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(Mark One)

x	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: September 29, 2002

OR

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

For the transition from ____ to ____

Delaware	33-0350671
(State or other jurisdiction of incorporation or	(IRS Employer Identification No.)
organization)

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.

     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 2, 2002 – Class A Common Stock - 38,301 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None

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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			10
Item 6	Selected Financial Data			11
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 8	Financial Statements and Supplementary Data			23
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			23
PART III
Item 10	Directors and Executive Officers of the Registrant			24
Item 11	Executive Compensation			26
Item 12	Security Ownership of Certain Beneficial Owners and Management			29
Item 13	Certain Relationships and Related Transactions			30
Item 14	Controls and Procedures			30
PART IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K			31
	Signatures			35
	Certifications			36

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Table of Contents

PART I

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 156 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 hot service 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 1,467,000 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 cost 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.

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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 35,000 square feet to 44,000 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 156 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 156 as of September 29, 2002. 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 68% 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 hot service 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. 27, 1998			Sept. 26, 1999			Sept. 24, 2000			Sept. 30, 2001			Sept. 29, 2002
Number of supermarkets:
Opened	2			1			—			1			1
Acquired	—			43			—			—			—
Replaced	—			(1	)		—			(1	)		—
Total at end of year	112			155			155			155			156
Minor Remodel	5			7			17			10			11
Major Remodel	6			10			2			2			3
Expansion	—			—			1			—			—

Beyond 2002, the Company plans to open approximately one to five 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 1,467,000 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 29, 2002, the Company operated approximately 139 tractors and 406 trailers, all of which were owned by the Company. The Company also operates a repair terminal at the Colton distribution facility.

Purchasing and Marketing
The Company uses an “Aggressive Everyday Low Price” (“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, hot service bakeries and hot service delicatessens. 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 executive officers 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 purchase 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 Ralph’s 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., Ralph’s, 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 2001, Santee Dairies processed approximately 66.8 million gallons of fluid products, including 54.1 million gallons of fluid milk. Total revenues in Santee Dairies’ 52-week fiscal year ended December 29, 2001 were $190.8 million, of which approximately $91.3 million were sales to Stater Bros. and Ralph’s. Santee Dairies also sells to unaffiliated supermarkets, independent food distributors, military bases and foodservice providers in Southern California.

In 1998, Santee Dairies moved to a new dairy plant in City of Industry, California. The new dairy increased Santee Dairies’ capacity to process milk to approximately 250,000 to 350,000 gallons per day, with the ability to expand capacity to approximately 500,000 gallons per day.

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 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.

During fiscal 2002, the Company completed the installation of NCR’s new generation of electronic scan systems, the 7452 ACS Scan System. These new systems are more customer-oriented, operate more efficiently and reduce the time required to check out customers. In fiscal years 2000, 2001 and 2002, fifteen, eleven and fifty-five systems were installed, respectively.

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Item 1.

Business (contd.)

Management Information Systems (contd.)
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. The Company has obtained a federal service mark for the name “Stater Express”.

Employees
The Company has approximately 13,400 employees, approximately 800 of whom are management and administrative employees and approximately 12,600 of whom are hourly employees. Approximately 70% of the Company’s employees work part-time. Substantially all of the Company’s hourly employees are members of either the United Food & Commercial Workers or International Brotherhood of Teamsters labor unions and are represented by several different collective bargaining agreements. The Company’s collective bargaining agreements with the United Food & Commercial Workers, which covers the largest number of employees, were renewed in October 1999 and expire in October 2003. The International Brotherhood of Teamsters 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 and a long history of community involvement.

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.

Government Regulation
The Company is subject to regulation by a variety of governmental authorities, including federal, state and local agencies that regulate trade practices, building standards, labor, health, safety and environmental matters and regulate the distribution and sale of alcoholic beverages, tobacco products, milk and other agricultural products and other food items.

Environmental
Environmental remediation costs incurred over the past five years were approximately $1.3 million, in the aggregate, including remediation costs of approximately $198,000 in 2000, $495,000 in 2001 and $324,000 in 2002. 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.

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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 29, 2002.

Facility	Square Feet
Grocery	896,000
Health and beauty care and general merchandise	131,000
Produce, meat and meat deli	118,000
Grocery deli	116,000
Frozen	74,000
Bakery	40,000
Support and administrative offices	92,000
Total	1,467,000

As of September 29, 2002, the Company owned 45 of its supermarkets and leased the remaining 111 supermarkets. Management believes that its supermarkets are well maintained and adequately meet the expectations of its customers. The Company operates 156 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 counts by size, county, and the number of stores that are either leased or owned as of September 29, 2002.

	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	40				12			28			10				14			5			5			6
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	156				45			111			24				51			14			29			38

The total size of the Company’s supermarkets is approximately 5,161,000 square feet, of which 3,693,000 is selling square feet.

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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.

In September of 2000, two lawsuits were filed against Stater Bros. Markets in the State of California Superior Court, County of San Bernardino alleging that certain of its employees are entitled to overtime wages. The two cases were purportedly filed on behalf of certain Stater Bros. Markets store managers and assistant store managers, respectively, alleging that such workers are non-exempt under California labor laws and are therefore entitled to overtime wages. The Company’s position is 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. This is consistent with the position taken by other supermarket chains in California. The Company believes it has complied in all respects with California laws and regulations relative to employee wages and that each of these Complaints is without merit.

Environmental Matters
Environmental remediation costs incurred during the last five years were approximately $1.3 million, in the aggregate, including remediation costs of approximately $198,000 in 2000, $495,000 in 2001 and $324,000 in 2002. 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.

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.

PART II

(a) Market Information
		There is no established public trading market for the Company’s common equity.
(b) Holders
		La Cadena holds 38,301 shares, or 100% of the Company’s Class A Common Stock.
(c) Dividends
		Dividends of $4.5 million were paid in fiscal 2002 on the common equity of the company. No dividends were paid in fiscal years 2001 and 2000. The Company does not intend to pay dividends on its common equity in the foreseeable future.

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The following table sets forth historical financial data derived from the audited financial statements of the Company as of and for the fiscal years ended September 27, 1998, September 26, 1999, September 24, 2000, September 30, 2001 and September 29, 2002. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the Consolidated Financial Statements of the Company and related notes thereto contained elsewhere herein. The information included in “Other Operating and Financial Data” and “Store Data” is unaudited.

	Fiscal Years Ended
		Sept. 27, 1998				Sept. 26, 1999				Sept. 24, 2000				Sept. 30,(5) 2001				Sept. 29, 2002
	(In thousands of dollars except per share and store data)
Statement of Earnings Data:
Sales	$	1,726,107			$	1,830,195			$	2,417,710			$	2,573,913			$	2,666,346
Cost of goods sold		1,323,522				1,387,619				1,819,068				1,911,065				1,957,526
Gross profit		402,585				442,576				598,642				662,848				708,820
Selling, general and administrative expenses		353,075				377,195				532,147				572,815				608,289
Depreciation and amortization		15,434				16,591				25,580				29,061				31,493
Acquisition integration expenses		—				5,590				4,594				—				—
Total operating expenses		368,509				399,376				562,321				601,876				639,782
Operating profit		34,076				43,200				36,321				60,972				69,038
Interest and other income		3,061				2,951				3,217				3,151				142
Interest expense		(30,206	)			(33,630	)			(53,680	)			(52,410	)			(52,814	)
Equity in income (loss) from unconsolidated affiliate		(2,941	)			1,130				1,483				1,584				2,914
Income (loss) before income taxes (benefit) and extraordinary gain (loss)		3,990				13,651				(12,659	)			13,297				19,280
Income taxes (benefit)		1,459				5,372				(5,369	)			5,452				7,491
Income (loss) before extraordinary gain (loss)		2,531				8,279				(7,290	)			7,845				11,789
Extraordinary gain (loss) (1) (2)		—				(17,311	)			1,123				—				—
Net income (loss)	$	2,531			$	(9,032	)		$	(6,167	)	$		7,845			$	11,789
Earnings (loss) per common share before extraordinary gain (loss)	$	50.62			$	165.58			$	(145.80	)	$		156.90			$	280.92
Earnings (loss) per common share	$	50.62			$	(180.64	)		$	(123.34	)	$		156.90			$	280.92

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Item 6.

Selected Financial Data (contd.)

	Fiscal Years Ended
	Sept. 27, 1998				Sept. 26, 1999				Sept. 24, 2000				Sept. 30, (5) 2001				Sept. 29, 2002
	(In thousands of dollars except per share and store data)
Balance Sheet Data (end of fiscal year):
Working capital	$	90,725			$	130,915			$	111,770			$	124,297			$	123,460
Total assets		364,318				603,917				595,288				629,294				634,130
Long-term notes		265,000				455,048				439,000				439,000				458,750
Long-term capitalized lease obligations		4,350				15,625				13,679				12,098				10,981
Other long-term liabilities		12,009				10,960				14,070				24,608				45,014
Common stockholders’ deficit		(34,055	)			(43,087	)			(49,254	)			(41,409	)			(74,121	)
Dividends paid per share, Class A Common Stock		—				—				—				—			$	117.49
Cash Flow Data:
Cash provided by operating activities		26,428				59,296				15,385				79,393				51,168
Cash provided by (used in) financing activities		(1,257	)			152,912				(10,664	)			(7,140	)			(31,218	)
Cash used in investing activity		(26,976	)			(176,137	)			(35,442	)			(33,248	)			(40,543	)
Other Operating and Financial Data:
Sales increases (decreases):
Total stores		0.5	%			6.0	%			32.1	%			6.5	%			3.6	%
Like stores (comparable 52-weeks)		(1.0	%)			1.9	%			1.4	%			4.5	%			5.3	%
EBITDA(3)	$	49,630			$	63,872			$	66,601			$	94,768			$	103,587
Operating profit	$	34,076			$	43,200			$	36,321			$	60,972			$	69,038
Ratio of earnings to fixed charges(4)		1.03	x			1.27	x			0.85	x			1.19	x			1.25	x
Gross profit as a percentage of sales		23.32	%			24.18	%			24.76	%			25.75	%			26.58	%
Selling, general and administrative expenses as a percentage of sales		20.46	%			20.61	%			22.01	%			22.25	%			22.81	%
Store Data:
Number of stores (at end of fiscal year)		112				155				155				155				156
Average sales per store (000s)	$	15,551			$	15,741			$	15,598			$	16,606			$	17,092
Average store size:
Total square feet		29,061				32,895				32,910				33,018				33,083
Selling square feet		20,991				23,570				23,570				23,639				23,675
Total square feet (at end of fiscal year) (000s)		3,255				5,099				5,101				5,118				5,161
Total selling square feet (at end of fiscal year) (000s)		2,351				3,653				3,653				3,664				3,693
Sales per total sq. ft.	$	537			$	531			$	474			$	503			$	517
Sales per selling sq. ft.	$	743			$	736			$	662			$	702			$	722

(1)		The extraordinary loss in 1999 represents the after-tax loss from the early extinguishment of debt.
(2)		The extraordinary gain in 2000 represents the after-tax gain from the early extinguishment of debt.
(3)		EBITDA represents earnings before extraordinary gain (loss), interest expense, depreciation and amortization and income tax expense. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Notes and because it is used by certain investors as a measure of a company’s ability to service its debt. EBITDA is not a measure of financial performance under generally accepted accounting principals and it 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.

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Item 6.

Selected Financial Data (contd.)

(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.
(5)		The fiscal year 2001 was a 53-week year, whereas fiscal years 1998, 1999, 2000 and 2002 were 52-week years.

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 judgements 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 judgements on the part of management.

Vendor Rebates and Allowances
The Company receives certain rebates and allowances (“allowances”) from its vendors. The Company recognizes these allowances as a reduction in cost of goods sold as the allowances are earned. These 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.

Self-Insurance
The Company is primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. 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.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Critical Accounting Policies (contd.)

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.

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 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, plant, 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 24, 2000, September 30, 2001 and September 29, 2002. The fiscal year ended September 30, 2001 was a 53-week year whereas fiscal years ended September 24, 2000 and September 29, 2002 were 52-week years.

	Fiscal Years Ended
	2000			2001			2002
Sales	100.00	%		100.00	%		100.00	%
Gross profit	24.76			25.75			26.58
Operating expenses:
Selling, general and administrative expenses	22.01			22.25			22.81
Depreciation and amortization	1.06			1.13			1.18
Acquisition integration expenses	0.19			—			—
Operating profit	1.50			2.37			2.59
Interest income	0.13			0.13			0.06
Interest expense	(2.22	)		(2.04	)		(1.98	)
Equity in income from unconsolidated affiliate	0.06			0.06			0.11
Other income (expense) net	0.01			—			(0.06	)
Income (loss) before income taxes and extraordinary gain	(0.52	%)		0.52	%		0.72	%

Total sales amounted to $2.666 billion in 2002 compared to $2.574 billion in 2001 and $2.418 billion in 2000. Like-store sales increased 5.3% in fiscal 2002, compared to 4.5% (52-week basis) in fiscal 2001 and an increase of 1.9% (before erosion of like-store sales of 0.5% to newly acquired stores) in fiscal 2000. 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. The increase in sales during fiscal 2001was due to favorable customer response to the Company’s marketing plan and to the replacement of one of its stores in San Bernardino, California.

Gross profits increased to $708.8 million or 26.58% of sales in 2002 compared to $662.8 million or 25.75% of sales in 2001 and $598.6 million or 24.76% of sales in 2000. The increase in gross profits, as a percent of sales, during the last three fiscal years was due to the introduction of higher gross margin products achieved through the Company’s merchandising expansion and upgrading programs including significant investments in product display fixtures. The Company adjusts its pricing strategy as necessary to retain its aggressive every day low price marketing position.

Operating expenses include selling, general and administrative expenses, depreciation and amortization and acquisition integration expenses. In fiscal year 2002, selling, general and administrative expenses amounted to $608.3 million or 22.81% of sales compared to $572.8 million or 22.25% of sales in 2001 and $532.1 million or 22.01% of sales in 2000. Selling, general and administrative expenses, as a percentage of sales, for fiscal 2002 increased over fiscal 2001 due primarily to increased payroll related costs resulting primarily from increases in union insurance and direct labor costs. Selling, general and administrative expenses, as a percentage of sales, for fiscal 2001 increased over fiscal 2000 due primarily to increased utility costs resulting from the energy crisis within the State of California.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Results of Operations (contd.)
Depreciation and amortization expenses amounted to $31.5 million in 2002 compared to $29.1 million in 2001 and $25.6 million in 2000. Depreciation and amortization expense, as a percentage of sales, was 1.18%, 1.13% and 1.06% for fiscal years 2002, 2001 and 2000, respectively. The changes in depreciation expense from year-to-year are due primarily to store additions, remodels and store and warehouse expenditures.

Acquisition integration expenses amounted to $4.6 million in fiscal 2000 and were related to the acquisition of 43 supermarkets acquired from Albertson’s in August 1999. No additional acquisition integration costs were incurred in fiscal 2001 or fiscal 2002 and none are anticipated in the future. Acquisition integration expenses consisted of salaries and wages, uniforms, supplies and non-recurring advertising expenses incurred during the integration of the supermarkets.

Operating profits amounted to $69.0 million or 2.59% of sales in 2002 compared to $61.0 million or 2.37% of sales in 2001 and $36.3 million or 1.50% of sales in 2000.

Interest expense amounted to $52.8 million, $52.4 million and $53.7 million for the 2002, 2001 and 2000 fiscal years, respectively. 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. The decrease in interest expense in fiscal 2001 compared to fiscal 2000 was due to the retirement of the remaining $5.0 million of 11% notes in March of 2001 and the early redemption of $11.0 million of 10.75% notes due 2006 in fiscal 2000.

The equity in income from unconsolidated affiliate amounted to $2.9 million in fiscal 2002 compared to $1.6 million in 2001 and $1.5 million in 2000. The increase in income from unconsolidated affiliate in fiscal 2002 over fiscal 2001 is due primarily to the revaluation, by the affiliate, of deferred tax benefits arising from past net operating losses. The effect of the revaluation in fiscal 2002 was an increase of $1.1 million in income from unconsolidated affiliate. 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 products, 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.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Results of Operations (contd.)
Income (loss) before income taxes (benefit) and extraordinary gain amounted to income of $19.3 million in fiscal 2002, compared to $13.3 million in fiscal 2001 and a $12.7 million loss in fiscal 2000.

Income (loss) before extraordinary gain amounted to income of $11.8 million in 2002, compared to $7.8 million in 2000 and a $7.3 million loss in 2000.

Extraordinary gain in fiscal 2000 amounted to $1.1 million ($1.9 million less tax effect) from early extinguishment of $11.0 million of 10.75% Senior Notes due 2006.

Net income, for fiscal 2002, amounted to $11.8 million, compared to $7.8 million in fiscal 2001 and a net loss of $6.2 million in fiscal year 2000.

Liquidity and Capital Resources
The Company has historically 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 2003 and consists of a revolving loan facility for working capital of $50.0 million, and a letter of credit facility with a maximum availability of $25.0 million. The credit agreement was amended December 13, 2001, to include a $15.0 million letter of credit sublimit. As of September 29, 2002, the Company had $29.4 million of outstanding letters of credit and had $45.6 million available under the revolving loan facility. As of September 29, 2002, and for the fifty-two weeks then ended, the Company had no outstanding balances and had not drawn down on 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 to secure certain rent obligations.

The Company had no short-term borrowings outstanding at the end of fiscal years 2002, 2001 and 2000, and the Company did not incur short-term borrowings during fiscal years 2002, 2001 and 2000.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)

Liquidity and Capital Resources (contd.)
The following table sets forth the Company’s contractual cash obligations and commercial commitments as of September 29, 2002.

	Contractual Cash Obligations (In thousands)
	Total			Less than 1 Year			1-3 Years			4-5 Years			After 5 Years
10.75% Senior Notes due August 2006
Principal	$	438,750		$	—		$	—		$	438,750		$	—
Interest		184,732			47,166			94,331			43,235			—
		623,482			47,166			94,331			481,985			—
5.0% Subordinated Note due March 2007
Principal		20,000			—			—			20,000			—
Interest		4,500			1,000			2,000			1,500			—
		24,500			1,000			2,000			21,500			—
Capital Lease Obligations (1)
Principal		12,098			1,117			1,986			1,751			7,244
Interest		11,553			1,896			3,248			2,613			3,796
		23,651			3,013			5,234			4,364			11,040
Operating Leases (1)		216,563			29,507			50,931			42,794			93,331
Total Contractual Cash Obligations	$	888,196		$	80,686		$	152,496		$	550,643		$	104,371

	Other Commercial Commitments (In thousands)
	Total			Less than 1 Year			1-3 Years			4-5 Years			After 5 Years
Standby Letters of Credit (2)	$	29,357		$	29,357		$	—		$	—		$	—
Total Other Commercial Commitments	$	29,357		$	29,357		$	—		$	—		$	—

(1)	The Company leases the majority of its retail stores, offices, warehouses and distribution facilities. Certain leases provide for additional rents based on sales. Primary lease terms range from 10 to 99 years and substantially all leases provide for renewal options.
(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 12, 2002 and December 31, 2002.

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

Liquidity and Capital Resources (contd.)
Working capital amounted to $123.5 million at September 29, 2002, $124.3 million at September 30, 2001 and $111.8 million at September 24, 2000. The Company’s current ratios were 1.64:1, 1.64:1 and 1.63:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash provided by operating activities amounted to $51.2 million in 2002, $79.4 million in 2001 and $15.4 million in 2000. Fluctuations in operating assets and liabilities are not unusual in the industry. The change in cash provided by operating activities in fiscal 2002 compared to fiscal 2001 was due to normal operations. 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 receivables and other assets offset by increases in income tax receivables and inventories and decreases in accounts payable. The change in cash provided by operating activity in fiscal 2001 compared to fiscal 2000 was due primarily to changes from normal operations and the termination of a lease guarantee escrow account. Cash provided from 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 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. 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 the current year 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 financing activities during fiscal 2000 amounted to $10.7 million and consisted of funds of $8.7 million used to retire $11.0 million of 10.75% Senior Notes due 2006 and principal payment on capital lease obligations of $1.9 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. Net cash used in investing activities during fiscal 2000 amounted to $35.4 million and consisted primarily of the purchase of property and equipment of $38.2 million which included approximately $21.8 million to fund projects related to the acquisition of the 43 supermarkets and related warehouse expansion. Additional capital expenditures were used to acquire land for a store site as well as fund normal maintenance capital expenditures. Proceeds from the sale of assets in fiscal 2000 amounted to $2.8 million and consisted primarily from the sale of a store site in Colton, California. The Colton store site was leased backed by the Company under an operating lease.

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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 cash capital expenditures for fiscal 2003 will be approximately $50.5 million.

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

The Company operated 156 supermarkets at September 29, 2002, and 155 supermarkets at September 30, 2001 and September 24, 2000.

The Company’s supermarkets had approximately 5.2 million total square feet at September 29, 2002 and approximately 5.1 million total square feet at September 30, 2001 and September 24, 2000.

      Credit Facilities
The Company’s principal operating subsidiary, Stater Bros. Markets, signed a credit facility with Bank of America N.A. on August 6, 1999. The credit facility, as amended December 13, 2001, provides for (i) a $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility and (iii) a “Revolving Loan Commitment L/C Sublimit” which is defined as an amount equal to the lesser of (a) the Revolving Loan Commitment and (b) $15,000,000. The Revolving Loan Commitment L/C 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 the purchase of inventory, obligations incurred in connection with the construction of stores, workers’ compensation insurance obligations and 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 Stater Bros. Markets under the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of the Company, and any subsidiaries that Stater Bros. 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 2.25%. 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 Stater Bros. Markets of one, two, three or six months.

The revolving loan facility, as amended January 18, 2002, will cease to be available and will be payable in full on March 31, 2003. Letters of credit under the credit facility can be issued until March 31, 2004. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.

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

Liquidity and Capital Resources (contd.)
      Credit Facilities (contd.)
Loans under the 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 Stater Bros. Markets. Stater Bros. 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 1.50% per annum on the face amount of such letters of credit, payable quarterly in arrears. The Company 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 Stater Bros. 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 leaseback, 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 of 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 Stater Bros. 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; judgment; 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 29, 2002, for purposes of the credit facility with Bank of America, the Company was in compliance with all restrictive covenants and exceeded the minimum net worth covenant by approximately $64.3 million and exceeded minimum inventory coverage by approximately $49.6 million. The minimum EBITDA (as defined) covenant measurement period began (as amended) in the quarter ending June 25, 2000, and requires an annualized minimum EBITDA, as amended January 18, 2002, of $85.0 million. As of September 29, 2002, Stater Bros. Markets exceeded minimum annualized EBITDA by approximately $18.5 million.

As of September 29, 2002, for purposes of the credit facility with Bank of America, the Company was 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 29, 2002, the Company was in compliance with all such covenants. However, there can be no assurance that the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

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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 and other major supermarket employers in Southern California negotiated a four-year contract, beginning October 1999 and expiring in October 2003, with the United Food and Commercial Workers Union. The Company’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in September 2002 and expires in September 2005. Management believes it has good relations with its employees.

Recent Accounting Pronouncements
During the Company’s fiscal 2002, the Financial Accounting Standards Board (“FASB”) issued or required the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, No. 143, No. 145 and No. 146. Adoption of SFAS No. 142, No. 143, No. 145 and No. 146 were either not applicable to the Company or were adopted by the Company in its fiscal 2002 and did not have a material effect on the Company’s financial position or its results of operations in fiscal 2002. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This statement is effective for the Company beginning September 30, 2002, and the Company is evaluating the impact, if any, that the implementation will have on the financial statements.

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

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

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Information called for by this item is set forth in the Company’s financial statements and supplementary data contained in this report. Specific financial statements and supplementary data can be found on the pages listed in the following index.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page Number
Report of Independent Auditors		F-2
Consolidated Balance Sheets at September 24, 2000, September 30, 2001 and September 29, 2002		F-3
Fiscal years ended September 24, 2000, September 30, 2001 and September 29, 2002:
Consolidated Statements of Operations		F-5
Consolidated Statements of Cash Flows		F-6
Consolidated Statements of Stockholders’ Deficit		F-7
Notes to Consolidated Financial Statements		F-8

None

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PART III

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		63		Chairman of the Board, President and Chief Executive Officer
Donald I. Baker		61		Executive Vice President and Chief Operating Officer
Phillip J. Smith		55		Senior Vice President and Chief Financial Officer
Dennis L. McIntyre		42		Group Senior Vice President of Marketing
James W. Lee		51		Group Senior Vice President of Retail Operations
Edward A. Stater		51		Senior Vice President of Retail Operations
Bruce D. Varner		66		Director and Secretary
Thomas W. Field, Jr.		68		Vice Chairman of the Board of Directors
C. Dale Warman		73		Director

Background of Directors and Executive Officers
     Jack H. Brown has been President and Chief Executive Officer of the Company since June 1981 and Chairman of the Board since 1986. From September 1978 to June 1981, Mr. Brown served as President of Pantry Food Markets, Inc. and American Community Stores Corporation, Inc., both wholly owned subsidiaries of Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr. Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a publicly held corporation. Mr. Brown has been employed in various capacities in the supermarket industry for 50 years. Mr. Brown has a majority interest and is the managing general partner of La Cadena.

     Donald I. Baker has been Executive Vice President and Chief Operating Officer since November 2001 and Executive Vice President of the Company since October 1998. Mr. Baker joined the Company in November 1983 as Vice President-Warehouse and Transportation and was Group Senior Vice President-Administration from July 1996 to October 1998. From July 1992 to July 1996, Mr. Baker was Group Senior Vice President-Human Resources and Distribution. From August 1986 to July 1992, Mr. Baker was Senior Vice President-Human Resources and Distribution. Mr. Baker has approximately 36 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.

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Item 10.

Directors and Executive Officers of the Registrant (contd.)

Background of Directors and Executive Officers (contd.)
     Phillip J. Smith has 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 27 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. McIntyre has been Group Senior Vice President of Marketing since August 2002. Mr. McIntyre has served the Company for 24 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. Lee joined the Company in August 2002 as Group Senior Vice President of Retail Operations. Mr. Lee has over 30 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. Stater has been Senior Vice President of Retail Operations since April 2000. Mr. Stater has served the Company for 34 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. Varner has 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. He has been President of Field and Associates since 1989. From 1988 to 1989, Mr. Field was Chairman of the Board, President and Chief Executive Officer of McKesson Corporation and was its President since 1984, and President and Chief Executive Officer from 1986 to 1988. Mr. Field was President of American Stores Company from 1981 to 1984 and was President of Alpha Beta Company from 1976 to 1984. Mr. Field was a Director of American Stores Company from 1979 to 1984. Mr. Field is a nationally recognized and highly regarded supermarket executive. Mr. Field has held various positions in the Supermarket Industry for over 43 years and serves as a Director for several companies including, Campbell Soup Company and Maxicare.

     C. Dale Warman has been a Director of the Company since 2000. He served the Fred Meyer Company for over 41 years. He served as a Director of Fred Meyer from 1975 to 1990. He served as President of Fred Meyer Foods from 1982 to 1990. He served as Executive Vice President of Fred Meyer Inc. from 1981 to 1990. He was Executive Vice President of Allied Foods from 1972 to 1975. He served as a Director of Big Bear Stores from 1987 to 1989 and as a Director of Allied Stores from 1973 to 1975. He is considered one of the supermarket industry’s outstanding executives.

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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
Name and Principal Position		Year		Salary			Bonuses (4) (5)			Other Annual Compensation			All Other Compensation (1)(2)(3)
Jack H. Brown		2002		$	1,188,000		$	—		$	—		$	51,500
Chairman, President and		2001		$	1,128,000		$	1,400,000		$	—		$	52,161
Chief Executive Officer		2000		$	1,044,000		$	2,995,000		$	—		$	52,378
Donald I. Baker		2002		$	473,000		$	—		$	—		$	—
Executive Vice President		2001		$	412,000		$	225,000		$	—		$	1,661
and Chief Operating Officer		2000		$	360,000		$	175,000		$	—		$	1,378
Phillip J. Smith		2002		$	202,000		$	—		$	—		$	—
Senior Vice President and		2001		$	187,000		$	90,000		$	—		$	1,661
Chief Financial Officer		2000		$	150,000		$	70,000		$	—		$	1,378
Dennis L. McIntyre		2002		$	192,000		$	—		$	—		$	—
Group Senior Vice		2001		$	173,000		$	55,000		$	—		$	1,661
President of Marketing		2000		$	143,000		$	40,000		$	—		$	1,378
Edward A. Stater		2002		$	182,000		$	—		$	—		$	—
Senior Vice President		2001		$	167,000		$	50,000		$	—		$	1,661
of Retail Operations		2000		$	140,000		$	35,000		$	—		$	1,376

(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 2000, 2001 and 2002, which amounted to $51,000, $50,500, and $51,500, respectively.
(4)		The Board of Directors of Stater Bros. Holdings Inc. unanimously awarded Mr. Brown a one-time bonus in 2000 for successful integration of the 43 acquired supermarkets.
(5)		Annual Bonuses to be paid to the Named Executive Officers for fiscal 2002 had neither been calculated nor awarded as of December 10, 2002, the latest practical date.

Stock Options and SARs

None

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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 29, 2002: Jack H. Brown - 21 years, Donald I. Baker - 19 years, Phillip J. Smith - 15 years, Dennis L. McIntyre - 24 years and Edward A. Stater - 34 years.

The amounts shown in the following table are estimated annual retirement benefits under the Pension Plan (assuming payments are made on the normal life annuity and not under any of the various survivor forms of benefits) based upon retirement at age 65, after various years of service at selected salary levels. Benefits under the Pension Plan do not become fully vested until the employee has five years of credited service with the Company. The Internal Revenue Code of 1986, as amended, places certain limitations on pension benefits that can be paid from a tax-qualified pension plan and trust, as well as the compensation that may be taken into account in determining such benefits. Such limitations are not reflected in the table below. The maximum annual benefit for 2002 retirees with ten or more years of service at retirement is $160,000. The maximum annual compensation that may be considered for 2002 retirees is $200,000.

		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		13,163			17,550			21,938			26,325			30,713
	100,000		21,225			28,300			35,375			42,450			49,525
	125,000		29,288			39,050			48,813			58,575			68,338
	150,000		37,350			49,800			62,250			74,700			87,150
	175,000		45,413			60,550			75,688			90,825			105,963
	200,000		53,475			71,300			89,125			106,950			124,775

Compensation of Directors
Directors of the Company are paid an annual fee of $50,000 plus $500 for each board meeting attended.

Employment and Severance Agreements
In June of 2000, the Company’s principal operating subsidiary, Stater Bros. Markets, entered into Employment Agreements with Messrs. Brown, Baker, Smith, McIntyre and Stater. Under each of the Agreements, the employee is employed to serve as an officer of the Company and with certain exceptions the Agreements prohibits 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

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Item 11.

Executive Compensation (contd.)

Employment and Severance Agreements (contd.)
any of the Agreements of Messrs. Baker, Smith, McIntyre and Stater 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. Stater’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 42 additional current members of Senior 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 and September 29, 2002, there were 663,000 and 668,000 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.

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The following table sets forth, as of December 2, 2002, 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:

Name and Address of Beneficial Owner	Shares of Class A Common Stock Beneficially Owned			Percentage of Class A Common Stock 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 (9 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