
While the Company has factored these increases into its estimates of
ultimate loss, no assurance can be given that future events will not
require a change in these estimates. The Company discounts its
workers compensation, automobile and general liability insurance
reserves at a discount rate of approximately 7.5%.InventoriesInventories are stated at the lower of cost (first-in, first-out) or
market. Management believes that its inventory turns and inventory
controls are sufficient and that reserves are not needed for excess,
obsolete or discontinued inventory.Deferred Debt Issuance CostsDirect costs incurred as a result of financing transactions are
capitalized and amortized to expense over the term of the applicable
debt agreements.Deferred Income TaxesAlthough there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable
income, when combined with the income taxes paid in prior years, will
be adequate to realize its deferred tax assets.Phantom Stock PlanIt is the Companys policy to expense phantom stock units to the
extent that they vest and appreciate during the accounting period.
 15




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OWNERSHIP OF THE COMPANYLa Cadena Investments (La Cadena) is the sole shareholder of the
Company and holds all of the shares of the Companys Class A Common
Stock. La Cadena is a California General Partnership whose partners
include Jack H. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company and a former member of Senior
Management of the Company. Jack H. Brown has a majority interest in
La Cadena and is the managing general partner with the power to vote
the shares of the Company held by La Cadena.RESULTS OF OPERATIONSThe following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and thirty-nine weeks
ended June 29, 2003 and June 27, 2004.
 Thirteen Weeks
    
    Thirty-Nine Weeks2003
    
    2004
    
    2003
    
    2004Sales
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    27.50
    
    
    
    26.50
    
    
    
    27.46
    
    
    
    28.84Operating expenses:Selling, general and
administrative expenses
    
    
    24.44
    
    
    
    22.21
    
    
    
    24.01
    
    
    
    22.04Depreciation and amortization
    
    
    1.00
    
    
    
    0.96
    
    
    
    0.96
    
    
    
    0.81Operating profit
    
    
    2.06
    
    
    
    3.33
    
    
    
    2.49
    
    
    
    5.99Interest income
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.04Interest expense
    
    
    (1.94
    )
    
    
    (4.55
    )
    
    
    (1.95
    )
    
    
    (2.56
    )Equity in unconsolidated affiliate
    
    
    0.03
    
    
    
    
    
    
    
    0.06
    
    
    
    0.03Other expenses  net
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (0.04
    )Income (loss) before income
taxes (benefit)
    
    
    0.17
    %
    
    
    (1.24
    )%
    
    
    0.60
    %
    
    
    3.46
    %
 As of February 6, 2004, the results of Santee Dairies, Inc.
(Santee), previously accounted for under the equity method of
accounting, have been consolidated in the Companys results of
operations and all inter-company transactions have been eliminated
(see Notes to Consolidated Financial Statements (unaudited) of the
Company contained in this report on Form 10-Q).The labor dispute involving three of Stater Bros. principal
competitors from October 11, 2003 through February 29, 2004, had a
materially positive effect on Stater Bros. results of operations in
the period. On October 11, 2003, the United Food and Commercial
Workers Union (UFCW) declared a strike against Safeway, Inc.
(Vons); in turn, Albertsons, Inc. (Albertsons) and Ralphs
Grocery Company (Ralphs) locked out all of their UFCW employees.
The UFCW did not strike against Stater Bros. as a result of an
agreement whereby Stater Bros. agreed to accept the same contract
terms that the UFCW negotiated with Vons, Albertsons and Ralphs.
 16




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.)On February 29, 2004, members of the UFCW in Southern California
ratified new collective bargaining agreements and ended their strike.
Under the new collective bargaining agreements, Stater Bros. made
special contributions to the UFCWs health and welfare fund totaling
$29.3 million, and made strike ratification bonus payments to its
employees totaling $4.7 million.During the labor dispute, many of the former Vons, Albertsons and
Ralphs customers chose to honor the picket lines and took their
business to Stater Bros. Markets and other grocery retailers.
Subsequent to the labor dispute, the Company has been able to retain
some of these additional customers. The labor dispute had both a
significant and material effect on the Companys sales volume, results
of operations and financial position.The increased sales volume has had a positive effect on results of
operations as the Company has been able to realize some economics of
scale from the increased sales volume. As a result, cost of goods
sold, labor and other operating expenses, as a percentage of sales,
have decreased for the thirty-nine weeks ended June 27, 2004 when
compared with the corresponding period of fiscal 2003.The impact of the labor dispute on the Company was unprecedented and
is not expected to be repeated in the future. As of June 27, 2004,
the Company has been able to retain some of the increased volume
gained during the labor dispute. Management has taken steps through
price promotions, customer service and attention to detail to retain
as much of the increased volume as possible. The ultimate amount
of increased volume retained, if any, cannot be forecast with any
degree of certainty; although, management anticipates retaining some
of the increased sales volume.Like store sales are calculated by comparing year-to-year sales for
stores that are opened in both years. For stores that were not opened
for the entire previous year periods, only the current years weekly
sales that correspond to the weeks the stores were opened in the
previous year are used. All of the current years replacement stores
sales are included in the like store sale calculation.Sales for the thirteen weeks ended June 27, 2004, the third quarter of
fiscal 2004, increased $159.9 million or 23.24% and amounted to $848.0
million compared to $688.1 million for the same period in the prior
year. The consolidation of Santee in fiscal 2004 increased sales by
$30.6 million or 4.45% over prior year sales. Like store sales
increased $117.9 million or 17.13% over the prior year. The increase
in like store sales for the thirteen weeks ended June 27, 2004 is
primarily the result of the Companys ability to retain some of the
increased sales volume generated during the labor dispute. The
remaining increase in total sales is due to the opening of a new store
in Corona, California in June of 2003 and the opening of a new store
in Moreno Valley, California in March of 2004.
 17




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.)Sales for the thirty-nine weeks ended June 27, 2004, increased $817.2
million or 39.93% and amounted to $2.864 billion compared to $2.047
billion for the same period in the prior year. The consolidation of
Santee in fiscal 2004 increased sales by $47.0 million or 2.30% over
prior year sales. Like store sales increased $739.8 million or 36.15%
over the prior year. The increase in like store sales for the
thirty-nine weeks ended June 27, 2004 is due primarily to the
increased sales volume during the labor dispute and to the Companys
ability to retain some of the increased sales volume after the labor
dispute. For the portion of the thirty-nine week period during the
labor dispute, like store sales increased $576.2 million or 54.52%
over the same time frame of fiscal 2003. For the portion of the
thirty-nine week period after the labor dispute, like store sales
increased $158.9 million or 17.75% over the same time frame of fiscal
2003. The remaining increase in sales is due to the opening of a new
store in Corona, California in June of 2003 and the opening of a new
store in Moreno Valley, California in March of 2004.Gross profit for the thirteen weeks ended June 27, 2004, amounted to
$224.7 million or 26.50% of sales compared to $189.2 million or 27.50%
of sales in the same period of the prior year. Gross profit, as a
percentage of sales, in the current year compared to the prior year
decreased 1.00%. Store gross margins, as a percentage of sales,
decreased 0.87% compared to the prior year and is attributed to
pricing steps taken by the Company to retain volume gained during the
labor dispute. Offsetting the reduction in store margins from pricing
were favorable reductions in warehousing and transportation costs, as
a percentage of sales, of approximately 0.52% attributed to the
leveraging of fixed costs over the increased sales volume. The
consolidation of Santee in fiscal 2004 contributed to a reduction in
gross profit, as a percentage of sales, of approximately 0.51%.Gross profit for the thirty-nine weeks ended June 27, 2004, amounted
to $825.9 million or 28.84% of sales compared to $562.1 million or
27.46% of sales in the same period of the prior year. Gross profit,
as a percentage of sales, for the thirty-nine week period increased
1.38% compared to the prior year. The increase in the year-to-date
gross profit is comprised of increased store gross profit of 0.93%
attributed primarily to reduced shrink in the perishable departments
during the labor dispute, a reduction, as a percentage of sales, of
0.88% in warehouse and transportation costs attributed to the
leveraging of fixed costs over the increased sales volume offset by
the consolidation of Santee in fiscal 2004 which created a reduction
in gross profit, as a percentage of sales, for the year-to-date period
of 0.27%.Operating expenses include selling, general and administrative
expenses, and depreciation and amortization. For the thirteen weeks
ended June 27, 2004, selling, general and administrative expenses
amounted to $188.4 million or 22.21% of sales compared to $168.2
million or 24.44% of sales for the thirteen weeks ended June 29, 2003.
For the thirty-nine weeks ended June 27, 2004, selling, general and
administrative expenses amounted to $631.1 million or 22.04% of sales
compared to $491.4 million or 24.01% of sales for the thirty-nine
weeks ended June 29, 2003.
 18




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.)The reduction in selling, general and administrative expenses, as a
percentage of sales, for the thirteen week period of the current year
compared to the prior year included a 0.53% reduction, as a percentage
of sales, in labor expense due to changes to the new collective
bargaining agreement with the UCFW and the ability to leverage labor
expense against increased sales volume; a 0.40% reduction, as a
percentage of sales, in workers compensation costs; and a 0.41%
reduction, as a percentage of sales, in utility cost due both to
reduced electric rates and continued energy conservations programs by
the Company. The consolidation of Santee in fiscal 2004 caused a
reduction in selling general and administrative expenses, as a
percentage of sales, of 0.56% in the current thirteen week period
compared to the thirteen week period of the previous year.Included in selling, general and administrative expenses for the
thirty-nine week fiscal 2004 is a $22.4 million gain from a settlement
agreement reached with Ralphs (see Notes to Consolidated Financial
Statements (unaudited) of the Company contained in this report on Form
10-Q). The gain from litigation settlement reduced selling, general
and administrative expenses, as a percentage of sales, by 0.81% for
the thirty-nine week fiscal 2004.Also, included in the thirty-nine week fiscal 2004 selling, general
and administrative expenses is $34.0 million for special
payments related to the labor dispute and contract ratification. The
Company made special payments of approximately $29.3 million to UFCW
union trust funds to bring the funds up to levels negotiated during
collective bargaining contract negotiations. Under the new negotiated
collective bargaining agreement, future union insurance payments by
the Company are proscribed at specified hourly rates. In addition,
the Company paid approximately $4.7 million to UFCW union members as a
contract ratification bonus. The reduction in selling, general and
administrative expenses, as a percentage of sales, for the thirty-nine
week period is also attributed to the Company being able to leverage
direct labor costs and fixed facility costs over the increased sales
volume resulting from the labor dispute.The amount of salaries, wages and administrative costs associated with
the purchase of the Companys products included in selling, general
and administrative expenses for the fiscal third quarters of fiscal
2004 and fiscal 2003 is $245,000 and $217,000, respectively, and the
amount in the thirty-nine week fiscal 2004 and fiscal 2003 is $767,000
and $658,000, respectively.Depreciation and amortization expenses amounted to $8.1 million for
the thirteen weeks ended June 27, 2004 and $6.9 million for the
thirteen weeks ended June 29, 2003. Depreciation and amortization
expense was $23.3 million and $19.6 million for the thirty-nine week
periods ended June 27, 2004 and June 29, 2003, respectively. The
increase in depreciation and amortization expense in fiscal 2004 was
primarily due to an increase in fixed assets. Included in cost of
goods sold is $3.1 million and $1.9 million of depreciation in the
third quarters of fiscal 2004 and fiscal 2003, respectively, and $7.2
million and $5.6 million of depreciation in the thirty-nine week
fiscal 2004 and fiscal 2003, respectively, related to dairy production
and warehousing and distribution activities for the stores.
 19




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.)Interest expense amounted to $13.1 million for the third quarter of 2004
compared to $13.3 million for the third quarter of 2003. For the fiscal
year-to-date of 2004 and 2003, interest expense amounted to $39.4 million
and $39.9 million, respectively. Interest expense related to debt
purchase was $25.5 million and $34.0 million for the thirteen and
thirty-nine weeks ended June 27, 2004, respectively. Interest expense
related to debt purchase for the thirteen weeks ended June 27, 2004
included a $16.9 million payment for tender premium and fees on the
purchase of $397.8 million of the 10.75% Notes and an $8.6 million charge
for the write-off of deferred offering cost related to i) the purchase of
$397.8 million of the 10.75% Senior Notes due 2006, ii) the early
retirement of the $20.0 million 5.0% Subordinated Note due 2007 and iii)
the redemption of the Santee Notes. In addition to the above items,
interest expense related to debt purchase for the thirty-nine weeks of
fiscal 2004 included a make whole payment by Santee of $8.5 million
related to Santees redemption of all outstanding Santee Notes (see Notes
to Consolidated Financial Statements (unaudited) of the Company contained
in this report on Form 10-Q).The Companys equity in earnings from unconsolidated affiliate amounted
to $217,000 for the third quarter of fiscal 2003. There was no equity in
earnings from unconsolidated affiliate in the third quarter of fiscal
2004. For the fiscal year-to-date periods of 2004 and 2003, the
Companys equity in earnings from unconsolidated affiliate amounted to
$929,000 and $1,196,000, respectively. On February 6, 2004, the Company
acquired 100% ownership of Santee as part of a litigation settlement and
Santee has been consolidated into the Companys results of operations
subsequent to that date.Income (loss) before income taxes (benefit) amounted to a loss of $10.5
million in the third quarter of 2004 and income of $1.2 million for the
third quarter of 2003, respectively. Income before income taxes amounted
to $99.0 million and $12.3 million for the thirty-nine weeks year-to-date
periods of 2004 and 2003, respectively.Net income (loss) for the third quarter of 2004 amounted to a loss of
$5.8 million and net income of $769,000 for the third quarter of 2003,
respectively. Net income for the fiscal year-to-date periods amounted to
$59.1 million and $7.5 million for 2004 and 2003, respectively.LIQUIDITY AND CAPITAL RESOURCESThe Company historically has funded its daily cash flow requirements
through funds provided by operations and through borrowings from
short-term revolving credit facilities. The Companys credit agreement,
as amended and restated on June 17, 2004 expires in March 2007 and
consists of a revolving loan facility for working capital and letters of
credit of $75.0 million. As of June 27, 2004, the Company had $46.9
million of outstanding letters of credit and had $28.1 million available
under the revolving loan facility. The letter of credit facility is
maintained pursuant to the Companys workers compensation and general
liability self-insurance requirements.Santees credit agreement, as
amended, became effective December 1999, expires on September 1, 2004 and
consists of a revolving loan facility for working capital of $5.0 million
of which $2.0 million may be used to secure letters of credit issued to
support workers compensation liabilities. The revolver is limited to a
borrowing base equivalent to 75% of Santees outstanding accounts
receivable, excluding balances owed by Markets, less the total amount of
outstanding letters of credit. Borrowings under the revolver are secured
by the receivables of Santee.
Advances under the revolver bear interest at Bank of Americas prime rate
plus 0.5% with interest due monthly or, if elected by Santee, at the
Interbank Offered Rate plus 1.75%. The outstanding undrawn portion of
the workers compensation letter of credit is subject to an annual
commitment fee of 1.25%. As of June 27, 2004, Santee had $1.4 million of
outstanding letters of credit and had $3.6 million available under the
revolving loan facility.
 20




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##### 



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.)The following table sets forth the Companys contractual cash
obligations and commercial commitments as of June 27, 2004.
 Contractual Cash Obligations (In thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years8.125% Senior Notes due June 2012Principal
    
    $
    525,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    525,000Interest
    
    
    341,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    127,968866,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    652,968Floating
Rate Senior Notes due June 2010 (1)Principal
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,000Interest
    
    
    53,081
    
    
    
    8,806
    
    
    
    17,710
    
    
    
    17,710
    
    
    
    8,855228,081
    
    
    
    8,806
    
    
    
    17,710
    
    
    
    17,710
    
    
    
    183,85510.75%
Senior Notes due August 2006(2)Principal
    
    
    40,950
    
    
    
    40,950
    
    
    
    
    
    
    
    
    
    
    
    Interest
    
    
    3,314
    
    
    
    3,314
    
    
    
    
    
    
    
    
    
    
    
    44,264
    
    
    
    44,264
    
    
    
    
    
    
    
    
    
    
    
    Capital
Lease Obligations(3)Principal
    
    
    11,123
    
    
    
    1,300
    
    
    
    2,353
    
    
    
    2,063
    
    
    
    5,407Interest
    
    
    8,433
    
    
    
    1,623
    
    
    
    2,716
    
    
    
    2,126
    
    
    
    1,96819,556
    
    
    
    2,923
    
    
    
    5,069
    
    
    
    4,189
    
    
    
    7,375Operating
Leases(3)
    
    
    240,247
    
    
    
    33,354
    
    
    
    56,979
    
    
    
    39,532
    
    
    
    110,382Total Contractual Cash Obligations
    
    $
    1,398,161
    
    
    $
    131,766
    
    
    $
    165,071
    
    
    $
    146,744
    
    
    $
    954,580Other Commercial Commitments (In thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 YearsStandby
Letters of Credit(4)
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Other Commercial Commitments
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (1)
    
    Interest on the Floating Rate Notes is based on the
Three-month LIBOR plus 3.50% and is set quarterly based on the
Three-month LIBOR rate for the second London Banking Day proceeding
each interest period. The floating interest rate at June 27, 2004
was 5.06%. Notes continued on next page
 21




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.)
 Contractual Cash Obligations (contd.)
  (2)
    
    On June 29, 2004, the Company elected to redeem the
remaining $41.0 million outstanding 10.75% Senior Notes due August
2006 on August 16, 2004. The outstanding notes will be redeemed at
a price of $1,026.875 per $1,000 plus accrued interest. The
redemption premium has been included with interest for purposes of
this contractual cash obligations disclosure.(3)
    
    The Company leases the majority of its retail stores, offices,
warehouses and distribution facilities. Certain leases provide for
additional rents based on sales. Primary lease terms range from 3
to 55 years and substantially all leases provide for renewal
options.(4)
    
    Standby letters of credit are committed as security for
workers compensation obligations. Outstanding letters of credit
expire between September 2004 and February 2005. Working capital amounted to $324.1 million at June 27, 2004 and $124.5
million at September 28, 2003, and the Companys current ratios were
2.14:1, and 1.60:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.Net cash provided by operating activities in the thirty-nine weeks
ended June 27, 2004 improved significantly over the thirty-nine weeks
ended June 29, 2003, primarily as a result of the increase in net
income for such period attributable mainly to the labor dispute. Net
cash provided by operating activities for the thirty-nine weeks ended
June 27, 2004 amounted to $116.6 million compared to $75.9 million for
the thirty-nine weeks ended June 29, 2003. In addition to the
substantial increase in net income of $59.1 million in the current
year compared to $7.5 million in the prior year, cash provided by
operating activities in fiscal 2004 of $116.6 million reflected a
$52.4 million increase in accrued liabilities, self-insurance reserves
and other liabilities, an increase of $26.7 million in accounts
payable, a $12.9 million decrease in other assets and $30.6 million of
depreciation and amortization; partially offset by a $20.0 million
increase in restricted cash, a $15.3 million increase in inventory and
a $22.4 million gain from litigation settlement. Cash provided by
operating activities in fiscal 2003 of $75.9 million consisted of a
$22.3 million increase in accrued liabilities, self-insurance reserves
and other liabilities, an increase of $7.5 million in accounts
payable, a decrease in income tax receivables of $5.8 million, a
decrease of $5.1 million in inventory and $25.2 million of
depreciation and amortization. Fluctuations in cash provided by
operating activities are not unusual in the industry.
 22




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.)Net cash used in investing activities for the thirty-nine weeks ended
June 27, 2004, amounted to $45.3 million compared to $37.6 million for
the thirty-nine weeks ended June 29, 2003. The difference in net cash
used in investing activities between the comparable periods is due to
the Companys capital expenditures during such periods, net of
proceeds from asset disposals. Capital expenditures amounted to $45.4
million in the fiscal year-to-date of 2004 compared to $37.7 million
in the fiscal year-to-date of 2003.Net cash provided by financing
activities amounted to $144.4 million
for the thirty-nine weeks ended June 27, 2004 and net cash used in
financing activities amounted to and $0.9 million in the thirty-nine
weeks ended June 29, 2003. In the thirty-nine weeks to date of 2004,
the Company issued $525.0 million of 8.125% Senior Notes due June
2012, issued $175.0 million of Floating Rate Senior Notes due June
2010, purchased $397.8 million of 10.75% Senior Notes due August 2006,
retired the $20 million 5.0% Subordinated Note due March 2007,
redeemed $53.5 million of outstanding Santee Notes, paid $16.9 million
in tender premium and fees for the purchase of the 10.75% Senior
Notes, paid a make whole payment of $8.5 million for the redemption
of the Santee Notes, paid a dividend of $45.0 million to La Cadena, incurred fees of
$22.3 million associated with the issuance of the 8.125% Senior Notes
and Floating Rate Senior Notes and amortized remaining deferred
offering costs of $8.6 million related to i) the purchase 10.75%
Notes, ii) the early retirement of the 5.0% Subordinated Note and iii)
the redemption of the Santee Notes, (see Notes to Consolidated
Financial Statements (unaudited) of the Company contained in this
report on Form 10-Q), executed a new capital lease for $0.7 million
and had payments on capitalized leases of $0.9 million. The cash used
in financing activities in the thirty-nine weeks to date of 2003 of
$0.9 million consisted of payments on the Companys capitalized lease
obligations.Issuance of Debt and Early Retirement of DebtOn June 17, 2004, the Company issued $525.0 million of 8.125% Senior
Notes due June 15, 2012 and $175.0 million Floating Rate Senior Notes
due June 15, 2010. The 8.125% Senior Notes and the Floating Rate
Senior Notes are unregistered. The interest rate on the Floating Rate
Senior Notes as of June 27, 2004 was 5.06%. The Company incurred
$22.3 million of debt issuance cost related to the issuance of these
notes which will be amortized over the term of the respective notes.On June 17, 2004 the Company used part of the proceeds from the issue
of these notes for the purchase of $397.8 million of the 10.75% Senior
Notes due August 2006, the payment of $16.9 million for tender premium
and fees on the purchased 10.75% Senior Notes, the early retirement of
the $20.0 million 5.0% Subordinated Note due March 2007 and to pay
accrued interest on the purchased 10.75% Senior Notes and the retired
5.0% Subordinated Note.
On June 29, 2004 the Company advised the trustee of the 10.75% Senior
Notes that the Company has elected to redeem the remaining outstanding
10.75% Notes due August 2006 at a price of $1,026.875 per $1,000 plus
accrued interest.
 23




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.)The Credit
FacilitiesOn June 17, 2004, the Company entered
into an amended and restated credit facility (the New Credit
Facility) with Bank of America N.A. (Bank of America) as sole and
exclusive administrative agent, and sole initial lender, consisting of
a three-year revolving credit facility in a principal amount of up to
$75.0 million, with the right to increase, under certain
circumstances, the size of the New Credit Facility to an aggregate
principal amount of $100.0 million. The New Credit Facility amended
and restated the existing credit facility in its entirety. Subject to
certain restrictions, the entire amount of the New Credit Facility may
be used for loans, letters of credit, or a combination thereof.
Borrowings under the New Credit Facility are unsecured and will be
used for certain working capital, capital expenditures and other
corporate purposes. Letters of credit under the letter of credit
facility are expected to be used to support obligations incurred in
connection with the construction of stores, construction of new
warehouse facilities and workers compensation
insurance obligations. The availability of the loans and letters of
credit are subject to certain borrowing restrictions.The New Credit Facility is guaranteed by the Company and all of its
existing and future material subsidiaries, including Stater Bros.
Development, Inc. and Santee (subject, in the case of Santee, to
termination upon certain specified events).Loans under the New Credit Facility bear interest at a rate based upon
either (i) the Base Rate (defined as the higher of (a) the federal
funds rate plus 0.50% and (b) the rate of interest publicly announced
by Bank of America as its reference rate), plus 1.00%, or (ii) the
Offshore Rate (defined as the average British Bankers Association
Interest Settlement Rate for deposits in dollars, adjusted for the
maximum reserve requirement for Eurocurrency funding), plus 1.75%.
For Offshore Rate Loans, the Offshore Rate will be applied in
consecutive periods of the earlier of (a) the maturity date of the
loan or (b) periods, as selected by Markets of one, two, three or six
months.The New Credit Facility will cease to be available and will be payable
in full on May 31, 2007. Notwithstanding such maturity date, at any
time prior thereto Markets shall be entitled to request the issuance
of standby letters of credit having a term which is up to one year
following such maturity date, and commercial letters of credit having
a term which is up to six months following such maturity date. Loans
under the New Credit Facility must be repaid for a period of ten
consecutive days semi-annually.Loans under the New Credit Facility may be repaid and re-borrowed.
The loans under the New Credit Facility may be prepaid at any time
without penalty, subject to certain minimums and payment of any
breakage and re-deployment costs in the case of loans based on the
offshore rate. The commitments under the New Credit Facility may be
reduced by Markets. Markets will be required to pay a commitment fee
equal to 0.25% per annum on the actual daily unused portion of the
revolving loan facility and the letter of credit facility, payable
quarterly in arrears. Outstanding letters of credit under the credit
facility are subject to a fee of 1.25% per annum on the face amount of
such letters of credit, payable quarterly in arrears. Markets will be
required to pay standard
fees charged by Bank of America with respect to the issuance,
negotiation, and amendment of commercial letters of credit issued
under the letter of credit facility.
 24




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.)The Credit Facilities (contd.)The New Credit Facility requires Markets to meet certain financial
tests, including minimum net worth and other tests. The New Credit
Facility contains covenants which, among other things, limit the
ability of Markets and its subsidiaries to (i) incur indebtedness,
grant liens and guarantee obligations, (ii) enter into mergers,
consolidations, liquidations and dissolutions, asset sales,
investments, leases and transactions with affiliates, and (iii) make
restricted payments. The New Credit Facility also contains covenants
that apply to the Company and its subsidiaries, and the Company is a
party to the New Credit Facility for purposes of these covenants.
These covenants, among other things, limit the ability of the Company
and its subsidiaries to incur indebtedness, make restricted payments,
enter into transactions with affiliates, and make amendments to the
Indenture governing the 8.125% Senior Notes due June 15, 2012 and the
Floating Rate Senior Notes due June 15, 2010.The New Credit Facility contains customary events of default,
including payment defaults; material inaccuracies in representations
and warranties; covenant defaults; cross-defaults to certain other
indebtedness; certain bankruptcy events; certain ERISA events;
judgment defaults; invalidity of any guaranty; and change of control.In December 1999, Santee entered into a revolving line of credit with
Bank of America (the Revolver) Under the Revolver, Santee may borrow
up to $5.0 million of which $2.0 million may be used to secure letters
of credit issued to support workers compensation liabilities. The
Revolver is limited to a borrowing base equivalent to 75% of Santees
outstanding accounts receivable, excluding balances owed by Markets,
less the total amount of outstanding letters of credit. Borrowings
under the Revolver are secured by the receivables of Santee. The
Revolver is scheduled to expire September 1, 2004 and is currently
being negotiated for renewal.Advances under the Revolver bear interest at Bank of Americas prime
rate plus 0.5% with interest due monthly or, if elected by Santee, at
the Interbank Offered Rate plus 1.75%. The outstanding undrawn
portion of the workers compensation letter of credit is subject to an
annual commitment fee of 1.25%.Under the Revolver, Santee is required to comply with certain
financial covenants, which include certain financial ratios.As of June 27, 2004, for purposes of the credit facilities with Bank
of America, Santee, Markets and the Company were in compliance with
all restrictive covenants. The Company is also subject to certain
covenants associated with its 10.75% Senior Notes due 2006, its 8.125%
Senior Notes due 2012 and its Floating Rate Senior Notes due 2010. As
of June 27, 2004, the Company was in compliance with all such
covenants. However, there can be no assurance that Santee, Markets or
the Company will be able to achieve the expected operating results or
implement the capital expenditure strategy upon which future
compliance with such covenants is based.
 25




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Labor RelationsThe Companys collective bargaining contract with the UFCW was
ratified during the second quarter of fiscal 2004 and extends through
March 2007. The Companys collective bargaining agreement with the
International Brotherhood of Teamsters was renewed in September 2002
and expires in September 2005. Santees collective bargaining
agreement with the International Brotherhood of Teamsters was renewed
in March 2004 and expires in March 2007. Management believes it has
good relations with its employees.EFFECT OF INFLATION AND COMPETITIONThe Companys performance is
affected by inflation. In recent years the impact of inflation on the
operations of the Company has been moderate. As inflation has
increased expenses, the Company has recovered, to the extent permitted
by competition, the increase in expenses by increasing prices over
time. However, the economic and competitive environment in Southern
California continues to challenge the Company to become more cost
efficient as its ability to recover increases in expenses through
price increases is diminished. The future results of operations of
the Company will depend upon the ability of the Company to adapt to
the current economic environment as well as the current competitive
conditions.The Companys primary business
function is the
operation of retail food supermarkets, which offer for sale to the
public most merchandise typically found in supermarkets. The
supermarket industry is highly competitive and is characterized by low
profit margins. The Companys primary competitors include Vons,
Albertsons, Ralphs and a number of independent supermarket operators.
Competitive factors typically include the price, quality and
selection of products offered for sale, customer service, and the
convenience and location of retail facilities. Through its
wholly-owned subsidiary Santee, the Company operates one of the largest
dairy operations in California. Markets is the primary customer of
Santee. Santee also sells to Ralphs, unaffiliated supermarkets,
independent food distributors, military bases and food service
providers in southern California. The Companys captive
purchases limit the effect of competition on dairy operations.
However, sells to non-related parties is highly competitive with
competitive factors including price, quality and timely delivery of
product.


The Company monitors
competitive activity and Senior Management regularly reviews the
Companys marketing and business strategy and periodically adjusts
them to adapt to changes in the Companys primary trading area.CAUTIONARY STATEMENT FOR PURPOSES OF SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Certain information contained in the
Companys filings with the Securities and Exchange Commission (as well
as information included in oral statements or other written statements
made or to be made by the Company) includes statements that are
forward-looking, such as statements relating to plans for future
activities. Such forward-looking information involves important risks
and uncertainties that could significantly affect results in the
future and, accordingly, such results may differ from those expressed
in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to domestic economic conditions, seasonal and weather
fluctuations, expansion and other activities of competitors, changes
in federal or state laws and the administration of such laws and the
general condition of the economy.
 26




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STATER BROS. HOLDINGS INC.
JUNE 27, 2004 PART I  FINANCIAL INFORMATION (contd.) 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company
is subject to interest rate risk on its Floating Rate Senior Notes due June
2010. The Companys interest expense on the Floating Rate Senior Notes due
June 2010 will increase as interest rates rise and will decrease as interest
rates decline. Interest on the Floating Rate Senior Notes due June 2010 is
based upon the Three-month LIBOR plus 3.50%. As of June 27, 2004, the floating
interest rate was 5.06%. In addition, the Company is subject to interest rate
risk on its fixed interest rate debt obligations. The Companys fixed rate debt
obligations are comprised of the 8.125% Senior Notes due June 2012 and the
10.75% Senior Notes due August 2006 and capital lease obligations. In general, the
fair value of fixed rate debt will increase as the market rate of interest
decreases and will decrease as the market rate of interest increases.
The Company has not engaged in any interest rate swap agreements,
derivative financial instruments or other type of financial
transactions to manage interest risk. 
 Item 4. CONTROLS AND PROCEDURES As of the quarter ended June 27, 2004, the Company carried out an evaluation,
under the supervision of the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Companys disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have each concluded that those controls and procedures were
effective in making known to them, on a timely basis, the material information
needed for the preparation of this Report on Form 10-Q. During the quarter and
fiscal year-to-date periods ended June 27, 2004, there were no significant
changes in the Companys internal control over financial reporting or in other
factors that could significantly affect the internal control over financial
reporting since the date of their evaluation, nor did they find any significant
deficiencies or material weaknesses that would have required corrective actions
to be taken. 27




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STATER BROS. HOLDINGS
INC.JUNE 27, 2004 
 PART II  OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS Various legal actions and claims are pending against the Company in the
ordinary course of business. In the opinion of management and its general
legal counsel, the ultimate resolution of such pending legal actions and
claims will not have a material adverse effect on the Companys
consolidated financial position or its results of operations.For a description of legal proceedings, please refer to the footnote
entitled Litigation Matters contained in the Notes to Consolidated
Financial Statements section of the Companys Form 10-K for the fiscal
year ended September 28, 2003.On February 6, 2004, a final settlement agreement became effective
between Markets and Hughes to resolve litigation matters and control
of Santee. For a description of the Settlement Agreement see the
footnote entitled Santee in the notes to the Consolidated Financial
Statements (unaudited) contained in this Report on Form 10-Q.
 
 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 27, 2004, the Company entered into a Second Supplemental
Indenture to the Indenture dated as of August 6, 1999 governing the
Companys 10 3/4% Senior Notes due 2006 (as amended, the 10 3/4%
Senior Notes Indenture). The Second Supplemental Indenture
eliminated substantially all of the restrictive covenants contained in
the 10 3/4% Senior Notes Indenture, and became operative as of June
17, 2004. The description of the Second Supplemental Indenture
contained herein is qualified by reference to the terms of the Second
Supplemental Indenture, a copy of which is attached as an Exhibit to
this Form 10-Q.
 
 Item 3. DEFAULTS UPON SENIOR SECURITIES None
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
 
 Item 5. OTHER INFORMATION None
 28




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STATER BROS. HOLDINGS
INC.JUNE 27, 2004 PART II  OTHER INFORMATION (contd.) 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a)
    
    Exhibits10.34
    
    Second Supplemental Indenture, dated as of May 27,
2004 between Stater Bros. Holdings Inc. and The Bank of New
York, as successor in interest to IBJ Whitehall Bank & Trust
Company, as Trustee for the 10.75% Senior Notes due 2006.10.35
    
    Owner Participation Agreement, dated as of April 14,
2004 between Stater Bros. Markets and the Inland Valley
Development Agency.10.36
    
    Development Parcel Disposition Agreement, dated as of
June 16, 2004 between Stater Bros. Markets and Hillwood/San
Bernardino, LLC.31.1
    
    Certification of Principal Executive Officer pursuant
to Section 302 (a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant
to Section 302 (a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(b)
    
    Reports on Form 8-KCurrent Report on Form 8-K dated May 18,
2004Current Report on Form 8-K dated June 1, 2004Current Report on Form 8-K dated June 4, 2004Current Report on Form 8-K dated June 15, 2004Current Report on Form 8-K dated June 18, 2004
 29




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STATER BROS. HOLDINGS INC. 
 Signatures Pursuant to the requirements of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized. Date: August 11, 2004
    
    
    
    /s/     Jack H. Brown

          Jack H. Brown 
          Chairman of the Board, President,
          and Chief Executive Officer
          (Principal Executive Officer)Date: August 11, 2004
    
    
    
    /s/     Phillip J. Smith

          Phillip J. Smith
          Senior Vice President
          and Chief Financial Officer 
          (Principal Financial Officer)
 30