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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period
ended March 27, 2005 
OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition from  to Commission file number
001-13222 STATER BROS. HOLDINGS INC.  Delaware
    

    33-0350671(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)21700 Barton RoadColton, 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 I5(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. YesþNoo. Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). YesoNoþ. As of May 11, 2005, there were issued and outstanding
38,301 shares of the registrants Class A Common Stock.




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STATER BROS. HOLDINGS INC.
March 27, 2005 INDEX PagePART I

FINANCIAL INFORMATIONItem 1.
    

Financial StatementsConsolidated Balance Sheets as of September 26, 2004 and
March 27, 2005 (Unaudited)
    
    
    3Consolidated Statements of Income (Unaudited) for the 13
weeks ended March 28, 2004 (as restated) and March 27, 2005
    
    
    5Consolidated Statements of Income (Unaudited) for the 26
weeks ended March 28, 2004 (as restated) and March 27, 2005
    
    
    6Consolidated Statements of Cash Flows (Unaudited) for the 26
weeks ended March 28, 2004 (as restated) and March 27, 2005
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.


Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14Item 3.

Quantitative and Qualitative Disclosure about Market Risk
    
    
    26Item 4.

Controls and Procedures
    
    
    26PART
II

OTHER INFORMATION
    
    
    
    


Item 1.

Legal Proceedings
    
    
    27Item 2.

Changes in Securities and Use of Proceeds
    
    
    27Item 3.

Defaults Upon Senior Securities
    
    
    27Item 4.

Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.

Other Information
    
    
    27Item 6.

Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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PART I  FINANCIAL INFORMATION 
 Item 1. FINANCIAL STATEMENTS STATER BROS. HOLDINGS INC. 
 CONSOLIDATED BALANCE SHEETS
  ASSETS Sept. 26,
    
    
    Mar. 27,2004
    
    
    2005(Unaudited)Current assetsCash and cash equivalents
    
    $
    301,947
    
    
    $
    246,359Restricted cash
    
    
    20,000
    
    
    
    29,000Receivables
    
    
    39,258
    
    
    
    41,640Income tax receivables
    
    
    
    
    
    
    7,532Inventories
    
    
    185,567
    
    
    
    188,738Prepaid expenses
    
    
    8,847
    
    
    
    11,110Deferred income taxes
    
    
    25,416
    
    
    
    24,427Total current assets
    
    
    581,035
    
    
    
    548,806Property and equipmentLand
    
    
    68,120
    
    
    
    81,892Buildings and improvements
    
    
    252,715
    
    
    

    271,628Store fixtures and equipment
    
    
    337,589
    
    
    
    357,176Property subject to capital leases
    
    
    25,891
    
    
    
    25,891684,315
    
    
    
    736,587Less accumulated depreciation and amortization
    
    
    279,459
    
    
    
    301,775404,856
    
    
    
    434,812Deferred debt issuance costs, net
    
    
    21,891
    
    
    
    20,532Deferred
income taxes, long-term
    
    
    
    
    
    
    1,796Other assets
    
    
    6,339
    
    
    
    6,23928,230
    
    
    
    28,567Total assets
    
    $
    1,014,121
    
    
    $
    1,012,185
 See accompanying notes to unaudited consolidated financial statements. 3




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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS DEFICIT Sept. 26,
    
    
    Mar. 27,2004
    
    
    2005(Unaudited)Current liabilitiesAccounts payable
    
    $
    142,077
    
    
    $
    131,444Accrued payroll and related expenses
    
    
    55,049
    
    
    
    53,848Other accrued liabilities
    
    
    62,745
    
    
    
    63,297Accrued income taxes
    
    
    62
    
    
    
    Current portion of capital lease obligations
    
    
    1,247
    
    
    
    1,170Total current liabilities
    
    
    261,180
    
    
    
    249,759Deferred income taxes
    
    
    2,209
    
    
    
    Long-term debt
    
    
    700,000
    
    
    
    700,000Capital lease obligations, less current portion
    
    
    9,470
    
    
    
    8,894Long-term portion of self-insurance and other
reserves
    
    
    35,654
    
    
    
    38,719Other long-term liabilities
    
    
    45,249
    
    
    
    47,591Total liabilities
    
    
    1,053,762
    
    
    
    1,044,963Stockholder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
    
    
    (49,381
    )
    
    
    (42,518
    )Total stockholders deficit
    
    
    (39,641
    )
    
    
    (32,778
    )Total liabilities and stockholders deficit
    
    $
    1,014,121
    
    
    $
    1,012,185
 See accompanying notes to unaudited consolidated financial statements. 4




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STATER BROS. HOLDINGS INC. 
 CONSOLIDATED STATEMENTS OF INCOME
 
 13 Weeks EndedMar. 28,
    
    
    Mar. 27,2004
    
    
    2005(as restated)Sales
    
    $
    989,418
    
    
    $
    842,852Cost of goods sold
    
    
    693,079
    
    
    
    624,610Gross profit
    
    
    296,339
    
    
    
    218,242Operating expenses:Selling, general and administrative expenses
    
    
    215,844
    
    
    
    189,336Depreciation and amortization
    
    
    7,958
    
    
    
    9,648Total operating expenses
    
    
    223,802
    
    
    
    198,984Operating profit
    
    
    72,537
    
    
    
    19,258Interest income
    
    
    464
    
    
    
    1,469Interest expense
    
    
    (13,137
    )
    
    
    (14,578
    )Interest from debt redemption
    
    
    (8,522
    )
    
    
    Equity in earnings from unconsolidated affiliate
    
    
    303
    
    
    
    Other
expenses  net
    
    
    (256
    )
    
    
    (184
    )Income before income taxes
    
    
    51,389
    
    
    
    5,965Income taxes
    
    
    21,203
    
    
    
    2,365Net income
    
    $
    30,186
    
    
    $
    3,600Earnings per share
    
    $
    788.13
    
    
    $
    93.99Average 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 INCOME
 
 26 Weeks EndedMar. 28,
    
    
    Mar. 27,2004
    
    
    2005(as restated)Sales
    
    $
    2,015,971
    
    
    $
    1,681,917Cost of goods sold
    
    
    1,414,750
    
    
    
    1,246,666Gross profit
    
    
    601,221
    
    
    
    435,251Operating expenses:Selling, general and administrative expenses
    
    
    442,695
    
    
    
    378,496Depreciation and amortization
    
    
    15,582
    
    
    
    19,097Total operating expenses
    
    
    458,277
    
    
    
    397,593Operating profit
    
    
    142,944
    
    
    
    37,658Interest income
    
    
    848
    
    
    
    2,661Interest expense
    
    
    (26,313
    )
    
    
    (28,674
    )Interest from debt redemption
    
    
    (8,522
    )
    
    
    Equity in earnings from unconsolidated affiliate
    
    
    929
    
    
    
    Other expenses -net
    
    
    (709
    )
    
    
    (299
    )Income before income taxes
    
    
    109,177
    
    
    
    11,346Income taxes
    
    
    44,440
    
    
    
    4,483Net income
    
    $
    64,737
    
    
    $
    6,863Earnings per share
    
    $
    1,690.22
    
    
    $
    179.19Average 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
 
 26 Weeks EndedMar. 28,
    
    
    Mar. 27,2004
    
    
    2005(as restated)Operating activities:Net income
    
    $
    64,737
    
    
    $
    6,863Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    19,729
    
    
    
    25,226Gain from litigation settlement
    
    
    (22,371
    )
    
    
    Deferred income taxes
    
    
    (126
    )
    
    
    (3,016
    )Loss on disposals of assets
    
    
    734
    
    
    
    388Net undistributed gain in investment in unconsolidated affiliate
    
    
    (929
    )
    
    
    Changes in operating assets and liabilities:Increase in restricted cash
    
    
    (20,000
    )
    
    
    (9,000
    )(Increase) decrease in receivables
    
    
    6,818
    
    
    
    (2,382
    )(Increase) decrease in income tax receivables
    
    
    4,354
    
    
    
    (7,532
    )Increase in inventories
    
    
    (21,437
    )
    
    
    (3,171
    )Increase in prepaid expenses
    
    
    (2,440
    )
    
    
    (2,263
    )Decrease in other assets
    
    
    11,944
    
    
    
    1,459Increase (decrease) in accounts payable
    
    
    17,315
    
    
    
    (10,633
    )Increase (decrease) in income taxes payable
    
    
    12,538
    
    
    
    (62
    )Increase in accrued liabilities, long-term portion of
self-insurance reserves and other liabilities
    
    
    55,002
    
    
    
    4,758Net cash provided by operating activities
    
    
    125,868
    
    
    
    635Investing activities:Purchase of property and equipment
    
    
    (34,731
    )
    
    
    (55,606
    )Proceeds from sale of property and equipment
    
    
    33
    
    
    
    36Net cash used in investing activities
    
    
    (34,698
    )
    
    
    (55,570
    )Financing activities:Principal payments on capital lease obligations
    
    
    (593
    )
    
    
    (653
    )Principal payments on long-term debt
    
    
    (53,500
    )
    
    
    Proceeds from equipment financing
    
    
    506
    
    
    
    Net cash used in financing activities
    
    
    (53,587
    )
    
    
    (653
    )Net increase (decrease) in cash and cash equivalents
    
    
    37,583
    
    
    
    (55,588
    )Cash and cash equivalents at beginning of period
    
    
    111,152
    
    
    
    301,947Cash and cash equivalents at end of period
    
    $
    148,735
    
    
    $
    246,359Interest paid
    
    $
    34,746
    
    
    $
    26,917Income taxes paid
    
    $
    27,500
    
    
    $
    15,165
 See accompanying notes to unaudited consolidated financial statements. 7




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STATER BROS. HOLDINGS INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 27, 2005
 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. 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 U.S. 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 weeks ended March 27, 2005 are not necessarily indicative of the results
that may be expected for the year ending September 25, 2005. The consolidated balance sheet at September 26, 2004 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial statements and footnotes thereto
included in Stater Bros. Holdings Inc.s (the Company) report on Form 10-K/A for the year ended
September 26, 2004. Note 2 - Restatement of Previously Issued Financial Statements As a result of a letter issued by the Chief Accountant of the Securities and Exchange
Commission dated February 7, 2005 to the American Institute of Certified Accountants wherein the
Chief Accountant clarified accounting for leases under U.S. generally accepted accounting
principles and other recent interpretations regarding certain operating lease accounting issues,
the Company completed a review of its accounting for leases and leasehold improvements underlying
its leases. As a result of this review, management determined that the useful lives used to
depreciate certain leasehold improvements were in excess of either their economic useful life, the
initial lease term for assets placed in service at the commencement of the lease or the remaining
lease term including any option periods that were reasonably assured of being exercised for other
leaseholds and were not consistent with the views expressed by the Chief Accountant of the
Securities and Exchange Commission and that a restatement of previously issued financial statements
was required. The Company has restated its consolidated statements of income and cash flows for the
thirteen and twenty-six week periods ended March 28, 2004 in order to correct the accounting error noted above.
The effect of the correction was a reduction in net income of $93,000 and $185,000 in the thirteen
and twenty-six week fiscal periods ended March 28, 2004, respectively. For further information
regarding the restatement of previous periods refer to the consolidated financial statements and
footnotes thereto included in Stater Bros. Holdings Inc.s report on Form 10-K/A for the year
ended September 26, 2004. 8




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)March 27, 2005 Note 2 - Restatement of Previously Issued Financial Statements (contd.) The following is a summary of the effect of these accounting changes on the
Companys consolidated statement of income for the thirteen week period ended March 28, 2004
(in thousands, except per share amount): As PreviouslyReported
    
    
    Adjustments
    
    
    RestatedSelling, general and administrative expenses
    
    $
    215,886
    
    
    $
    (42
    )
    
    $
    215,844Depreciation and amortization
    
    
    7,760
    
    
    
    198
    
    
    
    7,958Total operating expenses
    
    
    223,646
    
    
    
    156
    
    
    
    223,802Operating profit
    
    
    72,693
    
    
    
    (156
    )
    
    
    72,537Income before income taxes
    
    
    51,545
    
    
    
    (156
    )
    
    
    51,389Income taxes
    
    
    21,266
    
    
    
    (63
    )
    
    
    21,203Net income
    
    $
    30,279
    
    
    $
    (93
    )
    
    $
    30,186Earnings per common share
    
    $
    790.55
    
    
    $
    (2.42
    )
    
    $
    788.13
 The following is a summary of the effect of these accounting changes on the
Companys consolidated statement of income for the twenty-six week period ended March 28,
2004 (in thousands, except per share amount): As PreviouslyReported
    
    
    Adjustments
    
    
    RestatedSelling, general and administrative expenses
    
    $
    442,780
    
    
    $
    (85
    )
    
    $
    442,695Depreciation and amortization
    
    
    15,186
    
    
    
    396
    
    
    
    15,582Total operating expenses
    
    
    457,966
    
    
    
    311
    
    
    
    458,277Operating profit
    
    
    143,255
    
    
    
    (311
    )
    
    
    142,944Income before income taxes
    
    
    109,488
    
    
    
    (311
    )
    
    
    109,177Income taxes
    
    
    44,566
    
    
    
    (126
    )
    
    
    44,440Net income
    
    $
    64,922
    
    
    $
    (185
    )
    
    $
    64,737Earnings per common share
    
    $
    1,695.05
    
    
    $
    (4.83
    )
    
    $
    1,690.22
 The following is a summary of the effect of these accounting changes on the
Companys consolidated statement of cash flows for the twenty-six week period ended March 28,
2004 (in thousands): As PreviouslyReported
    
    
    Adjustments
    
    
    RestatedNet income
    
    $
    64,922
    
    
    $
    (185
    )
    
    $
    64,737Depreciation and amortization
    
    
    19,333
    
    
    
    396
    
    
    
    19,729Deferred income taxes
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )Accrued liabilities, long-term portion of
self
insurance reserves and other liabilities
    
    
    55,087
    
    
    
    (85
    )
    
    
    55,002Net cash provided by operating activities
    
    $
    125,868
    
    
    $
    
    
    
    $
    125,868
 9




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)March 27, 2005 Note 3  Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from 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. 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
    
    
    26 Weeks EndedMar. 28,
    
    
    Mar. 27,
    
    
    Mar. 28,
    
    
    Mar. 27,2004
    
    
    2005
    
    
    2004
    
    
    2005(in thousands)
    
    
    (in thousands)Service cost
 benefits earned
during
the period
    
    $
    571
    
    
    $
    604
    
    
    $
    1,143
    
    
    $
    1,207Interest cost on projected benefit
obligation
    
    
    613
    
    
    
    696
    
    
    
    1,226
    
    
    
    1,391Actual return on assets
    
    
    (498
    )
    
    
    (394
    )
    
    
    (996
    )
    
    
    (779
    )Net amortization and deferral
    
    
    6
    
    
    
    
    
    
    
    13
    
    
    
    Recognized gains or losses
    
    
    158
    
    
    
    192
    
    
    
    315
    
    
    
    384Prior service cost recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Net periodic pension cost
    
    $
    850
    
    
    $
    1,098
    
    
    $
    1,701
    
    
    $
    2,202Assumptions used for accounting
were:Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of increase in compensation
levels
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Expected long-term rate of return
on
assets
    
    
    7.00
    %
    
    
    5.00
    %
    
    
    7.00
    %
    
    
    5.00
    %
 10




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)March 27, 2005 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. 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, 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
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 Agreement was $22.4 million, which was recorded as a
gain in fiscal 2004 in the unaudited Consolidated Statements of
Income 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
 11




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Unaudited)March 27, 2005 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 all of the outstanding $53.5 million Santee Notes and paid a make-whole fee of $8.5
million. The Company recognized equity in earnings from unconsolidated affiliate of $303,000 and
$929,000 for the thirteen and twenty-six weeks ended March 28, 2004, respectively. Santee has
been included as a wholly-owned subsidiary of the Company for all of fiscal 2005. 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
    
    
    26 Weeks EndedMar. 28,
    
    
    Mar. 28,2004
    
    
    2004(as restated)
    
    
    (as restated)Sales
    
    $
    1,000,903
    
    
    $
    2,062,365Income before income taxes
    
    $
    51,854
    
    
    $
    111,098Net income
    
    $
    30,345
    
    
    $
    65,521Earnings per share
    
    $
    792.28
    
    
    $
    1,710.69
 Note 7  Issuance of 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 were unregistered at the time of issuance. On October 4, 2004, the
Company exchanged the unregistered 8.125% Senior Notes due June 15, 2012 and the unregistered
Floating Rate Senior Notes due June 15, 2010 for substantially identical registered 8.125% Senior
Notes due June 15, 2012 and registered Floating Rate Senior Notes due June 15, 2010. These Notes
are jointly and severally guaranteed by Stater Bros. Markets, Santee Dairies, Inc. and Stater
Bros. Development, Inc. (each a subsidiary guarantor, and collectively, the subsidiary
guarantors). The interest rate on the Floating Rate Senior Notes as of March 27, 2005 was 6.51%.
The Company incurred $22.7 million of debt issuance costs related to the issuance of these notes
which is being amortized over the term of the respective notes. 12




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)March 27, 2005 Note 7  Issuance of Debt and Early Extinguishment of Debt (contd.) 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
tender premium, fees and accrued interest on the purchased 10.75% Senior Notes, the early
retirement of the $20.0 million 5.0% Subordinated Note due March 2007 and the payment of a $45.0
million dividend to La Cadena Investments, the sole stockholder of the Company. On
August 16, 2004, the Company redeemed the remaining $41.0 million of outstanding 10.75%
Notes and paid accrued interest and a make-whole fee. Note 8  Corporate Office and Distribution Facilities Markets plans to build new corporate office and distribution facilities on approximately
160 acres of real property located on the former Norton Air Force Base (the NAFB) in the City of
San Bernardino, California. Markets has entered into an Owner Participation Agreement with the
Inland Valley Development Agency, a joint powers agency (the IVDA), which is the entity
responsible for the redevelopment of the NAFB, to acquire approximately 93 acres of the project
property owned by the IVDA. As a component of this agreement the IVDA is completing an agreement
with a sister governmental agency for acquisition of an additional 51 acres that would be
transferred or leased to Markets with a purchase option. Of the 160 acre project site, four parcels
consisting of approximately 16 acres are privately owned. Markets has acquired two of these parcels
and is negotiating the acquisition of the two remaining privately held parcels consisting of
approximately 7.6 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 occupying buildings on the
project property, to construct and complete the corporate office and distribution facilities and to
obtain all City of San Bernardino building permits and entitlements required for construction of
the project. Markets has also entered into an agreement with Hillwood/San Bernardino LLC
(Hillwood), the master developer of the NAFB, for
infrastructure improvements. Under the Hillwood
agreement, 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 for the project.
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 credit in
the approximate amount of $7.5 million. The NAFB site will be used to relocate and consolidate Markets corporate office and all
distribution facilities to a single integrated facility from the 13 distribution buildings at 7
different locations in 4 cities currently in use. This site is located within eight miles of the main
distribution facility in Colton, so there will be no change in the average distance between the
new facility and Markets retail supermarkets. The facility will consist of approximately 2.1
million square feet and will include Markets corporate office,
training facilities, truck maintenance and other
support facilities required for consolidation of all of its Southern California office,
distribution and maintenance operations. Taking into account the increased cost of raw materials
including steel, concrete and asphalt, the projected net cost of the facility is approximately
$220 million. Construction of the facility will be in three
components: 1  corporate office; 2  dry goods warehouse; and 3  perishable building. Construction of the first component is planned
to commence in September of 2005 with completion in the fall of 2006; construction of the second
component is planned to commence in February of 2006 with completion in the summer of 2007; and
construction of the third component is planned to commence April of 2006 with completion
in the fall of 2007. 13




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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 POLICIES The 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 U.S.
generally accepted accounting principles. The preparation of the
financial statements requires the use of estimates and judgments 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 statement
presentation and require the most difficult, subjective and complex
judgments on the part of management. Self-Insurance Reserves The Company is primarily self-insured, subject to certain
retention levels for workers compensation, automobile and general
liability costs. The Company is covered by umbrella insurance
policies for catastrophic events. The Company records its
self-insurance liability based on the claims filed and an estimate of
claims incurred but not yet reported. The estimates used by
management are based on the Companys historical experiences as well
as current facts and circumstances. The Company uses third party
actuarial analysis in making its estimates. Actuarial projections and
the Companys estimate of ultimate losses are subject to a high
degree of variability. The variability in the projections and
estimates are subject to, but not limited to, such factors as
judicial and administrative rulings, legislative actions, and changes
in compensation benefits structure. 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
discounted its workers compensation, automobile and general
liability insurance reserves at a discount rate of 5.5%. The analysis
of self-insurance liability is sensitive to the rate used to discount
the anticipated future cash flows for the workers compensation,
automobile and general liability insurance reserves. For fiscal 2005,
if a rate of 4.5% was used to discount the reserves, the reserves for
self-insurance would have been $828,000 higher than the reserves
calculated at a 5.5% discount rate. If a rate of 6.5% was used to
discount the reserves for fiscal 2005, the reserves for
self-insurance would be $786,000 lower than the reserves calculated
at a 5.5% discount rate. 14




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES (contd.) Advertising Allowances The Company receives co-operative advertising allowances from vendors for
advertising specific vendor products over specific periods of time. The Company
performs an analysis of the amount of co-operative advertising allowances
received from its vendors compared to the cost of running the corresponding
advertisement. Co-operative funds received in excess of the cost of advertising
is recorded as a reduction in cost of goods sold. Determining the amount of
advertising costs that corresponds to the co-operative advertising allowances
received requires judgment on the part of management. 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. On a monthly basis, management estimates the cost of advertisements
related to co-operative advertising allowances by dividing the direct
out-of-pocket costs for printing and distributing its print ads by the product of
total number of print ad pages run during the month and the number of individual
ads in a typical twice weekly advertisement. The dollar amount determined is
deemed to be the fair value of advertising costs. The fair value of advertising
costs is then compared to the amount of co-operative advertising allowances
received during the month and any allowances received in excess of cost are
recorded as a reduction in cost of goods sold. Employee Benefit Plans The determination of the Companys obligation and expense for pension benefits is
dependent, in part, on the Companys selection of certain assumptions used by its
actuaries in calculating these amounts. These assumptions are
disclosed in Note 5
in the accompanying notes to the unaudited consolidated financial statements and
include, among other things, the discount rate, the expected long-term rate of
return on plan assets and the rate of compensation changes. In accordance with U.S.
generally accepted accounting principles, actual results that differ from the
Companys assumptions are accumulated and amortized over future periods and,
therefore, affect recognized expense and the recorded obligation in such future
periods. While the Company believes its assumptions are appropriate, significant
differences in the Companys actual experience or significant changes in the
assumptions may materially affect the Companys pension obligations and expense for
pension benefits. For the twenty-six week
period ending March 27, 2005, the discount rate used to
calculate the net periodic pension cost was 6.0%. If the rate used to discount the
net periodic pension cost was 5.0%, net periodic pension cost for the twenty-six
week period would have been $326,000 higher than the cost calculated at a 6.0%
discount rate. If the rate used to calculate the net periodic pension cost was
7.0%, net periodic pension cost for the twenty-six week period would have been
$273,000 lower than the cost calculated at the 6.0% discount rate. The Company also participates in various multi-employer defined benefit retirement
plans for substantially all employees represented by unions. The Company is
required to make contributions to these plans in amounts established under
collective bargaining agreements, generally based on the number of hours worked.
Pension expenses for these plans are recognized as contributions are funded. While
the Company expects contributions to these plans to continue to increase as they
have in recent years, the amount of increase or decrease will depend upon the
outcome of collective bargaining, actions taken by trustees and the actual return
on assets held in these plans. For these reasons, it is not practicable to
determine the amount by which multi-employer pension contributions will increase
or decrease. 15




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Significant Accounting Policies In addition to the critical accounting policies disclosed above, there are certain accounting
policies that the Company has adopted that may differ from policies of other companies within the
same industry. Such differences in the treatment of these policies may be important to the
readers of the Companys report on Form 10-Q and the Companys unaudited consolidated financial
statements contained herein. For further information regarding the Companys accounting policies,
refer to the significant accounting policies included in the notes to the consolidated financial
statements contained herein and in the Companys report on Form 10-K/A for the year ended
September 26, 2004. OWNERSHIP OF THE COMPANY La 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 OPERATIONS The following table sets forth certain income statement components expressed as a percent of
sales for the thirteen and twenty-six weeks ended March 28, 2004
and March 27, 2005. Thirteen Weeks
    
    
    Twenty-six Weeks2004
    
    
    2005
    
    
    2004
    
    
    2005Sales
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    29.95
    
    
    
    25.89
    
    
    
    29.82
    
    
    
    25.88Operating expenses:Selling, general and
administrative expenses
    
    
    21.82
    
    
    
    22.46
    
    
    
    21.96
    
    
    
    22.50Depreciation and amortization
    
    
    0.80
    
    
    
    1.15
    
    
    
    0.77
    
    
    
    1.14Operating profit
    
    
    7.33
    
    
    
    2.28
    
    
    
    7.09
    
    
    
    2.24Interest income
    
    
    0.05
    
    
    
    0.17
    
    
    
    0.04
    
    
    
    0.16Interest expense
    
    
    (1.33
    )
    
    
    (1.73
    )
    
    
    (1.31
    )
    
    
    (1.70
    )Interest from debt redemption
    
    
    (0.86
    )
    
    
    
    
    
    
    (0.42
    )
    
    
    Equity in unconsolidated affiliate
    
    
    0.03
    
    
    
    
    
    
    
    0.05
    
    
    
    Other
expenses  net
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.03
    )Income before income taxes
    
    
    5.19
    %
    
    
    0.71
    %
    
    
    5.42
    %
    
    
    0.67
    %
 16




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) 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 fiscal 2004. 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. On February 29, 2004, members of the UFCW in Southern California ratified new collective
bargaining agreements and ended their strike. 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. The
increase in sales volume during the labor dispute had a significant and positive effect on the
Companys sales and results of operation in fiscal 2004. During the labor dispute, the Company
experienced a material increase in sales in fiscal 2004 over fiscal 2003. Additionally, the Company
was able to operate more efficiently as certain fixed costs remained unchanged while sales volumes
were increased. While the Company has been able to retain some of the customers acquired during the
labor dispute, the Companys sales volume in fiscal 2005 is significantly lower than fiscal 2004
sales volume. Fiscal 2005 results of operations compared to fiscal 2004 are significantly affected
by the unprecedented and material impact that the labor dispute had on the Companys sales volume
and results of operations in fiscal 2004. 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. For stores that have been closed, only prior year sales that correspond to the week the
stores were opened in the current year are used. Sales for the thirteen weeks ended March 27, 2005, the second quarter of fiscal 2005, decreased
$146.6 million or 14.81% and amounted to $842.9 million compared to $989.4 million for the same
period in the prior year. Sales for the twenty-six weeks ended March 27, 2005 decreased $334.1
million or 16.57% and amounted to $1,681.9 million compared to $2,016.0 million for the same
period in the prior year. The sales decrease in fiscal 2005 was partially offset by Santee being
consolidated for the entire thirteen and twenty-six weeks in fiscal 2005 versus being
consolidated for only a portion of the thirteen and twenty-six weeks of fiscal 2004. The
consolidation of Santee for the entire fiscal period increased sales over prior year sales by
$12.4 million or 1.28% and $40.3 million or 2.01% for the thirteen and twenty-six week periods of
fiscal 2005, respectively. Like store sales decreased $178.0 million or 18.35% for the second
quarter of fiscal 2005 over the prior year. In the twenty-six weeks ended March
27, 2005, total like store sales decreased $405.2 million or
20.31%. The decrease in like store sales for the thirteen and
twenty-six week periods ended March 27, 2005 is primarily the
result of increased sales during the labor dispute in fiscal 2004
versus more normalized sales in fiscal 2005. While sales have
decreased in fiscal 2005 over fiscal 2004, the Company has been able to retain some of the
customers picked up during the labor dispute. The Company opened four new stores in Southern
California, since the beginning of the second quarter of fiscal 2004, increasing sales for the
thirteen weeks ended March 27, 2005 by approximately $21.6 million. The closure of one store in September 2004
decreased second quarter fiscal 2005 sales by approximately $2.5 million when compared to the
prior year. 17




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) Gross profit for the thirteen weeks ended March 27, 2005, amounted to $218.2 million or 25.89% of
sales compared to $296.3 million or 29.95% of sales in the same period of the prior year. Gross
profit for the twenty-six weeks ended March 27, 2005 amounted to $435.3 million or 25.88% of sales
compared to $601.2 million or 29.82% 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 4.06% and 3.94%
for the thirteen and twenty-six weeks, respectively. The consolidation of Santee in fiscal 2005
decreased gross profit, as a percentage of sales, by approximately 0.43% and 0.42% in the thirteen
and twenty-six weeks, respectively. In fiscal 2004, the Company was able to leverage warehouse and
transportation expenses against the increased sales volume experienced during the labor dispute.
Second quarter 2005 warehouse and transportation costs were 3.56% of sales compared to 3.23% of
sales for the same period in 2004. For the twenty-six weeks ended March 27, 2005, warehouse and
transportation costs were 3.66% of sales compared to 3.16% of sales for the same period in 2004.
Gross profit, after the effect of warehouse and transportation costs and Santee, decreased 3.30%
and 3.02%, as a percentage of sales, for the thirteen and twenty-six weeks ending March 27, 2005,
respectively, compared to the prior year. This decrease is attributed in part to the Company having
a higher gross profit during the labor dispute as shrink, primarily in the perishable departments,
was reduced as a result of increased inventory turns. The remaining decrease in gross profit is
attributed to continued price reductions in fiscal 2005 as the Company responds to competitive
pressures to retain sales volume. Operating expenses include selling, general and administrative expenses, and depreciation and
amortization. For the thirteen weeks ended March 27, 2005, selling, general and administrative
expenses amounted to $189.3 million or 22.46% of sales compared to $215.8 million or 21.82% of
sales for the thirteen weeks ended March 28, 2004. For the twenty-six weeks ended March 27, 2005,
selling, general and administrative expenses amounted to $378.5 million or 22.50% of sales
compared to $442.7 million or 21.96% of sales for the same period of 2004. The increase 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 gain from
litigation settlement of 2.30% of sales in fiscal 2004 with no gain from litigation settlement in
fiscal 2005; a reduction of 2.76% of sales due to one time special payments in fiscal 2004 related
to the labor dispute and contract ratification; an increase of 0.38%, as a percentage of sales, in
remaining payroll related cost in the current year over the prior year; and an increase in the
current year over the prior year in advertising related costs of 0.30%, as a percentage of sales.
In addition, certain operating costs such as electricity, facility rents and general insurance
increased cumulatively by only $42,000 in fiscal 2005 compared to fiscal 2004, however, due to the
decreased sales volume in fiscal 2005, these expenses, as a percentage of sales, increased 0.43%. The increase in selling, general and administrative expenses, as a percentage of sales, for the
twenty-six week period of fiscal 2005 compared to fiscal 2004 included a gain from litigation
settlement of 1.12% of sales with no gain from litigation settlement in fiscal 2004; a reduction
of 1.70% of sales due to one time special payments in fiscal 2004 related to the labor dispute and
contract ratification; an increase of 0.48%, as a percentage of sales, in remaining payroll
related costs in the current year over the prior year; and an increase in fiscal 2005 over fiscal
2004 in advertising related costs of 0.30%, as a percentage of sales. In addition, certain
operating costs such as electricity, facilities rent and general insurance in total decreased
$864,000 in fiscal 2005 compared to fiscal 2004, however, due to the decrease in sales volume in
fiscal 2005, these expenses, as a percentage of sales, increased 0.44%. 18




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) 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 second quarters
of fiscal 2005 and fiscal 2004 is $287,000 and $269,000, respectively and $584,000 and $522,000 for
the twenty-six weeks ended March 27, 2005 and March 28, 2004, respectively. Depreciation and amortization expenses amounted to $9.6 million for the thirteen weeks ended March
27, 2005 and $8.0 million for the thirteen weeks ended March 28, 2004. Depreciation and
amortization expenses amounted to $19.1 million for the twenty-six weeks ended March 27, 2005 and
$15.6 million for the twenty-six weeks ended March 28, 2004. The increase in depreciation and
amortization expense in fiscal 2005 was primarily due to an increase in fixed assets. Included in
cost of goods sold is $3.1 million and $2.5 million of depreciation in the second quarters of
fiscal 2005 and fiscal 2004, respectively, and $6.1 million and $4.1 million in the twenty-six
week periods of fiscal 2005 and fiscal 2004, respectively, related to dairy production and
warehousing and distribution activities. Interest expense amounted to
$14.6 million for the second quarter of 2005 compared to $13.1
million for the second quarter of 2004. For the fiscal year-to-date of 2005 and 2004, interest
expense was $28.7 million and $26.3 million, respectively. In fiscal 2004, the Company paid a
make-whole payment of $8.5 million related to Santees redemption of all outstanding Santee Notes.
The make-whole payment has been classified under interest from debt redemption. The Companys equity in earnings from unconsolidated affiliate amounted to $303,000 for the second
quarter and $929,000 for the year-to-date of fiscal 2004. There was no equity in earnings from
unconsolidated affiliate in fiscal 2005 as Santee has been consolidated into the Companys results
of operations since February 6, 2004. Income before income taxes amounted to $6.0 million and $11.3 million in the thirteen and
twenty-six weeks ending March 27, 2005, respectively, and $51.4 million and $109.2 million in the
thirteen and twenty-six weeks ending March 28, 2004, respectively. Net income for the second quarter amounted to $3.6 million and $30.2 million for 2005 and 2004,
respectively. Net income for the year-to-date periods amounted to $6.9 million and $64.7 million
for 2005 and 2004, respectively. 19




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##### Table of Contents



STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The 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 March
27, 2005, 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 revolving line of credit includes a credit line of up to $5.0 million all of which may be
used to secure letters of credit. As of March 27, 2005, Santee had $2.1 million of outstanding
letters of credit in support of workers compensation liabilities and had $2.8 million available
under the revolving loan facility. Santees revolving line of credit expires in May 2007. The Company had no short-term borrowings outstanding as of March 27, 2005 and did not incur any
short-term borrowings during the twenty-six week period ended
March 27, 2005. 20




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##### Table of Contents



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 March 27, 2005. Contractual Cash Obligations(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    l Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years8.125% Senior Notes due June 2012Principal
    
    $
    525,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    525,000Interest
    
    
    319,922
    
    
    
    42,656
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    106,640844,922
    
    
    
    42,656
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    631,640Floating Rate Senior Notes due June
2010 (1)Principal
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,000Interest
    
    
    60,697
    
    
    
    11,551
    
    
    
    23,133
    
    
    
    23,101
    
    
    
    2,912235,697
    
    
    
    11,551
    
    
    
    23,133
    
    
    
    23,101
    
    
    
    177,912Capital
lease obligations (2)Principal
    
    
    10,064
    
    
    
    1,170
    
    
    
    2,129
    
    
    
    2,305
    
    
    
    4,460Interest
    
    
    7,190
    
    
    
    1,475
    
    
    
    2,489
    
    
    
    1,884
    
    
    
    1,34217,254
    
    
    
    2,645
    
    
    
    4,618
    
    
    
    4,189
    
    
    
    5,802Operating
leases  (2)
    
    
    249,051
    
    
    
    34,645
    
    
    
    56,394
    
    
    
    36,103
    
    
    
    121,909Total contractual cash obligations
    
    $
    1,346,924
    
    
    $
    91,497
    
    
    $
    169,458
    
    
    $
    148,706
    
    
    $
    937,263
 Other Commercial Commitments(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    l Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsStandby letters of
credit (3)
    
    $
    49,040
    
    
    $
    49,040
    
    
    $
    
    
    
    $
    
    
    
    $
    Total other
commercial
commitments
    
    $
    49,040
    
    
    $
    49,040
    
    
    $
    
    
    
    $
    
    
    
    $
    
   (l)
 Notescontinued 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)The Company leases the majority of its retail stores, offices,
warehouses and distribution facilities. Certain leases provide for additional rents based on
sales. Initial lease terms range from 3 to 55 years and substantially all leases provide for
renewal options. (3)Standby letters of credit are committed as security for workers compensation
obligations. Outstanding letters of credit expire between
September 2005 and February 2006. Working capital amounted to $299.0 million at March 27, 2005 and $319.9 million at
September 26, 2004, and the Companys current ratios were 2.20:1 and 2.22:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the industry. Net cash provided by operating activities for the twenty-six weeks ended March 27, 2005 was
$635,000 as compared to $125.9 million for the twenty-six weeks ended March 28, 2004. Cash flow
from operations was negatively impacted primarily by a significant decline in net income in fiscal
2005 as compared to fiscal 2004 as a result of the higher net income in fiscal 2004 from the labor
dispute. In addition to the substantial decrease in net income, cash was negatively impacted by a
decrease in accounts payable due to the timing of payments for product purchases, an increase in
income tax receivable, a decrease in income taxes payable due to the timing of estimated tax
payments, and the transfer of funds from cash and cash equivalents to restricted cash as collateral
for current year workers compensation reserve requirements. Other significant uses of cash included $31.0 million of capital expenditures during the period
for normal new store construction, store remodels and equipment purchases. Historically, new store
construction costs, store remodels and equipment expenditures are financed through operating cash
flows. In addition, $24.6 million was expended on the Companys new corporate office and
distribution facilities, which are being funded by cash allocated from the proceeds from the
issuance of the 8.125% Senior Notes and Floating Rate Senior Notes. Management estimates that
remaining fiscal 2005 expenditures for the new corporate office and distribution facilities will
be $32.4 million, which is expected to be funded from cash on hand. Management believes that operating cash flows and current cash reserves will be sufficient to
meet the Companys currently identified operating needs and scheduled capital expenditures.
However, management may elect to fund some capital expenditures through operating leases or
debt financing. There can be no assurance that such debt and lease financing will be available
to the Company in the future. Issuance of Debt and Early Retirement 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. The 8.125% Senior Notes
and the Floating Rate Senior Notes were unregistered at the time of issuance. On October 4,
2004, the Company exchanged the unregistered 8.125% Senior Notes due June 15, 2012 and the
unregistered Floating Rate Senior Notes due June 15, 2010 for substantially identical
registered 8.125% Senior Notes due June 15, 2012 and registered Floating Rate Senior Notes due
June 15, 2010. These Notes are jointly and severally guaranteed by Stater Bros. Markets, Santee
Dairies, Inc. and Stater Bros. Development, Inc. (each a subsidiary guarantor, and
collectively, the subsidiary guarantors). The interest rate on the Floating Rate Senior Notes
as of March 27, 2005 was 6.51%. The Company incurred $22.7 million of debt issuance costs
related to the issuance of these notes which is being amortized over the term of the respective
notes. 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.) 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 tender premium, fees and accrued interest on the purchased 10.75%
Senior Notes, the early retirement of the $20.0 million 5.0% Subordinated Note due March
2007 and the payment of a $45.0 million dividend to La Cadena Investments, the sole
stockholder of the Company. On August 16, 2004, the Company redeemed the remaining $41.0 million of outstanding
10.75% Notes and paid accrued interest and a make-whole fee. The Credit Facilities On June 17, 2004, the Company entered into an amended and restated credit
facility (the 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 Credit Facility to an
aggregate principal amount of $100.0 million. Subject to certain restrictions, the
entire amount of the Credit Facility may be used for loans, letters of credit, or a
combination thereof. Borrowings under the Credit Facility are unsecured and 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 the new distribution facilities and workers compensation insurance
obligations. The availability of the loans and letters of credit are subject to certain
borrowing restrictions. The 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 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 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 Credit
Facility must be repaid for a period of ten consecutive days semi-annually. Loans under the Credit Facility may be repaid and re-borrowed. The loans under the
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 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. 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 Facilities (contd.) The Credit Facility requires Markets to meet certain financial tests,
including minimum net worth and other tests. The 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 Credit Facility also contains covenants that apply to
the Company and its subsidiaries, and the Company is a party to the Credit
Facility for purposes of these covenants. These covenants, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, make
restricted payments, enter into transactions with affiliates, and make 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 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 November 2004, 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 all of which may be used to secure letters of credit. Letters of credit
under the Revolver are expected to be used for workers compensation insurance
obligations and for general corporate purposes. Borrowings under the Revolver are
secured by the receivables of Santee. The Revolver is scheduled to expire on May
31, 2007. 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 letters 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 March 27, 2005, 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
8.125% Senior Notes due 2012 and its Floating Rate Senior Notes due 2010. As of
March 27, 2005, 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. Labor Relations The 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. 24




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STATER BROS. HOLDINGS
INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 EFFECT OF INFLATION AND COMPETITION The 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 conducts business in one industry segment, the operation of retail
food supermarkets, which offer for sale to the public most merchandise typically
found in supermarkets. The Company operates in the highly competitive supermarket
industry, which is characterized by low profit margins. Competitive factors
typically include the price, quality and variety of products, customer service,
and store location and condition. The Company believes that its competitive
strengths include its specialty services, everyday low prices, breadth of product
selection, high product quality, one-stop shopping convenience, attention to
customer service, convenient store locations, a long history of community
involvement, established long-term customer base in the Inland Empire (consisting
of San Bernardino and Riverside counties) and a growing customer awareness in the
counties of Orange, San Diego and Los Angeles. Given the wide assortment of products it offers, the Company competes with various
types of retailers, including local, regional and national supermarket retailers,
convenience stores, retail drug stores, national general merchandisers and
discount retailers, membership clubs and warehouse stores. The Companys primary
competitors include Vons, Albertsons, Ralphs, and a number of independent
supermarket operators. The Company, and its competitors, will be faced with
additional competitive pressures with the entry in its geographic market area of
Wal-Marts Supercenter format stores. Wal-Mart currently has a number of Wal-Mart
discount locations and Sams Clubs within the Companys marketing area selling a
variety of grocery products. Recent events have increased competitive pressures.
Wal-Mart has begun to open their Supercenter format stores in the Companys market
area and Vons, Albertsons and Ralphs, post labor dispute, continue to apply
pricing pressures as they attempt to win back customers lost during the labor
dispute. The Company believes that its everyday low prices, breadth of product
offering, specialty service department and long-term customer relationships will
help it withstand the increased competitive environment. 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.   25




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STATER BROS. HOLDINGS INC.
MARCH 27, 2005 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 March 27, 2005, the floating interest rate was 6.51%. 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 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
swap agreements, derivative financial instruments or other type of financial
transactions to manage interest rate risk. 
 Item 4. CONTROLS AND PROCEDURES As of the quarter ended
March 27, 2005, 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 ended March 27, 2005, 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. 26




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STATER BROS. HOLDINGS INC. MARCH 27, 2005
 
 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/A for the fiscal year ended
September 26, 2004.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  None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES  None 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  None 
 Item 5. OTHER INFORMATION  None 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    Exhibits31.1
    Certification of Principal Executive Officer
pursuant to Section 302 (a) of the Sarbanes-Oxley Act.31.2
    Certification of Principal Financial Officer pursuant to Section 302 (a) of
the Sarbanes-Oxley Act.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-KNone. 27




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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: May 11, 2005
    
    /s/
    
    Jack H. BrownJack H. BrownChairman of the Board, President,
and Chief Executive Officer(Principal Executive Officer)
 Date: May 11, 2005
    
    /s/
    
    Phillip J. SmithPhillip J. SmithSenior Vice President and Chief Financial Officer(Principal Financial Officer)
 28