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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Mark One) þ quarterly report pursuant to section13or15(d)of the securitiesexchange act of 1934
 For the quarterly period ended December 26, 2004 or o transition report pursuant to section13or15(d)of the securitiesexchange act of 1934 For the transition from  to Commission file number 001-13222 STATER BROS. HOLDINGS INC.  Delaware

    

    33-0350671(State or other jurisdiction of incorporation or

    

    (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. 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 5, 2005, there were issued and outstanding
38,301 shares of the registrants Class A Common Stock.
 1




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Explanatory Note: This Report on Form 10-Q/A amends the Report on Form 10-Q for Stater Bros. Holdings Inc. (the
Company) for the thirteen week period ended December 26, 2004 as filed with the Securities and
Exchange Commission on February 9, 2005 for the periods ended December 28, 2003 and December 26,
2004. Management reviewed its accounting practices related to leases and determined that the useful lives
used to depreciate certain leasehold improvements were not consistent with views recently expressed
in a letter issued by the Chief Accountant of the Securities and Exchange Commission dated February
7, 2005. The restatement presented herein corrects errors in the lives used for certain leasehold
improvements and corrects these lives to conform to U.S. generally accepted accounting principles.
See Note 2  Restatement of Previously Issued Financial Statements to the Companys unaudited
consolidated financial statements which provides further information regarding the restatement and
provides schedules summarizing the effect on the Companys consolidated balance sheets and related
statements of income and cash flows for the thirteen week periods ended December 28, 2003 and
December 26, 2004. Information not affected by the restatement is unchanged and reflects the
disclosures made as of the Companys original filing of Form 10-Q on February 9, 2005.




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STATER BROS. HOLDINGS INC.December 26, 2004 INDEX PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 26, 2004 and December 26, 2004 (Unaudited) (as restated)
    
    
    4Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 28, 2003 (as restated) and December 26, 2004 (as restated)
    
    
    6Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 28, 2003 (as restated) and December 26, 2004 (as restated)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 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
    
    
    
    
    28EX-31.1EX-31.2EX-32.1
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PART I  FINANCIAL INFORMATION 
 Item 1.FINANCIAL STATEMENTS 
 STATER BROS. HOLDINGS INC.CONSOLIDATED BALANCE SHEETS(In thousands) ASSETS Sept. 26,
    
    
    Dec. 26,2004
    
    
    2004(as restated)
    
    
    (as restated)(Unaudited)Current assetsCash and cash equivalents
    
    $
    301,947
    
    
    $
    245,247Restricted cash
    
    
    20,000
    
    
    
    29,000Receivables
    
    
    39,258
    
    
    
    45,415Inventories
    
    
    185,567
    
    
    
    199,780Prepaid expenses
    
    
    8,847
    
    
    
    13,158Deferred income taxes
    
    
    25,416
    
    
    
    23,372Total current assets
    
    
    581,035
    
    
    
    555,972Property and equipmentLand
    
    
    68,120
    
    
    
    68,120Buildings and improvements
    
    
    252,715
    
    
    
    271,382Store fixtures and equipment
    
    
    337,589
    
    
    
    345,610Property subject to capital leases
    
    
    25,891
    
    
    
    25,891684,315
    
    
    
    711,003Less accumulated depreciation and amortization
    
    
    279,459
    
    
    
    290,241404,856
    
    
    
    420,762Deferred debt issuance costs, net
    
    
    21,891
    
    
    
    21,282Deferred income taxes, long-term
    
    
    
    
    
    
    1,046Other assets
    
    
    6,339
    
    
    
    6,34928,230
    
    
    
    28,677Total assets
    
    $
    1,014,121
    
    
    $
    1,005,411
 See accompanying notes to unaudited consolidated financial statements.
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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS DEFICIT Sept. 26,
    
    
    Dec. 26,2004
    
    
    2004(as restated)
    
    
    (as restated)(Unaudited)Current liabilitiesAccounts payable
    
    $
    142,077
    
    
    $
    140,044Accrued payroll and related expenses
    
    
    55,049
    
    
    
    53,223Other accrued liabilities
    
    
    62,745
    
    
    
    49,150Accrued income taxes
    
    
    62
    
    
    
    2,198Current portion of capital lease obligations
    
    
    1,247
    
    
    
    1,206Total current liabilities
    
    
    261,180
    
    
    
    245,821Deferred income taxes
    
    
    2,209
    
    
    
    Long-term debt
    
    
    700,000
    
    
    
    700,000Capital lease obligations, less current portion
    
    
    9,470
    
    
    
    9,186Long-term portion of self-insurance and other reserves
    
    
    35,654
    
    
    
    40,020Other long-term liabilities
    
    
    45,249
    
    
    
    46,762Total liabilities
    
    
    1,053,762
    
    
    
    1,041,789Stockholder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
    )
    
    
    (46,118
    )Total stockholders deficit
    
    
    (39,641
    )
    
    
    (36,378
    )Total liabilities and stockholders deficit
    
    $
    1,014,121
    
    
    $
    1,005,411
 See accompanying notes to unaudited consolidated financial statements. 5




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STATER BROS. HOLDINGS
INC.
CONSOLIDATED STATEMENTS OF INCOME 
 13 Weeks EndedDec. 28,
    
    
    Dec. 26,2003
    
    
    2004(as restated)
    
    
    (as restated)Sales
    
    $
    1,026,553
    
    
    $
    839,065Cost of goods sold
    
    
    721,671
    
    
    
    622,056Gross profit
    
    
    304,882
    
    
    
    217,009Operating expensesSelling, general and administrative expenses
    
    
    226,851
    
    
    
    189,160Depreciation and amortization
    
    
    7,624
    
    
    
    9,449Total operating expenses
    
    
    234,475
    
    
    
    198,609Operating profit
    
    
    70,407
    
    
    
    18,400Interest income
    
    
    384
    
    
    
    1,192Interest expense
    
    
    (13,176
    )
    
    
    (14,096
    )Equity in earnings from unconsolidated affiliate
    
    
    626
    
    
    
    Other expenses, net
    
    
    (453
    )
    
    
    (115
    )Income before income taxes
    
    
    57,788
    
    
    
    5,381Income taxes
    
    
    23,237
    
    
    
    2,118Net income
    
    $
    34,551
    
    
    $
    3,263Earnings per share
    
    $
    902.09
    
    
    $
    85.19Average 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
(Unaudited)
(In thousands) 13 Weeks EndedDec. 28,
    
    
    Dec. 26,2003
    
    
    2004(as restated)
    
    
    (as restated)Operating activities:Net income
    
    $
    34,551
    
    
    $
    3,263Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    9,273
    
    
    
    12,516Deferred income taxes
    
    
    (63
    )
    
    
    (1,211
    )Loss on disposals of assets
    
    
    453
    
    
    
    160Net undistributed gain in investment in unconsolidated affiliate
    
    
    (626
    )
    
    
    Changes in operating assets and liabilities:Increase in restricted cash
    
    
    (20,000
    )
    
    
    (9,000
    )Increase in receivables
    
    
    (7,193
    )
    
    
    (6,157
    )Decrease in income tax receivables
    
    
    4,354
    
    
    
    Increase in inventories
    
    
    (13,001
    )
    
    
    (14,213
    )Increase in prepaid expenses
    
    
    (2,971
    )
    
    
    (4,311
    )Decrease in other assets
    
    
    855
    
    
    
    599Increase (decrease) in accounts payable
    
    
    68,919
    
    
    
    (2,033
    )Increase in accrued income taxes
    
    
    18,946
    
    
    
    2,136Increase (decrease) in accrued liabilities, long-term portion
of self-insurance reserves and other liabilities
    
    
    46,772
    
    
    
    (9,542
    )Net cash provided by (used in) operating activities
    
    
    140,269
    
    
    
    (27,793
    )Investing activities:Purchase of property and equipment
    
    
    (15,267
    )
    
    
    (28,584
    )Proceeds from sale of property and equipment
    
    
    12
    
    
    
    2Net cash used in investing activities
    
    
    (15,255
    )
    
    
    (28,582
    )Financing activities:Principal payments on capital lease obligations
    
    
    (262
    )
    
    
    (325
    )Net cash used in financing activities
    
    
    (262
    )
    
    
    (325
    )Net increase (decrease) in cash and cash equivalents
    
    
    124,752
    
    
    
    (56,700
    )Cash and cash equivalents at beginning of period
    
    
    111,152
    
    
    
    301,947Cash and cash equivalents at end of period
    
    $
    235,904
    
    
    $
    245,247Interest paid
    
    $
    950
    
    
    $
    23,888Income taxes paid
    
    $
    
    
    
    $
    1,265
 See accompanying notes to unaudited consolidated financial statements. 7




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 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 December 26, 2004 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 balance sheet as of December 26, 2004, and the
consolidated statements of income and cash flows for the thirteen week periods ended December 28,
2003 and December 26, 2004 in order to correct the accounting error noted above. The cumulative
effect of the correction was a $2.4 million increase in retained deficit at the beginning of fiscal
2005 and a reduction in net income of $92,000 and $98,000 in the thirteen week fiscal periods ended
December 28, 2003 and December 26, 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)DECEMBER 26, 2004 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
balance sheets as of September 26, 2004 and December 26, 2004 (in thousands). As PreviouslySeptember 26, 2004

    
    Reported
    
    
    Adjustments
    
    

RestatedProperty and equipment, net
    
    $
    409,623
    
    
    $
    (4,767
    )
    
    $
    404,856Total assets
    
    
    1,018,888
    
    
    
    (4,767
    )
    
    
    1,014,121Deferred income taxes
    
    
    3,894
    
    
    
    (1,685
    )
    
    
    2,209Other long-term liabilities
    
    
    45,881
    
    
    
    (632
    )
    
    
    45,249Total liabilities
    
    
    1,056,079
    
    
    
    (2,317
    )
    
    
    1,053,762Retained deficit
    
    
    (46,931
    )
    
    
    (2,450
    )
    
    
    (49,381
    )Total stockholders deficit
    
    
    (37,191
    )
    
    
    (2,450
    )
    
    
    (39,641
    )Total liabilities and stockholders deficit
    
    $
    1,018,888
    
    
    $
    (4,767
    )
    
    $
    1,014,121
 As PreviouslyDecember 26, 2004
    
    Reported
    
    
    Adjustments
    
    

RestatedProperty and equipment, net
    
    $
    425,713
    
    
    $
    (4,951
    )
    
    $
    420,762Deferred income taxes  long-term
    
    
    
    
    
    
    1,046
    
    
    
    1,046Total assets
    
    
    1,009,316
    
    
    
    (3,905
    )
    
    
    1,005,411Deferred income taxes
    
    
    706
    
    
    
    (706
    )
    
    
    Other long-term liabilities
    
    
    47,413
    
    
    
    (651
    )
    
    
    46,762Total liabilities
    
    
    1,043,146
    
    
    
    (1,357
    )
    
    
    1,041,789Retained deficit
    
    
    (43,570
    )
    
    
    (2,548
    )
    
    
    (46,118
    )Total stockholders deficit
    
    
    (33,830
    )
    
    
    (2,548
    )
    
    
    (36,378
    )Total liabilities and stockholders deficit
    
    $
    1,009,316
    
    
    $
    (3,905
    )
    
    $
    1,005,411
 The following is a summary of the effect of these accounting changes on the Companys
consolidated statements of income for the thirteen week periods ended December 28, 2003 and
December 26, 2004 (in thousands, except per share amount). As PreviouslyDecember 28, 2003
    
    Reported
    
    
    Adjustments
    
    
    RestatedSelling, general and administrative expenses
    
    $
    226,894
    
    
    $
    (43
    )
    
    $
    226,851Depreciation and amortization
    
    
    7,426
    
    
    
    198
    
    
    
    7,624Total operating expenses
    
    
    234,320
    
    
    
    155
    
    
    
    234,475Operating Profit
    
    
    70,562
    
    
    
    (155
    )
    
    
    70,407Income before income taxes
    
    
    57,943
    
    
    
    (155
    )
    
    
    57,788Income taxes
    
    
    23,300
    
    
    
    (63
    )
    
    
    23,237Net income
    
    $
    34,643
    
    
    $
    (92
    )
    
    $
    34,551Earnings per common share
    
    $
    904.49
    
    
    $
    (2.40
    )
    
    $
    902.09
 9




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 Note 2 - Restatement
of Previously Issued Financial Statements (contd.) As PreviouslyDecember 26, 2004
    

Reported
    
    
    Adjustments
    
    
    RestatedSelling, general and administrative expenses
    
    $
    189,179
    
    
    $
    (19
    )
    
    $
    189,160Depreciation and amortization
    
    
    9,265
    
    
    
    184
    
    
    
    9,449Total operating expenses
    
    
    198,444
    
    
    
    165
    
    
    
    198,609Operating Profit
    
    
    18,565
    
    
    
    (165
    )
    
    
    18,400Income before income taxes
    
    
    5,546
    
    
    
    (165
    )
    
    
    5,381Income taxes
    
    
    2,185
    
    
    
    (67
    )
    
    
    2,118Net income
    
    $
    3,361
    
    
    $
    (98
    )
    
    $
    3,263Earnings per common share
    
    $
    87.75
    
    
    $
    (2.56
    )
    
    $
    85.19
 The following is a summary of the effect of these accounting changes on the Companys
consolidated statements of cash flows for the thirteen week periods ended December 28, 2003 and
December 26, 2004 (in thousands). As PreviouslyDecember
28, 2003
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet income
    
    $
    34,643
    
    
    $
    (92
    )
    
    $
    34,551Depreciation and amortization
    
    
    9,075
    
    
    
    198
    
    
    
    9,273Deferred income taxes
    
    
    
    
    
    
    (63
    )
    
    
    (63
    )Accrued liabilities and long-term portion of self insurance reserves
    
    
    46,815
    
    
    
    (43
    )
    
    
    46,772Net cash provided by operating activities
    
    $
    140,269
    
    
    $
    
    
    
    $
    140,269
 As PreviouslyDecember
26, 2004
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet income
    
    $
    3,361
    
    
    $
    (98
    )
    
    $
    3,263Depreciation and amortization
    
    
    12,332
    
    
    
    184
    
    
    
    12,516Deferred income taxes
    
    
    (1,144
    )
    
    
    (67
    )
    
    
    (1,211
    )Accrued liabilities and long-term portion of self insurance reserves
    
    
    (9,523
    )
    
    
    (19
    )
    
    
    (9,542
    )Net cash provided by operating activities
    
    $
    (27,793
    )
    
    $
    
    
    
    $
    (27,793
    )
 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. 10




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 Note 5 - Retirement Plans (contd.) Net periodic pension cost included the following components: 13 Weeks EndedDec. 28,
    
    
    Dec. 26,2003
    
    
    2004(in thousands)Service cost  benefits earned during
the period
    
    $
    554
    
    
    $
    603Interest cost on projected benefit
obligation
    
    
    622
    
    
    
    695Actual return on assets
    
    
    (486
    )
    
    
    (385
    )Net amortization and deferral
    
    
    7
    
    
    
    (1
    )Recognized gains or losses
    
    
    180
    
    
    
    192Prior service cost recognized
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    877
    
    
    $
    1,104Assumptions used for accounting were:Discount rate
    
    
    6.00
    %
    
    
    6.00
    %Rate of increase in compensation levels
    
    
    4.00
    %
    
    
    4.00
    %Expected long-term rate of return on
assets
    
    
    7.00
    %
    
    
    5.00
    %
 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. 11




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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 Note 6  Santee (contd.) 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. 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
 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. The Company recognized equity in earnings from unconsolidated affiliate of $626,000 for the
thirteen weeks ended December 28, 2003. Santee has been included as a wholly-owned subsidiary of
the Company for all of fiscal 2005. 12




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 Note 6  Santee (contd.) 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 EndedDec. 28,2003(as restated)Sales
    
    $
    1,061,462Income before income taxes
    
    $
    59,244Net income
    
    $
    35,431Earnings per share
    
    $
    925.07
 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 December 26, 2004 was 5.99%. 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. 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, and the early retirement
of the $20.0 million 5.0% Subordinated Note due March 2007. 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. 13




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)DECEMBER 26, 2004 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 an additional 51 acres that would be transferred or leased to Markets with
a purchase option. Of the 160 acre project site, 16 acres are privately owned. Markets has
acquired one of these parcels and is negotiating the acquisition of the three remaining privately
held parcels consisting of approximately 13.5 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 amount of $8.6 million. The agreements with the
IVDA and Hillwood are contingent upon Markets successfully completing acquisition of all the
privately owned property. 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 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, 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 and
completion of the construction of the facility is planned for the winter of 2006. 14




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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 $1.4 million 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 $1.4 million lower than the reserves calculated at a 5.5%
discount rate. 15




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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. 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. 16




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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 weeks ended December 28, 2003 and December 26, 2004. Thirteen Weeks2004
    
    
    2005(as restated)
    
    
    (as restated)Sales
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    29.70
    
    
    
    25.86Operating expensesSelling, general and
administrative expenses
    
    
    22.10
    
    
    
    22.54Depreciation and amortization
    
    
    0.74
    
    
    
    1.13Operating profit
    
    
    6.86
    
    
    
    2.19Interest income
    
    
    0.04
    
    
    
    0.14Interest expense
    
    
    (1.28
    )
    
    
    (1.68
    )Equity in earnings from unconsolidated affiliate
    
    
    0.06
    
    
    
    Other expenses, net
    
    
    (0.05
    )
    
    
    (0.01
    )Income before income taxes
    
    
    5.63
    %
    
    
    0.64
    %
 For fiscal 2005, the results of 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 unaudited consolidated financial statements of
the Company contained in this report on Form 10-Q/A). 17




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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. All of the current years replacement
stores sales are included in the like store sale calculation. Sales for the thirteen weeks ended December 26, 2004, the first quarter of fiscal 2005,
decreased $187.5 million or 18.26% and amounted to $839.1 million compared to $1,026.6 million
for the same period in the prior year. The sales decrease in fiscal 2005 was partially offset
by the consolidation of Santee in fiscal 2005, which increased sales by $27.8 million or 2.71%
over prior year sales. Like store sales decreased $227.1 million or 22.18% over the prior year.
The decrease in like store sales for the thirteen weeks ended December 26, 2004 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. Three new
stores in Southern California, opened since the first quarter of fiscal 2004, increased sales
for the thirteen weeks ended December 26, 2004 by $14.3 million. The closure of a store in
Hemet, California in September 2004 decreased fiscal 2005 sales by approximately $2.5 million
when compared to the prior year. 18




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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 December 26, 2004, amounted to $217.0 million or
25.86% of sales compared to $304.9 million or 29.70% 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 3.84%. The consolidation of Santee in fiscal 2005 decreased gross profit, as a
percentage of sales, by approximately 0.40%. In fiscal 2004, the Company was able to leverage
warehouse and transportation expenses against the increased sales volume experienced during the
labor dispute. In fiscal 2005, warehouse and transportation costs were 3.76% of sales compared
to 3.10% of sales in fiscal 2004. Fiscal 2005 gross profit, after the effect of warehouse and
transportation costs and Santee, decreased 2.78%, as a percentage of sales, 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 December 26, 2004, selling, general and
administrative expenses amounted to $189.2 million or 22.54% of sales compared to $226.9 million
or 22.10% of sales for the thirteen weeks ended December 28, 2003. 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 an increase in net
labor related costs of 0.13%, as a percentage of sales, in fiscal 2005 over fiscal 2004 and an
increase of 0.31%, as a percentage of sales, of advertising costs in fiscal 2005 over fiscal
2004. Certain operating costs such as electricity, facility rents and general insurance in
total decreased $906,000 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 0.45%. The
consolidation of Santee in fiscal 2005 decreased selling, general and administrative expenses by
approximately 0.51%, as a percentage of sales, compared to previous year. 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 first
quarters of fiscal 2005 and fiscal 2004 is $297,000 and $253,000, respectively. Depreciation and amortization expenses amounted to $9.4 million for the thirteen weeks ended
December 26, 2004 and $7.6 million for the thirteen weeks ended December 28, 2003. 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 $1.6 million of
depreciation in the first quarters of fiscal 2005 and fiscal 2004, respectively, related to
dairy production and warehousing and distribution activities. Interest expense amounted to $14.1 million for the first quarter of 2005 compared to $13.2
million for the first quarter of 2004. The Companys equity in earnings from unconsolidated affiliate amounted to $626,000 for the
first quarter of fiscal 2004. There was no equity in earnings from unconsolidated affiliate in
the first quarter of fiscal 2005 as Santee has been consolidated into the Companys results of
operations since February 6, 2004. Income before income taxes amounted to $5.4 million in the first quarter of 2005 and $57.8
million for the first quarter of 2004. Net income for the first quarter of 2005 amounted to $3.3 million and $34.6 million for the
first quarter of 2004. 19




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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
December 26, 2004, the Company had $46.9 million of outstanding letters of credit and had $28.1
million available under the revolving loan facility. The letter of credit facility is
maintained pursuant to the Companys workers compensation and general liability self-insurance
requirements. Santees revolving line of credit includes a credit line of up to $5.0 million of which $2.0
million may be used to secure letters of credit. As of December 26, 2004, Santee had $1.4
million of outstanding letters of credit in support of workers compensation liabilities and had
$3.6 million available under the revolving loan facility. On January 31, 2005, subsequent to
the quarter ended December 26, 2004, the revolving line of credit was amended to raise the
amount which may be used at any one time for letters of credit to $5.0 million. Santees
revolving line of credit expires in May 2007. The Company had no short-term borrowings outstanding as of December 26, 2004 and did not incur
short-term borrowings during the quarterly period. 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 December 26, 2004. Contractual Cash Obligations(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years8.125% Senior Notes due June 2012Principal
    
    $
    525,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    525,000Interest
    
    
    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
    
    
    58,468
    
    
    
    10,628
    
    
    
    21,256
    
    
    
    21,285
    
    
    
    5,299233,468
    
    
    
    10,628
    
    
    
    21,256
    
    
    
    21,285
    
    
    
    180,299Capital lease obligations (2)Principal
    
    $
    10,392
    
    
    $
    1,206
    
    
    $
    2,178
    
    
    $
    2,221
    
    
    $
    4,787Interest
    
    
    7,590
    
    
    
    1,519
    
    
    
    2,564
    
    
    
    1,969
    
    
    
    1,53817,982
    
    
    
    2,725
    
    
    
    4,742
    
    
    
    4,190
    
    
    
    6,325Operating leases (2)
    
    
    242,214
    
    
    
    34,022
    
    
    
    56,676
    
    
    
    37,286
    
    
    
    114,230Total contractual cash obligations
    
    $
    1,338,586
    
    
    $
    90,031
    
    
    $
    167,987
    
    
    $
    148,074
    
    
    $
    932,494
 Other Commercial Commitments(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsStandby letters of credit (3)
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    Total other commercial commitments
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (1)
 Notes continued on next page 21




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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (contd.) Contractual Cash Obligations (contd.) (2) 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. (3) Standby letters of credit are committed as security for workers
compensation obligations. Outstanding letters of credit expire between December 2004 and
December 2005. Working capital amounted to $310.2 million at December 26, 2004 and $319.9 million at
September 26, 2004, and the Companys current ratios were 2.26:1, and 2.22:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the industry. Net cash used in operating activities for the thirteen weeks ended December 26, 2004 was $27.8
million as compared to net cash provided by operating activities of $140.3 million for the thirteen
weeks ended December 28, 2003. 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 increases in inventory levels for the holiday
season, a decrease in accrued liabilities due to the timing of the semi-annual interest payments on
the Companys 8.125% Senior Notes in mid-December 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 $13.0 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, $15.6 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
$41.4 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 December
26, 2004 was 5.99%. 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 and the early
retirement of the $20.0 million 5.0% Subordinated Note due March 2007. 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 of which $2.0 million 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. On
January 31, 2005, subsequent to the quarter ended December 26, 2004, the Revolver was amended to
raise the amount which may be used at any one time for letters of credit to $5.0 million.
Borrowings under the Revovler 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 December 26, 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 8.125% Senior Notes due 2012 and its Floating
Rate Senior Notes due 2010. As of December 26, 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. 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.
DECEMBER 26, 2004 PART I - FINANCIAL INFORMATION (contd.) 
 Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The
Company is subject to interest rate risk on its Floating Rate Senior Notes due June 2010. The
Companys interest expense on the Floating Rate Senior Notes due June 2010 will increase as
interest rates rise and will decrease as interest rates decline. Interest on the Floating Rate
Senior Notes due June 2010 is based upon the Three-month LIBOR plus 3.50%. As of December 26,
2004, the floating interest rate was 5.99%. 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 December 26, 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/A. During the quarter ended December 26, 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, except as noted below, or
material weaknesses that would have required corrective actions to be taken. In concluding that the Company did not have any material weaknesses in disclosure controls and
procedures as of December 26, 2004, the Chief Executive Officer and the Chief Financial Officer
considered, among other things, the significant deficiency related to the useful lives used to
depreciate certain leasehold improvements which resulted in a need to restate previously issued
financial statements. Taking into consideration that (i) the restatement adjustments did not have
a material impact on the financial statements of prior interim or annual periods taken as a whole;
(ii) the cumulative impact of the restatement adjustments on shareholders deficit was not material
to the financial statements of prior interim or annual periods; and (iii) the Company restated its
previously issued financial statements because the cumulative impact of the error, if recorded in
the current period, would have been material to the current years net income, the Chief Executive
Officer and the Chief Financial Officer concluded that the control deficiency that resulted in the
restatement of prior period financial statements was a significant deficiency but was not a
material weakness. Subsequent to December 26, 2004, the Chief Executive Officer and the Chief Financial Officer have
caused additional disclosure controls and procedures to be implemented that have been designed to
ensure that the useful lives used to depreciate leasehold improvements are in conformity with U.S.
generally accepted accounting procedures. The Company believes that these additional disclosure
controls and principles substantially correct any significant deficiency in existence prior to
December 26, 2004 related to useful lives used to depreciate leasehold improvements. 26




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STATER BROS. HOLDINGS INC.
DECEMBER 26, 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 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/A. 
 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-K
None 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 6, 2005
    
    /s/
    
    Jack H. BrownJack H. BrownChairman of the Board, President,and Chief Executive Officer(Principal Executive Officer)Date: May 6, 2005
    
    /s/
    
    Phillip J. SmithPhillip J. SmithSenior Vice Presidentand Chief Financial Officer(Principal Financial Officer)
 28