##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

|           |  |                                                                               
|---------- |  | ------------------------------------------------------------------------------
|(Mark One)
|x          |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  |                                                                               
|           |  | For
the fiscal year ended: September 28, 2003                                 
|           |  |                                                                               
|           |  | OR                                                                            

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|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.


(Exact name of registrant as specified in its charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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. Yes x No o.

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. Yes x No o.

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2
of the Act). Yes o No x.

No voting stock of the registrant is held by non-affiliates of the
registrant.

Number of shares of the registrants Common Stock, $.01 par value,
outstanding as of December 19, 2003Class A Common
Stock - 38,301 shares.

DOCUMENTS INCORPORATED BY REFERENCE
None



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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|             | Item 3. Legal Proceedings                                                                    
|             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II     
|             | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|             | Item 6. Selected Financial Data                                                              
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                           
|             | Item 8. Financial Statements and Supplementary Data                                          
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|             | Item 9A. Controls and Procedures                                                             
|PART III    
|             | Item 10. Directors and Executive Officers of the Registrant                                  
|             | Item 11. Executive Compensation                                                              
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|             | Item 13. Certain Relationships and Related Transactions                                      
|             | Item 14. Principal Accounting Fees and Services                                              
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES  
|EXHIBIT 12  
|EXHIBIT 14  
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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##### Table of Contents



STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS

|        |  |                                                                                       |  |            |    |  |    |  |             |  | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---------- | -- |  | -- |  | ----------- |  | 
|        |  |                                                                                       |  |            |    |  |    |  | Page Number
|        |  |                                                                                       |  |            |    |  |    |  |            
|        |  |                                                                                       |  | PART I     |    |  |    | 
|Item 1  |  | Business                                                                              |  |            | 3  | 
|Item 2  |  | Properties                                                                            |  |            | 9  | 
|Item 3  |  | Legal Proceedings                                                                     |  |            | 10 | 
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  |            | 10 | 
|        |  |                                                                                       |  | PART II    |    |  |    | 
|Item 5  |  | Market for the Registrants Common Equity and
Related Stockholder Matters             |  |            | 11 | 
|Item 6  |  | Selected Financial Data                                                               |  |            | 12 | 
|Item 7  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |            | 15 | 
|Item 7A |  | Quantitative and Qualitative Disclosure about Market Risk                             |  |            | 26 | 
|Item 8  |  | Financial Statements and Supplementary Data                                           |  |            | 27 | 
|Item 9  |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |            | 27 | 
|Item 9A |  | Controls and Procedures                                                               |  |            | 27 | 
|        |  |                                                                                       |  | PART III   |    |  |    | 
|Item 10 |  | Directors and Executive Officers of the Registrant                                    |  |            | 28 | 
|Item 11 |  | Executive Compensation                                                                |  |            | 30 | 
|Item 12 |  | Security Ownership of Certain Beneficial Owners
and Management                        |  |            | 33 | 
|Item 13 |  | Certain Relationships and Related Transactions                                        |  |            | 34 | 
|Item 14 |  | Principal Accounting Fees and Services                                                |  |            | 34 | 
|        |  |                                                                                       |  | PART IV    |    |  |    | 
|Item 15 |  | Exhibits, Financial Statement Schedules and
Reports on Form 8-K                       |  |            | 35 | 
|        |  |                                                                                       |  | Signatures |    |  | 40 | 

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##### Table of Contents






PART I




Item 1. Business

General

Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively Stater Bros. or the Company) were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California and operates 157
supermarkets under the Stater Bros. Markets name.

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 5.2 million total square
feet including approximately 3.7 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 a centralized warehouse and distribution facilities that
provide the Companys supermarkets with approximately 77% of the volume of the
merchandise they offer for sale. The Companys warehouse and distribution
facilities encompass approximately 1,660,000 square feet and include facilities
for 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 bears 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.

Acquisition

On May 7, 1999, Stater Bros. entered into an agreement with Albertsons, Inc.
(Albertsons) to purchase 43 supermarkets and one future store site (the
Acquisition) in Stater Bros. existing and contiguous market areas. The
stores were formerly operated by Albertsons or Lucky Stores and were divested
in connection with the merger of Albertsons and American Store Company, the
parent of Lucky Stores. The purchase price was $94.4 million for land,
buildings and equipment, $39.6 million for inventories on hand at closing, and
the assumption of $13.3 million of capitalized lease obligations and
approximately $2.2 million of capitalized costs related to the transfer of
ownership of the supermarkets. The supermarkets were acquired sequentially
over a twenty-four day period, which began on August 9, 1999. Each acquired
store was reopened under the Stater Bros. name within two days of its
acquisition and was fully integrated into the Stater Bros. operating systems.

3



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##### Table of Contents



Item 1. Business (contd.)

Acquisition (contd.)

The Acquisition was funded through an issue, in August 1999, of $450 million of
the 10.75% Notes under Rule 144A of the Securities Act of 1933. Proceeds from
the issuance were used to (a) retire all of the 9% Notes ($100.0 million), (b)
retire substantially all of the 11% Notes ($159,952,000), (c) fund early
redemption premiums of $18.7 million for both the 9% Notes and the 11% Notes,
(d) acquire the assets of 43 supermarkets and one future store site for $134.0
million, (e) pay a fee to La Cadena for financial advisory services of $4.5
million, and (f) pay fees and expenses of the transaction. The remaining
proceeds from the issue were used for general corporate purposes, including
capital expenditures. Of the 10.75% Notes, $449,750,000 were registered
securities and $250,000 were restricted and unregistered.

Business Strategy

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 33,100 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 157 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 is 157 as of September 28, 2003. 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.

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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 75% 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 remodelings and expansions are to improve the attractiveness of
supermarkets, increase sales of higher margin product categories and, where
feasible, to increase selling area. The Company conducts all of its new
construction and most of its remodeling through its wholly owned subsidiary,
Stater Bros. Development, Inc., which serves as the general contractor for all
Company construction projects.

The following table sets forth certain statistical information with respect to
the Companys supermarket expansion and remodeling for the periods indicated.

|                        |                      |  |                   |     |           |  |           |     |           |  |           |     |   |  |  |     |  |  |  |     | 
|----------------------- | -------------------- |  | ----------------- | --- | --------- |  | --------- | --- | --------- |  | --------- | --- | - |  |  | --- |  |  |  | --- | 
|                        |                      |  | Fiscal Year Ended
|                        |                      |  |                  
|                        |                      |  | Sept. 26,         |     | Sept. 24, |  | Sept. 30, |     | Sept. 29, |  | Sept. 28,
|                        |                      |  | 1999              |     | 2000      |  | 2001      |     | 2002      |  | 2003     
|                        |                      |  |                   |     |           |  |           |     |           |  |          
|Number of supermarkets: |                      |  |                   |     |           |  |           |     |           |  |           |     |   |  |  |     |  |  |  |    
|                        | Opened               |  |                   | 1   |           |  |           |    |           |  |           | 1   |   |  |  | 1   |  |  |  | 1   | 
|                        | Acquired             |  |                   | 43  |           |  |           |    |           |  |           |    |   |  |  |    |  |  |  |    | 
|                        | Replaced             |  |                   | (1  | )         |  |           |    |           |  |           | (1  | ) |  |  |    |  |  |  |    | 
|                        | Total at end of year |  |                   | 155 |           |  |           | 155 |           |  |           | 155 |   |  |  | 156 |  |  |  | 157 | 
|                        | Minor Remodel        |  |                   | 7   |           |  |           | 17  |           |  |           | 10  |   |  |  | 11  |  |  |  | 20  | 
|                        | Major Remodel        |  |                   | 10  |           |  |           | 2   |           |  |           | 2   |   |  |  | 3   |  |  |  | 4   | 
|                        | Expansion            |  |                   |    |           |  |           | 1   |           |  |           |    |   |  |  |    |  |  |  |    | 

Beyond 2003, 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.

Warehouse and Distribution Facilities

The Companys warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 1,660,000 square
feet. The facilities include warehouses for grocery, deli, produce, meat, meat
deli, frozen, bakery, health and beauty care, and general merchandise products.
Management believes that its existing warehouse and distribution facilities
are adequate to meet its current volume. Approximately 77% of the volume of
the products offered for sale in the Companys supermarkets are processed
through the Companys warehouse and distribution facilities.

The Companys warehouse and distribution facilities are centrally located and
are an average distance of approximately 41 miles from its supermarkets. Most
supermarkets can be reached without using the most congested portions of the
Southern California freeway system.

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Item 1. Business (contd.)

Warehouse and Distribution Facilities (contd.)

The Companys transportation fleet consists of modern well-maintained vehicles.
As of September 28, 2003, the Company operated approximately 139 tractors, 122
which were owned and 17 which were leased and 426 trailers, all of which were
owned.

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 warehouses and distribution
facilities.

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 17 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. 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.

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Item 1. Business (contd.)

Santee Dairies, LLC

Stater Bros. and The Kroger Co., which operates as Ralphs Supermarkets,
currently each own a 50% interest in Santee Dairies, LLC, and have jointly
owned the Santee Dairies operation since 1986. Santee Dairies operates one of
the largest dairy plants in California and provides fluid milk products to
Stater Bros., Ralphs, and other customers in Southern California. Santee
Dairies 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 store brand names. Santee Dairies 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 Dairies is the exclusive licensee for
Foremost Farms USA, Cooperative of the Foremost trademark for fluid milk in
Southern California. Santee Dairies also distributes Hershey chocolate milk
under license. In calendar year 2002, Santee Dairies processed approximately
68.5 million gallons of fluid products, including 55.4 million gallons of fluid
milk. Total revenues in Santee Dairies 52-week fiscal year ended December 28,
2002 were $177.0 million, of which approximately $85.5 million were sales to
Stater Bros. and Ralphs. Santee Dairies 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.

Stater Bros. and Santee Dairies are parties to a ten year fluid milk purchase
agreement entered into in July 1997. It requires that Stater Bros. purchase
its requirements of fluid milk and certain other products, subject to a minimum
volume each year equal to approximately 80% of the volume purchased during
Stater Bros. 1996 fiscal year. Prices under the agreement are calculated to
cover Santee Dairies direct and indirect costs of production, including
financing costs. However, recoverable costs by Santee Dairies may not include
under any circumstances amounts owing solely by reason of the acceleration of
principal payments under any loan agreement to which Santee Dairies is a party.

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

Management Information Systems

The Companys management information systems and point-of-sale scanning
technology reduce the labor costs attributable to product pricing and customer
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.

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Item 1. Business (contd.)

Employees

The Company has approximately 13,500 employees, approximately 800 of whom are
management and administrative employees and approximately 12,700 of whom are
hourly employees. Approximately 72% of the Companys employees work part-time.
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 Companys collective bargaining agreement with the UFCW, which covers the
largest number of employees, expired in October 2003. The UFCW had the same
collective bargaining agreement with the Company and with the Companys three
major competitors, Vons, Albertsons and Ralphs. On April 14, 2003, prior to
the expiration of the collective bargaining agreement, the Company signed an
agreement with the UFCW which stated that the Company would accept the same
contract terms that the UFCW negotiated with Vons, Albertsons and Ralphs. In
return, the UFCW agreed not to strike the Company. The Company is not a party
to the contract negotiations between the UFCW and Vons, Albertsons and Ralphs.

Prior to the labor action, Vons, Albertsons and Ralphs informed the UFCW that
a strike against any one of the grocery chains would be considered as a strike
against all three chains. On October 11, 2003, the UFCW declared a strike
against Vons; in turn Albertsons and Ralphs locked out all of their UFCW
employees. As of the date of this filing, a new agreement has not been reached
and the strike and lockout continue. The effect, if any, of any new collective
bargaining agreement on the Companys future labor costs is unknown. Also, the
long-term effect on the Companys sales volume resulting from the strike is
unknown.

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.

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.

8



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##### Table of Contents



Item 1. Business (contd.)

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.

Environmental

Environmental remediation costs incurred over the past five years were
approximately $1.5 million, in the aggregate, including remediation costs of
approximately $101,000 in 1999, $198,000 in 2000, $495,000 in 2001, $324,000 in
2002 and $395,000 in 2003. 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 2. Properties

The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to meet its current volume.

The following schedule presents the Companys warehouse and distribution
facilities by product classification and the size of each facility as of
September 28, 2003.

|                                               |       |      |         |           | 
|---------------------------------------------- | ----- | ---- | ------- | --------- | 
|                                               |       |      | Square 
|Facility                                       |       | Feet
|                                               |       |     
|Grocery                                        |       |      | 960,000 |          
|Health and beauty care and general merchandise |       |      | 188,000 |          
|Produce, meat and meat deli                    |       |      | 118,000 |          
|Grocery deli                                   |       |      | 116,000 |          
|Frozen                                         |       |      | 146,000 |          
|Bakery                                         |       |      | 40,000  |          
|Support and administrative offices             |       |      | 92,000  |          
|                                               |       |      |         |          
|                                               | Total |      |         | 1,660,000 | 
|                                               |       |      |         |          

As of September 28, 2003, the Company owned 45 of its supermarkets and leased
the remaining 112 supermarkets. Management believes that its supermarkets are
well maintained and adequately meet the expectations of its customers. The
Company operates 157 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 28, 2003.

|               |  |               |     |                   |  |        |    |        |  |        |     |        |  |        |    |         |  |         |    |         |  |      |    |  |  |  |    |  |  |  |    | 
|-------------- |  | ------------- | --- | ----------------- |  | ------ | -- | ------ |  | ------ | --- | ------ |  | ------ | -- | ------- |  | ------- | -- | ------- |  | ---- | -- |  |  |  | -- |  |  |  | -- | 
|               |  | No. of Stores |     | Total Square Feet
|               |  |               |     |                  
|               |  |               |     |                   |  |        |    |        |  |        |     |        |  | Under  |    | 25,000- |  | 30,000- |    | 35,000- |  | Over
|County         |  | Total         |     | Owned             |  | Leased |    | 25,000 |  | 29,999 |     | 34,999 |  | 40,000 |    | 40,000 
|               |  |               |     |                   |  |        |    |        |  |        |     |        |  |        |    |        
|San Bernardino |  |               | 47  |                   |  |        | 9  |        |  |        | 38  |        |  |        | 5  |         |  |         | 16 |         |  |      | 6  |  |  |  | 14 |  |  |  | 6  | 
|Riverside      |  |               | 41  |                   |  |        | 12 |        |  |        | 29  |        |  |        | 10 |         |  |         | 14 |         |  |      | 5  |  |  |  | 5  |  |  |  | 7  | 
|Orange         |  |               | 30  |                   |  |        | 11 |        |  |        | 19  |        |  |        | 4  |         |  |         | 13 |         |  |      | 1  |  |  |  | 4  |  |  |  | 8  | 
|Los Angeles    |  |               | 27  |                   |  |        | 8  |        |  |        | 19  |        |  |        | 5  |         |  |         | 7  |         |  |      | 1  |  |  |  | 3  |  |  |  | 11 | 
|San Diego      |  |               | 10  |                   |  |        | 5  |        |  |        | 5   |        |  |        |   |         |  |         | 1  |         |  |      |   |  |  |  | 2  |  |  |  | 7  | 
|Kern           |  |               | 2   |                   |  |        |   |        |  |        | 2   |        |  |        |   |         |  |         |   |         |  |      | 1  |  |  |  | 1  |  |  |  |   | 
|               |  |               |     |                   |  |        |    |        |  |        |     |        |  |        |    |         |  |         |    |         |  |      |    |  |  |  |    |  |  |  |    | 
|Total          |  |               | 157 |                   |  |        | 45 |        |  |        | 112 |        |  |        | 24 |         |  |         | 51 |         |  |      | 14 |  |  |  | 29 |  |  |  | 39 | 
|               |  |               |     |                   |  |        |    |        |  |        |     |        |  |        |    |         |  |         |    |         |  |      |    |  |  |  |    |  |  |  |    | 

The total size of the Companys supermarkets is approximately 5,205,000 square
feet, of which 3,724,000 is selling square feet.

9



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##### Table of Contents






Item 3. Legal Proceedings

In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company records an
appropriate provision when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.

On July 9, 2003, the Companys principal operating subsidiary Stater Bros.
Markets (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 $2.0 million was recognized as expense in fiscal
2001. Subsequent to year-end, the settlement was paid.

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 Markets, Inc., Ralphs Grocery
Company (Ralphs), Fred Meyer, Inc. and The Kroger Company (Defendants)
alleging among other things breaches of their Product Purchase Agreement with
Santee and failure to make certain capital contributions for Santees dairy
facility in the City of Industry. In July of 2003, Defendants filed a
cross-complaint against Markets, Santee and others seeking among other things
Declaratory Relief for interpretation of the requirements of the Product
Purchase Agreements and for damages against Markets, Santee and certain
directors of Santee for adoption of a Milk Incentive Program and payments to
Markets under that program and other claims for damages. Subsequent to
year-end, the parties mediated and reached a settlement agreement that is
subject to a sixty day close. A component of the settlement requires the
parties to execute a transfer agreement whereby Defendants will relinquish its
right, title and interest in Santee to the Company.

Environmental Matters

Environmental remediation costs incurred during the last five years were
approximately $1.5 million, in the aggregate, including remediation costs of
approximately $101,000 in 1999, $198,000 in 2000, $495,000 in 2001, $324,000 in
2002 and $395,000 in 2003. 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

10



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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 |         | Outstanding
|                     |  |            |         |            
|Common Stock         |  |            | 100,000 |             |  |  | 0      | 
|Class 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 Companys credit facility with Bank of America N.A. dated August
6, 1999 and as subsequently amended, limits the Companys ability to
pay dividends. The Company may declare and pay dividends after
December 31, 2000, but the aggregate amount of the dividend may not
exceed 50% of the cumulative amount of the Companys consolidated net
income from the fiscal periods after September 30, 2000 through the
most recent quarter prior to the declaration and payment of
dividends.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Dividends of $4.5 million were paid in fiscal 2002 on the common
equity of the company. Cumulative consolidated net income from
September 30, 2000 through December 30, 2001 was $11.8 million. No
dividends were paid in fiscal years 2003 and 2001. The Company does
not intend to pay dividends on its common equity in the foreseeable
future.                                                                                                                                           

11



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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 26, 1999, September 24, 2000, September 30, 2001,
September 29, 2002 and September 28, 2003. 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 Ended
|                                               |  |                   
|                                               |  | Sept. 26,          |           | Sept. 24, |  | Sept. 30,(6)                                              |           | Sept. 29, |  | Sept. 28,
|                                               |  | 1999               |           | 2000      |  | 2001                                                      |           | 2002      |  | 2003     
|                                               |  |                    |           |           |  |                                                           |           |           |  |          
|                                               |  |                    |           |           |  | (In thousands of dollars except per share and store data) |           |           |  |          
|Statement of Earnings Data:                    |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Sales                                          |  | $                  | 1,830,195 |           |  | $                                                         | 2,417,710 |           |  | $         | 2,573,913 |   |  | $ | 2,666,346 |   |  | $ | 2,753,774 |  
|Cost of goods sold                             |  |                    | 1,387,619 |           |  |                                                           | 1,819,068 |           |  |           | 1,911,065 |   |  |   | 1,957,526 |   |  |   | 1,999,361 |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Gross profit                                   |  |                    | 442,576   |           |  |                                                           | 598,642   |           |  |           | 662,848   |   |  |   | 708,820   |   |  |   | 754,413   |  
|Selling, general and administrative
expenses   |  |                    | 377,195   |           |  |                                                           | 532,147   |           |  |           | 572,815   |   |  |   | 608,289   |   |  |   | 652,291   |  
|Depreciation and amortization                  |  |                    | 16,591    |           |  |                                                           | 25,580    |           |  |           | 29,061    |   |  |   | 31,493    |   |  |   | 34,308    |  
|Acquisition integration expenses               |  |                    | 5,590     |           |  |                                                           | 4,594     |           |  |           |          |   |  |   |          |   |  |   |          |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Total operating expenses                       |  |                    | 399,376   |           |  |                                                           | 562,321   |           |  |           | 601,876   |   |  |   | 639,782   |   |  |   | 686,599   |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Operating profit                               |  |                    | 43,200    |           |  |                                                           | 36,321    |           |  |           | 60,972    |   |  |   | 69,038    |   |  |   | 67,814    |  
|Interest and other income (expense)            |  |                    | 2,951     |           |  |                                                           | 3,217     |           |  |           | 3,151     |   |  |   | 142       |   |  |   | (44       | )
|Interest expense(1)                            |  |                    | (62,174   | )         |  |                                                           | (51,784   | )         |  |           | (52,410   | ) |  |   | (52,814   | ) |  |   | (53,254   | )
|Equity in income from
unconsolidated affiliate |  |                    | 1,130     |           |  |                                                           | 1,483     |           |  |           | 1,584     |   |  |   | 2,914     |   |  |   | 1,330     |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Income (loss) before income taxes              |  |                    | (14,893   | )         |  |                                                           | (10,763   | )         |  |           | 13,297    |   |  |   | 19,280    |   |  |   | 15,846    |  
|Income taxes (benefit)                         |  |                    | (5,861    | )         |  |                                                           | (4,596    | )         |  |           | 5,452     |   |  |   | 7,491     |   |  |   | 5,719     |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Net income (loss)                              |  | $                  | (9,032    | )         |  | $                                                         | (6,167    | )         |  | $         | 7,845     |   |  | $ | 11,789    |   |  | $ | 10,127    |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  
|Earnings (loss) per common share               |  | $                  | (180.64   | )         |  | $                                                         | (123.34   | )         |  | $         | 156.90    |   |  | $ | 280.92    |   |  | $ | 264.41    |  
|                                               |  |                    |           |           |  |                                                           |           |           |  |           |           |   |  |   |           |   |  |   |           |  

| |                              
| | -----------------------------
| | (footnotes on following page)

12



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##### Table of Contents



Item 6. Selected Financial Data (contd.)

|                                                                      |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |        |  
|--------------------------------------------------------------------- | ------------------------------------ | - | --------------------------------------------------------- | ------ | --------- | - | ------------ | ------ | --------- | - | --------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                      |                                      |   | Fiscal Years Ended                                       
|                                                                      |                                      |   |                                                          
|                                                                      |                                      |   | Sept. 26,                                                 |        | Sept. 24, |   | Sept. 30,(6) |        | Sept. 29, |   | Sept. 28,
|                                                                      |                                      |   | 1999                                                      |        | 2000      |   | 2001         |        | 2002      |   | 2003     
|                                                                      |                                      |   |                                                           |        |           |   |              |        |           |   |          
|                                                                      |                                      |   | (In thousands of dollars except per share and store data)
|Balance Sheet Data (end of fiscal year):                              |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|Working capital                                                       |                                      | $ | 127,029                                                   |        |           | $ | 107,907      |        |           | $ | 120,457   |        |   | $ | 119,643 |        |   | $ | 124,517 |       
|Total assets                                                          |                                      |   | 603,917                                                   |        |           |   | 595,288      |        |           |   | 629,294   |        |   |   | 634,130 |        |   |   | 667,826 |       
|Long-term notes                                                       |                                      |   | 455,048                                                   |        |           |   | 439,000      |        |           |   | 439,000   |        |   |   | 458,750 |        |   |   | 458,750 |       
|Long-term capitalized lease
obligations                               |                                      |   | 15,625                                                    |        |           |   | 13,679       |        |           |   | 12,098    |        |   |   | 10,981  |        |   |   | 9,926   |       
|Other long-term liabilities                                           |                                      |   | 10,960                                                    |        |           |   | 14,070       |        |           |   | 24,608    |        |   |   | 45,014  |        |   |   | 54,916  |       
|Common stockholders deficit                                          |                                      |   | (43,087                                                   | )      |           |   | (49,254      | )      |           |   | (41,409   | )      |   |   | (74,121 | )      |   |   | (63,994 | )     
|Dividends paid per share, Class A
Common Stock                        |                                      | $ |                                                          |        |           | $ |             |        |           | $ |          |        |   | $ | 117.49  |        |   | $ |        |       
|Cash Flow Data:                                                       |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|Cash provided by operating activities                                 |                                      |   | 59,296                                                    |        |           |   | 15,385       |        |           |   | 79,393    |        |   |   | 51,168  |        |   |   | 82,950  |       
|Cash provided by (used in)
financing activities                       |                                      |   | 152,912                                                   |        |           |   | (10,664      | )      |           |   | (7,140    | )      |   |   | (31,218 | )      |   |   | (1,116  | )     
|Cash used in investing activities                                     |                                      |   | (176,137                                                  | )      |           |   | (35,442      | )      |           |   | (33,248   | )      |   |   | (40,543 | )      |   |   | (51,725 | )     
|Other Operating and Financial Data:                                   |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|Sales increases:                                                      |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|                                                                      | Total stores                         |   |                                                           | 6.0    | %         |   |              | 32.1   | %         |   |           | 6.5    | % |   |         | 3.6    | % |   |         | 3.3    | %
|                                                                      | Like stores (comparable 52-weeks)(2) |   |                                                           | 1.9    | %         |   |              | 1.4    | %         |   |           | 4.5    | % |   |         | 5.3    | % |   |         | 2.8    | %
|EBITDA(3)                                                             |                                      | $ | 63,872                                                    |        |           | $ | 66,601       |        |           | $ | 94,768    |        |   | $ | 103,587 |        |   | $ | 103,408 |       
|Operating profit                                                      |                                      | $ | 43,200                                                    |        |           | $ | 36,321       |        |           | $ | 60,972    |        |   | $ | 69,038  |        |   | $ | 67,814  |       
|Ratio of earnings to fixed charges(1)(4)                              |                                      |   | 0.83                                                      | x      |           |   | 0.87         | x      |           |   | 1.19      | x      |   |   | 1.25    | x      |   |   | 1.21    | x     
|Gross profit as a percentage
of sales                                 |                                      |   | 24.18                                                     | %      |           |   | 24.76        | %      |           |   | 25.75     | %      |   |   | 26.58   | %      |   |   | 27.40   | %     
|Selling, general and administrative
expenses as a percentage of sales |                                      |   | 20.61                                                     | %      |           |   | 22.01        | %      |           |   | 22.25     | %      |   |   | 22.81   | %      |   |   | 23.69   | %     
|Store Data(5):                                                        |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|Number of stores (at end of
fiscal year)                              |                                      |   | 155                                                       |        |           |   | 155          |        |           |   | 155       |        |   |   | 156     |        |   |   | 157     |       
|Average sales per store (000s)                                        |                                      | $ | 15,741                                                    |        |           | $ | 15,598       |        |           | $ | 16,606    |        |   | $ | 17,092  |        |   | $ | 17,619  |       
|Average store size:                                                   |                                      |   |                                                           |        |           |   |              |        |           |   |           |        |   |   |         |        |   |   |         |       
|                                                                      | Total square feet                    |   |                                                           | 32,895 |           |   |              | 32,910 |           |   |           | 33,018 |   |   |         | 33,083 |   |   |         | 33,111 |  
|                                                                      | Selling square feet                  |   |                                                           | 23,570 |           |   |              | 23,570 |           |   |           | 23,639 |   |   |         | 23,675 |   |   |         | 23,693 |  
|Total square feet (at end of
fiscal year) (000s)                      |                                      |   | 5,099                                                     |        |           |   | 5,101        |        |           |   | 5,118     |        |   |   | 5,161   |        |   |   | 5,205   |       
|Total selling square feet (at end
of fiscal year) (000s)              |                                      |   | 3,653                                                     |        |           |   | 3,653        |        |           |   | 3,664     |        |   |   | 3,693   |        |   |   | 3,724   |       
|Sales per total sq. ft.                                               |                                      | $ | 531                                                       |        |           | $ | 474          |        |           | $ | 503       |        |   | $ | 517     |        |   | $ | 532     |       
|Sales per selling sq. ft.                                             |                                      | $ | 736                                                       |        |           | $ | 662          |        |           | $ | 702       |        |   | $ | 722     |        |   | $ | 744     |       



|(1) |  | Effective September 30, 2002, the Company adopted FASB Statement 145,
Rescission of Statements 4, 44 and 62 (SFAS 145). SFAS 145 rescinds
Statement 4, Reporting Gains and Losses from Extinguishment of Debt.
Under SFAS 145, gains and losses from extinguishment of debt previously
reported as extraordinary items were reclassified to continuing
operations. For fiscal 1999, a $17.3 million ($28.5 million less tax
effect) extraordinary loss from the early retirement of 9% Senior
Subordinated Notes due 2004 and 11% Senior Notes due 2001 was
reclassified to continuing operations. For fiscal 1999, $28.5 million
was reclassified as an increase to interest expense and $11.2 was
reclassified as a reduction to income taxes. For fiscal 2000, a $1.1
million ($1.9 million less tax effect) extraordinary gain from the early
retirement of $11 million of 10.75% Senior Notes due 2006 was
reclassified to continuing operations. For fiscal
2000, $1.9 million was reclassified as a decrease to interest expense
and $0.8 million was reclassified as an increase to income taxes.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                        
| | ---------------------------------------
| | (footnotes continued on following page)

13



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##### Table of Contents



Item 6. Selected Financial Data (contd.)



|(2) |  | 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 monthly sales that
correspond to the months the store was open in the previous year are
used. Since replacement stores are replacing an existing operating
store, all of the current year replacement store sales are included in
the like store sales calculation. There were no stores closed in the
years considered in this table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | EBITDA is included here as the Company believes that it is used by
the Companys bond holders, security analysts and other interested
parties to evaluate the Companys operating results and as a measure of
the Companys ability to both service debt and to comply with certain
debt covenants. Management uses EBITDA as one measure of operating
performance and believes that it is an important measure of liquidity.
EBITDA is a calculation derived from the Companys debt covenants and is
defined as earnings before interest expense, income taxes and
depreciation and amortization. EBITDA is not a measure of financial
performance under accounting principles generally accepted in the United
States and should not be used as an alternative to, or be construed as
more meaningful than, operating profit or cash flows as an indicator of
the Companys operating performance. The following table reconciles
EBITDA to cash provided by operating activities which is the most
closely comparable GAAP measure of liquidity:

|                                                 |  |                    |         |           |  |                                                           |        |           |  |           |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------ | ------- | --------- |  | --------------------------------------------------------- | ------ | --------- |  | --------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Fiscal Years Ended
|                                                 |  |                   
|                                                 |  | Sept. 26,          |         | Sept. 24, |  | Sept. 30,(6)                                              |        | Sept. 29, |  | Sept. 28,
|                                                 |  | 1999               |         | 2000      |  | 2001                                                      |        | 2002      |  | 2003     
|                                                 |  |                    |         |           |  |                                                           |        |           |  |          
|                                                 |  |                    |         |           |  | (In thousands of dollars except per share and store data) |        |           |  |          
|Net cash provided by
operating activities        |  | $                  | 59,296  |           |  | $                                                         | 15,385 |           |  | $         | 79,393  |   |  | $ | 51,168  |   |  | $ | 82,950  |  
|Net increase in operating assets
and liabilities |  |                    | (53,293 | )         |  |                                                           | (4,058 | )         |  |           | (40,892 | ) |  |   | (6,471  | ) |  |   | (38,056 | )
|Loss on disposal of assets                       |  |                    | (357    | )         |  |                                                           | (29    | )         |  |           | (258    | ) |  |   | (1,579  | ) |  |   | (1,093  | )
|Change in deferred income taxes                  |  |                    | 783     |           |  |                                                           | 6,632  |           |  |           | (2,921  | ) |  |   | (2,750  | ) |  |   | (696    | )
|Equity in income from
unconsolidated affiliate   |  |                    | 1,130   |           |  |                                                           | 1,483  |           |  |           | 1,584   |   |  |   | 2,914   |   |  |   | 1,330   |  
|Interest expense                                 |  |                    | 62,174  |           |  |                                                           | 51,784 |           |  |           | 52,410  |   |  |   | 52,814  |   |  |   | 53,254  |  
|Income tax expense (benefit)                     |  |                    | (5,861  | )         |  |                                                           | (4,596 | )         |  |           | 5,452   |   |  |   | 7,491   |   |  |   | 5,719   |  
|                                                 |  |                    |         |           |  |                                                           |        |           |  |           |         |   |  |   |         |   |  |   |         |  
|EBITDA                                           |  | $                  | 63,872  |           |  | $                                                         | 66,601 |           |  | $         | 94,768  |   |  | $ | 103,587 |   |  | $ | 103,408 |  
|                                                 |  |                    |         |           |  |                                                           |        |           |  |           |         |   |  |   |         |   |  |   |         |  



|(4) |  | For the purpose of determining the ratio of earnings to fixed
charges, earnings consist of income before income taxes and the
extraordinary gain or loss and amortization of previously capitalized
interest. Fixed charges consist of interest expense whether expensed
or capitalized, amortization of deferred debt expense, 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 an unconsolidated
affiliate. See Computation of Earnings to Fixed Charges filed as
Exhibit 12 to this Report on Form 10-K.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | 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.                                                                                                                                                                                                                                                                                                                                  
|   
|(6) |  | The fiscal year 2001 was a 53-week year, whereas fiscal years 1999,
2000, 2002 and 2003 were 52-week years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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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.

Revenue Recognition

The Company recognizes revenue from the sale of its products at the point of
sale to the customer. Sales are recognized net of any discounts given to the
customer.

Cost of Goods Sold

Included in cost of goods sold are direct product purchase costs, all in-bound
freight costs, all direct receiving and inspection costs, all quality assurance
costs, all warehousing costs and all costs associated with transporting goods
from the Companys warehouses to its stores, net of earned vendor rebates and
allowances. The Company recognizes, as a reduction to cost of goods sold,
certain rebates and allowances (allowances) from its vendors as the
allowances are earned. Allowances are earned by promoting certain products or
by purchasing specified amounts of product. The Company records a liability
for allowance funds that have been received but not yet earned.

Selling, General and Administrative Expenses

Included in selling, general and administrative expenses are all store
operation costs which includes all store labor costs associated with receiving,
displaying and selling the Companys products at the store level; all
advertising costs, net in fiscal 2003 of the portion of co-operative
advertising allowances directly related to the fair value of the advertising
and net of all co-operative advertising allowances in the prior years; certain
salary, wages and administrative costs associated with the purchasing of the
Companys products and all security, management information services,
accounting and corporate management costs.

Within the supermarket industry, there are a wide range of differences in the
disclosure of costs related to the purchasing and distribution of products
sold. Some companies include all of their purchasing and distribution costs in
cost of goods sold while others will include a portion of the costs in 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.

Vendor Rebates and Allowances

The Company receives certain allowances from its vendors that relate to the
purchase and promotion of certain products. All allowances, except for
advertising allowances described under Advertising Allowance, are recognized
as a reduction in cost of goods sold as the performance is completed and
inventory sold. Allowances, such as slotting fees, which are tied to the
promotion of certain products are recognized as reductions in cost of goods
sold as the Company meets the required performance criteria. Allowances that
are based upon purchase or sales volumes are recognized as reductions in cost
of goods sold as the products are sold. The Company receives lump-sum payments
from vendors for the promotion or purchase of products over multi-year periods.
The Company records a liability for unearned allowances and recognizes, as a
reduction in cost of goods sold, these allowances over time as the criteria of
these contracts are met.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies (contd.)

Advertising Allowances

The Company receives co-operative advertising allowances from vendors for
advertising specific vendor products over specific periods of time. For fiscal
2003, the Company recognized the portion of co-operative advertising allowances
directly related to the fair value of the advertising as a reduction in
advertising costs. A significant portion of the Companys advertising
expenditures is in the form of twice weekly print advertisements. The Company
distributes its print ads through inserts in local newspapers, in direct
mailers and as handouts distributed in its stores. The Company analyzes, on an
annual basis, the direct out-of-pocket costs for printing and distributing its
print ads. Using the number of ads in a typical twice weekly advertisement, the
actual direct cost of an individual advertisement is determined. The cost
determined is deemed to be the fair value of advertising. In fiscal 2003, 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 and fiscal 2001, all co-operative advertising allowances were
recognized as reductions in advertising expense.

Advertising

The Companys advertising costs, net of vendor allowances for co-operative
advertising, are recognized in the period the advertising is incurred and are
included in selling, general and administrative expenses.

Leases

Certain of the Companys operating leases provide for minimum annual payments
that change over the life of the lease. The aggregate minimum annual payments
are expensed on a straight-line basis over the minimum lease term. The Company
recognizes a liability for minimum step rents when the amount of straight-line
rent expense exceeds the actual lease payment and it reduces the step rent
liability when the actual lease payment exceeds the amount of straight-line
rent expense.

Self-Insurance Reserves

The Company is primarily self-insured, subject to certain retention levels for
workers compensation, automobile and general liability costs. The Company is
covered by umbrella insurance policies for catastrophic events. The Company
records its self-insurance liability based on the claims filed and an estimate
of claims incurred but not yet reported. The estimates used by management are
based on the Companys historical experiences as well as current facts and
circumstances. The Company uses third party actuarial analysis in making its
estimates. Actuarial projections and the Companys estimate of ultimate losses
are subject to a high degree of variability. The variability in the projections
and estimates are subject to, but not limited to, such factors as judicial and
administrative rulings, legislative actions, and changes in compensation
benefits structure. In recent years, the Company and employers within the
State of California as a whole have seen significant increases in the severity
of workers compensation claims. While the Company has factored these
increases into its estimates of ultimate loss, no assurance can be given that
future events will not require a change in these estimates. The Company
discounts its workers compensation, automobile and general liability insurance
reserves at a discount rate of approximately 7.5%.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.
Management believes that its inventory turns and inventory controls are
sufficient and that reserves are not needed for excess, obsolete or
discontinued inventory.

Investment in Affiliate

The Company owns 50% of Santee Dairies, LLC. The Company is not the
controlling stockholder and accordingly accounts for its investment using the
equity method of accounting.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Critical Accounting Policies (contd.)

Deferred Debt Issuance Costs

Direct costs incurred as a result of financing transactions are capitalized and
amortized to expense over the term of the applicable debt agreements.

Deferred Income Taxes

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

Phantom Stock Plan

It is the Companys policy to expense phantom stock units to the extent that
they vest and appreciate during the accounting period.

Ownership of the Company

La Cadena 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.

Acquisition

On May 7, 1999, the Company entered into an agreement with Albertsons to
acquire 43 supermarkets and one future store site. The stores were formerly
operated by Albertsons or Lucky Stores and were divested in connection with
the merger of Albertsons and American Stores Company, the parent of Lucky
Stores. The supermarkets were acquired sequentially over a twenty-four day
period beginning August 9, 1999. The purchase price for the property,
equipment and inventories of 43 supermarkets and one future store site was
approximately $134.0 million plus capital lease obligations assumed of $13.3
million and approximately $2.2 million of capitalized costs related to the
transfer of ownership of the supermarkets. The acquisition was accounted for
using the purchase method of accounting and the results of operations of the 43
supermarkets are included in the Companys consolidated results of operations
from the acquisition date of each supermarket.

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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 30, 2001, September 29,
2002 and September 28, 2003. The fiscal year ended September 30, 2001 was a
53-week year whereas fiscal years ended September 29, 2002 and September 28,
2003 were 52-week years.

|                                               |                                              |  |                    |       |      |  |        |       |  |  |        |       | 
|---------------------------------------------- | -------------------------------------------- |  | ------------------ | ----- | ---- |  | ------ | ----- |  |  | ------ | ----- | 
|                                               |                                              |  | Fiscal Years Ended
|                                               |                                              |  |                   
|                                               |                                              |  | 2001               |       | 2002 |  | 2003  
|                                               |                                              |  |                    |       |      |  |       
|Sales                                          |                                              |  | 100.00             | %     |      |  | 100.00 | %     |  |  | 100.00 | %    
|Gross profit                                   |                                              |  | 25.75              |       |      |  | 26.58  |       |  |  | 27.40  |      
|Operating expenses:                            |                                              |  |                    |       |      |  |        |       |  |  |        |      
|                                               | Selling, general and
administrative expenses |  |                    | 22.25 |      |  |        | 22.81 |  |  |        | 23.69 | 
|                                               | Depreciation and amortization                |  |                    | 1.13  |      |  |        | 1.18  |  |  |        | 1.25  | 
|Operating profit                               |                                              |  | 2.37               |       |      |  | 2.59   |       |  |  | 2.46   |      
|Interest income                                |                                              |  | 0.13               |       |      |  | 0.06   |       |  |  | 0.04   |      
|Interest expense                               |                                              |  | (2.04              | )     |      |  | (1.98  | )     |  |  | (1.93  | )    
|Equity in income from
unconsolidated affiliate |                                              |  | 0.06               |       |      |  | 0.11   |       |  |  | 0.05   |      
|Other expenses-net                             |                                              |  |                   |       |      |  | (0.06  | )     |  |  | (0.04  | )    
|Income before income taxes                     |                                              |  | 0.52               | %     |      |  | 0.72   | %     |  |  | 0.58   | %    

Total sales amounted to $2.754 billion in 2003 compared to $2.666 billion in
2002 and $2.574 billion in 2001. Like-store sales increased $74.1 million or
2.78% in fiscal 2003, compared to $133.6 million or 5.30% in fiscal 2002 and
$156.2 million or 4.50% (52-week basis) in fiscal 2001. The increase in sales
in 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. The
increase in sales during fiscal 2002 was due to favorable customer response to
the Companys marketing plan and to the addition of a new store in Chino Hills,
California.

Gross profits increased to $754.4 million or 27.40% of sales in 2003 compared
to $708.8 million or 26.58% of sales in 2002 and $662.8 million or 25.75% of
sales in 2001. The increase in gross profits, as a percent of sales, during
the last three fiscal years 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 profits 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. Prior year 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.

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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 2003, selling, general and
administrative expenses amounted to $652.3 million or 23.69% of sales compared
to $608.3 million or 22.81% of sales in 2002 and $572.8 million or 22.25% of
sales in 2001. Selling, general and administrative expenses, as a percentage
of sales, increased for both fiscal 2003 over fiscal 2002 and for fiscal 2002
over fiscal 2001. 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. The increase in selling,
general and administrative expenses in fiscal 2002 over fiscal 2001 was due
primarily to an increase of approximately $10.1 million in union
pension cost and an increase of approximately $7.6 million in union insurance
costs. Due to the uncertainty regarding the outcome of current
collective bargaining negotiations (see Employees under Item 1), the Company
cannot predict the impact of future changes in union insurance and other labor
costs at this time.

Depreciation and amortization expenses amounted to $34.3 million in 2003
compared to $31.5 million in 2002 and $29.1 million in 2001. Depreciation and
amortization expense, as a percentage of sales, was 1.25%, 1.18% and 1.13% for
fiscal years 2003, 2002 and 2001, respectively. The changes in depreciation
expense from year-to-year are due primarily to store additions, remodels and
store and warehouse expenditures.

Operating profits amounted to $67.8 million or 2.46% of sales in 2003 compared
to $69.0 million or 2.59% of sales in 2002 and $61.0 million or 2.37% of sales
in 2001.

Interest expense amounted to $53.3 million, $52.8 million and $52.4 million for
the 2003, 2002 and 2001 fiscal years, respectively. The increase in interest
expense in fiscal 2003 compared to fiscal 2002 is primarily due to the full
year interest expense on the 5% Subordinated Note in fiscal 2003 versus
interest from only January 2002 in fiscal 2002. The increase in interest
expense in fiscal 2002 over fiscal 2001 was due primarily to the issuance, in
January 2002, of the $20 million 5% Subordinated Note due March 2007.

Equity in income from unconsolidated affiliate amounted to $1.3 million in
fiscal 2003 compared to $2.9 million in 2002 and $1.6 million in 2001. The
decrease in income from unconsolidated affiliate in fiscal 2003 was due
primarily from a $1.1 million deferred tax revaluation, by the unconsolidated
affiliate, in fiscal 2002 that was not present in fiscal 2003. Also, net sales
and operating profits decreased at the unconsolidated affiliate in fiscal 2003
versus fiscal 2002. The increase in income from unconsolidated affiliate in
fiscal 2002 over fiscal 2001 is due primarily to the $1.1 million deferred tax
revaluation in fiscal 2002. Stater Bros. Markets and The Kroger Co. (the
Owners) are each party to ten year fluid milk purchasing agreements entered
into in July 1997. The agreements require the Owners to each purchase their
fluid milk and certain other product requirements, subject to a minimum volume
each year equal to approximately 80% of the volume purchased in 1996. Prices
under the agreements are calculated to cover Santees direct and indirect costs
of production, including financing costs. However, recoverable costs by Santee
may not include under any circumstance amounts owing solely by reason of
acceleration of principal payments under any loan agreement to which Santee is
a party.

Income before income taxes amounted to $15.9 million, $19.3 million and $13.3
million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.

Net income, for fiscal 2003, amounted to $10.1 million, compared to $11.8
million in fiscal 2002 and $7.8 million in fiscal 2001.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (contd.)

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, became
effective August 6, 1999 and expires in March 2005 and consists of a revolving
loan facility for working capital of $75.0 million, and a Letter of Credit
Sublimit with a maximum availability of $50.0 million. As of September 28,
2003, the Company had $47.7 million of outstanding letters of credit and had
$27.3 million available under the revolving loan facility. The letter of
credit facility is maintained pursuant to the Companys workers compensation
and general liability self-insurance requirements and as security for certain
rent obligations.

The Company had no short-term borrowings outstanding at the end of fiscal years
2003, 2002 and 2001, and the Company did not incur short-term borrowings during
fiscal years 2003, 2002 and 2001.

Working capital amounted to $124.5 million at September 28, 2003, $119.6
million at September 29, 2002 and $120.5 million at September 30, 2001. The
Companys current ratios were 1.60:1, 1.62:1 and 1.62:1, respectively.
Fluctuations in working capital and current ratios are not unusual in the
industry.

Net cash provided by operating activities amounted to $83.0 million in 2003,
$51.2 million in 2002 and $79.4 million in 2001. Fluctuations in cash provided
by operating activities are not unusual in the industry. 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. 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. Cash
provided by operating activities in fiscal 2001 consisted primarily of
depreciation and amortization, increases in accrued liabilities and
self-insurance reserves, increases in accounts payable and the termination of a
lease guarantee escrow account.

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 fiscal
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 financing activities during fiscal 2001 amounted
to $7.1 million and consisted of the retirement of the remaining $5.0 million
of 11% notes that matured in March 2001 and payment on capital lease
obligations.

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. Net cash used in investing activities in fiscal 2001 amounted to
$33.2 million and consisted primarily of the purchase of property and equipment
of $33.5 million.

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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 2004 will be
approximately $63.0 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 2004 capital expenditures.

Expected Capital Expenditures Fiscal 2004
(In thousands)

|                                            |  |   |        | 
|------------------------------------------- |  | - | ------ | 
|New store construction, less reimbursements |  | $ | 7,813  | 
|Store remodels                              |  |   | 24,557 | 
|MIS equipment and software                  |  |   | 14,771 | 
|Store equipment                             |  |   | 9,141  | 
|Transportation equipment                    |  |   | 4,914  | 
|Warehouse equipment                         |  |   | 1,057  | 
|Office equipment and other                  |  |   | 761    | 
|                                            |  |   |        | 
|                                            |  | $ | 63,014 | 
|                                            |  |   |        | 

Management believes that operating cash flows 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 rather than through operating cash flows. There
can be no assurance that such debt and lease financing will be available to the
Company in the future.

The Company operated 157 supermarkets at September 28, 2003, 156 supermarkets
at September 29, 2002 and 155 supermarkets at September 30, 2001.

The Companys supermarkets had approximately 5.2 million total square feet at
September 28, 2003 and September 29, 2002 and approximately 5.1 million total
square feet at September 30, 2001.

Credit Facilities

The Companys principal operating subsidiary, Markets, entered into a credit
facility, as amended, with Bank of America N.A. on August 6, 1999 (the credit
facility). The credit facility provides for (i) a $75.0 million revolving
loan facility and (ii) a Letter of Credit Sublimit which is defined as an
amount equal to the lesser of (a) the Revolving Loan Commitment and (b)
$50,000,000. The Letter of Credit Sublimit is part of, and not in addition to,
the Revolving Loan Commitment. Borrowings under the revolving loan facility
are unsecured and expected to be used for certain working capital and corporate
purposes. Letters of credit under the letter of credit facility are expected
to be used to support obligations incurred in connection with the construction
of stores, workers compensation insurance obligations and as security for
certain rent obligations.

The availability of the loans and letters of credit are subject to certain
sublimits and other borrowing restrictions. Indebtedness of Markets under the
credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary
of the Company, and any subsidiaries that Markets or Stater Bros. Development,
Inc. acquires or forms after the date of the credit facility.

Loans under the credit facility bear interest at a rate based upon either (i)
the Base Rate (defined as the higher of (a) the federal funds rate plus 0.50%
and (b) the rate of interest publicly announced by Bank of America as its
reference rate), plus 1.00%, or (ii) the Offshore Rate (defined as the
average British Bankers Association Interest Settlement Rate for deposits in
dollars, adjusted for the maximum reserve requirement for Eurocurrency
funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be
applied in consecutive periods of the earlier of (a) the maturity date of the
loan or (b) periods, as selected by Markets of one, two, three or six months.

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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.)

The revolving loan facility will cease to be available and will be payable in
full on March 31, 2005. Letters of credit under the credit facility can be
issued until March 31, 2006. The loans under the revolving loan facility must
be repaid for a period of ten consecutive days semi-annually.

Loans under the revolving loan facility may be repaid and re-borrowed. The
loans under the revolving loan facility may be prepaid at any time without
penalty, subject to certain minimums and payment of any breakage and
re-deployment costs in the case of loans based on the offshore rate. The
commitments under the credit facility may be reduced by Markets. Markets will
be required to pay a commitment fee equal to 0.25% per annum on the actual
daily unused portion of the revolving loan facility and the letter of credit
facility, payable quarterly in arrears. Outstanding letters of credit under
the credit facility are subject to a fee of 1.25% per annum on the face amount
of such letters of credit, payable quarterly in arrears. Markets will be
required to pay standard fees charged by Bank of America with respect to the
issuance, negotiation, and amendment of commercial letters of credit issued
under the letter of credit facility.

Availability of the loans and letters of credit under the credit facility is
subject to a monthly borrowing base test based on inventory. The credit
facility requires Markets to meet certain financial tests, including minimum
net worth and minimum EBITDA tests. The credit facility contains covenants
which, among other things, will limit indebtedness, liens, guarantee
obligations, mergers, consolidations, liquidations and dissolutions, asset
sales, leases, investments, loans and advances, transactions with affiliates,
sale and leasebacks, other matters customarily restricted in such agreements
and modifications to the holding company status of the Company.

The credit facility also contains covenants that apply to the Company and the
Company is a party to the credit facility for purposes of these covenants.
These covenants, among other things, limit dividends and other payments in
respect to the Companys capital stock, prepayments and redemptions of the
exchange notes and other debt, and limit indebtedness, investments, loans and
advances by the Company.

The credit facility requires the Company and Markets to comply with certain
covenants intended to ensure that their legal identities remain separate.

The credit facility contains customary events of default, including payment
defaults; material inaccuracies in representations and warranties; covenant
defaults; cross-defaults to certain other indebtedness; certain bankruptcy
events; certain ERISA events; judgments; defaults; invalidity of any guaranty;
failure of Jack H. Brown to be Chairman of the Board and Chief Executive
Officer of Stater Bros. Markets; and change of control.

As of September 28, 2003, for purposes of the credit facility with Bank of
America, both Markets and the Company were in compliance with all restrictive
covenants. The Company is also subject to certain covenants associated with
its 10.75% Senior Notes due 2006. As of September 28, 2003, the Company was in
compliance with all such covenants. However, there can be no assurance that
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.

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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.)

Liquidity and Capital Resources (contd.)

Labor Relations

The Companys collective bargaining agreement with the UFCW, which covers the
largest number of employees, expired in October 2003. The UFCW had the same
collective bargaining agreement with the Company and with the Companys three
major competitors, Vons, Albertsons and Ralphs. On April 14, 2003, prior to
the expiration of the collective bargaining agreement, the Company signed an
agreement with the UFCW which stated that the Company would accept the same
contract terms that the UFCW negotiated with Vons, Albertsons and Ralphs. In
return, the UFCW agreed not to strike the Company. The Company is not a party
to the contract negotiations between the UFCW and Vons, Albertsons and Ralphs.

Prior to the labor action, Vons, Albertsons and Ralphs informed the UFCW that
a strike against any one of the grocery chains would be considered as a strike
against all three chains. On October 11, 2003, the UFCW declared a strike
against Vons; in turn Albertsons and Ralphs locked out all of their UFCW
employees. As of the date of this filing, a new agreement has not been reached
and the strike and lockout continue. The effect, if any, of any new collective
bargaining agreement on the Companys future labor costs is unknown. Also, the
long-term effect on the Companys sales volume resulting from the strike is
unknown.

The Teamsters collective bargaining agreement was renewed in September 2002
and expires in September 2005.

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 5
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.

23



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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.)

Tabular Disclosure of Contractual Cash Obligations

The following table sets forth the Companys contractual cash obligations
and commercial commitments as of September 28, 2003.

|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|------------------------------------- |  | ---------------------------- | ------- | ------ |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ | ----- |  | - | ------- | 
|                                      |  | Contractual Cash Obligations
|                                      |  |                             
|                                      |  | (In thousands)              
|                                      |  |                              |         |        |  | Less      |        |           |  |         |         |  |  |   |        |       |  |  
|                                      |  |                              |         |        |  | than      |        |           |  |         |         |  |  |   |        | After
|                                      |  | Total                        |         | 1 Year |  | 1-3 Years |        | 4-5 Years |  | 5 Years
|                                      |  |                              |         |        |  |           |        |           |  |        
|10.75% Senior Notes due August 2006   |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Principal                             |  | $                            | 438,750 |        |  | $         |       |           |  | $       | 438,750 |  |  | $ |       |       |  | $ |        | 
|Interest                              |  |                              | 137,567 |        |  |           | 47,166 |           |  |         | 90,401  |  |  |   |       |       |  |   |        | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|                                      |  |                              | 576,317 |        |  |           | 47,166 |           |  |         | 529,151 |  |  |   |       |       |  |   |        | 
|5.0% Subordinated Note due March 2007 |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Principal                             |  |                              | 20,000  |        |  |           |       |           |  |         |        |  |  |   | 20,000 |       |  |   |        | 
|Interest                              |  |                              | 4,000   |        |  |           | 1,500  |           |  |         | 2,000   |  |  |   | 500    |       |  |   |        | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|                                      |  |                              | 24,000  |        |  |           | 1,500  |           |  |         | 2,000   |  |  |   | 20,500 |       |  |   |        | 
|Capital Lease Obligations (1)         |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Principal                             |  |                              | 10,982  |        |  |           | 1,056  |           |  |         | 1,780   |  |  |   | 1,894  |       |  |   | 6,252   | 
|Interest                              |  |                              | 9,657   |        |  |           | 1,725  |           |  |         | 2,898   |  |  |   | 2,340  |       |  |   | 2,694   | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|                                      |  |                              | 20,639  |        |  |           | 2,781  |           |  |         | 4,678   |  |  |   | 4,234  |       |  |   | 8,946   | 
|Operating Leases (1)                  |  |                              | 228,117 |        |  |           | 31,312 |           |  |         | 59,063  |  |  |   | 43,600 |       |  |   | 94,142  | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Total Contractual Cash Obligations    |  | $                            | 849,073 |        |  | $         | 82,759 |           |  | $       | 594,892 |  |  | $ | 68,334 |       |  | $ | 103,088 | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|                                     
|                                      |  | Other Commercial Commitments
|                                      |  |                             
|                                      |  | (In thousands)              
|                                      |  |                              |         |        |  | Less      |        |           |  |         |         |  |  |   |        |       |  |  
|                                      |  |                              |         |        |  | than      |        |           |  |         |         |  |  |   |        | After
|                                      |  | Total                        |         | 1 Year |  | 1-3 Years |        | 4-5 Years |  | 5 Years
|                                      |  |                              |         |        |  |           |        |           |  |        
|Standby Letters of Credit (2)         |  | $                            | 47,702  |        |  | $         | 47,702 |           |  | $       |        |  |  | $ |       |       |  | $ |        | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Total Other Commercial Commitments    |  | $                            | 47,702  |        |  | $         | 47,702 |           |  | $       |        |  |  | $ |       |       |  | $ |        | 
|                                      |  |                              |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 



|(1) |  | The Company leases the majority of its retail stores, offices,
warehouses 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, 2003 and
October 1, 2004.                                                                                                                                                                                                                                                       

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Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (contd.)

Recent Accounting Pronouncements

In April 2003, the FASB issued Statement 149, Amendment of Statement 133,
Accounting for Derivative Instruments and Hedging Activities. Statement 149
requires that contracts with comparable characteristics be accounted for
similarly. The Company does not expect the adoption of this pronouncement to
have a material impact on the results of its operations, financial position or
liquidity. In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. The
Company does not expect the adoption of this pronouncement to have a material
impact on the results of its operations, financial position or liquidity. In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (Interpretation 46), an interpretation of ARB No. 51. The
Company is in the initial stages of reviewing this interpretation, but does not
believe it has any variable interest entities to which Interpretation 46 would
apply.

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. 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.

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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. The Companys fixed rate debt obligations are comprised of the
10.75% Notes due August 2006, the 5% Subordinated Note due March 2007 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 fair value of the 10.75% Notes is based
upon quoted market prices. Although quoted market prices are not readily
available on the 5% Subordinated Note and 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 debt obligations. The fair value shown here is based upon
the quoted market price of the 10.75% Notes and the stated value of the 5%
Subordinated Note and capital leases as of September 28, 2003.

Expected Year of Maturity
(In thousands)

|                                             |  |      |       |      |  |      |       |      |  |      |         |            |  |       |        |   |  |   |       |   |  |   |       |   |  |      |         | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------- | ---------- |  | ----- | ------ | - |  | - | ----- | - |  | - | ----- | - |  | ---- | ------- | 
|                                             |  |      |       |      |  |      |       |      |  |      |         |            |  |       |        |   |  |   |       |   |  |   |       |   |  | Fair
|                                             |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |         | Thereafter |  | Value
|                                             |  |      |       |      |  |      |       |      |  |      |         |            |  |      
|Long-Term
Debt and Capital Lease Obligations |  | $    | 1,056 |      |  | $    | 930   |      |  | $    | 439,599 |            |  | $     | 20,902 |   |  | $ | 992   |   |  | $ | 6,252 |   |  | $    | 492,766 | 
|Average Interest Rate                        |  |      | 10.63 | %    |  |      | 10.61 | %    |  |      | 10.59   | %          |  |       | 9.82   | % |  |   | 16.34 | % |  |   | 17.26 | % |  |      |         | 

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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 Number
|                                                                                             |                                                  |  |            
|Report of Independent Auditors                                                               |                                                  |  | F-2         |    
|Consolidated Balance Sheets at September 30, 2001,
September 29, 2002 and September 28, 2003 |                                                  |  | F-3         |    
|Fiscal years ended September 30, 2001, September 29, 2002 and
September 28, 2003:            |                                                  |  |             |    
|                                                                                             | Consolidated Statements of Income                |  |             | F-5 | 
|                                                                                             | Consolidated Statements of Cash Flows            |  |             | F-6 | 
|                                                                                             | Consolidated Statements of Stockholders Deficit |  |             | F-7 | 
|Notes 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 28, 2003, the Company carried out an evaluation,
under the supervision of the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Companys disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have each concluded that those controls and procedures were
effective in making known to them, on a timely basis, the material information
needed for the preparation of this Report on Form 10-K. During the quarter and
fiscal year ended September 28, 2003, there were no significant changes in the
Companys internal control over financial reporting or in other factors that
could significantly affect the internal control over financial reporting since
the date of their evaluation, nor did they find any significant deficiencies or
material weaknesses that would have required corrective actions to be taken.

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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 |    | Position
|                     |  |     |    |         
|Jack H. Brown        |  |     | 64 |          |  | Chairman of the Board, President  and
Chief Executive Officer
|                     |  |     |    |          |  |                                                              
|Donald I. Baker      |  |     | 62 |          |  | Executive Vice President  and
Chief Operating Officer        
|                     |  |     |    |          |  |                                                              
|Phillip J. Smith     |  |     | 56 |          |  | Senior Vice President and Chief Financial Officer            
|                     |  |     |    |          |  |                                                              
|Dennis L. McIntyre   |  |     | 43 |          |  | Group Senior Vice President of Marketing                     
|                     |  |     |    |          |  |                                                              
|James W. Lee         |  |     | 52 |          |  | Group Senior Vice President of Retail Operations             
|                     |  |     |    |          |  |                                                              
|Edward A. Stater     |  |     | 52 |          |  | Senior Vice President of Retail Operations                   
|                     |  |     |    |          |  |                                                              
|Bruce D. Varner      |  |     | 67 |          |  | Director and Secretary                                       
|                     |  |     |    |          |  |                                                              
|Thomas W. Field, Jr. |  |     | 69 |          |  | Vice Chairman of the Board of Directors                      
|                     |  |     |    |          |  |                                                              
|C. Dale Warman       |  |     | 74 |          |  | 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 51 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. Bakerhas 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 37
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.

28



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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 28 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 25 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 31 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 35 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 44 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 42 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.

29



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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 Compensation |      |        |  |    
|                            |  |                     |      |        |  |    
|                            |  |                     |      |        |  |     |           |              |  |           |           |              |  |              |   |  |  | All Other
|Name and                    |  |                     |      |        |  |     |           |              |  | Bonuses   |           | Other Annual |  | Compensation
|Principal Position          |  | Year                |      | Salary |  | (4) |           | Compensation |  | (1)(2)(3)
|                            |  |                     |      |        |  |     |           |              |  |          
|Jack H. Brown               |  |                     | 2003 |        |  | $   | 1,260,000 |              |  | $         |          |              |  | $            |  |  |  | $         | 51,000 | 
|Chairman, President and     |  |                     | 2002 |        |  | $   | 1,188,000 |              |  | $         | 1,540,000 |              |  | $            |  |  |  | $         | 53,340 | 
|Chief Executive Officer     |  |                     | 2001 |        |  | $   | 1,128,000 |              |  | $         | 1,400,000 |              |  | $            |  |  |  | $         | 52,161 | 
|Donald I. Baker             |  |                     | 2003 |        |  | $   | 515,000   |              |  | $         |          |              |  | $            |  |  |  | $         |       | 
|Executive Vice President    |  |                     | 2002 |        |  | $   | 473,000   |              |  | $         | 250,000   |              |  | $            |  |  |  | $         | 1,840  | 
|and Chief Operating Officer |  |                     | 2001 |        |  | $   | 412,000   |              |  | $         | 225,000   |              |  | $            |  |  |  | $         | 1,661  | 
|Phillip J. Smith            |  |                     | 2003 |        |  | $   | 215,000   |              |  | $         |          |              |  | $            |  |  |  | $         |       | 
|Senior Vice President and   |  |                     | 2002 |        |  | $   | 202,000   |              |  | $         | 100,000   |              |  | $            |  |  |  | $         | 1,840  | 
|Chief Financial Officer     |  |                     | 2001 |        |  | $   | 187,000   |              |  | $         | 90,000    |              |  | $            |  |  |  | $         | 1,661  | 
|Dennis L. McIntyre          |  |                     | 2003 |        |  | $   | 240,000   |              |  | $         |          |              |  | $            |  |  |  | $         |       | 
|Group Senior Vice           |  |                     | 2002 |        |  | $   | 192,000   |              |  | $         | 60,000    |              |  | $            |  |  |  | $         | 1,840  | 
|President of Marketing      |  |                     | 2001 |        |  | $   | 173,000   |              |  | $         | 55,000    |              |  | $            |  |  |  | $         | 1,661  | 
|James W. Lee                |  |                     | 2003 |        |  | $   | 232,000   |              |  | $         |          |              |  | $            |  |  |  | $         |       | 
|Group Senior Vice President |  |                     | 2002 |        |  | $   | 28,000    |              |  | $         | 20,000    |              |  | $            |  |  |  | $         |       | 
|of Retail Operations        |  |                     | 2001 |        |  | $   |          |              |  | $         |          |              |  | $            |  |  |  | $         |       | 



| | (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 2001, 2002 and 2003, which
amounted to $51,000, $50,500, and $51,500, respectively.                                                                                                                                                              
|
| | (4) |  | Annual Bonuses to be paid to the Named Executive Officers for fiscal
2003 had neither been calculated nor awarded as of December 17, 2003,
the latest practical date.                                                                                                                   

Stock Options and SARs

None

30



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##### Table of Contents



Item 11. Executive Compensation (contd.)

Pension Plan

The Companys Pension Plan for Salaried Employees (the Pension Plan) is a
non-contributory, defined benefit plan which applies to all salaried employees
who have completed one year of qualified service, including directors who are
employees. For each year of credited service, the annual pension to which an
employee is entitled under the Pension Plan upon normal retirement at age 65 is
an amount equal to three quarters of one percent of the employees compensation
for each year up to the social security wage base, plus 2.15 percent of the
employees compensation for each year in excess of the social security wage
base. The Named Executive Officers have the following years of credited
service under the Pension Plan as of September 28, 2003: Jack H. Brown - 22
years, Donald I. Baker - 20 years, Phillip J. Smith - 16 years, Dennis L.
McIntyre - 25 years and James W. Lee - 1 year.

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 2003
retirees with ten or more years of service at retirement is $200,000. The
maximum annual compensation that may be considered for 2003 retirees is
$160,000.

|             |         |    |                    |        |  |    |   |        |  |    |   |        |  |  |   |         |  |  |   |         | 
|------------ | ------- | -- | ------------------ | ------ |  | -- | - | ------ |  | -- | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|             |         |    | Pension Plan Table
|             |         |    | Years of Service  
|             |         |    |                   
|Remuneration |         | 15 |                    | 20     |  | 25 |   | 30     |  | 35
|             |         |    |                    |        |  |    |   |        |  |   
|$            | 50,000  |    | $                  | 5,625  |  |    | $ | 7,500  |  |    | $ | 9,375  |  |  | $ | 11,250  |  |  | $ | 13,125  | 
|             | 75,000  |    |                    | 12,911 |  |    |   | 17,214 |  |    |   | 21,518 |  |  |   | 25,821  |  |  |   | 30,125  | 
|             | 100,000 |    |                    | 20,973 |  |    |   | 27,964 |  |    |   | 34,955 |  |  |   | 41,946  |  |  |   | 48,937  | 
|             | 125,000 |    |                    | 29,036 |  |    |   | 38,714 |  |    |   | 48,393 |  |  |   | 58,071  |  |  |   | 67,750  | 
|             | 150,000 |    |                    | 37,098 |  |    |   | 49,464 |  |    |   | 61,830 |  |  |   | 74,196  |  |  |   | 86,562  | 
|             | 175,000 |    |                    | 45,161 |  |    |   | 60,214 |  |    |   | 75,268 |  |  |   | 90,321  |  |  |   | 105,375 | 
|             | 200,000 |    |                    | 53,223 |  |    |   | 70,964 |  |    |   | 88,705 |  |  |   | 106,446 |  |  |   | 124,187 | 

Board of Directors

Directors of the Company are paid an annual fee of $50,000 plus $500 for each
board meeting attended. The Board had two standing committees during fiscal
2003.

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, Mr. Field and Mr. Varner. 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.

31



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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 Stater Bros. 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 30, 2001, September 29, 2002 and September 28, 2003, there were
663,000, 668,000 and 693,000 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.

32



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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 19, 2003, 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 of      |        |               |  | 
|                                                                 |  | Class A Common |        | Percentage of
|                                                                 |  | Stock          |        | Class A      
|Name and Address                                                 |  | Beneficially   |        | Common Stock 
|of Beneficial Owner                                              |  | Owned          |        | Outstanding  
|                                                                 |  |                |        |              
|La 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. Certain La
Cadena issues, such as the disposition of such shares of the Company,
may require approval of 60% of the voting power of La Cadena.
Accordingly, Messrs. Brown and Moseley may be deemed to have shared
voting power or shared investment power with respect to the shares owned
by La Cadena, and such individuals therefore may be deemed to be the
beneficial owners thereof. 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

33



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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 2003 was approximately $1.4 million. 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.

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, except with respect to certain fundamental corporate
changes of the Company, including the disposition of such shares. Accordingly,
Messrs. Brown and Moseley may be deemed to have shared voting power with
respect to shares of the Company owned by La Cadena. Mr. Moseley served the
Company for over 44 years 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 billed the Company in aggregate $308,000 in fiscal 2003 and
$266,000 in fiscal 2002 for services associated with the annual audit and
reviews of the Companys quarterly report on Form 10-Q.

Audit Related Fees

Ernst & Young LLP billed the Company in aggregate $31,000 in fiscal 2003 and
$28,000 in fiscal 2002 for audits of the Companys pension and profit sharing
plans.

Tax Fees

Ernst & Young LLP billed the Company in aggregate $177,000 in fiscal 2003 and
$25,000 in fiscal 2002 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 2003 or fiscal 2002.

34



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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 Statements
See Financial Statement Index included in Item 8 of Part II
of this Form 10-K.                                                                                                                                                                                                         
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Financial Statement Schedules
The Financial Statement Schedules required by Item 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) |  | Exhibits 
Exhibits as required by Item 15(c) are as follows:                                                                                                                                                                                                                                                

|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|----------- | ---- |  |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
NO. |      |  |  | DESCRIPTION
|            |      |  |  |            
|            | 1    |  |  | (5)         |  | Purchase Agreement dated August 6, 1999 by and
between Stater Bros. and Banc of America Securities LLC.                                                                                                                                                                
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 2.1  |  |  | (5)         |  | Asset Purchase Agreement dated as of May 7, 1999,
by and between Albertsons Inc., Stater Bros. Markets and
Stater Bros.                                                                                                                                               
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 3.1  |  |  | (1)         |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                           
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 3.2  |  |  | (1)         |  | By-Laws of the Company.                                                                                                                                                                                                                                                
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 4.2  |  |  | (4)         |  | First Supplemental Indenture between the Company and IBJ
Schroder Bank & Trust Company, as Trustee, for $165,000,000 11% Senior
Notes due 2001, dated as of July 22, 1997 (the First Supplemental
Indenture).                                                        
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 4.6  |  |  | (5)         |  | Indenture dated as of August 6, 1999, between Stater
Bros. and IBJ Whitehall Bank & Trust Company.                                                                                                                                                                     
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 4.7  |  |  | (5)         |  | Registration Rights Agreement dated as of August 6, 1999,
by and between Stater Bros. and Banc of America Securities, LLC.                                                                                                                                             
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 4.8  |  |  | (5)         |  | Second Supplemental Indenture
dated as of July 16, 1999 between Stater Bros. and
IBJ Whitehall Bank & Trust Company, for the
securities issued under the indenture dated as of
March 8, 1994, as amended by the First Supplemental
Indenture dated as of July 22, 1997.
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 5.0  |  |  | (5)         |  | Opinion of Gibson, Dunn & Crutcher LLP                                                                                                                                                                                                                                 
|            |      |  |  |             |  |                                                                                                                                                                                                                                                                        
|            | 10.1 |  |  | (1)         |  | Reclassification Agreement dated September 3, 1993, by
and among the Company, Craig and La Cadena.                                                                                                                                                                     

35



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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. |  |  |  |     |  | DESCRIPTION                                                                                                                                                      
|            |  |  |  |     |  |                                                                                                                                                                  
|10.2        |  |  |  | (1) |  | Amendment to Reclassification Agreement, dated January 12,
1994, by and among the Company, Craig and La Cadena.                                                  
|            |  |  |  |     |  |                                                                                                                                                                  
|10.3        |  |  |  | (1) |  | Agreement of Stockholders dated May 10, 1989, by and
among the Company, Craig and La Cadena.                                                                     
|            |  |  |  |     |  |                                                                                                                                                                  
|10.4        |  |  |  | (1) |  | Amendment to Agreement of Stockholders dated September 3,
1993, by and among the Company, Craig, Craig
Management, Inc. (CMI) and La Cadena.                   
|            |  |  |  |     |  |                                                                                                                                                                  
|10.5        |  |  |  | (1) |  | Option Agreement dated September 3, 1993, by and between
the Company and Craig.                                                                                  
|            |  |  |  |     |  |                                                                                                                                                                  
|10.6        |  |  |  | (1) |  | Amendment to Option Agreement dated January 12, 1994, by
and between the Company and Craig.                                                                      
|            |  |  |  |     |  |                                                                                                                                                                  
|10.7        |  |  |  | (1) |  | Consulting Agreement dated September 3, 1993, by and
between the Company, Craig and CMI.                                                                         
|            |  |  |  |     |  |                                                                                                                                                                  
|10.8        |  |  |  | (1) |  | Letter Agreement regarding Consulting Agreement, dated
March 8,1994, by and between the Company, Craig and
CMI.                                                  
|            |  |  |  |     |  |                                                                                                                                                                  
|10.9        |  |  |  | (1) |  | Second Amended and Restated Stock Agreement dated
January 12, 1994, by and among the Company, Craig, CMI,
La Cadena and James J. Cotter.                         
|            |  |  |  |     |  |                                                                                                                                                                  
|10.10       |  |  |  | (1) |  | Security Agreement dated March 8, 1994, by and between the
Company and Craig.                                                                                    
|            |  |  |  |     |  |                                                                                                                                                                  
|10.12       |  |  |  | (1) |  | Credit Agreement dated March 8, 1994, by and between
Stater Bros. Markets and Bank of America Trust and Savings
Association.                                     
|            |  |  |  |     |  |                                                                                                                                                                  
|10.12 (a)   |  |  |  | (2) |  | Amendment dated June 23, 1995 to the Credit Agreement
dated March 8, 1994, by and between Stater Bros. Markets
and Bank of America Trust and Savings Association.
|            |  |  |  |     |  |                                                                                                                                                                  
|10.12 (b)   |  |  |  | (3) |  | Amendment dated July 22, 1996 to the Credit Agreement
dated March 8, 1994, by and between Stater Bros. Markets and
Bank of America Trust and Savings Association.
|            |  |  |  |     |  |                                                                                                                                                                  
|10.12 (c)   |  |  |  | (5) |  | Credit Agreement dated as of August 6, 1999 by and among
Stater Bros. Markets, Stater Bros. and Bank of America, N.A.                                            
|            |  |  |  |     |  |                                                                                                                                                                  
|10.13       |  |  |  | (1) |  | Continuing Guaranty dated March 8, 1994, of Stater Bros.
Development, Inc. in favor of Bank of America Trust and
Savings Association.                            
|            |  |  |  |     |  |                                                                                                                                                                  
|10.15       |  |  |  | (1) |  | Subordination Agreement dated March 8, 1994, by and
among the Company, Stater Bros. Markets and Bank of
America Trust and Savings Association.                   

36



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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. |  |  |  |     |  | DESCRIPTION                                                                                                                                                                        
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.16       |  |  |  | (1) |  | Amended and Restated Sublease Agreement dated June 1,
1983, between Wren Leasing Corp., as Lessor, and Stater
Bros. Markets, as Lessee.                                            
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.17       |  |  |  | (1) |  | Preferred Stock Agreement dated March 22, 1983, between
Stater Bros. Markets and Petrolane Incorporated.                                                                           
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.18       |  |  |  | (1) |  | Escrow Agreement dated September 19, 1985, by and among
Stater Bros. Markets, Petrolane Incorporated and First
Interstate Bank of California.                                      
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.19       |  |  |  | (5) |  | Dealer Manager Agreement dated as of July 1, 1999, by and
between Stater Bros. and Banc of America Securities LLC.                                                                 
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.20       |  |  |  | (6) |  | Employment contract dated June 1, 2000 by and between Stater
Bros. Markets and Jack H. Brown.                                                                                      
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.21.1     |  |  |  | (7) |  | Employment contract dated June 1, 2000, as amended, by and
between Stater Bros. Markets and Donald I. Baker.                                                                       
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.22.1     |  |  |  | (7) |  | Employment contract dated June 1, 2000, as amended, by and
between Stater Bros. Markets and A. Gayle Paden.                                                                        
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.23       |  |  |  | (7) |  | Employment contract dated June 1, 2000 by and between Stater
Bros. Markets and H. Harrison Lightfoot.                                                                              
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.24       |  |  |  | (7) |  | Employment contract dated June 1, 2000 by and between Stater
Bros. Markets and Phillip J. Smith                                                                                    
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.25       |  |  |  | (7) |  | Stater Bros. Holdings Inc. Phantom Stock Plan                                                                                                                                      
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.26       |  |  |  | (8) |  | 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.
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.27       |  |  |  | (8) |  | 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.
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.28       |  |  |  | (8) |  | 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.  
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.29       |  |  |  | (8) |  | Subordinated Note for $20,000,000 dated January 22, 2002
between the Company and H. Harrison Lightfoot with an
interest rate of 5% due March 31, 2007.                             
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.30       |  |  |  | (9) |  | Employment contract dated June 1, 2000 by and between Stater
Bros. Markets and Dennis L. McIntyre.                                                                                 
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.31       |  |  |  | (9) |  | Employment contract dated June 1, 2000 by and between Stater
Bros. Markets and Edward A. Stater.                                                                                   
|            |  |  |  |     |  |                                                                                                                                                                                    
|10.32       |  |  |  | (9) |  | Employment contract dated August 1, 2002 by and between
Stater Bros. Markets and James W. Lee.                                                                                     

37



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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)

(a)(3) Exhibits (contd.)

|            |  |  |  |      |  |                                                                                                                                                                                       
|----------- |  |  |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  |  |  |      |  | DESCRIPTION                                                                                                                                                                           
|            |  |  |  |      |  |                                                                                                                                                                                       
|10.33       |  |  |  | (10) |  | 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.    
|            |  |  |  |      |  |                                                                                                                                                                                       
|12          |  |  |  | (11) |  | Computation of ratio of earnings to fixed charges.                                                                                                                                    
|            |  |  |  |      |  |                                                                                                                                                                                       
|14          |  |  |  | (11) |  | Copy of Financial
Code of Ethics.                                                                                                                                                     
|            |  |  |  |      |  |                                                                                                                                                                                       
|21          |  |  |  | (1)  |  | Subsidiaries of the Company.                                                                                                                                                          
|            |  |  |  |      |  |                                                                                                                                                                                       
|24          |  |  |  | (5)  |  | Powers of Attorney (included on signature pages of this
Registration Statement on Form S-4)                                                                                           
|            |  |  |  |      |  |                                                                                                                                                                                       
|25          |  |  |  | (5)  |  | Form T-1 Statement of Eligibility and Qualification of IBJ
Whitehall Bank & Trust Company, as Trustee.                                                                                
|            |  |  |  |      |  |                                                                                                                                                                                       
|31.1        |  |  |  | (11) |  | Certification of Principal Executive Officer pursuant to Section
302 (a) of the Sarbanes-Oxley Act of 2002.                                                                           
|            |  |  |  |      |  |                                                                                                                                                                                       
|31.2        |  |  |  | (11) |  | Certification of Principal Financial Officer pursuant to Section
302 (a) of the Sarbanes-Oxley Act of 2002.                                                                           
|            |  |  |  |      |  |                                                                                                                                                                                       
|32.1        |  |  |  | (11) |  | 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 Registrants Quarterly Report on Form 10-Q dated
June 25, 1995 and filed on August 8, 1995.
|
| | (3) |  | Previously filed with the Securities and Exchange Commission
as exhibit 10.12(b) with the Annual Report on Form 10-K for the fiscal
year ended September 29, 1996.           
|
| | (4) |  | Previously filed with the Securities
and Exchange Commission as exhibits to the
Registration Statement S-4, No. 333-34113 dated
October 17, 1997.                            
|
| | (5) |  | Previously filed with the Securities
and Exchange Commission as exhibits to the
Registration Statement S-4, No. 333-85723 dated
September 13, 1999.                          
|
| | (6) |  | 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.      
|
| | (7) |  | 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.                              
|
| | (8) |  | Previously filed with the Securities
and Exchange Commission as exhibits to the
Registrants Quarterly Report on Form 10-Q dated
December 31, 2001.                          
|
| | (9) |  | 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.                              

38



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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (contd.)

(a)(3) Exhibits (contd.)



| | (10) |  | Previously filed with the Securities
and Exchange Commission as exhibits to the
Registrants Quarterly Report on Form 10-Q dated
December 29, 2002.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (11) |  | Filed with the Securities and
Exchange Commission as exhibits with the Annual Report
on Form 10-K for the fiscal year ended September 28,
2003.    



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



| | (b) |  | Reports on Form 8-K                            
| | --- |  | -----------------------------------------------
|
| |     |  | Current Report on Form 8-K dated July 11, 2003.

39



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##### Table of Contents



STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2003
FORM 10-K




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                       |  |                            |  |     |  |                       
|---------------------- |  | -------------------------- |  | --- |  | ----------------------
|December 19, 2003
Date |  | Stater Bros. Holdings Inc.
|                       |  | By:                        |  | /s/ |  | Jack H. Brown         
|                       |  |                            |  |    
|                       |  |                            |  |     |  | Jack H. Brown         
|                       |  |                            |  |     |  | Chairman of the Board,
|                       |  |                            |  |     |  | President and Chief   
|                       |  |                            |  |     |  | Executive Officer     

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|          |  |                                      |  |                                      |  |                  
|--------- |  | ------------------------------------ |  | ------------------------------------ |  | -----------------
|Signature |  | Title                                |  | Date                                
|          |  |                                      |  |                                     
|/s/       |  | Jack H. Brown                        |  | Chairman of the Board, President and |  | December 19, 2003
|          |  | Chief Executive Officer and Director |  |                                     
|          |  | Jack H. Brown                        |  | (Principal Executive Officer)        |  |                  
|          |  |                                      |  |                                      |  |                  
|/s/       |  | Thomas W. Field, Jr.                 |  | Vice Chairman of the Board           |  | December 19, 2003
|          |  | and Director                         |  |                                     
|          |  | Thomas W. Field, Jr.                 |  |                                      |  |                  
|          |  |                                      |  |                                      |  |                  
|/s/       |  | Bruce D. Varner                      |  | Secretary and Director               |  | December 19, 2003
|          |  |                                      |  |                                     
|          |  | Bruce D. Varner                      |  |                                      |  |                  
|          |  |                                      |  |                                      |  |                  
|/s/       |  | C. Dale Warman                       |  | Director                             |  | December 19, 2003
|          |  |                                      |  |                                     
|          |  | C. Dale Warman                       |  |                                      |  |                  
|          |  |                                      |  |                                      |  |                  
|/s/       |  | Phillip J. Smith                     |  | Senior Vice President and            |  | December 19, 2003
|          |  | Chief Financial Officer              |  |                                     
|          |  | Phillip J. Smith                     |  | (Principal Financial Officer)        |  |                  

40



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                             |                                                  |  |             |     | 
|-------------------------------------------------------------------------------------------- | ------------------------------------------------ |  | ----------- | --- | 
|                                                                                             |                                                  |  | Page Number
|                                                                                             |                                                  |  |            
|Report of Independent Auditors                                                               |                                                  |  | F-2         |    
|Consolidated Balance Sheets at September 30, 2001,
September 29, 2002 and September 28, 2003 |                                                  |  | F-3         |    
|Fiscal years ended September 30, 2001, September 29, 2002 and
September 28, 2003:            |                                                  |  |             |    
|                                                                                             | Consolidated Statements of Income                |  |             | F-5 | 
|                                                                                             | Consolidated Statements of Cash Flows            |  |             | F-6 | 
|                                                                                             | Consolidated Statements of Stockholders Deficit |  |             | F-7 | 
|Notes to Consolidated Financial Statements                                                   |                                                  |  | F-8         |    

F-1



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. and subsidiaries as of September 30, 2001, September 29,
2002 and September 28, 2003, and the related consolidated statements of income,
stockholders deficit, and cash flows for the 52-week periods ended September
29, 2002 and September 28, 2003 and the 53-week period ended September 30,
2001. 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 auditing standards generally
accepted in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stater Bros. Holdings Inc. and subsidiaries as of September 30, 2001,
September 29, 2002 and September 28, 2003, and the consolidated results of
their operations and their cash flows for the 52-week periods ended September
29, 2002 and September 28, 2003 and the 53-week period ended September 30,
2001, in conformity with accounting principles generally accepted in the United
States.



| | ERNST & YOUNG LLP
| | -----------------

Orange County, California
December 5, 2003

F-2



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

|                                       |                                                |   |           |         |           |   |           |         |  |   |         |         | 
|-------------------------------------- | ---------------------------------------------- | - | --------- | ------- | --------- | - | --------- | ------- |  | - | ------- | ------- | 
|                                       |                                                |   | Sept. 30, |         | Sept. 29, |   | Sept. 28,
|                                       |                                                |   | 2001      |         | 2002      |   | 2003     
|                                       |                                                |   |           |         |           |   |          
|Current assets                         |                                                |   |           |         |           |   |           |         |  |   |         |        
|                                       | Cash and cash equivalents                      |   | $         | 101,636 |           |   | $         | 81,043  |  |   | $       | 111,152 | 
|                                       | Receivables                                    |   |           | 29,894  |           |   |           | 26,500  |  |   |         | 23,217  | 
|                                       | Income tax receivables                         |   |           | 358     |           |   |           | 7,061   |  |   |         | 4,354   | 
|                                       | Inventories                                    |   |           | 170,189 |           |   |           | 175,404 |  |   |         | 172,267 | 
|                                       | Prepaid expenses                               |   |           | 6,743   |           |   |           | 7,860   |  |   |         | 6,962   | 
|                                       | Deferred income taxes                          |   |           | 6,634   |           |   |           | 15,281  |  |   |         | 14,793  | 
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        
|Total current assets                   |                                                |   | 315,454   |         |           |   | 313,149   |         |  |   | 332,745 |        
|Investment in unconsolidated affiliate |                                                |   | 12,666    |         |           |   | 15,580    |         |  |   | 16,910  |        
|Property and equipment                 |                                                |   |           |         |           |   |           |         |  |   |         |        
|                                       | Land                                           |   |           | 50,930  |           |   |           | 50,930  |  |   |         | 50,930  | 
|                                       | Buildings and improvements                     |   |           | 182,269 |           |   |           | 191,514 |  |   |         | 200,349 | 
|                                       | Store fixtures and equipment                   |   |           | 190,581 |           |   |           | 212,741 |  |   |         | 242,562 | 
|                                       | Property subject to capital leases             |   |           | 24,670  |           |   |           | 24,670  |  |   |         | 24,670  | 
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        
|                                       |                                                |   | 448,450   |         |           |   | 479,855   |         |  |   | 518,511 |        
|                                       | Less accumulated depreciation and amortization |   |           | 170,123 |           |   |           | 194,039 |  |   |         | 216,366 | 
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        
|                                       |                                                |   | 278,327   |         |           |   | 285,816   |         |  |   | 302,145 |        
|Deferred income taxes                  |                                                |   | 4,897     |         |           |   |          |         |  |   |        |        
|Deferred debt issuance costs, net      |                                                |   | 12,042    |         |           |   | 13,936    |         |  |   | 10,486  |        
|Other assets                           |                                                |   | 5,908     |         |           |   | 5,649     |         |  |   | 5,540   |        
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        
|                                       |                                                |   | 22,847    |         |           |   | 19,585    |         |  |   | 16,026  |        
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        
|Total assets                           |                                                | $ | 629,294   |         |           | $ | 634,130   |         |  | $ | 667,826 |        
|                                       |                                                |   |           |         |           |   |           |         |  |   |         |        

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 STOCKHOLDERS DEFICIT

|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |   |         |   | 
|------------------------------------------------------ |  | --------------------------------------------------------------- | ----------------------------------------------------------------------- | - | --------- | - | --------- | - | --------- | - | ------- | - | ------- | - | 
|                                                       |  |                                                                 |                                                                         |   | Sept. 30, |   | Sept. 29, |   | Sept. 28,
|                                                       |  |                                                                 |                                                                         |   | 2001      |   | 2002      |   | 2003     
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |          
|Current liabilities                                    |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|                                                       |  | Accounts payable                                                |                                                                         | $ | 107,485   |   |           | $ | 104,166   |   |         | $ | 112,458 |  
|                                                       |  | Accrued payroll and related expenses                            |                                                                         |   | 41,737    |   |           |   | 41,567    |   |         |   | 44,362  |  
|                                                       |  | Other accrued liabilities                                       |                                                                         |   | 44,340    |   |           |   | 46,656    |   |         |   | 50,352  |  
|                                                       |  | Current portion of capital lease obligations and long-term debt |                                                                         |   | 1,435     |   |           |   | 1,117     |   |         |   | 1,056   |  
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|Total current liabilities                              |  |                                                                 | 194,997                                                                 |   |           |   | 193,506   |   |           |   | 208,228 |  
|Deferred income taxes                                  |  |                                                                 |                                                                        |   |           |   | 6,500     |   |           |   | 6,708   |  
|Long-term debt, less current portion                   |  |                                                                 | 439,000                                                                 |   |           |   | 458,750   |   |           |   | 458,750 |  
|Capital lease obligations, less current portion        |  |                                                                 | 12,098                                                                  |   |           |   | 10,981    |   |           |   | 9,926   |  
|Long-term portion of self-insurance and other reserves |  |                                                                 | 15,852                                                                  |   |           |   | 23,855    |   |           |   | 27,941  |  
|Other long-term liabilities                            |  |                                                                 | 8,756                                                                   |   |           |   | 14,659    |   |           |   | 20,267  |  
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|Total liabilities                                      |  |                                                                 | 670,703                                                                 |   |           |   | 708,251   |   |           |   | 731,820 |  
|Stockholders deficit                                  |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|                                                       |  | Common Stock, $.01 par value:                                   |                                                                         |   |           |   |           |   |           |   |         |   |         |  
|                                                       |  |                                                                 | Authorized shares - 100,000                                             |   |           |   |           |   |           |   |         |   |         |   | 
|                                                       |  |                                                                 | Issued and outstanding shares -
0 in 2001, 2002 and 2003                |   |           |  |           |   |           |  |         |   |         |  | 
|                                                       |  | Class A Common Stock, $.01 par value:                           |                                                                         |   |           |   |           |   |           |   |         |   |         |  
|                                                       |  |                                                                 | Authorized shares - 100,000                                             |   |           |   |           |   |           |   |         |   |         |   | 
|                                                       |  |                                                                 | Issued and outstanding shares -
50,000 in 2001; 38,301 in 2002 and 2003 |   |           | 1 |           |   |           |  |         |   |         |  | 
|                                                       |  | Additional paid-in capital                                      |                                                                         |   | 12,715    |   |           |   | 9,740     |   |         |   | 9,740   |  
|                                                       |  | Retained deficit                                                |                                                                         |   | (54,125   | ) |           |   | (83,861   | ) |         |   | (73,734 | )
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|Total stockholders deficit                            |  |                                                                 | (41,409                                                                 | ) |           |   | (74,121   | ) |           |   | (63,994 | )
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  
|Total liabilities and stockholders deficit            |  | $                                                               | 629,294                                                                 |   |           | $ | 634,130   |   |           | $ | 667,826 |  
|                                                       |  |                                                                 |                                                                         |   |           |   |           |   |           |   |         |  

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)

|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |         | 
|---------------------------------------------- | -------------------------------------------- | - | ----------------- | ------- | --------- | - | --------- | ------- |  | - | --------- | ------- | 
|                                               |                                              |   | Fiscal Year Ended
|                                               |                                              |   |                  
|                                               |                                              |   | Sept. 30,         |         | Sept. 29, |   | Sept. 28,
|                                               |                                              |   | 2001              |         | 2002      |   | 2003     
|                                               |                                              |   |                   |         |           |   |          
|Sales                                          |                                              | $ | 2,573,913         |         |           | $ | 2,666,346 |         |  | $ | 2,753,774 |        
|Cost of goods sold                             |                                              |   | 1,911,065         |         |           |   | 1,957,526 |         |  |   | 1,999,361 |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Gross profit                                   |                                              |   | 662,848           |         |           |   | 708,820   |         |  |   | 754,413   |        
|Operating expenses:                            |                                              |   |                   |         |           |   |           |         |  |   |           |        
|                                               | Selling, general and administrative expenses |   |                   | 572,815 |           |   |           | 608,289 |  |   |           | 652,291 | 
|                                               | Depreciation and amortization                |   |                   | 29,061  |           |   |           | 31,493  |  |   |           | 34,308  | 
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Total operating expenses                       |                                              |   | 601,876           |         |           |   | 639,782   |         |  |   | 686,599   |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Operating profit                               |                                              |   | 60,972            |         |           |   | 69,038    |         |  |   | 67,814    |        
|Interest income                                |                                              |   | 3,409             |         |           |   | 1,721     |         |  |   | 1,049     |        
|Interest expense                               |                                              |   | (52,410           | )       |           |   | (52,814   | )       |  |   | (53,254   | )      
|Equity in income from unconsolidated affiliate |                                              |   | 1,584             |         |           |   | 2,914     |         |  |   | 1,330     |        
|Other expense - net                            |                                              |   | (258              | )       |           |   | (1,579    | )       |  |   | (1,093    | )      
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Income before income taxes                     |                                              |   | 13,297            |         |           |   | 19,280    |         |  |   | 15,846    |        
|Income taxes                                   |                                              |   | 5,452             |         |           |   | 7,491     |         |  |   | 5,719     |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Net income                                     |                                              | $ | 7,845             |         |           | $ | 11,789    |         |  | $ | 10,127    |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Earnings per common share                      |                                              | $ | 156.90            |         |           | $ | 280.92    |         |  | $ | 264.41    |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Average common shares outstanding              |                                              |   | 50,000            |         |           |   | 41,965    |         |  |   | 38,301    |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        
|Common shares outstanding at end of year       |                                              |   | 50,000            |         |           |   | 38,301    |         |  |   | 38,301    |        
|                                               |                                              |   |                   |         |           |   |           |         |  |   |           |        

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |        |        | 
|--------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------------------------------------------- | ------- | ----------------- | ------ | --------- | ------- | --------- | ------ | - | ------- | ------ | ------ | 
|                                                                                  |                                                      |                                                                                  |         | Fiscal Year Ended
|                                                                                  |                                                      |                                                                                  |         |                  
|                                                                                  |                                                      |                                                                                  |         | Sept. 30,         |        | Sept. 29, |         | Sept. 28,
|                                                                                  |                                                      |                                                                                  |         | 2001              |        | 2002      |         | 2003     
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |          
|Operating activities:                                                             |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Net income                                                                        |                                                      | $                                                                                | 7,845   |                   |        | $         | 11,789  |           |        | $ | 10,127  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|                                                                                  | Depreciation and amortization                        |                                                                                  |         | 29,061            |        |           |         | 31,493    |        |   |         | 34,308 |       
|                                                                                  | Deferred income taxes                                |                                                                                  |         | 2,921             |        |           |         | 2,750     |        |   |         | 696    |       
|                                                                                  | Loss on disposals of assets                          |                                                                                  |         | 258               |        |           |         | 1,579     |        |   |         | 1,093  |       
|                                                                                  | Net undistributed income in unconsolidated affiliate |                                                                                  |         | (1,584            | )      |           |         | (2,914    | )      |   |         | (1,330 | )     
|                                                                                  | Changes in operating assets and liabilities:         |                                                                                  |         |                   |        |           |         |           |        |   |         |        |       
|                                                                                  |                                                      | (Increase) decrease in receivables                                               |         |                   | (1,713 | )         |         |           | 3,394  |   |         |        | 3,283  | 
|                                                                                  |                                                      | (Increase) decrease in income tax receivables                                    |         |                   | (95    | )         |         |           | (6,703 | ) |         |        | 2,707  | 
|                                                                                  |                                                      | (Increase) decrease in inventories                                               |         |                   | (4,857 | )         |         |           | (5,215 | ) |         |        | 3,137  | 
|                                                                                  |                                                      | (Increase) decrease in prepaid expenses                                          |         |                   | (1,427 | )         |         |           | (1,136 | ) |         |        | 893    | 
|                                                                                  |                                                      | Decrease in other assets                                                         |         |                   | 15,683 |           |         |           | 3,398  |   |         |        | 3,559  | 
|                                                                                  |                                                      | Increase (decrease) in accounts payable                                          |         |                   | 6,708  |           |         |           | (3,319 | ) |         |        | 8,292  | 
|                                                                                  |                                                      | Increase in accrued liabilities and long-term
portion of self-insurance reserves |         |                   | 26,593 |           |         |           | 16,052 |   |         |        | 16,185 | 
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Net cash provided by operating activities                                         |                                                      |                                                                                  | 79,393  |                   |        |           | 51,168  |           |        |   | 82,950  |       
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Financing activities:                                                             |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Debt issuance costs                                                               |                                                      |                                                                                  |        |                   |        |           | (5,033  | )         |        |   |        |       
|Stock redemption                                                                  |                                                      |                                                                                  |        |                   |        |           | (20,000 | )         |        |   |        |       
|Dividends paid                                                                    |                                                      |                                                                                  |        |                   |        |           | (4,500  | )         |        |   |        |       
|Principal payments on long-term debt                                              |                                                      |                                                                                  | (5,048  | )                 |        |           | (250    | )         |        |   |        |       
|Principal payments on capital lease obligations                                   |                                                      |                                                                                  | (2,092  | )                 |        |           | (1,435  | )         |        |   | (1,116  | )     
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Net cash used in financing activities                                             |                                                      |                                                                                  | (7,140  | )                 |        |           | (31,218 | )         |        |   | (1,116  | )     
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Investing activities:                                                             |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Purchase of property and equipment                                                |                                                      |                                                                                  | (33,499 | )                 |        |           | (40,722 | )         |        |   | (51,890 | )     
|Proceeds from sale of property and equipment                                      |                                                      |                                                                                  | 251     |                   |        |           | 179     |           |        |   | 165     |       
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Net cash used in investing activities                                             |                                                      |                                                                                  | (33,248 | )                 |        |           | (40,543 | )         |        |   | (51,725 | )     
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                      |                                                                                  | 39,005  |                   |        |           | (20,593 | )         |        |   | 30,109  |       
|Cash and cash equivalents at beginning of year                                    |                                                      |                                                                                  | 62,631  |                   |        |           | 101,636 |           |        |   | 81,043  |       
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Cash and cash equivalents at end of year                                          |                                                      | $                                                                                | 101,636 |                   |        | $         | 81,043  |           |        | $ | 111,152 |       
|                                                                                  |                                                      |                                                                                  |         |                   |        |           |         |           |        |   |         |       
|Interest paid                                                                     |                                                      | $                                                                                | 49,848  |                   |        | $         | 49,927  |           |        | $ | 49,560  |       
|Income taxes paid                                                                 |                                                      | $                                                                                | 2,890   |                   |        | $         | 11,443  |           |        | $ | 3,000   |       

See accompanying notes to consolidated financial statements.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(In thousands)

|                               |                                                  |   |        |   |        |   |         |    |            |   |        |        |   |   |         |         |   |   |         |         |  
|------------------------------ | ------------------------------------------------ | - | ------ | - | ------ | - | ------- | -- | ---------- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------- | ------- | -
|                               |                                                  |   |        |   |        |   | Class A |    | Additional |   |        |        |   |   |         |         |  
|                               |                                                  |   | Common |   | Common |   | Paid-in |    | Retained   |   |        |        |  
|                               |                                                  |   | Stock  |   | Stock  |   | Capital |    | Deficit    |   | Total 
|                               |                                                  |   |        |   |        |   |         |    |            |   |       
|Balances at September 24, 2000 |                                                  | $ |       |   |        | $ | 1       |    |            | $ | 12,715 |        |   | $ | (61,970 | )       |   | $ | (49,254 | )      
|                               | Net income for 53 weeks ended
September 30, 2001 |   |        |  |        |   |         |   |            |   |        |       |   |   |         | 7,845   |   |   |         | 7,845   |  
|                               |                                                  |   |        |   |        |   |         |    |            |   |        |        |   |   |         |         |   |   |         |        
|Balances at September 30, 2001 |                                                  |   |       |   |        |   | 1       |    |            |   | 12,715 |        |   |   | (54,125 | )       |   |   | (41,409 | )      
|                               | Net income for 52 weeks ended
September 29, 2002 |   |        |  |        |   |         |   |            |   |        |       |   |   |         | 11,789  |   |   |         | 11,789  |  
|                               | Dividend paid                                    |   |        |  |        |   |         |   |            |   |        |       |   |   |         | (4,500  | ) |   |         | (4,500  | )
|                               | Stock redemption                                 |   |        |  |        |   |         | (1 | )          |   |        | (2,975 | ) |   |         | (37,025 | ) |   |         | (40,001 | )
|                               |                                                  |   |        |   |        |   |         |    |            |   |        |        |   |   |         |         |   |   |         |        
|Balances at September 29, 2002 |                                                  |   |       |   |        |   |        |    |            |   | 9,740  |        |   |   | (83,861 | )       |   |   | (74,121 | )      
|                               | Net income for 52 weeks ended
September 28, 2003 |   |        |  |        |   |         |   |            |   |        |       |   |   |         | 10,127  |   |   |         | 10,127  |  
|                               |                                                  |   |        |   |        |   |         |    |            |   |        |        |   |   |         |         |   |   |         |        
|Balances at September 28, 2003 |                                                  | $ |       |   |        | $ |        |    |            | $ | 9,740  |        |   | $ | (73,734 | )       |   | $ | (63,994 | )      
|                               |                                                  |   |        |   |        |   |         |    |            |   |        |        |   |   |         |        

See accompanying notes to consolidated financial statements.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2003

Note 1 - The Company and Summary of Significant Accounting Policies

Description of Business

Stater Bros. Holdings Inc. (the Company) is engaged primarily in the
operation of retail supermarkets. As of September 28, 2003, the Company
operated 157 retail grocery supermarkets under the name Stater Bros. Markets.
The Companys supermarkets are located in Southern Californias San
Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern counties. The
Company and its predecessor companies have operated retail grocery stores under
the Stater Bros. Markets name in the Inland Empire of Southern California
since 1936.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Stater Bros. Markets (Markets) and Stater
Bros. Development, Inc. All significant inter-company transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Fiscal Year

The Companys fiscal year ends on the last Sunday in September. The
fiscal years ended September 29, 2002 and September 28, 2003 were 52-week years
and the fiscal year ended September 30, 2001 was a 53-week year.

Cash and Cash Equivalents

Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.

Inventories

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

Receivables

Receivables represent amounts expected to be received during the next
operating cycle of the Company. The carrying amount reported in the balance
sheet for receivables approximates their fair value.

Investment in Affiliate

The Company owns 50% of Santee Dairies, LLC. The Company is not the
controlling stockholder and accordingly accounts for its investment using the
equity method of accounting.

Long-Lived Assets

Financial Accounting Standards Board Statement No. 144 (SFAS No. 144),
Accounting for the Impairment or Disposal of Long-Lived Assets became
effective for the Company on September 30, 2002. This standard replaces SFAS
No. 121 and APB No. 30 and amends APB No. 51 among others. Adoption of this
standard did not have a material effect on the Companys financial statements.
As part of the adoption of this standard, assets previously classified as
Properties held for sale on the consolidated balance sheets were reclassified
to Property and equipment.

The Company reviews the recoverability of its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. If the estimated future, undiscounted cash
flows from the use of an asset are less than its carrying value, a write-down
is recorded to reduce the related asset to estimated fair value.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 1 - The Company and Summary of Significant Accounting Policies (contd.)

Property and Equipment

Property and equipment are stated at cost and are depreciated or
amortized, principally on a straight-line basis over the estimated useful lives
of the assets, and for capitalized leases over the initial lease term or the
estimated economic life of the asset.

The average estimated economic lives are as follows:

|                                   |  |               |  |                |  |  |  | 
|---------------------------------- |  | ------------- |  | -------------- |  |  |  | 
|                                   |  | Range         |  | Most Prevalent
|                                   |  |               |  |               
|Buildings and improvements         |  | 8 - 30 Years  |  | 25 Years      
|Store furniture and equipment      |  | 3 - 10 Years  |  | 5 Years       
|Property subject to capital leases |  | Life of Lease |  | 25 Years      

Deferred Debt Issuance Costs

Direct costs incurred as a result of financing transactions are
capitalized and amortized to interest expense over the terms of the applicable
debt agreements.

Phantom Stock Plan

It is the Companys policy to expense phantom stock units to the extent
that they vest and appreciate during the accounting period.

Self-insurance Reserves

The Company is primarily self-insured, subject to certain retention levels
for workers compensation, automobile and general liability costs. The Company
is covered by umbrella insurance policies for catastrophic events. The Company
records its self-insurance liability based on the claims filed and an estimate
of claims incurred but not yet reported. The estimates used by management are
based on the Companys historical experiences as well as current facts and
circumstances. The Company uses third party actuarial analysis in making its
estimates. Actuarial projections and the Companys estimate of ultimate losses
are subject to a high degree of variability. The variability in the
projections and estimates are subject to, but not limited to, such factors as
judicial and administrative rulings, legislative actions, and changes in
compensation benefits structure. In recent years, the Company and employers
within the State of California as a whole have seen significant increases in
the severity of workers compensation claims. The Company discounts its
workers compensation, automobile and general liability insurance reserves at a
discount rate of approximately 7.5%. The Company is self-insured, subject to
certain retention levels, for health care costs of eligible non-bargaining unit
employees. Such health care reserves are not discounted.

Income Taxes

The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes.

Revenue Recognition

The Company recognizes revenue from the sale of its products at the point
of sale to the customer. Sales are recognized net of any discounts given to
the customer.

Cost of Goods Sold

Included in cost of goods sold are direct product purchase costs, all
in-bound freight costs, all direct receiving and inspection costs, all quality
assurance costs, all warehousing costs and all costs associated with
transporting goods from the Companys warehouses to its stores, net of earned
vendor rebates and allowances. The Company recognizes, as a reduction to cost
of goods sold, certain rebates and allowances (allowances) from its vendors
as the allowances are earned. Allowances are earned by promoting certain
products or by purchasing specified amounts of product. The Company records a
liability for allowance funds that have been received but not yet earned.
Included as a reduction in cost of goods sold for fiscal 2003 is $4.6 million
of advertising costs in excess of the fair value of the co-operative
advertising.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 1 - The Company and Summary of Significant Accounting Policies (contd.)

Selling, General and Administrative Expenses

Included in selling, general and administrative expenses are all store
operation costs which includes all store labor costs associated with receiving,
displaying and selling the Companys products at the store level; all
advertising costs, net in fiscal 2003 of the portion of co-operative
advertising allowances directly related to the fair value of the advertising
and net of all co-operative advertising allowances in the prior years; certain
salary, wages and administrative costs associated with the purchasing of the
Companys products and all security, management information services,
accounting and corporate management costs.

As noted under Cost of Goods Sold, the Company includes all purchasing
and distribution costs to deliver the product for sale to its stores in cost of
goods sold, except for certain salary, wages and administrative costs
associated with the purchasing of its products. The amount of salary, wages
and administrative costs associated with the purchase of its product included
in selling, general and administrative costs was $808,000, $861,000 and
$891,000 in fiscal 2001, fiscal 2002 and fiscal 2003, respectively.

Vendor Rebates and Allowances

The Company receives certain allowances from its vendors that relate to
the purchase and promotion of certain products. All allowances, except for
advertising allowances described under Advertising Allowances, are recognized
as a reduction in cost of goods sold as the performance is completed and
inventory sold. Allowances, such as slotting fees, which are tied to the
promotion of certain products are recognized as reductions in cost of goods
sold as the Company meets the required performance criteria. Allowances that
are based upon purchase or sales volumes are recognized as reductions in cost
of goods sold as the products are sold. The Company receives lump-sum payments
from vendors for the promotion or purchase of products over multi-year periods.
The Company records a liability for unearned allowances and recognizes, as a
reduction in cost of goods sold, these allowances over time as the criteria of
these contracts are met.

Advertising Allowances

The Company receives co-operative advertising allowances from vendors for
advertising specific vendor products over specific periods of time. For fiscal
2003, the Company recognized the portion of co-operative advertising allowances
directly related to the fair value of advertising as a reduction in advertising
costs. In fiscal 2003, $4.6 million of excess allowances received over the
fair value of advertising were recorded as a reduction to cost of goods sold.
In fiscal 2001 and fiscal 2002, all co-operative advertising allowances were
recognized as reductions in advertising expense. A significant portion of the
Companys advertising expenditures is in the form of twice weekly print
advertisements. The Company distributes its print ads through inserts in local
newspapers, in direct mailers and as handouts distributed in its stores. The
Company analyzes, on an annual basis, the direct out-of-pocket costs for
printing and distributing its print ads. Using the number of ads in a typical
twice weekly advertisement, the actual direct costs of an individual advertisement
is determined. The cost determined is deemed to be the fair value of
advertising. The amount of co-operative advertising allowance recognized as a
reduction in advertising expense was $11.8 million, $11.9 million and $5.9
million in fiscal 2001, fiscal 2002 and fiscal 2003, respectively.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 1 - The Company and Summary of Significant Accounting Policies (contd.)

Advertising

The Companys advertising costs, net of vendor allowances for co-operative
advertising, are recognized in the period the advertising is incurred and are
included in selling, general and administrative expenses. Advertising costs,
net of vendor allowances, were $20.8 million, $23.7 million and $27.4 million
in fiscal 2001, 2002 and 2003, respectively.

Leases

Certain of the Companys operating leases provide for minimum annual
payments that change over the life of the lease. The aggregate minimum annual
payments are expensed on a straight-line basis over the minimum lease term.
The Company recognizes a liability for minimum step rents when the amount of
straight-line rent expense exceeds the actual lease payment and it reduces the
step rent liability when the actual lease payment exceeds the amount of
straight-line rent expense.

Recent Accounting Pronouncements

In April 2003, the FASB issued Statement 149, Amendment of Statement 133,
Accounting for Derivative Instruments and Hedging Activities. Statement 149
requires that contracts with comparable characteristics be accounted for
similarly. The Company does not expect the adoption of this pronouncement to
have a material impact on the results of its operations, financial position or
liquidity. In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. The
Company does not expect the adoption of this pronouncement to have a material
impact on the results of its operations, financial position or liquidity. In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (Interpretation 46), an interpretation of ARB No. 51. The
Company is in the initial stages of reviewing this interpretation, but does not
believe it has any variable interest entities to which Interpretation 46 would
apply.

Reclassifications

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

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 2 - Impact of Recent EITF

Effective September 30, 2002, the Company adopted EITF Issue No. 02-16
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. The Companys adoption of the EITF has had no effect
on the Companys current year or prior years net income. In fiscal 2003, as a
result of EITF Issue No. 02-16, vendor payments of $4.6 million related to
advertising reimbursements, previously classified as a reduction in selling,
general and administrative expenses were reclassified as a reduction in cost of
goods sold. Prior year financial statements were not reclassified. The
following table shows the pro forma consolidated operating profit for fiscal
2001 and fiscal 2002 if the impact of EITF Issue No. 02-16 had been applied to
fiscal 2001 and fiscal 2002.

|                         |                                              |   |                   |         |           |   |           |         | 
|------------------------ | -------------------------------------------- | - | ----------------- | ------- | --------- | - | --------- | ------- | 
|                         |                                              |   | Fiscal Year Ended
|                         |                                              |   |                  
|                         |                                              |   | (In thousands)   
|                         |                                              |   | Sept. 30,         |         | Sept. 29,
|                         |                                              |   | 2001              |         | 2002     
|                         |                                              |   |                   |         |          
|Sales                    |                                              | $ | 2,573,913         |         |           | $ | 2,666,346 |        
|Cost of goods sold       |                                              |   | 1,906,842         |         |           |   | 1,953,761 |        
|                         |                                              |   |                   |         |           |   |           |        
|Gross profit             |                                              |   | 667,071           |         |           |   | 712,585   |        
|Operating expenses:      |                                              |   |                   |         |           |   |           |        
|                         | Selling, general and administrative expenses |   |                   | 577,038 |           |   |           | 612,054 | 
|                         | Depreciation and amortization                |   |                   | 29,061  |           |   |           | 31,493  | 
|                         |                                              |   |                   |         |           |   |           |        
|Total operating expenses |                                              |   | 606,099           |         |           |   | 643,547   |        
|                         |                                              |   |                   |         |           |   |           |        
|Operating profit         |                                              | $ | 60,972            |         |           | $ | 69,038    |        
|                         |                                              |   |                   |         |           |   |           |        

Note 3 - Debt

Long-term debt consisted of the following:

|                              |  |                |         |           |  |           |         |  |  |   |         | 
|----------------------------- |  | -------------- | ------- | --------- |  | --------- | ------- |  |  | - | ------- | 
|                              |  | Sept. 30,      |         | Sept. 29, |  | Sept. 28,
|                              |  | 2001           |         | 2002      |  | 2003     
|                              |  |                |         |           |  |          
|                              |  | (In thousands)
|5% Subordinated Note due 2007 |  | $              |        |           |  | $         | 20,000  |  |  | $ | 20,000  | 
|10.75% Senior Notes due 2006  |  |                | 439,000 |           |  |           | 438,750 |  |  |   | 438,750 | 
|                              |  |                |         |           |  |           |         |  |  |   |         | 
|Total long-term debt          |  | $              | 439,000 |           |  | $         | 458,750 |  |  | $ | 458,750 | 
|                              |  |                |         |           |  |           |         |  |  |   |         | 

Interest on the 10.75% Senior Notes due August 2006, is payable
semi-annually on February 15 and August 15. Principal on the 10.75% Senior
Notes is due in the fiscal year 2006.

Interest on the 5% subordinated note due March 2007, is payable
semi-annually on March 31 and September 30. Principal on the 5% subordinated
note is due in the fiscal year 2007.

Interest capitalized during fiscal years 2001, 2002 and 2003 amounted to
$238,000, $144,000 and $126,000 respectively. Interest expense incurred,
before the effect of capitalized interest, during 2001, 2002 and 2003 amounted
to $52,648,000, $52,958,000 and $53,380,000, respectively.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 3 - Debt (contd.)

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.

Note 4 - Unconsolidated Affiliate

The Company owns 50% of Santee Dairies LLC. Through its wholly owned
subsidiary, Santee Dairies, Inc. (Santee), it operates a fluid milk
processing plant located in City of Industry. The Company is not the
controlling stockholder. Accordingly, the Company accounts for its investment
in Santee Dairies LLC using the equity method of accounting and recognized
income of $1,584,000, $2,914,000 and $1,330,000 for fiscal years 2001, 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.

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

|                        |  |                |         |                |  |                |         |  |  |   |         | 
|----------------------- |  | -------------- | ------- | -------------- |  | -------------- | ------- |  |  | - | ------- | 
|                        |  | 52 Weeks       |         | 52 Weeks       |  | 52 Weeks      
|                        |  |                |         |                |  |               
|                        |  | Sept. 29, 2001 |         | Sept. 28, 2002 |  | Sept. 27, 2003
|                        |  |                |         |                |  |               
|                        |  | (In thousands)
|Current assets          |  | $              | 24,060  |                |  | $              | 24,918  |  |  | $ | 25,771  | 
|Non-current assets      |  |                | 95,236  |                |  |                | 91,674  |  |  |   | 89,096  | 
|Current liabilities     |  |                | 26,754  |                |  |                | 23,257  |  |  |   | 24,952  | 
|Non-current liabilities |  |                | 67,046  |                |  |                | 62,012  |  |  |   | 56,215  | 
|Shareholders equity    |  |                | 25,496  |                |  |                | 31,323  |  |  |   | 33,700  | 
|                       
|Sales                   |  |                | 188,627 |                |  |                | 181,686 |  |  |   | 172,718 | 
|Gross profit            |  |                | 29,663  |                |  |                | 30,497  |  |  |   | 27,962  | 
|Net income              |  | $              | 3,168   |                |  | $              | 5,826   |  |  | $ | 2,660   | 

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 5 - Bank Facilities

The Companys principal operating subsidiary, Markets, entered into a
credit facility, as amended, with Bank of America N.A. on August 6, 1999 (the
credit facility). The credit facility provides for (i) a $75.0 million
revolving loan facility and (ii) a Letter of Credit Sublimit which is defined
as an amount equal to the lesser of (a) the Revolving Loan Commitment and (b)
$50,000,000. The Letter of Credit Sublimit is part of, and not in addition to,
the Revolving Loan Commitment. Borrowings under the revolving loan facility
are unsecured and expected to be used for certain working capital and corporate
purposes. Letters of credit under the letter of credit facility are expected
to be used to support obligations incurred in connection with the construction
of stores, workers compensation insurance obligations and as security for
certain rent obligations.

The availability of the loans and letters of credit are subject to certain
sublimits and other borrowing restrictions. Indebtedness of Markets under the
credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary
of the Company, and any subsidiaries that Markets or Stater Bros. Development,
Inc. acquires or forms after the date of the credit facility.

Loans under the credit facility bear interest at a rate based upon either
(i) the Base Rate (defined as the higher of (a) the federal funds rate plus
0.50% and (b) the rate of interest publicly announced by Bank of America as its
reference rate), plus 1.00%, or (ii) the Offshore Rate (defined as the
average British Bankers Association Interest Settlement Rate for deposits in
dollars, adjusted for the maximum reserve requirement for Eurocurrency
funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be
applied in consecutive periods of the earlier of (a) the maturity date of the
loan or (b) periods, as selected by Markets of one, two, three or six months.

The revolving loan facility will cease to be available and will be payable
in full on March 31, 2005. Letters of credit under the credit facility can be
issued until March 31, 2006. The loans under the revolving loan facility must
be repaid for a period of ten consecutive days semi-annually.

Loans under the revolving loan facility may be repaid and re-borrowed.
The loans under the revolving loan facility may be prepaid at any time without
penalty, subject to certain minimums and payment of any breakage and
re-deployment costs in the case of loans based on the offshore rate. The
commitments under the credit facility may be reduced by Markets. Markets will
be required to pay a commitment fee equal to 0.25% per annum on the actual
daily unused portion of the revolving loan facility and the letter of credit
facility, payable quarterly in arrears. Outstanding letters of credit under
the credit facility are subject to a fee of 1.25% per annum on the face amount
of such letters of credit, payable quarterly in arrears. Markets will be
required to pay standard fees charged by Bank of America with respect to the
issuance, negotiation, and amendment of commercial letters of credit issued
under the letter of credit facility.

The Company had no short-term borrowings outstanding at the end of fiscal
years 2001, 2002 and 2003, and the Company did not incur short-term borrowings
during fiscal years 2001, 2002 and 2003.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 5 - Bank Facilities (contd.)

Availability of the loans and letters of credit under the credit facility
is subject to a monthly borrowing base test based on inventory. The credit
facility requires Markets to meet certain financial tests, including minimum
net worth and minimum EBITDA tests. The credit facility contains covenants
which, among other things, will limit indebtedness, liens, guarantee
obligations, mergers, consolidations, liquidations and dissolutions, asset
sales, leases, investments, loans and advances, transactions with affiliates,
sale and leasebacks, other matters customarily restricted in such agreements
and modifications to the holding company status of the Company.

The credit facility also contains covenants that apply to the Company and
the Company is a party to the credit facility for purposes of these covenants.
These covenants, among other things, limit dividends and other payments in
respect to the Companys capital stock, prepayments and redemptions of the
exchange notes and other debt, and limit indebtedness, investments, loans and
advances by the Company.

The credit facility requires the Company and Markets to comply with
certain covenants intended to ensure that their legal identities remain
separate.

The credit facility contains customary events of default, including
payment defaults; material inaccuracies in representations and warranties;
covenant defaults; cross-defaults to certain other indebtedness; certain
bankruptcy events; certain ERISA events; judgments; defaults; invalidity of any
guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief
Executive Officer of Stater Bros. Markets; and change of control.

As of September 28, 2003, for purposes of the credit facility with Bank of
America, both Markets and the Company were in compliance with all restrictive
covenants. The Company is also subject to certain covenants associated with
its 10.75% Senior Notes due 2006. As of September 28, 2003, the Company was in
compliance with all such covenants. However, there can be no assurance that
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.

Note 6 - Leases

The Company leases the majority of its retail stores, offices, warehouses
and distribution facilities. Certain of the operating leases provide for
minimum annual payments that change over the life of the lease. The aggregate
minimum annual payments are expensed on a straight-line basis over the minimum
lease term. In addition, certain leases provide for additional rents based on
sales and some of these leases allow the Company to reduce current year
contingent rent payments by amounts paid for property taxes, insurance and in
some cases capital expenditures. Primary lease terms range from 3 to 55 years
and substantially all leases provide for renewal options.

As of September 24, 2000, a portion of the Companys lease obligations
were guaranteed by Petrolane Incorporated (Petrolane) or its successor. The
leases guaranteed by Petrolane had initial terms of 20 years and expired in
2003. Lease payments for the properties subject to the Petrolane guarantees
were approximately $10.0 million per year. Under the terms of the agreement
related to the Companys acquisition of Stater Bros. Markets from Petrolane in
1983, as amended in 1985, Stater Bros. Markets was required to make annual
deposits into a lease guarantee escrow account. In addition, 10 shares of
Stater Bros. Markets $11.00 Cumulative Redeemable Preferred Stock due 2003
were held by Petrolane in connection with the lease guarantees.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 6 - Leases (contd.)

During the first quarter of fiscal 2001, Stater Bros. Markets redeemed all
10 outstanding shares of its $11.00 Cumulative Redeemable Preferred Stock due
2003 from Texas Eastern Corporation, Petrolanes assignee of such preferred
stock. The Petrolane lease guarantees were terminated in exchange for a
$400,000 fee and a letter of credit was issued in favor of Texas Eastern to
secure a portion of the remaining lease payments through 2003. As part of
these transactions, the lease guarantee escrow account was terminated and the
$13.2 million in such account was released to Stater Bros. Markets. All of the
store leases that had been guaranteed by Petrolane were extended for an
additional five years following expiration of their respective initial terms in
2003.

Following is a summary of future minimum lease payments as of September 28, 2003:

|                                        |  |                |        |         |  |           |         | 
|--------------------------------------- |  | -------------- | ------ | ------- |  | --------- | ------- | 
|                                        |  |                |        |         |  | Operating
|                                        |  |                |        |         |  | Leases   
|                                        |  | Capital        |        | Minimum
|Fiscal Year                             |  | Leases         |        | Payment
|                                        |  |                |        |        
|                                        |  | (In thousands)
|2004                                    |  | $              | 2,781  |         |  | $         | 31,312  | 
|2005                                    |  |                | 2,453  |         |  |           | 30,896  | 
|2006                                    |  |                | 2,225  |         |  |           | 28,167  | 
|2007                                    |  |                | 2,139  |         |  |           | 23,074  | 
|2008                                    |  |                | 2,095  |         |  |           | 20,526  | 
|Thereafter                              |  |                | 8,946  |         |  |           | 94,142  | 
|                                        |  |                |        |         |  |           |         | 
|Total minimum lease payments            |  |                | 20,639 |         |  | $         | 228,117 | 
|                                        |  |                |        |         |  |           |         | 
|Less amounts representing interest      |  |                | 9,657  |         |  |           |         | 
|                                        |  |                |        |         |  |           |         | 
|Present value of minimum lease payments |  |                | 10,982 |         |  |           |         | 
|Less current portion                    |  |                | 1,056  |         |  |           |         | 
|                                        |  |                |        |         |  |           |         | 
|Long-term portion                       |  | $              | 9,926  |         |  |           |         | 
|                                        |  |                |        |         |  |           |         | 

Rental expense and sublease income were as follows:

|                       |  |                |        |                |  |                |        |  |  |   |        | 
|---------------------- |  | -------------- | ------ | -------------- |  | -------------- | ------ |  |  | - | ------ | 
|                       |  | Sept. 30, 2001 |        | Sept. 29, 2002 |  | Sept. 28, 2003
|                       |  |                |        |                |  |               
|                       |  | (In thousands)
|Minimum rentals        |  | $              | 23,612 |                |  | $              | 25,009 |  |  | $ | 26,383 | 
|Rentals based on sales |  | $              | 10,372 |                |  | $              | 10,487 |  |  | $ | 10,951 | 
|Sublease income        |  | $              | 1,165  |                |  | $              | 1,200  |  |  | $ | 1,213  | 

Aggregate sublease income to be received subsequent to September 28, 2003
is approximately $4,422,000.

Note 7 - Preferred Stock

During fiscal 2001, the Company paid all cumulative deferred dividends and
redeemed all outstanding $11.00 Cumulative Redeemable Preferred Stock due 2003
of Stater Bros. Markets (see Note 6).

F-16



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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 8 - Income Taxes

The provision for income taxes consisted of the following:

|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | -------------- | ------- | -------------- | - | -------------- | ------- | - | - | ------- | ------- | -
|                                                                                                                    |                                       |   | Sept. 30, 2001 |         | Sept. 29, 2002 |   | Sept. 28, 2003
|                                                                                                                    |                                       |   |                |         |                |   |               
|                                                                                                                    |                                       |   |                |         |                |   | (In thousands) |         |   |   |        
|Current                                                                                                             |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    | Federal                               |   | $              | 3,642   |                |   | $              | 3,317   |   |   | $       | 2,590   |  
|                                                                                                                    | State                                 |   |                | 933     |                |   |                | 1,037   |   |   |         | 1,343   |  
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    |                                       |   | 4,575          |         |                |   | 4,354          |         |   |   | 3,933   |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|Deferred                                                                                                            |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    | Federal                               |   |                | 635     |                |   |                | 2,459   |   |   |         | 1,707   |  
|                                                                                                                    | State                                 |   |                | 242     |                |   |                | 678     |   |   |         | 79      |  
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    |                                       |   | 877            |         |                |   | 3,137          |         |   |   | 1,786   |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|Income tax expense                                                                                                  |                                       | $ | 5,452          |         |                | $ | 7,491          |         |   | $ | 5,719   |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                   
|A reconciliation of the provision for income taxes to amounts computed at
the federal statutory rate is as follows:
|                                                                                                                   
|                                                                                                                    |                                       |   | Sept. 30, 2001 |         | Sept. 29, 2002 |   | Sept. 28, 2003
|                                                                                                                    |                                       |   |                |         |                |   |               
|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            |         |   |   | 5.8     |        
|Tax credits                                                                                                         |                                       |   | (4.6           | )       |                |   | (3.3           | )       |   |   | (3.3    | )      
|Other                                                                                                               |                                       |   | 4.8            |         |                |   | 1.4            |         |   |   | (1.4    | )      
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |         |  
|                                                                                                                    |                                       |   | 41.0           | %       |                |   | 38.9           | %       |   |   | 36.1    | %      
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |         |  
|                                                                                                                   
|Components of deferred income taxes are as follows:                                                                
|                                                                                                                   
|                                                                                                                    |                                       |   | Sept. 30, 2001 |         | Sept. 29, 2002 |   | Sept. 28, 2003
|                                                                                                                    |                                       |   |                |         |                |   |               
|                                                                                                                    |                                       |   |                |         |                |   | (In thousands) |         |   |   |        
|Deferred income tax assets:                                                                                         |                                       |   |                |         |                |   |                |         |   |   |         |        
|Self-insurance reserves                                                                                             |                                       | $ | 10,646         |         |                | $ | 15,034         |         |   | $ | 18,592  |        
|Pension and vacation liabilities                                                                                    |                                       |   | 3,844          |         |                |   | 4,138          |         |   |   | 4,893   |        
|Inventories                                                                                                         |                                       |   | 1,862          |         |                |   | 2,010          |         |   |   | 2,318   |        
|Investment in unconsolidated affiliate                                                                              |                                       |   | 427            |         |                |   |               |         |   |   |        |        
|Income deferred for book purposes                                                                                   |                                       |   | 2,762          |         |                |   | 3,591          |         |   |   | 2,765   |        
|Tax credits and operating loss carry forwards                                                                       |                                       |   | 4,190          |         |                |   | 5,514          |         |   |   | 1,650   |        
|Other, net                                                                                                          |                                       |   |               |         |                |   |               |         |   |   | 3,509   |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    | Total deferred income tax assets      |   |                | 23,731  |                |   |                | 30,287  |   |   |         | 33,727  |  
|Deferred income tax liabilities:                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|Property and equipment                                                                                              |                                       |   | (7,936         | )       |                |   | (18,453        | )       |   |   | (22,282 | )      
|Other assets                                                                                                        |                                       |   | (2,058         | )       |                |   | (2,058         | )       |   |   | (2,058  | )      
|Investment in unconsolidated affiliate                                                                              |                                       |   |               |         |                |   | (760           | )       |   |   | (1,302  | )      
|Other, net                                                                                                          |                                       |   | (2,206         | )       |                |   | (235           | )       |   |   |        |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|                                                                                                                    | Total deferred income tax liabilities |   |                | (12,200 | )              |   |                | (21,506 | ) |   |         | (25,642 | )
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        
|Net deferred income tax assets                                                                                      |                                       | $ | 11,531         |         |                | $ | 8,781          |         |   | $ | 8,085   |        
|                                                                                                                    |                                       |   |                |         |                |   |                |         |   |   |         |        

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 8 - Income Taxes (contd.)

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

Note 9 - Retirement Plans

Pension Plan

The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employees compensation during the eligibility period while employed with
the Company. The Companys funding policy for this plan is to contribute
annually at a rate that is intended to provide sufficient assets to meet future
benefit payment requirements.

Net periodic pension cost included the following components:

|                                                 |  |                |        |                |  |                |        |   |  |   |        |  
|------------------------------------------------ |  | -------------- | ------ | -------------- |  | -------------- | ------ | - |  | - | ------ | -
|                                                 |  | Sept. 30, 2001 |        | Sept. 29, 2002 |  | Sept. 28, 2003
|                                                 |  |                |        |                |  |               
|                                                 |  |                |        |                |  | (In thousands) |        |   |  |  
|Service cost - benefits earned during
the period |  | $              | 1,299  |                |  | $              | 1,577  |   |  | $ | 2,095  |  
|Interest cost on projected benefit
obligation    |  |                | 1,671  |                |  |                | 2,041  |   |  |   | 2,256  |  
|Actual return on assets                          |  |                | (1,528 | )              |  |                | (1,719 | ) |  |   | (2,047 | )
|Net amortization and deferral                    |  |                | 27     |                |  |                | 27     |   |  |   | 27     |  
|Recognized gains or losses                       |  |                | 60     |                |  |                | 281    |   |  |   | 467    |  
|Prior service cost recognized                    |  |                | (5     | )              |  |                | (2     | ) |  |   | (2     | )
|                                                 |  |                |        |                |  |                |        |   |  |   |        |  
|Net periodic pension cost                        |  | $              | 1,524  |                |  | $              | 2,205  |   |  | $ | 2,796  |  
|                                                 |  |                |        |                |  |                |        |   |  |   |        |  
|Assumptions used for accounting were:            |  |                |        |                |  |                |        |   |  |   |        |  
|Discount rate                                    |  |                | 7.75   | %              |  |                | 7.25   | % |  |   | 6.50   | %
|Rate of increase in compensation levels          |  |                | 5.00   | %              |  |                | 5.00   | % |  |   | 5.00   | %
|Expected long-term rate of return on
assets      |  |                | 9.00   | %              |  |                | 8.00   | % |  |   | 8.00   | %

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 9 - Retirement Plans (contd.)

Pension Plan (contd.)

The following table sets forth the plans funded status and amounts
recognized in the Companys balance sheet at:

|                                                         |                                |   |                |        |                |   |                |        |  |   |         |        | 
|-------------------------------------------------------- | ------------------------------ | - | -------------- | ------ | -------------- | - | -------------- | ------ |  | - | ------- | ------ | 
|                                                         |                                |   | Sept. 30, 2001 |        | Sept. 29, 2002 |   | Sept. 28, 2003
|                                                         |                                |   |                |        |                |   |               
|                                                         |                                |   |                |        |                |   | (In thousands) |        |  |   |        
|Actuarial present value of benefit obligations:          |                                |   |                |        |                |   |                |        |  |   |         |       
|                                                         | Accumulated benefit obligation |   | $              | 20,159 |                |   | $              | 27,595 |  |   | $       | 33,342 | 
|                                                         |                                |   |                |        |                |   |                |        |  |   |         |       
|                                                         | Vested benefit obligation      |   | $              | 20,397 |                |   | $              | 26,860 |  |   | $       | 32,505 | 
|                                                         |                                |   |                |        |                |   |                |        |  |   |         |       
|Projected benefit obligation                             |                                | $ | (26,622        | )      |                | $ | (34,963        | )      |  | $ | (41,354 | )     
|Plan assets at fair value,
primarily notes and bonds     |                                |   | 20,497         |        |                |   | 24,865         |        |  |   | 27,792  |       
|                                                         |                                |   |                |        |                |   |                |        |  |   |         |       
|Projected benefit obligation in
excess of plan assets    |                                |   | (6,125         | )      |                |   | (10,098        | )      |  |   | (13,562 | )     
|Unrecognized net loss                                    |                                |   | 4,851          |        |                |   | 9,679          |        |  |   | 13,381  |       
|Unrecognized prior service cost                          |                                |   | (5             | )      |                |   | (2             | )      |  |   |        |       
|Unrecognized net obligations established
October 1, 1987 |                                |   | 81             |        |                |   | 54             |        |  |   | 27      |       
|                                                         |                                |   |                |        |                |   |                |        |  |   |         |       
|Pension liability recognized in the
balance sheet        |                                | $ | (1,198         | )      |                | $ | (367           | )      |  | $ | (154    | )     
|                                                         |                                |   |                |        |                |   |                |        |  |   |         |       

Expenses recognized for this retirement plan were $1,795,000, $2,418,000
and $3,068,000 in 2001, 2002 and 2003, respectively.

Profit Sharing Plan

The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may
participate if their collective bargaining agreement specifically provides for
their inclusion. The Company may contribute up to 7.5% of total compensation
paid or accrued during the year to each plan participant subject to limitations
imposed by the Internal Revenue Code. The Company recognized expenses for this
plan in the amount of $787,000, $550,000 and $668,000 in 2001, 2002 and 2003,
respectively.

Multi-Employer Plans

The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the
number of hours worked. Information for these plans as to vested and
non-vested accumulated benefits and net assets available for benefits is not
available.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 9 - Retirement Plans (contd.)

Multi-Employer Plans (contd.)

The Companys expense for these retirement plans and health and welfare
plans consisted of the following:

|                                  |  |                |        |                |  |                |        |  |  |   |         | 
|--------------------------------- |  | -------------- | ------ | -------------- |  | -------------- | ------ |  |  | - | ------- | 
|                                  |  | Sept. 30, 2001 |        | Sept. 29, 2002 |  | Sept. 28, 2003
|                                  |  |                |        |                |  |               
|                                  |  |                |        |                |  | (In thousands) |        |  |  |  
|Multi-Employer Pension Plans      |  | $              | 6,579  |                |  | $              | 16,726 |  |  | $ | 22,986  | 
|Multi-Employer Health and Welfare |  |                | 58,000 |                |  |                | 65,588 |  |  |   | 79,561  | 
|                                  |  |                |        |                |  |                |        |  |  |   |         | 
|Total Multi-Employer Benefits     |  | $              | 64,579 |                |  | $              | 82,314 |  |  | $ | 102,547 | 
|                                  |  |                |        |                |  |                |        |  |  |   |         | 

The Companys employer contributions fluctuate as a result of periodic
resumptions and suspensions of employer contributions to collective bargaining
trusts.

Note 10 - Labor Relations

The Companys collective bargaining agreement with the United Food and
Commercial Workers (UFCW), which covers the largest number of employees,
expired in October 2003. The UFCW had the same collective bargaining agreement
with the Company and with the Companys three major competitors, Vons,
Albertsons and Ralphs. On April 14, 2003, prior to the expiration of the
collective bargaining agreement, the Company signed an agreement with the UFCW
which stated that the Company would accept the same contract terms that the
UFCW negotiated with Vons, Albertsons and Ralphs. In return, the UFCW agreed
not to strike the Company. The Company is not a party to the contract
negotiations between the UFCW and Vons, Albertsons and Ralphs.

Prior to the labor action, Vons, Albertsons and Ralphs informed the UFCW that
a strike against any one of the grocery chains would be considered as a strike
against all three chains. On October 11, 2003, the UFCW declared a strike
against Vons; in turn Albertsons and Ralphs locked out all of their UFCW
employees. As of the date of this filing, a new agreement has not been reached
and the strike and lock out continue.

The International Brotherhood of Teamsters collective bargaining agreement was
renewed in September 2002 and expires in September 2005.

Note 11 - Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short-term
maturity of these instruments.

Receivables

The carrying amount approximates fair value because of the short-term
maturity of these instruments.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 11 - Fair Value of Financial Instruments (contd.)

Long-Term
Debt and Capital Lease Obligations

The fair value of the 10.75% Notes, is based on quoted market prices.
Although market quotes for the fair value of the Companys capitalized lease
obligations and the 5% Subordinated Note are not readily available, the Company
believes the stated value approximates fair value.

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

|                              |  |                    |         |       |  |   |         | 
|----------------------------- |  | ------------------ | ------- | ----- |  | - | ------- | 
|                              |  | As of             
|                              |  | September 28, 2003
|                              |  |                   
|                              |  | (In thousands)    
|                              |  | Carrying           |         | Fair 
|                              |  | Amount             |         | Value
|                              |  |                    |         |      
|Cash and cash equivalents     |  | $                  | 111,152 |       |  | $ | 111,152 | 
|Receivables                   |  | $                  | 27,571  |       |  | $ | 27,571  | 
|Long-term
debt                |  | $                  | 458,750 |       |  | $ | 481,784 | 
|Capitalized lease obligations |  | $                  | 10,982  |       |  | $ | 10,982  | 

Note 12 - Litigation Matters

In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company records an
appropriate provision when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.

On July 9, 2003, the Companys principal operating subsidiary Markets
agreed to a settlement of two lawsuits which had been filed on behalf of
certain of Markets existing and former store managers and assistant managers
which alleged that such workers are non-exempt under California labor laws and
are therefore entitled to overtime wages. Markets admitted no wrong doing
under the settlement and it believes it has appropriately followed California
law in the classification and payment of its employees. Markets believes that
the store managers and assistant managers are highly compensated employees with
duties and responsibilities which place them in the exempt category under
California law and that such employees are not entitled to overtime wages.
Markets continues to feel the case was without merit; however, because of
escalating litigation expenses, Markets determined a settlement was the best
solution. The amount of the settlement was $3.2 million. Of the $3.2 million,
$1.2 million of the settlement was recognized as expense in fiscal 2003 and
$2.0 million was recognized as expense in fiscal 2001. Subsequent to
year-end, the settlement was paid.

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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 12 - Litigation Matters (contd.)

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 Markets, Inc., Ralphs Grocery
Company (Ralphs), Fred Meyer, Inc. and The Kroger Company (Defendants)
alleging among other things breaches of their Product Purchase Agreement with
Santee and failure to make certain capital contributions for Santees dairy
facility in the City of Industry. In July of 2003, Defendants filed a
cross-complaint against Markets, Santee and others seeking among other things
Declaratory Relief for interpretation of the requirements of the Product
Purchase Agreements and for damages against Markets, Santee and certain
directors of Santee for adoption of a Milk Incentive Program and payments to
Markets under that program and other claims for damages. Subsequent to
year-end, the parties mediated and reached a settlement agreement that is
subject to a sixty day close. A component of the settlement requires the
parties to execute a transfer agreement whereby Defendants will relinquish its
right, title and interest in Santee to the Company.

Note 13 - Stock Redemption

During fiscal 2002, the Company obtained consent of the holders of its
10.75% Senior Notes due 2006 to make a distribution and payment to stockholders
consisting of $25.0 million in cash and a subordinated note in the principal
amount of $20.0 million. On January 22, 2002, the Company redeemed 11,699
shares of the Companys stock previously held by La Cadena Investments (La
Cadena), the sole shareholder of the Company, and made a cash payment of $20.0
million and executed a $20.0 million subordinated note due March 31, 2007 to a
former partner of La Cadena. The subordinated note bears 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, were approximately $5.0
million.

Note 14  Phantom Stock Plan

The Company maintains a phantom stock plan for certain executives of
Stater Bros. 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 30, 2001,
September 29, 2002 and September 28, 2003, there were 663,000, 668,000 and
693,000 units outstanding, respectively. The Company recognized an expense for
the plan of $4.8 million, $6.0 million and $6.0 million in 2001, 2002 and 2003,
respectively.

F-22



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##### Table of Contents



STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 15 - Quarterly Results (unaudited)



Quarterly results for fiscal 2001, 2002 and 2003 are as follows:


(In thousands)


|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|----------------------- |  | ----- | --------- | ------ |  | ------ | ------- | --------- |  | --- | ------ |  |  | - | ------ | 
|                        |  |       |           |        |  | Gross  |         | Operating |  | Net
|                        |  | Sales |           | Profit |  | Profit |         | Income   
|                        |  |       |           |        |  |        |         |          
|Fiscal 2001 Quarters    |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|13 weeks ended 12/24/00 |  | $     | 624,849   |        |  | $      | 157,892 |           |  | $   | 14,432 |  |  | $ | 1,822  | 
|13 weeks ended 03/25/01 |  |       | 612,305   |        |  |        | 155,670 |           |  |     | 13,680 |  |  |   | 1,360  | 
|13 weeks ended 06/24/01 |  |       | 639,925   |        |  |        | 166,119 |           |  |     | 15,939 |  |  |   | 2,269  | 
|14 weeks ended 09/30/01 |  |       | 696,834   |        |  |        | 183,167 |           |  |     | 16,921 |  |  |   | 2,394  | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|                        |  | $     | 2,573,913 |        |  | $      | 662,848 |           |  | $   | 60,972 |  |  | $ | 7,845  | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|Fiscal 2002 Quarters    |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|13 weeks ended 12/30/01 |  | $     | 662,587   |        |  | $      | 176,163 |           |  | $   | 18,723 |  |  | $ | 3,932  | 
|13 weeks ended 03/31/02 |  |       | 654,213   |        |  |        | 172,813 |           |  |     | 19,476 |  |  |   | 4,294  | 
|13 weeks ended 06/30/02 |  |       | 672,779   |        |  |        | 177,142 |           |  |     | 17,707 |  |  |   | 2,911  | 
|13 weeks ended 09/29/02 |  |       | 676,767   |        |  |        | 182,702 |           |  |     | 13,132 |  |  |   | 652    | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|                        |  | $     | 2,666,346 |        |  | $      | 708,820 |           |  | $   | 69,038 |  |  | $ | 11,789 | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|Fiscal 2003 Quarters    |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|13 weeks ended 12/29/02 |  | $     | 681,509   |        |  | $      | 182,457 | (1)       |  | $   | 17,429 |  |  | $ | 2,927  | 
|13 weeks ended 03/30/03 |  |       | 677,196   |        |  |        | 185,486 | (1)       |  |     | 19,415 |  |  |   | 3,831  | 
|13 weeks ended 06/29/03 |  |       | 688,071   |        |  |        | 187,333 | (1)       |  |     | 14,170 |  |  |   | 769    | 
|13 weeks ended 09/28/03 |  |       | 706,998   |        |  |        | 199,137 |           |  |     | 16,800 |  |  |   | 2,600  | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 
|                        |  | $     | 2,753,774 |        |  | $      | 754,413 |           |  | $   | 67,814 |  |  | $ | 10,127 | 
|                        |  |       |           |        |  |        |         |           |  |     |        |  |  |   |        | 

(1) Gross profit for the first three quarters of fiscal 2003 has been restated
to reflect the adoption of EITF 02-16 effective September 30, 2002. The
adoption caused a reclassification between cost of goods sold and selling,
general and administrative expenses. There was no net income impact from the
adoption. The effect of the restatement was to reduce cost of goods sold by
$1.1 million, $1.3 million and $1.0 million in quarters ended December 29,
2002, March 30, 2003 and June 29, 2003, respectively.

F-23