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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) [X]
 For the quarterly period ended March 28, 2004 or [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition from ____ to ____ Commission file number 001-13222 STATER BROS. HOLDINGS INC.  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 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 May 12, 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.
MARCH 28, 2004 INDEX PagePART I FINANCIAL INFORMATION (Unaudited)Item 1. Financial StatementsConsolidated Balance Sheets (Unaudited) as of September 28, 2003
and March 28, 2004
    
    
    3Consolidated Statements of Income (Unaudited) for the 26 weeks ended
March 30, 2003 and March 28, 2004
    
    
    5Consolidated Statements of Income (Unaudited) for the 13 weeks ended
March 30, 2003 and March 28, 2004
    
    
    6Consolidated Statements of Cash Flows (Unaudited) for the 26 weeks ended
March 30, 2003 and March 28, 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
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATIONItem 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. 28,
    
    Mar. 28,2003
    
    2004Current assetsCash and cash equivalents
    
    $
    111,152
    
    
    $
    148,735Restricted cash
    
    
    
    
    
    
    20,000Receivables
    
    
    23,217
    
    
    
    27,691Income tax receivables
    
    
    4,354
    
    
    
    Inventories
    
    
    172,267
    
    
    
    196,400Prepaid expenses
    
    
    6,962
    
    
    
    10,571Deferred income taxes
    
    
    14,793
    
    
    
    14,793Total current assets
    
    
    332,745
    
    
    
    418,190Investment in unconsolidated affiliate
    
    
    16,910
    
    
    
    Property and equipmentLand
    
    
    50,930
    
    
    
    68,120Buildings and improvements
    
    
    200,349
    
    
    
    251,831Store fixtures and equipment
    
    
    242,562
    
    
    
    322,019Property subject to capital leases
    
    
    24,670
    
    
    
    25,676518,511
    
    
    
    667,646Less accumulated depreciation and amortization
    
    
    216,366
    
    
    
    259,591302,145
    
    
    
    408,055Deferred debt issuance costs, net
    
    
    10,486
    
    
    
    8,762Other assets
    
    
    5,540
    
    
    
    6,42516,026
    
    
    
    15,187Total assets
    
    $
    667,826
    
    
    $
    841,432
 See accompanying notes to unaudited consolidated financial statements 3




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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS(Continued)
(Unaudited)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) Sept. 28,
    
    Mar. 28,2003
    
    2004Current liabilitiesAccounts payable
    
    $
    112,458
    
    
    $
    137,407Accrued payroll and related expenses
    
    
    44,362
    
    
    
    81,197Income taxes payable
    
    
    
    
    
    
    9,744Other accrued liabilities
    
    
    50,352
    
    
    
    48,993Current portion of capital lease obligations
    
    
    1,056
    
    
    
    1,267Total current liabilities
    
    
    208,228
    
    
    
    278,608Deferred income taxes
    
    
    6,708
    
    
    
    12,881Long-term debt
    
    
    458,750
    
    
    
    458,750Capital lease obligations, less current portion
    
    
    9,926
    
    
    
    9,909Long-term portion of self-insurance and other reserves
    
    
    27,941
    
    
    
    40,316Other long-term liabilities
    
    
    20,267
    
    
    
    40,040Total liabilities
    
    
    731,820
    
    
    
    840,504Stockholders equity (deficit)Common 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
    )
    
    
    (8,812
    )Total stockholders equity (deficit)
    
    
    (63,994
    )
    
    
    928Total liabilities and stockholders equity (deficit)
    
    $
    667,826
    
    
    $
    841,432
 See accompanying notes to unaudited consolidated financial statements 4




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STATER BROS. HOLDINGS INC. 
 CONSOLIDATED STATEMENTS OF INCOME
  26 Weeks EndedMar. 30,
    
    Mar. 28,2003
    
    2004Sales
    
    $
    1,358,705
    
    
    $
    2,015,971Cost of goods sold
    
    
    985,872
    
    
    
    1,414,750Gross profit
    
    
    372,833
    
    
    
    601,221Operating expenses:Selling, general and administrative expenses
    
    
    323,244
    
    
    
    442,780Depreciation and amortization
    
    
    12,745
    
    
    
    15,186Total operating expenses
    
    
    335,989
    
    
    
    457,966Operating profit
    
    
    36,844
    
    
    
    143,255Interest income
    
    
    526
    
    
    
    848Interest expense
    
    
    (26,559
    )
    
    
    (34,835
    )Equity in earnings from unconsolidated affiliate
    
    
    979
    
    
    
    929Other income (expenses) - net
    
    
    (627
    )
    
    
    (709
    )Income before income taxes
    
    
    11,163
    
    
    
    109,488Income taxes
    
    
    4,404
    
    
    
    44,566Net income
    
    $
    6,759
    
    
    $
    64,922Earnings per share
    
    $
    176.47
    
    
    $
    1,695.05Average 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
  13 Weeks EndedMar. 30,
    
    Mar. 28,2003
    
    2004Sales
    
    $
    677,196
    
    
    $
    989,418Cost of goods sold
    
    
    489,138
    
    
    
    693,079Gross profit
    
    
    188,058
    
    
    
    296,339Operating expenses:Selling, general and administrative expenses
    
    
    162,226
    
    
    
    215,886Depreciation and amortization
    
    
    6,417
    
    
    
    7,760Total operating expenses
    
    
    168,643
    
    
    
    223,646Operating profit
    
    
    19,415
    
    
    
    72,693Interest income
    
    
    254
    
    
    
    464Interest expense
    
    
    (13,301
    )
    
    
    (21,659
    )Equity in earnings from unconsolidated affiliate
    
    
    233
    
    
    
    303Other income (expenses) - net
    
    
    (239
    )
    
    
    (256
    )Income before income taxes
    
    
    6,362
    
    
    
    51,545Income taxes
    
    
    2,531
    
    
    
    21,266Net income
    
    $
    3,831
    
    
    $
    30,279Earnings per share
    
    $
    100.02
    
    
    $
    790.55Average 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. 30,
    
    Mar. 28,2003
    
    2004Operating activities:Net income
    
    $
    6,759
    
    
    $
    64,922Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    16,449
    
    
    
    19,333Gain from litigation settlement
    
    
    
    
    
    
    (22,371
    )Loss on disposals of assets
    
    
    627
    
    
    
    734Net undistributed gain in investment in unconsolidated affiliate
    
    
    (979
    )
    
    
    (929
    )Changes in operating assets and liabilities:Increase in restricted cash
    
    
    
    
    
    
    (20,000
    )Decrease in receivables
    
    
    2,794
    
    
    
    6,818Decrease in income tax receivables
    
    
    6,204
    
    
    
    4,354(Increase) decrease in inventories
    
    
    5,689
    
    
    
    (21,437
    )Increase in prepaid expenses
    
    
    (1,569
    )
    
    
    (2,440
    )Decrease in other assets
    
    
    1,670
    
    
    
    11,944Increase (decrease) in accounts payable
    
    
    (911
    )
    
    
    17,315Increase in income taxes payable
    
    
    
    
    
    
    12,538Increase in accrued liabilities, long-term portion
of self-insurance reserves and other liabilities
    
    
    6,331
    
    
    
    55,087Net cash provided by operating activities
    
    
    43,064
    
    
    
    125,868Investing activities:Purchase of property and equipment
    
    
    (24,717
    )
    
    
    (34,731
    )Proceeds from sale of property and equipment
    
    
    64
    
    
    
    33Net cash used in investing activities
    
    
    (24,653
    )
    
    
    (34,698
    )Financing activities:Proceeds
from equipment financing
    
    
    
    
    
    
    506Principal payments on long-term debt
    
    
    
    
    
    
    (53,500
    )Principal payments on capital lease obligations
    
    
    (580
    )
    
    
    (593
    )Net cash used in financing activities
    
    
    (580
    )
    
    
    (53,587
    )Net increase in cash and cash equivalents
    
    
    17,831
    
    
    
    37,583Cash and cash equivalents at beginning of period
    
    
    81,043
    
    
    
    111,152Cash and cash equivalents at end of period
    
    $
    98,874
    
    
    $
    148,735Interest paid
    
    $
    25,050
    
    
    $
    34,746Income taxes paid
    
    
    
    
    
    $
    27,500
 See accompanying notes to unaudited consolidated financial statements 7




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STATER BROS. HOLDINGS INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 28, 2004
 Note 1 - Basis of Presentation In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
Company) and its subsidiaries as of September 28, 2003 and March 28, 2004,
and the results of its operations and cash flows for the twenty-six and
thirteen weeks ended March 30, 2003 and March 28, 2004. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys
latest annual report filed on Form 10-K. The operating results for the
twenty-six and thirteen weeks ended March 28, 2004 are not necessarily
indicative of the results of operations for a full year. 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 effect 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 - Income Taxes The provision for income taxes for the twenty-six weeks ended March 30,
2003 and March 28, 2004 consists of the following: 26 Weeks EndedMar. 30, 2003
    
    Mar. 28, 2004(In thousands)CurrentFederal income taxes
    
    $
    3,408
    
    
    $
    34,877State income taxes
    
    
    996
    
    
    
    9,689$
    4,404
    
    
    $
    44,566
 8




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)MARCH 28, 2004 Note 6 - 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. 30,
    
    Mar. 28,
    
    Mar. 30,
    
    Mar. 28,2003
    
    2004
    
    2003
    
    2004(In thousands)Service cost
- benefits earned during
the period
    
    $
    524
    
    
    $
    571
    
    
    $
    1,048
    
    
    $
    1,143Interest cost on projected benefit
obligation
    
    
    564
    
    
    
    613
    
    
    
    1,128
    
    
    
    1,226Actual return on assets
    
    
    (512
    )
    
    
    (498
    )
    
    
    (1,023
    )
    
    
    (996
    )Net amortization and deferral
    
    
    6
    
    
    
    6
    
    
    
    13
    
    
    
    13Recognized gains or losses
    
    
    117
    
    
    
    158
    
    
    
    233
    
    
    
    315Prior service cost recognized
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Net periodic pension cost
    
    $
    699
    
    
    $
    850
    
    
    $
    1,398
    
    
    $
    1,701
 Note 7 - 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)MARCH 28, 2004 Note 7  Santee (contd.) Certain disagreements arose regarding the PPAs and other matters between
Markets and Ralphs 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 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: As of February 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
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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)MARCH 28, 2004 Note 7  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
    
    26 Weeks EndedMar. 30,
    
    Mar. 28,
    
    Mar. 30,
    
    Mar. 28,2003
    
    2004
    
    2003
    
    2004Sales
    
    $
    703,537
    
    
    $
    1,000,903
    
    
    $
    1,413,297
    
    
    $
    2,062,365Income before income taxes
    
    
    6,907
    
    
    
    52,010
    
    
    
    13,092
    
    
    
    111,409Net income
    
    $
    4,066
    
    
    $
    30,438
    
    
    $
    7,456
    
    
    $
    65,706Earnings per share
    
    $
    106.16
    
    
    $
    794.70
    
    
    $
    194.67
    
    
    $
    1,715.52
 11




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)MARCH 28, 2004 Note 8  Corporate Office and Warehouse Facilities Stater Bros. Markets is currently in negotiations to acquire approximately
161 acres located on the former Norton Air Force Base in the City of San
Bernardino, California. The Company 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 91 acres of the project property and is
negotiating with another governmental agency for an additional 46.6 acres that
would ultimately be transferred under lease to the Company with a purchase
option. The agreement with the IVDA requires the Company 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. The Company 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, the Company will share costs associated with
the infrastructure improvements for water, sewer, streets and utilities which
will be required by the City of San Bernardino. The Company, 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 the Company 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 Stater Bros. Markets retail
supermarkets. The facility will consist of approximately 1,900,000 square feet
and will include Stater Bros. Markets corporate headquarters, truck maintenance
and other support facilities required for consolidation of all of its Southern
California office, warehousing, distribution and maintenance operations. The
projected cost of the facility is approximately $190 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 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
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 Recognition Markets, 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 Sold Included 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 Eliminations Markets 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 Expenses Included 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 cost 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 Allowances The Company receives certain allowances from its vendors that relate
to the purchase and promotion of certain products. All allowances,
except for advertising allowances described under Advertising
Allowance, 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 Allowances The 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.) Advertising The Companys advertising costs, net of vendor allowances for
co-operative advertising, are recognized in the period the advertising
is incurred and are included in selling, general and administrative
expenses. Leases Certain of the Companys operating leases provide for minimum annual
payments that change over the life of the lease. The aggregate
minimum annual payments are expensed on 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 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 discounts its
workers compensation, automobile and general liability insurance
reserves at a discount rate of approximately 7.5%. Inventories Inventories 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 Costs Direct costs incurred as a result of financing transactions are
capitalized and amortized to expense over the term of the applicable
debt agreements. Deferred Income Taxes Although 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. 15




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES (contd.) Phantom Stock Plan It is the Companys policy to expense phantom stock units to the
extent that they vest and appreciate during the accounting period. 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 30, 2003. Thirteen Weeks
    
    Twenty-Six Weeks2003
    
    2004
    
    2003
    
    2004Sales
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    27.77
    
    
    
    29.95
    
    
    
    27.44
    
    
    
    29.82Operating expenses:Selling, general and
administrative expenses
    
    
    23.95
    
    
    
    21.82
    
    
    
    23.79
    
    
    
    21.96Depreciation and amortization
    
    
    0.95
    
    
    
    0.78
    
    
    
    0.94
    
    
    
    0.75Operating profit
    
    
    2.87
    
    
    
    7.35
    
    
    
    2.71
    
    
    
    7.11Interest income
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.04Interest expense
    
    
    (1.96
    )
    
    
    (2.19
    )
    
    
    (1.95
    )
    
    
    (1.73
    )Equity in unconsolidated affiliate
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.07
    
    
    
    0.05Other income
(expenses) - net
    
    
    (0.04
    )
    
    
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.04
    )Income before income taxes
    
    
    0.94
    %
    
    
    5.21
    %
    
    
    0.82
    %
    
    
    5.43
    %
 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). Throughout Managements discussion and analysis of financial condition
and results of operations for the twenty-six weeks and quarter ended
March 28, 2004 is the pervasive and over-riding impact of the recent
labor dispute in Southern California, as described below, on the
Companys financial condition and results of operations. 16




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) Beginning October 11, 2003 and continuing until February 29, 2004,
there was a labor dispute between the Companys three major
competitors Vons, Albertsons and Ralphs and the United Food and
Commercial Workers Union (UFCW). The Company and its three major
competitors had the same collective bargaining agreement with the UFCW
that expired in October of 2003. On April 14, 2003, the Company
signed an agreement with the UFCW which stated that the Company would
accept the same contract terms that the UFCW negotiates with Vons,
Albertsons and Ralphs. In return, the UFCW agreed not to strike the
Company. The April 14, 2003 agreement extended the expiring
collective bargaining agreement until a new collective bargaining
agreement was negotiated. The Company was not a party to the contract
negotiations between the UFCW and Vons, Albertsons and Ralphs. On October 11, 2003, the UFCW declared a strike against Vons; in turn,
Albertsons and Ralphs locked out all of their UFCW employees (the
labor dispute). Initially, the UFCW placed picket lines at all Vons,
Albertsons and Ralphs stores in Southern California. Subsequently,
the UFCW removed the picket lines at most of the Ralphs stores. 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 twenty-six weeks ended March 28, 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 March 28, 2004,
the Company had 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. Management anticipates
that some of the retained volume realized to date will be lost as its
major competitors take marketing steps of their own to win back the
business lost during the labor dispute. The ultimate amount of
increased volume retained, if any, cannot be forecast with any degree
of certainty. Sales for the thirteen weeks ended March 28, 2004, the second quarter
of fiscal 2004, increased $312.2 million or 46.11% and amounted to
$989.4 million compared to $677.2 million for the same period in the
prior year. Sales for the twenty-six weeks ended March 28, 2004,
increased $657.3 million or 48.37% and amounted to $2.016 billion
compared to $1.359 billion for the same period in the prior year. The
increase in sales for both the thirteen weeks and twenty-six weeks
ended March 28, 2004 over the same periods in the prior year is due
primarily to the effect of the labor dispute and the retention, after
the labor dispute, of some of the customers gained during the labor
dispute. 17




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) 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. For the portion of the second quarter of fiscal 2004 during the labor
dispute, like store sales increased $244.9 million or 52.09% compared
to the same time frame in fiscal 2003. For the portion of the fiscal
2004 second quarter after the labor dispute, like store sales
increased $41.1 million or 19.84% over the same time frame of the
previous year. The consolidation of Santees sales contributed
approximately $16.4 million of additional sales over the prior year
quarter. In total, like store sales increased $286.0 million or
42.23% for the second quarter of fiscal 2004. In the twenty-six weeks
ended March 28, 2004, total like store sales increased $622.0 million
or 45.78%. For the portion of the twenty-six week period prior to the
labor dispute, like store sales increased $4.7 million or 4.93% over
the same time frame in the prior year. For the portion of the
twenty-six 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 twenty-six week period after the labor
dispute, like store sales increased $41.1 million or 19.84% over the
same time frame of fiscal 2004. The consolidation of Santees sales
contributed approximately $16.4 million of additional sales over the
prior year twenty-six weeks. The remaining sales increase for the
thirteen and twenty-six weeks is due to a store opened in the third
quarter of fiscal 2003 in Corona, California and a store added in the
second quarter of fiscal 2004 in Moreno Valley, California. Gross profit for the thirteen weeks ended March 28, 2004, amounted to
$296.3 million or 29.95% of sales compared to $188.1 million or 27.77%
of sales in the same period of the prior year. Gross profit for the
twenty-six weeks ended March 28, 2004, amounted to $601.2 million or
29.82% of sales compared to $372.8 million or 27.44% of sales in the
same period of the prior year. Gross profit, as percentage of sales,
increased 2.18% and 2.38% for the thirteen weeks and twenty-six weeks,
respectively. The increase in gross profit, as a percentage of sales,
is due in part to improvement of approximately 1.03% and 0.95% for the
thirteen weeks and twenty-six weeks, respectively, from increased
efficiencies in labor and facilities usage within the warehouse and
distribution operations resulting from the increased sales volume.
The remaining improvement in gross profit, as a percentage of sales,
is due primarily to reduced inventory shrink in the stores perishable
departments resulting from increased inventory turns. Operating expenses include selling, general and administrative
expenses, and depreciation and amortization. For the thirteen weeks
ended March 28, 2004, selling, general and administrative expenses
amounted to $215.9 million or 21.82% of sales compared to $162.2
million or 23.95% of sales for the thirteen weeks ended March 30,
2003. For the twenty-six weeks ended March 28, 2004, selling, general
and administrative expenses amounted to $442.8 million or 21.96% of
sales compared to $323.2 million or 23.79% of sales for the twenty-six
weeks ended March 30, 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.) Included in selling, general and administrative expenses for the
thirteen week and twenty-six week fiscal 2004 is a $22.4 million gain
from a settlement agreement reached with Hughes (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 2.26% and 1.11% for the thirteen week and twenty-six week
fiscal 2004. Included in the twenty-six week fiscal 2004 selling, general and
administrative expenses is $34.0 million, of which $26.9 million was
expensed in the second quarter of fiscal 2004, for one time special
payments related to the labor dispute and contract ratification. The
Company made one time 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, is also
attributed to the Company being able to leverage direct labor cost and
fixed facility cost over the increased sales volume resulting from the
labor dispute. As the reduction in selling, general and administrative expenses, as a
percentage of sales, was caused by the gain from litigation settlement
and by a material change in sales volume resulting from the labor
dispute, Management does not foresee that the reduction in selling
general and administrative expenses, as a percentage of sales, will
continue now that the litigation has been settled and the labor
dispute resolved. 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 second quarters of fiscal
2004 and fiscal 2003 is $269,000 and $226,000, respectively, and the
amount in the twenty-six week fiscal 2004 and fiscal 2003 is $522,000
and $441,000, respectively. Depreciation and amortization expenses amounted to $7.8 million for
the thirteen weeks ended March 28, 2004 and $6.4 million for the
thirteen weeks ended March 30, 2003. Depreciation and amortization
expense was $15.2 million and $12.7 million for the twenty-six week
periods ended March 28, 2004 and March 30, 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 $2.5 million and $1.9 million of depreciation in the
second quarters of fiscal 2004 and fiscal 2003, respectively, and $4.1
million and $3.7 million of depreciation in the twenty-six week fiscal
2004 and fiscal 2003, respectively, related to warehousing and
distribution activities. 19




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (contd.) Operating profit for the second quarter of 2004 amounted to $72.7
million or 7.35% of sales compared to $19.4 million or 2.87% of sales
for the second quarter of 2003. Operating profit for the fiscal
year-to-date of 2004 amounted to $143.3 million or 7.11% of sales
compared to $36.8 million or 2.71% of sales for the fiscal
year-to-date of 2003. Interest expense amounted to $21.7 million for the second quarter of
2004 compared to $13.3 million for the second quarter of 2003. For
the fiscal year-to-date of 2004 and 2003, interest expense amounted to
$34.8 million and $26.6 million, respectively. Interest expense for
the thirteen weeks and twenty-six weeks of fiscal 2004 includes 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 $303,000 for the second quarter of fiscal 2004 compared to
$233,000 in the second quarter of the prior year. 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
$979,000, 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 before income taxes amounted to $51.5 million and $6.4 million
for the second quarter of 2004 and 2003, respectively. Income before
income taxes amounted to $109.5 million and $11.2 million for the
twenty-six weeks year-to-date periods of 2004 and 2003, respectively. Net income for the second quarter amounted to $30.3 million and $3.8
million for 2004 and 2003, respectively. Net income for the fiscal
year-to-date periods amounted to $64.9 million and $6.8 million for
2004 and 2003, respectively. 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. Markets credit agreement, as amended, became effective
August 6, 1999 and expires in March 2005 and consists of a revolving
loan facility for working capital of $75.0 million which includes a
Letter of Credit Sublimit with a maximum availability of $50 million.
As of March 28, 2004, Markets 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 and as security for certain rent obligations. Santees
credit agreement, as amended, became effective December 1999 and
expires in September 2004 and consist 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. As of March 28, 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 March 28, 2004. Contractual Cash Obligations (In thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years10.75% Senior Notes due August 2006Principal
    
    $
    438,750
    
    
    $
    
    
    
    $
    438,750
    
    
    $
    
    
    
    $
    Interest
    
    
    113,984
    
    
    
    47,166
    
    
    
    66,818
    
    
    
    
    
    
    
    552,734
    
    
    
    47,166
    
    
    
    505,568
    
    
    
    
    
    
    
    5.0% Subordinated Note due March 2007Principal
    
    
    20,000
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    Interest
    
    
    3,000
    
    
    
    1,000
    
    
    
    2,000
    
    
    
    
    
    
    
    23,000
    
    
    
    1,000
    
    
    
    22,000
    
    
    
    
    
    
    
    Capital Lease Obligations (1)Principal
    
    
    11,176
    
    
    
    1,267
    
    
    
    2,221
    
    
    
    1,990
    
    
    
    5,698Interest
    
    
    8,834
    
    
    
    1,662
    
    
    
    2,774
    
    
    
    2,199
    
    
    
    2,19920,010
    
    
    
    2,929
    
    
    
    4,995
    
    
    
    4,189
    
    
    
    7,897Operating Leases (1)
    
    
    232,661
    
    
    
    32,829
    
    
    
    58,056
    
    
    
    40,703
    
    
    
    101,073Total Contractual Cash Obligations
    
    $
    828,405
    
    
    $
    83,924
    
    
    $
    590,619
    
    
    $
    44,892
    
    
    $
    108,970Other Commercial Commitments (In thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years

    
    4-5 Years
    
    5 YearsStandby Letters of Credit (2)
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Other Commercial Commitments
    
    $
    48,240
    
    
    $
    48,240
    
    
    $

    
    
    
    $
    
    
    
    $
    
 (1) 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. (2) Standby letters of credit are committed as security for workers
compensation obligations and as security for current rent obligations.
Outstanding letters of credit expire between September 2004 and
February 2005. 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.) Working capital amounted to $139.6 million at March 28, 2004 and
$124.5 million at September 28, 2003, and the Companys current ratios
were 1.50:1, 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 twenty-six weeks
ended March 28, 2004 amounted to $125.9 million compared to $43.1
million for the twenty-six weeks ended March 30, 2003. Fluctuations
in net cash provided by operating activities are not unusual in the
industry. Cash provided by operating activities in fiscal 2004 of
$125.9 million consisted of a $55.1 million increase in accrued
liabilities, self-insurance reserves and other liabilities, a $12.5
million increase in income taxes payable, an increase of $17.3 million
in accounts payable, a $11.9 million decrease in other assets and
$19.3 million of depreciation and amortization; offset by a $20.0
million increase in restricted cash, a $21.4 million increase in
inventory and a $22.4 million gain from litigation settlement. Cash
provided by operating activities in fiscal 2003 of $43.1 million
consisted of a $6.3 million increase in accrued liabilities,
self-insurance reserves and other liabilities, a decrease of $6.2
million in income tax receivables, a decrease of $5.7 million in
inventory, a decrease in receivables of $2.8 million, a decrease in
other assets of $1.7 million and $16.4 million of depreciation and
amortization offset by an increase in prepaid expenses of $1.6
million. Net cash used in investing activities for the twenty-six weeks ended
March 28, 2004, amounted to $34.7 million compared to $24.7 million
for the twenty-six weeks ended March 30, 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 $34.7
million in the fiscal year-to-date of 2004 compared to $24.7 million
in the fiscal year-to-date of 2003. Net cash used by financing activities amounted to $53.6 million and
$0.6 million for the twenty-six weeks ended March 28, 2004 and March
30, 2003, respectively. In the twenty-six weeks fiscal 2004, the
Company redeemed $53.5 million of outstanding 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 $0.5 million and had payments on capitalized leases of $0.6
million. The cash used in financing activities in the twenty-six week
fiscal 2003 of $0.6 million consisted of payments on the Companys
capitalized lease obligations. 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.)The Credit Facilities The Companys principal operating subsidiary, Markets, entered into a
credit facility, as amended, with Bank of America N.A. on August 6,
1999 (the credit facility). The credit facility provides for (i) a
$75.0 million revolving loan facility and (ii) a Letter of Credit
Sublimit which is defined as an amount equal to the lesser of (a) the
Revolving Loan Commitment and (b) $50,000,000. The Letter of Credit
Sublimit is part of, and not in addition to, the Revolving Loan
Commitment. Borrowings under the revolving loan facility are
unsecured and expected to be used for certain working capital and
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, workers compensation
insurance obligations and as security for certain rent obligations. The availability of the loans and letters of credit are subject to
certain sublimits and other borrowing restrictions. Indebtedness of
Markets under the credit facility is guaranteed by Stater Bros.
Development, Inc., a subsidiary of the Company, and any subsidiaries
that Markets or Stater Bros. Development, Inc. acquires or forms after
the date of the credit facility. 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 revolving loan facility will cease to be available and will be
payable in full on March 31, 2005. Letters of credit under the credit
facility can be issued until March 31, 2006. The loans under the
revolving loan facility must be repaid for a period of ten consecutive
days semi-annually. Loans under the revolving loan facility may be repaid and re-borrowed.
The loans under the revolving loan 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.) Availability of the loans and letters of credit under the credit
facility is subject to a monthly borrowing base test based on
inventory. The credit facility requires Markets to meet certain
financial tests, including minimum net worth and minimum EBITDA tests.
The credit facility contains covenants which, among other things,
will limit indebtedness, liens, guarantee obligations, mergers,
consolidations, liquidations and dissolutions, asset sales, leases,
investments, loans and advances, transactions with affiliates, sale
and leasebacks, other matters customarily restricted in such
agreements and modifications to the holding company status of the
Company. The credit facility also contains covenants that apply to the Company
and the Company is a party to the credit facility for purposes of
these covenants. These covenants, among other things, limit dividends
and other payments in respect to the Companys capital stock,
prepayments and redemptions of the exchange notes and other debt, and
limit indebtedness, investments, loans and advances by the Company. The credit facility requires the Company and Markets to comply with
certain covenants intended to ensure that their legal identities
remain separate. 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;
judgments; defaults; invalidity of any guaranty; failure of Jack H.
Brown to be Chairman of the Board and Chief Executive Officer of
Stater Bros. Markets; and change of control. In December 1999, Santee entered into a revolving line of credit with
Bank of America N.A. which (the Revolver) was amended in 2002.
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 and Ralphs, 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. 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 March 28, 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. As of
March 28, 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. 24




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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
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. 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 28, 2004 PART I - FINANCIAL INFORMATION (contd.) 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable. 
 Item 4. CONTROLS AND PROCEDURES As of the quarter ended March 28, 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 March 28, 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. 26




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STATER BROS. HOLDINGS INC.
MARCH 28, 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 None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES None 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 Item 5. OTHER INFORMATION  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. 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    ExhibitsNone(b)
    
    Reports on Form 8-KCurrent Report on Form 8-K
dated February 2, 2004. 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 12, 2004
    
    /s/
    
    Jack H. BrownJack H. BrownChairman of the Board, President,and Chief Executive Officer(Principal Executive Officer)Date: May 12, 2004
    
    /s/
    
    Phillip J. SmithPhillip J. SmithSenior Vice Presidentand Chief Financial Officer(Principal Financial Officer)
 28