<PAGE>   1
                                  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 1934

            For the fiscal year ended:  September 27, 1998

                                       OR

  [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

                      For the transition from ____ to ____

                        Commission file number 001-13222

                           STATER BROS. HOLDINGS INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                             33-0350671
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                             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. YES [X]  NO [ ].

        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. YES [X]  NO [ ].

        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 11, 1998--Class A Common Stock - 50,000 shares.



                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>   2
                           STATER BROS. HOLDINGS INC.

                                    FORM 10-K

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                     PART I

                                                                                Page Number
                                                                                -----------
<S>                                                                             <C>
Item 1   Business..............................................................       3
Item 2   Properties............................................................      10
Item 3   Legal Proceedings.....................................................      10
Item 4   Submission of Matters to a Vote of Security Holders...................      11



                                     PART II

Item 5   Market for the Registrant's Common Equity and Related Stockholder
                 Matters.......................................................     11
Item 6   Selected Financial Data...............................................     12
Item 7   Management's Discussion and Analysis of Financial Condition and
                 Results of Operations.........................................     14
Item 8   Financial Statements and Supplementary Data...........................     23
Item 9   Changes in and Disagreements with Accountants on Accounting and 
                 Financial Disclosure..........................................     23


                                    PART III

Item 10  Directors and Executive Officers of the Registrant....................     24
Item 11  Executive Compensation................................................     26
Item 12  Security Ownership of Certain Beneficial Owners and Management........     28
Item 13  Certain Relationships and Related Transactions........................     29



                                     PART IV

Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K.......     32

         Signatures............................................................     35
</TABLE>



                                       2
<PAGE>   3
                                     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 and Stater Bros.
Development, Inc., (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, operating 112
supermarkets in the Inland Empire Region of Southern California.

The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The Company
offers 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 full-service meat departments and many of the supermarkets
have service delicatessens and service bakery departments. All of the Company's
supermarkets have expanded selections of produce merchandise.

The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 84% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 1,017,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.

OWNERSHIP OF THE COMPANY

In August 1997, La Cadena Investments ("La Cadena") became the sole shareholder
of the Company and holds all of the shares of the Company's Class A Common Stock
which are entitled to 1.1 votes per share. La Cadena Investments is a California
General Partnership whose partners include Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of the Company and other members 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.

RECAPITALIZATION TRANSACTION

In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the Company to
La Cadena, reclassified the Company's outstanding equity, provided for certain
cash payments and distributions to Craig Corporation ("Craig"), previously a
common shareholder of the Company, and provided the Company with an option to
acquire Craig's remaining equity in Stater Bros. Holdings Inc. The
Recapitalization Transaction was funded through an offering of $165.0 million of
11% Senior Notes due 2001 (the "11% Notes") under Rule 144A of the Securities
Act of 1933, as amended. Proceeds from the 1994 Notes were used to (a) repay
$75.5 million of 9.8% Senior Notes, together with prepayment premiums of $13.9
million, (b) repay outstanding bank loans and mortgages of approximately $12.0
million, (c) repay an outstanding capital expenditure revolving credit facility
of $9.0 million, (d) fund a $5.0 million five-year consulting agreement and
covenant not to compete with Craig, (e) fund a payment of $14.6 million to
purchase an option to acquire Craig's remaining interest in the Company, (f) pay
$20.0 million in dividends on the Company's Common Stock (held by Craig) and (g)
pay fees and expenses associated with the Recapitalization. The 11% Notes are
listed and trade on the American Stock Exchange.



                                       3
<PAGE>   4
ITEM 1. BUSINESS (CONTD.)


CONVERSION AND REDEMPTION OF SERIES B PREFERRED STOCK

Effective March 8, 1996, pursuant to options available to the Company, the
Company exercised its right to convert all of its outstanding shares of Common
Stock (previously held by Craig) into 693,650 shares of its Series B Preferred
Stock. The Series B Preferred Stock had a redemption value of approximately
$69.4 million and currently paid dividends at the rate of 10.5% per annum. In
August 1997, the Company redeemed all of the outstanding shares of its Series B
Preferred Stock for $69.4 million plus accrued and unpaid dividends.

In July 1997, the Company issued $100 million of 9% Senior Subordinated Notes
due 2004 (the "9% Notes") under Rule 144A of the Securities Act of 1933.
Proceeds from the issuance of the 9% Notes were used as follows (a) $69.4
million to redeem the Series B Preferred Stock, (b) $4.6 million to pay accrued
dividends due from the Series B Preferred Stock, (c) $4.9 million to obtain
consents from the holders of the Company's 11% Senior Notes due 2001 to permit
the issue of the 9% Notes, (d) $2.0 million to La Cadena for financial advice
relating to the transaction, (e) $3.4 million for fees and expenses of the
transaction. The remaining proceeds from the issuance of the 9% Notes were used
for general corporate purposes, including capital expenditures. The 9% Notes are
listed and trade on the American Stock Exchange.

BUSINESS STRATEGY

STORE PROFILE AND LOCATIONS

The Company's existing 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 Stater Bros. supermarket is approximately 30,000 square
feet, while newly constructed Stater Bros. supermarkets range from approximately
35,300 to 43,200 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 112 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 Inland Empire. Such
expansion has been accomplished through improving and remodeling existing stores
and constructing new supermarkets rather than by acquiring other supermarket
operations. The number of supermarkets operated by the Company has grown from 82
in September 1979 to 112 as of September 27, 1998. 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 selective acquisitions of existing supermarkets, if such
opportunities arise. 




                                       4
<PAGE>   5

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
54% of the Company's supermarkets have been either newly constructed or
remodeled within the last five years. Minor remodels cost between $100,000 and
$250,000 and typically include new fixtures, a change in decor, and the addition
of one or more specialty service departments such as a delicatessen or bakery.
Major remodels cost in excess of $250,000 and typically involve more extensive
refurbishment of the store's interior and often increase the retail selling
space per store. Expansions entail enlargement of the store building and
typically includes breaking through an exterior wall. The primary objectives of
remodelings 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
remodeling through its wholly-owned subsidiary, Stater Bros. Development, Inc.,
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.

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                             ------------------------------------------------------------
                             Sept. 25,    Sept. 24,    Sept. 29,    Sept. 28,   Sept. 27,
                               1994         1995         1996         1997        1998 
                             ---------    ---------    ---------    ---------   ---------
<S>                          <C>          <C>          <C>          <C>         <C>
Number of supermarkets:
  Opened..................        3           --            1           --           2
  Replaced................       (1)          --           (1)          --          --
  Closed..................       --           (1)          --           --          --
  Total at end of year....      111          110          110          110         112
  Minor Remodel...........        4            8            8           13           5
  Major Remodel...........       --           --            8            1           6
  Expansion...............       --            1           --           --          --
</TABLE>


Beyond 1998, the Company plans to open approximately two to four 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/leaseback transactions
or secured long-term financings. However, no assurances can be made as to the
availability of such financings. The Company opened a new replacement
supermarket in Loma Linda, California in December 1998 which is not included in
the table above.

WAREHOUSE AND DISTRIBUTION FACILITIES

The Company's warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 1,017,000 square
feet. The facilities include warehouses for grocery, produce and deli products,
meats and frozen products, health and beauty aids and bakery merchandise.
Management believes that its existing warehouse and distribution facilities are
adequate to meet its currently identified expansion plans. Approximately 84% of
the products offered for sale in the Company's supermarkets are processed
through the Company's warehouse and distribution facilities.



                                       5
<PAGE>   6
ITEM 1. BUSINESS (CONTD.)


WAREHOUSE AND DISTRIBUTION FACILITIES (CONTD.)

The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 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 27, 1998, the Company operated approximately 107 tractors and
302 trailers, approximately 5% of which were leased by the Company. The Company
also operates a repair terminal at the Colton distribution facility.

PURCHASING AND MARKETING

The Company uses an aggressive Everyday Low Price ("EDLP") format supported 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 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
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 and generic brands of 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
processing and distributing the merchandise through its perishable warehouses
and distribution facilities.

RETAIL OPERATIONS

The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 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 all its supermarkets under a single format,
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. Additionally, the store manager is supported by
individual department managers for grocery, meat, produce, and where applicable,
bakeries and delicatessens. Store managers report to one of six 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 executive officers and is implemented
at all levels of employees. 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
purchase carry-out service and have express check-out lanes for purchases of 10
items or less.



                                       6
<PAGE>   7
ITEM 1. BUSINESS (CONTD.)


SANTEE DAIRIES, LLC

The Company and Hughes Family Markets ("Hughes") currently each own a 50%
interest in Santee Dairies Limited Liability Company ("Santee LLC"), and have
jointly owned Santee Dairies, Inc. ("Santee") since 1986. Santee is a
wholly-owned subsidiary of Santee LLC. Santee operates one of the largest dairy
plants in California and provides fluid milk products to the Company, Hughes,
and other customers in Southern California. Santee processes, packages and
distributes whole milk, low-fat and non-fat milk, as well as orange juice, fruit
drinks and certain cultured milk products under the Knudsen, Foremost and
certain store brand names. Santee is the exclusive licensee of the Knudsen
trademark from Kraft Foods, Inc. for fluid milk, juices and certain 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. Santee also processes, packages and
distributes Hershey chocolate milk under license. In calendar 1997, Santee
processed approximately 69 million gallons of fluid products, including 60
million gallons of fluid milk. Total revenues in Santee's fiscal year ended
December 27, 1997 were $169.7 million, of which approximately 29% were sales to
the Company and approximately 12% were from sales to Hughes. Santee also sells
to unaffiliated supermarkets, independent food distributors, military bases and
food service providers in Southern California.

Santee's prior dairy plant was built in 1914 and due to its age, Santee was
required to make significant expenditures for repairs and maintenance over the
past several years. In order to provide a consistent source of milk, fluid milk
products and other dairy products to accommodate expected expansion, Santee
constructed a new dairy plant in City of Industry, California (the "New
Facility"). The New Facility is expected to increase Santee's capacity to
process milk to approximately 250,000 to 350,000 gallons per day, with the
ability to expand capacity to approximately 500,000 gallons per day. The Company
expects that the New Facility, when fully operational, will also lower Santee's
costs of producing fluid milk and other products. However, as with any major
construction and capital expenditure project, the realization of these
anticipated benefits is subject to a number of risks and uncertainties and there
can be no assurance that these benefits will be realized.

Construction costs of the New Facility (excluding capitalized interest,
transition and training costs), are estimated to be approximately $91.5 million.
However, there can be no assurance that the cost of the new dairy will not
exceed this amount. To provide the funds necessary to finance the construction,
Santee issued $80 million of senior secured notes (the "Santee Notes") in a
private placement. The Company does not guarantee payment of the Santee Notes.

Stater Bros. Markets entered into a Fluid Milk and Other Products Requirements
Agreement (the "Product Purchase Agreement") with Santee. The term of the
Product Purchase Agreement is for ten years and requires that Stater Bros.
Markets purchase essentially the same type of products from Santee's New
Facility and to purchase from Santee a minimum volume of products each year
equal to approximately 80% of such products purchased by Stater Bros. Markets in
its 1996 fiscal year. The price for products charged by Santee to Stater Bros.
Markets, may increase or decrease, subject to the financial performance of
Santee and the price charged for products shall not, under any circumstances, be
adjusted to include any amount of principal on indebtedness of Santee which is
owing solely by reason of acceleration of principal payments under any loan
agreement. Additionally, if as a result of one of several events (an Alternative
Rate Event), Santee causes the interest rate charged on its debt to be increased
(an Alternative Rate), then the price charged for products shall be reset to
Market Price which is substantially the same price Santee charges to customers
other than its owners for the same product. Stater Bros. Markets believes it is
currently charged in excess of Market Price for the products it is currently
purchasing from Santee. The Company continues to explore alternatives available
to it regarding its investment in Santee.



                                       7
<PAGE>   8
ITEM 1. BUSINESS (CONTD.)


SANTEE DAIRIES, LLC (CONTD.)

The Company accounts for its investment in Santee using the equity method of
accounting.

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
check-out, 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.

During fiscal 1998, the Company installed in fifteen stores, NCR's new
generation of electronic scan systems, the 7452 ACS Scan System, and will
install an additional 28 systems during fiscal 1999. These new systems are more
customer oriented, operate more efficiently and reduce the time required to
check out customers.

During 1995, the Company completed the installation of the Stater Express(R)
system in all of the Company's supermarkets. Stater Express(R) 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(R) 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. The Company has obtained a federal
service mark for the name "Stater Express".

EMPLOYEES

The Company has approximately 8,700 employees, approximately 600 of whom are
management and administrative employees and approximately 8,100 of whom are
hourly employees. Approximately 69% of the Company's employees work part-time.
Substantially all of the Company's hourly employees are members of either the
United Food & Commercial Workers or International Brotherhood of Teamsters labor
unions and are represented by several different collective bargaining
agreements. The Company's collective bargaining agreements, with the United Food
& Commercial Workers, which covers the largest number of employees, were renewed
in October 1995 and expire in October 1999. The International Brotherhood of
Teamsters agreement was renewed in September 1998 and expires in September 2002.

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.

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
and a long history of community involvement.



                                       8
<PAGE>   9
ITEM 1. BUSINESS (CONTD.)


COMPETITION (CONTD.)

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 Lucky, Vons, Albertson's, Ralphs, and a
number of independent supermarket operators.

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 and regulate
the distribution and sale of alcoholic beverages, tobacco products, milk and
other agricultural products and other food items.

ENVIRONMENTAL

During fiscal 1998, the Company removed all of its underground gasoline fuel
storage tanks and remediated the surrounding soils, where necessary. The costs
incurred in 1998 to remove the underground gasoline storage tanks and to
remediate the surrounding soils amounted to approximately $84,000. During fiscal
1997, the Company removed all of its underground diesel fuel storage tanks and
related diesel refueling equipment from its Colton, California distribution
facility. The costs incurred during fiscal 1997 to remove the underground diesel
fuel storage tanks and to remediate the surrounding soils, amounted to
approximately $330,000. The Company refuels its transportation equipment at
several off-site locations which are owned and operated by an unrelated third
party.

Environmental remediation costs incurred over the past five years have been
approximately $684,000, in the aggregate, including remediation costs of
approximately, $8,000 in 1995, $80,000 in 1996, $330,000 in 1997 and $174,000 in
1998. Management believes that any such future remediation costs will not have
an adverse material effect on the financial condition or results of operations
of the Company.

YEAR 2000 COMPLIANCE

The efficient operations of the Company are dependent, in part, upon its
computer software programs, systems and processes (collectively, the
"Information Systems"). The Company's Information Systems are used in several
key areas of the Company, including, but not limited to, supermarket operations,
warehousing and distribution, merchandising and purchasing, inventory
management, and accounting and financial reporting. The Company is in the
process of updating its Information Systems for Year 2000 compliance
requirements. Additionally, the Company has also been in communication with some
of its vendors, financial institutions and others whose computer software,
programs and information systems may interface with those of the Company to
assess the status of their compliance with Year 2000 requirements. Failure of
companies (that the Company conducts business with) to comply with the Year 2000
requirements could have an adverse effect on the Company's operations.

Based on the information currently available, the Company believes it will meet
the Year 2000 compliance requirements through a combination of Information
Systems modifications and through the acquisition of new equipment and
technology that are Year 2000 compliant. The Company believes that costs
required to replace or modify Information Systems, including scheduled
replacements of in-store Point of Sale equipment, will approximate $8.4 million,
of which $6.9 million will be capitalized and $1.5 million will be expensed.
Through September 27, 1998, the Company has incurred capitalized expenditures of
$3.2 million and expenses of $340,000. The Company believes that it will
successfully achieve compliance with the year 2000 requirements, however, no
assurances can be given that the Company's Information Systems and it's vendors,
financial institutions and other will be successful in achieving Year 2000
compliance. 



                                       9
<PAGE>   10

ITEM 2. PROPERTIES


The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company.

The following schedule presents the Company's warehouse and distribution
facilities by product classification and the size of each facility as of
December 11, 1998.

<TABLE>
<CAPTION>
                                                                                      Square
  Facility                                                                              Feet 
  --------                                                                           ------- 
<S>                                                                                   <C>    
  Grocery......................................................................       416,000
  Forward-buy grocery..........................................................       237,000
  Produce/deli.................................................................       118,000
  Meat/frozen..................................................................       116,000
  Health and beauty aids.......................................................        35,000
  Bakery.......................................................................        21,000
  Support and administrative offices...........................................        74,000
                                                                                    ---------
      Total....................................................................     1,017,000
                                                                                    =========
</TABLE>

As of December 11, 1998, the Company owned 24 of its supermarkets and leased the
remaining 88 supermarkets. Management believes that its supermarkets are well
maintained and adequately meet the expectations of its customers. The Company
operates 112 supermarkets in the Southern California counties of San Bernardino,
Riverside, Orange, Los Angeles and Kern. The following schedule reflects the
Company's store counts by size, county, and the number of stores that are either
leased or owned as of December 11, 1998.

<TABLE>
<CAPTION>
                             No. of Stores                               Total Square Feet
                     ----------------------------     ---------------------------------------------------
                                                       Under     24,001-    29,001-    34,001-    39,001-
County               Total       Owned     Leased     24,000     29,000     34,000     39,000     45,000 
------               -----       -----     ------     ------     ------     ------     ------     -------
<S>                  <C>         <C>       <C>        <C>        <C>        <C>        <C>        <C>
San Bernardino.....    46          9         37         --         18         10         14          4
Riverside..........    35          7         28         --         15         14          5          1
Orange.............    16          7          9          1         13         --          1          1
Los Angeles........    13          1         12         --         11          1          1         --
Kern...............     2         --          2         --         --          1          1         --
                      ---        ---        ---        ---        ---        ---        ---        ---

Total..............   112         24         88          1         57         26         22          6
                      ===        ===        ===        ===        ===        ===        ===        ===
</TABLE>

Subsequent to fiscal year end, in December 1998, the Company opened a new 37,400
square foot replacement supermarket in Loma Linda, California, which is included
in the table above.



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.


                                       10
<PAGE>   11
ITEM 3.         LEGAL PROCEEDINGS (CONTD.)

On May 2, 1993, the Company was named as a defendant along with all of the other
major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs sought unspecified damages. The Company has recently
entered into a settlement agreement of this case which settlement does not
involve payment of monetary damages and is currently being processed through the
courts for approval. Such settlement will not have an adverse material effect on
the results of operations or financial condition of the Company.

On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of
Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the State
of California for the County of San Bernardino. The complaint filed by twelve
employees seeks unspecified damages alleging racial discrimination in the
Company's employment practices. The Company believes the complaint is without
merit and intends to vigorously defend the case. There can be no assurances,
however, as to the outcome of this case.

ENVIRONMENTAL MATTERS

During fiscal 1998, the Company removed all of its underground gasoline fuel
storage tanks and remediated the surrounding soils, where necessary. The costs
incurred in 1998 to remove the underground gasoline storage tanks and to
remediate the surrounding soils amounted to approximately $84,000. During fiscal
1997, the Company removed all of its underground diesel fuel storage tanks and
related diesel refueling equipment from its Colton, California distribution
facility. The costs incurred during fiscal 1997 to remove the underground diesel
fuel storage tanks and to remediate the surrounding soils, amounted to
approximately $330,000. The Company refuels its transportation equipment at
several off-site locations which are owned and operated by an unrelated third
party.

Environmental remediation costs incurred during the last five years have been
approximately $684,000, in the aggregate, including remediation costs of
approximately $8,000 in 1995, $80,000 in 1996, $330,000 in 1997 and $174,000 in
1998. Management believes that any such future remediation costs will not have
an adverse material effect on the financial condition or results of operations
of the Company.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


                                      None



                                     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
                La Cadena Investments holds 50,000 shares, or 100% of the 
Company's Class A Common Stock.

     (c) Dividends
                No dividends were paid in fiscal years 1998, 1997, and 1996 on 
the common equity of the Company and the Company does not intend to pay
dividends on its common equity in the foreseeable future. 




                                       11
<PAGE>   12

ITEM 6. SELECTED FINANCIAL DATA


The following table sets forth historical financial data derived from the
audited financial statements of the Company as of and for the fiscal years ended
September 25, 1994, September 24, 1995, September 29, 1996, September 28, 1997
and September 27, 1998. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the 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.



<TABLE>
<CAPTION>
                                                                          FISCAL YEARS ENDED
                                         -----------------------------------------------------------------------------------
                                          SEPT. 25,          SEPT. 24,       SEPT. 29,(7)        SEPT. 28,          SEPT. 27,
                                            1994               1995              1996              1997              1998
                                         -----------       -----------       -----------       -----------       -----------
                                                              (In thousands of dollars except per share and store data)
<S>                                      <C>               <C>               <C>               <C>               <C>
STATEMENT OF EARNINGS DATA:
Sales..................................  $ 1,539,717       $ 1,579,895       $ 1,705,332       $ 1,717,924       $ 1,726,107
Cost of goods sold.....................    1,199,794         1,227,355         1,315,726         1,326,410         1,323,522
                                         -----------       -----------       -----------       -----------       -----------
Gross profit...........................      339,923           352,540           389,606           391,514           402,585
Selling, general and administrative
  expenses.............................      297,474           308,332           328,242           333,199           353,075
Depreciation and amortization..........      11,656            11,756            12,583            13,265            15,434
Consulting fees(1).....................          830             1,500             1,525             1,458                --
                                         -----------       -----------       -----------       -----------       -----------
Total operating expenses...............      309,960           321,588           342,350           347,922           368,509
                                         -----------       -----------       -----------       -----------       -----------
Operating profit.......................       29,963            30,952            47,256            43,592            34,076

Interest and other income..............          775             1,049             1,757             3,110             3,061
Interest expense.......................      (15,501)          (20,076)          (20,258)          (21,563)          (30,206)
Equity in earnings (loss) from
  unconsolidated affiliate.............         (592)             (980)           (1,624)           (2,313)           (2,941)
                                         -----------       -----------       -----------       -----------       -----------
Income before income taxes,
  extraordinary charge and
  cumulative effect of a change
  in accounting for income taxes.......       14,645            10,945            27,131            22,826             3,990
Income taxes...........................        5,856             4,218            11,120             9,359             1,459
                                         -----------       -----------       -----------       -----------       -----------
Income before extraordinary charge
  and cumulative effect of a change
  in accounting for income taxes.......        8,789             6,727            16,011            13,467             2,531
Extraordinary (charge)(2)..............       (8,036)               --                --                --                --
Cumulative effect of a change in
  accounting for income taxes(5).......          372                --                --                --                --
                                         -----------       -----------       -----------       -----------       -----------
Net income.............................        1,125             6,727            16,011            13,467             2,531
Preferred dividends....................          327                --             4,111             6,166                --
                                         -----------       -----------       -----------       -----------       -----------
Income available to common
  stockholders.........................  $       798       $     6,727       $    11,900       $     7,301       $     2,531
                                         ===========       ===========       ===========       ===========       ===========
Earnings per common share before
  extraordinary charge and
  cumulative effect of a change
  in accounting for income taxes.......  $     84.62       $     67.27       $    165.28       $    146.02       $     50.62
Earnings per common share..............  $      7.98       $     67.27       $    165.28       $    146.02       $     50.62
</TABLE>


                                                   (FOOTNOTES ON FOLLOWING PAGE)



                                       12
<PAGE>   13
ITEM 6.         SELECTED FINANCIAL DATA (CONTD.)

<TABLE>
<CAPTION>
                                                                                   FISCAL YEARS ENDED
                                                  -----------------------------------------------------------------------------
                                                   SEPT. 25,        SEPT. 24,      SEPT. 29,(7)      SEPT. 28,         SEPT. 27,
                                                     1994             1995            1996             1997              1998
                                                   ---------        ---------      ---------         ---------         ---------
                                                            (In thousands of dollars except per share and store data)
<S>                                               <C>              <C>              <C>              <C>              <C>      
BALANCE SHEET DATA (END OF FISCAL YEAR):
Working capital.................................. $  41,422        $  45,014        $  63,473        $  92,013        $  90,725
Total assets.....................................   306,489          314,082          338,294          358,477          364,318
Long-term notes and mortgages payable............   165,000          165,000          165,000          265,000          265,000
Long-term capitalized lease obligations..........     9,187            8,099            6,917            5,661            4,350
Other long-term liabilities......................    15,765           13,772           12,858           11,348           12,009
Series B Preferred Stock.........................        --               --           69,365               --               --
Common stockholders' equity (deficit)............     6,851           13,578          (43,887)         (36,586)         (34,055)
Dividends declared per share:
  Common Stock................................... $     400               --               --               --               --
  Class A Common Stock...........................        --               --               --               --               --
  10.5% Series B Preferred Stock.................        --               --        $    5.93        $    8.91               --

Other Operating and Financial Data:
Sales increases (decreases):
  Total stores...................................       0.9%             2.6%             7.9%             0.7%             0.5%
  Like stores (comparable 52-weeks)..............      (0.7%)            1.2%             6.3%             2.6%            (1.0%)
EBITDA(3)........................................ $  45,802        $  42,777        $  59,972        $  57,654        $  49,630
Operating profit................................  $  29,963        $  30,952        $  47,256        $  43,592        $  34,076
Ratio of earnings to fixed charges(4)...........      1.47x            1.36x            1.53x            1.23x            1.03x
Gross profit as a percentage of sales...........     22.08%            22.31%           22.85%           22.79%           23.32%
Selling, general and administrative
  expenses as a percentage of sales.............      19.32%           19.52%           19.25%           19.40%           20.46%

STORE DATA:
Number of stores (at end of fiscal year)........        111              110              110              110              112
Average sales per store (000s)..................  $  13,997        $  14,298        $  15,503        $  15,617        $  15,551
Average store size:
  Total square feet.............................     28,617           28,717           28,809           28,809           29,061
  Selling square feet...........................     20,708           20,773           20,845           20,845           20,991
Total square feet (at end of fiscal year) (000s)      3,177            3,159            3,169            3,169            3,255
Total selling square feet (at end of fiscal
  year) (000s)..................................      2,299            2,285            2,293            2,293            2,351
Sales per average total sq. ft..................  $     492        $     499        $     538        $     542        $     537
Sales per average selling sq. ft................  $     680        $     689        $     744        $     749        $     743
</TABLE>


(1)     Effective March 1994, the Company paid $1.5 million annually in
        consulting fees to Craig Corporation, subject to a certain five year
        Consulting Agreement entered into between the Company and Craig. The
        Company's agreement to pay Craig an annual consulting fee was
        terminated, at the election of the Company, in August 1997.



                    (FOOTNOTES CONTINUED ON FOLLOWING PAGE)



                                       13
<PAGE>   14
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)


(2)     Extraordinary charges in 1994 represent the after-tax charge from the
        early retirement of debt.

(3)     EBITDA represents earnings before extraordinary charge, interest
        expense, depreciation and amortization, standstill fees and income tax
        expense. The Company has included information concerning EBITDA here as
        it is relevant for covenant analysis under the Notes and because it is
        used by certain investors as a measure of a company's ability to service
        its debt. EBITDA should not be used as an alternative to, or be
        construed as more meaningful than, operating profit or cash flows as an
        indicator of the Company's operating performance.

(4)     For the purpose of determining the ratio of earnings to fixed charges,
        earnings consist of income before income taxes and the extraordinary
        charge, amortization of previously capitalized interest and
        undistributed earnings or loss from less than 50% owned subsidiaries and
        includes fixed charges. Fixed charges consist of interest expense
        whether expensed or capitalized, amortization of deferred debt expense,
        preferred stock dividends adjusted to represent pre-tax earnings
        requirements and such portion of rental expense as can be deemed by
        management to be representative of the interest factor in the particular
        case.

(5)     The Company adopted SFAS No. 109 ("Accounting for Income Taxes")
        effective at the beginning of fiscal 1994 as a cumulative effect of a
        change in accounting principle.

(6)     Certain amounts in prior periods have been reclassified to conform to
        the current period financial statement presentation.

(7)     The year ending September 29, 1996 was a 53-week year, whereas fiscal
        years 1994, 1995, 1997 and 1998 were 52-week years.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


Comparisons between the 1996, 1997 and 1998 fiscal years are difficult due to
the additional week in the 1996 fiscal year and the additional long-term debt
incurred in 1997. Fiscal year 1996 was a 53-week fiscal year, whereas fiscal
years 1997 and 1998 consisted of 52 weeks.

OWNERSHIP OF THE COMPANY

Effective August, 1997, La Cadena became the sole shareholder of the Company and
holds all of the shares of the Company's Class A Common Stock which are entitled
to 1.1 votes per share. La Cadena Investments is a California General
Partnership whose partners include Jack H. Brown, Chairman of the Board,
President and Chief Executive Officer of the Company and other members 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.



                                       14
<PAGE>   15
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 52-week fiscal years ended September 27, 1998 and
September 28, 1997 and the 53-week fiscal year ended September 29, 1996.

<TABLE>
<CAPTION>
                                                   Fiscal Years Ended
                                         -------------------------------------
                                          1996           1997           1998 
                                         ------         ------         -------
<S>                                      <C>            <C>            <C>
Sales                                    100.00%        100.00%        100.00%
Gross profit                              22.85          22.79          23.32
Operating expenses:
  Selling, general and
     administrative expense               19.25          19.40          20.46
  Depreciation and amortization             .74            .77            .89
  Consulting fees                           .09            .08             --
Operating profit                           2.77           2.54           1.97
Interest income                             .11            .18            .18
Interest (expense)                        (1.19)         (1.26)         (1.75)
Equity in (loss) from
  unconsolidated affiliate                 (.10)          (.13)          (.17)
Other income (expense) net                   --             --             --
Earnings before income taxes               1.59%          1.33%           .23%
</TABLE>

Total sales amounted to $1.726 billion in the 52-week 1998 fiscal year compared
to $1.718 billion in the 52-week 1997 fiscal year, and $1.705 billion in the
53-week 1996 fiscal year. Like-store sales for comparable 52-week periods
decreased 1.0% in 1998 compared to increases of 2.6% in fiscal 1997 and 6.3% in
fiscal 1996. The increase in like-store sales in fiscals 1997 and 1996 was due
to many factors including slight improvements in the Southern California economy
and favorable customer response to the Company's merchandising expansion and
upgrading program which included expanding product offerings in the deli,
bakery, frozen foods and dairy departments and continuing with the introduction
of fresh cut flowers and prepackaged vegetables into most of the Company's
supermarkets. Additionally, like store sales were impacted by the departure of a
competitor from the market place.

During the second quarter of the Company's fiscal 1996, Smith's Food & Drug
("Smith's"), announced the termination of its Southern California operations and
began closing all of its supermarkets located in Southern California.
Approximately fifteen Smith's supermarkets competed with the Company. As of
September 29, 1996, nine Smith's supermarkets remained closed and as of
September 28, 1997, five Smith's supermarkets remained closed. Accordingly, the
Company's sales in fiscal 1996 were aided by a direct competitor leaving the
market place. Sales for fiscal 1997 and 1998 were adversely effected as
competitors periodically acquired and reopened the vacated Smith's supermarkets.
Management believes it has been successful in attracting and retaining many of
the previous Smith's customers to its supermarkets.

Gross profits increased to $402.6 million or 23.32% in 1998 compared to $391.5
million or 22.79% of sales in 1997 and $389.6 million or 22.85% of sales in
1996. The increase in gross profits, as a percent of sales in fiscal year 1998
was due 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. The decrease in gross profits as a
percentage of sales in 1997 when compared to 1996, was due to aggressive
competitive pricing in selected areas of Southern California in the third and
fourth quarters of fiscal 1997. The Company adjusts its pricing strategy as
necessary to retain its every day low price marketing position.



                                       15
<PAGE>   16
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,
depreciation and amortization, and consulting fees expenses. In fiscal year
1998, selling, general and administrative expenses amounted to $353.1 million or
20.46% of sales compared to $333.2 million or 19.40% of sales in 1997 and $328.2
million or 19.25% of sales in 1996. Selling, general and administrative expenses
for fiscal 1998 included expenses incurred to operate two additional
supermarkets and non-recurring advertising expenses of approximately $2.1
million incurred in the second and third quarters to re-affirm the Company's
strategy of Every Day Low Price leadership in its primary marketing areas and to
advertise the Company's successful No Club Card strategy. Additionally,
commencing in April 1998, the Company was required to resume employer
contributions of approximately $750,000 per month to a previously over-funded
collective bargaining pension trust. Such employer contributions had been
suspended since 1994. In fiscal 1997, selling, general and administrative
expenses increased as a percentage of sales due to contractual increases in
collective bargaining employees rates of pay and increases in fixed expenses
such as rent expense, utilities, depreciation and supermarket supplies expenses.
In fiscal 1996, selling, general and administrative expenses decreased as a
percent of sales primarily due to the additional week in the 53-week 1996 fiscal
year and a non-recurring reduction to expenses of approximately $3.8 million
from a two month suspension of employer contributions to an over funded
collective bargaining health and welfare benefit trust. Employer contributions
and related suspensions of payments, if applicable, to the collective bargaining
trusts are subject to, but not limited to, labor agreements funding
requirements, regulatory statutes, actuarial calculations and performance of
plan assets.

Depreciation and amortization expenses amounted to $15.4 million in 1998
compared to $13.3 million in 1997 and $12.6 million in 1996 and includes
amortization of $1.0 million in 1998, 1997 and 1996, from a $5.0 million prepaid
five-year covenant not to compete included in a Consulting Agreement between the
Company and Craig, which became effective March 8, 1994 as part of the
Recapitalization Transaction.

Since January 1, 1989, the Company has entered into various consulting
agreements with its then stockholders, La Cadena and Craig, that required them
to provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters. These consulting agreements
with its stockholders terminated on September 26, 1993. In March 1994, the
Company entered into a new five-year Consulting Agreement with Craig
Corporation, whereby the Company paid Craig $1.5 million per year and Craig
provided the Company with consultation and advice in connection with general
business issues, financial, management consulting, real estate acquisition and
development and product diversification matters. Consulting fees expense
amounted to $1.5 million in 1997 and 1996. The agreement to make annual
consulting payments to Craig was terminated, at the election of the Company, in
August 1997.

Operating profits amounted to $34.1 million or 1.97% of sales in 1998 compared
to $43.6 million or 2.54% of sales in 1997 and $47.3 million or 2.77% of sales
in 1996.

Interest expense amounted to $30.2 million, $21.6 million and $20.2 million for
the 1998, 1997 and 1996 fiscal years, respectively. The increase in interest
expense in 1998 was due to the issuance of $100 million of 9% Senior
Subordinated Notes due 2004 which were issued in July 1997 and remain
outstanding. Interest expense included amortization of fees and expenses
incurred to acquire debt of $2.8 million in 1998, $1.5 million in 1997 and $1.2
million in 1996.



                                       16
<PAGE>   17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


RESULTS OF OPERATIONS (CONTD.)

The increase in the Company's equity in loss from unconsolidated affiliate in
fiscal years 1998, 1997 and 1996 resulted from increased depreciation expense as
a result of Santee's decision to not exercise an option to extend the lease of
the old facility located in Los Angeles, California for ten years, but to vacate
the facility which reduced the economic lives of certain assets and negotiated a
two year lease extension in that facility which increased rent expense during
the two year lease extension for the Los Angeles, California facility. Santee
vacated the Los Angeles, California facility in March 1998 and thereafter
occupied a new facility which is located in City of Industry, California.
Additionally, during fiscal 1998, the Company's equity in loss from
unconsolidated affiliate included costs and expenses incurred to relocate to the
new City of Industry facility and costs incurred to start up and commission the
new plant. Since June 1998, the Company has accepted and paid approximately $4.3
million (approximately $1.0 million per month) from a temporary increase in the
cost of dairy products purchased from Santee by the Company. The temporary
increase in the costs of products purchased from Santee is included in cost of
goods sold. Senior Management of Santee has informed the Company, and the
Company believes, that the temporary price increases will continue through March
1999, but no assurances can be provided that the temporary price increases will
cease on or before March 1999. The Company continues to explore alternatives
available to it regarding its investment in Santee.

Income before income taxes amounted to $4.0 million, $22.8 million and $27.1
million for the 1998, 1997 and 1996 fiscal years, respectively.

Net income amounted to $2.5 million in 1998, $13.5 million in 1997 and $16.0
million in 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its daily cash flow requirements through
funds generated from operations and from borrowings from short-term revolving
credit facilities. The Company's credit agreement as amended, expires in June
2000, and consists of a revolving credit facility for working capital of $15.0
million, which was available at September 27, 1998 and a standby letter of
credit facility with a maximum availability of $25.0 million, of which $14.2
million was available at September 27, 1998. Such standby letter of credit
facility is maintained pursuant to the Company's workers' compensation and
general liability self-insurance requirements.

The Company had no short-term borrowings outstanding at fiscal years end 1998,
1997 and 1996, and the Company did not incur short-term borrowings during fiscal
years 1998, 1997 and 1996.

Working capital amounted to $90.7 million at September 27, 1998 and $92.0
million at September 28, 1997 and $63.5 million at September 29, 1996. The
Company's current ratios were 1.78:1, 1.81:1 and 1.50:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the
industry.

Net cash provided by operating activities amounted to $26.4 million in 1998,
$9.6 million in 1997 and $27.9 million in 1996. Fluctuations in operating assets
and liabilities are not unusual in the industry. The change in net cash provided
by operating activities between 1998, 1997 and 1996 is primarily due to
fluctuations in inventories and related accounts payable. In September 1996, the
Company increased its inventory and related accounts payable in anticipation of
the implementation of the Company's 60th Anniversary Marketing Program in the
first quarter of fiscal 1997 and the subsequent decrease in accounts payable in
the first quarter of 1997. Fiscal 1998 reflects a return to a more traditional
year end balance of accounts payable.



                                       17
<PAGE>   18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


LIQUIDITY AND CAPITAL RESOURCES (CONTD.)

Net cash used in financing activities during fiscal 1998 amounted to $1.3
million and consisted of reductions in capitalized lease obligations. Net cash
provided by financing activities in fiscal 1997 amounted to $12.8 million and
consisted of the issuance of $100 million of 9% Notes, redemption of the Series
B Preferred Stock for $69.365 million, costs and expenses to issue debt of $10.5
million, payment of dividends on the Series B Preferred Stock of $6.2 million
and reduction to amounts due on capitalized lease obligations of $1.2 million.

The 9% Notes are due in 2004 and are general unsecured obligations of the
Company, subordinated in right of payment to the 11% Senior Notes and all other
present and future Senior Indebtedness of the Company, including the Company's
obligations under the revolving credit agreement and effectively subordinated to
all indebtedness and other obligations of the subsidiaries of the Company.
Interest on the 9% Notes is payable semi-annually in arrears on January 1 and
July 1 of each year. The proceeds from the issuance of the 9% Notes were used
(approximately) as follows; (a) $69.4 million to redeem all of the outstanding
shares of the Company's Series B Preferred Stock, (b) $4.6 million to pay
accrued dividends on the Series B Preferred Stock, (c) $4.9 million to obtain
the consent from the holders of the Company's 11% Notes to permit the issue of
the 9% Notes, (d) $2.0 million to La Cadena for financial advise relating to the
transaction, and (e) $3.4 million for fees and expenses of the transaction. The
remaining proceeds from the 9% Notes were used for general corporate purposes,
including capital expenditures.

Net cash used in financing activities in fiscal year 1996 amounted to $5.2
million. Net cash used in financing activities in 1996 reduced amounts due under
capitalized lease obligations by $1.1 million. Effective March 8, 1996, the
Company converted its outstanding Common Stock for 693,650 shares of its 10.5%
Series B Preferred Stock, stated value $100 per share. Dividends paid or accrued
for the 10.5% Series B Preferred Stock amounted to $4.1 million in 1996.

Net cash used in investing activities for the 1998, 1997 and 1996 fiscal years,
amounted to $27.0 million, $8.6 million and $3.8 million, respectively. The
difference in net cash used in investing activities between the comparable
periods in 1998, 1997 and 1996 was due to the Company's capital expenditures
during such periods, net of proceeds from asset dispositions. Capital
expenditures amounted to $26.3 million in 1998, $20.3 million in 1997 and $22.4
million in 1996. Capital expenditures for 1998 included costs to complete
construction and to open two supermarkets, to begin construction on a third
supermarket (which opened in December 1998) and to complete five minor and six
major remodels. Additionally, during fiscal 1998, the Company installed 15 new
NCR 7452 scan systems in its supermarkets. Capital expenditures for 1998 were
funded through cash flow from operations.

Capital expenditures for 1997 amounted to $20.3 million and included costs
incurred to complete thirteen minor remodels and one major remodel, acquire one
supermarket site and to remodel a perishable products warehouse. Two
supermarkets were under construction during fiscal 1997. Capital expenditures
for fiscal 1997 were funded from the proceeds of the October 1996 sale and
leaseback transaction and from a portion of the net proceeds from the July 1997
issuance of the 9% Notes.

In October 1996 (fiscal 1997), the Company completed a sale and leaseback
transaction with an unrelated third party for four of the Company's
supermarkets. The net proceeds from the sale of the four supermarkets amounted
to approximately $16.0 million, which approximated fair market value. The
Company entered into leases for the four supermarkets with initial terms of 20
years and with options available to the Company which extend the lease terms up
to an additional 20 years. The Company believes the rents due under the leases
approximate fair market rents. The



                                       18
<PAGE>   19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


LIQUIDITY AND CAPITAL RESOURCES (CONTD.)

gains from the sale of the supermarkets were approximately $2.5 million and will
be deferred and amortized into income over the initial term of the leases. As a
result of the additional rent expenses, net of reductions in depreciation
expense, due on the four supermarkets, operating expenses increased by
approximately $1.2 million in fiscal 1997.

Capital expenditures for 1996 amounted to $22.4 million and included costs
incurred to construct a replacement supermarket and to complete eight major
remodels and eight minor remodels and capital expenditures incurred to acquire
store equipment to support the 1996 merchandising expansion and upgrade program.
Capital expenditures in 1996 were financed primarily by proceeds from the
January 1996 sale and leaseback of five supermarkets.

In January 1996 (fiscal 1996), the Company completed a sale and leaseback
transaction with an unrelated third party for five of the Company's
supermarkets. Gross proceeds from the sale of the five supermarkets amounted to
approximately $18.5 million, which approximated fair market value. The Company
entered into leases for the five supermarkets with initial terms of 20 years and
with options available to the Company which extend the lease terms up to an
additional 20 years. The Company believes the rents due in accordance with the
terms of the leases approximate fair market rents. The gains from the sale of
the supermarkets are deferred and will be amortized into income over the initial
term of the leases. As a result of the additional rent expenses, net of
reductions in depreciation expense, paid on the five supermarkets, operating
expenses increased by approximately $900,000 in fiscal 1996 and by $259,000 in
fiscal 1997.

In November 1996, for approximately $200,000, the Company increased its
ownership in Santee Dairies, Inc. to 50%. Additionally, during the first quarter
of fiscal 1997, the Company increased its investment in Santee Dairies, Inc. by
approximately $4.8 million. Hughes Family Markets ("Hughes"), located in
Irwindale, California retained a 50% ownership in Santee. Both the Company and
Hughes subsequently exchanged all of the Common Stock of Santee Dairies, Inc.
for equal interests in Santee Dairies Limited Liability Company. In May 1998,
the Company increased its investment in Santee Dairies LLC by contributing $1.1
million into Santee's capital structure. Santee Dairies, Inc. is a wholly owned
subsidiary of Santee Dairies LLC. Santee Dairies, Inc. operates a fluid milk
processing plant in City of Industry, California. Santee provides the Company's
supermarkets with a significant amount of high quality fluid milk and other
dairy products.

Management believes that cash capital expenditures for fiscal 1999 will be
approximately $22.0 million.

Management believes that operating cash flow, supplemented by capital
expenditures financings obtained through capital and operating leases, will be
sufficient to meet the Company's currently identified operating needs and
scheduled capital expenditures. However, there can be no assurance that such
lease financings will be available to the Company.

The Company operated 112 supermarkets at September 27, 1998 and operated 110
supermarkets at September 28, 1997 and September 29, 1996.

The Company's supermarkets had approximately 3.3 million retail square feet at
September 27, 1998 and approximately 3.2 million retail square feet at September
28, 1997 and September 29, 1996.




                                       19
<PAGE>   20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


LIQUIDITY AND CAPITAL RESOURCES (CONTD.)

     THE BANK FACILITIES

Stater Bros. Markets, the Company's operating subsidiary, and Bank of America
National Trust and Savings Association (the "Bank") entered into a Credit
Agreement in March 1994, as amended and effective June 1, 1996, whereby the Bank
provides Stater Bros. Markets with a revolving operating line of credit (the
"Operating Facility") with a maximum availability of $15.0 million which was
available at September 27, 1998 and a revolving letter of credit facility (the
"LC Facility") with a maximum availability of $25.0 million (collectively, the
"Bank Facilities"). As of September 27, 1998, approximately $14.2 million of the
LC Facility was available to the Company. The Bank Credit Agreement expires on
June 1, 2000.

The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $190.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month.

As of September 27, 1998, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive convenants and had (i) a current
ratio of 1.86:1, (ii) tangible net worth and debt subordinated to the Bank of
$234.4 million; (iii) a ratio of total liabilities to tangible net worth and
debt subordinated to the Bank of 0.55:1 and (iv) a fixed charge coverage ratio
(as defined in the Bank Facilities) of 1.51:1. If for any reason Stater Bros.
Markets is unable to comply with the terms of the Bank Facilities, including the
covenants contained therein, such noncompliance would result in an event of
default under the Bank Facilities, and could result in acceleration of the
payment of indebtedness then outstanding under Bank Facilities or, in certain
situations, the prohibition of payments of dividends or advances to the Company.
In addition, no amendment, waiver or supplement may be made to the Indenture
without the prior written consent of the Bank if such amendment, waiver or
supplement adversely affects the rights of the Bank as lender to Stater Bros.
Markets.

The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.



                                       20
<PAGE>   21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


LIQUIDITY AND CAPITAL RESOURCES (CONTD.)

     THE BANK FACILITIES (CONTD.)

The Company is also subject to certain covenants associated with its 11% Senior
Notes due 2001 and its 9% Senior Subordinated Notes due 2004. As of September
27, 1998, the Company was in compliance with all such covenants. However, there
can be no assurance that 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 CONVERSION AND REDEMPTION OF SERIES B PREFERRED STOCK

In March 1994, the Company acquired, for $14.7 million, an option available to
the Company to convert the Company's 50,000 shares of Common Stock held by Craig
Corporation into 693,650 shares of 10.5% Series B Preferred Stock on or before
March 8, 1996.

Effective March 8, 1996, the Company exercised its option to convert the
Company's 50,000 shares of Common Stock held by Craig Corporation into 693,650
shares of the Company's Series B Preferred Stock. The Series B Preferred Stock
was redeemed by the Company, in August 1997, for $69.4 million plus accrued and
unpaid dividends.

     LABOR RELATIONS

The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1995, with the United Food
and Commercial Workers Union. The Company's collective bargaining agreement with
the International Brotherhood of Teamsters was renewed in 1998 and expires in
September 2002. Management believes it has good relations with its employees.


YEAR 2000 COMPLIANCE

The efficient operations of the Company are dependent, in part, upon its
computer software programs, systems and processes (collectively, the
"Information Systems"). The Company's Information Systems are used in several
key areas of the Company, including, but not limited to, supermarket operations,
warehousing and distribution, merchandising and purchasing, inventory
management, and accounting and financial reporting. The Company is in the
process of updating its Information Systems for Year 2000 compliance
requirements. Additionally, the Company has also been in communication with some
of its vendors, financial institutions and others whose computer software,
programs and information systems may interface with those of the Company to
assess the status of their compliance with Year 2000 requirements. Failure of
companies (that the Company conducts business with) to comply with the Year 2000
requirements could have an adverse effect on the Company's operations.

Based on the information currently available, the Company believes it will meet
the Year 2000 compliance requirements through a combination of Information
Systems modifications and through the acquisition of new equipment and
technology that are Year 2000 compliant. The Company believes that costs
required to replace or modify Information Systems, including scheduled
replacements of in-store Point of Sale equipment, will approximate $8.4 million,
of which $6.9 million will be capitalized and $1.5 million will be expensed.
Through September 27, 1998, the Company has incurred capitalized expenditures of
$3.2 million and expenses of $340,000. The Company believes that it will
successfully achieve compliance with the year 2000 requirements, however, no
assurances can be given that the Company's Information Systems and it's vendors,
financial institutions and other will be successful in achieving Year 2000
compliance.



                                       21
<PAGE>   22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTD.)


RECENT ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"; No. 130, "Reporting
on Comprehensive Income"; and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", all of which were adopted by the Company in
its fiscal year ending on September 27, 1998 (fiscal 1998). The adoption of SFAS
No. 128, No. 130 and No. 131 did not have material effect on its financial
position or its results of operations in fiscal 1998.


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 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 supermarket industry is highly competitive and is
characterized by low profit margins. The Company's primary competitors include
Lucky, Vons, Albertson's, Ralphs, and a number of independent supermarket
operators. Competitive factors typically include the price, quality and
selection of products offered for sale, customer service, and the convenience
and location of retail facilities. The Company monitors competitive activity and
Senior Management regularly reviews the Company's marketing and business
strategy and periodically adjusts them to adapt to changes in the Company's
primary trading area.


CAUTIONARY STATEMENT

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in the Company's
filings with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) includes statements that are forward-looking, such as statements
relating to plans for future activities. Such forward-looking information
involves important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
domestic economic conditions, seasonal and weather fluctuations, expansion and
other activities of competitors, changes in federal or state laws and the
administration of such laws and the general condition of the economy.



                                       22
<PAGE>   23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Information called for by this item is set forth in the Company's 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

<TABLE>
<CAPTION>
                                                                                    Page Number
                                                                                    -----------
<S>                                                                                 <C>
Report of Independent Auditors......................................................     F-2

Consolidated Balance Sheets at September 29, 1996, September 28, 1997 and 
     September 27, 1998.............................................................     F-3

Fiscal years ended September 29, 1996, September 28, 1997 and September 27,
     1998:

        Consolidated Statements of Income...........................................     F-5

        Consolidated Statements of Cash Flows.......................................     F-6

        Consolidated Statements of Stockholders' Equity (Deficit)...................     F-8

Notes to Consolidated Financial Statements..........................................     F-9
</TABLE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

                                      None



                                       23
<PAGE>   24
                                    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.

<TABLE>
<CAPTION>
         NAME                        AGE                              POSITION
         ----                        ---                              --------
<S>                                   <C>    <C>
Jack H. Brown......................   59     Chairman of the Board, President
                                               and Chief Executive Officer

Donald I. Baker....................   57     Executive Vice President

H. Harrison Lightfoot..............   60     Group Senior Vice President - Development

A. Gayle Paden.....................   62     Group Senior Vice President - Human Resources

Dennis N. Beal.....................   48     Senior Vice President - Finance
                                               and Chief Financial Officer

Bruce D. Varner....................   62     Director and Secretary

Thomas W. Field, Jr................   64     Vice Chairman of the Board of Directors
</TABLE>


BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS

     Jack H. Brown has 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 46 years. Mr. Brown has a majority interest and is the
managing general partner of La Cadena Investments.

     Donald I. Baker has been 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 32 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 Kroger Company from 1966 to 1972.



                                       24
<PAGE>   25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTD.)


BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS (CONTD.)


     H. Harrison Lightfoot has been Group Senior Vice President-Development
since May 1998 and was Group Senior Vice President-Retail Operations of the
Company from June 1986 to May 1998. Mr. Lightfoot has served the Company for 44
years in various capacities, including store manager, buyer, general supervisor
and Vice President. Mr.
Lightfoot is a general partner of La Cadena Investments.

     A. Gayle Paden has been Group Senior Vice President-Human Resources since
May 1998 and was Group Senior Vice President-Distribution from July 1996 to May
1998. Mr. Paden joined the Company in 1986 as Group Senior Vice
President-Administration and served in that capacity until July 1996. Mr. Paden
was previously with Lucky Stores for 35 years where he served in various
capacities, the most recent of which was President of the Southern California
Food Division.

     Dennis N. Beal has been Senior Vice President-Finance and Chief Financial
Officer since May 1998 and was Vice President of Finance and Chief Financial
Officer of the Company from September 1992 to May 1998. Mr. Beal was Vice
President and Controller of American Stores Company from 1989 to 1992 and Vice
President and Controller of subsidiaries of American Stores Company from 1987 to
1989 and served in various financial positions since 1981. Mr. Beal, a certified
public accountant, was also a partner in the accounting firm of Bushman, Daines,
Rasmussen & Wisan and served in various capacities with the firm from 1974 to
1981.

     Bruce D. Varner has been a director of Stater Bros. Markets since September
1985 and 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 & Dobler
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 & Dobler 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. He 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 40 years and serves
as a Director for several companies including, Campbell Soup Company and
Maxicare.



                                       25
<PAGE>   26
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:

<TABLE>
<CAPTION>
                                                    ANNUAL COMPENSATION
                                     -----------------------------------------------------
                                                                              OTHER ANNUAL         ALL OTHER
NAME AND                                        SALARY          BONUSES       COMPENSATION       COMPENSATION
PRINCIPAL POSITION                   YEAR        ($)           ($)(4)(5)           ($)            ($)(1)(2)(3)
------------------                   ----     ---------      ------------     ------------       --------------
<S>                                  <C>      <C>            <C>              <C>                <C>
Jack H. Brown                        1998     $ 879,000      $          -        $    -            $  26,000
  Chairman, President and            1997     $ 800,000      $  1,650,000        $    -            $  28,889
  Chief Executive Officer            1996     $ 729,500      $    595,000        $    -            $  27,201
                                                                               
H. Harrison Lightfoot                1998     $ 311,000      $          -        $    -            $       -
  Group Senior Vice                  1997     $ 297,500      $    140,000        $    -            $   2,865
  President, Development             1996     $ 281,500      $    130,000        $    -            $   1,701
                                                                               
A. Gayle Paden                       1998     $ 279,500      $         -         $    -            $       -
  Group Senior Vice                  1997     $ 269,000      $     55,000        $    -            $   8,246
  President, Human Resources         1996     $ 256,500      $     50,000        $    -            $   1,701
                                                                               
Donald I. Baker                      1998     $ 234,000      $          -        $    -            $       -
  Executive Vice President           1997     $ 210,000      $     90,000        $    -            $   1,820
                                     1996     $ 187,500      $     80,000        $    -            $   1,701
                                                                               
Dennis N. Beal                       1998     $ 168,000      $          -        $    -            $       -
  Senior Vice President-Finance      1997     $ 160,000      $     80,000        $    -            $   5,702
  and Chief Financial Officer        1996     $ 150,500      $     55,000        $    -            $   1,701
</TABLE>


                                                                         
(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 1996, 1997 and 1998 which amounted
     to $25,500, $25,500, and $26,000, respectively.

(4)  Bonuses to be paid to the Named Executive Officers for fiscal 1998 had
     neither been calculated nor awarded as of December 18, 1998, the latest
     practical date.

(5)  The Board of Directors of Stater Bros. Holdings Inc. unanimously awarded
     Mr. Brown a one-time bonus for his expertise in handling the July 1997
     issuance of the 9% Senior Subordinated Notes. The amount is included in his
     1997 Bonus.


                             STOCK OPTIONS AND SARs

                                      None



                                       26



<PAGE>   27
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 27, 1998: Jack H. Brown - 17 years, H.
Harrison Lightfoot - 44 years, A. Gayle Paden - 12 years, Donald I. Baker - 15
years and Dennis N. Beal - 5 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 1998
retirees with ten or more years of service at retirement is $130,000. The
maximum annual compensation that may be considered for 1998 retirees is
$160,000.

<TABLE>
<CAPTION>
                                                            PENSION PLAN TABLE

                                                              YEARS OF SERVICE
                                    --------------------------------------------------------------------------
    REMUNERATION                         15              20             25              30              35    
    ------------                    -----------    ------------    ------------    -----------     -----------
<S>                                 <C>            <C>             <C>             <C>             <C>        
     $100,000..................     $    23,367    $     31,156    $     38,945    $    46,734     $    54,523
      150,000..................          39,492          52,656          65,820         78,984          92,148
      200,000..................          55,617          74,156          92,695        111,234         129,773
      250,000..................          71,742          95,656         119,570        143,484         167,398
      300,000..................          87,867         117,156         146,445        175,734         205,023
      350,000..................         103,992         138,656         173,320        207,984         242,648
      400,000..................         120,117         160,156         200,195        240,234         280,273
      450,000..................         136,242         181,656         227,070        272,484         317,898
      500,000..................         152,367         203,156         253,945        304,734         355,523
</TABLE>


COMPENSATION OF DIRECTORS

Directors of the Company are paid an annual fee of $25,000 plus $500 for each
board meeting attended.

EMPLOYMENT AND SEVERANCE AGREEMENTS

There are no written employment contracts between the Company and any Named
Executive Officer. 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.


                                       27
<PAGE>   28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The following table sets forth, as of December 11, 1998, 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:

<TABLE>
<CAPTION>
                                                           Shares of
                                                        Class A Common           Percentage of
                                                            Stock                  Class A
Name and Address                                          Beneficially          Common Stock
of Beneficial Owner                                         Owned                 Outstanding 
-------------------                                     ---------------         --------------
<S>                                                     <C>                     <C> 
La Cadena Investments(1).......                            50,000                  100%
Jack H. Brown(1)(2)............                            50,000                  100%
H. Harrison Lightfoot(1)(2)....                            50,000                  100%
Richard C. Moseley(1)(2).......                            50,000                  100%
A. Gayle Paden(2)..............                                --                    --
Donald I. Baker(2).............                                --                    --
Dennis N. Beal(2)..............                                --                    --
Bruce D. Varner(2).............                                --                    --
Thomas W. Field, Jr.(2)........                                --                    --
All directors and executive
 officers as a group
 (7 persons)(1)................                            50,000                  100%
</TABLE>

---------------

(1)  The 50,000 outstanding shares of the Company's Class A Common Stock are
     owned by La Cadena Investments and may be deemed to be beneficially owned
     by the partners of La Cadena Investments. The general partners of La Cadena
     Investments are Jack H. Brown, Richard C. Moseley and H. Harrison
     Lightfoot. Mr. Brown has the majority interest and is the managing general
     partner of La Cadena Investments and has the power to vote the shares of
     the Company owned by La Cadena Investments on all matters. Certain La
     Cadena issues, such as the disposition of such shares of the Company, may
     require approval of 60% of the voting power of La Cadena Investments.
     Accordingly, Messrs. Brown, Moseley and Lightfoot may be deemed to have
     shared voting power or shared investment power with respect to the shares
     owned by La Cadena Investments, and such individuals therefore may be
     deemed to be the beneficial owners thereof. The address of La Cadena
     Investments is 3750 University Avenue, Suite 610, Riverside, California
     92501.

(2)  The address of Messrs. Brown, Lightfoot, Moseley, Paden, Baker, Beal,
     Varner and Field is c/o the Company at 21700 Barton Road, Colton,
     California 92324.

CHANGE OF CONTROL ARRANGEMENTS

As of September 3, 1993, the Company, La Cadena, Craig and certain of their
affiliates entered into a series of separate agreements, as subsequently
amended, and took certain actions, for the purpose of reclassifying the
Company's outstanding equity, providing for effective operating control of the
Company by La Cadena, making certain cash payments and distributions to Craig,
and providing the Company with the option to acquire Craig's equity interest in
the Company, all of which were completed simultaneously with the closing of the
Recapitalization Transaction. In August 1997, the Company redeemed all of the
outstanding shares of its Series B Preferred Stock and La Cadena became the sole
shareholder of the Company.


                                       28
<PAGE>   29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Mr. Bruce D. Varner and the law firm of Varner, Saleson & Dobler 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 1998 was approximately $1.6 million. The Company believes that the terms
and costs of such legal services provided by Mr. Varner and the law firm of
Varner, Saleson & Dobler 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.

Prior to March 24, 1994, the Company's common stock was owned equally by La
Cadena and Craig. In March 1994, the Company completed the 1994
Recapitalization, which transferred effective voting control of the Company to
La Cadena, reclassified the Company's outstanding equity, provided for certain
cash payments and distributions to Craig and provided the Company with an option
to acquire Craig's remaining equity in the Company. The 1994 Recapitalization
was funded through the offering of the 11% Senior Notes. The following
paragraphs describe the 1994 Recapitalization.

The Company amended its Certificate of Incorporation to provide for two classes
of common stock designated "Common Stock" and "Class A Common Stock", and two
series of preferred stock designated "Series A Preferred Stock" and "Series B
Preferred Stock." The then existing shares of outstanding common stock were
classified as Common Stock, and holders of such stock were afforded the right to
exchange all such shares into a like number of shares of Class A Common Stock.
La Cadena exchanged its shares of Common Stock for shares of Class A Common
Stock and Craig initially retained its shares of Common Stock (subject to the
Company's right to convert such shares of Common Stock into shares of Series B
Preferred Stock, and subject to the Company's option to acquire such shares of
Common Stock, as described below). For a period of five years following the 1994
Recapitalization, each share of Class A Common Stock was entitled to 1.1 votes
while each share of Common Stock was entitled to one vote, thereby giving La
Cadena approximately 52% and Craig approximately 48% of the total voting power
of the Company.

The Board of Directors of the Company declared a dividend of $400 per share on
the Common Stock, payable to holders of record at the close of business on the
day following the closing of the 1994 Recapitalization. As a result of the
amendment of the Company's Certificate of Incorporation and the exchange by La
Cadena of its shares of Common Stock for Class A Common Stock, the aggregate
amount of the dividend on the Common Stock amounted to $20.0 million, and the
entire dividend was paid to Craig.

Pursuant to the Option Agreement dated as of September 3, 1993 between the
Company and Craig, as amended (the "Option Agreement"), the Company was given
the right, at its option, for a period of two years from the 1994
Recapitalization, to convert the Common Stock into 693,650 shares of Series B
Preferred Stock. The Company exercised the option effective March 8, 1996.

The Series B Preferred Stock provided for dividends at the rate of 10.5% per
annum through September 2002, increasing to 12% per annum beginning October 2002
and by 100 basis points per year thereafter to a maximum rate of 15% per annum.

Under the Option Agreement, holders of the Series B Preferred Stock were
entitled to certain registration rights. In addition, the Option Agreement
provided holders of the Series B Preferred Stock with the right to require the
redemption of all, but not less than all, the Series B Preferred Stock owned by
such holder in the event of certain changes of control of the Company or in the
event Jack H. Brown shall cease to be the Chief Executive Officer of the
Company, other than by reason of death, disability or retirement in accordance
with the Company's normal retirement policies.



                                       29
<PAGE>   30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)


The Option Agreement provided the Company an option to purchase all shares of
the Series B Preferred Stock held by Craig for a purchase price, in cash, of
$69.4 million, plus accrued and unpaid dividends. The Company paid Craig $14.7
million in consideration of the grant of the option, which amount was not
credited toward the exercise price of the option.

In August 1997, the Company redeemed all outstanding shares of the Series B
Preferred Stock. The Company used a portion of the net proceeds from the
issuance and sale of $100 million of 9% Senior Subordinated Notes Due 2004 to
redeem the outstanding Series B Preferred Stock.

The Company entered into a prepaid five year covenant not to compete and a
consulting agreement with Craig, pursuant to which the Company paid Craig $5.0
million at the closing of the 1994 Recapitalization. Additionally, the Company
had been paying an annual consulting fee of $1.5 million. The covenant not to
compete and consulting arrangements with Craig were unique, based upon the
confidential information available to Craig and its experience with, and
relationship to the Company. Accordingly, the Company had no basis to determine
whether comparable services could be obtained from unaffiliated third parties on
similar or more favorable terms. On July 31, 1997, the Company gave notice to
Craig to terminate the Consulting Agreement.

Pursuant to the Option Agreement, at the 1994 Recapitalization closing, the
Company purchased from Craig 72,000 shares of the Company's Series A Preferred
Stock, held by Craig, for a total purchase price of $1.8 million plus accrued
and unpaid dividends of approximately $306,000, and paid approximately $79,000
to Craig as payment of all unpaid interest owing to Craig on a shareholder note.
In addition, the Company purchased from La Cadena 72,000 shares of the Company's
Series A Preferred Stock, held by La Cadena, for a total purchase price of $1.8
million, plus accrued and unpaid dividends of approximately $306,000 and paid
approximately $79,000 to La Cadena as payment of all unpaid interest owing to La
Cadena on a shareholder's note. In September 1993, the Company issued 40,000
shares of the Company's Series A Preferred Stock to each of Craig and La Cadena
in payment of all principal owing on such notes.

Pursuant to the Second Amended and Restated Stock Agreement dated as of January
12, 1994 (the "Craig Stock Agreement"), among the Company, Craig, La Cadena and
James J. Cotter, in consideration for a standstill agreement by Craig, the
Company transferred to Craig 311,404 shares of Craig's Common Stock owned by the
Company at such time following the 1994 Recapitalization, as the Company
determined it was legally entitled to do so under applicable California law
governing distributions to shareholders. Such agreement resulted in a pre-tax
charge to earnings of $4.0 million in the second quarter of fiscal 1994.

Pursuant to the Amendment to the Agreement of Stockholders of Stater Bros.
Holdings Inc. dated as of September 3, 1993, the Agreement of Stockholders of
Stater Bros. Holdings Inc. dated as of May 10, 1989 among the Company, La
Cadena, Craig and an affiliate of Craig (as amended, the "Stockholders
Agreement") was amended effective as of the 1994 Recapitalization closing to
provide that, among other things: (a) the Stockholders Agreement may be
terminated by any party upon exercise by the Company of its right to convert the
Common Stock into the Series B Preferred Stock as described above, and (b)
certain rights of the stockholders to purchase shares of Common Stock owned by
other stockholders would be suspended until after the expiration of the
Company's right to convert the Common Stock into the Series B Preferred Stock.
Under the Stockholders Agreement, the Company and the holders of the Class A
Common Stock and Common Stock were granted certain rights of first refusal with
respect to transfers of such stock. The Stockholders Agreement was terminated
effective October 15, 1996.



                                       30
<PAGE>   31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)


In connection with the 1994 Recapitalization, the Company utilized approximately
$88.9 million of the net proceeds from the 1994 debt offering to redeem its 9.8%
Senior Notes due 2001, including an estimated $13.4 million (pre-tax) for a
redemption premium associated with the early retirement of such notes (including
accrued interest thereon). In addition, the Company utilized approximately $12.2
million of the net proceeds of the 1994 offering to repay certain notes payable
secured by real property, and approximately $9.0 million of the net proceeds of
the 1994 offering to repay outstanding balances owing under the Company's
existing capital expenditures credit facility.

In June 1997, in connection with the Consent Solicitation, the Company retained
La Cadena to provide financial advisory services for a fee of $2.0 million.

The 50,000 outstanding shares of the Company's Class A Common Stock are owned by
La Cadena Investments and may be deemed to be beneficially owned by the partners
of La Cadena Investments. The general partners of La Cadena are Jack H. Brown,
Richard C. Moseley and H. Harrison Lightfoot. Mr. Brown has a majority interest
and is the managing general partner. Mr. Brown is a director of the Company and
Messrs. Brown and Lightfoot are Named Executive Officers of the Company. Mr.
Brown has the power to vote the shares of the Company owned by La Cadena, except
with respect to certain fundamental corporate changes of the Company, including
the disposition of such shares. Accordingly, Messrs. Brown, Moseley and
Lightfoot may be deemed to have shared voting power with respect to shares of
the Company owned by La Cadena. Mr. Moseley served the Company for over 44 years
and 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.



                                       31
<PAGE>   32
                                     PART IV

ITEM 14.                    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                            AND REPORTS ON FORM 8-K

         (a)      Document list

                  (1) Financial Statements
                      See Financial Statement Index included in Item 8 of Part
                      II of this Form 10-K.

                  (2) Financial Statement Schedules
                      The Financial Statement Schedules required by Item 14(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) Exhibits
                      Exhibits as required by Item 14(c) are as follows:


<TABLE>
<CAPTION>
                      EXHIBIT NO.                DESCRIPTION
                      -----------                -----------
<S>                              <C>
                        3.1     (1) Certificate of Incorporation of the Company.

                        3.2     (1) By-Laws of the Company.

                        4.1     (4) Indenture between the Company and First
                                    Trust of New York, as Trustee, for 
                                    $100,000,000 9% Senior Subordinated Notes
                                    due 2004, dated as of July 24, 1997 (the
                                    "Indenture").

                        4.2     (4) First Supplemental Indenture between the
                                    Company and IBJ Schroder Bank & Trust 
                                    Company, as Trustee, for $165,000,000 11%
                                    Senior Notes due 2001, dated as of July 22,
                                    1997 (the "First Supplemental Indenture").

                        4.3     (4) Form of Specimen Certificate evidencing
                                    Global Notes of the Company issued pursuant
                                    to the Indenture.

                        4.4     (4) Registration Rights Agreement among the
                                    Company and BancAmerica Securities, Inc. 
                                    dated July 24, 1997.

                        4.5     (4) Form of Letter of Transmittal regarding the
                                    Offer for all Outstanding Privately Placed 
                                    9% Senior Subordinated Notes due 2004 in
                                    Exchange for 9% Senior Subordinated Notes
                                    due 2004 (including Notice of Guaranteed
                                    Delivery).

                        10.1    (1) Reclassification Agreement dated September
                                    3, 1993, by and among the Company, Craig 
                                    and La Cadena.
</TABLE>



                                       32
<PAGE>   33
ITEM 14.                    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                            AND REPORTS ON FORM 8-K (CONTD.)

         (a)(3)       Exhibits (contd.)

<TABLE>
<CAPTION>
                      EXHIBIT NO.                DESCRIPTION
                      -----------                -----------
<S>                              <C>

                        10.2    (1) Amendment to Reclassification Agreement,
                                    dated January 12, 1994, by and among the
                                    Company, Craig and La Cadena.

                        10.3    (1) Agreement of Stockholders dated May 10,
                                    1989, by and among the Company, Craig and La
                                    Cadena.

                        10.4    (1) Amendment to Agreement of Stockholders dated
                                    September 3, 1993, by and among the Company,
                                    Craig, Craig Management, Inc. ("CMI") and La
                                    Cadena.

                        10.5    (1) Option Agreement dated September 3, 1993, by
                                    and between the Company and Craig.

                        10.6    (1) Amendment to Option Agreement dated January
                                    12, 1994, by and between the Company and 
                                    Craig.

                        10.7    (1) Consulting Agreement dated September 3,
                                    1993, by and between the Company, Craig and 
                                    CMI.

                        10.8    (1) Letter Agreement regarding Consulting
                                    Agreement, dated March 8,1994, by and 
                                    between the Company, Craig and CMI.

                        10.9    (1) Second Amended and Restated Stock Agreement
                                    dated January 12, 1994, by and among the
                                    Company, Craig, CMI, La Cadena and James J.
                                    Cotter.

                        10.10   (1) Security Agreement dated March 8, 1994, by
                                    and between the Company and Craig.

                        10.12   (1) Credit Agreement dated March 8, 1994, by and
                                    between Stater Bros. Markets and Bank of 
                                    America Trust and Savings Association.

                        10.12(a)(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 Association.

                        10.12(b)(3) 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.

                        10.13   (1) Continuing Guaranty dated March 8, 1994, of
                                    Stater Bros. Development, Inc. in favor of 
                                    Bank of America Trust and Savings
                                    Association.

                        10.15   (1) Subordination Agreement dated March 8, 1994,
                                    by and among the Company, Stater Bros. 
                                    Markets and Bank of America Trust and
                                    Savings Association.

                        10.16   (1) Amended and Restated Sublease Agreement
                                    dated June 1, 1983, between Wren Leasing 
                                    Corp., as Lessor, and Stater Bros. Markets,
                                    as Lessee.
</TABLE>



                                       33
<PAGE>   34
ITEM 14.                    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                            AND REPORTS ON FORM 8-K (CONTD.)

         (a)(3)       Exhibits (contd.)

<TABLE>
<CAPTION>
                      EXHIBIT NO.                DESCRIPTION
                      -----------                -----------
<S>                              <C>

                        10.17   (1) Preferred Stock Agreement dated March 22,
                                    1983, between Stater Bros. Markets and 
                                    Petrolane Incorporated.

                        10.18   (1) Escrow Agreement dated September 19, 1985,
                                    by and among Stater Bros. Markets, Petrolane
                                    Incorporated and First Interstate Bank of
                                    California.

                        11          Calculation of earnings per common share.

                        12          Computation of ratio of earnings to fixed
                                    charges.

                        21      (1) Subsidiaries of the Company.

                        27          Financial Data Schedule
</TABLE>

                        --------------------------------------------------------

                        (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
                                Registrant's Quarterly Report on Form 10-Q dated
                                June 25, 1995 and filed on August 8, 1995.

                        (3)     Previously filed with the Securities and
                                Exchange Commission as exhibit 10.12(b) with the
                                Annual Report on Form 10-K for the fiscal year
                                ended September 29, 1996.

                        (4)     Previously filed with the Securities and
                                Exchange Commission as exhibits to the
                                Registration Statement S-4, No. 333-34113 dated
                                October 17, 1997.



                        Copies of Exhibits listed herein can be obtained
                        by writing and requesting such Exhibits from: Corporate
                        Secretary, P. O. Box 150, Colton, California 92324.


         (b)          Reports on Form 8-K
                      None



                                       34
<PAGE>   35
                           STATER BROS. HOLDINGS INC.
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1998
                                    FORM 10-K

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(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 18, 1998               Stater Bros. Holdings Inc.
-----------------------------
             Date


                                       By: /s/  Jack H. Brown
                                           -------------------------------------
                                                Jack H. Brown
                                                Chairman of the Board,
                                                President and Chief
                                                Executive 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.


<TABLE>
<CAPTION>
        SIGNATURE                                 TITLE                                  DATE
        ---------                                 -----                                  ----
<S>                                     <C>                                        <C> 
  /s/  Jack H. Brown                    Chairman of the Board, President           December 18, 1998
----------------------------------      and Chief Executive Officer             
       Jack H. Brown                    and Director (Principal     
                                        Executive Officer)          
                                        


  /s/   Thomas W. Field, Jr.            Vice Chairman of the Board                 December 18, 1998
----------------------------------      and Director
        Thomas W. Field, Jr.            




  /s/   Bruce D. Varner                 Secretary and Director                     December 18, 1998
-----------------------------------
        Bruce D. Varner




  /s/   Dennis N. Beal                  Senior Vice President - Finance            December 18, 1998
------------------------------------    and Chief Financial Officer           
        Dennis N. Beal                  (Principal Accounting Officer) 
</TABLE>



                                       35
<PAGE>   36
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                 Page Number
                                                                                 -----------
<S>                                                                              <C>
Report of Independent Auditors...................................................     F-2

Consolidated Balance Sheets at September 29, 1996,
     September 28, 1997 and September 27, 1998...................................     F-3

Fiscal years ended September 29, 1996, September 28, 1997 and September 27,
     1998:

        Consolidated Statements of Income........................................     F-5

        Consolidated Statements of Cash Flows....................................     F-6

        Consolidated Statements of Stockholders' Equity (Deficit)................     F-8

Notes to Consolidated Financial Statements.......................................     F-9
</TABLE>



                                      F-1
<PAGE>   37
                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors of
Stater Bros. Holdings Inc.

     We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. and subsidiaries as of September 29, 1996, September 28,
1997 and September 27, 1998, and the related consolidated statements of income,
stockholders' equity (deficit), and cash flows for the 53-week period then ended
for 1996 and for each of the 52-week periods then ended for 1997 and 1998. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stater Bros. Holdings Inc. and subsidiaries as of September 29, 1996, September
28, 1997 and September 27, 1998, and the consolidated results of their
operations and their cash flows for the 53-week period then ended for 1996 and
for each of the 52-week periods then ended for 1997 and 1998 in conformity with
generally accepted accounting principles.




                                                               ERNST & YOUNG LLP
Riverside, California
December 1, 1998



                                      F-2
<PAGE>   38
                           STATER BROS. HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

                                     ASSETS

<TABLE>
<CAPTION>
                                                        SEPT. 29,     SEPT. 28,     SEPT. 27,
                                                          1996          1997          1998 
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>     
Current Assets
    Cash and cash equivalents ....................      $ 45,279      $ 59,086      $ 57,281
    Receivables ..................................        19,009        21,481        20,451
    Inventories ..................................       117,372       115,513       116,274
    Prepaid expenses .............................         3,357         4,667         5,176
    Deferred income taxes ........................         4,710         2,978         4,588
    Properties held for sale .....................         1,787         1,342         3,969
                                                        --------      --------      --------

Total current assets .............................       191,514       205,067       207,739


Investment in unconsolidated affiliate ...........         7,626        10,313         8,472


Property and equipment
    Land .........................................        18,688        16,443        15,924
    Buildings and improvements ...................        89,856        87,605        94,794
    Store fixtures and equipment .................        78,570        86,644       100,781
    Property subject to capital leases ...........        14,368        14,368        14,368
                                                        --------      --------      --------
                                                         201,482       205,060       225,867


    Less accumulated depreciation and amortization        87,267        96,203       107,513
                                                        --------      --------      --------
                                                         114,215       108,857       118,354


Deferred income taxes ............................         5,295         4,699         2,449
Deferred debt issuance costs, net ................         5,221        14,273        12,294
Lease guarantee escrow ...........................         6,701         8,069         9,629
Other assets .....................................         7,722         7,199         5,381
                                                        --------      --------      --------

Total assets .....................................      $338,294      $358,477      $364,318
                                                        ========      ========      ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   39
                           STATER BROS. HOLDINGS INC.
                      CONSOLIDATED BALANCE SHEETS (CONTD.)
                      (In thousands, except share amounts)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                  SEPT. 29,       SEPT. 28,        SEPT. 27,
                                                                     1996           1997             1998 
                                                                  ---------       ---------       ---------
<S>                                                               <C>             <C>             <C>      
Current Liabilities
    Accounts payable .......................................      $  79,271       $  66,834       $  65,553
    Accrued payroll and related expenses ...................         23,981          23,851          25,363
    Other accrued liabilities ..............................         23,607          21,113          24,788
    Current portion of capital lease obligations ...........          1,182           1,256           1,310
                                                                  ---------       ---------       ---------

Total current liabilities ..................................        128,041         113,054         117,014

Long-term debt, less current portion .......................        165,000         265,000         265,000
Capital lease obligations, less current portion ............          6,917           5,661           4,350
Long-term portion of self-insurance and other reserves .....         10,332           7,409           8,284
Other long-term liabilities ................................          2,526           3,939           3,725
10.5% Cumulative Series B Preferred Stock:
    (stated value $100 per share)
       Authorized shares - 693,650
       Issued and outstanding shares -
          693,650 in 1996, and 0 in 1997 and 1998 ..........         69,365              --              --

Stockholders' equity (deficit) Common Stock, $.01 par value:
       Authorized shares - 100,000
       Issued and outstanding shares -
          0 in 1996, 1997 and 1998 .........................             --              --              --
    Class A Common Stock, $.01 par value:
       Authorized shares - 100,000
       Issued and outstanding shares -
          50,000 in 1996, 1997 and 1998 ....................              1               1               1
    Additional paid-in capital .............................         12,715          12,715          12,715
    Retained earnings (deficit) ............................        (41,953)        (49,302)        (46,771)
    Less option to acquire stock ...........................        (14,650)             --              --
                                                                  ---------       ---------       ---------

Total stockholders' equity (deficit) .......................        (43,887)        (36,586)        (34,055)
                                                                  ---------       ---------       ---------

Total liabilities and stockholders' equity (deficit) .......      $ 338,294       $ 358,477       $ 364,318
                                                                  =========       =========       =========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>   40
                           STATER BROS. HOLDINGS INC.
                        CONSOLIDATED STATEMENTS OF INCOME
               (In thousands, except per share and share amounts)


<TABLE>
<CAPTION>
                                                                     FISCAL YEAR ENDED
                                                      -----------------------------------------------
                                                       53 WEEKS          52 WEEKS          52 WEEKS
                                                      -----------------------------------------------
                                                       SEPT. 29,          SEPT. 28,        SEPT. 27,
                                                          1996              1997              1998 
                                                      -----------       -----------       -----------
<S>                                                   <C>               <C>               <C>        
Sales ..........................................      $ 1,705,332       $ 1,717,924       $ 1,726,107
Cost of goods sold .............................        1,315,726         1,326,410         1,323,522
                                                      -----------       -----------       -----------
Gross profit ...................................          389,606           391,514           402,585

Operating expenses:
    Selling, general and administrative expenses          328,242           333,199           353,075
    Depreciation and amortization ..............           12,583            13,265            15,434
    Consulting fees ............................            1,525             1,458                --
                                                      -----------       -----------       -----------
Total operating expenses .......................          342,350           347,922           368,509
                                                      -----------       -----------       -----------

Operating profit ...............................           47,256            43,592            34,076

Interest income ................................            1,929             3,034             3,059
Interest expense ...............................          (20,258)          (21,563)          (30,206)
Equity in (loss) from unconsolidated affiliate .           (1,624)           (2,313)           (2,941)
Other income (expense) - net ...................             (172)               76                 2
                                                      -----------       -----------       -----------

Income before income taxes .....................           27,131            22,826             3,990
Income taxes ...................................           11,120             9,359             1,459
                                                      -----------       -----------       -----------
Net income .....................................           16,011            13,467             2,531

    Less preferred dividends ...................            4,111             6,166                --
                                                      -----------       -----------       -----------
Net income available to common shareholders ....      $    11,900       $     7,301       $     2,531
                                                      ===========       ===========       ===========

Earnings per common share ......................      $    165.28       $    146.02       $     50.62
                                                      ===========       ===========       ===========

Average common shares outstanding ..............           72,000            50,000            50,000
                                                      ===========       ===========       ===========

Common shares outstanding at end of year .......           50,000            50,000            50,000
                                                      ===========       ===========       ===========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>   41
                           STATER BROS. HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                               FISCAL YEAR ENDED
                                                                   -----------------------------------------
                                                                   53 WEEKS        52 WEEKS        52 WEEKS
                                                                   -----------------------------------------
                                                                   SEPT. 29,       SEPT. 28,       SEPT. 27,
                                                                      1996           1997             1998 
                                                                   ---------       ---------       ---------
<S>                                                                <C>             <C>             <C>
OPERATING ACTIVITIES:
Net income ..................................................      $  16,011       $  13,467       $   2,531
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Depreciation and amortization ...........................         12,583          13,265          15,434
    Deferred income taxes ...................................         (2,238)          2,328             640
    Loss (gain) on disposals of assets ......................            172             (75)             (2)
    Net undistributed loss in unconsolidated affiliate ......          1,624           2,313           2,941
    Changes in operating assets and liabilities:
     (Increase) decrease in receivables .....................         (3,132)         (2,472)          1,030
     (Increase) decrease in inventories .....................        (10,226)          1,859            (761)
     (Increase) decrease in prepaid expenses ................            234          (1,310)           (509)
     (Increase) decrease in other assets ....................          1,738            (629)            557
     Increase (decrease) in accounts payable ................         11,667         (12,437)         (1,281)
     Increase (decrease) in accrued liabilities and long-term
      portion of self-insurance reserves ....................           (514)         (6,649)          5,848
                                                                   ---------       ---------       ---------

Net cash provided by operating activities ...................         27,919           9,660          26,428
                                                                   ---------       ---------       ---------


FINANCING ACTIVITIES:
Proceeds from long-term debt ................................             --         100,000              --
Debt issuance cost ..........................................             --         (10,513)             --
Redemption of preferred stock ...............................             --         (69,365)             --
Common stock exchanged for preferred stock ..................        (69,365)             --              --
Preferred stock issued and exchanged for common stock .......         69,365              --              --
Principal payments on long-term debt and capital
  lease obligations .........................................         (1,087)         (1,182)         (1,257)
Dividends paid on preferred stock ...........................         (4,111)         (6,166)             --
                                                                   ---------       ---------       ---------

Net cash provided by (used in) financing activities .........      $  (5,198)      $  12,774       $  (1,257)
                                                                   =========       =========       =========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-6
<PAGE>   42
                           STATER BROS. HOLDINGS INC.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTD.)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                            FISCAL YEAR ENDED
                                                                 ---------------------------------------
                                                                 53 WEEKS      52 WEEKS       52 WEEKS
                                                                 ---------------------------------------
                                                                 SEPT. 29,      SEPT. 28,      SEPT. 27,
                                                                   1996           1997           1998 
                                                                 --------       --------       --------
<S>                                                              <C>            <C>            <C>      
INVESTING ACTIVITIES:
Investments in unconsolidated affiliate ...................      $     --       $ (5,000)      $ (1,100)
Purchase of property and equipment ........................       (22,415)       (20,268)       (26,278)
Proceeds from sale of property and equipment and properties
  held for sale ...........................................        18,665         16,641            402
                                                                 --------       --------       --------
Net cash (used in) investing activities ...................        (3,750)        (8,627)       (26,976)
                                                                 --------       --------       --------

Net increase (decrease) in cash and cash equivalents ......        18,971         13,807         (1,805)
Cash and cash equivalents at beginning of year ............        26,308         45,279         59,086
                                                                 --------       --------       --------

Cash and cash equivalents at end of year ..................      $ 45,279       $ 59,086       $ 57,281
                                                                 ========       ========       ========

Interest paid .............................................      $ 21,360       $ 18,859       $ 27,133
Income taxes paid .........................................      $  9,725       $  6,500       $  1,000
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-7
<PAGE>   43
                           STATER BROS. HOLDINGS INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                                     OPTION
                                                           CLASS A     ADDITIONAL     RETAINED         TO
                                            COMMON         COMMON       PAID-IN       EARNINGS      ACQUIRE
                                            STOCK           STOCK       CAPITAL       (DEFICIT)      STOCK 
                                            ------         -------     ----------     ---------     --------
<S>                                       <C>            <C>           <C>           <C>            <C>
Balances at September 24, 1995 .....      $      1       $      1      $ 12,715      $ 15,511        $(14,650)
    Conversion of Common Stock for
       Series B Preferred Stock ....            (1)            --            --       (69,364)            --
    Net income for 53 weeks ended
       September 29, 1996 ..........            --             --            --        16,011             --
    Preferred stock dividends paid .            --             --            --        (4,111)            --
                                          --------       --------      --------      --------       --------

Balances at September 29, 1996 .....            --              1        12,715       (41,953)       (14,650)
    Net income for 52 weeks ended
       September 28, 1997 ..........            --             --            --        13,467             --
    Preferred stock dividends paid .            --             --            --        (6,166)            --
    Exercise Option to Acquire Stock            --             --            --       (14,650)        14,650
                                          --------       --------      --------      --------       --------

Balances at September 28, 1997 .....            --              1        12,715       (49,302)            --
    Net income for 52 weeks ended
       September 27, 1998 ..........            --             --            --         2,531             --
                                          --------       --------      --------      --------       --------

Balances at September 27, 1998 .....      $     --       $      1      $ 12,715      $(46,771)      $     --
                                          ========       ========      ========      ========       ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-8
<PAGE>   44
                           STATER BROS. HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 27, 1998

NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

     Description of Business

     Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the
operation of retail supermarkets. As of September 27, 1998, the Company operated
112 retail food supermarkets under the name "Stater Bros." The Company's
supermarkets are located principally in the "Inland Empire" area of Southern
California - San Bernardino, Riverside and the eastern portions of Los Angeles,
Orange and Kern counties. The Company and its predecessor companies have
operated retail grocery stores under the "Stater Bros." name in the Inland
Empire 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. All significant inter-company transactions have been
eliminated in consolidation.

     Fiscal Year

     The Company's fiscal year ends on the last Sunday in September. The fiscal
years ended September 28, 1997 and September 27, 1998 were 52-week years and the
fiscal year ended September 29, 1996 was a 53-week year.

     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.

     Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or
market.

     Receivables

     Receivables represents 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.

     Properties Held for Sale

     Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value and
consist of land, buildings and equipment.

     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.

     Self-insurance Reserves

     The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its
self-insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.



                                      F-9
<PAGE>   45
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

     Recent Accounting Pronouncements

     The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"; No. 130, "Reporting
on Comprehensive Income"; and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", all of which were adopted by the Company at
the beginning of its fiscal year ending on September 27, 1998 (fiscal 1998).
Adoption of SFAS No. 128, No. 130 and No. 131 did not have a material adverse
effect on the Company's financial position or its results of operations in
fiscal 1998.

     Property and Equipment

     Property and equipment are stated at cost and are depreciated or amortized,
principally on the straight-line method 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 economic lives are as follows:
<TABLE>
<CAPTION>
                                                                    Range       Most Prevalent   
                                                                    -----       --------------   
<S>                                                             <C>             <C>     
         Buildings and improvements.......................      8 - 30 Years      25 Years
         Store furniture and equipment....................      3 - 10 Years      5 Years
         Property subject to capital leases...............      Life of Lease     25 Years
</TABLE>

     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.

     Cost of Goods Sold

     Costs of goods sold include certain warehousing, transportation and
distribution costs.

     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 Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.



NOTE 2 - DEBT

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                Sept. 29,     Sept. 28,     Sept. 27,
                                                  1996          1997          1998   
                                                ---------     ---------     ---------
                                                          (In thousands)
<S>                                             <C>           <C>           <C>     
11% Senior Notes due March 2001 ..........      $165,000      $165,000      $165,000

9% Senior Subordinated Notes due July 2004            --       100,000       100,000
                                                --------      --------      --------

Total long-term debt .....................      $165,000      $265,000      $265,000
                                                ========      ========      ========
</TABLE>



                                      F-10
<PAGE>   46
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 2 - DEBT (CONTD.)

     As of September 27, 1998, principal payments amounting to $165 million were
due in the next three years. Interest on the 11% Senior Notes due 2001 is
payable semi-annually on September 1 and March 1. Interest on the 9% Senior
Subordinated Notes due 2004 is payable semi-annually on July 1 and January 1.

     Interest capitalized during fiscal years 1996, 1997 and 1998 amounted to
$116,000, $251,000 and $224,000, respectively. Interest expense incurred, before
the effect of capitalized interest, during 1996, 1997 and 1998 amounted to
$20,374,000, $21,814,000 and $30,430,000, respectively.

     The Company did not have short-term borrowings outstanding at September 29,
1996, September 28, 1997 and September 27, 1998. The Company did not incur any
short-term borrowings during fiscal years 1996, 1997 and 1998.

     The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001 and 9% Senior Subordinated Notes due 2004 and its bank credit
agreement. As of September 27, 1998, the Company was in compliance with all such
covenants.



NOTE 3 - UNCONSOLIDATED AFFILIATE

     The Company owns 50% of Santee Dairies LLC. Through its wholly owned
subsidiary, Santee Dairies, Inc. ("Santee"), it operated a fluid milk processing
plant located in Los Angeles, California, and as of May 1, 1998, Santee moved
its operations to a newly constructed fluid milk processing plant in City of
Industry. The Company is not the controlling stockholder. Accordingly, the
Company accounts for its investment in Santee Dairies LLC using the equity
method of accounting and recognized losses of $1,624,000, $2,313,000, and
$2,941,000 for fiscal years 1996, 1997 and 1998, respectively. The Company is a
significant customer of Santee which supplies the Company with a substantial
portion of its fluid milk and dairy products.

Summary of unaudited financial information for Santee Dairies LLC is as follows:


<TABLE>
<CAPTION>
                                52 Weeks          52 Weeks           52 Weeks       
                             --------------------------------------------------
                             Sept. 28, 1996    Sept. 27, 1997    Sept. 26, 1998
                             --------------    --------------    --------------
                                              (In thousands)
<S>                            <C>               <C>               <C>      
Current assets                 $  16,937         $  41,657         $  19,690
Non-current assets                26,351            86,371           111,236
Current liabilities               23,410            24,548            31,178
Non-current liabilities            2,860            83,028            82,807
Shareholder's equity              17,018            20,452            16,941

Sales                            191,481           175,937           166,314
Gross profit                      16,174            12,592             3,509
Net income (loss)              $  (1,640)        $  (6,156)        $  (5,711)
</TABLE>



                                      F-11
<PAGE>   47
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 3 - UNCONSOLIDATED AFFILIATE (CONTD.)

     The Company accepted and paid a temporary increase in costs of product
purchased from Santee of approximately $4.3 million for product delivered by
Santee to the Company during the last eighteen weeks of fiscal 1998. The
temporary increase in cost of product is included in cost of goods sold for the
year to date period ended September 27, 1998. The Company believes the temporary
increase in the cost of product purchased from Santee by the Company will
continue through March 1999, however, no assurances can be provided that the
temporary increase in the cost of product will terminate on or before March
1999.



NOTE 4 - BANK FACILITIES

     Stater Bros. Markets and Bank of America National Trust and Savings
Association (the "Bank") have entered into a credit agreement (as amended)
whereby the Bank provides Stater Bros. Markets with a revolving operating line
of credit (the "Operating Facility") with a maximum availability of $15.0
million, which was available on September 27, 1998, and a revolving letter of
credit facility (the "LC Facility") with a maximum availability of $25.0
million, of which $14.2 was available on September 27, 1998 (collectively, the
"Bank Facilities"). The Bank Facilities will expire on June 1, 2000. Interest on
the outstanding principal balance of the Operating Facility is payable monthly
at either the Bank's reference rate plus one percent per annum or at a fixed
rate of interest. Borrowings under the Bank Facilities are unsecured general
obligations of Stater Bros. Markets and are guaranteed by Stater Bros.
Development, Inc. The Bank Facilities contain customary cross-default provisions
with respect to the Company's 11% Senior Notes due 2001 and 9% Senior
Subordinated Notes due 2004.

     The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $190.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month. As of September 27, 1998, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with all
restrictive convenants and had (i) a current ratio of 1.86:1, (ii) tangible net
worth and debt subordinated to the Bank of $234.4 million; (iii) a ratio of
total liabilities to tangible net worth and debt subordinated to the Bank of
 .55:1 and (iv) a fixed charge coverage ratio (as defined in the Bank Facilities)
of 1.51:1. If for any reason Stater Bros. Markets is unable to comply with the
terms of the Bank Facilities, including the covenants contained therein, such
noncompliance would result in an event of default under the Bank Facilities, and
could result in acceleration of the payment of indebtedness then outstanding
under Bank Facilities or, in certain situations, the prohibition of the payment
of dividends or advances to the Company. In addition, no amendment, waiver or
supplement may be made to the Indenture without the prior written consent of the
Bank if such amendment, waiver or supplement adversely affects the rights of the
Bank as lender to Stater Bros. Markets.



                                      F-12
<PAGE>   48
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 4 - BANK FACILITIES (CONTD.)

     The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.



NOTE 5 - LEASES

     The Company leases the majority of its retail stores, offices, warehouses
and distribution facilities. Certain leases provide for additional rents based
on sales. Primary lease terms range from 10 to 99 years and substantially all
leases provide for renewal options.

     A portion of the Company's lease obligations are guaranteed by Petrolane
Incorporated ("Petrolane") or its successor (see Note 6). The leases guaranteed
by Petrolane had initial terms of 20 years and expire in the year 2003. Lease
payments for the properties subject to the Petrolane guarantees are
approximately $10.0 million per year. Under the terms of the agreement related
to the Company's acquisition of Stater Bros. Markets from Petrolane in 1983, as
amended in 1985, Stater Bros. Markets is required to make annual deposits into a
lease guarantee escrow account. The amount of each annual deposit is to be based
on (a) a percentage of sales of 20 supermarkets, as specified in the agreement,
to the extent they exceed a defined base; and (b) a percentage of rents adjusted
for increases in the Consumer Price Index for certain rental property, including
the Company's office and warehouse complex. The Company deposited $738,000,
$1,064,000 and $1,113,000 into the lease guarantee escrow account during fiscal
years 1996, 1997 and 1998, respectively.

     Upon termination of the leases, or the termination of the Petrolane lease
guarantees, all amounts deposited into the lease guarantee escrow account, plus
interest thereon, less any amounts disbursed, will be returned to the Company.
At September 27, 1998, the lease guarantee escrow account had a cumulative
balance of $9,629,000, compared to $8,069,000 and $6,701,000 as of September 28,
1997 and September 29, 1996, respectively.



                                      F-13
<PAGE>   49
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 5 - LEASES (CONTD.)

     Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the lease guarantee escrow account for
any amounts which Petrolane or its successor may be required to pay as guarantor
of the lease obligations of Stater Bros. Markets.

     Following is a summary of future minimum lease payments as of September 27,
1998:


<TABLE>
<CAPTION>
                                                                                                   Operating
                                                                                                     Leases
                                                                                Capital             Minimum
         Fiscal Year                                                            Leases              Payment 
         -----------                                                           --------            ---------
                                                                                      (In thousands)
<S>                                                                             <C>                <C>      
         1999..........................................................         $ 1,760            $  20,375
         2000..........................................................           1,693               19,648
         2001..........................................................           1,397               17,946
         2002..........................................................             980               17,673
         2003..........................................................             629               14,788
         Thereafter....................................................             413               61,732
                                                                                -------            ---------

         Total minimum lease payments..................................           6,872            $ 152,162
                                                                                                   =========

         Less amounts representing interest............................           1,212
                                                                                -------

         Present value of minimum lease payments.......................           5,660
         Less current portion..........................................           1,310
                                                                                -------

         Long-term portion.............................................         $ 4,350
                                                                                =======
</TABLE>

     Rental expense and sublease income were as follows:

<TABLE>
<CAPTION>
                                        53 Weeks          52 Weeks          52 Weeks
                                     -------------------------------------------------
                                     Sept. 29, 1996   Sept. 28, 1997    Sept. 27, 1998
                                     --------------   --------------    --------------
                                                      (In thousands)
<S>                                      <C>              <C>              <C>    
         Minimum rentals                 $19,267          $20,710          $20,194
         Rentals based on sales          $ 5,072          $ 5,101          $ 4,727
         Sublease income                 $ 1,186          $ 1,121          $ 1,267
</TABLE>


     Aggregate sublease income to be received subsequent to September 27, 1998
is approximately $5,481,000.




                                      F-14
<PAGE>   50
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 6 - PREFERRED STOCK

     Stater Bros. Markets has issued and outstanding 10 shares of its $11.00
Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and
unpaid dividends. Dividends are accrued at the rate of $11.00 per share per
annum. The preferred stock was issued in conjunction with a guarantee of Stater
Bros. Markets lease obligations by Petrolane Incorporated or its successors (see
Note 5). For as long as shares of the $11.00 Cumulative Redeemable Preferred
Stock remain outstanding, Stater Bros. Markets is subject to certain covenants.
The most restrictive covenant limits the amount of dividends that may be paid to
amounts that may be legally paid under applicable state laws. At September 27,
1998, accumulated earnings available for dividend distributions were
approximately $221.9 million. In the event of non-compliance by Stater Bros.
Markets, the holders of the Stater Bros. Markets preferred stock may elect the
Board of Directors of Stater Bros. Markets. At September 27, 1998, Stater Bros.
Markets was in compliance with these covenants.

     Effective March 8, 1996, pursuant to options available to the Company, the
Company exercised its right to convert all of its outstanding shares of Common
Stock previously held by Craig Corporation ("Craig") into 693,650 shares of its
Series B Preferred Stock. The Series B Preferred Stock had a redemption value of
approximately $69.4 million and currently paid dividends at the rate of 10.5%
per annum. In August 1997, the Company redeemed all of the outstanding shares of
its Series B Preferred Stock for $69.4 million plus accrued and unpaid
dividends.



NOTE 7 - INCOME TAXES

     The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                    53 Weeks          52 Weeks         52 Weeks
                                  ------------------------------------------------
                                  Sept. 29, 1996   Sept. 28, 1997   Sept. 27, 1998
                                  --------------   --------------   --------------
                                                  (In thousands)
<S>                               <C>              <C>              <C>
         Current
           Federal ........          $ 8,116          $ 4,771           $ 1,921
           State ..........            2,478            1,756               795
                                     -------          -------           -------
                                      10,594            6,527             2,716
                                     -------          -------           -------
         Deferred
           Federal ........              488            2,480              (813)
           State ..........               38              352              (444)
                                     -------          -------           -------
                                         526            2,832            (1,257)
                                     -------          -------           -------
         Income tax expense          $11,120          $ 9,359           $ 1,459
                                     =======          =======           =======
</TABLE>



                                      F-15
<PAGE>   51
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 7 - INCOME TAXES (CONTD.)

     A reconciliation of the provision for income taxes to amounts computed at
the federal statutory rate is as follows:


<TABLE>
<CAPTION>
                                          53 Weeks        52 Weeks       52 Weeks
                                       ----------------------------------------------
                                       Sept. 29, 1996  Sept. 28, 1997  Sept. 27, 1998
                                       --------------  --------------  --------------
<S>                                    <C>             <C>             <C>  
Statutory federal income tax rate          35.0%           35.0%          34.0%
State franchise tax rate, net of
    federal income tax benefit ..           6.1             6.0            6.1
Tax credits .....................            --              --           (2.7)
Other ...........................           (.1)             --            (.9)
                                           ----            ----           ----
                                           41.0%           41.0%          36.5%
                                           ====            ====           ====
</TABLE>


     Deferred income taxes resulted from timing differences in recognizing
revenue and expense for tax and financial statement purposes. The sources of
these timing differences and the income tax (benefit) of each were as follows:


<TABLE>
<CAPTION>
                                  53 Weeks         52 Weeks          52 Weeks
                               --------------------------------------------------
                               Sept. 29, 1996    Sept. 28, 1997    Sept. 27, 1998
                               --------------    --------------    --------------
                                                 (In thousands)
<S>                            <C>               <C>               <C>     
Accrued liabilities ....          $   364           $ 1,340           $  (744)
California franchise tax             (590)              678               306
Depreciation ...........              (22)              (39)             (240)
Other, net .............              774               853              (579)
                                  -------           -------           -------
                                  $   526           $ 2,832           $(1,257)
                                  =======           =======           =======
</TABLE>


     Components of deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                 Sept. 29, 1996    Sept. 28, 1997     Sept. 27, 1998
                                                 --------------    --------------     --------------
                                                                  (In thousands)
<S>                                                <C>                <C>                <C>     
Deferred income tax assets:
Property and equipment ..................          $    671           $    228           $     --
Self-insurance reserves .................             4,533              3,768              3,712
Pension and vacation liabilities ........             2,453              2,740              1,812
Inventories .............................             1,213              1,469              1,341
Investment in unconsolidated affiliate ..                --                943              1,917
Income deferred for book purposes .......             1,254              1,187              1,695
Other ...................................                --                 --                 --
                                                   --------           --------           --------
    Total deferred income tax assets ....            10,124             10,335             10,477

Deferred income tax liabilities:
Property and equipment ..................                --                 --               (347)
Investment in unconsolidated affiliate ..                (5)                --                 --
Other assets ............................                --                 --               (950)
Other, net ..............................              (114)            (2,658)            (2,143)
                                                   --------           --------           --------
    Total deferred income tax liabilities              (119)            (2,658)            (3,440)
                                                   --------           --------           --------

Net deferred income tax assets ..........          $ 10,005           $  7,677           $  7,037
                                                   ========           ========           ========
</TABLE>



                                      F-16
<PAGE>   52
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 7 - INCOME TAXES (CONTD.)

     Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable income,
when combined with the income taxes paid in prior years, will be adequate to
realize the deferred income tax assets.



NOTE 8 - RELATED PARTY TRANSACTIONS

     Consulting Agreements and Covenant Not to Compete

     Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena Investments ("La Cadena") and Craig,
that required them to provide consultation and advice to the Company in
connection with general business, financial, management consulting, real estate
acquisition and development, and product diversification matters. These
consulting agreements with its stockholders terminated on September 26, 1993. In
March 1994, the Company entered into a new five-year Consulting Agreement with
Craig, whereby the Company paid Craig $1.5 million per year and Craig provided
the Company with consultation and advise in connection with general business
issues, financial management consulting, real estate acquisition and development
and product diversification matters. Consulting fees expense amounted to $1.5
million in 1997 and 1996. The agreement to make annual consulting payments to
Craig was terminated, at the election of the Company, in August 1997.
Additionally, on March 8, 1994, the Company paid Craig $5.0 million which is
amortized to earnings over the five-year term of the covenant not to compete
included in the Consulting Agreement.



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 three years before retirement. 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:

<TABLE>
<CAPTION>
                                                53 Weeks           52 Weeks           52 Weeks
                                             -----------------------------------------------------
                                             Sept. 29, 1996     Sept. 28, 1997      Sept. 27, 1998
                                             --------------     --------------      --------------
                                                                 (In thousands)
<S>                                              <C>                <C>                <C>    
Service cost - benefits earned during
  the period ..........................          $   752            $   826            $   902
Interest cost on projected benefit
  obligation ..........................            1,000              1,109              1,241
Actual return on assets ...............             (429)              (761)            (1,033)
Net amortization and deferral .........             (181)                78                187
                                                 -------            -------            -------

Net periodic pension cost .............          $ 1,142            $ 1,252            $ 1,297
                                                 =======            =======            =======

Assumptions used for accounting were:
Discount rate .........................             7.50%              7.50%              7.50%
Rate of increase in compensation levels             5.00%              5.00%              5.00%
Expected long-term rate of return on
  assets ..............................             9.00%              9.00%              9.00%
</TABLE>



                                      F-17
<PAGE>   53
                           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:

<TABLE>
<CAPTION>
                                                         53 Weeks            52 Weeks          52 Weeks
                                                       ---------------------------------------------------
                                                       Sept. 29, 1996    Sept. 28, 1997     Sept. 27, 1998
                                                       --------------    --------------     --------------
                                                                             (In thousands)
<S>                                                      <C>                <C>                <C>     
Actuarial present value of benefit obligations:
  Vested benefit obligation ...................          $ 10,591           $ 11,794           $ 15,376
                                                         ========           ========           ========

  Accumulated benefit obligation ..............          $ 10,930           $ 12,160           $ 15,850
                                                         ========           ========           ========

Projected benefit obligation ..................          $(14,991)          $(16,639)          $(21,636)
Plan assets at fair value,
  primarily notes and bonds ...................             9,028             10,442             11,951
                                                         --------           --------           --------

Projected benefit obligation in
  excess of plan assets .......................            (5,963)            (6,197)            (9,685)
Unrecognized net loss .........................             3,745              3,597              6,774
Unrecognized prior service cost ...............               (71)               (66)               (61)
Unrecognized net obligations established
  October 1, 1987 .............................               216                189                162
                                                         --------           --------           --------
Pension (liability) recognized in the
   balance sheet ..............................          $ (2,073)          $ (2,477)          $ (2,810)
                                                         ========           ========           ========
</TABLE>


     Expenses recognized for this retirement plan were $1,290,000, $1,392,000
and $1,499,000 in 1996, 1997 and 1998, 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 $347,000, $396,000 and $420,000 in 1996, 1997 and 1998,
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-18
<PAGE>   54
                           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:


<TABLE>
<CAPTION>
                                           53 Weeks        52 Weeks           52 Weeks
                                        Sept. 29, 1996   Sept. 28, 1997    Sept. 27, 1998
                                        --------------   --------------    --------------
                                                         (In thousands)
<S>                                     <C>              <C>               <C>    
Multi-Employer Pension Plans.........      $ 7,376          $ 8,677          $12,420

Multi-Employer Health and Welfare....       36,632           36,771           36,930
                                           -------          -------          -------

Total Multi-Employer Benefits........      $44,008          $45,448          $49,350
                                           =======          =======          =======
</TABLE>

     The Company's employer contributions increased in fiscal 1998 as a result
of the resumption of employer contributions to a collective bargaining pension
trust, such employer contributions had previously been suspended since 1994.



NOTE 10 - LABOR RELATIONS

     The Company entered into a four-year collective bargaining agreement with
the United Food & Commercial Workers collective bargaining units in October 1995
and entered into a four-year collective bargaining agreement in September 1998
with the International Brotherhood of Teamsters collective bargaining units.



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.

     Long-Term Debt

     The fair value of the 11% Senior Notes due 2001 and 9% Senior Subordinated
Notes due 2004, is 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.



                                      F-19
<PAGE>   55
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTD.)

     The estimated fair values of the Company's financial instruments are as
follows:

<TABLE>
<CAPTION>
                                              As of
                                        September 27, 1998
                                        ------------------
                                          (In thousands)
                                   Carrying            Fair
                                    Amount             Value
                                   ---------         --------
<S>                                <C>               <C>     
Cash and cash equivalents.....     $ 57,281          $ 57,281
Receivables ..................     $ 20,451          $ 20,451
Long-term debt ...............     $270,660          $276,060
</TABLE>



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 May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs sought unspecified damages. The Company has recently
entered into a settlement agreement with this case and such settlement does not
involve payment of monetary damages and is currently being processed through the
courts for approval and will not have an adverse material effect on the Company.

On June 19, 1997, Stater Bros. Markets was named as a defendant in the case of
Ufondu, et al. vs. Stater Bros. Markets filed in the Superior Court of the State
of California for the County of San Bernardino. The complaint filed by twelve
employees seeks unspecified damages alleging racial discrimination in the
Company's employment practices. The Company believes the complaint is without
merit and intends to vigorously defend the case. There can be no assurances,
however, as to the outcome of this case.



                                      F-20
<PAGE>   56
                           STATER BROS. HOLDINGS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)

NOTE 13 - QUARTERLY RESULTS (UNAUDITED)


     Quarterly results for fiscal 1996, 1997 and 1998 are as follows:
                                    (In thousands)


<TABLE>
<CAPTION>
                                                                                                            Net Income (Loss)
                                                  Gross         Operating          Net          Preferred     Available to
                                 Sales            Profit          Profit      Income (Loss)     Dividends     Shareholders
                               ----------        --------       ---------     ------------      ---------   ----------------
<S>                            <C>               <C>           <C>            <C>               <C>         <C>     
Fiscal 1996 Quarters
13 weeks ended 12/24/95.....   $  408,740        $ 92,261        $11,015        $  3,597         $   --        $  3,597
13 weeks ended 03/24/96.....      406,223          93,548         12,266           4,341            339           4,002
13 weeks ended 06/23/96.....      429,349          99,257         12,188           4,385          1,816           2,569
14 weeks ended 09/29/96.....      461,020         104,540         11,787           3,688          1,956           1,732
                               ----------        --------        -------        --------         ------        --------

     Total (53 weeks).......   $1,705,332        $389,606        $47,256        $ 16,011         $4,111        $ 11,900
                               ==========        ========        =======        ========         ======        ========

Fiscal 1997 Quarters
13 weeks ended 12/29/96.....   $  433,400        $100,826        $12,080        $  4,195         $1,816        $  2,379
13 weeks ended 03/30/97.....      431,422          97,695         11,978           4,354          1,816           2,538
13 weeks ended 06/29/97.....      427,445          96,714         11,511           4,078          1,816           2,262
13 weeks ended 09/28/97.....      425,657          96,279          8,023             840            718             122
                               ----------        --------        -------        --------         ------        --------

     Total (52 weeks).......   $1,717,924        $391,514        $43,592        $ 13,467         $6,166        $  7,301
                               ==========        ========        =======        ========         ======        ========

Fiscal 1998 Quarters
13 weeks ended 12/28/97.....   $  430,918        $ 98,296        $10,110        $  1,373         $   --        $  1,373
13 weeks ended 03/29/98.....      422,829         100,467         10,090           1,225             --           1,225
13 weeks ended 06/28/98.....      431,301          99,113          5,115          (1,185)            --          (1,185)
13 weeks ended 09/27/98.....      441,059         104,709          8,761           1,118             --           1,118
                               ----------        --------        -------        --------         ------        --------

     Total (52 weeks).......   $1,726,107        $402,585        $34,076        $  2,531         $   --        $  2,531
                               ==========        ========        =======        ========         ======        ========
</TABLE>



                                      F-21