##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K/A  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended: September 26, 2004  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition from ____to____
Commission file number 001-13222 STATER BROS. HOLDINGS INC.  Delaware
    
    33-0350671(State or other jurisdiction of incorporation or
organization)
    
    (IRS Employer Identification No.)
 21700 Barton Road
Colton, California
    
    92324(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
    
    (909) 783-5000
 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. YesþNoo. 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/A or any
amendment to this Form 10-K/A. YesþNoo. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YesoNoþ. 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 May 5, 2005Class A Common Stock  38,301 shares. DOCUMENTS INCORPORATED BY REFERENCE None
 1




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Explanatory Note: This Report on Form 10-K/A amends the Annual Report on Form 10-K for Stater Bros. Holdings Inc.
(the Company) for the fiscal year ended September 26, 2004 as filed with the Securities and
Exchange Commission on December 21, 2004 for the periods ended September 29, 2002, September 28,
2003 and September 26, 2004. Management reviewed its accounting practices related to leases and determined that the useful lives
used to depreciate certain leasehold improvements were not consistent with views recently expressed
in a letter issued by the Chief Accountant of the Securities and Exchange Commission dated February
7, 2005. The restatement presented herein corrects errors in the lives used for certain leasehold
improvements and corrects these lives to conform to U.S. generally accepted accounting principles.
See Note 2  Restatement of Previously Issued Financial Statements to the Companys audited
consolidated financial statements which provides further information regarding the restatement and
provides schedules summarizing the effect on the Companys consolidated balance sheets and related
consolidated statements of income, stockholders deficit and cash flows for the 52-week periods
ended September 29, 2002, September 28, 2003 and September 26, 2004. In addition, the Company has
clarified its policies regarding land rent, rent holidays, deferred rent and amortization of
leaseholds which can be found under the captions Property & Equipment and Leases under Note 1
- The Company and Summary of Significant Accounting Policies and Note 8  Leases to the
Companys audited consolidated financial statements. Information not affected by the restatement
is unchanged and reflects the disclosures made as of the Companys original filing of Form 10-K on
December 21, 2004. 2




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STATER BROS. HOLDINGS INC.
FORM 10-K/A
TABLE OF CONTENTS Page NumberPART IItem 1
    
    Business
    
    
    4Item 2
    
    Properties
    
    
    11Item 3
    
    Legal Proceedings
    
    
    12Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5
    
    Market for the Registrants Common Equity and
Related Stockholder Matters
    
    
    13Item 6
    
    Selected Financial Data
    
    
    14Item 7
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 7A
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    29Item 8
    
    Financial Statements and Supplementary Data
    
    
    30Item 9
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    30Item 9A
    
    Controls and Procedures
    
    
    30PART IIIItem 10
    
    Directors and Executive Officers of the Registrant
    
    
    32Item 11
    
    Executive Compensation
    
    
    34Item 12
    
    Security Ownership of Certain Beneficial Owners
and Management
    
    
    37Item 13
    
    Certain Relationships and Related Transactions
    
    
    38Item 14
    
    Principal Accounting Fees and Services
    
    
    38PART IVItem 15
    
    Exhibits, Financial Statement Schedules and
Reports on Form 8-K
    
    
    39Signatures
    
    
    44EX-12.1EX-14.1EX-31.1EX-31.2EX-32.1
  3




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




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##### Table of Contents



Item 1. Business (contd.) Business Strategy Issuance of New Debt and Early Extinguishment of Debt (contd.)
On June 17, 2004 the Company used part of the proceeds from the issuance of these notes for the
purchase of $397.8 million of the 10.75% Senior Notes due August 2006, the payment of $16.9 million
for tender premium and fees on the purchased 10.75% Senior Notes, the early retirement of the $20.0
million 5.0% Subordinated Note due March 2007 and to pay accrued interest on the purchased 10.75%
Senior Notes and the retired 5.0% Subordinated Note. On August 16, 2004, the Company redeemed the
remaining outstanding $41.0 million 10.75% Notes and paid a make whole fee on the redemption of
$1.1 million. Store Profile and Locations
The Companys supermarkets have well-established locations and low overhead expenses, including
fixed rent payments in most supermarkets. In addition, the Company believes that its existing
supermarkets are well maintained and generally require capital expenditures only for customary
maintenance. An average supermarket is approximately 33,200 square feet, while newly constructed
supermarkets range from approximately 40,000 square feet to 46,000 square feet. Stater Bros.
supermarkets typically utilize approximately 72% of total square feet for retail selling space.
The Company operates its supermarkets with minimal back-room storage space because of the close
proximity of its distribution facility to its store locations. Generally, all Stater Bros.
supermarkets are similarly designed and stocked thereby allowing Stater Bros. customers to find
items easily in any of the Companys supermarkets. Substantially all of the Companys 158 supermarkets are located in neighborhood shopping centers in
well-populated residential areas. The Company endeavors to locate its supermarkets in growing
areas that will be convenient to potential customers and will accommodate future supermarket
expansion. Management actively pursues the acquisition of sites for new supermarkets. In an effort to
determine sales potential, new supermarket sites are carefully researched and analyzed by
management for population shifts, zoning changes, traffic patterns, nearby new construction and
competitive locations. Stater Bros. works with developers to attain the Companys criteria for
potential supermarket sites, and to insure adequate parking and a complementary co-tenant mix. Store Expansion and Remodeling
The Company has historically focused its expansion in the San Bernardino, Riverside, Orange, Los
Angeles, San Diego and Kern counties of Southern California. Such expansion has been accomplished
through improving and remodeling existing stores, constructing new supermarkets, and the
acquisition of other supermarket operations. The number of supermarkets operated by the Company
was 158 as of September 26, 2004. The Company intends to continue to expand its existing
supermarket operations by enlarging and remodeling existing supermarkets and constructing new
supermarkets. The Company may also make strategic acquisitions of existing supermarkets, if such
opportunities arise. 5




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Item 1. Business (contd.) Store Expansion and Remodeling (contd.)
The Company monitors sales and profitability of its operations on a store-by-store basis and
enlarges, remodels or replaces stores in light of their performance and managements assessment of
their future potential. Approximately 87% of the Companys supermarkets have been either newly
constructed or remodeled within the last five years. Minor remodels cost between $100,000 and
$500,000 and typically include new fixtures and may include a change in decor. Major remodels cost
in excess of $500,000 and typically involve more extensive refurbishment of the stores interior
and may include the addition of one or more specialty service departments such as a hot service
delicatessen or a bakery. Expansions entail enlargement of the store building and typically
includes breaking through an exterior wall. The primary objectives of remodeling and expansions
are to improve the attractiveness of supermarkets, increase sales of higher margin product
categories and, where feasible, to increase selling area. The Company conducts all of its new
construction and most of its remodeling through its wholly owned subsidiary Development which
serves as the general contractor for all Company construction projects. The following table sets forth certain statistical information with respect to the Companys
supermarket expansion and remodeling for the periods indicated. Fiscal Year EndedSept. 24,
    
    
    Sept. 30,
    
    
    Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Number of supermarkets:Opened
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Closed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Replaced
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Total at end of year
    
    
    155
    
    
    
    155
    
    
    
    156
    
    
    
    157
    
    
    
    158Minor remodel
    
    
    17
    
    
    
    10
    
    
    
    11
    
    
    
    20
    
    
    
    31Major remodel
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    4
    
    
    
    5Expansion
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Beyond 2004, the Company plans to open approximately three to six new stores per year, based upon a
number of factors, including customer demand, market conditions, profitability, costs of opening,
and availability of financing for such new stores. The Companys plans with respect to major and
minor remodels, expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company finances its new store
construction primarily from cash provided by operating activities and short-term borrowings under
its credit facilities. Long-term financing of new stores generally will be obtained through either
sale and leaseback transactions or secured long-term financings. However, no assurances can be
made as to the availability of such financings. Corporate Office and Distribution Facilities
The Companys corporate office and distribution facilities are located in Colton, California, and
encompass approximately 1.7 million square feet. The facilities include distribution facilities
for grocery, grocery deli, produce, meat, meat deli, frozen, bakery, health and beauty care, and
general merchandise products. Approximately 78% of the volume of the products offered for sale in
the Companys supermarkets are processed through the Companys distribution facilities. The Companys distribution facilities are centrally located and are an average distance of
approximately 39 miles from its supermarkets. Most supermarkets can be reached without using the
most congested portions of the Southern California freeway system. The Companys transportation fleet consists of modern well-maintained vehicles. As of September
26, 2004, the Company operated approximately 145 tractors, 108 which were owned and 37 which were
leased and 446 trailers, all of which were owned. 6




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Item 1. Business (contd.) Corporate Office and Distribution Facilities (contd.)
Markets plans to build new corporate office and distribution facilities on approximately 160 acres
of real property located on the former Norton Air Force Base (NAFB) in the City of San
Bernardino, California. Markets has entered into an Owner Participation Agreement with the Inland
Valley Development Agency, a joint powers agency (IVDA), which is the entity responsible for the
redevelopment of NAFB, to acquire approximately 93 acres of the project property owned by IVDA. As
a component of this Agreement, IVDA is completing an agreement with a sister governmental agency
for an additional 51 acres that would be transferred or leased to Markets with a purchase option.
Of the 160 acre project site, 16 acres are owned privately. Markets has acquired one of these
parcels and is negotiating the acquisition of the three remaining privately held parcels consisting
of approximately 13.5 acres. The Agreement with IVDA requires Markets to acquire those parcels not
owned by IVDA, to relocate all tenants and other business owners occupying buildings on the project
property, to construct and complete the corporate office and distribution facilities and to obtain
all City of San Bernardino building permits and entitlements required for construction of the
project. Markets also has entered into an agreement with Hillwood/San Bernardino LLC (Hillwood),
the master developer of NAFB, for infrastructure improvements. Under the Hillwood Agreement,
Markets will share costs associated with the infrastructure improvements including water, sewer,
streets and utilities, which will be required by the City of San Bernardino for the project.
Markets, after completion of the acquisition of the project property, will secure its commitment
with Hillwood for infrastructure improvements by the posting of either cash or letters of credits
in the amount of $10.8 million. The agreements with IVDA and Hillwood are contingent upon Markets
successfully completing acquisition of all the privately owned property. The NAFB site will be used to relocate and consolidate Markets corporate office and all
distribution facilities to a single integrated facility from the 13 distribution buildings at 7
different locations currently in use. The site is located within eight miles of the main
distribution facility in Colton, so there will be no change in the average distance between the new
facility and Markets retail supermarkets. The facility will consist of approximately 2.1 million
square feet and will include Markets corporate office, truck maintenance and other support
facilities required for consolidation of all of its Southern California office, distribution and
maintenance operations. Taking into account the increased cost of raw materials including steel,
concrete and asphalt, the projected net cost of the facility is approximately $220 million and
completion of the construction is planned for the winter of 2006. Purchasing and Marketing
The Company uses an Aggressive Everyday Low Price (AEDLP) format supported heavily by radio,
TV, newspaper and direct mail advertising programs as an integral part of its purchasing and
marketing strategy to provide its customers with the best overall supermarket value in its primary
market areas. The Company supplements its everyday low price structure with chain-wide temporary
price reductions (Stater Savers) on selected food and non-food merchandise. The geographic
location of the Companys supermarkets allows it to reach its target consumers through a variety of
media and the Company aggressively advertises its everyday low prices through local and regional
newspapers, direct mail and printed circulars as well as extensive advertisements on radio and
television. A key factor in the Companys business strategy is to provide its customers with a variety of
quality brand-name merchandise as well as alternative selections of high-quality private label
merchandise. To meet the needs of customers, most supermarkets are stocked with approximately
35,000 items. The Company places particular emphasis on the freshness and quality of its meat and
produce merchandise and maintains high standards for these perishables by distributing the
merchandise through its perishable distribution facilities. 7




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Item 1. Business (contd.) Retail Operations
The Companys supermarkets are well maintained, have sufficient off-street parking and generally
are open from 6:00 a.m. or 7:00 a.m. until 10:00 p.m. or 11:00 p.m., seven days a week, including
all holidays with the exception of Christmas Day. Because Stater Bros. operates its supermarkets
under similar formats, management believes it is able to achieve certain operating economies. Store Management. Each supermarket is managed by a store manager and an assistant manager,
each of whom receives a base salary and may receive a bonus based on the individual supermarkets
overall performance and management of labor costs within the supermarket. The store manager and
assistant manager are supported by their store management staff who have the training and skills
necessary to provide proper customer service, operate the store and manage personnel in each
department. Each store has individual department managers for grocery, meat, produce, and where
applicable, bakeries, hot service delicatessens and seafood. Store managers report to one of nine
district managers, each of whom is responsible for an average of 18 supermarkets. District
managers report to one of three Regional Vice Presidents. Customer Service. The Company considers customer service and customer confidence to be
critical to the success of its business strategy. This strategy, to provide courteous and
efficient customer service through specific programs and training, is a focus of the Senior
Management and is implemented by employees at all levels of the Company. Each store is staffed
with a Customer Service Manager who coordinates all customer service issues in the store. The
Company maintains an intensive checker training school to train prospective checkers and to provide
a refresher program for existing checkers. All of the Companys supermarkets provide customers
with carry-out service and have express checkout lanes. Santee Dairies, LLC
Pursuant to a settlement agreement reached among Markets, Hughes Markets, Inc. (Hughes), Quality
Food Centers, Inc., Ralphs Grocery Company (Ralphs), Fred Meyer, Inc., and the Kroger Co., Hughes
relinquished to Markets its ownership in Santee Dairies, Inc. (Santee), giving Markets 100%
ownership of Santee. Santee had been jointly owned by Hughes and Markets since 1986. Prior to the
settlement agreement, the Company accounted for its investment in Santee using the equity method of
accounting. Santee has been included in the consolidated financial statements of the Company as a
wholly-owned subsidiary of Markets as of February 6, 2004, the effective date of the settlement
agreement. Santee operates one of the largest dairy plants in California, based on fluid production, and
provides fluid milk products to Stater Bros., Ralphs, and other customers in Southern California.
Santee processes, packages and distributes whole, low-fat and non-fat milk, as well as orange
juice, fruit drinks and certain other cultured milk products under the Knudsen®, Foremost® and
certain other brand names, as well as store brand names. Santee is the exclusive licensee of the
Knudsen® trademark from Kraft Foods, Inc. for fluid milk, juices and certain other cultured milk
products in the Southern California market. In addition, Santee is the exclusive licensee for
Foremost Farms USA, cooperative of the Foremost® trademark for fluid milk in Southern California.
From February 6, 2004 to September 26, 2004, Santee processed approximately 46.2 million gallons of
fluid products, including 38.7 million gallons of fluid milk. During this time period, Markets
purchased 23.8 million gallons of fluid products. Santees total revenue from February 6, 2004
through September 26, 2004, excluding related party sales, was $75.6 million. Ralphs has agreed to
purchase fluid milk and certain other products from Santee in declining volumes through July 31,
2007. Santee also sells to unaffiliated supermarkets, independent food distributors, military
bases and foodservice providers in Southern California. The dairys capacity to process milk is approximately 250,000 to 350,000 gallons per day, with the
ability to expand capacity to approximately 500,000 gallons per day. 8




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##### Table of Contents



Item 1. Business (contd.) Management Information Systems
The Companys management information systems and point-of-sale scanning technology reduce the labor
costs attributable to product pricing and customer checkout, and provide management with
information that facilitates purchasing, receiving and management of inventory and accounts
payable. The Company has point-of-sale scanning checkout technology in all of its stores. All
stores use electronic systems for employee time and attendance records, inventory orderings, and
labor scheduling, which assist store management in developing a more efficient and
customer-sensitive work schedule. The Company uses the Stater Express system in all of the Companys supermarkets. Stater
Express is a combined supermarket technology platform that includes enhanced systems for check
verification and acceptance and provides alternative pay choices such as most nationally recognized
financial institution debit and credit cards. Stater Express also provides each supermarket with
the technology required to print in-store-advertising signs and connects each supermarket to the
Companys host computer which provides certain efficiencies in data transfers between the
supermarkets and the Companys main office. Employees
The Company has approximately 15,700 employees, approximately 900 of whom are management and
administrative employees and approximately 14,800 of whom are hourly union employees.
Substantially all of the Companys hourly employees are members of either the United Food and
Commercial Workers (UFCW) or International Brotherhood of Teamsters (Teamsters) labor unions
and are represented by several different collective bargaining agreements. The UFCWs collective bargaining agreements were ratified on February 29, 2004 and expire in March
of 2007. The Teamsters collective bargaining agreement was renewed in September 2002 and expires
in September 2005. The Company values its employees and believes its relationship with them is good and that employee
loyalty and enthusiasm are key elements of its operating performance. Southern California Labor Dispute
A major labor dispute involving three of Stater Bros. principal competitors lasted from
October 11, 2003 through February 29, 2004. On October 11, 2003, the United Food and Commercial
Workers Union (the UFCW), declared a strike against Safeway, Inc. (Vons); in turn, Albertsons,
Inc. (Albertsons) and Ralphs locked out all of their UFCW employees (the labor dispute). The
UFCW did not strike against Stater Bros. as a result of an agreement that Stater Bros. would accept
the same contract terms that the UFCW negotiated with Vons, Albertsons and Ralphs. On February 29, 2004, members of the UFCW in Southern California ratified new collective bargaining
agreements and ended their strike. Under the new collective bargaining agreements, Stater Bros.
made special contributions to the UFCWs health and welfare fund and made strike ratification bonus
payments to its employees. The labor dispute had a materially positive effect on Stater Bros. results of operations for
fiscal 2004. The impact of the labor dispute on Stater Bros. was unprecedented and is not expected
to be repeated in the future. Following the settlement of the labor dispute, management has taken
steps through price promotions, customer service and attention to detail to retain as much of the
increased volume as possible. However, the ultimate amount of increased volume retained, if any,
cannot be forecast with any degree of certainty. 9




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##### Table of Contents



Item 1. Business (contd.) Competition
The Company operates in a highly competitive industry characterized by narrow profit margins.
Competitive factors include price, quality and variety of products, customer service, and store
location and condition. The Company believes that its competitive strengths include its specialty
services, everyday low prices, breadth of product selection, high product quality, one-stop
shopping convenience, attention to customer service, convenient store locations, a long history of
community involvement, established long-term customer base in the Inland Empire (consisting of San
Bernardino and Riverside counties) and a growing customer awareness in the counties of Orange, San
Diego and Los Angeles. Given the wide assortment of products it offers, the Company competes with various types of
retailers, including local, regional and national supermarket retailers, convenience stores, retail
drug stores, national general merchandisers and discount retailers, membership clubs and warehouse
stores. The Companys primary competitors include Vons, Albertsons, Ralphs, and a number of
independent supermarket operators. The Company, and its competitors, will be faced with additional
competitive pressures with the entry in the geographic market area of Wal-Marts Super Center
format stores. Wal-Mart currently has a number of Wal-Mart discount locations and Sams Clubs
within the Companys marketing area selling a variety of grocery products. The Company believes
that its everyday low prices, breadth of product offering, specialty service departments and
long-term customer relationships will help it withstand the increased competitive environment. Government Regulation
The Company is subject to regulation by a variety of governmental authorities, including federal,
state and local agencies that regulate trade practices, building standards, labor, health, safety
and environmental matters. The Company is also subject to agencies that regulate the distribution
and sale of alcoholic beverages, tobacco products, milk and other agricultural products and other
food items. Santee is subject to periodic inspections by personnel from the California Department of Food and
Agriculture, as well as the United States Food and Drug Administration, who test, among other
things, Santees pasteurization and homogenization equipment, storage tanks, and bottling
apparatuses to ensure compliance with applicable health and safety regulations. The price of raw
milk is regulated by the federal government through federal market orders and price support
programs, and by the State of California. The price of raw milk can fluctuate widely. Environmental
Environmental remediation costs incurred over the past five years were approximately $1.7 million,
in the aggregate, including remediation costs of approximately $198,000 in 2000, $495,000 in 2001,
$324,000 in 2002, $395,000 in 2003 and $260,000 in 2004. Management believes that any such future
remediation costs will not have a material adverse effect on the financial condition or results of
operations of the Company. 10




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##### Table of Contents



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




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Item 3. Legal Proceedings In the ordinary course of its business, the Company is party to various legal actions which
the Company believes are incidental to the operation of the business of the Company and its
subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable
and can be reasonably estimated. The Company believes that the outcome of such legal proceedings
to which the Company is currently a party will not have a material adverse effect upon its results
of operations or its consolidated financial condition. On July 9, 2003, the Companys principal operating subsidiary Markets agreed to a settlement of two
lawsuits which had been filed on behalf of certain of Markets existing and former store managers
and assistant managers which alleged that such workers are non-exempt under California labor laws
and are therefore entitled to overtime wages. Markets admitted no wrong doing under the settlement
and it believes it has appropriately followed California law in the classification and payment of
its employees. Markets believes that the store managers and assistant managers are highly
compensated employees with duties and responsibilities which place them in the exempt category
under California law and that such employees are not entitled to overtime wages. Markets continues
to feel the case was without merit; however, because of escalating litigation expenses, Markets
determined a settlement was the best solution. The amount of the settlement was $3.2 million. Of
the $3.2 million, $1.2 million of the settlement was recognized as expense in fiscal 2003 and the
remainder was expensed in prior years. In July of 2002, Markets initiated litigation on its own behalf and derivatively on behalf of
Santee in the Superior Court for the State of California, County of Los Angeles, against Hughes,
Ralphs, Fred Meyer, Inc. and The Kroger Company (Defendants). In July of 2003, Defendants filed
a cross-complaint against Markets, Santee and others. In order to settle the resulting
litigation, Markets, Hughes, Santee and Santee Dairies, LLC. (SDL) entered into three separate
but interconnected agreements Settlement Agreement and Release of all Claims, Dissolution and
Transfer Agreement and Assignment and Assumption Agreement all three agreements collectively
known as the Settlement Agreement. Under the Settlement Agreement, the Ralphs Guaranty was
terminated, a new purchase of products schedule for Ralphs was established, Hughes agreed to pay
$1,550,000 to Markets, SDL was dissolved and the shares of Santee, previously held by SDL, were
transferred equally to Markets and Hughes. Concurrently with this transfer, Hughes immediately
transferred Hughes Santee shares to Santee for cancellation and retirement. Through the Settlement Agreement, Hughes relinquished its interest in Santee to Markets. The
consideration received by Markets under the Settlement Agreement was $1,550,000 in cash and the
value of the additional 50% ownership interest in Santee. The value assigned to the additional 50%
interest in Santee was $21.8 million which was determined by management based upon the net present
value of the most probable future cash flows. The Settlement Agreements effective date was the
close of business on February 6, 2004. In fiscal 2004, the Company incurred legal fees of $500,000
related to the Settlement Agreement. In addition, the Company, through Santee, made payments,
aggregating $500,000, to four Directors of Santee who had been named by Hughes as defendants in
litigation settled by the Settlement Agreement. Three of the four Directors are related parties to
the Company. The net consideration received by the Company under the Settlement Agreements was
$22.4 million which was recorded as a gain in fiscal 2004 in the Consolidated Statements of Income
under the line item Selling, general and administrative expenses. Environmental Matters
Environmental remediation costs incurred during the last five years were approximately $1.7
million, in the aggregate, including remediation costs of approximately $198,000 in 2000, $495,000
in 2001, $324,000 in 2002, $395,000 in 2003 and $260,000 in 2004. Management believes that any
such future remediation costs will not have a material adverse effect on the financial condition or
results of operations of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders None 12




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##### Table of Contents



PART II 
  Item 5.
    Market for the Registrants Common Equity and Related Stockholder Matters (a) Market Information There is no established public trading market for the Companys common equity. (b) Holders Authorized
    
    OutstandingCommon Stock
    
    
    100,000
    
    
    
    0Class A Common Stock
    
    
    100,000
    
    
    
    38,301
 La Cadena holds 38,301 shares, or 100% of the Companys Class A Common Stock. (c) Dividends The New Credit Facility, as amended and restated on June 17, 2004, limits the
Companys ability to pay dividends. The Company may declare and pay dividends after
June 27, 2004, but the aggregate amount of the dividend may not exceed, as of any date
of determination, an amount equal to the sum of $25.0 million plus 50% of the
Companys consolidated net income for the period then ending following June 27, 2004.
The New Credit Facility specifically allowed for the payment to La Cadena of a
dividend in an amount not to exceed $45.0 million substantially concurrently with the
issuance of the 8.125% Senior Notes Due 2012 and the Floating Rate Senior Notes due
2010. Dividends of $45.0 million were paid in fiscal 2004. No dividends were paid in fiscal
2003. Dividends of $4.5 million were paid in fiscal 2002. The Company does not
intend to pay dividends on its common equity in the foreseeable future. 13




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##### Table of Contents



Item 6. Selected Financial Data The following table sets forth historical financial data derived from the audited consolidated
financial statements of the Company as of and for the fiscal years ended September 24, 2000,
September 30, 2001, September 29, 2002, September 28, 2003 and September 26, 2004. The information
set forth below should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations, the Audited Consolidated Financial Statements of
the Company and related notes thereto contained elsewhere herein. The information included in
Other Operating and Financial Data and Store Data is unaudited. Fiscal Years EndedSept. 24,
    
    
    Sept. 30,
(4)
    
    
    Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)(In thousands of dollars except per share and store data)Statement of Earnings Data:Sales
    
    $
    2,417,710
    
    
    $
    2,573,913
    
    
    $
    2,666,346
    
    
    $
    2,753,774
    
    
    $
    3,704,882Cost of goods sold
    
    
    1,819,068
    
    
    
    1,911,065
    
    
    
    1,957,526
    
    
    
    1,999,361
    
    
    
    2,652,812Gross profit
    
    
    598,642
    
    
    
    662,848
    
    
    
    708,820
    
    
    
    754,413
    
    
    
    1,052,070Selling, general and administrative
expenses
    
    
    537,370
    
    
    
    579,422
    
    
    
    615,317
    
    
    
    659,547
    
    
    
    820,329Depreciation and amortization
    
    
    20,930
    
    
    
    22,988
    
    
    
    25,052
    
    
    
    27,660
    
    
    
    33,284Acquisition integration expenses
    
    
    4,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    562,894
    
    
    
    602,410
    
    
    
    640,369
    
    
    
    687,207
    
    
    
    853,613Operating profit
    
    
    35,748
    
    
    
    60,438
    
    
    
    68,451
    
    
    
    67,206
    
    
    
    198,457Interest and other income (expense)
    
    
    3,217
    
    
    
    3,151
    
    
    
    142
    
    
    
    (44
    )
    
    
    855Interest expense
    
    
    (51,784
    )
    
    
    (52,410
    )
    
    
    (52,814
    )
    
    
    (53,254
    )
    
    
    (53,951
    )Interest expense related
to debt purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,647
    )Equity in income from
unconsolidated affiliate
    
    
    1,483
    
    
    
    1,584
    
    
    
    2,914
    
    
    
    1,330
    
    
    
    929Income (loss) before income taxes
    
    
    (11,336
    )
    
    
    12,763
    
    
    
    18,693
    
    
    
    15,238
    
    
    
    110,643Income taxes (benefit)
    
    
    (4,830
    )
    
    
    5,234
    
    
    
    7,252
    
    
    
    5,471
    
    
    
    39,202Net income (loss)
    
    $
    (6,506
    )
    
    $
    7,529
    
    
    $
    11,441
    
    
    $
    9,767
    
    
    $
    71,441Earnings (loss) per common share
    
    $
    (130.12
    )
    
    $
    150.58
    
    
    $
    272.63
    
    
    $
    255.01
    
    
    $
    1,865.25
 (footnotes on
following page) 14




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##### Table of Contents



Item 6. Selected Financial Data (contd.) Fiscal Years EndedSept. 24,
    
    
    Sept. 30, (4)
    
    
    Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)(In thousands of dollars except per share and store data)Balance Sheet Data (end of fiscal year):Working capital
    
    $
    107,907
    
    
    $
    120,457
    
    
    $
    119,643
    
    
    $
    124,517
    
    
    $
    319,855Total assets
    
    
    594,224
    
    
    
    627,786
    
    
    
    630,921
    
    
    
    663,836
    
    
    
    1,014,121Long-term notes
    
    
    439,000
    
    
    
    439,000
    
    
    
    458,750
    
    
    
    458,750
    
    
    
    700,000Long-term capitalized lease
obligations
    
    
    13,679
    
    
    
    12,098
    
    
    
    10,981
    
    
    
    9,926
    
    
    
    9,470Other long-term liabilities
    
    
    14,070
    
    
    
    24,480
    
    
    
    43,533
    
    
    
    53,014
    
    
    
    83,112Common stockholders deficit
    
    
    (50,318
    )
    
    
    (42,789
    )
    
    
    (75,849
    )
    
    
    (66,082
    )
    
    
    (39,641
    )Dividends paid per share, Class A
Common Stock
    
    $
    
    
    
    $
    
    
    
    $
    117.49
    
    
    $
    
    
    
    $
    1,174.90Cash Flow Data:Cash provided by operating activities
    
    
    15,385
    
    
    
    79,393
    
    
    
    51,168
    
    
    
    82,950
    
    
    
    150,516Cash provided by (used in)
financing activities
    
    
    (10,664
    )
    
    
    (7,140
    )
    
    
    (31,218
    )
    
    
    (1,116
    )
    
    
    102,090Cash used in investing activities
    
    
    (35,442
    )
    
    
    (33,248
    )
    
    
    (40,543
    )
    
    
    (51,725
    )
    
    
    (61,811
    )Other Operating and Financial Data:Sales increases:Total stores
    
    
    32.1
    %
    
    
    6.5
    %
    
    
    3.6
    %
    
    
    3.3
    %
    
    
    34.5
    %Like
stores (comparable 52-weeks)
(1)
    
    
    1.4
    %
    
    
    4.5
    %
    
    
    5.3
    %
    
    
    2.8
    %
    
    
    30.3
    %Operating profit
    
    $
    35,748
    
    
    $
    60,438
    
    
    $
    68,451
    
    
    $
    67,206
    
    
    $
    198,457Ratio of
earnings to fixed charges
(2)
    
    
    0.87
    x
    
    
    1.18
    x
    
    
    1.24
    x
    
    
    1.21
    x
    
    
    1.97
    xGross profit as a percentage
of sales
    
    
    24.76
    %
    
    
    25.75
    %
    
    
    26.58
    %
    
    
    27.40
    %
    
    
    28.40
    %Selling, general and administrative
expenses as a percentage of sales
    
    
    22.23
    %
    
    
    22.51
    %
    
    
    23.08
    %
    
    
    23.96
    %
    
    
    22.14
    %Store
Data (3):Number of stores (at end of
fiscal year)
    
    
    155
    
    
    
    155
    
    
    
    156
    
    
    
    157
    
    
    
    158Average sales per store (000s)
    
    $
    15,598
    
    
    $
    16,606
    
    
    $
    17,092
    
    
    $
    17,619
    
    
    $
    23,014Average store size:Total square feet
    
    
    32,910
    
    
    
    33,018
    
    
    
    33,083
    
    
    
    33,111
    
    
    
    33,206Selling square feet
    
    
    23,570
    
    
    
    23,639
    
    
    
    23,675
    
    
    
    23,693
    
    
    
    23,746Total square feet (at end of
fiscal year) (000s)
    
    
    5,101
    
    
    
    5,118
    
    
    
    5,161
    
    
    
    5,205
    
    
    
    5,267Total selling square feet (at end
of fiscal year) (000s)
    
    
    3,653
    
    
    
    3,664
    
    
    
    3,693
    
    
    
    3,724
    
    
    
    3,764Sales per total sq. ft
    
    $
    474
    
    
    $
    503
    
    
    $
    517
    
    
    $
    532
    
    
    $
    693Sales per selling sq. ft
    
    $
    662
    
    
    $
    702
    
    
    $
    722
    
    
    $
    744
    
    
    $
    969
   (1)
    Like store sales are calculated by comparing year-to-year sales for stores that are
opened in both years. For stores that were not opened for the entire previous year, only
the current years weekly sales that correspond to the weeks the stores were open in the
previous year are used. For replacement store sales, sales for the entire year are
included in the like store sales calculation. A store in Hemet, California was closed on
the last day of fiscal 2004. Accordingly, all of this stores sales for fiscal 2003 and
fiscal 2004 were included in the like store sales calculation. (footnotes continued on following page) 15




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##### Table of Contents



Item 6. Selected Financial Data (contd.)  (2)
    For the purpose of determining the ratio of earnings to fixed charges, earnings consist
of income before income taxes and amortization of previously capitalized interest. Fixed
charges consist of interest expense whether expensed or capitalized, amortization of debt
issuance costs, and such portion of rental expense as can be deemed by management to be
representative of the interest factor in the particular case. Included in earnings and
fixed charges is the Companys 50% share of Santee. For fiscal 2004, included in earnings
and fixed charges is the Companys 50% share of fixed charges and earnings of Santee
through February 6, 2004. Santee has been consolidated into the Companys consolidated
results since that date.(3)
    Average sales per store, sales per total square feet and sales per selling square feet
are calculated by prorating the number of stores, total square feet and selling square feet
by the period of time the store was opened, for new stores, or the period of time the
expanded square footage was in service, for expanded stores.(4)
    The fiscal year 2001 was a 53-week year, whereas fiscal years 2000, 2002, 2003 and 2004
were 52-week years. 16




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies
The Companys discussion and analysis of financial condition and results of operations are based
upon the Companys audited consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the financial statements
requires the use of estimates and judgments on the part of management. The Company based its
estimates on the Companys historical experience combined with managements understanding of
current facts and circumstances. The Company believes that the following critical accounting
policies are the most important to the Companys financial statement presentation and require the
most difficult, subjective and complex judgments on the part of management. Self-Insurance Reserves
The Company is primarily self-insured, subject to certain retention levels for workers
compensation, automobile and general liability costs. The Company is covered by umbrella insurance
policies for catastrophic events. The Company records its self-insurance liability based on the
claims filed and an estimate of claims incurred but not yet reported. The estimates used by
management are based on the Companys historical experiences as well as current facts and
circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial
projections and the Companys estimate of ultimate losses are subject to a high degree of
variability. The variability in the projections and estimates are subject to, but not limited to,
such factors as judicial and administrative rulings, legislative actions, and changes in
compensation benefits structure. In recent years, the Company and employers within the State of
California as a whole have seen significant increases in the severity of workers compensation
claims. While the Company has factored these increases into its estimates of ultimate loss, no
assurance can be given that future events will not require a change in these estimates. The
Company discounted its workers compensation, automobile and general liability insurance reserves
at a discount rate of 7.5% in fiscal 2002 and fiscal 2003 and 5.5% in fiscal 2004. The analysis of
self-insurance liability is sensitive to the rate used to discount the anticipated future cash
flows for the workers compensation, automobile and general liability insurance reserves. For
fiscal 2004, if a rate of 4.5% was used to discount the reserves, the reserves for self insurance
would have been $1.3 million higher then the reserves calculated at a 5.5% discount rate. If a
rate of 6.5% was used in fiscal 2004 to discount the reserves, the reserves for self insurance
would have been $1.2 million lower then the reserves calculated at a 5.5% discount rate. Advertising Allowances
The Company receives co-operative advertising allowances from vendors for advertising specific
vendor products over specific periods of time. Effective September 30, 2002, the Company adopted
EITF Issue No. 02-16 Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. The adoption of EITF Issue No. 02-16 effects the classification of
allowances received between cost of goods sold and advertising expense but has no net effect on the
profitability of the Company. EITF Issue No. 02-16 requires the Company to perform an analysis of
the amount of co-operative advertising allowances received from its vendors compared to the cost of
running the corresponding advertisement. Any amount of co-operative funds received in excess of
the cost of advertising is recorded as a reduction in cost of goods sold. Determining the amount
of advertising cost that corresponds to the co-operative advertising allowances received requires
judgment on the part of management. 17




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Critical Accounting Policies (contd.) Advertising Allowances (contd.)
A significant portion of the Companys advertising expenditures is in the form of twice weekly
print advertisements. The Company distributes its print ads through inserts in local newspapers,
in direct mailers and as handouts distributed in its stores. On a monthly basis, management
estimates the cost of advertisements related to co-operative advertising allowances by dividing the
direct out-of-pocket costs for printing and distributing its print ads by the product of total
number of print ad pages run during the month and the number of individual ads in a typical twice
weekly advertisement. The dollar amount determined is deemed to be the fair value of advertising
costs. The fair value of advertising cost is then compared to the amount of co-operative adverting
allowances received during the month and any allowances received in excess of cost are recorded as
a reduction in cost of goods sold. In fiscal 2003 and fiscal 2004, the amount of co-operative
advertising allowances in excess of the direct fair value of the advertising was recognized as a
reduction in cost of goods sold. In fiscal 2002, all co-operative advertising allowances were
recognized as reductions in advertising expense. Significant Accounting Policies
In addition to the critical accounting policies disclosed above, there are certain accounting
policies that the Company has adopted that may differ from policies of other companies within the
same industry. Such differences in the treatment of these policies may be important to the readers
of the Companys Form 10-K/A and the Companys Consolidated Financial Statements contained herein.
For further information regarding the Companys accounting policies, refer to the significant
accounting policies included in the Notes to the Consolidated Financial Statements contained
here-in. Ownership of the Company
La Cadena is the sole shareholder of the Company and holds all of the shares of the Companys Class
A Common Stock. La Cadena is a California General Partnership whose partners include Jack H.
Brown, Chairman of the Board, President and Chief Executive Officer of the Company, and a former
member of senior management of the Company. Jack H. Brown has a majority interest in La Cadena and
is the Managing General Partner with the power to vote the shares of the Company held by La Cadena. 18




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Results of Operations
The following table sets forth certain income statement components expressed as a percent of sales
for the fiscal years ended September 29, 2002, September 28, 2003 and September 26, 2004. Fiscal Years Ended2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Sales
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Gross profit
    
    
    26.58
    
    
    
    27.40
    
    
    
    28.40Operating expenses:Selling, general and
administrative expenses
    
    
    23.08
    
    
    
    23.96
    
    
    
    22.14Depreciation and amortization
    
    
    0.93
    
    
    
    1.00
    
    
    
    0.90Operating profit
    
    
    2.57
    
    
    
    2.44
    
    
    
    5.36Interest income
    
    
    0.06
    
    
    
    0.04
    
    
    
    0.06Interest expense
    
    
    (1.98
    )
    
    
    (1.93
    )
    
    
    (1.46
    )Interest expense related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (0.96
    )Equity in income from
unconsolidated affiliate
    
    
    0.11
    
    
    
    0.05
    
    
    
    0.03Other expenses-net
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.04
    )Income before income taxes
    
    
    0.70
    %
    
    
    0.55
    %
    
    
    2.99
    %
 As of February 6, 2004, the results of Santee, previously accounted for under the equity method of
accounting, have been consolidated in the Companys results of operations and all inter-company
transactions have been eliminated. The labor dispute involving three of the Companys principal competitors from October 11, 2003
through February 29, 2004, had a materially positive effect on the Companys results of operations
in fiscal 2004. On October 11, 2003, the UFCW declared a strike against Vons; in turn, Albertsons
and Ralphs locked out all of their UFCW employees. The UFCW did not strike against the Company as a
result of an agreement whereby the Company agreed to accept the same contract terms that the UFCW
negotiated with Vons, Albertsons and Ralphs. On February 29, 2004, members of the UFCW in Southern California ratified new collective bargaining
agreements and ended their strike. Under the new collective bargaining agreements, the Company made
special contributions to the UFCWs health and welfare fund totaling $29.3 million, and made strike
ratification bonus payments to its employees totaling $4.7 million. During the labor dispute, many of the former Vons, Albertsons and Ralphs customers chose to honor
the picket lines and took their business to the Companys markets and other grocery retailers.
Subsequent to the labor dispute, the Company has been able to retain some of these additional
customers. The labor dispute had both a significant and material effect on the Companys sales
volume, results of operations and financial position. The increased sales volume has had a positive effect on results of operations as the Company has
been able to realize some economics of scale from the increased sales volume. As a result, gross
profit, as a percentage of sales, has increased and operating expenses, as a percentage of sales,
have decreased for the fiscal year 2004 when compared to fiscal 2003. 19




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Results of Operations (contd.)
The impact of the labor dispute on the Company was unprecedented and is not expected to be repeated
in the future. As of September 26, 2004, the Company has been able to retain some of the increased
volume gained during the labor dispute. Management has taken steps through price promotions,
customer service and attention to detail to retain as much of the increased volume as possible.
Management anticipates that some of the retained volume realized to date will be lost as its major
competitors take continued marketing steps of their own to win back the business lost during the
labor dispute. The ultimate amount of increased volume retained, if any, cannot be forecast with
any degree of certainty. Like store sales are calculated by comparing year-to-year sales for stores that are opened in both
years. For stores that were not opened for the entire previous year periods, only the current
years weekly sales that correspond to the weeks the stores were opened in the previous year are
used. For replacement store sales, sales for the entire year are included in the like store sales
calculation. Total sales amounted to $3.7 billion in 2004 compared to $2.8 billion in 2003 and $2.7 billion in
2002. The consolidation of Santee in fiscal 2004 increased sales by $75.6 million or 2.75% over
prior year sales. Like-store sales increased $834.8 million or 30.3% in fiscal 2004, compared to
$74.1 million or 2.78% in fiscal 2003 and $133.6 million or 5.30% in fiscal 2002. The increase in
like store sales for fiscal 2004 is due primarily to the increased sales volume during the labor
dispute and to the Companys ability to retain some of the increased sales volume after the labor
dispute. For the portion of the fiscal year during the labor dispute, like store sales increased
$576.2 million or 54.52% over the same time frame of fiscal 2003. For the portion of fiscal year
after the labor dispute, like store sales increased $253.9 million or 15.85% over the same time
frame of fiscal 2003. The remaining increase in sales is due to the opening of a new store in
Corona, California in June of 2003, the opening of a new store in Moreno Valley, California in
March of 2004 and the opening of an additional new store in Corona, California in July of 2004.
The increase in sales during fiscal 2003 was due to favorable customer response to the Companys
marketing plan and to the addition of a new store in Corona, California. Gross profit increased to $1.1 billion or 28.40% of sales in 2004 compared to $754.4 million or
27.40% of sales in 2003 and $708.8 million or 26.58% of sales in 2002. Gross profit, as a
percentage of sales, for the fiscal 2004 increased 1.00% compared to the prior year. The increase
in gross profit, as a percentage of sales, in fiscal 2004 over the prior fiscal year is comprised
of increased store gross profit of 0.55% attributed primarily to reduced shrink in the perishable
departments during the labor dispute, a reduction, as a percentage of sales, of 0.80% in
distribution and transportation costs attributed to the leveraging of fixed costs over the
increased sales volume offset by the consolidation of Santee in fiscal 2004 which created a
reduction in gross profit, as a percentage of sales, for the fiscal year of 0.32%. The increase in
gross profit, as a percent of sales, during fiscal 2003 was due in large part to the introduction
of higher gross margin products achieved through the Companys merchandising expansion and
upgrading programs including significant investments in product display fixtures. Also
contributing to the increased gross profit in fiscal 2003 over fiscal 2002 was a $4.6 million
reduction in cost of goods sold caused by the reclassification of the amount of vendor co-operative
advertising allowances in excess of the fair value of advertising. This reclassification resulted
from the Companys adoption in fiscal 2003 of EITF Issue No. 02-16 Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor. Fiscal 2002 cost of
goods sold were not reclassified. The Company adjusts its pricing strategy as necessary to retain
its aggressive every day low price market position. 20




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Results of Operations (contd.)
Operating expenses include selling, general and administrative expenses, and depreciation and
amortization. In fiscal year 2004, selling, general and administrative expenses amounted to $820.3
million or 22.14% of sales compared to $659.5 million or 23.96% of sales in 2003 and $615.3 million
or 23.08% of sales in 2002. Included in selling, general and administrative expenses for fiscal 2004 is $34.0 million for
special payments related to the labor dispute and contract ratification. These special payments,
as a percentage of sales, were 0.92% of sales in fiscal 2004. The Company made special payments
of approximately $29.3 million to UFCW union trust funds to bring the funds up to levels negotiated
during collective bargaining contract negotiations. Under the new negotiated collective bargaining
agreement, future union insurance payments by the Company are proscribed at specified hourly rates.
In addition, the Company paid approximately $4.7 million to UFCW union members as a contract
ratification bonus. Also, included in selling, general and administrative expenses for fiscal 2004
is a $22.4 million gain from a settlement agreement reached with Ralphs. The gain from litigation
settlement reduced selling, general and administrative expenses, as a percentage of sales, by 0.62%
for fiscal 2004. The consolidation of Santee in fiscal 2004 caused a reduction in selling general
and administrative expenses, as a percentage of sales, of 0.29% for fiscal 2004. After removing the effect of the special union payments, the gain from a settlement agreement and
the consolidation of Santee, selling general and administrative expenses, as a percentage of sales,
decreased 1.82% in the current fiscal year over the previous fiscal year. Most of the remaining
reductions in the selling, general and administrative expenses, as a percentage of sales, are
attributed to the Company being able to leverage fixed cost and operating more efficiently during
the labor dispute. The reductions in selling, general and administrative expenses, as a percentage
of sales, include a 0.97% reduction in payroll related expenses, 0.23% reduction in workers
compensation expense, a 0.39% reduction in utility expenses and a 0.23% in rent expense. These
savings were offset by a 0.44%, as a percentage of sales, increase in phantom stock expense. The increase in selling, general and administrative expenses in fiscal 2003 over fiscal 2002 was
due primarily to an increase of approximately $14.0 million in union insurance costs, an increase
of approximately $6.3 million in union pension cost and to the reclassification of $4.6 million of
vendor co-operative advertising allowances that were in excess of the fair value of advertising
from selling, general and administrative expenses to cost of goods sold. Depreciation and amortization expenses amounted to $33.3 million in 2004 compared to $27.7 million
in 2003 and $25.1 million in 2002. Depreciation and amortization expense, as a percentage of
sales, was 0.90%, 1.00% and 0.93% for fiscal years 2004, 2003 and 2002, respectively. The changes
in depreciation expense from year-to-year are due primarily to store additions and remodels and
corporate expenditures. Operating profit amounted to $198.5 million or 5.36% of sales in 2004 compared to $67.2 million or
2.44% of sales in 2003 and $68.5 million or 2.57% of sales in 2002. Interest expense amounted to $54.0 million, $53.3 million and $52.8 million for the 2004, 2003 and
2002 fiscal years, respectively. The increase in interest expense in fiscal 2004 compared to
fiscal 2003 is due primarily to the increase in outstanding debt by the Company offset by the
reduction in average interest rates of its long term debt. The increase in interest expense in
fiscal 2003 compared to fiscal 2002 is primarily twelve months of interest expense on the 5.0%
Subordinated Note in fiscal 2003 versus nine months in fiscal 2002. 21




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Results of Operations (contd.)
For fiscal 2004, interest expense related to debt purchase was $35.6 million and included a $16.9
million payment for tender premium and fees on the purchase of $397.8 million of the 10.75% Notes,
an $8.5 million make whole payment by Santee related to Santees redemption of all outstanding
Santee Notes, a $1.1 million make whole payment on the redemption of the remaining $41.0 million
10.75% Senior Notes, and a $9.1 million charge for the write-off of the remaining debt issuance
costs related to (i) the purchase of $397.8 million of the 10.75% Notes, (ii) the redemption of the
remaining $41.0 million 10.75% Senior Notes, (iii) the early retirement of the $20.0 million 5.0%
Subordinated Note due 2007 and (iv) the redemption of the Santee Notes. For fiscal 2003 and fiscal
2002, there was no interest expense related to debt purchase. Equity in income from unconsolidated affiliate amounted to $0.9 million in fiscal 2004 compared to
$1.3 million in 2003 and $2.9 million in 2002. The decrease in equity in income from
unconsolidated affiliate in fiscal 2004 is due to Santee being consolidated as a wholly-owned
subsidiary as of February 6, 2004, the effective date of the settlement agreement. The decrease in
income from unconsolidated affiliate in fiscal 2003 was due primarily from a $1.1 million deferred
tax revaluation, by Santee, in fiscal 2002 that was not present in fiscal 2003. Also, Santees net
sales and operating profits decreased in fiscal 2003 versus fiscal 2002. Income before income taxes amounted to $110.6 million, $15.2 million and $18.7 million in fiscal
2004, fiscal 2003 and fiscal 2002, respectively. Net income, for fiscal 2004, amounted to $71.4 million, compared to $9.8 million in fiscal 2003 and
$11.4 million in fiscal 2002. Liquidity and Capital Resources
The Company historically has funded its daily cash flow requirements through funds provided by
operations and through borrowings from short-term revolving credit facilities. The Companys
credit agreement, as amended and restated on June 17, 2004 expires in May 2007 and consists of a
revolving loan facility for working capital and letters of credit of $75.0 million. As of September
26, 2004, the Company had $46.9 million of outstanding letters of credit and had $28.1 million
available under the revolving loan facility. The letter of credit facility is maintained pursuant
to the Companys workers compensation and general liability self-insurance requirements. In November 2004, Santee entered into a revolving line of credit with Bank of America (the
Revolver). Under the Revolver, Santee may borrow up to $5.0 million of which $2.0 million may be
used to secure letters of credit issued to support workers compensation liabilities. Borrowings
under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire
on May 31, 2007. Advances under the revolver bear interest at Bank of Americas prime rate plus
0.5% with interest due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%.
The outstanding undrawn portion of the workers compensation letter of credit is subject to an
annual commitment fee of 1.25%. As of September 26, 2004, Santee had $1.4 million of outstanding
letters of credit and had $3.6 million available under the revolving loan facility. The Company had no short-term borrowings outstanding at the end of fiscal years 2004, 2003 and
2002, and the Company did not incur short-term borrowings during fiscal years 2004, 2003 and 2002. Working capital amounted to $319.9 million at September 26, 2004, $124.5 million at September 28,
2003 and $119.6 million at September 29, 2002. The Companys current ratios were 2.22:1, 1.60:1
and 1.62:1, respectively. Fluctuations in working capital and current ratios are not unusual in
the industry. 22




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)
Net cash provided by operating activities amounted to $150.5 million in 2004, $83.0 million in 2003
and $51.2 million in 2002. Net cash provided by operating activities in fiscal 2004 improved
significantly over fiscal 2003 primarily as a result of the increase in net income attributable
mainly to the labor dispute. In addition to the substantial increase in net income to $71.4
million in the current year compared to $9.8 million in the prior year, cash provided by operating
activities in fiscal 2004 of $150.5 million reflected a $70.2 million increase in accrued
liabilities, self-insurance reserves and other liabilities, an increase of $22.0 million in
accounts payable, a $13.7 million decrease in other assets and $43.7 million of depreciation and
amortization; partially offset by a $20.0 million increase in restricted cash, an increase of $17.1
million in deferred income taxes, a $10.6 million increase in inventory and a $22.4 million gain
from litigation settlement. Net cash provided by operating activities in fiscal 2003 consisted
primarily of depreciation and amortization, increases in accrued liabilities and self-insurance
reserves, increases in accounts payable and decreases in receivables. Net cash provided by
operating activities in fiscal 2002 consisted primarily of depreciation and amortization, increases
in accrued liabilities and self-insurance reserves and decreases in accounts receivables and other
assets offset by increases in income tax receivables and inventories and decreases in accounts
payable. Net cash provided by financing activities in fiscal 2004 amounted to $102.1 million. In fiscal
2004, the Company issued $525.0 million of 8.125% Senior Notes due June 2012, issued $175.0 million
of Floating Rate Senior Notes due June 2010, purchased $397.8 million of 10.75% Senior Notes due
June 2006, redeemed the remaining $41.0 million of 10.75% Senior Notes due June 2006, retired the
$20.0 million 5.0% Subordinated Note due March 2007, redeemed $53.5 million of outstanding Santee
Notes, paid $16.9 million in tender premium and fees for the purchase of the 10.75% Senior Notes,
paid a make-whole payment of $1.1 million on the redemption of the remaining outstanding 10.75%
Senior Notes, paid a make-whole payment of $8.5 million for the redemption of the Santee Notes,
paid a dividend of $45.0 million to La Cadena, incurred fees of $22.7 million associated with the
issuance of the 8.125% Senior Notes and Floating Rate Senior Notes and amortized the remaining debt
issuance costs of $9.1 million related to (i) the purchase of the 10.75% Senior Notes, (ii) the
redemption of the remaining outstanding 10.75% Senior Notes, (iii) the early retirement of the 5.0%
Subordinated Note and (iv) the redemption of the Santee Notes, executed a new capital lease for
$0.7 million and had payments on capitalized leases of $1.3 million. Net cash used in financing
activities in fiscal 2003 amounted to $1.1 million and consisted of principal payments on capital
lease obligations. Net cash used in financing activities in fiscal 2002 amounted to $31.2 million
and consisted of the redemption of 11,699 shares of the Companys stock previously held by La
Cadena, for $20.0 million in cash and the issuance of a $20.0 million subordinated note, which
bears interest at a rate of 5.0% per annum, payable semi-annually; $4.5 million for the payment of
a dividend to La Cadena; and fees of approximately $5.0 million for the consent of the holders of
its 10.75% Senior Notes and fees and expenses of the transaction, including a $500,000 financial
advisory service fee to La Cadena. Also in 2002, the Company redeemed $250,000 of its 10.75%
Senior Notes due 2006 for $250,000 plus accrued interest. These Notes were restricted and
unregistered. The remaining financial activities in fiscal 2002 were for principal payment on
capital lease obligations. Net cash used in investing activities for 2004 amounted to $61.8 million and consisted primarily of
the purchase of property and equipment of $62.0 million. Net cash used in investing activities for
2003 amounted to $51.7 million and consisted primarily of the purchase of property and equipment of
$51.9 million. Net cash used in investing activities in fiscal 2002 amounted to $40.5 million and
consisted primarily of the purchase of property and equipment of $40.7 million. 23




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)
Management believes that capital expenditures for fiscal 2005 will be approximately $139.0
million and are expected to be financed by cash on hand and cash from operating activities. The
following table sets forth the major components of expected fiscal 2005 capital expenditures. Expected Capital Expenditures Fiscal 2005
(In thousands) New corporate office and distribution facilities
    
    $
    57,031New store construction, less reimbursements
    
    
    17,114Store remodels
    
    
    23,554MIS equipment and software
    
    
    8,115Store equipment
    
    
    26,677Transportation equipment
    
    
    4,641Production equipment
    
    
    626Distribution equipment
    
    
    768Office equipment and other
    
    
    464$
    138,990
 Management believes that operating cash flows and current cash reserves will be sufficient to meet
the Companys currently identified operating needs and scheduled capital expenditures. However,
some expenditures may be funded through operating leases or from debt financing. There can be no
assurance that such debt and lease financing will be available to the Company in the future. The Company operated 158 supermarkets at September 26, 2004, 157 supermarkets at September 28, 2003
and 156 supermarkets at September 29, 2002. The Companys supermarkets had approximately 5.3 million total square feet at September 26, 2004
and 5.2 million total square feet at September 28, 2003 and September 29, 2002. Credit Facilities  The New Credit Facility is guaranteed by the Company and all of its existing and future
material subsidiaries, including Development and Santee (subject, in the case of Santee, to
termination upon certain specified events). 24




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)Credit Facilities (contd.) Loans under the New Credit Facility bear interest at a rate based upon either (i) the Base Rate
(defined as the higher of (a) the federal funds rate plus 0.50% and (b) the rate of interest
publicly announced by Bank of America as its reference rate), plus 1.00%, or (ii) the Offshore
Rate (defined as the average British Bankers Association Interest Settlement Rate for deposits in
dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For
Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a)
the maturity date of the loan or (b) periods, as selected by Markets of one, two, three or six
months. The New Credit Facility will cease to be available and will be payable in full on May 31, 2007.
Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to request
the issuance of standby letters of credit having a term which is up to one year following such
maturity date, and commercial letters of credit having a term which is up to six months following
such maturity date. Loans under the New Credit Facility must be repaid for a period of ten
consecutive days semi-annually. Loans under the New Credit Facility may be repaid and re-borrowed. The loans under the New Credit
Facility may be prepaid at any time without penalty, subject to certain minimums and payment of any
breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments
under the New Credit Facility may be reduced by Markets. Markets will be required to pay a
commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan
facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters of
credit under the credit facility are subject to a fee of 1.25% per annum on the face amount of such
letters of credit, payable quarterly in arrears. Markets will be required to pay standard fees
charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial
letters of credit issued under the letter of credit facility. The New Credit Facility requires
Markets to meet certain financial tests, including minimum net worth and other tests. The New
Credit Facility contains covenants which, among other things, limit the ability of Markets and its
subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into
mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and
transactions with affiliates, and (iii) make restricted payments. The New Credit Facility also
contains covenants that apply to the Company and its subsidiaries, and the Company is a party to
the New Credit Facility for purposes of these covenants. These covenants, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, make restricted
payments, enter into transactions with affiliates, and make amendments to the Indenture governing
the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes due June 15, 2010. The New Credit Facility contains customary events of default, including payment defaults; material
inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other
indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any
guaranty; and change of control. In November 2004, Santee entered into a revolving line of credit with Bank of America (the
Revolver). Under the Revolver, Santee may borrow up to $5.0 million of which $2.0 million may be
used to secure letters of credit issued to support workers compensation liabilities. Borrowings
under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire
on May 31, 2007. 25




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Liquidity and Capital Resources (contd.)Credit Facilities (contd.) Advances under the Revolver bear interest at Bank of Americas prime rate plus 0.5% with interest
due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%. The outstanding
undrawn portion of the workers compensation letter of credit is subject to an annual commitment
fee of 1.25%. Under the Revolver, Santee is required to comply with certain financial covenants, which include
certain financial ratios. As of September 26, 2004, for purposes of the credit facilities with Bank of America, Santee,
Markets and the Company were in compliance with all restrictive covenants. The Company is also
subject to certain covenants associated with its 8.125% Senior Notes due 2012 and its Floating Rate
Senior Notes due 2010. As of September 26, 2004, the Company was in compliance with all such
covenants. However, there can be no assurance that Santee, Markets or the Company will be able to
achieve the expected operating results or implement the capital expenditure strategy upon which
future compliance with such covenants is based. Labor Relations
The UFCWs collective bargaining agreements were ratified on February 29, 2004 and expire in March
2007. The Teamsters collective bargaining agreement was renewed in September 2002 and expires in
September 2005. Santees collective bargaining agreement with the Teamsters was renewed in March
2004 and expires in March 2007. The Company values its employees and believes its relationship with them is good and that employee
loyalty and enthusiasm are key elements of its operating performance. Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, other than stand-by letters of credit, as
discussed under the caption Liquidity and Capital Resources in Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations of this report and operating leases
as disclosed in Note 7  Leases of the Audited Consolidated Financial Statements, that would have
or are reasonably likely to have material current or future effect on the registrants financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources. 26




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Tabular Disclosure of Contractual Cash Obligations The following table sets forth the Companys contractual cash obligations and commercial
commitments as of September 26, 2004. Contractual Cash Obligations(In thousands)Lessthan
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years8.125% Senior Notes due 2012Principal
    
    $
    525,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    525,000Interest
    
    
    341,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    127,968866,013
    
    
    
    42,419
    
    
    
    85,313
    
    
    
    85,313
    
    
    
    652,968Floating Rate Senior Notes due 2010Principal
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,000Interest
    
    
    54,136
    
    
    
    9,415
    
    
    
    18,830
    
    
    
    18,830
    
    
    
    7,061229,136
    
    
    
    9,415
    
    
    
    18,830
    
    
    
    18,830
    
    
    
    182,061Capital Lease Obligations (1)Principal
    
    
    10,717
    
    
    
    1,247
    
    
    
    2,226
    
    
    
    2,140
    
    
    
    5,104Interest
    
    
    8,006
    
    
    
    1,568
    
    
    
    2,641
    
    
    
    2,050
    
    
    
    1,74718,723
    
    
    
    2,815
    
    
    
    4,867
    
    
    
    4,190
    
    
    
    6,851Operating Leases (1)
    
    
    233,045
    
    
    
    33,434
    
    
    
    55,589
    
    
    
    37,053
    
    
    
    106,969Total Contractual Cash Obligations
    
    $
    1,346,917
    
    
    $
    88,083
    
    
    $
    164,599
    
    
    $
    145,386
    
    
    $
    948,849
 Other Commercial Commitments(In thousands)Lessthan
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsStandby Letters of Credit (2)
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Other Commercial Commitments
    
    $
    48,240
    
    
    $
    48,240
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (1)
    
    The Company leases the majority of its retail stores, offices and distribution
facilities. Certain of the Companys operating leases provide for minimum annual payments
that change over the primary term of the lease. For purposes of contractual cash
obligations shown here, contractual step increases or decreases are shown in the period
they are due. Primary lease terms range from 3 to 55 years and substantially all leases
provide for renewal options.(2)
    
    Standby letters of credit are committed as security for workers compensation obligations
and as security for current rent obligations. Outstanding letters of credit expire between
December 31, 2004 and October 1, 2005. 27




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Recent Accounting Pronouncements
In November 2004, the FASB issued Statement 151, Inventory Costs, an amendment of APB 43,
Statement 151 clarifies what amount of expenses should be recognized as current period charges.
The Company does not expect the adoption to of this pronouncement to have a material impact on the
results of its operations. Effect of Inflation and Competition
The Companys performance is affected by inflation. In recent years the impact of inflation on the
operations of the Company has been moderate. As inflation has increased expenses, the Company has
recovered, to the extent permitted by competition, the increase in expenses by increasing prices
over time. However, the economic and competitive environment in Southern California continues to
challenge the Company to become more cost efficient as its ability to recover increases in expenses
through price increases is diminished. The future results of operations of the Company will depend
upon the ability of the Company to adapt to the current economic environment as well as to the
current competitive conditions. The Company conducts business in one industry segment, the operation of retail food supermarkets,
which offer for sale to the public most merchandise typically found in supermarkets. The Company
operates in the highly competitive supermarket industry which is characterized by low profit
margins. Competitive factors include price, quality and variety of products, customer service, and
store location and condition. The Company believes that its competitive strengths include its
specialty services, everyday low prices, breadth of product selection, high product quality,
one-stop shopping convenience, attention to customer service, convenient store locations, a long
history of community involvement, established long-term customer base in the Inland Empire
(consisting of San Bernardino and Riverside counties) and a growing customer awareness
in the counties of Orange, San Diego and Los Angeles. Given the wide assortment of products it offers, the Company competes with various types of
retailers, including local, regional and national supermarket retailers, convenience store, retail
drug stores, national general merchandisers and discount retailers, membership clubs and warehouse
stores. The Companys primary competitors include Vons, Albertsons, Ralphs, and a number of
independent supermarket operators. The Company, and its competitors, will be faced with additional
competitive pressures with the entry in the geographic market area of Wal-Marts Super Center
format stores. Wal-Mart currently has a number of Wal-Mart discount locations and Sams Clubs
within the Companys marketing area selling a variety of grocery products. Recent events have
increased competitive pressures. Wal-Mart has begun to open their Super Center format stores in
the Companys market area and Vons, Albertsons and Ralphs, post labor dispute, continue to apply
pricing pressures as they attempt to win back customers lost during the labor dispute. The Company
believes that its everyday low prices, breadth of product offering, specialty service department
and long-term customer relationships will help it withstand the increased competitive environment.
The Company monitors competitive activity of its major competitors and Senior Management regularly
reviews the Companys marketing and business strategy and periodically adjusts them to adapt to
changes in the Companys primary trading area. 28




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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.) Cautionary Statement
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Certain information contained in the Companys filings with the Securities and
Exchange Commission (as well as information included in oral statements or other written statements
made or to be made by the Company) includes statements that are forward-looking, such as statements
relating to plans for future activities. Such forward-looking information involves important risks
and uncertainties that could significantly affect results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made by or on behalf of
the Company. These risks and uncertainties include, but are not limited to, those relating to
domestic economic conditions, seasonal and weather fluctuations, labor unrest, expansion and other
activities of competitors, changes in federal or state laws and the administration of such laws and
the general condition of the economy. 
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk The Company is subject to interest rate risk on its fixed interest rate debt obligations and
floating rate debt obligations. The Companys fixed rate debt obligations are comprised of the
8.125% Senior Notes due June 2012 and capital lease obligations. In general, the fair value of
fixed rate debt will increase as the market rate of interest decreases and will decrease as the
market rate of interest increases. The Company floating rate debt obligations are the Floating
Rate Senior Notes due June 2010. The fair values of the 8.125% Senior Notes due June 2012 and
Floating Rate Senior Notes due June 2010 are based upon quoted market prices. Although quoted
market prices are not readily available on the Companys capital lease obligations, the Company
believes that stated values approximate the fair value of these obligations. The Company has not
engaged in any interest rate swap agreements, derivative financial instruments or other type of
financial transactions to manage interest rate risk. The following table provides the future
principal cash flows and weighted-average interest rates expected on the Companys fixed rate and
floating rate debt obligations. The fair value shown here is based upon the quoted market price of
the 8.125% Senior Notes and Floating Rate Senior Notes and the stated value of the capital leases
as of September 26, 2004. Expected Year of Maturity
(In thousands) Fair2005
    
    
    2006
    
    
    2007
    
    

    2008
    
    
    2009
    
    
    Thereafter
    
    
    ValueLong-Term Debt and
Capital Lease Obligations
    
    $
    1,247
    
    
    $
    1,188
    
    
    $
    1,038
    
    
    $
    992
    
    
    $
    1,148
    
    
    $
    705,104
    
    
    $
    736,967Average Interest Rate
    
    
    7.53
    %
    
    
    7.52
    %
    
    
    7.66
    %
    
    
    7.48
    %
    
    
    7.49
    %
    
    
    7.97
    %
 29




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Information called for by this item is set forth in the Companys audited consolidated financial
statements and supplementary data contained in this report. Specific financial statements and
supplementary data can be found on the pages listed in the following index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page NumberReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at September 29, 2002 (as restated),
September 28, 2003 (as restated) and September 26, 2004 (as restated)
    
    
    F-3Fiscal years ended September 29, 2002 (as restated), September 28, 2003 (as restated)
and September 26, 2004 (as restated):Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Consolidated Statements of Stockholders Deficit
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 
 Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure None 
 Item 9A. Controls and Procedures As of the year ended September 26, 2004, the Company carried out an evaluation, under the
supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have each concluded that those controls and procedures were
effective in making known to them, on a timely basis, the material information needed for the
preparation of this Report on Form 10-K/A. During the quarter and fiscal year ended September 26,
2004, there were no significant changes in the Companys internal control over financial reporting
or in other factors that could significantly affect the internal control over financial reporting
since the date of their evaluation, nor did they find any significant deficiencies, except as noted
below, or material weaknesses that would have required corrective actions to be taken. In concluding that the Company did not have any material weaknesses in disclosure controls and
procedures as of September 26, 2004, the Chief Executive Officer and the Chief Financial Officer
considered, among other things, the significant deficiency related to the useful lives used to
depreciate certain leasehold improvements which resulted in a need to restate previously issued
financial statements. Taking into consideration that (i) the restatement adjustments did not have
a material impact on the financial statements of prior interim or annual periods taken as a whole;
(ii) the cumulative impact of the restatement adjustments on shareholders deficit was not material
to the financial statements of prior interim or annual periods; and (iii) the Company restated its
previously issued financial statements because the cumulative impact of the error, if recorded in
the current period, would have been material to the current years net income, the Chief Executive
Officer and the Chief Financial Officer concluded that the control deficiency that resulted in the
restatement of prior period financial statements was a significant deficiency but was not a
material weakness. 30




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##### Table of Contents



Item 9A. Controls and Procedures (continued) Subsequent to September 26, 2004, the Chief Executive Officer and the Chief Financial Officer have
caused additional disclosure controls and procedures to be implemented that have been designed to
ensure that the useful lives used to depreciate leasehold improvements are in conformity with U.S.
generally accepted accounting procedures. The Company believes that these additional disclosure
controls and principles substantially correct any significant deficiency in existence prior to
September 26, 2004 related to useful lives used to depreciate leasehold improvements. 31




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information with respect to the current executive officers
and directors of the Company, their ages and principal occupations for at least the past five
years. Directors of the Company each serve for a term of one year, or until their successors are
elected. The officers serve at the discretion of the Board of Directors of the Company. Name
    
    Age
    
    PositionJack H. Brown
    
    
    65
    
    
    Chairman of the Board, President
and Chief Executive OfficerDonald I. Baker
    
    
    63
    
    
    Executive Vice President
and Chief Operating OfficerPhillip J. Smith
    
    
    57
    
    
    Senior Vice President and Chief Financial OfficerDennis L. McIntyre
    
    
    44
    
    
    Group Senior Vice President of MarketingJames W. Lee
    
    
    53
    
    
    Group Senior Vice President of Retail OperationsEdward A. Stater
    
    
    53
    
    
    Senior Vice President of Retail OperationsBruce D. Varner
    
    
    68
    
    
    Director and SecretaryThomas W. Field, Jr.
    
    
    70
    
    
    Vice Chairman of the Board of DirectorsC. Dale Warman
    
    
    75
    
    
    Director
 Background of Directors and Executive Officers Jack H. Brownhas been President and Chief Executive Officer of the Company since June 1981
and Chairman of the Board since 1986. From September 1978 to June 1981, Mr. Brown served as
President of Pantry Food Markets, Inc. and American Community Stores Corporation, Inc., both wholly
owned subsidiaries of Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr.
Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a publicly held corporation.
Mr. Brown has been employed in various capacities in the supermarket industry for 52 years. Mr.
Brown has a majority interest and is the managing general partner of La Cadena. Mr. Brown serves
as a Director for the Automobile Club of Southern California. Donald I. Bakerwas promoted to President of Markets in September 2004 and has been Executive
Vice President and Chief Operating Officer since November 2001 and Executive Vice President of the
Company since October 1998. Mr. Baker joined the Company in November 1983 as Vice
President-Warehouse and Transportation and was Group Senior Vice President-Administration from July
1996 to October 1998. From July 1992 to July 1996, Mr. Baker was Group Senior Vice President-Human
Resources and Distribution. From August 1986 to July 1992, Mr. Baker was Senior Vice
President-Human Resources and Distribution. Mr. Baker has approximately 38 years of experience in
the supermarket industry. Prior to joining the Company, Mr. Baker was employed by American
Community Stores Corporation, Inc., a subsidiary of Cullum Companies, Inc., a publicly held
corporation, from 1972 to 1983 in various capacities including Vice President of Retail Operations,
and was also employed by The Kroger Co. from 1966 to 1972. 32




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##### Table of Contents



Item 10. Directors and Executive Officers of the Registrant (contd.) Background of Directors and Executive Officers (contd.) Phillip J. Smithhas been Senior Vice President and Chief Financial Officer since November
2000, and was Vice President and Controller from April 1998 until November 2000. Mr. Smith joined
the Company in 1987 as Controller. Mr. Smith has approximately 29 years experience in the
supermarket industry. Prior to joining the Company, Mr. Smith was employed by Market Basket
Foodstores as Vice President and Chief Financial Officer from 1985 to 1987. From 1975 until 1985,
Mr. Smith was employed by various divisions of Cullum Companies, Inc., a publicly held corporation,
in various financial capacities. Dennis L. McIntyrehas been Group Senior Vice President of Marketing since August 2002. Mr.
McIntyre has served the Company for 26 years in various capacities including Courtesy Clerk,
Assistant Manager, Buyer, Assistance Vice President of Marketing from 1994 until 1999, Vice
President of Marketing from 1999 to 2000 and Senior Vice President of Marketing from 2000 to 2002. James W. Leejoined the Company in August 2002 as Group Senior Vice President of Retail
Operations. Mr. Lee has over 32 years experience in the supermarket industry. Prior to joining
the Company, Mr. Lee was with Wild Oats Markets, Inc. between 1997 and 2001 as Chief Operating
Officer. Mr. Lee was employed in various operating capacities with Ralphs Grocery Company, a
division of Kroger Co., from 1972 until 1996. Edward A. Staterhas been Senior Vice President of Retail Operations since April 2000. Mr.
Stater has served the Company for 36 years in various capacities including Clerk, Produce Buyer,
Assistant Warehouse Supervisor, New Store Set-up Manager, Grocery Supervisor, District Manager and
Regional Vice President from 1986 until 2000. Bruce D. Varnerhas been a Director of Stater Bros. Markets since September 1985 and a
Director of Stater Bros. Holdings Inc. since May 1989. Since February 1997, Mr. Varner has been a
partner in the law firm of Varner, Saleson & Brandt LLP. From 1967 to February 1997, Mr. Varner
was a partner in the law firm of Gresham, Varner, Savage, Nolan & Tilden. Mr. Varner specializes
in business and corporate matters. Mr. Varner and the law firm of Varner, Saleson & Brandt LLP
have performed legal services in the past for the Company and the Company expects such services to
continue in the future. Thomas W. Field, Jr.has been Vice Chairman of the Board of Directors of the Company since May
1998 and a Director of the Company since 1994. Mr. Field has been President of Field and
Associates since 1989. From 1988 to 1989, Mr. Field was Chairman of the Board, President and Chief
Executive Officer of McKesson Corporation and was its President since 1984, and President and Chief
Executive Officer from 1986 to 1988. Mr. Field was President of American Stores Company from 1981
to 1984 and was President of Alpha Beta Company from 1976 to 1984. Mr. Field was a Director of
American Stores Company from 1979 to 1984. Mr. Field is a nationally recognized and highly
regarded supermarket executive. Mr. Field has held various positions in the Supermarket Industry
for over 45 years and serves as a Director for the Campbell Soup Company. C. Dale Warmanhas been a Director of the Company since 2000. Mr. Warman served the Fred
Meyer Company for over 43 years. Mr. Warman served as a Director of Fred Meyer from 1975 to 1990,
Mr. Warman served as President from 1982 to 1990 and was its Executive Vice President from 1981 to
1990. Mr. Warman was Executive Vice President of Allied Foods from 1972 to 1975. Mr. Warman
served as a Director of Big Bear Stores from 1987 to 1989 and as a Director of Allied Stores from
1973 to 1975. Mr. Warman is considered one of the supermarket industrys outstanding executives. 33




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##### Table of Contents



Item 11. Executive Compensation The following table summarizes the compensation for services rendered during the prior three fiscal
years paid to the CEO and the four most highly compensated executive officers other than the CEO of
the Company: Annual CompensationAll OtherName and
    
    
    
    
    
    
    
    
    
    Bonuses
    
    
    Other Annual
    
    
    CompensationPrincipal Position
    
    Year
    
    
    Salary
    
    
    (4) (5)
    
    
    Compensation
    
    
    (1)(2)(3)Jack H. Brown
    
    
    2004
    
    
    $
    1,350,000
    
    
    $
    900,000
    
    
    $
    
    
    
    $
    51,500Chairman, President and
    
    
    2003
    
    
    $
    1,260,000
    
    
    $
    1,848,000
    
    
    $
    
    
    
    $
    53,067Chief Executive Officer
    
    
    2002
    
    
    $
    1,188,000
    
    
    $
    1,540,000
    
    
    $
    
    
    
    $
    53,340Donald I. Baker
    
    
    2004
    
    
    $
    553,000
    
    
    $
    150,000
    
    
    $
    
    
    
    $
    Executive Vice President
    
    
    2003
    
    
    $
    515,000
    
    
    $
    295,000
    
    
    $
    
    
    
    $
    2,067and Chief Operating Officer
    
    
    2002
    
    
    $
    473,000
    
    
    $
    250,000
    
    
    $
    
    
    
    $
    1,840Phillip J. Smith
    
    
    2004
    
    
    $
    231,000
    
    
    $
    370,000
    
    
    $
    
    
    
    $
    Senior Vice President and
    
    
    2003
    
    
    $
    215,000
    
    
    $
    125,000
    
    
    $
    
    
    
    $
    2,067Chief Financial Officer
    
    
    2002
    
    
    $
    202,000
    
    
    $
    100,000
    
    
    $
    
    
    
    $
    1,840Dennis L. McIntyre
    
    
    2004
    
    
    $
    257,000
    
    
    $
    70,000
    
    
    $
    
    
    
    $
    Group Senior Vice
    
    
    2003
    
    
    $
    240,000
    
    
    $
    80,000
    
    
    $
    
    
    
    $
    2,067President of Marketing
    
    
    2002
    
    
    $
    192,000
    
    
    $
    60,000
    
    
    $
    
    
    
    $
    1,840James W. Lee
    
    
    2004
    
    
    $
    252,000
    
    
    $
    70,000
    
    
    $
    
    
    
    $
    Group Senior Vice President
    
    
    2003
    
    
    $
    232,000
    
    
    $
    80,000
    
    
    $
    
    
    
    $
    2,067of Retail Operations
    
    
    2002
    
    
    $
    28,000
    
    
    $
    20,000
    
    
    $
    
    
    
    $
    
   (1)
    
    The dollar value of perquisites and other personal benefits, if any, for each of the
Named Executive Officers was less than the reporting thresholds established by the
Securities and Exchange Commission.(2)
    
    Amounts shown for the Named Executive Officers represent the Companys contributions to
the Companys Profit Sharing Plan, a defined contribution plan, for the account of each
Named Executive Officer. Plan participants become fully vested in the plan after seven
years of service.(3)
    
    Includes Mr. Browns Director Fees for 2002, 2003 and 2004, which amounted to $50,500,
$51,500 and 51,500, respectively.(4)
    
    Annual performance bonuses to be paid to the Named Executive Officers for fiscal 2004
had neither been calculated nor awarded as of December 21, 2004, the latest practical date.
Amounts shown for fiscal 2004 are related to performance during the Southern California
labor dispute.(5)
    
    Amounts shown for fiscal 2004 for Mr. Smith also include bonuses for the Santee
transaction and successful bond offering. Stock Options and SARs None 34




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##### Table of Contents



Item 11. Executive Compensation (contd.) Pension Plan  The amounts shown in the following table are estimated annual retirement benefits under the Pension
Plan (assuming payments are made on the normal life annuity and not under any of the various
survivor forms of benefits) based upon retirement at age 65, after various years of service at
selected salary levels. Benefits under the Pension Plan do not become fully vested until the
employee has five years of credited service with the Company. The Internal Revenue Code of 1986,
as amended, places certain limitations on pension benefits that can be paid from a tax-qualified
pension plan and trust, as well as the compensation that may be taken into account in determining
such benefits. Such limitations are not reflected in the table below. The maximum annual benefit
for 2004 retirees with ten or more years of service at retirement is $160,000. The maximum annual
compensation that may be considered for 2004 retirees is $200,000. Pension Plan TableYears of ServiceRemuneration
    
    
    15
    
    
    20
    
    
    25
    
    
    30
    
    
    35$
    
    

    50,000
    
    
    $
    5,625
    
    
    $
    7,500
    
    
    $
    9,375
    
    
    $
    11,250
    
    
    $
    13,12575,000
    
    
    
    12,785
    
    
    
    17,046
    
    
    
    21,308
    
    
    
    25,569
    
    
    
    29,831100,000
    
    
    
    20,847
    
    
    
    27,796
    
    
    
    34,745
    
    
    
    41,694
    
    
    
    48,643125,000
    
    
    
    28,910
    
    
    
    38,546
    
    
    
    48,183
    
    
    
    57,819
    
    
    
    67,456150,000
    
    
    
    36,972
    
    
    
    49,296
    
    
    
    61,620
    
    
    
    73,944
    
    
    
    86,268175,000
    
    
    
    45,035
    
    
    
    60,046
    
    
    
    75,058
    
    
    
    90,069
    
    
    
    105,081200,000
    
    
    
    53,097
    
    
    
    70,796
    
    
    
    88,495
    
    
    
    106,194
    
    
    
    123,893
 Board of Directors  The Audit Committee recommends the appointment or removal of the Companys independent auditors,
reviews the scope and results of the independent audit of the Company, reviews audit fees and

reviews changes in accounting policies that have a significant effect on the Companys financial
statements. The Audit Committee members are Mr. Warman and Mr. Field. Mr. Field is the Audit
Committees Financial Expert and is an independent member of the Board. The Compensation Committee approves compensation and annual performance bonuses paid to the Chief
Executive Officer and the Senior Management of the Company. The Compensation Committee members are
Mr. Varner and Mr. Field. Code of Ethics
The Company has adopted a Financial Code of Ethics which has been signed by the CEO, CFO and
Controllers of the Company. A copy of the Code of Ethics has been provided as an exhibit to this
Report on Form 10-K/A. 35




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##### Table of Contents



Item 11. Executive Compensation (contd.) Employment and Severance Agreements
In June of 2000, the Companys principal operating subsidiary, Stater Bros. Markets, entered into
Employment Agreements (Agreements) with Messrs. Brown, Baker, Smith and McIntyre. In August of
2002, a similar agreement was entered into with Mr. Lee. Under each of the Agreements, the
employee is employed to serve as an officer of the Company and with certain exceptions the
Agreements prohibit the employee from employment in any other business except for a parent or
subsidiary of the Company. Each of the Agreements may be terminated by the Company with cause and
by either party without cause upon ninety (90) days written notice. If the employment is
terminated without cause, the employees compensation continues through the expiration of the term
of the Agreement then in effect, except in the event of termination of any of the Agreements of
Messrs. Baker, Smith, McIntyre and Lee by Mr. Brown or by the Board of Directors with the consent
of Mr. Brown. If the employee is terminated as a result of a change of control, he is entitled to
receive all salary and benefits provided under the Agreement for the original term notwithstanding
termination of his employment. Each Agreement provides for annual base compensation at the
employees current level with annual increases plus employee benefits and incentive bonus
calculated in accordance with a formula based on the Companys earnings. Mr. Browns Agreement has
an original term of five (5) years which is automatically renewed on July 1 of each year for a five
(5) year term unless ninety (90) days notice of termination is given by either party. Mr. Bakers
Agreement has an original term of four (4) years and unless sooner terminated is renewed
automatically through April 20, 2006, the date of Mr. Bakers sixty-fifth (65th) birthday, the
Companys normal retirement age. Mr. Smiths, Mr. McIntyres and Mr. Lees Agreements have an
original term of three (3) years, which is automatically renewed for an additional term of three
(3) years unless sooner terminated. In addition, the Companys operating entity, Stater Bros. Markets has entered into employment
contracts with 43 additional key members of Management. The Companys severance policies generally provide for two weeks of severance pay to full-time,
non-bargaining unit employees for every year of service to the Company, up to a maximum of twelve
weeks. Phantom Stock Plan
The Company maintains a phantom stock plan to provide additional incentive compensation to certain
executives of Markets whose performance is considered especially critical to the Companys
business. Under the plan, grants may be made by the Compensation Committee and Board of Directors
to persons recommended by the Chairman of the Board or Chief Executive Officer. Existing
stockholders and partners of La Cadena are not eligible to receive awards. Awards under the plan
are for units that have an assigned value. The value of the units awarded under the plan will
increase or decrease in accordance with net profits of the Company. Subject to vesting provisions
of the plan, units are paid in cash either (i) in a lump sum upon a change in control of the
Company; or (ii) if sooner, in either a lump sum or installments (with interest) over a five-year
period (as the Company may determine) following termination of the participants employment by
reason of retirement, permanent total disability or death. Awards under the plan vest after five
years, except that upon a participants early retirement, permanent total disability or death,
awards are considered partially vested at the rate of 20% for each year of employment following the
grant. If a participant voluntarily terminates his or her employment, or is terminated for cause,
any unvested awards under the plan will terminate and no payment will be made thereunder. As of
September 29, 2002, September 28, 2003 and September 26, 2004, there were 668,000, 693,000 and
702,000 units outstanding, respectively. Payments pursuant to units awarded under the plan are based upon the value of a unit at the date of
retirement, permanent total disability or death, except that if such date occurs within two years
of the grant the amount of payment, per unit, is limited to the appreciated value of the units
during the period. Upon a change of control, the payment on all units is equal to the full value
of the units. 36




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and
Management The following table sets forth, as of December 21, 2004, the number and percentage of outstanding
shares of Class A Common Stock beneficially owned by (a) each person known by the Company to
beneficially own more than 5% of such stock, (b) each Director of the Company, (c) each of the
Named Executive Officers, and (d) all Directors and executive officers of the Company as a group: Shares ofClass A Common

    
    Percentage ofStock

    
    Class AName and Address
    
    Beneficially

    
    Common Stockof Beneficial Owner
    
    Owned

    
    OutstandingLa Cadena
 (1)
    
    
    38,301
    
    
    
    100
    %Jack H.
Brown (1)(2)
    
    
    38,301
    
    
    
    100
    %Richard C.
Moseley (1)(2)
    
    
    38,301
    
    
    
    100
    %Donald I.
Baker (2)
    
    
    
    
    
    
    Phillip J.
Smith (2)
    
    
    
    
    
    
    Dennis L.
McIntyre (2)
    
    
    
    
    
    
    James W. Lee
(2)
    
    
    
    
    
    
    Edward A.
Stater (2)
    
    
    
    
    
    
    Bruce D.
Varner (2)
    
    
    
    
    
    
    Thomas W.
Field, Jr. (2)
    
    
    
    
    
    
    C. Dale
Warman (2)
    
    
    
    
    
    
    All Directors and executive
officers as a group
(10 persons) (1)
    
    
    38,301
    
    
    
    100
    %
   (1)
    
    The 38,301 outstanding shares of the Companys Class A Common Stock are owned by La
Cadena and may be deemed to be beneficially owned by the partners of La Cadena. The
general partners of La Cadena are Jack H. Brown and Richard C. Moseley. Mr. Brown has the
majority interest and is the Managing General Partner of La Cadena and has the power to
vote the shares of the Company owned by La Cadena on all matters. The address of La Cadena
is 3750 University Avenue, Suite 610, Riverside, California 92501.(2)
    
    The address of Messrs. Brown, Moseley, Baker, Smith, McIntyre, Lee, Stater, Varner,
Field and Warman is c/o the Company at 21700 Barton Road, Colton, California 92324. Change of Control Arrangements None 37




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##### Table of Contents



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




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K  (a)
    Document list  (1)
    Financial StatementsSee Financial Statement Index included in Item 8 of Part II of this Form
10-K/A.(2)
    Financial Statement SchedulesThe Financial Statement Schedules required by Item 15(d) for which provision
is made in the applicable accounting regulations of the Securities and
Exchange Commission, are not required under the related instructions or are
inapplicable and therefore, have been omitted.(3)
    ExhibitsExhibits as required by Item 15(c) are as follows: exhibit no.
    
    
    
    
    
    description3.1
    
    
    (1
    )
    
    Certificate of Incorporation of Stater Bros. Holdings Inc.3.2
    
    
    (1
    )
    
    By-Laws of Stater Bros. Holdings Inc.3.3
    
    
    (9
    )
    
    Articles of Incorporation of Stater Bros. Markets3.4
    
    
    (9
    )
    
    By-Laws of Stater Bros. Markets3.5
    
    
    (9
    )
    
    Articles of Incorporation of Stater Bros. Development, Inc.3.6
    
    
    (9
    )
    
    By-Laws of Stater Bros. Development, Inc.3.7
    
    
    (9
    )
    
    Articles of Incorporation of Santee Dairies, Inc3.8
    
    
    (9
    )
    
    By-Laws of Santee Dairies, Inc.4.1
    
    
    (9
    )
    
    Indenture dated as of June 17, 2004 among
Stater Bros. Holdings Inc. as Issuer, Stater Bros. Markets, Stater
Bros. Development, Inc. and Santee Dairies Inc., as Guarantors, and
The Bank of New York, as Trustee4.2
    
    
    (9
    )
    
    Registration Rights Agreement dated as of
June 17, 2004 between Stater Bros. Holdings Inc., as Issuer, Stater
Bros. Markets, Stater Bros. Development, Inc. and Santee Dairies,
Inc., as Guarantors and Bank of America Securities LLC, as Initial
Purchaser4.3
    
    
    (9
    )
    
    Specimen Form of Fixed Rate Global Note4.4
    
    
    (9
    )
    
    Specimen Form of Floating Rate Global Note
 39




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K (contd.)  (a)(3)
    Exhibits (contd.) exhibit no.
    
    
    
    
    
    description4.5
    
    
    (9
    )
    
    First Supplemental Indenture, dated as of
January 11, 2002, between Stater Bros. Holdings Inc. and The Bank of
New York, as successor in interest to IBJ Whitehall Bank & Trust
Company, as Trustee for the 10.75% Senior Notes due 20064.6
    
    
    (8
    )
    
    Second Supplemental Indenture, dated as
of May 27, 2004 between Stater Bros. Holdings Inc. and The Bank of
New York, as successor in interest to IBJ Whitehall Bank & Trust
Company, as Trustee for the 10.75% Senior Notes due 20065.1
    
    
    (9
    )
    
    Opinion of Gibson, Dunn & Crutcher LLP10.1
    
    
    (1
    )
    
    Reclassification Agreement dated
September 3, 1993, by and among Stater Bros., Craig and La Cadena10.2
    
    
    (1
    )
    
    Amendment to Reclassification Agreement,
dated January 12, 1994, by and among Stater Bros., Craig and La
Cadena10.3
    
    
    (1
    )
    
    Agreement of Stockholders dated May 10,
1989, by and among Stater Bros., Craig and La Cadena10.4
    
    
    (1
    )
    
    Amendment to Agreement of Stockholders
dated September 3, 1993, by and among Stater Bros., Craig, Craig
Management, Inc. and La Cadena10.5
    
    
    (1
    )
    
    Option Agreement dated September 3, 1993,
by and between Stater Bros. and Craig10.6
    
    
    (1
    )
    
    Amendment to Option Agreement dated
January 12, 1994, by and between Stater Bros. and Craig10.7
    
    
    (1
    )
    
    Consulting Agreement dated September 3,
1993, by and between Stater Bros., Craig and CMI10.8
    
    
    (1
    )
    
    Letter Agreement regarding Consulting
Agreement, dated March 8,1994, by and between Stater Bros., Craig
and CMI10.9
    
    
    (1
    )
    
    Second Amended and Restated Stock
Agreement dated January 12, 1994, by and among Stater Bros., Craig,
CMI, La Cadena and James J. Cotter10.10
    
    
    (1
    )
    
    Security Agreement dated March 8, 1994,
by and between Stater Bros. and Craig10.11
    
    
    (1
    )
    
    Credit Agreement dated March 8, 1994, by
and between Stater Bros. Markets and Bank of America Trust and
Savings Association10.12
    
    
    (2
    )
    
    Amendment dated June 23, 1995 to the
Credit Agreement dated March 8, 1994, by and between Stater Bros.
Markets and Bank of America Trust and Savings Association10.13
    
    
    (2
    )
    
    Amendment dated July 22, 1996 to the
Credit Agreement dated March 8, 1994, by and between Stater Bros.
Markets and Bank of America Trust and Savings Association
 40




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K (contd.)  (a)(3)
    Exhibits (contd.) exhibit no.
    
    
    
    
    
    description10.14
    
    
    (9
    )
    
    Credit Agreement dated as of June 17, 2004 by and among Stater Bros.
Markets, Stater Bros. and Bank of America, N.A10.15
    
    
    (1
    )
    
    Continuing Guaranty dated March 8, 1994, of Stater Bros. Development, Inc.
in favor of Bank of America Trust and Savings Association10.16
    
    
    (1
    )
    
    Subordination Agreement dated March 8, 1994, by and among Stater Bros.,
Stater Bros. Markets and Bank of America Trust and Savings Association10.17
    
    
    (1
    )
    
    Amended and Restated Sublease Agreement dated June 1, 1983, between Wren
Leasing Corp., as Lessor, and Stater Bros. Markets, as Lessee10.18
    
    
    (1
    )
    
    Preferred Stock Agreement dated March 22, 1983, between Stater Bros. Markets
and Petrolane Incorporated10.19
    
    
    (1
    )
    
    Escrow Agreement dated September 19, 1985, by and among Stater Bros.
Markets, Petrolane Incorporated and First Interstate Bank of California10.20
    
    
    (2
    )
    
    Dealer Manager Agreement dated as of July 1, 1999, by and between Stater
Bros. and Banc of America Securities LLC10.21
    
    
    (3
    )
    
    Employment contract dated June 1, 2000 by and between Stater Bros. Markets
and Jack H. Brown10.22
    
    
    (4
    )
    
    Employment contract dated June 1, 2000, as amended, by and between Stater
Bros. Markets and Donald I. Baker10.23
    
    
    (4
    )
    
    Employment contract dated June 1, 2000, as amended, by and between Stater
Bros. Markets and A. Gayle Paden10.24
    
    
    (4
    )
    
    Employment contract dated June 1, 2000 by and between Stater Bros. Markets
and H. Harrison Lightfoot10.25
    
    
    (4
    )
    
    Employment contract dated June 1, 2000 by and between Stater Bros. Markets
and Phillip J. Smith10.26
    
    
    (4
    )
    
    Stater Bros. Holdings Inc. Phantom Stock Plan10.27
    
    
    (5
    )
    
    First Amendment dated September 15, 2000 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc.
and Bank of America, N.A.10.28
    
    
    (5
    )
    
    Second Amendment dated December 13, 2001 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc.
and Bank of America, N.A.10.29
    
    
    (5
    )
    
    Third Amendment dated January 18, 2002 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc.
and Bank of America, N.A.
 41




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K (contd.)  (a)(3)
    Exhibits (contd.) exhibit no.
    
    
    
    
    
    description10.30
    
    
    (5
    )
    
    Subordinated Note for $20,000,000 dated January 22, 2002 between Stater
Bros. and H. Harrison Lightfoot with an interest rate of 5% due March 31,
200710.31
    
    
    (6
    )
    
    Employment contract dated June 1, 2000 by and between Stater Bros. Markets
and Dennis L. McIntyre10.32
    
    
    (6
    )
    
    Employment contract dated June 1, 2000 by and between Stater Bros. Markets
and Edward A. Stater10.33
    
    
    (6
    )
    
    Employment contract dated August 1, 2002 by and between Stater Bros. Markets
and James W. Lee10.34
    
    
    (7
    )
    
    Fourth Amendment dated February 4, 2003 to the Credit Agreement dated as of
August 6, 1999 by and among Stater Bros. Markets, Stater Bros. Holdings Inc.
and Bank of America, N.A.10.35
    
    
    (8
    )
    
    Owner Participation Agreement, dated as of April 14, 2004 between Stater
Bros. Markets and the Inland Valley Development Agency10.36
    
    
    (8
    )
    
    Development Parcel Disposition Agreement, dated as of June 16, 2004 between
Stater Bros. Markets and Hillwood/San Bernardino, LLC10.37
    
    
    (9
    )
    
    Subsidiary Guaranty entered into as of June 17, 2004 by Stater Bros.
Holdings Inc., Stater Bros. Development, Inc. and Santee Dairies, Inc.12.1
    
    
    (10
    )
    
    Computation of ratio of earnings to fixed charges.14.1
    
    
    (10
    )
    
    Copy of Financial Code of Ethics.21.1
    
    
    (9
    )
    
    Subsidiaries of Stater Bros. Holdings Inc.21.2
    
    
    (9
    )
    
    Subsidiaries of Stater Bros. Markets31.1
    
    
    (10
    )
    
    Certification of Principal Executive Officer pursuant to Section 302 (a) of
the Sarbanes-Oxley Act of 2002.31.2
    
    
    (10
    )
    
    Certification of Principal Financial Officer pursuant to Section 302 (a) of
the Sarbanes-Oxley Act of 2002.32.1
    
    
    (10
    )
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 (1)
    
    Previously filed with the Securities and Exchange Commission as an exhibit to the Registration
Statement S-4 No. 33-77296 dated July 21, 1994.(2)
    
    Previously filed with the Securities and Exchange Commission as an exhibit to the Registration
Statement S-4 No. 333-85723 dated August 20, 1999(3)
    
    Previously filed with the Securities and Exchange Commission as exhibits to Registrants Quarterly Report on Form 10-Q dated June
25, 2000 and filed on August 9, 2000.
 42




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K (contd.)  (a)(3)
    Exhibits (contd.) (4)
    
    Previously filed with the Securities and Exchange Commission as
exhibits with the Annual Report on Form 10-K for the fiscal year
ended September 24, 2000.(5)
    
    Previously filed with the Securities and
Exchange Commission as exhibits to the Registrants Quarterly Report
on Form 10-Q dated December 31, 2001.(6)
    
    Previous filed with the Securities and
Exchange Commission as exhibits with the Annual Report on Form 10-K
for the fiscal year ended September 29, 2002.(7)
    
    Previously filed with the Securities and
Exchange Commission as exhibits to the Registrants Quarterly Report
on Form 10-Q dated December 29, 2002.(8)
    
    Incorporated by reference to Exhibit 10.35 to
the Quarterly Report on Form 10-Q for the quarter ended June 27,
2004.(9)
    
    Previously filed with the Securities and
Exchange Commission as an exhibit to the Registration Statement S-4
No. 333-118436 dated August 27, 2004, as amended.(10)
    
    Filed with the Securities and Exchange
Commission as exhibits with the Annual Report on Form 10-K/A for the
fiscal year ended September 26, 2004.Copies of Exhibits listed herein can be obtained by writing and
requesting Exhibits from: Corporate Secretary, P. O. Box 150,
Colton, California 92324.
  (b)
    Reports on Form 8-KOn April 20, 2005, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission, under item 4.02, related to its
evaluation of lease accounting practices and announcing non-reliance on
financial statements and associated restatements. 43




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##### Table of Contents



STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 2004
FORM 10-K/A 
 SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. May, 6, 2005
    
    
    
    Stater Bros. Holdings Inc.DateBy:
    
    /s/ Jack H. BrownJack H. BrownChairman of the Board,President and ChiefExecutive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/
    
    Jack H. Brown
    
    Chairman of the Board, President and
    
    May 6, 2005Jack H. Brown
    
    Chief Executive Officer and Director(Principal Executive Officer)/s/
    
    Thomas W. Field, Jr.
    
    Vice Chairman of the Board
    
    May 6, 2005Thomas W. Field, Jr.
    
    and Director/s/
    
    Bruce D. Varner
    
    Secretary and Director
    
    May 6, 2005Bruce D. Varner/s/
    
    C. Dale Warman
    
    Director
    
    May 6, 2005C. Dale Warman/s/
    
    Phillip J. Smith
    
    Senior Vice President and
    
    May 6, 2005Phillip J. Smith
    
    Chief Financial Officer(Principal Financial Officer)
 44




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##### Table of Contents



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




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of
Stater Bros. Holdings Inc. We have audited the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. as
of September 29, 2002, September 28, 2003 and September 26, 2004, and the related consolidated
statements of income, stockholders deficit, and cash flows for the 52-week periods ended September
29, 2002, September 28, 2003, and September 26, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Stater Bros. Holdings Inc. at September 29, 2002,
September 28, 2003 and September 26, 2004, and the consolidated results of their operations and
their cash flows for the 52-week periods ended September 29, 2002, September 28, 2003, and
September 26, 2004, in conformity with U.S. generally accepted accounting principles. As described in Note 2, Restatement of Previously Issued Financial Statements, the Company
has restated previously issued financial statements as of September 29, 2002, September 28, 2003
and September 26, 2004 and for the periods then ended and the beginning retained deficit as of
September 30, 2001. /s/ Ernst &Young LLP Irvine, California
December 20, 2004,
except for Note 2 as to which the date is,
April 21, 2005 F-2




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##### Table of Contents



STATER BROS. HOLDINGS INC. 
 CONSOLIDATED BALANCE SHEETS
 ASSETS Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Current assetsCash and cash equivalents
    
    $
    81,043
    
    
    $
    111,152
    
    
    $
    301,947Restricted cash
    
    
    
    
    
    
    
    
    
    
    20,000Receivables
    
    
    26,500
    
    
    
    23,217
    
    
    
    39,258Income tax receivables
    
    
    7,061
    
    
    
    4,354
    
    
    
    Inventories
    
    
    175,404
    
    
    
    172,267
    
    
    
    185,567Prepaid expenses
    
    
    7,860
    
    
    
    6,962
    
    
    
    8,847Deferred income taxes
    
    
    15,281
    
    
    
    14,793
    
    
    
    25,416Total current assets
    
    
    313,149
    
    
    
    332,745
    
    
    
    581,035Investment in unconsolidated affiliate
    
    
    15,580
    
    
    
    16,910
    
    
    
    Property and equipmentLand
    
    
    50,930
    
    
    
    50,930
    
    
    
    68,120Buildings and improvements
    
    
    191,514
    
    
    
    200,349
    
    
    
    252,715Store fixtures and equipment
    
    
    212,741
    
    
    
    242,562
    
    
    
    337,589Property subject to capital leases
    
    
    24,670
    
    
    
    24,670
    
    
    
    25,891479,855
    
    
    
    518,511
    
    
    
    684,315Less accumulated depreciation and amortization
    
    
    197,248
    
    
    
    220,356
    
    
    
    279,459282,607
    
    
    
    298,155
    
    
    
    404,856Deferred debt issuance costs, net
    
    
    13,936
    
    
    
    10,486
    
    
    
    21,891Other assets
    
    
    5,649
    
    
    
    5,540
    
    
    
    6,33919,585
    
    
    
    16,026
    
    
    
    28,230Total assets
    
    $
    630,921
    
    
    $
    663,836
    
    
    $
    1,014,121
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



STATER BROS. HOLDINGS INC.CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS DEFICIT Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Current liabilitiesAccounts payable
    
    $
    104,166
    
    
    $
    112,458
    
    
    $
    142,077Accrued payroll and related expenses
    
    
    41,567
    
    
    
    44,362
    
    
    
    55,049Other accrued liabilities
    
    
    46,656
    
    
    
    50,352
    
    
    
    62,745Accrued income taxes
    
    
    
    
    
    
    
    
    
    
    62Current portion of capital lease obligations
    
    
    1,117
    
    
    
    1,056
    
    
    
    1,247Total current liabilities
    
    
    193,506
    
    
    
    208,228
    
    
    
    261,180Deferred income taxes
    
    
    5,311
    
    
    
    5,272
    
    
    
    2,209Long-term debt
    
    
    458,750
    
    
    
    458,750
    
    
    
    700,000Capital lease obligations, less current portion
    
    
    10,981
    
    
    
    9,926
    
    
    
    9,470Long-term portion of self-insurance and other reserves
    
    
    23,855
    
    
    
    27,941
    
    
    
    35,654Other long-term liabilities
    
    
    14,367
    
    
    
    19,801
    
    
    
    45,249Total liabilities
    
    
    706,770
    
    
    
    729,918
    
    
    
    1,053,762Stockholders deficitCommon Stock, $.01 par value:Authorized shares - 100,000
Issued and outstanding shares -
0 in 2002, 2003 and 2004
    
    
    
    
    
    
    
    
    
    
    Class A Common Stock, $.01 par value:Authorized shares - 100,000
Issued and outstanding shares -
38,301 in 2002, 2003 and 2004
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    9,740
    
    
    
    9,740
    
    
    
    9,740Retained deficit
    
    
    (85,589
    )
    
    
    (75,822
    )
    
    
    (49,381
    )Total stockholders deficit
    
    
    (75,849
    )
    
    
    (66,082
    )
    
    
    (39,641
    )Total liabilities and stockholders deficit
    
    $
    630,921
    
    
    $
    663,836
    
    
    $
    1,014,121
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



STATER BROS. HOLDINGS INC. 
 CONSOLIDATED STATEMENTS OF INCOME
 Fiscal Year EndedSept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Sales
    
    $
    2,666,346
    
    
    $
    2,753,774
    
    
    $
    3,704,882Cost of goods sold
    
    
    1,957,526
    
    
    
    1,999,361
    
    
    
    2,652,812Gross profit
    
    
    708,820
    
    
    
    754,413
    
    
    
    1,052,070Operating expenses:Selling, general and administrative expenses
    
    
    615,317
    
    
    
    659,547
    
    
    
    820,329Depreciation and amortization
    
    
    25,052
    
    
    
    27,660
    
    
    
    33,284Total operating expenses
    
    
    640,369
    
    
    
    687,207
    
    
    
    853,613Operating profit
    
    
    68,451
    
    
    
    67,206
    
    
    
    198,457Interest income
    
    
    1,721
    
    
    
    1,049
    
    
    
    2,198Interest expense
    
    
    (52,814
    )
    
    
    (53,254
    )
    
    
    (53,951
    )Interest expense related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (35,647
    )Equity in income from unconsolidated affiliate
    
    
    2,914
    
    
    
    1,330
    
    
    
    929Other expenses  net
    
    
    (1,579
    )
    
    
    (1,093
    )
    
    
    (1,343
    )Income before income taxes
    
    
    18,693
    
    
    
    15,238
    
    
    
    110,643Income taxes
    
    
    7,252
    
    
    
    5,471
    
    
    
    39,202Net income
    
    $
    11,441
    
    
    $
    9,767
    
    
    $
    71,441Earnings per common share
    
    $
    272.63
    
    
    $
    255.01
    
    
    $
    1,865.25Dividends per common share
    
    $
    117.49
    
    
    $
    
    
    
    $
    1,174.90Average common shares outstanding
    
    
    41,965
    
    
    
    38,301
    
    
    
    38,301Common shares outstanding at end of year
    
    
    38,301
    
    
    
    38,301
    
    
    
    38,301
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



STATER BROS. HOLDINGS INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year EndedSept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Operating activities:Net income
    
    $
    11,441
    
    
    $
    9,767
    
    
    $
    71,441Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    32,245
    
    
    
    35,089
    
    
    
    43,735Gain from litigation settlement
    
    
    
    
    
    
    
    
    
    
    (22,371
    )Deferred income taxes
    
    
    2,511
    
    
    
    448
    
    
    
    (17,064
    )Loss on disposals of assets
    
    
    1,579
    
    
    
    1,093
    
    
    
    1,488Net undistributed income in unconsolidated affiliate
    
    
    (2,914
    )
    
    
    (1,330
    )
    
    
    (929
    )Changes in operating assets and liabilities:Increase in restricted cash
    
    
    
    
    
    
    
    
    
    
    (20,000
    )(Increase) decrease in receivables
    
    
    3,394
    
    
    
    3,283
    
    
    
    (4,749
    )(Increase) decrease in income tax receivables
    
    
    (6,703
    )
    
    
    2,707
    
    
    
    4,354(Increase) decrease in inventories
    
    
    (5,215
    )
    
    
    3,137
    
    
    
    (10,604
    )(Increase) decrease in prepaid expenses
    
    
    (1,136
    )
    
    
    893
    
    
    
    (721
    )Decrease in other assets
    
    
    3,398
    
    
    
    3,559
    
    
    
    13,667Increase (decrease) in accounts payable
    
    
    (3,319
    )
    
    
    8,292
    
    
    
    21,985Increase in accrued income taxes
    
    
    
    
    
    
    
    
    
    
    62Increase in accrued liabilities and long-term
portion of self-insurance reserves
    
    
    15,887
    
    
    
    16,012
    
    
    
    70,222Net cash provided by operating activities
    
    
    51,168
    
    
    
    82,950
    
    
    
    150,516Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    700,000Proceeds from equipment financing
    
    
    
    
    
    
    
    
    
    
    718Premium, fees and make-whole payments related to debt purchase
    
    
    
    
    
    
    
    
    
    
    (26,519
    )Debt issuance costs
    
    
    (5,033
    )
    
    
    
    
    
    
    (22,723
    )Stock redemption
    
    
    (20,000
    )
    
    
    
    
    
    
    Amortization of debt issuance cost related to debt purchase
    
    
    
    
    
    
    
    
    
    
    9,128Dividends paid
    
    
    (4,500
    )
    
    
    
    
    
    
    (45,000
    )Principal payments on long-term debt
    
    
    (250
    )
    
    
    
    
    
    
    (512,250
    )Principal payments on capital lease obligations
    
    
    (1,435
    )
    
    
    (1,116
    )
    
    
    (1,264
    )Net cash provided by (used in) financing activities
    
    
    (31,218
    )
    
    
    (1,116
    )
    
    
    102,090Investing activities:Purchase of property and equipment
    
    
    (40,722
    )
    
    
    (51,890
    )
    
    
    (61,986
    )Proceeds from sale of property and equipment
    
    
    179
    
    
    
    165
    
    
    
    175Net cash used in investing activities
    
    
    (40,543
    )
    
    
    (51,725
    )
    
    
    (61,811
    )Net increase (decrease) in cash and cash equivalents
    
    
    (20,593
    )
    
    
    30,109
    
    
    
    190,795Cash and cash equivalents at beginning of year
    
    
    101,636
    
    
    
    81,043
    
    
    
    111,152Cash and cash equivalents at end of year
    
    $
    81,043
    
    
    $
    111,152
    
    
    $
    301,947Interest paid
    
    $
    49,927
    
    
    $
    49,560
    
    
    $
    72,449Income taxes paid
    
    $
    11,443
    
    
    $
    3,000
    
    
    $
    51,656
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



STATER BROS. HOLDINGS INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 Class A
    
    
    AdditionalCommon
    
    
    Common
    
    
    Paid-in
    
    
    RetainedStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Total(as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)Balances at September 30, 2001
    
    $
    
    
    
    $
    1
    
    
    $
    12,715
    
    
    $
    (55,505
    )
    
    $
    (42,789
    )Net income for 52 weeks ended
September 29, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,441
    
    
    
    11,441Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
    
    
    (4,500
    )Stock redemption
    
    
    
    
    
    
    (1
    )
    
    
    (2,975
    )
    
    
    (37,025
    )
    
    
    (40,001
    )Balances at September 29, 2002
    
    
    
    
    
    
    
    
    
    
    9,740
    
    
    
    (85,589
    )
    
    
    (75,849
    )Net income for 52 weeks ended
September 28, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,767
    
    
    
    9,767Balances at September 28, 2003
    
    
    
    
    
    
    
    
    
    
    9,740
    
    
    
    (75,822
    )
    
    
    (66,082
    )Net income for 52 weeks ended
September 26, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,441
    
    
    
    71,441Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,000
    )
    
    
    (45,000
    )Balances at September 26, 2004
    
    $
    
    
    
    $
    
    
    
    $
    9,740
    
    
    $
    (49,381
    )
    
    $
    (39,641
    )
 See accompanying notes to consolidated financial statements. F-7




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##### Table of Contents



STATER BROS. HOLDINGS INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  SEPTEMBER 26, 2004
 Note 1  The Company and Summary of Significant Accounting Policies Description of Business  Principles of Consolidation  Reclassifications  Use of Estimates  Fiscal Year  Cash and Cash Equivalents  RestrictedCash  Inventories  Receivables  Long-Lived Assets  F-8




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 1  The Company and Summary of Significant Accounting Policies (contd.) Property and Equipment  The average estimated economic lives are as follows: Range
    
    Most PrevalentBuildings and improvements
    
    5  20 Years
    
    20 YearsStore furniture and equipment
    
    3  10 Years
    
    5 YearsProperty subject to capital leases
    
    Life of Lease
    
    25 Years
 Deferred Debt Issuance Costs  Phantom Stock Plan  Self-Insurance Reserves  Income Taxes  Revenue Recognition  F-9




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 1  The Company and Summary of Significant Accounting Policies (contd.) Cost of Goods Sold  Selling, General and Administrative Expenses  As noted under Cost of Goods Sold, the Company includes all purchasing and distribution
costs to deliver the product for sale to its stores in cost of goods sold, except for certain
salary, wages and administrative costs associated with the purchasing of its products. The amount
of salary, wages and administrative costs associated with the purchase of its products included in
selling, general and administrative costs was $861,000, $891,000 and $1,057,000 in fiscal 2002,
fiscal 2003 and fiscal 2004, respectively. Vendor Rebates and Allowances  F-10




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 1  The Company and Summary of Significant Accounting Policies (contd.) Advertising Allowances  Advertising  Leases  Recent Accounting Pronouncements  F-11




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 2  Restatement of Previously Issued Financial Statements As a result of a letter issued by the Chief Accountant of the Securities and Exchange Commission
dated February 7, 2005 to the American Institute of Certified Accountants wherein the Chief
Accountant clarified accounting for leases under U.S. generally accepted accounting principles and
other recent interpretations regarding certain operating lease accounting issues, the Company
completed a review of its accounting for leases and leasehold improvements underlying its leases.
As a result of this review, management determined that the useful lives used to depreciate certain
leasehold improvements were in excess of either their economic useful life, the initial lease term
for assets placed in service at the commencement of the lease or the remaining lease term including
any option periods that were reasonably assured of being exercised for other leaseholds and were
not consistent with the views expressed by the Chief Accountant of the Securities and Exchange
Commission and that a restatement of previously issued financial statements was required. The Company has restated its consolidated balance sheets as of September 29, 2002, September 28,
2003 and September 26, 2004, and the related consolidated statements of income, stockholders
deficit and cash flows for 52-week periods ended September 29, 2002, September 28, 2003 and
September 26, 2004 in order to correct the accounting error noted above. The cumulative effect of
the correction was a $1.4 million increase in retained deficit at the beginning of fiscal 2002 and
a reduction in net income of $0.3 million, $0.4 million and $0.4 million in fiscal 2002, 2003 and
2004, respectively. The following is a summary of the effect of these accounting changes on the Companys consolidated
balance sheets as of September 29, 2002, September 28, 2003 and September 26, 2004 (in thousands). As PreviouslySeptember 29, 2002
    
    
    Reported
    
    
Adjustments
    
    
RestatedProperty and equipment, net
    
    $
    285,816
    
    
    $
    (3,209
    )
    
    $
    282,607Total assets
    
    
    634,130
    
    
    
    (3,209
    )
    
    
    630,921Deferred income taxes
    
    
    6,500
    
    
    
    (1,189
    )
    
    
    5,311Other long-term liabilities
    
    
    14,659
    
    
    
    (292
    )
    
    
    14,367Total liabilities
    
    
    708,251
    
    
    
    (1,481
    )
    
    
    706,770Retained deficit
    
    
    (83,861
    )
    
    
    (1,728
    )
    
    
    (85,589
    )Total stockholders deficit
    
    
    (74,121
    )
    
    
    (1,728
    )
    
    
    (75,849
    )Total liabilities and stockholders deficit
    
    $
    634,130
    
    
    $
    (3,209
    )
    
    $
    630,921
 As PreviouslySeptember 28, 2003
    
    
    Reported
    
    
Adjustments
    
    
RestatedProperty and equipment, net
    
    $
    302,145
    
    
    $
    (3,990
    )
    
    $
    298,155Total assets
    
    
    667,826
    
    
    
    (3,990
    )
    
    
    663,836Deferred income taxes
    
    
    6,708
    
    
    
    (1,436
    )
    
    
    5,272Other long-term liabilities
    
    
    20,267
    
    
    
    (466
    )
    
    
    19,801Total liabilities
    
    
    731,820
    
    
    
    (1,902
    )
    
    
    729,918Retained deficit
    
    
    (73,734
    )
    
    
    (2,088
    )
    
    
    (75,822
    )Total stockholders deficit
    
    
    (63,994
    )
    
    
    (2,088
    )
    
    
    (66,082
    )Total liabilities and stockholders deficit
    
    $
    667,826
    
    
    $
    (3,990
    )
    
    $
    663,836
 F-12




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 2  Restatement
of Previously Issued Financial Statements (contd.) As PreviouslySeptember 26, 2004
    
    
    Reported
    
    
Adjustments
    
    
RestatedProperty and equipment, net
    
    $
    409,623
    
    
    $
    (4,767
    )
    
    $
    404,856Total assets
    
    
    1,018,888
    
    
    
    (4,767
    )
    
    
    1,014,121Deferred income taxes
    
    
    3,894
    
    
    
    (1,685
    )
    
    
    2,209Other long-term liabilities
    
    
    45,881
    
    
    
    (632
    )
    
    
    45,249Total liabilities
    
    
    1,056,079
    
    
    
    (2,317
    )
    
    
    1,053,762Retained deficit
    
    
    (46,931
    )
    
    
    (2,450
    )
    
    
    (49,381
    )Total stockholders deficit
    
    
    (37,191
    )
    
    
    (2,450
    )
    
    
    (39,641
    )Total liabilities and stockholders deficit
    
    $
    1,018,888
    
    
    $
    (4,767
    )
    
    $
    1,014,121
 The following is a summary of the effect of these accounting changes on the Companys consolidated
statements of income for the 52 week periods ended September 29, 2002, September 28, 2003 and
September 26, 2004 (in thousands, except per share amount). As PreviouslySeptember 29, 2002
    
    
    Reported
    
    
Adjustments
    
    
RestatedSelling, general and administrative expenses
    
    $
    615,482
    
    
    $
    (165
    )
    
    $
    615,317Depreciation and amortization
    
    
    24,300
    
    
    
    752
    
    
    
    25,052Total operating expenses
    
    
    639,782
    
    
    
    587
    
    
    
    640,369Operating Profit
    
    
    69,038
    
    
    
    (587
    )
    
    
    68,451Income before income taxes
    
    
    19,280
    
    
    
    (587
    )
    
    
    18,693Income taxes
    
    
    7,491
    
    
    
    (239
    )
    
    
    7,252Net income
    
    $
    11,789
    
    
    $
    (348
    )
    
    $
    11,441Earnings per common share
    
    $
    280.92
    
    
    $
    (8.29
    )
    
    $
    272.63
 As PreviouslySeptember 28, 2003
    
    
    Reported
    
    
Adjustments
    
    
RestatedSelling, general and administrative expenses
    
    $
    659,720
    
    
    $
    (173
    )
    
    $
    659,547Depreciation and amortization
    
    
    26,879
    
    
    
    781
    
    
    
    27,660Total operating expenses
    
    
    686,599
    
    
    
    608
    
    
    
    687,207Operating Profit
    
    
    67,814
    
    
    
    (608
    )
    
    
    67,206Income before income taxes
    
    
    15,846
    
    
    
    (608
    )
    
    
    15,238Income taxes
    
    
    5,719
    
    
    
    (248
    )
    
    
    5,471Net income
    
    $
    10,127
    
    
    $
    (360
    )
    
    $
    9,767Earnings per common share
    
    $
    264.41
    
    
    $
    (9.40
    )
    
    $
    255.01
 As PreviouslySeptember 26, 2004
    
    
    Reported
    
    
Adjustments
    
    
RestatedSelling, general and administrative expenses
    
    $
    820,496
    
    
    $
    (167
    )
    
    $
    820,329Depreciation and amortization
    
    
    32,507
    
    
    
    777
    
    
    
    33,284Total operating expenses
    
    
    853,003
    
    
    
    610
    
    
    
    853,613Operating Profit
    
    
    199,067
    
    
    
    (610
    )
    
    
    198,457Income before income taxes
    
    
    111,253
    
    
    
    (610
    )
    
    
    110,643Income taxes
    
    
    39,450
    
    
    
    (248
    )
    
    
    39,202Net income
    
    $
    71,803
    
    
    $
    (362
    )
    
    $
    71,441Earnings per common share
    
    $
    1,874.70
    
    
    $
    (9.45
    )
    
    $
    1,865.25
 F-13




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 2  Restatement
of Previously Issued Financial Statements (contd.) The following is a summary of the effect of these accounting changes on the Companys consolidated
statements of stockholders deficit as of September 29, 2002, September 28, 2003 and September 26,
2004 (in thousands). As PreviouslySeptember 29, 2002
    
    
    Reported
    
    
Adjustments
    
    
RestatedBalance at September 30, 2001
    
    $
    (41,409
    )
    
    $
    (1,380
    )
    
    $
    (42,789
    )Net income for the 52 weeks ended September 29, 2002
    
    
    11,789
    
    
    
    (348
    )
    
    
    11,441Balance at September 29, 2002
    
    $
    (74,121
    )
    
    $
    (1,728
    )
    
    $
    (75,849
    )
 As PreviouslySeptember 28, 2003
    
    
    Reported
    
    
Adjustments
    
    
RestatedBalance at September 29, 2002
    
    $
    (74,121
    )
    
    $
    (1,728
    )
    
    $
    (75,849
    )Net income for the 52 weeks ended September 28, 2003
    
    
    10,127
    
    
    
    (360
    )
    
    
    9,767Balance at September 28, 2003
    
    $
    (63,994
    )
    
    $
    (2,088
    )
    
    $
    (66,082
    )
 As PreviouslySeptember 26, 2004
    
    
    Reported
    
    
Adjustments
    
    
RestatedBalance at September 28, 2003
    
    $
    (63,994
    )
    
    $
    (2,088
    )
    
    $
    (66,082
    )Net income for the 52 weeks ended September 26, 2004
    
    
    71,803
    
    
    
    (362
    )
    
    
    71,441Balance at September 26, 2004
    
    $
    (37,191
    )
    
    $
    (2,450
    )
    
    $
    (39,641
    )
 The following is a summary of the effect of these accounting changes on the Companys
consolidated statements of cash flows for the 52 periods ended September 29, 2002, September 28,
2003 and September 26, 2004 (in thousands). As PreviouslySeptember 29, 2002
    
    
    Reported
    
    
Adjustments
    
    
RestatedNet income
    
    $
    11,789
    
    
    $
    (348
    )
    
    $
    11,441Depreciation and amortization
    
    
    31,493
    
    
    
    752
    
    
    
    32,245Deferred income taxes
    
    
    2,750
    
    
    
    (239
    )
    
    
    2,511Accrued liabilities and long-term portion of self insurance reserves
    
    
    16,052
    
    
    
    (165
    )
    
    
    15,887Net cash provided by operating activities
    
    $
    51,168
    
    
    $
    
    
    
    $
    51,168
 As PreviouslySeptember 28, 2003
    
    
    Reported
    
    
Adjustments
    
    
RestatedNet income
    
    $
    10,127
    
    
    $
    (360
    )
    
    $
    9,767Depreciation and amortization
    
    
    34,308
    
    
    
    781
    
    
    
    35,089Deferred income taxes
    
    
    696
    
    
    
    (248
    )
    
    
    448Accrued liabilities and long-term portion of self insurance reserves
    
    
    16,185
    
    
    
    (173
    )
    
    
    16,012Net cash provided by operating activities
    
    $
    82,950
    
    
    $
    
    
    
    $
    82,950
 As PreviouslySeptember 26, 2004
    
    
    Reported
    
    
Adjustments
    
    
RestatedNet income
    
    $
    71,803
    
    
    $
    (362
    )
    
    $
    71,441Depreciation and amortization
    
    
    42,958
    
    
    
    777
    
    
    
    43,735Deferred income taxes
    
    
    (16,816
    )
    
    
    (248
    )
    
    
    (17,064
    )Accrued liabilities and long-term portion of self insurance reserves
    
    
    70,389
    
    
    
    (167
    )
    
    
    70,222Net cash provided by operating activities
    
    $
    150,516
    
    
    $
    
    
    
    $
    150,516
 F-14




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##### Table of Contents



STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (contd.)
 Note 3  Impact of Recent EITF Effective September 30, 2002, the Company adopted EITF Issue No. 02-16 Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor. The Companys adoption
of the EITF has had no effect on the Companys current year or prior years net income. For fiscal
2003 and fiscal 2004 vendor payments of $4.6 million and $4.4 million, respectively, related to
advertising reimbursements in excess of advertising cost were recorded as reductions to cost of
goods sold. Financial statements for fiscal 2002 were not reclassified. The following table shows
the pro forma consolidated operating profit for fiscal 2002 if the impact of EITF Issue No. 02-16
had been applied to fiscal 2002. Fiscal YearEndedSept. 29,2002(as restated)(In thousands)Sales
    
    $
    2,666,346Cost of goods sold
    
    
    1,953,761Gross profit
    
    
    712,585Operating expenses:Selling, general and administrative expenses
    
    
    619,082Depreciation and amortization
    
    
    25,052Total operating expenses
    
    
    644,134Operating profit
    
    $
    68,451
 Note 4  Santee In 1997, in connection with the construction of a new dairy facility in City of Industry,
California, Markets and Hughes Markets (Hughes), the owners Santee contributed the outstanding
shares of Santee to a new entity Santee Dairies, LLC (SDL) with each company owning 50% of SDL.
Markets and Hughes each entered into separate product purchase agreements (PPA) with Santee for
the purchase of fluid milk and other products. Financing for the new dairy was provided through the
issuance of $80.0 million Senior Secured 9.36% Notes due 2008 (Santee Notes). One of the
covenants of the Santee Notes was a covenant that required the payment of the outstanding Santee
Notes in the event of a change in control of Santee. Certain disagreements arose regarding the PPAs and other matters between Markets and Ralphs, the
parent company of Hughes, and Ralphs and Santee. In order to settle the resulting litigation,
Markets, Hughes, Santee and SDL entered into three separate but interconnected agreements
Settlement Agreement and Release of all Claims, Dissolution and Transfer Agreement and
Assignment and Assumption Agreement all three agreements collectively known as the Settlement
Agreement. Under the Settlement Agreement, the Ralphs Guaranty was terminated, a new purchase of
products schedule for Ralphs was established, Hughes agreed to pay $1,550,000 to Markets, SDL was
dissolved and the shares of Santee, previously held by SDL, were transferred equally to Markets and
Hughes. Concurrently with this transfer, Hughes immediately transferred Hughes Santee shares to
Santee for cancellation and retirement. F-15




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 4  Santee (contd.) Through the Settlement Agreement, Hughes relinquished its interest in Santee to Markets. The
consideration received by Markets under the Settlement Agreement was $1,550,000 in cash and the
value of the additional 50% ownership interest in Santee. The value assigned to the additional 50%
interest in Santee was $21.8 million which was determined by management based upon the net present
value of the most probable future cash flows. The Settlement Agreements effective date was the
close of business on February 6, 2004. In fiscal 2004, the Company incurred legal fees of $500,000
related to the Settlement Agreement. In addition, the Company, through Santee, made payments,
aggregating $500,000, to four Directors of Santee who had been named by Hughes as defendants in
litigation settled by the Settlement Agreement. Three of the four Directors are related parties to
the Company. The net consideration received by the Company under the Settlement Agreements was
$22.4 million which was recorded as a gain in fiscal 2004 in the Consolidated Statements of Income
under the line item Selling, general and administrative expenses. The following table is a condensed balance sheet that discloses the value assigned to the Santee
assets acquired and the liabilities assumed as a result of the Settlement Agreement: Feb. 6, 2004(in thousands)Current assets
    
    $
    13,246Property and equipment
    
    
    47,630Other long-term assets
    
    
    550Total assets acquired
    
    
    61,426Current liabilities
    
    
    14,005Long-term liabilities
    
    
    25,600Total liabilities assumed
    
    
    39,605Net assets acquired
    
    $
    21,821
 Previously, Markets accounted for Santee under the equity method of accounting as Markets owned 50%
of the stock and did not exercise control over Santee. The dissolution of SDL and the retirement of
the Hughes shares gave Markets 100% direct ownership of Santee and caused a change in control of
Santee. The change in control triggered the early payment requirement of the Santee Notes, which
included a make whole provision. In order to finance the payment of the Santee Notes and the make
whole payment, Markets loaned Santee $55.0 million. On February 6, 2004, Santee redeemed $53.5
million of Santee Notes, all the notes outstanding, and paid a make whole fee of $8.5 million. In
addition, $1.2 million of previously unamortized debt issuance costs related to the Santee Notes
was expensed. The make-whole fee and amortization of the remaining debt issuance costs were
recorded as a component of interest expense related to debt purchase in the Companys Consolidated
Statements of Income. F-16




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 4  Santee (contd.) Santee has been included in the consolidated financial statements of the Company as a wholly-owned
subsidiary as of the effective date of the Settlement Agreement. The following table provides
supplemental pro forma results of operations presented as though Santee had been consolidated as of
the beginning of the reporting periods. Condensed Pro Forma Results of Operations
(in thousands, except per share amounts) Fiscal Year EndedSept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Sales
    
    $
    2,799,160
    
    
    $
    2,878,809
    
    
    $
    3,771,647Income before income taxes
    
    $
    21,186
    
    
    $
    17,983
    
    
    $
    112,541Net income
    
    $
    14,702
    
    
    $
    14,751
    
    
    $
    69,921Earnings per share
    
    $
    350.35
    
    
    $
    385.14
    
    
    $
    1,825.56
 Prior to the Company obtaining 100% ownership of Santee, the Company recognized income of
$929,000 in fiscal 2004 and the Company recognized income of $2.9 million and $1.3 million for
fiscal years 2002 and 2003, respectively. The Company is a significant customer of Santee which
supplies the Company with a substantial portion of its fluid milk and dairy products. Note 5  Issuance of New Debt and Early Extinguishment of Debt On June 17, 2004, the Company issued $525.0 million of unregistered 8.125% Senior Notes due June
15, 2012 and $175.0 million of unregistered Floating Rate Senior Notes due June 15, 2010. On
October 4, 2004, subsequent to year-end, the Company exchanged the unregistered 8.125% Senior Notes
due June 15, 2012 and unregistered Floating Rate Senior Notes due June 15, 2010 for substantially
identical registered 8.125% Senior Notes due June 15, 2012 and registered Floating Rate Senior
Notes due June 15, 2010 collectively, (the Notes). The Company incurred $22.7 million of debt
issuance cost related to the issuance of the Notes which will be amortized over the term of the
respective Notes. The Notes are guaranteed by Markets, Development, and the Companys indirect subsidiary Santee
(each, a subsidiary guarantor, and collectively, the subsidiary guarantors). Condensed
consolidating financial information with respect to the subsidiary guarantors is not provided
because the Company has no independent assets or operations, the subsidiary guarantees are full and
unconditional and joint and several, and there are no other subsidiaries of the Company other than
the subsidiary guarantors. F-17




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 5  Issuance of New Debt and Early Extinguishment of Debt (contd.) On June 17, 2004 the Company used part of the proceeds from the issuance of these notes for the
purchase of $397.8 million of the 10.75% Senior Notes due August 2006, the payment of $16.9 million
for tender premium and fees on the purchased 10.75% Senior Notes, the early retirement of the $20.0
million 5.0% Subordinated Note due March 2007 and to pay accrued interest on the purchased 10.75%
Senior Notes and the retired 5.0% Subordinated Note. On August 16, 2004, the Company redeemed the
remaining outstanding $41.0 million 10.75% Senior Notes and paid a make whole fee on the redemption
of $1.1 million. In addition, the Company recognized an expense in fiscal 2004 of $5.2 million
related unamortized debt issuance costs on the 10.75% Senior Notes that were tendered and redeemed
and $2.7 million related to the unamortized debt issuance costs on the 5.0% Subordinated Note which
was retired. The tender premium and fees, the make whole fee and the amortization of remaining
unamortized debt issuance costs for both the 10.75% Senior Notes and the 5.0% Subordinated Note
were recorded as components of interest expense related to debt purchase in the Companys
Consolidated Statements of Income. Note 6  Debt Long-term debt consisted of the following: Sept. 29,
    
    
    Sept. 28,
    
    
    Sept. 26,2002
    
    
    2003
    
    
    2004(In thousands)8.125% Senior Note dues 2012
    
    $
    
    
    
    $
    
    
    
    $
    525,000Floating Rate Senior Notes due 2010
    
    
    
    
    
    
    
    
    
    
    175,0005% Subordinated Note due 2007
    
    
    20,000
    
    
    
    20,000
    
    
    
    10.75% Senior Notes due 2006
    
    
    438,750
    
    
    
    438,750
    
    
    
    Total long-term debt
    
    $
    458,750
    
    
    $
    458,750
    
    
    $
    700,000
 Interest on the 8.125% Senior Notes due June 2012, is payable semi-annually in arrears on June
15 and December 15. Principal on the 8.125% Senior Notes is due in the fiscal year 2012. Interest on the Floating Rate Notes due June 2010, is payable quarterly in arrears on March
15, June 15, September 15 and December 15. The interest rate on the Floating Rate Senior Notes is
reset quarterly equal to LIBOR plus 3.50%. The interest rate in effect on the Floating Rate Senior
Notes at September 26, 2004 was 5.38%. Principal on the Floating Rate Senior Notes is due in
fiscal year 2010. Interest capitalized during fiscal years 2002, 2003 and 2004 amounted to $144,000, $126,000
and $323,000 respectively. Interest expense incurred, before the effect of capitalized interest,
during 2002, 2003 and 2004 amounted to $53.0 million, $53.4 million and $54.3 million,
respectively. During fiscal 2002, the Company redeemed $250,000 of its 10.75% Senior Notes due 2006. The
Notes were restricted and unregistered. The Notes were redeemed for $250,000 plus accrued
interest. F-18




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 7  Bank Facilities On June 17, 2004, the Company entered into an amended and restated credit facility (the New
Credit Facility) with Bank of America N.A. (Bank of America) as sole and exclusive
administrative agent, and sole initial lender, consisting of a three-year revolving credit facility
in a principal amount of up to $75.0 million, with the right to increase, under certain
circumstances, the size of the New Credit Facility to an aggregate principal amount of $100.0
million. The New Credit Facility amended and restated the existing credit facility in its
entirety. Subject to certain restrictions, the entire amount of the New Credit Facility may be
used for loans, letters of credit, or a combination thereof. Borrowings under the New Credit
Facility are unsecured and will be used for certain working capital, capital expenditures and other
corporate purposes. Letters of credit under the letter of credit facility are expected to be used
to support obligations incurred in connection with the construction of stores, construction of the
new corporate office and distribution facilities and workers compensation insurance obligations.
The availability of the loans and letters of credit are subject to certain borrowing restrictions. The New Credit Facility is guaranteed by the Company and all of its existing and future
material subsidiaries, including Development and Santee (subject, in the case of Santee, to
termination upon certain specified events). Loans under the New Credit Facility bear interest at a rate based upon either (i) the Base
Rate (defined as the higher of (a) the Federal Funds Rate plus 0.50% and (b) the rate of interest
publicly announced by Bank of America as its reference rate), plus 1.00%, or (ii) the Offshore
Rate (defined as the average British Bankers Association Interest Settlement Rate for deposits in
dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For
Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a)
the maturity date of the loan or (b) periods, as selected by Markets of one, two, three or six
months. The New Credit Facility will cease to be available and will be payable in full on May 31,
2007. Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to
request the issuance of standby letters of credit having a term which is up to one year following
such maturity date, and commercial letters of credit having a term which is up to six months
following such maturity date. Loans under the New Credit Facility must be repaid for a period of
ten consecutive days semi-annually. Loans under the New Credit Facility may be repaid and re-borrowed. The loans under the New
Credit Facility may be prepaid at any time without penalty, subject to certain minimums and payment
of any breakage and re-deployment costs in the case of loans based on the offshore rate. The
commitments under the New Credit Facility may be reduced by Markets. Markets will be required to
pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving
loan facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters
of credit under the credit facility are subject to a fee of 1.25% per annum on the face amount of
such letters of credit, payable quarterly in arrears. Markets will be required to pay standard
fees charged by Bank of America with respect to the issuance, negotiation, and amendment of
commercial letters of credit issued under the letter of credit facility. F-19




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 7  Bank Facilities (contd.) The New Credit Facility requires Markets to meet certain financial tests, including minimum net
worth and other tests. The New Credit Facility contains covenants which, among other things, limit
the ability of Markets and its subsidiaries to (i) incur indebtedness, grant liens and guarantee
obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales,
investments, leases and transactions with affiliates, and (iii) make restricted payments. The New
Credit Facility also contains covenants that apply to the Company and its subsidiaries, and the
Company is a party to the New Credit Facility for purposes of these covenants. These covenants,
among other things, limit the ability of the Company and its subsidiaries to incur indebtedness,
make restricted payments, enter into transactions with affiliates, and make amendments to the
Indenture governing the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes
due June 15, 2010. The New Credit Facility contains customary events of default, including payment defaults; material
inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other
indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any
guaranty; and change of control. In November 2004, Santee entered into a revolving line of credit with Bank of America (the
Revolver). Under the Revolver, Santee may borrow up to $5.0 million of which $2.0 million may be
used to secure letters of credit issued to support workers compensation liabilities. Borrowings
under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire
on May 31, 2007. Advances under the Revolver bear interest at Bank of Americas prime rate plus 0.5% with interest
due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%. The outstanding
undrawn portion of the workers compensation letter of credit is subject to an annual commitment
fee of 1.25%. Under the Revolver, Santee is required to comply with certain financial covenants, which include
certain financial ratios. As of September 26, 2004, for purposes of the credit facilities with Bank of America, Santee,
Markets and the Company were in compliance with all restrictive covenants. The Company is also
subject to certain covenants associated with its 8.125% Senior Notes due 2012 and its Floating Rate
Senior Notes due 2010. As of September 26, 2004, the Company was in compliance with all such
covenants. However, there can be no assurance that Santee, Markets or the Company will be able to
achieve the expected operating results or implement the capital expenditure strategy upon which
future compliance with such covenants is based. The Company had no short-term borrowings outstanding at the end of fiscal years 2002, 2003 and
2004, and the Company did not incur any short-term borrowings during fiscal years 2002, 2003 and
2004. Note 8  Leases The Company leases the majority of its retail stores, offices and distribution facilities.
Certain of the operating leases provide for minimum annual payments that change over the life of
the lease. The Company capitalizes, as part of the cost of store construction, land rental during
the construction of new stores. The dollar amount of land rental during new store construction is
determined by first calculating the portion of the minimum lease payments attributed to land under
the new store. The amortization time period for the portion of the lease payment attributed to the
land under the store is deemed to be from the time the Company takes possession of the property for
construction to the end of the minimum lease term of the lease. The amount of holiday rent is then
calculated by dividing the amount of rent allocated to the land under the store by the amortization
period for the land under the store and multiplying this result by the period of store
construction. F-20




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 8  Leases (contd.) Certain of the Companys operating leases provide for minimum annual payments that change over
the life of the lease. The aggregate minimum annual payments, after reductions for any land rent
capitalized as construction costs, are expensed on the straight-line basis over the minimum lease
term. The Company recognizes a deferred rent liability for minimum step rents when the amount of
rent expense exceeds the actual lease payments and it reduces the deferred rent liability when the
actual lease payments exceeds the amount of straight line rent expense. Rent holidays and
tenant improvement allowances for store remodels are amortized on a straight line basis over the
initial term of the lease and any option period reasonably expected to be exercised by the Company.
Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal
options. Following is a summary of future minimum lease payments as of September 26, 2004: OperatingLeasesCapital
    
    
    MinimumFiscal Year
    
    
    Leases
    
    
    Payment(In thousands)2005
    
    $
    2,815
    
    
    $
    33,4342006
    
    
    2,587
    
    
    
    30,3742007
    
    
    2,280
    
    
    
    25,2152008
    
    
    2,095
    
    
    
    22,5852009
    
    
    2,095
    
    
    
    14,468Thereafter
    
    
    6,851
    
    
    
    106,969Total minimum lease payments
    
    
    18,723
    
    
    $
    233,045Less amounts representing interest
    
    
    8,006Present value of minimum lease payments
    
    
    10,717Less current portion
    
    
    1,247Long-term portion
    
    $
    9,470
 Rental expense and sublease income were as follows: Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(In thousands)Minimum rentals
    
    $
    25,009
    
    
    $
    26,383
    
    
    $
    27,854Rentals based on sales
    
    $
    10,487
    
    
    $
    10,951
    
    
    $
    13,427Sublease income
    
    $
    1,200
    
    
    $
    1,213
    
    
    $
    1,258
 Aggregate sublease income to be received subsequent to September 26, 2004 is approximately
$4.0 million. F-21




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 9  Income Taxes The provision for income taxes consisted of the following: Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(as restated)
    
    
    (as restated)
    
    
    (as restated)(In thousands)CurrentFederal
    
    $
    3,317
    
    
    $
    2,590
    
    
    $
    43,564State
    
    
    1,037
    
    
    
    1,343
    
    
    
    12,2484,354
    
    
    
    3,933
    
    
    
    55,812DeferredFederal
    
    
    2,272
    
    
    
    1,513
    
    
    
    (14,734
    )State
    
    
    626
    
    
    
    25
    
    
    
    (1,876
    )2,898
    
    
    
    1,538
    
    
    
    (16,610
    )Income tax expense
    
    $
    7,252
    
    
    $
    5,471
    
    
    $
    39,202
 A reconciliation of the provision for income taxes to amounts computed at the federal
statutory rate is as follows: Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(as restated)
    
    
    (as restated)
    
    
    (as restated)Statutory federal income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State franchise tax rate, net of
federal income tax benefit
    
    
    5.8
    
    
    
    5.8
    
    
    
    5.8Change for contingent tax matters
    
    
    
    
    
    
    (3.2
    )
    
    
    (5.5
    )Tax credits
    
    
    (3.3
    )
    
    
    (3.3
    )
    
    
    (0.4
    )Other
    
    
    1.3
    
    
    
    1.6
    
    
    
    0.538.8
    %
    
    
    35.9
    %
    
    
    35.4
    %
 Components of deferred income taxes are as follows: Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(as restated)
    
    
    (as restated)
    
    
    (as restated)(In thousands)Deferred income tax assets:Self-insurance reserves
    
    $
    15,034
    
    
    $
    18,592
    
    
    $
    24,142Phantom stock
    
    
    4,270
    
    
    
    6,636
    
    
    
    16,407Pension and vacation liabilities
    
    
    4,138
    
    
    
    4,893
    
    
    
    8,604State franchise tax
    
    
    363
    
    
    
    420
    
    
    
    4,388Inventories
    
    
    2,010
    
    
    
    2,318
    
    
    
    2,233Income deferred for book purposes
    
    
    3,591
    
    
    
    2,765
    
    
    
    1,472Tax credits and operating loss carry forwards
    
    
    5,514
    
    
    
    1,650
    
    
    
    9,134Total deferred income tax assets
    
    
    34,920
    
    
    
    37,274
    
    
    
    66,380Deferred income tax liabilities:Property and equipment
    
    
    (17,145
    )
    
    
    (20,656
    )
    
    
    (37,589
    )Other assets
    
    
    (2,058
    )
    
    
    (2,058
    )
    
    
    (1,751
    )Investment in unconsolidated affiliate
    
    
    (760
    )
    
    
    (1,302
    )
    
    
    (1,681
    )Other, net
    
    
    (4,987
    )
    
    
    (3,737
    )
    
    
    (56
    )Total deferred income tax liabilities
    
    
    (24,950
    )
    
    
    (27,753
    )
    
    
    (41,077
    )Net deferred taxes before valuation allowance
    
    
    9,970
    
    
    
    9,521
    
    
    
    25,303Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (2,096
    )Net deferred income tax assets
    
    $
    9,970
    
    
    $
    9,521
    
    
    $
    23,207
 F-22




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##### Table of Contents



STATER BROS. HOLDINGS INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (contd.)
 Note 9  Income Taxes (contd.) As of September 26, 2004, the Company had approximately $17.5 million of federal net operating
loss carryforwards which expire beginning in 2012 through 2020 if not utilized, approximately $4.7
million of state net operating loss carryforwards which expire beginning in 2005 through 2012 if
not utilized, and $2.1 million of state manufacturers tax credits which expire between 2006 and
2011. The Company records a valuation allowance to reflect the estimated amount of deferred tax
assets that more likely than not will not be realized. Due to anticipated federal and state usage
limitation of the net operating loss and tax credit carryforwards under Internal Revenue Code
Section 382 and applicable state statutes, the Company has established valuation allowances for the
entire amount of state manufactures tax credit of $2.1 million. Although there can be no
assurances as to future taxable income of the Company, the Company believes that its expectations
of future taxable income, when combined with the income taxes paid in prior years and established
valuation reserves, will be adequate to realize the deferred income tax assets. The Company establishes deferred tax liabilities for anticipated tax timing differences where
payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately
expected to be paid, and the amounts may be adjusted over time as additional information becomes
known. The effects of changes to accrued liabilities related to tax matters resulted in a
reduction in tax expense of approximately $6.1 million and $0.5 million in fiscal 2004 and fiscal
2003, respectively. Note 10  Retirement Plans Pension Plan  Net periodic pension cost included the following components: Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(In thousands)Service cost  benefits earned during
the period
    
    $
    1,577
    
    
    $
    2,095
    
    
    $
    2,218Interest cost on projected benefit
obligation
    
    
    2,041
    
    
    
    2,256
    
    
    
    2,489Actual return on assets
    
    
    (1,719
    )
    
    
    (2,047
    )
    
    
    (1,944
    )Net amortization and deferral
    
    
    27
    
    
    
    27
    
    
    
    27Recognized gains or losses
    
    
    281
    
    
    
    467
    
    
    
    720Prior service cost recognized
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Net periodic pension cost
    
    $
    2,205
    
    
    $
    2,796
    
    
    $
    3,508Assumptions used for accounting were:Discount rate
    
    
    7.25
    %
    
    
    6.50
    %
    
    
    6.00
    %Rate of increase in compensation levels
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    4.00
    %Expected
long-term rate of return on assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    7.00
    %
 F-23




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 10  Retirement Plans (contd.) Pension Plan (contd.)  Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(In thousands)Actuarial present value of benefit obligations:Accumulated benefit obligation
    
    $
    27,595
    
    
    $
    33,342
    
    
    $
    38,423Vested benefit obligation
    
    $
    26,860
    
    
    $
    32,505
    
    
    $
    37,585Projected benefit obligation
    
    $
    (34,963
    )
    
    $
    (41,354
    )
    
    $
    (47,132
    )Plan assets at fair value,
primarily notes and bonds
    
    
    24,865
    
    
    
    27,792
    
    
    
    29,812Projected benefit obligation in
excess of plan assets
    
    
    (10,098
    )
    
    
    (13,562
    )
    
    
    (17,320
    )Unrecognized net loss
    
    
    9,679
    
    
    
    13,381
    
    
    
    15,843Unrecognized prior service cost
    
    
    (2
    )
    
    
    
    
    
    
    2Unrecognized net obligations established
October 1, 1987
    
    
    54
    
    
    
    27
    
    
    
    Pension liability recognized in the
balance sheet
    
    $
    (367
    )
    
    $
    (154
    )
    
    $
    (1,475
    )
 Expenses recognized for this retirement plan were $2.4 million, $3.1 million and $3.8 million
in 2002, 2003 and 2004, respectively. Profit Sharing Plan  Multi-Employer Plans  F-24




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 10  Retirement Plans (contd.) Multi-Employer Plans (contd.)  Sept. 29, 2002
    
    
    Sept. 28, 2003
    
    
    Sept. 26, 2004(In thousands)Multi-Employer Pension Plans
    
    $
    16,726
    
    
    $
    22,986
    
    
    $
    35,007Multi-Employer Health and Welfare
    
    
    65,588
    
    
    
    79,561
    
    
    
    132,423Total Multi-Employer Benefits
    
    $
    82,314
    
    
    $
    102,547
    
    
    $
    167,430
 The Companys employer contributions fluctuate as a result of periodic resumptions and
suspensions of employer contributions to collective bargaining trusts. Note 11  Labor Relations The Companys collective bargaining contract with the UFCW was ratified in fiscal 2004 and
extends through March 2007. The Companys collective bargaining agreement with the International
Brotherhood of Teamsters was renewed in September 2002 and expires in September 2005. Santees
collective bargaining agreement with the International Brotherhood of Teamsters was renewed in
March 2004 and expires in March 2007. Management believes it has good relations with its employees. Note 12  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  Receivables  F-25




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 12  Fair Value of Financial Instruments (contd.) Long-Term Debt and Capital Lease Obligations  The estimated fair values of the Companys financial instruments are as follows: As ofSeptember 26, 2004(In thousands)Carrying
    
    
    FairAmount
    
    
    ValueCash and cash equivalents
    
    $
    301,947
    
    
    $
    301,947Receivables
    
    $
    39,258
    
    
    $
    39,258Long-term debt
    
    $
    700,000
    
    
    $
    726,250Capitalized lease obligations
    
    $
    10,717
    
    
    $
    10,717
 Note 13  Litigation Matters In the ordinary course of its business, the Company is party to various legal actions which
the Company believes are incidental to the operation of the business of the Company and its
subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable
and can be reasonably estimated. The Company believes that the outcome of such legal proceedings
to which the Company is currently a party will not have a material adverse effect upon its results
of operations or its consolidated financial condition. On July 9, 2003, the Companys principal operating subsidiary Markets agreed to a settlement
of two lawsuits which had been filed on behalf of certain of Markets existing and former store
managers and assistant managers which alleged that such workers are non-exempt under California
labor laws and are therefore entitled to overtime wages. Markets admitted no wrong doing under the
settlement and it believes it has appropriately followed California law in the classification and
payment of its employees. Markets believes that the store managers and assistant managers are
highly compensated employees with duties and responsibilities which place them in the exempt
category under California law and that such employees are not entitled to overtime wages. Markets
continues to feel the case was without merit; however, because of escalating litigation expenses,
Markets determined a settlement was the best solution. The amount of the settlement was $3.2
million. Of the $3.2 million, $1.2 million of the settlement was recognized as expense in fiscal
2003 and the remaining was expensed in prior years. On February 6, 2004, a final settlement agreement became effective between Markets and Hughes to
resolve litigation matters and control of Santee. For a description of the Settlement Agreement see
Note 3  Santee. F-26




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 14  Stock Redemption During fiscal 2002, the Company obtained consent of the holders of its 10.75% Senior Notes due
2006 to make a distribution and payment to stockholders consisting of $25.0 million in cash and a
subordinated note in the principal amount of $20.0 million. On January 22, 2002, the Company
redeemed 11,699 shares of the Companys stock previously held by La Cadena Investments (La
Cadena), the sole shareholder of the Company, and made a cash payment of $20.0 million and
executed a $20.0 million subordinated note due March 31, 2007 to a former partner of La Cadena.
The subordinated note bore interest at a rate of 5.0% per annum, payable semi-annually. In
February 2004, the Company retired the 5.0% Subordinated Note. On February 1, 2002, the Company
paid a $4.5 million dividend to La Cadena. Fees for consent of the holders of its 10.75% Senior
Notes and fees and expenses of the transaction, including a $500,000 financial advisory service fee
to La Cadena, were approximately $5.0 million. Note 15  Phantom Stock Plan The Company maintains a phantom stock plan for certain executives of Markets. Existing
stockholders and partners of La Cadena are not eligible to receive awards. Awards under the plan
are for units that have an assigned value. Awards under the plan vest after five years, except
that upon a participants early retirement, permanent total disability or death, awards are
considered partially vested at the rate of 20% for each year of employment following the grant. If
a participant voluntarily terminates his or her employment, or is terminated for cause, any
unvested awards under the plan will terminate and no payment will be made thereunder. As of
September 29, 2002, September 28, 2003 and September 26, 2004, there were 668,000, 693,000 and
702,000 units outstanding, respectively. The Company recognized an expense for the plan of $5.8
million, $5.8 million and $23.8 million in 2002, 2003 and 2004, respectively. Note 16  Dividend Payment On June 17, 2004, the Company paid a $45.0 million dividend to La Cadena
Investments, the sole stockholder of the Company. Note 17  Corporate Office and Distribution Facilities Markets plans to build new corporate office and distribution facilities on approximately 160 acres
of real property located on the former Norton Air Force Base (NAFB) in the City of San
Bernardino, California. Markets has entered into an Owner Participation Agreement with the Inland
Valley Development Agency, a joint powers agency (IVDA), which is the entity responsible for the
redevelopment of NAFB, to acquire approximately 93 acres of the project property owned by IVDA. As
a component of this Agreement IVDA is completing an agreement with a sister governmental agency for
an additional 51 acres that would be transferred or leased to Markets with a purchase option. Of
the 160 acre project site, 16 acres are privately owned. Markets has acquired one of these parcels
and is negotiating the acquisition of the three remaining privately held parcels consisting of
approximately 13.5 acres. The Agreement with IVDA requires Markets to acquire those parcels not
owned by IVDA, to relocate all tenants and other business owners occupying buildings on the project
property, to construct and complete the corporate office and distribution facilities and to obtain
all City of San Bernardino building permits and entitlements required for construction of the
project. Markets also has entered into an agreement with Hillwood/San Bernardino LLC (Hillwood),
the master developer of NAFB, for infrastructure improvements. Under the Hillwood Agreement,
Markets will share costs associated with the infrastructure improvements including water, sewer,
streets and utilities, which will be required by the City of San Bernardino for the project.
Markets, after completion of the acquisition of the project property, will secure its commitment
with Hillwood for infrastructure improvements by the posting of either cash or letters of credits
in the amount of $10.8 million. The agreements with IVDA and Hillwood are contingent upon Markets
successfully completing acquisition of all the privately owned property. F-27




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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(contd.) Note 17  Corporate Office and Distribution Facilities (contd.) The NAFB site will be used to relocate and consolidate Markets corporate office and all
distribution facilities to a single integrated facility from the 13 distribution buildings at 7
different locations currently in use. The site is located within eight miles of the main
distribution facility in Colton, so there will be no change in the average distance between the new
facility and Markets retail supermarkets. The facility will consist of approximately 2.1 million
square feet and will include Markets corporate office, truck maintenance and other support
facilities required for consolidation of all of its Southern California office, distribution and
maintenance operations. Taking into account the increased cost of raw materials including steel,
concrete and asphalt, the projected net cost of the facility is approximately $220 million and
completion of the construction is planned for the winter of 2006. Note 18  Quarterly Results (unaudited) Quarterly results for fiscal 2002, 2003 and 2004 are as follows: (In thousands) Net
    
    
    EarningsGross
    
    
    Operating
    
    
    Income
    
    
    (Loss)Sales
    
    
    Profit
    
    
    Profit
    
    
    (Loss)
    
    
    Per Share(as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)Fiscal 2002 Quarters13 weeks ended 12/30/01
    
    $
    662,587
    
    
    $
    176,163
    
    
    $
    18,585
    
    
    $
    3,850
    
    
    $
    77.0013 weeks ended 03/31/02
    
    
    654,213
    
    
    
    172,813
    
    
    
    19,334
    
    
    
    4,210
    
    
    
    102.0413 weeks ended 06/30/02
    
    
    672,779
    
    
    
    177,142
    
    
    
    17,553
    
    
    
    2,820
    
    
    
    73.6313 weeks ended 09/29/02
    
    
    676,767
    
    
    
    182,702
    
    
    
    12,979
    
    
    
    561
    
    
    
    14.65$
    2,666,346
    
    
    $
    708,820
    
    
    $
    68,451
    
    
    $
    11,441
    
    
    $
    272.63Fiscal 2003 Quarters13 weeks ended 12/29/02
    
    $
    681,509
    
    
    $
    184,775
    
    
    $
    17,278
    
    
    $
    2,839
    
    
    $
    74.1213 weeks ended 03/30/03
    
    
    677,196
    
    
    
    188,058
    
    
    
    19,270
    
    
    
    3,745
    
    
    
    97.7813 weeks ended 06/29/03
    
    
    688,071
    
    
    
    189,233
    
    
    
    14,012
    
    
    
    675
    
    
    
    17.6213 weeks ended 09/28/03
    
    
    706,998
    
    
    
    192,347
    
    
    
    16,646
    
    
    
    2,508
    
    
    
    65.49$
    2,753,774
    
    
    $
    754,413
    
    
    $
    67,206
    
    
    $
    9,767
    
    
    $
    255.01Fiscal 2004 Quarters13 weeks ended 12/28/03
    
    $
    1,026,553
    
    
    $
    304,882
    
    
    $
    70,407
    
    
    $
    34,551
    
    
    $
    902.0913 weeks ended 03/28/04
    
    
    989,418
    
    
    
    296,339
    
    
    
    72,538
    
    
    
    30,187
    
    
    
    788.1513 weeks ended 06/27/04
    
    
    847,983
    
    
    
    224,723
    
    
    
    28,060
    
    
    
    (5,863
    )
    
    
    (153.08
    )13 weeks ended 09/26/04
    
    
    840,928
    
    
    
    226,126
    
    
    
    27,452
    
    
    
    12,566
    
    
    
    328.09$
    3,704,882
    
    
    $
    1,052,070
    
    
    $
    198,457
    
    
    $
    71,441
    
    
    $
    1,865.25
 F-28