##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K (Mark One)x
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: September 26, 2004ORo
    

TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934For the transition
fromto
 Commission file number 001-13222 STATER BROS. HOLDINGS
INC.
  Delaware
    
    33-0350671(State or other jurisdiction of incorporation or
organization)
    
    (IRS Employer Identification No.)
 21700 Barton Road
Colton, California
    
    92324(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
    
    (909) 783-5000
 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
None 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. YesxNoo. Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. YesxNoo. Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2
of the Act). YesoNox. No voting stock of the registrant is held by non-affiliates of the
registrant. Number of shares of the registrants Common Stock, $.01 par value,
outstanding as
of December 21, 2004Class A Common Stock  38,301 shares. DOCUMENTS INCORPORATED BY REFERENCE None    1




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STATER BROS. HOLDINGS INC. FORM 10-K TABLE OF CONTENTS Page NumberPART IItem 1
    
    Business
    
    
    3Item 2
    
    Properties
    
    
    10Item 3
    
    Legal Proceedings
    
    
    11Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5
    
    Market for the
Registrants Common Equity and Related Stockholder Matters
    
    
    12Item 6
    
    Selected Financial Data
    
    
    13Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    28Item 8
    
    Financial Statements and Supplementary Data
    
    
    29Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    29Item 9A
    
    Controls and Procedures
    
    
    29PART IIIItem 10
    
    Directors and Executive Officers of the Registrant
    
    
    30Item 11
    
    Executive Compensation
    
    
    32Item 12
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    35Item 13
    
    Certain Relationships and Related Transactions
    
    
    36Item 14
    
    Principal Accounting Fees and Services
    
    
    36PART IVItem 15
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    37Signatures
    
    
    42Exhibit 12.1Exhibit 14.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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PART I 
 Item 1. Business General Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets (Markets) and Stater
Bros. Development, Inc. (Development), (collectively Stater Bros. or the
Company) were founded in 1936 when the first Stater Bros. Market opened in
Yucaipa, California. The Company is a leading supermarket chain in Southern
California and operates 158 supermarkets under the Stater Bros. Markets name.
The Company acquired controlling interest of Santee Dairies, Inc. (Santee)
effective February 6, 2004. Santee is a subsidiary of Markets. The Company has grown, primarily by constructing supermarkets in its primary
trading areas, through the enlargement of existing supermarkets and through a
strategic acquisition in August 1999 of 43 supermarkets in Southern California.
Stater Bros. supermarkets consist of approximately 5.3 million total square
feet including approximately 3.8 million selling square feet. The Companys
supermarkets offer its customers a high level of customer service, broad
selections of grocery, meat, produce, liquor and general merchandise. All of
the Companys supermarkets have expanded selections of produce and full-service
meat departments. Nearly all of the supermarkets have hot service
delicatessens and many have bakery departments. The Company utilizes centralized distribution facilities that provide the
Companys supermarkets with approximately 78% of the volume of the merchandise
they offer for sale. The Companys distribution facilities encompass
approximately 1.7 million square feet and include facilities for
grocery, grocery deli,
produce, meat, meat deli, frozen, bakery, health and beauty care, and general
merchandise products. 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 the 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. Stock Redemption During fiscal 2002, the Company obtained consent of the holders of its 10.75%
Senior Notes due 2006 (the 10.75% Notes) to make a distribution and payment
to stockholders consisting of $25.0 million in cash and a subordinated note in
the principal amount of $20.0 million. On January 22, 2002, the Company
redeemed 11,699 shares of the Companys stock previously held by La Cadena and
made a cash payment of $20.0 million and executed a $20.0 million subordinated
note due March 31, 2007 to a former partner of La Cadena. The subordinated
note bore interest at a rate of 5.0% per annum, payable semi-annually. On
February 1, 2002, the Company paid a $4.5 million dividend to La Cadena. Fees
for consent of the holders of its 10.75% Senior Notes and fees and expenses of
the transaction, including a $500,000 financial advisory service fee to La
Cadena, amounted to approximately $5.0 million. Issuance of New Debt and Early Extinguishment of Debt On June 17, 2004, the Company issued $525.0 million of unregistered 8.125%
Senior Notes due June 15, 2012 and $175.0 million of unregistered Floating Rate
Senior Notes due June 15, 2010. On October 4, 2004, subsequent to year-end,
the Company exchanged the unregistered 8.125% Senior Notes due June 15, 2012
and 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 collectively, (the Notes). The
Company incurred $22.7 million of debt issuance cost related to the issuance of
the Notes which will be amortized over the term of the respective Notes. 3




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Item 1. Business (contd.) Business Strategy Issuance of New Debt and Early Extinguishment of Debt (contd.) On June 17, 2004 the Company used part of the proceeds from the issuance of
these notes for the purchase of $397.8 million of the 10.75% Senior Notes due
August 2006, the payment of $16.9 million for tender premium and fees on the
purchased 10.75% Senior Notes, the early retirement of the $20.0 million 5.0%
Subordinated Note due March 2007 and to pay accrued interest on the purchased
10.75% Senior Notes and the retired 5.0% Subordinated Note. On August 16,
2004, the Company redeemed the remaining outstanding $41.0 million 10.75% Notes
and paid a make whole fee on the redemption of $1.1 million. Store Profile and Locations The Companys supermarkets have well-established locations and low overhead
expenses, including fixed rent payments in most supermarkets. In addition, the
Company believes that its existing supermarkets are well maintained and
generally require capital expenditures only for customary maintenance. An
average supermarket is approximately 33,200 square feet, while newly
constructed supermarkets range from approximately 40,000 square feet to 46,000
square feet. Stater Bros. supermarkets typically utilize approximately 72% of
total square feet for retail selling space. The Company operates its
supermarkets with minimal back-room storage space because of the close
proximity of its distribution facility to its store locations. Generally, all
Stater Bros. supermarkets are similarly designed and stocked thereby allowing
Stater Bros. customers to find items easily in any of the Companys
supermarkets. Substantially all of the Companys 158 supermarkets are located in neighborhood
shopping centers in well-populated residential areas. The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future supermarket expansion. Management actively pursues the acquisition of sites for new supermarkets. In
an effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Companys criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix. Store Expansion and Remodeling The Company has historically focused its expansion in the San Bernardino,
Riverside, Orange, Los Angeles, San Diego and Kern counties of Southern
California. Such expansion has been accomplished through improving and
remodeling existing stores, constructing new supermarkets, and the acquisition
of other supermarket operations. The number of supermarkets operated by the
Company was 158 as of September 26, 2004. The Company intends to continue to
expand its existing supermarket operations by enlarging and remodeling existing
supermarkets and constructing new supermarkets. The Company may also make
strategic acquisitions of existing supermarkets, if such opportunities arise. 4




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Item 1. Business (contd.) Store Expansion and Remodeling (contd.) The Company monitors sales and profitability of its operations on a
store-by-store basis and enlarges, remodels or replaces stores in light of
their performance and managements assessment of their future potential.
Approximately 87% of the Companys supermarkets have been either newly
constructed or remodeled within the last five years. Minor remodels cost
between $100,000 and $500,000 and typically include new fixtures and may
include a change in decor. Major remodels cost in excess of $500,000 and
typically involve more extensive refurbishment of the stores interior and may
include the addition of one or more specialty service departments such as a hot
service delicatessen or a bakery. Expansions entail enlargement of the store
building and typically includes breaking through an exterior wall. The primary
objectives of remodeling and expansions are to improve the attractiveness of
supermarkets, increase sales of higher margin product categories and, where
feasible, to increase selling area. The Company conducts all of its new
construction and most of its remodeling through its wholly owned subsidiary
Development which serves as the general contractor for all Company construction
projects. The following table sets forth certain statistical information with respect to
the Companys supermarket expansion and remodeling for the periods indicated. Fiscal Year EndedSept. 24,
    
    Sept. 30,
    
    Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2000
    
    2001
    
    2002
    
    2003
    
    2004Number of supermarkets:Opened
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Closed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Replaced
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Total at end of year
    
    
    155
    
    
    
    155
    
    
    
    156
    
    
    
    157
    
    
    
    158Minor remodel
    
    
    17
    
    
    
    10
    
    
    
    11
    
    
    
    20
    
    
    
    31Major remodel
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    4
    
    
    
    5Expansion
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Beyond 2004, the Company plans to open approximately three to six new stores
per year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores. The Companys plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company
finances its new store construction primarily from cash provided by operating
activities and short-term borrowings under its credit facilities. Long-term
financing of new stores generally will be obtained through either sale and
leaseback transactions or secured long-term financings. However, no assurances
can be made as to the availability of such financings. Corporate Office and Distribution Facilities The Companys corporate office and distribution facilities are located in
Colton, California, and encompass approximately 1.7 million square feet. The
facilities include distribution facilities for grocery, grocery deli, produce,
meat, meat deli, frozen, bakery, health and beauty care, and general
merchandise products. Approximately 78% of the volume of the products offered
for sale in the Companys supermarkets are processed through the Companys
distribution facilities. The Companys distribution facilities are centrally located and are an average
distance of approximately 39 miles from its supermarkets. Most supermarkets
can be reached without using the most congested portions of the Southern
California freeway system. The Companys transportation fleet consists of modern well-maintained vehicles.
As of September 26, 2004, the Company operated approximately 145 tractors, 108
which were owned and 37 which were leased and 446 trailers, all of which were
owned. 5




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Item 1. Business (contd.) Corporate Office and Distribution Facilities (contd.) 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 (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 (IVDA), which is the entity responsible for the
redevelopment of NAFB, to acquire approximately 93 acres of the project
property owned by IVDA. As a component of this Agreement, 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 IVDA requires Markets to acquire those parcels not owned by 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 also has
entered into an agreement with Hillwood/San Bernardino LLC (Hillwood), the
master developer of NAFB, for infrastructure improvements. Under the Hillwood
Agreement, Markets will share costs associated with the infrastructure
improvements including 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 credits in the amount of $10.8 million. The
agreements with 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.
The 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 is planned for
the winter of 2006. Purchasing and Marketing The Company uses an Aggressive Everyday Low Price (AEDLP) format supported
heavily by radio, TV, newspaper and direct mail advertising programs as an
integral part of its purchasing and marketing strategy to provide its customers
with the best overall supermarket value in its primary market areas. The
Company supplements its everyday low price structure with chain-wide temporary
price reductions (Stater Savers) on selected food and non-food merchandise.
The geographic location of the Companys supermarkets allows it to reach its
target consumers through a variety of media and the Company aggressively
advertises its everyday low prices through local and regional newspapers,
direct mail and printed circulars as well as extensive advertisements on radio
and television. A key factor in the Companys business strategy is to provide its customers
with a variety of quality brand-name merchandise as well as alternative
selections of high-quality private label merchandise. To meet the needs of
customers, most supermarkets are stocked with approximately 35,000 items. The
Company places particular emphasis on the freshness and quality of its meat and
produce merchandise and maintains high standards for these perishables by
distributing the merchandise through its perishable distribution facilities. 6




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Item 1. Business (contd.) Retail Operations The Companys supermarkets are well maintained, have sufficient off-street
parking and generally are open from 6:00 a.m. or 7:00 a.m. until 10:00 p.m. or
11:00 p.m., seven days a week, including all holidays with the exception of
Christmas Day. Because Stater Bros. operates its supermarkets under similar
formats, management believes it is able to achieve certain operating economies. Store Management. Each supermarket is managed by a store manager and an
assistant manager, each of whom receives a base salary and may receive a bonus
based on the individual supermarkets overall performance and management of
labor costs within the supermarket. The store manager and assistant manager
are supported by their store management staff who have the training and skills
necessary to provide proper customer service, operate the store and manage
personnel in each department. Each store has individual department managers
for grocery, meat, produce, and where applicable, bakeries, hot service
delicatessens and seafood. Store managers report to one of nine district
managers, each of whom is responsible for an average of 18 supermarkets.
District managers report to one of three Regional Vice Presidents. Customer Service. The Company considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the Senior Management and is implemented
by employees at all levels of the Company. Each store is staffed with a
Customer Service Manager who coordinates all customer service issues in the
store. The Company maintains an intensive checker training school to train
prospective checkers and to provide a refresher program for existing checkers.
All of the Companys supermarkets provide customers with carry-out service and
have express checkout lanes. Santee Dairies, LLC Pursuant to a settlement agreement reached among Markets, Hughes Markets, Inc.
(Hughes), Quality Food Centers, Inc., Ralphs Grocery Company (Ralphs), Fred
Meyer, Inc., and the Kroger Co., Hughes relinquished to Markets its ownership
in Santee Dairies, Inc. (Santee), giving Markets 100% ownership of Santee.
Santee had been jointly owned by Hughes and Markets since 1986. Prior to the
settlement agreement, the Company accounted for its investment in Santee using
the equity method of accounting. Santee has been included in the consolidated
financial statements of the Company as a wholly-owned subsidiary of Markets as
of February 6, 2004, the effective date of the settlement agreement. Santee operates one of the largest dairy plants in California, based on fluid
production, and provides fluid milk products to Stater Bros., Ralphs, and other
customers in Southern California. Santee processes, packages and distributes
whole, low-fat and non-fat milk, as well as orange juice, fruit drinks and
certain other cultured milk products under the Knudsen®, Foremost® and certain
other brand names, as well as store brand names. Santee is the exclusive
licensee of the Knudsen® trademark from Kraft Foods, Inc. for fluid milk,
juices and certain other cultured milk products in the Southern California
market. In addition, Santee is the exclusive licensee for Foremost Farms USA,
cooperative of the Foremost® trademark for fluid milk in Southern California.
From February 6, 2004 to September 26, 2004, Santee processed approximately
46.2 million gallons of fluid products, including 38.7 million gallons of fluid
milk. During this time period, Markets purchased 23.8 million gallons of fluid
products. Santees total revenue from February 6, 2004 through September 26,
2004, excluding related party sales, was $75.6 million. Ralphs has agreed to
purchase fluid milk and certain other products from Santee in declining volumes
through July 31, 2007. Santee also sells to unaffiliated supermarkets,
independent food distributors, military bases and foodservice providers in
Southern California. The dairys capacity to process milk is approximately 250,000 to 350,000
gallons per day, with the ability to expand capacity to approximately 500,000
gallons per day. 7




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Item 1. Business (contd.) Management Information Systems The Companys management information systems and point-of-sale scanning
technology reduce the labor costs attributable to product pricing and customer
checkout, and provide management with information that facilitates purchasing,
receiving and management of inventory and accounts payable. The Company has
point-of-sale scanning checkout technology in all of its stores. All stores
use electronic systems for employee time and attendance records, inventory
orderings, and labor scheduling, which assist store management in developing a
more efficient and customer-sensitive work schedule. The Company uses the Stater Express system in all of the Companys
supermarkets. Stater Express is a combined supermarket technology platform
that includes enhanced systems for check verification and acceptance and
provides alternative pay choices such as most nationally recognized financial
institution debit and credit cards. Stater Express also provides each
supermarket with the technology required to print in-store-advertising signs
and connects each supermarket to the Companys host computer which provides
certain efficiencies in data transfers between the supermarkets and the
Companys main office. Employees The Company has approximately 15,700 employees, approximately 900 of whom are
management and administrative employees and approximately 14,800 of whom are
hourly union employees. Substantially all of the Companys hourly employees
are members of either the United Food and Commercial Workers (UFCW) or
International Brotherhood of Teamsters (Teamsters) labor unions and are
represented by several different collective bargaining agreements. The UFCWs collective bargaining agreements were ratified on February 29, 2004
and expire in March of 2007. The Teamsters collective bargaining agreement was
renewed in September 2002 and expires in September 2005. The Company values its employees and believes its relationship with them is
good and that employee loyalty and enthusiasm are key elements of its operating
performance. Southern California Labor Dispute A major labor dispute involving three of Stater Bros. principal competitors
lasted from October 11, 2003 through February 29, 2004. On October 11, 2003,
the United Food and Commercial Workers Union (the UFCW), declared a strike
against Safeway, Inc. (Vons); in turn, Albertsons, Inc. (Albertsons) and
Ralphs locked out all of their UFCW employees (the labor dispute). The UFCW
did not strike against Stater Bros. as a result of an agreement that Stater
Bros. would 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. Under the new
collective bargaining agreements, Stater Bros. made special contributions to
the UFCWs health and welfare fund and made strike ratification bonus payments
to its employees. The labor dispute had a materially positive effect on Stater Bros. results of
operations for fiscal 2004. The impact of the labor dispute on Stater Bros.
was unprecedented and is not expected to be repeated in the future. Following
the settlement of 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. However, the ultimate amount of increased volume
retained, if any, cannot be forecast with any degree of certainty. 8




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Item 1. Business (contd.) Competition The Company operates in a highly competitive industry characterized by narrow
profit margins. Competitive factors include 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 the
geographic market area of Wal-Marts Super Center 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. The
Company believes that its everyday low prices, breadth of product offering,
specialty service departments and long-term customer relationships will help it
withstand the increased competitive environment. Government Regulation The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters. The
Company is also subject to agencies that regulate the distribution and sale of
alcoholic beverages, tobacco products, milk and other agricultural products and
other food items. Santee is subject to periodic inspections by personnel from the California
Department of Food and Agriculture, as well as the United States Food and Drug
Administration, who test, among other things, Santees pasteurization and
homogenization equipment, storage tanks, and bottling apparatuses to ensure
compliance with applicable health and safety regulations. The price of raw
milk is regulated by the federal government through federal market orders and
price support programs, and by the State of California. The price of raw milk
can fluctuate widely. Environmental Environmental remediation costs incurred over the past five years were
approximately $1.7 million, in the aggregate, including remediation costs of
approximately $198,000 in 2000, $495,000 in 2001, $324,000 in 2002, $395,000 in
2003 and $260,000 in 2004. Management believes that any such future
remediation costs will not have a material adverse effect on the financial
condition or results of operations of the Company. 9




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Item 2. Properties The Company leases its distribution facilities located in Colton, California,
and management believes that its distribution facilities are well maintained
and are adequate to meet its current volume. The following schedule presents the Companys distribution facilities by
product classification and the size of each facility as of September 26, 2004. SquareFacility
    
    FeetGrocery
    
    
    960,000Health and beauty care and general merchandise
    
    
    188,000Frozen
    
    
    146,000Produce, meat and meat deli
    
    
    118,000Grocery deli
    
    
    116,000Bakery
    
    
    40,000Support and administrative offices
    
    
    92,000Total
    
    
    1,660,000
 The following schedule shows the size of Santees production, storage and
administrative facilities: SquareFeetDairy manufacturing
    
    
    118,000Dairy cold storage
    
    
    67,000Support and administrative offices
    
    
    54,000Total
    
    
    239,000
 As of September 26, 2004, the Company owned 44 of its supermarkets and leased
the remaining 114 supermarkets. Management believes that its supermarkets are
well maintained and adequately meet the expectations of its customers. The
Company operates 158 supermarkets in the Southern California counties of San
Bernardino, Riverside, Orange, Los Angeles, San Diego and Kern. The following
schedule reflects the Companys store count by size and county, and the number
of stores that are either leased or owned as of September 26, 2004. No. of Stores
    
    Total Square FeetUnder
    
    25,000-
    
    30,000-
    
    35,000-
    
    OverCounty
    
    Total
    
    Owned
    
    Leased
    
    25,000
    
    29,999
    
    34,999
    
    40,000
    
    40,000San Bernardino
    
    
    47
    
    
    
    9
    
    
    
    38
    
    
    
    5
    
    
    
    16
    
    
    
    6
    
    
    
    14
    
    
    
    6Riverside
    
    
    42
    
    
    
    11
    
    
    
    31
    
    
    
    10
    
    
    
    13
    
    
    
    5
    
    
    
    5
    
    
    
    9Orange
    
    
    30
    
    
    
    11
    
    
    
    19
    
    
    
    4
    
    
    
    13
    
    
    
    1
    
    
    
    4
    
    
    
    8Los Angeles
    
    
    27
    
    
    
    8
    
    
    
    19
    
    
    
    5
    
    
    
    7
    
    
    
    1
    
    
    
    3
    
    
    
    11San Diego
    
    
    10
    
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    7Kern
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Total
    
    
    158
    
    
    
    44
    
    
    
    114
    
    
    
    24
    
    
    
    50
    
    
    
    14
    
    
    
    29
    
    
    
    41
 The total size of the Companys supermarkets is approximately 5.3 million
square feet, of which 3.8 million square feet is selling area. 10




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##### Table of Contents



Item 3. Legal Proceedings In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company records an
appropriate provision when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition. On July 9, 2003, the Companys principal operating subsidiary Markets agreed to
a settlement of two lawsuits which had been filed on behalf of certain of
Markets existing and former store managers and assistant managers which
alleged that such workers are non-exempt under California labor laws and are
therefore entitled to overtime wages. Markets admitted no wrong doing under
the settlement and it believes it has appropriately followed California law in
the classification and payment of its employees. Markets believes that the
store managers and assistant managers are highly compensated employees with
duties and responsibilities which place them in the exempt category under
California law and that such employees are not entitled to overtime wages.
Markets continues to feel the case was without merit; however, because of
escalating litigation expenses, Markets determined a settlement was the best
solution. The amount of the settlement was $3.2 million. Of the $3.2 million,
$1.2 million of the settlement was recognized as expense in fiscal 2003 and the
remainder was expensed in prior years. In July of 2002, Markets initiated litigation on its own behalf and
derivatively on behalf of Santee in the Superior Court for the State of
California, County of Los Angeles, against Hughes, Ralphs, Fred Meyer, Inc. and
The Kroger Company (Defendants). In July of 2003, Defendants filed a
cross-complaint against Markets, Santee and others. In order to settle the
resulting litigation, Markets, Hughes, Santee and Santee Dairies, LLC. (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 was
$21.8 million which was determined by management based upon the net 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 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 fiscal 2004 in the Consolidated Statements of Income
under the line item Selling, general and administrative expenses. Environmental Matters Environmental remediation costs incurred during the last five years were
approximately $1.7 million, in the aggregate, including remediation costs of
approximately $198,000 in 2000, $495,000 in 2001, $324,000 in 2002, $395,000 in
2003 and $260,000 in 2004. Management believes that any such future
remediation costs will not have a material adverse effect on the financial
condition or results of operations of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders None 11




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##### Table of Contents



PART II 
 Item 5. Market for the Registrants Common Equity and Related Stockholder Matters (a) Market Information There is no established public trading market for the Companys common equity. (b) Holders Authorized
    
    OutstandingCommon Stock
    
    
    100,000
    
    
    
    0Class A Common Stock
    
    
    100,000
    
    
    
    38,301
 La Cadena holds 38,301 shares, or 100% of the Companys Class A Common
Stock. (c) Dividends The New Credit Facility, as amended and restated on June 17, 2004,
limits the Companys ability to pay dividends. The Company may
declare and pay dividends after June 27, 2004, but the aggregate
amount of the dividend may not exceed, as of any date of
determination, an amount equal to the sum of $25.0 million plus 50%
of the Companys consolidated net income for the period then ending
following June 27, 2004. The New Credit Facility specifically
allowed for the payment to La Cadena of a dividend in an amount not
to exceed $45.0 million substantially concurrently with the issuance
of the 8.125% Senior Notes Due 2012 and the Floating Rate Senior
Notes due 2010. Dividends of $45.0 million were paid in fiscal 2004. No dividends
were paid in fiscal 2003. Dividends of $4.5 million were paid in
fiscal 2002. The Company does not intend to pay dividends on its
common equity in the foreseeable future. 12




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##### Table of Contents



Item 6. Selected Financial Data The following table sets forth historical financial data derived from the
audited consolidated financial statements of the Company as of and for the
fiscal years ended September 24, 2000, September 30, 2001, September 29, 2002,
September 28, 2003 and September 26, 2004. The information set forth below
should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations, the Audited Consolidated
Financial Statements of the Company and related notes thereto contained
elsewhere herein. The information included in Other Operating and Financial
Data and Store Data is unaudited. Fiscal Years EndedSept. 24,
    
    Sept. 30, (4)
    
    Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2000
    
    2001
    
    2002
    
    2003
    
    2004(In thousands of dollars except per share and store data)Statement of Earnings Data:Sales
    
    $
    2,417,710
    
    
    $
    2,573,913
    
    
    $
    2,666,346
    
    
    $
    2,753,774
    
    
    $
    3,704,882Cost of goods sold
    
    
    1,819,068
    
    
    
    1,911,065
    
    
    
    1,957,526
    
    
    
    1,999,361
    
    
    
    2,652,812Gross profit
    
    
    598,642
    
    
    
    662,848
    
    
    
    708,820
    
    
    
    754,413
    
    
    
    1,052,070Selling, general and administrative
expenses
    
    
    537,370
    
    
    
    579,549
    
    
    
    615,482
    
    
    
    659,720
    
    
    
    820,496Depreciation and amortization
    
    
    20,357
    
    
    
    22,327
    
    
    
    24,300
    
    
    
    26,879
    
    
    
    32,507Acquisition integration expenses
    
    
    4,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    562,321
    
    
    
    601,876
    
    
    
    639,782
    
    
    
    686,599
    
    
    
    853,003Operating profit
    
    
    36,321
    
    
    
    60,972
    
    
    
    69,038
    
    
    
    67,814
    
    
    
    199,067Interest and other income (expense)
    
    
    3,217
    
    
    
    3,151
    
    
    
    142
    
    
    
    (44
    )
    
    
    855Interest expense
    
    
    (51,784
    )
    
    
    (52,410
    )
    
    
    (52,814
    )
    
    
    (53,254
    )
    
    
    (53,951
    )Interest expense related
to debt purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,647
    )Equity in income from
unconsolidated affiliate
    
    
    1,483
    
    
    
    1,584
    
    
    
    2,914
    
    
    
    1,330
    
    
    
    929Income (loss) before income taxes
    
    
    (10,763
    )
    
    
    13,297
    
    
    
    19,280
    
    
    
    15,846
    
    
    
    111,253Income taxes (benefit)
    
    
    (4,596
    )
    
    
    5,452
    
    
    
    7,491
    
    
    
    5,719
    
    
    
    39,450Net income (loss)
    
    $
    (6,167
    )
    
    $
    7,845
    
    
    $
    11,789
    
    
    $
    10,127
    
    
    $
    71,803Earnings (loss) per common share
    
    $
    (123.34
    )
    
    $
    156.90
    
    
    $
    280.92
    
    
    $
    264.41
    
    
    $
    1,874.70
 (footnotes on following page) 13




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##### Table of Contents



Item 6. Selected Financial Data (contd.) Fiscal Years EndedSept. 24,
    
    Sept. 30, (4)
    
    Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2000
    
    2001
    
    2002
    
    2003
    
    2004(In thousands of dollars except per share and store data)Balance Sheet Data (end of fiscal year):Working capital
    
    $
    107,907
    
    
    $
    120,457
    
    
    $
    119,643
    
    
    $
    124,517
    
    
    $
    319,855Total assets
    
    
    595,288
    
    
    
    629,294
    
    
    
    634,130
    
    
    
    667,826
    
    
    
    1,018,888Long-term notes
    
    
    439,000
    
    
    
    439,000
    
    
    
    458,750
    
    
    
    458,750
    
    
    
    700,000Long-term capitalized lease
obligations
    
    
    13,679
    
    
    
    12,098
    
    
    
    10,981
    
    
    
    9,926
    
    
    
    9,470Other long-term liabilities
    
    
    14,070
    
    
    
    24,608
    
    
    
    45,014
    
    
    
    54,916
    
    
    
    85,429Common stockholders deficit
    
    
    (49,254
    )
    
    
    (41,409
    )
    
    
    (74,121
    )
    
    
    (63,994
    )
    
    
    (37,191
    )Dividends paid per share, Class A
Common Stock
    
    $
    
    
    
    $
    
    
    
    $
    117.49
    
    
    $
    
    
    
    $
    1,174.90Cash Flow Data:Cash provided by operating activities
    
    
    15,385
    
    
    
    79,393
    
    
    
    51,168
    
    
    
    82,950
    
    
    
    150,516Cash provided by (used in)
financing activities
    
    
    (10,664
    )
    
    
    (7,140
    )
    
    
    (31,218
    )
    
    
    (1,116
    )
    
    
    102,090Cash used in investing activities
    
    
    (35,442
    )
    
    
    (33,248
    )
    
    
    (40,543
    )
    
    
    (51,725
    )
    
    
    (61,811
    )Other Operating and Financial Data:Sales increases:Total stores
    
    
    32.1
    %
    
    
    6.5
    %
    
    
    3.6
    %
    
    
    3.3
    %
    
    
    34.5
    %Like
stores (comparable 52-weeks)(1)
    
    
    1.4
    %
    
    
    4.5
    %
    
    
    5.3
    %
    
    
    2.8
    %
    
    
    30.3
    %Operating profit
    
    $
    36,321
    
    
    $
    60,972
    
    
    $
    69,038
    
    
    $
    67,814
    
    
    $
    199,067Ratio of
earnings to fixed charges(2)
    
    
    0.87x
    
    
    
    1.19x
    
    
    
    1.25x
    
    
    
    1.21x
    
    
    
    1.98xGross profit as a percentage
of sales
    
    
    24.76
    %
    
    
    25.75
    %
    
    
    26.58
    %
    
    
    27.40
    %
    
    
    28.40
    %Selling, general and administrative
expenses as a percentage of sales
    
    
    22.01
    %
    
    
    22.25
    %
    
    
    22.81
    %
    
    
    23.69
    %
    
    
    22.15
    %Store
Data(3):Number of stores (at end of
fiscal year)
    
    
    155
    
    
    
    155
    
    
    
    156
    
    
    
    157
    
    
    
    158Average sales per store (000s)
    
    $
    15,598
    
    
    $
    16,606
    
    
    $
    17,092
    
    
    $
    17,619
    
    
    $
    23,014Average store size:Total square feet
    
    
    32,910
    
    
    
    33,018
    
    
    
    33,083
    
    
    
    33,111
    
    
    
    33,206Selling square feet
    
    
    23,570
    
    
    
    23,639
    
    
    
    23,675
    
    
    
    23,693
    
    
    
    23,746Total square feet (at end of
fiscal year) (000s)
    
    
    5,101
    
    
    
    5,118
    
    
    
    5,161
    
    
    
    5,205
    
    
    
    5,267Total selling square feet (at end
of fiscal year) (000s)
    
    
    3,653
    
    
    
    3,664
    
    
    
    3,693
    
    
    
    3,724
    
    
    
    3,764Sales per total sq. ft
    
    $
    474
    
    
    $
    503
    
    
    $
    517
    
    
    $
    532
    
    
    $
    693Sales per selling sq. ft
    
    $
    662
    
    
    $
    702
    
    
    $
    722
    
    
    $
    744
    
    
    $
    969
  (1)
    
    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, only the current years weekly sales that
correspond to the weeks the stores were open in the previous year are
used. For replacement store sales, sales for the entire year are
included in the like store sales calculation. A store in Hemet,
California was closed on the last day of fiscal 2004. Accordingly, all
of this stores sales for fiscal 2003 and fiscal 2004 were included in
the like store sales calculation. (footnotes continued on following page) 14




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##### Table of Contents



Item 6. Selected Financial Data (contd.)  (2)
    
    For the purpose of determining the ratio of earnings to fixed
charges, earnings consist of income before income taxes and amortization
of previously capitalized interest. Fixed charges consist of interest
expense whether expensed or capitalized, amortization of debt issuance
costs, and such portion of rental expense as can be deemed by management
to be representative of the interest factor in the particular case.
Included in earnings and fixed charges is the Companys 50% share of
Santee. For fiscal 2004, included in earnings and fixed charges is the
Companys 50% share of fixed charges and earnings of Santee through
February 6, 2004. Santee has been consolidated into the Companys
consolidated results since that date.(3)
    
    Average sales per store, sales per total square feet and sales per
selling square feet are calculated by prorating the number of stores,
total square feet and selling square feet by the period of time the
store was opened, for new stores, or the period of time the expanded
square footage was in service, for expanded stores.(4)
    
    The fiscal year 2001 was a 53-week year, whereas fiscal years 2000,
2002, 2003 and 2004 were 52-week years. 15




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##### Table of Contents



Item 7. 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 audited 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 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 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 7.5% in fiscal 2002 and fiscal 2003
and 5.5% in fiscal 2004. 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
2004, if a rate of 4.5% was used to discount the reserves, the reserves for
self insurance would have been $1.3 million higher then the reserves calculated
at a 5.5% discount rate. If a rate of 6.5% was used in fiscal 2004 to discount
the reserves, the reserves for self insurance would have been $1.2 million
lower then the reserves calculated at a 5.5% discount rate. Advertising Allowances The Company receives co-operative advertising allowances from vendors for
advertising specific vendor products over specific periods of time. Effective
September 30, 2002, the Company adopted EITF Issue No. 02-16 Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor. The adoption of EITF Issue No. 02-16 effects the classification of
allowances received between cost of goods sold and advertising expense but has
no net effect on the profitability of the Company. EITF Issue No. 02-16
requires the Company to perform an analysis of the amount of co-operative
advertising allowances received from its vendors compared to the cost of
running the corresponding advertisement. Any amount of 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 cost that
corresponds to the co-operative advertising allowances received requires
judgment on the part of management. 16




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Critical Accounting Policies (contd.) Advertising Allowances (contd.) 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 cost is then compared to the amount of co-operative
adverting allowances received during the month and any allowances received in
excess of cost are recorded as a reduction in cost of goods sold. In fiscal
2003 and fiscal 2004, the amount of co-operative advertising allowances in
excess of the direct fair value of the advertising was recognized as a
reduction in cost of goods sold. In fiscal 2002, all co-operative advertising
allowances were recognized as reductions in advertising expense. 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
Form 10-K and the Companys 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 here-in. Ownership of the Company 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. 17




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Results of Operations The following table sets forth certain income statement components expressed as
a percent of sales for the fiscal years ended September 29, 2002, September 28,
2003 and September 26, 2004. Fiscal Years Ended2002
    
    2003
    
    2004Sales
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    26.58
    
    
    
    27.40
    
    
    
    28.40Operating expenses:Selling, general and
administrative expenses
    
    
    23.08
    
    
    
    23.96
    
    
    
    22.15Depreciation and amortization
    
    
    0.91
    
    
    
    0.98
    
    
    
    0.88Operating profit
    
    
    2.59
    
    
    
    2.46
    
    
    
    5.37Interest income
    
    
    0.06
    
    
    
    0.04
    
    
    
    0.06Interest expense
    
    
    (1.98
    )
    
    
    (1.93
    )
    
    
    (1.46
    )Interest expense related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (0.96
    )Equity in income from
unconsolidated affiliate
    
    
    0.11
    
    
    
    0.05
    
    
    
    0.03Other expenses-net
    
    
    (0.06
    )
    
    
    (0.04
    )
    
    
    (0.04
    )Income before income taxes
    
    
    0.72
    %
    
    
    0.58
    %
    
    
    3.00
    %
 As of February 6, 2004, 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. The labor dispute involving three of the Companys principal competitors from
October 11, 2003 through February 29, 2004, had a materially positive effect on
the Companys results of operations in fiscal 2004. 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 UFCW did not strike against the Company as a
result of an agreement whereby the Company 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. Under the new
collective bargaining agreements, the Company made special contributions to the
UFCWs health and welfare fund totaling $29.3 million, and made strike
ratification bonus payments to its employees totaling $4.7 million. During the labor dispute, many of the former Vons, Albertsons and Ralphs
customers chose to honor the picket lines and took their business to the
Companys 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, gross profit, as a percentage of sales,
has increased and operating expenses, as a percentage of sales, have decreased
for the fiscal year 2004 when compared to fiscal 2003. 18




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Results of Operations (contd.) The impact of the labor dispute on the Company was unprecedented and is not
expected to be repeated in the future. As of September 26, 2004, the Company
has been able to retain some of the increased volume gained during the labor
dispute. Management has taken steps through price promotions, customer service
and attention to detail to retain as much of the increased volume as possible.
Management anticipates that some of the retained volume realized to date will
be lost as its major competitors take continued 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. 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 replacement
store sales, sales for the entire year are included in the like store sales
calculation. Total sales amounted to $3.7 billion in 2004 compared to $2.8 billion in 2003
and $2.7 billion in 2002. The consolidation of Santee in fiscal 2004 increased
sales by $75.6 million or 2.75% over prior year sales. Like-store sales
increased $834.8 million or 30.3% in fiscal 2004, compared to $74.1 million or
2.78% in fiscal 2003 and $133.6 million or 5.30% in fiscal 2002. The increase
in like store sales for fiscal 2004 is due primarily to the increased sales
volume during the labor dispute and to the Companys ability to retain some of
the increased sales volume after the labor dispute. For the portion of the
fiscal year 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 fiscal
year after the labor dispute, like store sales increased $253.9 million or
15.85% over the same time frame of fiscal 2003. The remaining increase in sales
is due to the opening of a new store in Corona, California in June of 2003, the
opening of a new store in Moreno Valley, California in March of 2004 and the
opening of an additional new store in Corona, California in July of 2004. The
increase in sales during fiscal 2003 was due to favorable customer response to
the Companys marketing plan and to the addition of a new store in Corona,
California. Gross profit increased to $1.1 billion or 28.40% of sales in 2004 compared to
$754.4 million or 27.40% of sales in 2003 and $708.8 million or 26.58% of sales
in 2002. Gross profit, as a percentage of sales, for the fiscal 2004 increased
1.00% compared to the prior year. The increase in gross profit, as a
percentage of sales, in fiscal 2004 over the prior fiscal year is comprised of
increased store gross profit of 0.55% attributed primarily to reduced shrink in
the perishable departments during the labor dispute, a reduction, as a
percentage of sales, of 0.80% in distribution and transportation costs
attributed to the leveraging of fixed costs over the increased sales volume
offset by the consolidation of Santee in fiscal 2004 which created a reduction
in gross profit, as a percentage of sales, for the fiscal year of 0.32%. The
increase in gross profit, as a percent of sales, during fiscal 2003 was due in
large part to the introduction of higher gross margin products achieved through
the Companys merchandising expansion and upgrading programs including
significant investments in product display fixtures. Also contributing to the
increased gross profit in fiscal 2003 over fiscal 2002 was a $4.6 million
reduction in cost of goods sold caused by the reclassification of the amount of
vendor co-operative advertising allowances in excess of the fair value of
advertising. This reclassification resulted from the Companys adoption in
fiscal 2003 of EITF Issue No. 02-16 Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor. Fiscal 2002 cost
of goods sold were not reclassified. The Company adjusts its pricing strategy
as necessary to retain its aggressive every day low price market position. 19




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Results of Operations (contd.) Operating expenses include selling, general and administrative expenses, and
depreciation and amortization. In fiscal year 2004, selling, general and
administrative expenses amounted to $820.5 million or 22.15% of sales compared
to $659.7 million or 23.96% of sales in 2003 and $615.5 million or 23.08% of
sales in 2002. Included in selling, general and administrative expenses for fiscal 2004 is
$34.0 million for special payments related to the labor dispute and contract
ratification. These special payments, as a percentage of sales, were 0.92% of
sales in fiscal 2004. The Company made special payments of approximately
$29.3 million to UFCW union trust funds to bring the funds up to levels
negotiated during collective bargaining contract negotiations. Under the new
negotiated collective bargaining agreement, future union insurance payments by
the Company are proscribed at specified hourly rates. In addition, the Company
paid approximately $4.7 million to UFCW union members as a contract
ratification bonus. Also, included in selling, general and administrative
expenses for fiscal 2004 is a $22.4 million gain from a settlement agreement

reached with Ralphs. The gain from litigation settlement reduced selling,
general and administrative expenses, as a percentage of sales, by 0.62% for
fiscal 2004. The consolidation of Santee in fiscal 2004 caused a reduction in
selling general and administrative expenses, as a percentage of sales, of 0.29%
for fiscal 2004. After removing the effect of the special union payments, the gain from a
settlement agreement and the consolidation of Santee, selling general and
administrative expenses, as a percentage of sales, decreased 1.82% in the
current fiscal year over the previous fiscal year. Most of the remaining
reductions in the selling, general and administrative expenses, as a percentage
of sales, are attributed to the Company being able to leverage fixed cost and
operating more efficiently during the labor dispute. The reductions in
selling, general and administrative expenses, as a percentage of sales, include
a 0.97% reduction in payroll related expenses, 0.23% reduction in workers
compensation expense, a 0.39% reduction in utility expenses and a 0.23% in rent
expense. These savings were offset by a 0.44%, as a percentage of sales,
increase in phantom stock expense. The increase in selling, general and administrative expenses in fiscal 2003
over fiscal 2002 was due primarily to an increase of approximately $14.0
million in union insurance costs, an increase of approximately $6.3 million in
union pension cost and to the reclassification of $4.6 million of vendor
co-operative advertising allowances that were in excess of the fair value of
advertising from selling, general and administrative expenses to cost of goods
sold. Depreciation and amortization expenses amounted to $32.5 million in 2004
compared to $26.9 million in 2003 and $24.3 million in 2002. Depreciation and
amortization expense, as a percentage of sales, was 0.88%, 0.98% and 0.91% for
fiscal years 2004, 2003 and 2002, respectively. The changes in depreciation
expense from year-to-year are due primarily to store additions and remodels and
corporate expenditures. Operating profit amounted to $199.1 million or 5.37% of sales in 2004 compared
to $67.8 million or 2.46% of sales in 2003 and $69.0 million or 2.59% of sales
in 2002. Interest expense amounted to $54.0 million, $53.3 million and $52.8 million for
the 2004, 2003 and 2002 fiscal years, respectively. The increase in interest
expense in fiscal 2004 compared to fiscal 2003 is due primarily to the increase
in outstanding debt by the Company offset by the reduction in average interest
rates of its long term debt. The increase in interest expense in fiscal 2003
compared to fiscal 2002 is primarily twelve months of interest expense on the
5.0% Subordinated Note in fiscal 2003 versus nine months in fiscal 2002. 20




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Results of Operations (contd.) For fiscal 2004, interest expense related to debt purchase was $35.6 million
and included a $16.9 million payment for tender premium and fees on the
purchase of $397.8 million of the 10.75% Notes, an $8.5 million make whole
payment by Santee related to Santees redemption of all outstanding Santee
Notes, a $1.1 million make whole payment on the redemption of the remaining
$41.0 million 10.75% Senior Notes, and a $9.1 million charge for the write-off
of the remaining debt issuance costs related to (i) the purchase of $397.8
million of the 10.75% Notes, (ii) the redemption of the remaining $41.0 million
10.75% Senior Notes, (iii) the early retirement of the $20.0 million 5.0%
Subordinated Note due 2007 and (iv) the redemption of the Santee Notes. For
fiscal 2003 and fiscal 2002, there was no interest expense related to debt
purchase. Equity in income from unconsolidated affiliate amounted to $0.9 million in
fiscal 2004 compared to $1.3 million in 2003 and $2.9 million in 2002. The
decrease in equity in income from unconsolidated affiliate in fiscal 2004 is
due to Santee being consolidated as a wholly-owned subsidiary as of February 6,
2004, the effective date of the settlement agreement. The decrease in income
from unconsolidated affiliate in fiscal 2003 was due primarily from a $1.1
million deferred tax revaluation, by Santee, in fiscal 2002 that was not
present in fiscal 2003. Also, Santees net sales and operating profits
decreased in fiscal 2003 versus fiscal 2002. Income before income taxes amounted to $111.3 million, $15.9 million and $19.3
million in fiscal 2004, fiscal 2003 and fiscal 2002, respectively. Net income, for fiscal 2004, amounted to $71.8 million, compared to $10.1
million in fiscal 2003 and $11.8 million in fiscal 2002. 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 May 2007 and consists of a revolving loan facility for
working capital and letters of credit of $75.0 million. As of September 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. 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 issued to
support workers compensation liabilities. Borrowings under the Revolver are
secured by the receivables of Santee. The Revolver is scheduled to expire on
May 31, 2007. Advances under the revolver bear interest at Bank of Americas prime
rate plus 0.5% with interest due monthly or, if elected by Santee, at the
Interbank Offered Rate plus 1.75%. The outstanding undrawn portion of the
workers compensation letter of credit is subject to an annual commitment fee
of 1.25%. As of September 26, 2004, Santee had $1.4 million of outstanding
letters of credit and had $3.6 million available under the revolving loan
facility. The Company had no short-term borrowings outstanding at the end of fiscal years
2004, 2003 and 2002, and the Company did not incur short-term borrowings during
fiscal years 2004, 2003 and 2002. Working capital amounted to $319.9 million at September 26, 2004, $124.5
million at September 28, 2003 and $119.6 million at September 29, 2002. The
Companys current ratios were 2.22:1, 1.60:1 and 1.62:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the
industry. 21




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.) Net cash provided by operating activities amounted to $150.5 million in 2004,
$83.0 million in 2003 and $51.2 million in 2002. Net cash provided by
operating activities in fiscal 2004 improved significantly over fiscal 2003
primarily as a result of the increase in net income attributable mainly to the
labor dispute. In addition to the substantial increase in net income to $71.8
million in the current year compared to $10.1 million in the prior year, cash
provided by operating activities in fiscal 2004 of $150.5 million reflected a
$70.4 million increase in accrued liabilities, self-insurance reserves and
other liabilities, an increase of $22.0 million in accounts payable, a $13.7
million decrease in other assets and $43.0 million of depreciation and
amortization; partially offset by a $20.0 million increase in restricted cash,
an increase of $16.8 million in deferred income taxes, a $10.6 million increase
in inventory and a $22.4 million gain from litigation settlement. Net cash
provided by operating activities in fiscal 2003 consisted primarily of
depreciation and amortization, increases in accrued liabilities and
self-insurance reserves, increases in accounts payable and decreases in
receivables. Net cash provided by operating activities in fiscal 2002
consisted primarily of depreciation and amortization, increases in accrued
liabilities and self-insurance reserves and decreases in accounts receivables
and other assets offset by increases in income tax receivables and inventories
and decreases in accounts payable. Net cash provided by financing activities in fiscal 2004 amounted to $102.1
million. In fiscal 2004, the Company issued $525.0 million of 8.125% Senior
Notes due June 2012, issued $175.0 million of Floating Rate Senior Notes due
June 2010, purchased $397.8 million of 10.75% Senior Notes due June 2006,
redeemed the remaining $41.0 million of 10.75% Senior Notes due June 2006,
retired the $20.0 million 5.0% Subordinated Note due March 2007, redeemed $53.5
million of outstanding Santee Notes, paid $16.9 million in tender premium and
fees for the purchase of the 10.75% Senior Notes, paid a make-whole payment of
$1.1 million on the redemption of the remaining outstanding 10.75% Senior
Notes, paid a make-whole payment of $8.5 million for the redemption of the
Santee Notes, paid a dividend of $45.0 million to La Cadena, incurred fees of
$22.7 million associated with the issuance of the 8.125% Senior Notes and
Floating Rate Senior Notes and amortized the remaining debt issuance costs of
$9.1 million related to (i) the purchase of the 10.75% Senior Notes, (ii) the
redemption of the remaining outstanding 10.75% Senior Notes, (iii) the early
retirement of the 5.0% Subordinated Note and (iv) the redemption of the Santee
Notes, executed a new capital lease for $0.7 million and had payments on
capitalized leases of $1.3 million. Net cash used in financing activities in
fiscal 2003 amounted to $1.1 million and consisted of principal payments on
capital lease obligations. Net cash used in financing activities in fiscal
2002 amounted to $31.2 million and consisted of the redemption of 11,699 shares
of the Companys stock previously held by La Cadena, for $20.0 million in cash
and the issuance of a $20.0 million subordinated note, which bears interest at
a rate of 5.0% per annum, payable semi-annually; $4.5 million for the payment
of a dividend to La Cadena; and fees of approximately $5.0 million for the
consent of the holders of its 10.75% Senior Notes and fees and expenses of the
transaction, including a $500,000 financial advisory service fee to La Cadena.
Also in 2002, the Company redeemed $250,000 of its 10.75% Senior Notes due 2006
for $250,000 plus accrued interest. These Notes were restricted and
unregistered. The remaining financial activities in fiscal 2002 were for
principal payment on capital lease obligations. Net cash used in investing activities for 2004 amounted to $61.8 million and
consisted primarily of the purchase of property and equipment of $62.0 million.
Net cash used in investing activities for 2003 amounted to $51.7 million and
consisted primarily of the purchase of property and equipment of $51.9 million.
Net cash used in investing activities in fiscal 2002 amounted to $40.5 million
and consisted primarily of the purchase of property and equipment of $40.7
million. 22




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.) Management believes that capital expenditures for fiscal 2005 will be
approximately $139.0 million and are expected to be financed by cash on hand
and cash from operating activities. The following table sets forth the major
components of expected fiscal 2005 capital expenditures. Expected Capital Expenditures Fiscal 2005
(In thousands) New corporate office and distribution facilities
    
    $
    57,031New store construction, less reimbursements
    
    
    17,114Store remodels
    
    
    23,554MIS equipment and software
    
    
    8,115Store equipment
    
    
    26,677Transportation equipment
    
    
    4,641Production equipment
    
    
    626Distribution equipment
    
    
    768Office equipment and other
    
    
    464$
    138,990
 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, some expenditures may be funded
through operating leases or from debt financing. There can be no assurance
that such debt and lease financing will be available to the Company in the
future. The Company operated 158 supermarkets at September 26, 2004, 157 supermarkets
at September 28, 2003 and 156 supermarkets at September 29, 2002. The Companys supermarkets had approximately 5.3 million total square feet at
September 26, 2004 and 5.2 million total square feet at September 28, 2003 and
September 29, 2002. Credit Facilities On June 17, 2004, the Company entered into an amended and restated credit
facility (the New Credit Facility) with Bank of America N.A. (Bank of
America) as sole and exclusive administrative agent, and sole initial lender,
consisting of a three-year revolving credit facility in a principal amount of
up to $75.0 million, with the right to increase, under certain circumstances,
the size of the New Credit Facility to an aggregate principal amount of $100.0
million. The New Credit Facility amended and restated the existing credit
facility in its entirety. Subject to certain restrictions, the entire amount
of the New Credit Facility may be used for loans, letters of credit, or a
combination thereof. Borrowings under the New Credit Facility are unsecured
and will be used for certain working capital, capital expenditures and other
corporate purposes. Letters of credit under the letter of credit facility are
expected to be used to support obligations incurred in connection with the
construction of stores, construction of the new corporate office and
distribution facilities and workers compensation insurance obligations. The
availability of the loans and letters of credit are subject to certain
borrowing restrictions. The New Credit Facility is guaranteed by the Company and all of its
existing and future material subsidiaries, including Development and Santee
(subject, in the case of Santee, to termination upon certain specified events). 23




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)Credit Facilities (contd.) Loans under the New Credit Facility bear interest at a rate based upon either
(i) the Base Rate (defined as the higher of (a) the federal funds rate plus
0.50% and (b) the rate of interest publicly announced by Bank of America as its
reference rate), plus 1.00%, or (ii) the Offshore Rate (defined as the
average British Bankers Association Interest Settlement Rate for deposits in
dollars, adjusted for the maximum reserve requirement for Eurocurrency
funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be
applied in consecutive periods of the earlier of (a) the maturity date of the
loan or (b) periods, as selected by Markets of one, two, three or six months. The New Credit Facility will cease to be available and will be payable in full
on May 31, 2007. Notwithstanding such maturity date, at any time prior thereto
Markets shall be entitled to request the issuance of standby letters of credit
having a term which is up to one year following such maturity date, and
commercial letters of credit having a term which is up to six months following
such maturity date. Loans under the New Credit Facility must be repaid for a
period of ten consecutive days semi-annually. Loans under the New Credit Facility may be repaid and re-borrowed. The loans
under the New Credit Facility may be prepaid at any time without penalty,
subject to certain minimums and payment of any breakage and re-deployment costs
in the case of loans based on the offshore rate. The commitments under the New
Credit Facility may be reduced by Markets. Markets will be required to pay a
commitment fee equal to 0.25% per annum on the actual daily unused portion of
the revolving loan facility and the letter of credit facility, payable
quarterly in arrears. Outstanding letters of credit under the credit facility
are subject to a fee of 1.25% per annum on the face amount of such letters of
credit, payable quarterly in arrears. Markets will be required to pay standard
fees charged by Bank of America with respect to the issuance, negotiation, and
amendment of commercial letters of credit issued under the letter of credit
facility. The New Credit Facility requires Markets to meet certain financial
tests, including minimum net worth and other tests. The New Credit Facility
contains covenants which, among other things, limit the ability of Markets and
its subsidiaries to (i) incur indebtedness, grant liens and guarantee
obligations, (ii) enter into mergers, consolidations, liquidations and
dissolutions, asset sales, investments, leases and transactions with
affiliates, and (iii) make restricted payments. The New Credit Facility also
contains covenants that apply to the Company and its subsidiaries, and the
Company is a party to the New Credit Facility for purposes of these covenants.
These covenants, among other things, limit the ability of the Company and its
subsidiaries to incur indebtedness, make restricted payments, enter into
transactions with affiliates, and make amendments to the Indenture governing
the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes
due June 15, 2010. The New Credit Facility contains customary events of default, including payment
defaults; material inaccuracies in representations and warranties; covenant
defaults; cross-defaults to certain other indebtedness; certain bankruptcy
events; certain ERISA events; judgment defaults; invalidity of any guaranty;
and change of control. In 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 issued to
support workers compensation liabilities. Borrowings under the Revolver are
secured by the receivables of Santee. The Revolver is scheduled to expire on
May 31, 2007. 24




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)Credit Facilities (contd.) 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 September 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 September 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 UFCWs collective bargaining agreements were ratified on February 29, 2004
and expire in March 2007. The Teamsters collective bargaining agreement was
renewed in September 2002 and expires in September 2005. Santees collective
bargaining agreement with the Teamsters was renewed in March 2004 and expires
in March 2007. The Company values its employees and believes its relationship with them is
good and that employee loyalty and enthusiasm are key elements of its operating
performance. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements, other than stand-by letters
of credit, as discussed under the caption Liquidity and Capital Resources in
Item 7 Managements Discussion and Analysis of Financial Condition and Results
of Operations of this report and operating leases as disclosed in Note 7 -
Leases of the Audited Consolidated Financial Statements, that would have or are
reasonably likely to have material current or future effect on the registrants
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources. 25




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Tabular Disclosure of Contractual Cash Obligations The following table sets forth the Companys contractual cash obligations
and commercial commitments as of September 26, 2004. Contractual Cash
Obligations(In thousands)Lessthan
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years8.125% Senior Notes due 2012Principal
    
    $
    525,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    525,000Interest
    
    
    341,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    127,968866,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    652,968Floating Rate Senior Notes due 2010Principal
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,000Interest
    
    
    54,136
    
    
    
    9,415
    
    
    
    18,830
    
    
    
    18,830
    
    
    
    7,061229,136
    
    
    
    9,415
    
    
    
    18,830
    
    
    
    18,830
    
    
    
    182,061Capital
Lease Obligations (1)Principal
    
    
    10,717
    
    
    
    1,247
    
    
    
    2,226
    
    
    
    2,140
    
    
    
    5,104Interest
    
    
    8,006
    
    
    
    1,568
    
    
    
    2,641
    
    
    
    2,050
    
    
    
    1,74718,723
    
    
    
    2,815
    
    
    
    4,867
    
    
    
    4,190
    
    
    
    6,851Operating
Leases (1)
    
    
    233,045
    
    
    
    33,434
    
    
    
    55,589
    
    
    
    37,053
    
    
    
    106,969Total Contractual Cash Obligations
    
    $
    1,346,917
    
    
    $
    88,083
    
    
    $
    164,599
    
    
    $
    145,386
    
    
    $
    948,849Other Commercial
Commitments(In thousands)Lessthan
    
    
    
    
    
    
    
    
    
    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 and
distribution facilities. Certain of the Companys operating leases
provide for minimum annual payments that change over the primary term
of the lease. For purposes of contractual cash obligations shown here,
contractual step increases or decreases are shown in the period they
are due. 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 December 31, 2004 and
October 1, 2005. 26




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Recent Accounting Pronouncements In
November 2004, the FASB issued Statement 151, Inventory
Costs, an
amendment of APB 43, Statement 151 clarifies what amount of expenses should be
recognized as current period charges. The Company does not expect the adoption
to of this pronouncement to have a material impact on the results of its
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 to 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 include 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 store, 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 the
geographic market area of Wal-Marts Super Center 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
Super Center 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 of its major competitors 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. 27




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Cautionary Statement 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,
labor unrest, 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. 
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk The Company is subject to interest rate risk on its fixed interest rate debt
obligations and floating 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 floating rate debt obligations are the
Floating Rate Senior Notes due June 2010. The fair values of the 8.125% Senior
Notes due June 2012 and Floating Rate Senior Notes due June 2010 are based upon
quoted market prices. Although quoted market prices are not readily available
on the Companys capital lease obligations, the Company believes that stated
values approximate the fair value of these obligations. The Company has not
engaged in any interest rate swap agreements, derivative financial instruments
or other type of financial transactions to manage interest rate risk. The
following table provides the future principal cash flows and weighted-average
interest rates expected on the Companys fixed rate and floating rate debt
obligations. The fair value shown here is based upon the quoted market price
of the 8.125% Senior Notes and Floating Rate Senior Notes and the stated value
of the capital leases as of September 26, 2004. Expected Year of Maturity
(In thousands) Fair2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    ValueLong-Term Debt and
Capital Lease Obligations
    
    $
    1,247
    
    
    $
    1,188
    
    
    $
    1,038
    
    
    $
    992
    
    
    $
    1,148
    
    
    $
    530,279
    
    
    $
    736,967Average Interest Rate
    
    
    7.53
    %
    
    
    7.52
    %
    
    
    7.66
    %
    
    
    7.48
    %
    
    
    7.49
    %
    
    
    7.97
    %
 28




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Information called for by this item is set forth in the Companys audited
consolidated financial statements and supplementary data contained in this
report. Specific financial statements and supplementary data can be found on
the pages listed in the following index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page NumberReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at September 29, 2002,
September 28, 2003 and September 26, 2004
    
    
    F-3Fiscal years ended September 29, 2002, September 28, 2003 and
September 26, 2004:Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Consolidated
Statements of Stockholders Deficit
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 
 Item 9A. Controls and Procedures As of the year ended September 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-K. During the quarter and
fiscal year ended September 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 or
material weaknesses that would have required corrective actions to be taken. 29




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information with respect to the current
executive officers and directors of the Company, their ages and principal
occupations for at least the past five years. Directors of the Company each
serve for a term of one year, or until their successors are elected. The
officers serve at the discretion of the Board of Directors of the Company. Name
    
    Age
    
    PositionJack H. Brown
    
    
    65
    
    
    Chairman of the Board, President
and Chief Executive OfficerDonald I. Baker
    
    
    63
    
    
    Executive Vice President
and Chief Operating OfficerPhillip J. Smith
    
    
    57
    
    
    Senior Vice President and Chief Financial OfficerDennis L. McIntyre
    
    
    44
    
    
    Group Senior Vice President of MarketingJames W. Lee
    
    
    53
    
    
    Group Senior Vice President of Retail OperationsEdward A. Stater
    
    
    53
    
    
    Senior Vice President of Retail OperationsBruce D. Varner
    
    
    68
    
    
    Director and SecretaryThomas W. Field, Jr.
    
    
    70
    
    
    Vice Chairman of the Board of DirectorsC. Dale Warman
    
    
    75
    
    
    Director
 Background of Directors and Executive Officers Jack H. Brownhas been President and Chief Executive Officer of the
Company since June 1981 and Chairman of the Board since 1986. From September
1978 to June 1981, Mr. Brown served as President of Pantry Food Markets, Inc.
and American Community Stores Corporation, Inc., both wholly owned subsidiaries
of Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr.
Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a
publicly held corporation. Mr. Brown has been employed in various capacities
in the supermarket industry for 52 years. Mr. Brown has a majority interest
and is the managing general partner of La Cadena. Mr. Brown serves as a
Director for the Automobile Club of Southern California. Donald I. Bakerwas promoted to President of Markets in September 2004 and
has been Executive Vice President and Chief Operating Officer since November
2001 and Executive Vice President of the Company since October 1998. Mr. Baker
joined the Company in November 1983 as Vice President-Warehouse and
Transportation and was Group Senior Vice President-Administration from July
1996 to October 1998. From July 1992 to July 1996, Mr. Baker was Group Senior
Vice President-Human Resources and Distribution. From August 1986 to July
1992, Mr. Baker was Senior Vice President-Human Resources and Distribution.
Mr. Baker has approximately 38 years of experience in the supermarket industry.
Prior to joining the Company, Mr. Baker was employed by American Community
Stores Corporation, Inc., a subsidiary of Cullum Companies, Inc., a publicly
held corporation, from 1972 to 1983 in various capacities including Vice
President of Retail Operations, and was also employed by The Kroger Co. from
1966 to 1972. 30




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##### Table of Contents



Item 10. Directors and Executive Officers of the Registrant (contd.) Background of Directors and Executive Officers (contd.) Phillip J. Smithhas been Senior Vice President and Chief Financial
Officer since November 2000, and was Vice President and Controller from April
1998 until November 2000. Mr. Smith joined the Company in 1987 as Controller.
Mr. Smith has approximately 29 years experience in the supermarket industry.
Prior to joining the Company, Mr. Smith was employed by Market Basket
Foodstores as Vice President and Chief Financial Officer from 1985 to 1987.
From 1975 until 1985, Mr. Smith was employed by various divisions of Cullum
Companies, Inc., a publicly held corporation, in various financial capacities. Dennis L. McIntyrehas been Group Senior Vice President of Marketing since
August 2002. Mr. McIntyre has served the Company for 26 years in various
capacities including Courtesy Clerk, Assistant Manager, Buyer, Assistance Vice
President of Marketing from 1994 until 1999, Vice President of Marketing from
1999 to 2000 and Senior Vice President of Marketing from 2000 to 2002. James W. Leejoined the Company in August 2002 as Group Senior Vice
President of Retail Operations. Mr. Lee has over 32 years experience in the
supermarket industry. Prior to joining the Company, Mr. Lee was with Wild Oats
Markets, Inc. between 1997 and 2001 as Chief Operating Officer. Mr. Lee was
employed in various operating capacities with Ralphs Grocery Company, a
division of Kroger Co., from 1972 until 1996. Edward A. Staterhas been Senior Vice President of Retail Operations since
April 2000. Mr. Stater has served the Company for 36 years in various
capacities including Clerk, Produce Buyer, Assistant Warehouse Supervisor, New
Store Set-up Manager, Grocery Supervisor, District Manager and Regional Vice
President from 1986 until 2000. Bruce D. Varnerhas been a Director of Stater Bros. Markets since
September 1985 and a Director of Stater Bros. Holdings Inc. since May 1989.
Since February 1997, Mr. Varner has been a partner in the law firm of Varner,
Saleson & Brandt LLP. From 1967 to February 1997, Mr. Varner was a partner in
the law firm of Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner
specializes in business and corporate matters. Mr. Varner and the law firm of
Varner, Saleson & Brandt LLP have performed legal services in the past for the
Company and the Company expects such services to continue in the future. Thomas W. Field, Jr.has been Vice Chairman of the Board of Directors of
the Company since May 1998 and a Director of the Company since 1994. Mr. Field
has been President of Field and Associates since 1989. From 1988 to 1989, Mr.
Field was Chairman of the Board, President and Chief Executive Officer of
McKesson Corporation and was its President since 1984, and President and Chief
Executive Officer from 1986 to 1988. Mr. Field was President of American
Stores Company from 1981 to 1984 and was President of Alpha Beta Company from
1976 to 1984. Mr. Field was a Director of American Stores Company from 1979 to
1984. Mr. Field is a nationally recognized and highly regarded supermarket
executive. Mr. Field has held various positions in the Supermarket Industry
for over 45 years and serves as a Director for the Campbell Soup Company. C. Dale Warmanhas been a Director of the Company since 2000. Mr. Warman
served the Fred Meyer Company for over 43 years. Mr. Warman served as a
Director of Fred Meyer from 1975 to 1990, Mr. Warman served as President from
1982 to 1990 and was its Executive Vice President from 1981 to 1990. Mr.
Warman was Executive Vice President of Allied Foods from 1972 to 1975. Mr.
Warman served as a Director of Big Bear Stores from 1987 to 1989 and as a
Director of Allied Stores from 1973 to 1975. Mr. Warman is considered one of
the supermarket industrys outstanding executives. 31




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##### Table of Contents



Item 11. Executive Compensation The following table summarizes the compensation for services rendered during
the prior three fiscal years paid to the CEO and the four most highly
compensated executive officers other than the CEO of the Company: Annual CompensationAll OtherName and
    
    
    
    
    
    
    
    
    
    Bonuses
    
    Other Annual
    
    CompensationPrincipal Position
    
    Year
    
    Salary
    
    (4) (5)
    
    Compensation
    
    (1)(2)(3)Jack H. Brown
    
    
    2004
    
    
    $
    1,350,000
    
    
    $
    900,000
    
    
    $
    
    
    
    $
    51,500Chairman, President and
    
    
    2003
    
    
    $
    1,260,000
    
    
    $
    1,848,000
    
    
    $
    
    
    
    $
    53,067Chief Executive Officer
    
    
    2002
    
    
    $
    1,188,000
    
    
    $
    1,540,000
    
    
    $
    
    
    
    $
    53,340Donald I. Baker
    
    
    2004
    
    
    $
    553,000
    
    
    $
    150,000
    
    
    $
    
    
    
    $
    Executive Vice President
    
    
    2003
    
    
    $
    515,000
    
    
    $
    295,000
    
    
    $
    
    
    
    $
    2,067and Chief Operating Officer
    
    
    2002
    
    
    $
    473,000
    
    
    $
    250,000
    
    
    $
    
    
    
    $
    1,840Phillip J. Smith
    
    
    2004
    
    
    $
    231,000
    
    
    $
    370,000
    
    
    $
    
    
    
    $
    Senior Vice President and
    
    
    2003
    
    
    $
    215,000
    
    
    $
    125,000
    
    
    $
    
    
    
    $
    2,067Chief Financial Officer
    
    
    2002
    
    
    $
    202,000
    
    
    $
    100,000
    
    
    $
    
    
    
    $
    1,840Dennis L. McIntyre
    
    
    2004
    
    
    $
    257,000
    
    
    $
    70,000
    
    
    $
    
    
    
    $
    Group Senior Vice
    
    
    2003
    
    
    $
    240,000
    
    
    $
    80,000
    
    
    $
    
    
    
    $
    2,067President of Marketing
    
    
    2002
    
    
    $
    192,000
    
    
    $
    60,000
    
    
    $
    
    
    
    $
    1,840James W. Lee
    
    
    2004
    
    
    $
    252,000
    
    
    $
    70,000
    
    
    $
    
    
    
    $
    Group Senior Vice President
    
    
    2003
    
    
    $
    232,000
    
    
    $
    80,000
    
    
    $
    
    
    
    $
    2,067of Retail Operations
    
    
    2002
    
    
    $
    28,000
    
    
    $
    20,000
    
    
    $
    
    
    
    $
    
  (1)
    
    The dollar value of perquisites and other personal benefits, if any,
for each of the Named Executive Officers was less than the reporting
thresholds established by the Securities and Exchange Commission.(2)
    
    Amounts shown for the Named Executive Officers represent the
Companys contributions to the Companys Profit Sharing Plan, a defined
contribution plan, for the account of each Named Executive Officer.
Plan participants become fully vested in the plan after seven years of
service.(3)
    
    Includes Mr. Browns Director Fees for 2002, 2003 and 2004, which
amounted to $50,500, $51,500 and 51,500, respectively.(4)
    
    Annual performance bonuses to be paid to the Named Executive Officers
for fiscal 2004 had neither been calculated nor awarded as of December
21, 2004, the latest practical date. Amounts shown for fiscal 2004 are
related to performance during the Southern California labor dispute.(5)
    
    Amounts shown for fiscal 2004 for Mr. Smith also include bonuses for
the Santee transaction and successful bond offering. Stock Options and SARs None 32




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##### Table of Contents



Item 11. Executive Compensation (contd.) Pension Plan The Companys Pension Plan for Salaried Employees (the Pension Plan) is a
non-contributory, defined benefit plan which applies to all salaried employees
who have completed one year of qualified service, including Directors who are
employees. For each year of credited service, the annual pension to which an
employee is entitled under the Pension Plan upon normal retirement at age 65 is
an amount equal to three quarters of one percent of the employees compensation
for each year up to the social security wage base, plus 2.15 percent of the
employees compensation for each year in excess of the social security wage
base. The Named Executive Officers have the following years of credited
service under the Pension Plan as of September 26, 2004: Jack H. Brown  23
years, Donald I. Baker  21 years, Phillip J. Smith  17 years, Dennis L.
McIntyre  26 years and James W. Lee  2 years. The amounts shown in the following table are estimated annual retirement
benefits under the Pension Plan (assuming payments are made on the normal life
annuity and not under any of the various survivor forms of benefits) based upon
retirement at age 65, after various years of service at selected salary levels.
Benefits under the Pension Plan do not become fully vested until the employee
has five years of credited service with the Company. The Internal Revenue Code
of 1986, as amended, places certain limitations on pension benefits that can be
paid from a tax-qualified pension plan and trust, as well as the compensation
that may be taken into account in determining such benefits. Such limitations
are not reflected in the table below. The maximum annual benefit for 2004
retirees with ten or more years of service at retirement is $160,000. The
maximum annual compensation that may be considered for 2004 retirees is
$200,000. Pension Plan Table Years of ServiceRemuneration
    
    15
    
    20
    
    25
    
    30
    
    35$
    50,000
    
    
    $
    5,625
    
    
    $
    7,500
    
    
    $
    9,375
    
    
    $
    11,250
    
    
    $
    13,12575,000
    
    
    
    12,785
    
    
    
    17,046
    
    
    
    21,308
    
    
    
    25,569
    
    
    
    29,831100,000
    
    
    
    20,847
    
    
    
    27,796
    
    
    
    34,745
    
    
    
    41,694
    
    
    
    48,643125,000
    
    
    
    28,910
    
    
    
    38,546
    
    
    
    48,183
    
    
    
    57,819
    
    
    
    67,456150,000
    
    
    
    36,972
    
    
    
    49,296
    
    
    
    61,620
    
    
    
    73,944
    
    
    
    86,268175,000
    
    
    
    45,035
    
    
    
    60,046
    
    
    
    75,058
    
    
    
    90,069
    
    
    
    105,081200,000
    
    
    
    53,097
    
    
    
    70,796
    
    
    
    88,495
    
    
    
    106,194
    
    
    
    123,893
 Board of Directors Directors of the Company are paid an annual fee of $50,000 plus $500 for each
board meeting attended. The Board had two standing committees during fiscal
2004. The Audit Committee recommends the appointment or removal of the Companys
independent auditors, reviews the scope and results of the independent audit of
the Company, reviews audit fees and reviews changes in accounting policies that
have a significant effect on the Companys financial statements. The Audit
Committee members are Mr. Warman and Mr. Field. Mr. Field is the Audit
Committees Financial Expert and is an independent member of the Board. The Compensation Committee approves compensation and annual performance bonuses
paid to the Chief Executive Officer and the Senior Management of the Company.
The Compensation Committee members are Mr. Varner and Mr. Field. Code of Ethics The Company has adopted a Financial Code of Ethics which has been signed by the
CEO, CFO and Controllers of the Company. A copy of the Code of Ethics has been
provided as an exhibit to this Report on Form 10-K. 33




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##### Table of Contents



Item 11. Executive Compensation (contd.) Employment and Severance Agreements In June of 2000, the Companys principal operating subsidiary, Stater Bros.
Markets, entered into Employment Agreements (Agreements) with Messrs. Brown,
Baker, Smith and McIntyre. In August of 2002, a similar agreement was entered
into with Mr. Lee. Under each of the Agreements, the employee is employed to
serve as an officer of the Company and with certain exceptions the Agreements
prohibit the employee from employment in any other business except for a parent
or subsidiary of the Company. Each of the Agreements may be terminated by the
Company with cause and by either party without cause upon ninety (90) days
written notice. If the employment is terminated without cause, the employees
compensation continues through the expiration of the term of the Agreement then
in effect, except in the event of termination of any of the Agreements of
Messrs. Baker, Smith, McIntyre and Lee by Mr. Brown or by the Board of
Directors with the consent of Mr. Brown. If the employee is terminated as a
result of a change of control, he is entitled to receive all salary and
benefits provided under the Agreement for the original term notwithstanding
termination of his employment. Each Agreement provides for annual base
compensation at the employees current level with annual increases plus
employee benefits and incentive bonus calculated in accordance with a formula
based on the Companys earnings. Mr. Browns Agreement has an original term of
five (5) years which is automatically renewed on July 1 of each year for a five
(5) year term unless ninety (90) days notice of termination is given by either
party. Mr. Bakers Agreement has an original term of four (4) years and unless
sooner terminated is renewed automatically through April 20, 2006, the date of
Mr. Bakers sixty-fifth (65th) birthday, the Companys normal retirement age.
Mr. Smiths, Mr. McIntyres and Mr. Lees Agreements have an original term of
three (3) years, which is automatically renewed for an additional term of three
(3) years unless sooner terminated. In addition, the Companys operating entity, Stater Bros. Markets has entered
into employment contracts with 43 additional key members of Management. The Companys severance policies generally provide for two weeks of severance
pay to full-time, non-bargaining unit employees for every year of service to
the Company, up to a maximum of twelve weeks. Phantom Stock Plan The Company maintains a phantom stock plan to provide additional incentive
compensation to certain executives of Markets whose performance is considered
especially critical to the Companys business. Under the plan, grants may be
made by the Compensation Committee and Board of Directors to persons
recommended by the Chairman of the Board or Chief Executive Officer. Existing
stockholders and partners of La Cadena are not eligible to receive awards.
Awards under the plan are for units that have an assigned value. The value of
the units awarded under the plan will increase or decrease in accordance with
net profits of the Company. Subject to vesting provisions of the plan, units
are paid in cash either (i) in a lump sum upon a change in control of the
Company; or (ii) if sooner, in either a lump sum or installments (with
interest) over a five-year period (as the Company may determine) following
termination of the participants employment by reason of retirement, permanent
total disability or death. Awards under the plan vest after five years, except
that upon a participants early retirement, permanent total disability or
death, awards are considered partially vested at the rate of 20% for each year
of employment following the grant. If a participant voluntarily terminates his
or her employment, or is terminated for cause, any unvested awards under the
plan will terminate and no payment will be made thereunder. As of September
29, 2002, September 28, 2003 and September 26, 2004, there were 668,000,
693,000 and 702,000 units outstanding, respectively. Payments pursuant to units awarded under the plan are based upon the value of a
unit at the date of retirement, permanent total disability or death, except
that if such date occurs within two years of the grant the amount of payment,
per unit, is limited to the appreciated value of the units during the period.
Upon a change of control, the payment on all units is equal to the full value
of the units. 34




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 21, 2004, the number and
percentage of outstanding shares of Class A Common Stock beneficially owned by
(a) each person known by the Company to beneficially own more than 5% of such
stock, (b) each Director of the Company, (c) each of the Named Executive
Officers, and (d) all Directors and executive officers of the Company as a
group: Shares ofClass A Common
    
    Percentage ofStock
    
    Class AName and Address
    
    Beneficially
    
    Common Stockof Beneficial Owner
    
    Owned
    
    OutstandingLa
Cadena(1)
    
    
    38,301
    
    
    
    100
    %Jack H. Brown(1)(2)
    
    
    38,301
    
    
    
    100
    %Richard C. Moseley(1)(2)
    
    
    38,301
    
    
    
    100
    %Donald I. Baker(2)
    
    
    
    
    
    
    Phillip J. Smith(2)
    
    
    
    
    
    
    Dennis L. McIntyre(2)
    
    
    
    
    
    
    James W. Lee(2)
    
    
    
    
    
    
    Edward A. Stater(2)
    
    
    
    
    
    
    Bruce D. Varner(2)
    
    
    
    
    
    
    Thomas W. Field, Jr.(2)
    
    
    
    
    
    
    C. Dale Warman(2)
    
    
    
    
    
    
    All Directors and executive
officers as a group
(10 persons)(1)
    
    
    38,301
    
    
    
    100
    %
   (1)
    
    The 38,301 outstanding shares of the Companys Class A Common Stock
are owned by La Cadena and may be deemed to be beneficially owned by the
partners of La Cadena. The general partners of La Cadena are Jack H.
Brown and Richard C. Moseley. Mr. Brown has the majority interest and
is the Managing General Partner of La Cadena and has the power to vote
the shares of the Company owned by La Cadena on all matters. The
address of La Cadena is 3750 University Avenue, Suite 610, Riverside,
California 92501.(2)
    
    The address of Messrs. Brown, Moseley, Baker, Smith, McIntyre, Lee,
Stater, Varner, Field and Warman is c/o the Company at 21700 Barton
Road, Colton, California 92324. Change of Control Arrangements None 35




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions Mr. Bruce D. Varner and the law firm of Varner, Saleson & Brandt LLP, of which
Mr. Varner is a partner, have performed legal services in the past for the
Company. The total cost of such legal services incurred by the Company during
fiscal 2004 was approximately $4.8 million. Mr. Varner was one of the named
defendants in the legal proceedings between Markets, Santee and Hughes and Mr.
Varner received $100,000 as part of litigation settlement between Markets and
Hughes. In addition Mr. Varner was paid Director fees of approximately
$52,000. The Company believes that the terms and costs of such legal services
provided by Mr. Varner and the law firm of Varner, Saleson & Brandt LLP were at
least as fair to the Company as could have been obtained from unaffiliated law
firms. The Company expects such services to continue in the future. Effective January 2002, the Company redeemed 11,699 shares of the Companys
stock previously held by La Cadena and made a cash payment of $20.0 million and
executed a $20.0 million subordinated note due March 31, 2007 to Mr. H.
Harrison Lightfoot, a former partner of La Cadena. The subordinated note bears
interest at a rate of 5.0% per annum, payable semi-annually. Effective
February 2002, the Company paid a $4.5 million dividend and a $500,000
financial advisory service fee to La Cadena. On June 17, 2004, the Company paid a $45.0 million dividend to La Cadena. The 38,301 outstanding shares of the Companys Class A Common Stock are owned
by La Cadena and may be deemed to be beneficially owned by the partners of La
Cadena. The general partners of La Cadena are Jack H. Brown and Richard C.
Moseley. Mr. Brown has a majority interest and is the Managing General
Partner. Mr. Brown is a Director of the Company and a Named Executive Officer
of the Company. Mr. Brown has the power to vote the shares of the Company
owned by La Cadena. Mr. Moseley served the Company for over 44 years in many
executive capacities, most recently and from September 1995 until his
retirement from the Company in January 1996, Mr. Moseley served as Executive
Vice President of the Company. 
 Item 14. Principal Accounting Fees and Services Audit Fees Ernst & Young LLP fees for audit services aggregated $868,000 in fiscal 2004
and $308,000 in fiscal 2003 for services associated with the annual audit and
reviews of the Companys quarterly reports on Form 10-Q. Fees for fiscal 2004
also included consent services related to an offering memorandum for purchase
of the Companys 10.75% Senior Notes due 2006 and the issuance and registration
of the Companys 8.125% Senior Notes due 2012 and Floating Rate Senior Notes
due 2010. Audit Related Fees Ernst & Young LLP billed the Company in aggregate $30,000 in fiscal 2004 and
$31,000 in fiscal 2003 for audits of the Companys pension and profit sharing
plans. Tax Fees Ernst & Young LLP billed the Company in aggregate $27,000 in fiscal 2004 and
$177,000 in fiscal 2003 for tax compliance, tax advice and tax planning
services. All Other Fees There were no fees billed by Ernst & Young LLP for other services in either
fiscal 2004 or fiscal 2003. 36




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    
    Document list  (1)
    
    Financial StatementsSee Financial Statement Index included in Item 8 of Part II
of this Form 10-K.(2)
    
    Financial Statement SchedulesThe Financial Statement Schedules required by Item 15(d) for
which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission, are
not required under the related instructions or are
inapplicable and therefore, have been omitted.(3)
    
    ExhibitsExhibits as required by Item 15(c) are as follows: EXHIBIT NO.
    
    
    
    
    
    DESCRIPTION3.1
    
    
    (1
    )
    
    Certificate of Incorporation of Stater Bros. Holdings Inc.3.2
    
    
    (1
    )
    
    By-Laws of Stater Bros. Holdings Inc.3.3
    
    
    (9
    )
    
    Articles of Incorporation of Stater Bros. Markets3.4
    
    
    (9
    )
    
    By-Laws of Stater Bros. Markets3.5
    
    
    (9
    )
    
    Articles of Incorporation of Stater Bros. Development, Inc.3.6
    
    
    (9
    )
    
    By-Laws of Stater Bros. Development, Inc.3.7
    
    
    (9
    )
    
    Articles of Incorporation of Santee Dairies, Inc3.8
    
    
    (9
    )
    
    By-Laws of Santee Dairies, Inc.4.1
    
    
    (9
    )
    
    Indenture dated as of June 17,
2004 among Stater Bros. Holdings Inc. as Issuer,
Stater Bros. Markets, Stater Bros. Development, Inc.
and Santee Dairies Inc., as Guarantors, and The Bank
of New York, as Trustee4.2
    
    
    (9
    )
    
    Registration Rights Agreement
dated as of June 17, 2004 between Stater Bros.
Holdings Inc., as Issuer, Stater Bros. Markets,
Stater Bros. Development, Inc. and Santee Dairies,
Inc., as Guarantors and Bank of America Securities
LLC, as Initial Purchaser4.3
    
    
    (9
    )
    
    Specimen Form of Fixed Rate Global Note4.4
    
    
    (9
    )
    
    Specimen Form of Floating Rate Global Note
 37




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)  (a)(3)
    
    Exhibits (contd.) EXHIBIT NO.
    
    
    
    
    
    DESCRIPTION4.5
    
    
    (9
    )
    
    First Supplemental Indenture,
dated as of January 11, 2002, between Stater Bros.
Holdings Inc. and The Bank of New York, as successor
in interest to IBJ Whitehall Bank & Trust Company, as
Trustee for the 10.75% Senior Notes due 20064.6
    
    
    (8
    )
    
    Second Supplemental Indenture,
dated as of May 27, 2004 between Stater Bros.
Holdings Inc. and The Bank of New York, as successor
in interest to IBJ Whitehall Bank & Trust Company, as
Trustee for the 10.75% Senior Notes due 20065.1
    
    
    (9
    )
    
    Opinion of Gibson, Dunn &
Crutcher LLP10.1
    
    
    (1
    )
    
    Reclassification Agreement
dated September 3, 1993, by and among Stater Bros.,
Craig and La Cadena10.2
    
    
    (1
    )
    
    Amendment to Reclassification
Agreement, dated January 12, 1994, by and among
Stater Bros., Craig and La Cadena10.3
    
    
    (1
    )
    
    Agreement of Stockholders
dated May 10, 1989, by and among Stater Bros., Craig
and La Cadena10.4
    
    
    (1
    )
    
    Amendment to Agreement of
Stockholders dated September 3, 1993, by and among
Stater Bros., Craig, Craig Management, Inc. and La
Cadena10.5
    
    
    (1
    )
    
    Option Agreement dated
September 3, 1993, by and between Stater Bros. and
Craig10.6
    
    
    (1
    )
    
    Amendment to Option Agreement
dated January 12, 1994, by and between Stater Bros.
and Craig10.7
    
    
    (1
    )
    
    Consulting Agreement dated
September 3, 1993, by and between Stater Bros., Craig
and CMI10.8
    
    
    (1
    )
    
    Letter Agreement regarding
Consulting Agreement, dated March 8,1994, by and
between Stater Bros., Craig and CMI10.9
    
    
    (1
    )
    
    Second Amended and Restated
Stock Agreement dated January 12, 1994, by and among
Stater Bros., Craig, CMI, La Cadena and James J.
Cotter10.10
    
    
    (1
    )
    
    Security Agreement dated
March 8, 1994, by and between Stater Bros. and Craig10.11
    
    
    (1
    )
    
    Credit Agreement dated March
8, 1994, by and between Stater Bros. Markets and Bank
of America Trust and Savings Association10.12
    
    
    (2
    )
    
    Amendment dated June 23, 1995
to the Credit Agreement dated March 8, 1994, by and
between Stater Bros. Markets and Bank of America
Trust and Savings Association10.13
    
    
    (2
    )
    
    Amendment dated July 22, 1996
to the Credit Agreement dated March 8, 1994, by and
between Stater Bros. Markets and Bank of America
Trust and Savings Association
 38




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)  (a)(3)
    
    Exhibits (contd.) EXHIBIT NO.
    
    
    
    
    
    DESCRIPTION10.14
    
    
    (9
    )
    
    Credit Agreement dated as of
June 17, 2004 by and among Stater Bros. Markets,
Stater Bros. and Bank of America, N.A10.15
    
    
    (1
    )
    
    Continuing Guaranty dated
March 8, 1994, of Stater Bros. Development, Inc. in
favor of Bank of America Trust and Savings
Association10.16
    
    
    (1
    )
    
    Subordination Agreement dated
March 8, 1994, by and among Stater Bros., Stater
Bros. Markets and Bank of America Trust and Savings
Association10.17
    
    
    (1
    )
    
    Amended and Restated Sublease
Agreement dated June 1, 1983, between Wren Leasing
Corp., as Lessor, and Stater Bros. Markets, as Lessee10.18
    
    
    (1
    )
    
    Preferred Stock Agreement
dated March 22, 1983, between Stater Bros. Markets
and Petrolane Incorporated10.19
    
    
    (1
    )
    
    Escrow Agreement dated
September 19, 1985, by and among Stater Bros.
Markets, Petrolane Incorporated and First Interstate
Bank of California10.20
    
    
    (2
    )
    
    Dealer Manager Agreement
dated as of July 1, 1999, by and between Stater Bros.
and Banc of America Securities LLC10.21
    
    
    (3
    )
    
    Employment contract dated
June 1, 2000 by and between Stater Bros. Markets and
Jack H. Brown10.22
    
    
    (4
    )
    
    Employment contract dated
June 1, 2000, as amended, by and between Stater Bros.
Markets and Donald I. Baker10.23
    
    
    (4
    )
    
    Employment contract dated
June 1, 2000, as amended, by and between Stater Bros.
Markets and A. Gayle Paden10.24
    
    
    (4
    )
    
    Employment contract dated
June 1, 2000 by and between Stater Bros. Markets and
H. Harrison Lightfoot10.25
    
    
    (4
    )
    
    Employment contract dated
June 1, 2000 by and between Stater Bros. Markets and
Phillip J. Smith10.26
    
    
    (4
    )
    
    Stater Bros. Holdings Inc.
Phantom Stock Plan10.27
    
    
    (5
    )
    
    First Amendment dated
September 15, 2000 to the Credit Agreement dated as
of August 6, 1999 by and among Stater Bros. Markets,
Stater Bros. Holdings Inc. and Bank of America, N.A.10.28
    
    
    (5
    )
    
    Second Amendment dated
December 13, 2001 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets,
Stater Bros. Holdings Inc. and Bank of America, N.A.10.29
    
    
    (5
    )
    
    Third Amendment dated January
18, 2002 to the Credit Agreement dated as of August
6, 1999 by and among Stater Bros. Markets, Stater
Bros. Holdings Inc. and Bank of America, N.A.
 39




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)  (a)(3)
    
    Exhibits (contd.) EXHIBIT NO.
    
    
    
    
    
    DESCRIPTION10.30
    
    
    (5
    )
    
    Subordinated Note for
$20,000,000 dated January 22, 2002 between Stater
Bros. and H. Harrison Lightfoot with an interest rate
of 5% due March 31, 200710.31
    
    
    (6
    )
    
    Employment contract dated
June 1, 2000 by and between Stater Bros. Markets and
Dennis L. McIntyre10.32
    
    
    (6
    )
    
    Employment contract dated
June 1, 2000 by and between Stater Bros. Markets and
Edward A. Stater10.33
    
    
    (6
    )
    
    Employment contract dated
August 1, 2002 by and between Stater Bros. Markets
and James W. Lee10.34
    
    
    (7
    )
    
    Fourth Amendment dated
February 4, 2003 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets,
Stater Bros. Holdings Inc. and Bank of America, N.A.10.35
    
    
    (8
    )
    
    Owner Participation
Agreement, dated as of April 14, 2004 between Stater
Bros. Markets and the Inland Valley Development
Agency10.36
    
    
    (8
    )
    
    Development Parcel
Disposition Agreement, dated as of June 16, 2004
between Stater Bros. Markets and Hillwood/San
Bernardino, LLC10.37
    
    
    (9
    )
    
    Subsidiary Guaranty entered
into as of June 17, 2004 by Stater Bros. Holdings
Inc., Stater Bros. Development, Inc. and Santee
Dairies, Inc.12.1
    
    
    (10
    )
    
    Computation of ratio of earnings to fixed charges.14.1
    
    
    (10
    )
    
    Copy of Financial Code of Ethics.21.1
    
    
    (9
    )
    
    Subsidiaries of Stater Bros. Holdings Inc.21.2
    
    
    (9
    )
    
    Subsidiaries of Stater Bros. Markets31.1
    
    
    (10
    )
    
    Certification of Principal
Executive Officer pursuant to Section 302 (a) of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    (10
    )
    
    Certification of Principal
Financial Officer pursuant to Section 302 (a) of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    (10
    )
    
    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.
 (1)
    
    Previously filed with the
Securities and Exchange Commission as an exhibit to
the Registration Statement S-4 No. 33-77296 dated
July 21, 1994.(2)
    
    Previously filed with the
Securities and Exchange Commission as an exhibit to
the Registration Statement S-4 No. 333-85723 dated
August 20, 1999(3)
    
    Previously filed with the
Securities and Exchange Commission as exhibits to
Registrants Quarterly Report on Form 10-Q dated June
25, 2000 and filed on August 9, 2000.
 40




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)  (a)(3)
    
    Exhibits (contd.) (4
    )
    
    Previously filed with the
Securities and Exchange Commission as exhibits with
the Annual Report on Form 10-K for the fiscal year
ended September 24, 2000.(5
    )
    
    Previously filed with the
Securities and Exchange Commission as exhibits to the
Registrants Quarterly Report on Form 10-Q dated
December 31, 2001.(6
    )
    
    Previous filed with the Securities
and Exchange Commission as exhibits with the Annual
Report on Form 10-K for the fiscal year ended
September 29, 2002.(7
    )
    
    Previously filed with the
Securities and Exchange Commission as exhibits to the
Registrants Quarterly Report on Form 10-Q dated
December 29, 2002.(8
    )
    
    Incorporated by reference to
Exhibit 10.35 to the Quarterly Report on Form 10-Q
for the quarter ended June 27, 2004.(9
    )
    
    Previously filed with the
Securities and Exchange Commission as an exhibit to
the Registration Statement S-4 No. 333-118436 dated
August 27, 2004, as amended.(10
    )
    
    Filed with the Securities and Exchange Commission as exhibits with the
Annual Report on Form 10-K for the fiscal year ended
September 26, 2004.
  Copies of Exhibits listed herein can be obtained by
writing and requesting Exhibits from: Corporate
Secretary, P. O. Box 150, Colton, California 92324.  (b)
    
    Reports on Form 8-KNone. 41




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##### Table of Contents



STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 2004
FORM 10-K 
 SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. December 21, 2004
    
    Stater Bros. Holdings Inc.DateBy:
    
    /s/ Jack H. BrownJack H. BrownChairman of the Board,President and ChiefExecutive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Jack H. Brown
Jack H. Brown
    
    Chairman of the Board, President and
Chief Executive Officer and Director
(Principal Executive Officer)
    
    December 21, 2004/s/ Thomas W. Field, Jr.
Thomas W. Field, Jr.
    
    Vice Chairman of the Board
and Director
    
    December 21, 2004/s/ Bruce D. Varner
Bruce D. Varner
    
    Secretary and Director
    
    December 21, 2004/s/ C. Dale Warman
C. Dale Warman
    
    Director
    
    December 21, 2004/s/ Phillip J. Smith
Phillip J. Smith
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    December 21, 2004
 42




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page NumberReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at September 29, 2002,
September 28, 2003 and September 26, 2004
    
    
    F-3Fiscal years ended September 29, 2002, September 28, 2003 and
September 26, 2004:Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Consolidated Statements of Stockholders Deficit
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of
Stater Bros. Holdings Inc. We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. as of September 29, 2002, September 28, 2003 and September
26, 2004, and the related consolidated statements of income, stockholders
deficit, and cash flows for the 52-week periods ended September 29, 2002,
September 28, 2003, and September 26, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stater Bros.
Holdings Inc. at September 29, 2002, September 28, 2003 and September 26, 2004,
and the consolidated results of their operations and their cash flows for the
52-week periods ended September 29, 2002, September 28, 2003, and September 26,
2004, in conformity with U.S. generally accepted accounting principles. Irvine, California
    
    /s/ Ernst &Young LLPDecember 20, 2004
 F - 2




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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004Current assetsCash and cash equivalents
    
    $
    81,043
    
    
    $
    111,152
    
    
    $
    301,947Restricted cash
    
    
    
    
    
    
    
    
    
    
    20,000Receivables
    
    
    26,500
    
    
    
    23,217
    
    
    
    39,258Income tax receivables
    
    
    7,061
    
    
    
    4,354
    
    
    
    Inventories
    
    
    175,404
    
    
    
    172,267
    
    
    
    185,567Prepaid expenses
    
    
    7,860
    
    
    
    6,962
    
    
    
    8,847Deferred income taxes
    
    
    15,281
    
    
    
    14,793
    
    
    
    25,416Total current assets
    
    
    313,149
    
    
    
    332,745
    
    
    
    581,035Investment in unconsolidated affiliate
    
    
    15,580
    
    
    
    16,910
    
    
    
    Property and equipmentLand
    
    
    50,930
    
    
    
    50,930
    
    
    
    68,120Buildings and improvements
    
    
    191,514
    
    
    
    200,349
    
    
    
    252,715Store fixtures and equipment
    
    
    212,741
    
    
    
    242,562
    
    
    
    337,589Property subject to capital leases
    
    
    24,670
    
    
    
    24,670
    
    
    
    25,891479,855
    
    
    
    518,511
    
    
    
    684,315Less accumulated depreciation and amortization
    
    
    194,039
    
    
    
    216,366
    
    
    
    274,692285,816
    
    
    
    302,145
    
    
    
    409,623Deferred debt issuance costs, net
    
    
    13,936
    
    
    
    10,486
    
    
    
    21,891Other assets
    
    
    5,649
    
    
    
    5,540
    
    
    
    6,33919,585
    
    
    
    16,026
    
    
    
    28,230Total assets
    
    $
    634,130
    
    
    $
    667,826
    
    
    $
    1,018,888
 See accompanying notes to consolidated financial statements. F - 3




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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS DEFICIT
 Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004Current liabilitiesAccounts payable
    
    $
    104,166
    
    
    $
    112,458
    
    
    $
    142,077Accrued payroll and related expenses
    
    
    41,567
    
    
    
    44,362
    
    
    
    55,049Other accrued liabilities
    
    
    46,656
    
    
    
    50,352
    
    
    
    62,745Accrued income taxes
    
    
    
    
    
    
    
    
    
    
    62Current portion of capital lease obligations
    
    
    1,117
    
    
    
    1,056
    
    
    
    1,247Total current liabilities
    
    
    193,506
    
    
    
    208,228
    
    
    
    261,180Deferred income taxes
    
    
    6,500
    
    
    
    6,708
    
    
    
    3,894Long-term debt
    
    
    458,750
    
    
    
    458,750
    
    
    
    700,000Capital lease obligations, less current portion
    
    
    10,981
    
    
    
    9,926
    
    
    
    9,470Long-term portion of self-insurance and other reserves
    
    
    23,855
    
    
    
    27,941
    
    
    
    35,654Other long-term liabilities
    
    
    14,659
    
    
    
    20,267
    
    
    
    45,881Total liabilities
    
    
    708,251
    
    
    
    731,820
    
    
    
    1,056,079Stockholders deficitCommon Stock, $.01 par value:Authorized shares - 100,000
Issued and outstanding shares -
0 in 2002, 2003 and 2004
    
    
    
    
    
    
    
    
    
    
    Class A Common Stock, $.01 par value:Authorized shares - 100,000
Issued and outstanding shares -
38,301 in 2002, 2003 and 2004
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    9,740
    
    
    
    9,740
    
    
    
    9,740Retained deficit
    
    
    (83,861
    )
    
    
    (73,734
    )
    
    
    (46,931
    )Total stockholders deficit
    
    
    (74,121
    )
    
    
    (63,994
    )
    
    
    (37,191
    )Total liabilities and stockholders deficit
    
    $
    634,130
    
    
    $
    667,826
    
    
    $
    1,018,888
 See accompanying notes to consolidated financial statements. F - 4




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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts) Fiscal Year EndedSept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004Sales
    
    $
    2,666,346
    
    
    $
    2,753,774
    
    
    $
    3,704,882Cost of goods sold
    
    
    1,957,526
    
    
    
    1,999,361
    
    
    
    2,652,812Gross profit
    
    
    708,820
    
    
    
    754,413
    
    
    
    1,052,070Operating expenses:Selling, general and administrative expenses
    
    
    615,482
    
    
    
    659,720
    
    
    
    820,496Depreciation and amortization
    
    
    24,300
    
    
    
    26,879
    
    
    
    32,507Total operating expenses
    
    
    639,782
    
    
    
    686,599
    
    
    
    853,003Operating profit
    
    
    69,038
    
    
    
    67,814
    
    
    
    199,067Interest income
    
    
    1,721
    
    
    
    1,049
    
    
    
    2,198Interest expense
    
    
    (52,814
    )
    
    
    (53,254
    )
    
    
    (53,951
    )Interest expense related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (35,647
    )Equity in income from unconsolidated affiliate
    
    
    2,914
    
    
    
    1,330
    
    
    
    929Other expenses  net
    
    
    (1,579
    )
    
    
    (1,093
    )
    
    
    (1,343
    )Income before income taxes
    
    
    19,280
    
    
    
    15,846
    
    
    
    111,253Income taxes
    
    
    7,491
    
    
    
    5,719
    
    
    
    39,450Net income
    
    $
    11,789
    
    
    $
    10,127
    
    
    $
    71,803Earnings per common share
    
    $
    280.92
    
    
    $
    264.41
    
    
    $
    1,874.70Dividends per common share
    
    $
    117.49
    
    
    $
    
    
    
    $
    1,174.90Average common shares outstanding
    
    
    41,965
    
    
    
    38,301
    
    
    
    38,301Common shares outstanding at end of year
    
    
    38,301
    
    
    
    38,301
    
    
    
    38,301
 See accompanying notes to consolidated financial statements. F - 5




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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Fiscal Year EndedSept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004Operating activities:Net income
    
    $
    11,789
    
    
    $
    10,127
    
    
    $
    71,803Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    31,493
    
    
    
    34,308
    
    
    
    42,958Gain from litigation settlement
    
    
    
    
    
    
    
    
    
    
    (22,371
    )Deferred income taxes
    
    
    2,750
    
    
    
    696
    
    
    
    (16,816
    )Loss on disposals of assets
    
    
    1,579
    
    
    
    1,093
    
    
    
    1,488Net undistributed income in unconsolidated affiliate
    
    
    (2,914
    )
    
    
    (1,330
    )
    
    
    (929
    )Changes in operating assets and liabilities:Increase in restricted cash
    
    
    
    
    
    
    
    
    
    
    (20,000
    )(Increase) decrease in receivables
    
    
    3,394
    
    
    
    3,283
    
    
    
    (4,749
    )(Increase) decrease in income tax receivables
    
    
    (6,703
    )
    
    
    2,707
    
    
    
    4,354(Increase) decrease in inventories
    
    
    (5,215
    )
    
    
    3,137
    
    
    
    (10,604
    )(Increase) decrease in prepaid expenses
    
    
    (1,136
    )
    
    
    893
    
    
    
    (721
    )Decrease in other assets
    
    
    3,398
    
    
    
    3,559
    
    
    
    13,667Increase (decrease) in accounts payable
    
    
    (3,319
    )
    
    
    8,292
    
    
    
    21,985Increase in accrued income taxes
    
    
    
    
    
    
    
    
    
    
    62Increase in accrued liabilities and long-term
portion of self-insurance reserves
    
    
    16,052
    
    
    
    16,185
    
    
    
    70,389Net cash provided by operating activities
    
    
    51,168
    
    
    
    82,950
    
    
    
    150,516Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    700,000Proceeds from equipment financing
    
    
    
    
    
    
    
    
    
    
    718Premium, fees and make-whole payments related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (26,519
    )Debt issuance costs
    
    
    (5,033
    )
    
    
    
    
    
    
    (22,723
    )Stock redemption
    
    
    (20,000
    )
    
    
    
    
    
    
    Amortization of debt issuance cost related to debt purchase
    
    
    
    
    
    
    
    
    
    
    9,128Dividends paid
    
    
    (4,500
    )
    
    
    
    
    
    
    (45,000
    )Principal payments on long-term debt
    
    
    (250
    )
    
    
    
    
    
    
    (512,250
    )Principal payments on capital lease obligations
    
    
    (1,435
    )
    
    
    (1,116
    )
    
    
    (1,264
    )Net cash provided by (used in) financing activities
    
    
    (31,218
    )
    
    
    (1,116
    )
    
    
    102,090Investing activities:Purchase of property and equipment
    
    
    (40,722
    )
    
    
    (51,890
    )
    
    
    (61,986
    )Proceeds from sale of property and equipment
    
    
    179
    
    
    
    165
    
    
    
    175Net cash used in investing activities
    
    
    (40,543
    )
    
    
    (51,725
    )
    
    
    (61,811
    )Net increase (decrease) in cash and cash equivalents
    
    
    (20,593
    )
    
    
    30,109
    
    
    
    190,795Cash and cash equivalents at beginning of year
    
    
    101,636
    
    
    
    81,043
    
    
    
    111,152Cash and cash equivalents at end of year
    
    $
    81,043
    
    
    $
    111,152
    
    
    $
    301,947Interest paid
    
    $
    49,927
    
    
    $
    49,560
    
    
    $
    72,449Income taxes paid
    
    $
    11,443
    
    
    $
    3,000
    
    
    $
    51,656
 See accompanying notes to consolidated financial statements. F - 6




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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(In thousands) Class A
    
    AdditionalCommon
    
    Common
    
    Paid-in
    
    RetainedStock
    
    Stock
    
    Capital
    
    Deficit
    
    TotalBalances at September 30, 2001
    
    $
    
    
    
    $
    1
    
    
    $
    12,715
    
    
    $
    (54,125
    )
    
    $
    (41,409
    )Net income for 52 weeks ended
September 29, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,789
    
    
    
    11,789Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
    
    
    (4,500
    )Stock redemption
    
    
    
    
    
    
    (1
    )
    
    
    (2,975
    )
    
    
    (37,025
    )
    
    
    (40,001
    )Balances at September 29, 2002
    
    
    
    
    
    
    
    
    
    
    9,740
    
    
    
    (83,861
    )
    
    
    (74,121
    )Net income for 52 weeks ended
September 28, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,127
    
    
    
    10,127Balances at September 28, 2003
    
    
    
    
    
    
    
    
    
    
    9,740
    
    
    
    (73,734
    )
    
    
    (63,994
    )Net income for 52 weeks ended
September 26, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,803
    
    
    
    71,803Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,000
    )
    
    
    (45,000
    )Balances at September 26, 2004
    
    $
    
    
    
    $
    
    
    
    $
    9,740
    
    
    $
    (46,931
    )
    
    $
    (37,191
    )
 See accompanying notes to consolidated financial statements. F - 7




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 2004 Note 1 - The Company and Summary of Significant Accounting Policies Description of Business Stater Bros. Holdings Inc. (the Company) is engaged primarily in the
operation of retail supermarkets. As of September 26, 2004, the Company
operated 158 retail grocery supermarkets under the name Stater Bros. Markets.
The Companys supermarkets are located in Southern Californias San
Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern counties. The
Company and its predecessor companies have operated retail grocery stores under
the Stater Bros. Markets name in the Inland Empire of Southern California
since 1936. Principles of Consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Stater Bros. Markets (Markets) and Stater
Bros. Development, Inc (Development). Santee Dairies, Inc. (Santee) is a
wholly-owned subsidiary of Markets since February 6, 2004. Prior to February
6, 2004, Markets owned 50% of Santee and accounted for Santee under the equity
method of accounting. All significant inter-company transactions have been
eliminated in consolidation. Reclassifications Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation. 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. Fiscal Year The Companys fiscal year ends on the last Sunday in September. Cash and Cash Equivalents Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased. RestrictedCash Restricted cash represents cash that has been set aside as collateral on
certain workers compensation and general liability reserves. Interest earned
on the restricted cash is controlled by the Company and is included in cash and
cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market. Receivables Receivables represent amounts expected to be received during the next
operating cycle of the Company. The carrying amount reported in the balance
sheet for receivables approximates their fair value. Long-Lived Assets The Company reviews the recoverability of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. If the estimated future,
undiscounted cash flows from the use of an asset are less than its carrying
value, a write-down is recorded to reduce the related asset to estimated fair
value. F-8




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 1 - The Company and Summary of Significant Accounting Policies (contd.) Property and Equipment Property and equipment are stated at cost and are depreciated or
amortized, principally on the straight-line basis over the estimated useful
lives of the assets, and for capitalized leases over the initial lease term or
the estimated economic life of the asset. The average estimated economic lives are as follows: Range
    
    Most PrevalentBuildings and improvements
    
    8 - 30 Years
    
    25 YearsStore furniture and equipment
    
    3 - 10 Years
    
    5 YearsProperty subject to capital leases
    
    Life of Lease
    
    25 Years
 Deferred Debt Issuance Costs Direct costs incurred as a result of financing transactions are
capitalized and amortized to interest expense over the terms of the applicable
debt agreements. 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. 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. The Company discounted its
workers compensation, automobile and general liability insurance reserves at a
discount rate of 7.5% in fiscal 2002 and fiscal 2003 and 5.5% in fiscal 2004.
The Company is self-insured, subject to certain retention levels, for health
care costs of eligible non-bargaining unit employees. Such health care
reserves are not discounted. Income Taxes The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes. Revenue Recognition The Company 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. F-9




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 1 - The Company and Summary of Significant Accounting Policies (contd.) Cost of Goods Sold Included in cost of goods sold are direct product purchase costs, 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 distribution facilities 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. Included as a reduction in cost of goods sold for fiscal 2003 and
fiscal 2004 is $4.6 million and $4.4 million, respectively, of advertising
costs in excess of the fair value of the co-operative advertising. Selling, General and Administrative Expenses Included in selling, general and administrative expenses are all store
operation 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 in fiscal 2004 and fiscal 2003 of the portion of
co-operative advertising allowances directly related to the fair value of the
advertising and net of all co-operative advertising allowances in fiscal 2002;
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 purchasing of its products. The amount of salary, wages
and administrative costs associated with the purchase of its products included
in selling, general and administrative costs was $861,000, $891,000 and
$1,057,000 in fiscal 2002, fiscal 2003 and fiscal 2004, respectively. 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 Allowances, are recognized
as a reduction in cost of goods sold as the performance is completed and
inventory sold. Allowances, such as slotting fees, which are tied to the
promotion of certain products are recognized as reductions in cost of goods
sold as the Company meets the required performance criteria. Allowances that
are based upon purchase or sales volumes are recognized as reductions in cost
of goods sold as the products are sold. The Company receives lump-sum payments
from vendors for the promotion or purchase of products over multi-year periods.
The Company records a liability for unearned allowances and recognizes, as a
reduction in cost of goods sold, these allowances over time as the criteria of
these contracts are met. F-10




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 1 - The Company and Summary of Significant Accounting Policies (contd.) Advertising Allowances The Company receives co-operative advertising allowances from vendors for
advertising specific vendor products over specific periods of time. For fiscal
2003 and fiscal 2004, the Company recognized the portion of co-operative
advertising allowances directly related to the fair value of advertising as a
reduction in advertising costs. In fiscal 2003 and fiscal 2004, $4.6 million
and $4.4 million, respectively, of excess allowances received over the fair
value of advertising were recorded as a reduction to cost of goods sold. In
fiscal 2002, all co-operative advertising allowances were recognized as
reductions in advertising expense. 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 costs of an individual advertisement is
determined. The cost determined is deemed to be the fair value of advertising.
The amount of co-operative advertising allowance recognized as a reduction in
advertising expense was $11.9 million, $5.9 million and $7.1 million in fiscal
2002, fiscal 2003 and fiscal 2004, respectively. 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. Advertising costs,
net of vendor allowances, were $23.7 million, $27.4 million
and $29.7 million
in fiscal 2002, 2003 and 2004, respectively. 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 the 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. Recent Accounting Pronouncements In November 2004, the FASB issued
Statement 151, Inventory Costs, an
amendment of APB 43, Statement 151 clarifies what amount of expenses should be
recognized as current period charges. The Company does not expect the adoption
to of this pronouncement to have a material impact on the results of its
operations. F-11




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 2  Impact of Recent EITF Effective September 30, 2002, the Company adopted EITF Issue No. 02-16
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. The Companys adoption of the EITF has had no effect
on the Companys current year or prior years net income. For fiscal 2003 and
fiscal 2004 vendor payments of $4.6 million and $4.4 million, respectively,
related to advertising reimbursements in excess of advertising cost were
recorded as reductions to cost of goods sold. Financial statements for fiscal
2002 were not reclassified. The following table shows the pro forma
consolidated operating profit for fiscal 2002 if the impact of EITF Issue No.
02-16 had been applied to fiscal 2002. Fiscal Year Ended(In thousands)Sept. 29,2002Sales
    
    $
    2,666,346Cost of goods sold
    
    
    1,953,761Gross profit
    
    
    712,585Operating expenses:Selling, general and administrative expenses
    
    
    619,247Depreciation and amortization
    
    
    24,300Total operating expenses
    
    
    643,547Operating profit
    
    $
    69,038
 Note 3  Santee In 1997, in connection with the construction of a new dairy facility in City of
Industry, California, Markets and Hughes Markets (Hughes), the owners 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 $80.0 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 a
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, 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. F-12




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 3  Santee (contd.) 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 was
$21.8 million which was determined by management based upon the net 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 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 fiscal 2004 in the Consolidated Statements of Income
under the line item Selling, general and administrative expenses. The following table is a condensed balance sheet that discloses the value
assigned to the Santee assets acquired and the liabilities assumed as a result
of the Settlement Agreement: Feb. 6, 2004(in thousands)Current assets
    
    $
    13,246Property and equipment
    
    
    47,630Other long-term assets
    
    
    550Total assets acquired
    
    
    61,426Current liabilities
    
    
    14,005Long-term liabilities
    
    
    25,600Total liabilities assumed
    
    
    39,605Net assets acquired
    
    $
    21,821
 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. In addition, $1.2
million of previously unamortized debt issuance costs related to the Santee
Notes was expensed. The make-whole fee and amortization of the remaining debt
issuance costs were recorded as a component of interest expense related to debt
purchase in the Companys Consolidated Statements of Income. F-13




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 3  Santee (contd.) 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) Fiscal Year EndedSept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004Sales
    
    $
    2,799,160
    
    
    $
    2,878,809
    
    
    $
    3,771,647Income before income taxes
    
    $
    21,773
    
    
    $
    18,591
    
    
    $
    113,151Net income
    
    $
    15,050
    
    
    $
    15,111
    
    
    $
    70,283Earnings per share
    
    $
    358.64
    
    
    $
    394.54
    
    
    $
    1,835.01
 Prior to the Company obtaining 100% ownership of Santee, the Company recognized
income of $929,000 in fiscal 2004 and the Company recognized income of $2.9
million and $1.3 million for fiscal years 2002 and 2003, respectively. The
Company is a significant customer of Santee which supplies the Company with a
substantial portion of its fluid milk and dairy products. Note 4 - Issuance of New Debt and Early Extinguishment of Debt On June 17, 2004, the Company issued $525.0 million of unregistered 8.125%
Senior Notes due June 15, 2012 and $175.0 million of unregistered Floating Rate
Senior Notes due June 15, 2010. On October 4, 2004, subsequent to year-end,
the Company exchanged the unregistered 8.125% Senior Notes due June 15, 2012
and 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 collectively, (the Notes). The
Company incurred $22.7 million of debt issuance cost related to the issuance of
the Notes which will be amortized over the term of the respective Notes. The Notes are guaranteed by Markets, Development, and the Companys indirect
subsidiary Santee (each, a subsidiary guarantor, and collectively, the
subsidiary guarantors). Condensed consolidating financial information with
respect to the subsidiary guarantors is not provided because the Company has no
independent assets or operations, the subsidiary guarantees are full and
unconditional and joint and several, and there are no other subsidiaries of the
Company other than the subsidiary guarantors. F-14




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 4 - Issuance of New Debt and Early Extinguishment of Debt (contd.) On June 17, 2004 the Company used part of the proceeds from the issuance of
these notes for the purchase of $397.8 million of the 10.75% Senior Notes due
August 2006, the payment of $16.9 million for tender premium and fees on the
purchased 10.75% Senior Notes, the early retirement of the $20.0 million 5.0%
Subordinated Note due March 2007 and to pay accrued interest on the purchased
10.75% Senior Notes and the retired 5.0% Subordinated Note. On August 16,
2004, the Company redeemed the remaining outstanding $41.0 million 10.75%
Senior Notes and paid a make whole fee on the redemption of $1.1 million. In
addition, the Company recognized an expense in fiscal 2004 of $5.2 million
related unamortized debt issuance costs on the 10.75% Senior Notes that were
tendered and redeemed and $2.7 million related to the unamortized debt issuance
costs on the 5.0% Subordinated Note which was retired. The tender premium and
fees, the make whole fee and the amortization of remaining unamortized debt
issuance costs for both the 10.75% Senior Notes and the 5.0% Subordinated Note
were recorded as components of interest expense related to debt purchase in the
Companys Consolidated Statements of Income. Note 5 - Debt Long-term debt consisted of the following: Sept. 29,
    
    Sept. 28,
    
    Sept. 26,2002
    
    2003
    
    2004(In thousands)8.125% Senior Note dues 2012
    
    $
    
    
    
    $
    
    
    
    $
    525,000Floating Rate Senior Notes due 2010
    
    
    
    
    
    
    
    
    
    
    175,0005% Subordinated Note due 2007
    
    
    20,000
    
    
    
    20,000
    
    
    
    10.75% Senior Notes due 2006
    
    
    438,750
    
    
    
    438,750
    
    
    
    Total long-term debt
    
    $
    458,750
    
    
    $
    458,750
    
    
    $
    700,000
 Interest on the 8.125% Senior Notes due June 2012, is payable
semi-annually in arrears on June 15 and December 15. Principal on the 8.125%
Senior Notes is due in the fiscal year 2012. Interest on the Floating Rate Notes due June 2010, is payable quarterly in
arrears on March 15, June 15, September 15 and December 15. The interest rate
on the Floating Rate Senior Notes is reset quarterly equal to LIBOR plus 3.50%.
The interest rate in effect on the Floating Rate Senior Notes at September 26,
2004 was 5.38%. Principal on the Floating Rate Senior Notes is due in fiscal
year 2010. Interest capitalized during fiscal years 2002, 2003 and 2004 amounted to
$144,000, $126,000 and $323,000 respectively. Interest expense incurred,
before the effect of capitalized interest, during 2002, 2003 and 2004 amounted
to $53.0 million, $53.4 million and $54.3 million, respectively. During fiscal 2002, the Company redeemed $250,000 of its 10.75% Senior
Notes due 2006. The Notes were restricted and unregistered. The Notes were
redeemed for $250,000 plus accrued interest. F-15




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 6 - Bank Facilities On June 17, 2004, the Company entered into an amended and restated credit
facility (the New Credit Facility) with Bank of America N.A. (Bank of
America) as sole and exclusive administrative agent, and sole initial lender,
consisting of a three-year revolving credit facility in a principal amount of
up to $75.0 million, with the right to increase, under certain circumstances,
the size of the New Credit Facility to an aggregate principal amount of $100.0
million. The New Credit Facility amended and restated the existing credit
facility in its entirety. Subject to certain restrictions, the entire amount
of the New Credit Facility may be used for loans, letters of credit, or a
combination thereof. Borrowings under the New Credit Facility are unsecured
and will be used for certain working capital, capital expenditures and other
corporate purposes. Letters of credit under the letter of credit facility are
expected to be used to support obligations incurred in connection with the
construction of stores, construction of the new corporate office and
distribution facilities and workers compensation insurance obligations. The
availability of the loans and letters of credit are subject to certain
borrowing restrictions. The New Credit Facility is guaranteed by the Company and all of its
existing and future material subsidiaries, including Development and Santee
(subject, in the case of Santee, to termination upon certain specified events). Loans under the New Credit Facility bear interest at a rate based upon
either (i) the Base Rate (defined as the higher of (a) the Federal Funds Rate
plus 0.50% and (b) the rate of interest publicly announced by Bank of America
as its reference rate), plus 1.00%, or (ii) the Offshore Rate (defined as
the average British Bankers Association Interest Settlement Rate for deposits
in dollars, adjusted for the maximum reserve requirement for Eurocurrency
funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be
applied in consecutive periods of the earlier of (a) the maturity date of the
loan or (b) periods, as selected by Markets of one, two, three or six months. The New Credit Facility will cease to be available and will be payable in
full on May 31, 2007. Notwithstanding such maturity date, at any time prior
thereto Markets shall be entitled to request the issuance of standby letters of
credit having a term which is up to one year following such maturity date, and
commercial letters of credit having a term which is up to six months following
such maturity date. Loans under the New Credit Facility must be repaid for a
period of ten consecutive days semi-annually. Loans under the New Credit Facility may be repaid and re-borrowed. The
loans under the New Credit Facility may be prepaid at any time without penalty,
subject to certain minimums and payment of any breakage and re-deployment costs
in the case of loans based on the offshore rate. The commitments under the New
Credit Facility may be reduced by Markets. Markets will be required to pay a
commitment fee equal to 0.25% per annum on the actual daily unused portion of
the revolving loan facility and the letter of credit facility, payable
quarterly in arrears. Outstanding letters of credit under the credit facility
are subject to a fee of 1.25% per annum on the face amount of such letters of
credit, payable quarterly in arrears. Markets will be required to pay standard
fees charged by Bank of America with respect to the issuance, negotiation, and
amendment of commercial letters of credit issued under the letter of credit
facility. F-16




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 6 - Bank Facilities (contd.) The New Credit Facility requires Markets to meet certain financial tests,
including minimum net worth and other tests. The New Credit Facility contains
covenants which, among other things, limit the ability of Markets and its
subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations,
(ii) enter into mergers, consolidations, liquidations and dissolutions, asset
sales, investments, leases and transactions with affiliates, and (iii) make
restricted payments. The New Credit Facility also contains covenants that
apply to the Company and its subsidiaries, and the Company is a party to the
New Credit Facility for purposes of these covenants. These covenants, among
other things, limit the ability of the Company and its subsidiaries to incur
indebtedness, make restricted payments, enter into transactions with
affiliates, and make amendments to the Indenture governing the 8.125% Senior
Notes due June 15, 2012 and the Floating Rate Senior Notes due June 15, 2010. The New Credit Facility contains customary events of default, including payment
defaults; material inaccuracies in representations and warranties; covenant
defaults; cross-defaults to certain other indebtedness; certain bankruptcy
events; certain ERISA events; judgment defaults; invalidity of any guaranty;
and change of control. In 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 issued to
support workers compensation liabilities. Borrowings under the Revolver are
secured by the receivables of Santee. The Revolver is scheduled to expire on
May 31, 2007. Advances under the Revolver bear interest at Bank of Americas prime rate plus
0.5% with interest due monthly or, if elected by Santee, at the Interbank
Offered Rate plus 1.75%. The outstanding undrawn portion of the 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 September 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 September 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. The Company had no short-term borrowings outstanding at the end of fiscal
years 2002, 2003 and 2004, and the Company did not incur any short-term
borrowings during fiscal years 2002, 2003 and 2004. Note 7 - Leases The Company leases the majority of its retail stores, offices and
distribution facilities. Certain of the operating leases provide for minimum
annual payments that change over the life of the lease. The aggregate minimum
annual payments are expensed on the straight-line basis over the minimum lease
term. In addition, certain leases provide for additional rents based on sales
and some of these leases allow the Company to reduce current year contingent
rent payments by amounts paid for property taxes, insurance and in some cases
capital expenditures. Primary lease terms range from 3 to 55 years and
substantially all leases provide for renewal options. F-17




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 7  Leases (contd.) Following is a summary of future minimum lease payments as of September
26, 2004: OperatingLeasesCapital
    
    MinimumFiscal Year
    
    Leases
    
    Payment(In thousands)2005
    
    $
    2,815
    
    
    $
    33,4342006
    
    
    2,587
    
    
    
    30,3742007
    
    
    2,280
    
    
    
    25,2152008
    
    
    2,095
    
    
    
    22,5852009
    
    
    2,095
    
    
    
    14,468Thereafter
    
    
    6,851
    
    
    
    106,969Total minimum lease payments
    
    
    18,723
    
    
    $
    233,045Less amounts representing interest
    
    
    8,006Present value of minimum lease payments
    
    
    10,717Less current portion
    
    
    1,247Long-term portion
    
    $
    9,470
 Rental expense and sublease income were as follows: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)Minimum rentals
    
    $
    25,009
    
    
    $
    26,383
    
    
    $
    27,854Rentals based on sales
    
    $
    10,487
    
    
    $
    10,951
    
    
    $
    13,427Sublease income
    
    $
    1,200
    
    
    $
    1,213
    
    
    $
    1,258
 Aggregate sublease income to be received subsequent to September 26, 2004
is approximately $4.0 million. F-18




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 8 - Income Taxes The provision for income taxes consisted of the following: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)CurrentFederal
    
    $
    3,317
    
    
    $
    2,590
    
    
    $
    43,564State
    
    
    1,037
    
    
    
    1,343
    
    
    
    12,2484,354
    
    
    
    3,933
    
    
    
    55,812DeferredFederal
    
    
    2,459
    
    
    
    1,707
    
    
    
    (14,540
    )State
    
    
    678
    
    
    
    79
    
    
    
    (1,822
    )3,137
    
    
    
    1,786
    
    
    
    (16,362
    )Income tax expense
    
    $
    7,491
    
    
    $
    5,719
    
    
    $
    39,450
 A reconciliation of the provision for income taxes to amounts computed at
the federal statutory rate is as follows: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004Statutory federal income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State franchise tax rate, net of
federal income tax benefit
    
    
    5.8
    
    
    
    5.8
    
    
    
    5.8Change for contingent tax matters
    
    
    
    
    
    
    (3.2
    )
    
    
    (5.5
    )Tax credits
    
    
    (3.3
    )
    
    
    (3.3
    )
    
    
    (0.4
    )Other
    
    
    1.4
    
    
    
    1.8
    
    
    
    0.638.9
    %
    
    
    36.1
    %
    
    
    35.5
    %
 Components of deferred income taxes are as follows: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)Deferred income tax assets:Self-insurance reserves
    
    $
    15,034
    
    
    $
    18,592
    
    
    $
    24,142Phantom stock
    
    
    4,389
    
    
    
    6,826

    
    
    
    16,665Pension and vacation liabilities
    
    
    4,138
    
    
    
    4,893
    
    
    
    8,604State franchise tax
    
    
    363
    
    
    
    420
    
    
    
    4,388Inventories
    
    
    2,010
    
    
    
    2,318
    
    
    
    2,233Income deferred for book purposes
    
    
    3,591
    
    
    
    2,765
    
    
    
    1,472Tax credits and operating loss carry forwards
    
    
    5,514
    
    
    
    1,650
    
    
    
    9,134Total deferred income tax assets
    
    
    35,039
    
    
    
    37,464
    
    
    
    66,638Deferred income tax liabilities:Property and equipment
    
    
    (18,453
    )
    
    
    (22,282
    )
    
    
    (39,532
    )Other assets
    
    
    (2,058
    )
    
    
    (2,058
    )
    
    
    (1,751
    )Investment in unconsolidated affiliate
    
    
    (760
    )
    
    
    (1,302
    )
    
    
    (1,681
    )Other, net
    
    
    (4,987
    )
    
    
    (3,737
    )
    
    
    (56
    )Total deferred income tax liabilities
    
    
    (26,258
    )
    
    
    (29,379
    )
    
    
    (43,020
    )Net deferred taxes before valuation allowance
    
    
    8,781
    
    
    
    8,085
    
    
    
    23,618Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (2,096
    )Net deferred income tax assets
    
    $
    8,781
    
    
    $
    8,085
    
    
    $
    21,522
 F-19




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 8 - Income Taxes (contd.) As of September 26, 2004, the Company had approximately $17.5 million of
federal net operating loss carryforwards which expire beginning in 2012 through
2020 if not utilized, approximately $4.7 million of state net operating loss
carryforwards which expire beginning in 2005 through 2012 if not utilized, and
$2.1 million of state manufacturers tax credits which expire between 2006 and
2011. The Company records a valuation allowance to reflect the estimated
amount of deferred tax assets that more likely than not will not be realized.
Due to anticipated federal and state usage limitation of the net operating loss
and tax credit carryforwards under Internal Revenue Code Section 382 and
applicable state statutes, the Company has established valuation allowances for
the entire amount of state manufactures tax credit of $2.1 million. 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 and established valuation reserves,
will be adequate to realize the deferred income tax assets. The Company establishes deferred tax liabilities for anticipated tax
timing differences where payment of tax is anticipated. Such amounts represent
a reasonable provision for taxes ultimately expected to be paid, and the
amounts may be adjusted over time as additional information becomes known. The
effects of changes to accrued liabilities related to tax matters resulted in a
reduction in tax expense of approximately $6.1 million and $0.5 million in
fiscal 2004 and fiscal 2003, respectively. Note 9 - Retirement Plans Pension Plan 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: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)Service cost
- benefits earned during
the period
    
    $
    1,577
    
    
    $
    2,095
    
    
    $
    2,218Interest cost on projected benefit
obligation
    
    
    2,041
    
    
    
    2,256
    
    
    
    2,489Actual return on assets
    
    
    (1,719
    )
    
    
    (2,047
    )
    
    
    (1,944
    )Net amortization and deferral
    
    
    27
    
    
    
    27
    
    
    
    27Recognized gains or losses
    
    
    281
    
    
    
    467
    
    
    
    720Prior service cost recognized
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Net periodic pension cost
    
    $
    2,205
    
    
    $
    2,796
    
    
    $
    3,508Assumptions used for accounting were:Discount rate
    
    
    7.25
    %
    
    
    6.50
    %
    
    
    6.00
    %Rate of increase in compensation levels
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    4.00
    %Expected long-term rate of return on
assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    7.00
    %
 F-20




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 9 - Retirement Plans (contd.) Pension Plan (contd.) The following table sets forth the plans funded status and amounts
recognized in the Companys balance sheet at: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)Actuarial present value of benefit obligations:Accumulated benefit obligation
    
    $
    27,595
    
    
    $
    33,342
    
    
    $
    38,423Vested benefit obligation
    
    $
    26,860
    
    
    $
    32,505
    
    
    $
    37,585Projected benefit obligation
    
    $
    (34,963
    )
    
    $
    (41,354
    )
    
    $
    (47,132
    )Plan assets at fair value,
primarily notes and bonds
    
    
    24,865
    
    
    
    27,792
    
    
    
    29,812Projected benefit obligation in
excess of plan assets
    
    
    (10,098
    )
    
    
    (13,562
    )
    
    
    (17,320
    )Unrecognized net loss
    
    
    9,679
    
    
    
    13,381
    
    
    
    15,843Unrecognized prior service cost
    
    
    (2
    )
    
    
    
    
    
    
    2Unrecognized net obligations established
October 1, 1987
    
    
    54
    
    
    
    27
    
    
    
    Pension liability recognized in the
balance sheet
    
    $
    (367
    )
    
    $
    (154
    )
    
    $
    (1,475
    )
 Expenses recognized for this retirement plan were $2.4 million, $3.1
million and $3.8 million in 2002, 2003 and 2004, respectively. Profit Sharing Plan The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may
participate if their collective bargaining agreement specifically provides for
their inclusion. The Company may contribute up to 7.5% of total compensation
paid or accrued during the year to each plan participant subject to limitations
imposed by the Internal Revenue Code. The Company recognized expenses for this
plan in the amount of $550,000, $668,000 and $1.0 million in 2002, 2003 and
2004, respectively. Multi-Employer Plans The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the
number of hours worked. Information for these plans as to vested and
non-vested accumulated benefits and net assets available for benefits is not
available. F-21




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 9 - Retirement Plans (contd.) Multi-Employer Plans (contd.) The Companys expense for these retirement plans and health and welfare
plans consisted of the following: Sept. 29, 2002
    
    Sept. 28, 2003
    
    Sept. 26, 2004(In thousands)Multi-Employer Pension Plans
    
    $
    16,726
    
    
    $
    22,986
    
    
    $
    35,007Multi-Employer Health and Welfare
    
    
    65,588
    
    
    
    79,561
    
    
    
    132,423Total Multi-Employer Benefits
    
    $
    82,314
    
    
    $
    102,547
    
    
    $
    167,430
 The Companys employer contributions fluctuate as a result of periodic
resumptions and suspensions of employer contributions to collective bargaining
trusts. Note 10 - Labor Relations The Companys collective bargaining contract with the UFCW was ratified in
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. Note 11 - Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value: Cash and Cash Equivalents The carrying amount approximates fair value because of the short-term
maturity of these instruments. Receivables The carrying amount approximates fair value because of the short-term
maturity of these instruments. F-22




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 11 - Fair Value of Financial Instruments (contd.) Long-Term Debt and Capital Lease Obligations The fair value of the 8.125% Senior Notes and the Floating Rate Senior
Notes, are based on quoted market prices. Although market quotes for the fair
value of the Companys capitalized lease obligations are not readily available,
the Company believes the stated value approximates fair value. The estimated fair values of the Companys financial instruments are as
follows: As ofSeptember 26, 2004(In thousands)Carrying
    
    FairAmount
    
    ValueCash and cash equivalents
    
    $
    301,947
    
    
    $
    301,947Receivables
    
    $
    39,258
    
    
    $
    39,258Long-term debt
    
    $
    700,000
    
    
    $
    726,250Capitalized lease obligations
    
    $
    10,717
    
    
    $
    10,717
 Note 12 - Litigation Matters In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company records an
appropriate provision when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition. On July 9, 2003, the Companys principal operating subsidiary Markets
agreed to a settlement of two lawsuits which had been filed on behalf of
certain of Markets existing and former store managers and assistant managers
which alleged that such workers are non-exempt under California labor laws and
are therefore entitled to overtime wages. Markets admitted no wrong doing
under the settlement and it believes it has appropriately followed California
law in the classification and payment of its employees. Markets believes that
the store managers and assistant managers are highly compensated employees with
duties and responsibilities which place them in the exempt category under
California law and that such employees are not entitled to overtime wages.
Markets continues to feel the case was without merit; however, because of
escalating litigation expenses, Markets determined a settlement was the best
solution. The amount of the settlement was $3.2 million. Of the $3.2 million,
$1.2 million of the settlement was recognized as expense in fiscal 2003 and the
remaining was expensed in prior years. 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 Note 3 - Santee. F-23




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 13 - Stock Redemption During fiscal 2002, the Company obtained consent of the holders of its
10.75% Senior Notes due 2006 to make a distribution and payment to stockholders
consisting of $25.0 million in cash and a subordinated note in the principal
amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699
shares of the Companys stock previously held by La Cadena Investments (La
Cadena), the sole shareholder of the Company, and made a cash payment of $20.0
million and executed a $20.0 million subordinated note due March 31, 2007 to a
former partner of La Cadena. The subordinated note bore interest at a rate of
5.0% per annum, payable semi-annually. In February 2004, the Company retired
the 5.0% Subordinated Note. On February 1, 2002, the Company paid a $4.5
million dividend to La Cadena. Fees for consent of the holders of its 10.75%
Senior Notes and fees and expenses of the transaction, including a $500,000
financial advisory service fee to La Cadena, were approximately $5.0 million. Note 14  Phantom Stock Plan The Company maintains a phantom stock plan for certain executives of
Markets. Existing stockholders and partners of La Cadena are not eligible to
receive awards. Awards under the plan are for units that have an assigned
value. Awards under the plan vest after five years, except that upon a
participants early retirement, permanent total disability or death, awards are
considered partially vested at the rate of 20% for each year of employment
following the grant. If a participant voluntarily terminates his or her
employment, or is terminated for cause, any unvested awards under the plan will
terminate and no payment will be made thereunder. As of September 29, 2002,
September 28, 2003 and September 26, 2004, there were 668,000, 693,000 and
702,000 units outstanding, respectively. The Company recognized an expense for
the plan of $6.0 million, $6.0 million and $24.0 million in 2002, 2003 and
2004, respectively. Note 15  Dividend Payment On June 17, 2004, the Company paid a $45.0 million dividend to La Cadena
Investments, the sole stockholder of the Company. Note 16 - 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 (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 (IVDA), which is the entity responsible for the
redevelopment of NAFB, to acquire approximately 93 acres of the project
property owned by IVDA. As a component of this Agreement 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 IVDA requires Markets to acquire those parcels not owned by 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 also has
entered into an agreement with Hillwood/San Bernardino LLC (Hillwood), the
master developer of NAFB, for infrastructure improvements. Under the Hillwood Agreement, Markets will share costs
associated with the infrastructure improvements including 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 credits in the amount of $10.8 million.
The agreements with IVDA and Hillwood are contingent upon Markets successfully
completing acquisition of all the privately owned property. F-24




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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.) Note 16 - Corporate Office and Distribution Facilities (contd.) 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.
The 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 is planned for
the winter of 2006. Note 17 - Quarterly Results (unaudited) Quarterly results for fiscal 2002, 2003 and 2004 are as follows:  Net
    
    EarningsGross
    
    Operating
    
    Income
    
    (Loss)Sales
    
    Profit
    
    Profit
    
    (Loss)
    
    Per ShareFiscal 2002 Quarters13 weeks ended 12/30/01
    
    $
    662,587
    
    
    $
    176,163
    
    
    $
    18,723
    
    
    $
    3,932
    
    
    $
    78.6413 weeks ended 03/31/02
    
    
    654,213
    
    
    
    172,813
    
    
    
    19,476
    
    
    
    4,294
    
    
    
    104.0813 weeks ended 06/30/02
    
    
    672,779
    
    
    
    177,142
    
    
    
    17,707
    
    
    
    2,911
    
    
    
    76.0013 weeks ended 09/29/02
    
    
    676,767
    
    
    
    182,702
    
    
    
    13,132
    
    
    
    652
    
    
    
    17.02$
    2,666,346
    
    
    $
    708,820
    
    
    $
    69,038
    
    
    $
    11,789
    
    
    $
    280.92Fiscal 2003 Quarters13 weeks ended 12/29/02
    
    $
    681,509
    
    
    $
    184,775
    
    
    $
    17,429
    
    
    $
    2,928
    
    
    $
    76.4513 weeks ended 03/30/03
    
    
    677,196
    
    
    
    188,058
    
    
    
    19,415
    
    
    
    3,831
    
    
    
    100.0213 weeks ended 06/29/03
    
    
    688,071
    
    
    
    189,233
    
    
    
    14,170
    
    
    
    769
    
    
    
    20.0813 weeks ended 09/28/03
    
    
    706,998
    
    
    
    192,347
    
    
    
    16,800
    
    
    
    2,599
    
    
    
    67.86$
    2,753,774
    
    
    $
    754,413
    
    
    $
    67,814
    
    
    $
    10,127
    
    
    $
    264.41Fiscal 2004 Quarters13 weeks ended 12/28/03
    
    $
    1,026,553
    
    
    $
    304,882
    
    
    $
    70,562
    
    
    $
    34,643
    
    
    $
    904.4913 weeks ended 03/28/04
    
    
    989,418
    
    
    
    296,339
    
    
    
    72,693
    
    
    
    30,279
    
    
    
    790.5613 weeks ended 06/27/04
    
    
    847,983
    
    
    
    224,723
    
    
    
    28,213
    
    
    
    (5,773
    )
    
    
    (150.73
    )13 weeks ended 09/26/04
    
    
    840,928
    
    
    
    226,126
    
    
    
    27,599
    
    
    
    12,654
    
    
    
    330.38$
    3,704,882
    
    
    $
    1,052,070
    
    
    $
    199,067
    
    
    $
    71,803
    
    
    $
    1,874.70
 F-25