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EX-12.1 - EX-12.1 - STATER BROS HOLDINGS INCv58081exv12w1.htm
EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INCv58081exv32w1.htm
EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INCv58081exv31w2.htm
EX-31.1 - EX-31.1 - STATER BROS HOLDINGS INCv58081exv31w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 26, 2010
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   (IRS Employer Identification No.)
organization)    
     
301 S. Tippecanoe Avenue    
San Bernardino, California   92408
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (909) 733-5000
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o   No þ.
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 þ 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 þ   No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o  Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes o   No þ.
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 15, 2010—Class A Common Stock — 34,552 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
 
 

 


 

STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
             
        Page Number  
   
 
       
           
   
 
       
Item 1       3  
Item 1A       8  
Item 1B       9  
Item 2       9  
Item 3       10  
Item 4       10  
   
 
       
           
   
 
       
Item 5       11  
Item 6       11  
Item 7       13  
Item 7A       24  
Item 8       25  
Item 9       25  
Item 9A       25  
Item 9B       26  
   
 
       
           
   
 
       
Item 10       27  
Item 11       29  
Item 12       38  
Item 13       39  
Item 14       39  
   
 
       
           
   
 
       
Item 15       40  
        44  
 EX-12.1
 EX-31.1
 EX-31.2
 EX-32.1

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Table of Contents

PART I
Item 1.   Business
General
Stater Bros. Holdings Inc. (“Holdings” or the “Company”) through its wholly-owned subsidiary, Stater Bros. Markets (“Markets”), operates a supermarket chain of 167 stores located throughout Southern California. We provide our customers with high quality grocery, health and general merchandise products at every day low prices while providing the highest level of customer service. All of our stores have expanded selection of produce and full-service meat departments, 155 have service deli departments, 88 have bakery departments, 84 have full-service seafood departments and 27 have pharmacies. We believe our service departments, along with our high level of customer service, creates a shopping experience that maintains customer loyalty and distinguishes us from other supermarket chains. The legal entity for our in-store pharmacies is Super Rx, Inc. (“Super Rx”), a wholly-owned subsidiary of Markets. Stater Bros. Development, Inc. (“Development”) a wholly-owned subsidiary of the Company is general contractor for all of our new store construction and store remodels. Prior to October 11, 2009, most of the milk products offered in our stores were manufactured by SBM Dairies, Inc. (“Dairies”), a wholly-owned subsidiary of Markets. Dairies operated under the name Heartland Farms. In addition to providing Markets with its milk products, Dairies sold milk and juice products to a variety of third party companies and organizations. On October 11, 2009, we sold substantially all of the assets of Dairies to subsidiaries of Dean Foods, Inc. (“Dean Foods”) (the “Dairy Transaction”) and entered into a ten year product purchase agreement (the “PPA”) to purchase substantially all of our milk products from Dean Foods and we discontinued all dairy manufacturing operations as of that date and we have changed the legal name of Dairies from Santee Dairies, Inc. to SBM Dairies, Inc.
Holdings was incorporated in Delaware in 1989 and has, through Markets and its predecessor companies, operated supermarkets in Southern California since 1936 when the first Stater Bros. Market opened in Yucaipa, California. The total square footage of our supermarkets is approximately 5.8 million square feet including approximately 4.1 million square feet of selling area. We have constructed most of our supermarkets through Development and it acts as general contractor for all new store construction and store remodels. We have grown our business through construction of new stores and through a strategic acquisition.
We utilize a centralized Distribution Center that provides our supermarkets with approximately 78% of the volume of the merchandise we offer for sale. Our Distribution Center, located on the former Norton Air Force base in San Bernardino, California (“Norton”) encompasses approximately 2.4 million square feet and includes our corporate offices.
Available Information
We file quarterly and annual reports electronically with the Security and Exchange Commission (“SEC”) under forms 10-Q and 10-K and we file current reports on form 8-K and amendments to these reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. These electronic files can be found at the SEC’s website at http://www.sec.gov. The public may read and copy any of our reports filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Ownership of the Company
La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust, holds all of our issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of Holdings, is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our Board of Directors, and any other matters requiring shareholder approval.

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Table of Contents

Item 1.   Business (contd.)
Store Profile and Locations
Our supermarkets have well-established locations with fixed rent payments in most locations. In addition, we believe our existing supermarkets are well maintained and generally require capital expenditures only for customary maintenance. An average supermarket is approximately 34,000 square feet, while newly constructed supermarkets range from approximately 40,000 square feet to 46,000 square feet. Because of the close proximity of our Distribution Center to our store locations, we operate our supermarkets with minimal back-room storage space. Our supermarkets utilize an average of approximately 71% of total square feet as retail selling space. Generally, all of our supermarkets are similarly designed and stocked which allows our customers to easily find items in any of our supermarkets.
Substantially all of our 167 supermarkets are located in neighborhood shopping centers in well-populated residential areas. We endeavor to locate our supermarkets in growing areas that will be convenient to potential customers and will accommodate future supermarket expansion.
We operated 167 supermarkets at both September 26, 2010 and September 27, 2009 and 165 supermarkets at September 28, 2008.
Our supermarkets had approximately 5.8 million total square feet at September 26, 2010 and September 27, 2009 and approximately 5.6 million total square feet at September 28, 2008.
Store Expansion and Remodeling
Our marketing area comprises the Southern California counties of San Bernardino, Riverside, Orange, Los Angeles, San Diego and Kern. We expand our customer base through construction of new stores and by improving, remodeling and expanding existing stores. We intend to continue to expand our existing supermarket operations by enlarging and remodeling existing supermarkets and constructing new supermarkets. We may also make strategic acquisitions of existing supermarkets, if such opportunities arise.
We actively pursue the acquisition of sites for new supermarkets. In an effort to determine sales potential, we carefully research and analyze new supermarket sites for population shifts, zoning changes, traffic patterns, nearby new construction and competitive locations. We work with developers to attain our criteria for potential supermarket sites and to insure adequate parking and a complementary co-tenant mix.
We monitor sales and profitability of our operations on a store-by-store basis and remodel or replace stores in light of their performance and our assessment of their future potential. Approximately 53% of our supermarkets have been either newly constructed or remodeled within the last five years. The capital expenditure for a minor remodel ranges between $250,000 and $1,000,000 and typically includes new fixtures and may include a change in decor. The capital expenditure for a major remodel exceeds $1,000,000 and typically involves more extensive refurbishment of the store’s interior and may include the addition of one or more specialty service departments such as a service deli, bakery or full-service seafood. Expansions entail enlargement of the store building and typically include breaking through an exterior wall. The primary objective of a remodel or expansion is to improve the attractiveness of the supermarket, increase sales of higher margin product categories and, where feasible, to increase selling area.

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Table of Contents

Item 1.   Business (contd.)
Store Expansion and Remodeling (contd.)
The following table sets forth certain statistical information with respect to our supermarket openings, closings and remodels for the periods indicated.
                                         
    Fiscal Years Ended
    Sept. 24,   Sept. 30,   Sept. 28,   Sept. 27,   Sept. 26,
    2006   2007   2008   2009   2010
Number of supermarkets:
                                       
Opened
    3       3       1       3        
Closed
    (2 )     (1 )           (1 )      
Total at end of year
    162       164       165       167       167  
Minor remodel
    34       6       3       3       2  
Major remodel
    14       12       10       9       4  
We continually review plans for major and minor remodels, expansions and new construction to take advantage of market opportunities. We finance our new store construction primarily from cash provided by operating activities and we may also use short-term borrowings under our credit facilities. Long-term financing of new stores generally will be obtained through either sale and leaseback transactions or secured long-term financings. However, no assurances can be made as to the availability of such financings.
Corporate Offices and Distribution Center
Our corporate office and Distribution Center encompass approximately 2.4 million square feet. Based on sales volume, approximately 78% of the products offered for sale in our supermarkets are received through our Distribution Center.
On average, our stores are located 41 miles from our Distribution Center. Most of our supermarkets can be reached without using the most congested portions of the Southern California freeway system.
Our transportation fleet consists of modern well-maintained vehicles. As of September 26, 2010, we operated approximately 124 tractors, 27 of which we owned and 97 we leased. We operated 494 trailers all of which we owned.

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Table of Contents

Item 1.   Business (contd.)
Purchasing and Marketing
To provide our customers with the best overall supermarket value in our primary marketing areas, we use an “Aggressive Everyday Low Price” (“AEDLP”) format. We supplement our everyday low price structure with chain-wide temporary price reductions (“Stater Savers”) on selected food and non-food merchandise. The geographic location of our supermarkets allows us to reach our target consumers through a variety of media and we aggressively advertise our everyday low prices through local and regional newspapers, direct mail and printed circulars as well as extensive advertisements on radio and television.
A key component of our business strategy is to provide our 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, our supermarkets are stocked with approximately 40,000 items. We place particular emphasis on the freshness and quality of our meat and produce merchandise and maintain high standards for these perishables by distributing the merchandise through our Distribution Center.
Retail Operations
Our supermarkets are well maintained, have adequate off-street parking and open between 6:00 a.m. and 7:00 a.m. and close between 10:00 p.m. and 12:00 a.m., seven days a week. We are closed on Christmas Day and have limited hours on Thanksgiving Day. Because we operate our supermarkets under similar formats, we believe we are able to achieve certain operating economies.
Store Management. Each of our supermarkets is managed by a store manager and an assistant manager, each of whom receives a base salary and may receive a bonus based on their individual supermarket’s overall performance and on meeting other established criteria. The store manager and assistant manager are supported by department and other store management who have the training and skills necessary to provide proper customer service, operate the store and manage personnel in each department. Each of our stores has individual department managers for grocery, meat, produce, and where applicable, bakery, service deli and full-service seafood. Departmental managers are hourly employees and may receive an annual bonus based on meeting established criteria. Store managers report to one of eight district managers, each of whom is responsible for an average of 21 supermarkets. District managers report to one of three Regional Vice Presidents.
Customer Service. We consider customer service and customer confidence to be critical to the success of our business strategy. Our strategy, to provide courteous and efficient customer service, is a focus of our Senior Management team and is implemented by employees at all levels of our Company. Each store is staffed with a customer service manager who coordinates all customer service issues in the store. We maintain an intensive checker training school to train prospective checkers and to provide a refresher program for existing checkers. All of our supermarkets have express checkout lanes and offer carry-out service.

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Table of Contents

Item 1.   Business (contd.)
Employees
We have approximately 16,300 employees. Of which approximately 800 are management and administrative employees and 15,500 are hourly union employees. Substantially all of our hourly employees are members of either the United Food and Commercial Workers (“UFCW”) or International Brotherhood of Teamsters (“Teamsters”) labor unions and are represented by several different collective bargaining agreements.
The UFCW’s collective bargaining agreements were renewed in March 2007 and expire in March 2011. Markets’ Teamsters’ collective bargaining agreement was renewed in October 2010 and expires in September 2015.
We value our employees and believe our relationships with them are good and that employee loyalty and enthusiasm are key elements of our operating performance.
Competition
We operate 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. We believe our competitive strengths include our specialty service departments, 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 and established long-term customer base in Southern California.
Given the wide assortment of products we offer, we compete with various types of retailers, including local, regional and national supermarket chains, convenience stores, retail drug stores, national general merchandisers and discount retailers, membership clubs and warehouse stores. Our primary traditional grocery format competitors include Vons a division of Safeway, Albertsons a division of SuperValu, Ralphs a division of Kroger, and a number of independent supermarket operators. We, and our traditional format grocery competitors, also face competitive pressures from “big box” format retailers including Walmart, Target, Costco and Winco.
We expect our competition to continue to apply pricing and other competitive pressures as they strive to grow their market share in our market area and as they continue to take steps to both maintain and grow their customer counts. We believe that our everyday low prices, breadth of product offering, which includes approximately 40,000 items offered for sale in our stores, specialty service departments and long-term customer relationships will enable us to compete effectively in this increasingly competitive environment.

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Table of Contents

Item 1.   Business (contd.)
Financial Information about Segments
We have two operating segments: Markets and Super Rx. Markets and Super Rx provide retail grocery, general merchandise and pharmaceutical products to customers through our supermarkets. As Markets and Super Rx have similar customers, regulatory requirements and delivery methods to customers, we aggregate Markets and Super Rx into a single reportable segment and as such we do not provide separate segment reporting.
Government Regulation
We are 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. We are also subject to oversight by government agencies that regulate the distribution and sale of alcoholic beverages, pharmaceuticals, tobacco products, milk and other agricultural products and other food items.
Environmental
We incurred approximately $211,000 in environmental remediation costs over the past three years. Remediation costs were approximately $96,000 in fiscal 2008, $61,000 in fiscal 2009 and $54,000 in fiscal 2010. We believe that any such future remediation costs will not have a material adverse effect on our financial condition or our results of operations.
Item 1A.   Risk Factors
The supermarket industry is highly competitive and generally characterized by narrow profit margins. We compete with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and independent and specialty grocers. Our primary traditional grocery format competitors include Vons, Albertsons, Ralphs, and a number of independent supermarket operators. We also face competition from restaurants and fast food chains as household food expenditures are directed to the purchase of food prepared outside the home.
Our principal competitors include traditional grocery format operators; “big box” format retailers, including Walmart, Target, Costco and Winco and regional markets which compete with us on the basis of location, quality of products, service, price, product variety and store condition. Our competitors maintain market share through high levels of promotional activities and discount pricing, which creates a difficult environment in which to consistently increase year-over-year sales gains. We expect our competitors to continue to apply pricing and other competitive pressures as they expand the number of their stores in our market area and as they continue to take steps to both maintain and grow their customer counts.
We face competitive pressure from existing competitors and from smaller format stores such as convenience stores, drug stores and discount stores that carry traditional grocery format items. Some of our competitors have greater resources than us and are not unionized resulting in lower labor cost. These competitors could use their resources to take measures which could adversely affect our competitive position.
Our marketing area in Southern California continues to be highly competitive and in flux. Our market changes frequently as competitors open and close supermarket locations and introduce new pricing strategies. We anticipate increased competition from “big box” format retailers, our traditional grocery format competitors and other smaller format competitors.
Our performance is affected by inflation and deflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. Our costs fluctuate for increases and decreases in commodities such as fuel, plastic and other product categories. As inflation has increased expenses, we have 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 us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

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Table of Contents

Item 1B.   Unresolved Staff Comments
     None
Item 2.   Properties
We own our corporate offices and Distribution Center located at Norton. The following schedule presents the square footage by major classification within our corporate offices and Distribution Center as of September 26, 2010.
         
    Square
Classification   Feet
Grocery
    1,078,000  
Refrigerated
    664,000  
Distribution support
    418,000  
Bread
    46,000  
Administrative offices
    176,000  
 
       
Total
    2,382,000  
 
       
As of September 26, 2010, we owned 48 of our supermarkets and leased the remaining 119 supermarkets. We believe our supermarkets are well maintained and adequately meet the expectations of our customers. We operate 167 supermarkets in the Southern California counties of San Bernardino, Riverside, Orange, Los Angeles, San Diego and Kern. The following schedule reflects our store count by size and county, and the number of stores that were either leased or owned by us as of September 26, 2010.
                                                                 
                            Total Square Feet
    No. of Stores   Under   25,000-   30,000-   35,000-   Over
County   Total   Owned   Leased   25,000   29,999   34,999   40,000   40,000
San Bernardino
    52       13       39       5       16       5       14       12  
Riverside
    47       11       36       9       13       3       5       17  
Orange
    30       11       19       4       13       1       4       8  
Los Angeles
    25       8       17       3       7       1       3       11  
San Diego
    11       5       6             1             2       8  
Kern
    2             2                   1       1        
 
                                                               
 
Total
    167       48       119       21       50       11       29       56  
 
                                                               
The total square footage of our supermarkets is approximately 5.8 million square feet, of which approximately 4.1 million square feet is selling area.

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Item 3.   Legal Proceedings
In the ordinary course of business, we are party to various legal actions which we believe are incidental to the operation of our business and the business of our subsidiaries. We record an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. We believe that the outcome of such legal proceedings to which we are currently a party will not have a material adverse effect upon our results of operations or our consolidated financial condition.
In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010, following mediation the case was settled. Under the settlement agreement, the settlement amount will be paid pursuant to procedures for filing and approval of claims for members of the certified class with a portion of any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount has been recorded in our consolidated financial statements.
Item 4.   Submission of Matters to a Vote of Security Holders
     None

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Table of Contents

PART II
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
     (a) Market Information
          There is no established public trading market for Holdings’ common equity.
     (b) Holders
                 
    Authorized   Outstanding
Common Stock
    100,000       0  
Class A Common Stock
    100,000       34,552  
          La Cadena holds 34,552 shares, or 100% of Holdings’ outstanding Class A Common Stock.
     (c) Dividends
          As of September 26, 2010, we had the ability and right to pay restricted payments, including dividends, of up to $38.0 million.
          Dividends of $5.0 million were paid in each of the fiscal years of 2010 and 2008.
Item 6.   Selected Financial Data
The following table sets forth historical financial data derived from the audited consolidated financial statements of Holdings as of and for the fiscal years ended September 24, 2006, September 30, 2007, September 28, 2008, September 27, 2009 and September 26, 2010. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Audited Consolidated Financial Statements and related notes thereto contained elsewhere herein. The information included in “Other Operating and Financial Data” and “Store Data” is unaudited.
                                         
    Fiscal Year Ended  
    Sept. 24, (5)     Sept. 30, (5)     Sept. 28, (5)     Sept. 27, (5)     Sept. 26, (5)  
    2006     2007     2008     2009     2010  
    (In thousands, except per share amounts)  
 
                                       
Statement of Earnings Data:
                                       
Sales
  $ 3,508,794     $ 3,674,427     $ 3,741,254     $ 3,766,040     $ 3,606,839  
Cost of goods sold
    2,578,435       2,674,563       2,743,074       2,764,004       2,636,891  
 
                             
Gross profit
    930,359       999,864       998,180       1,002,036       969,948  
Selling, general and administrative expenses
    790,756       818,863       829,697       827,192       819,698  
Gain on sale of dairy assets
                            (9,396 )
Depreciation and amortization
    46,642       48,715       52,987       53,536       50,822  
 
                             
Total operating expenses
    837,398       867,578       882,684       880,728       861,124  
 
                             
 
                                       
Operating profit
    92,961       132,286       115,496       121,308       108,824  
 
                                       
Interest and other income
    8,288       13,927       8,598       1,194       863  
Interest expense
    (57,238 )     (59,586 )     (57,464 )     (68,252 )     (68,516 )
Interest expense related to purchase of debt
          (3,953 )                  
 
                             
Income before income taxes
    44,011       82,674       66,630       54,250       41,171  
Income taxes
    17,945       33,279       26,000       19,481       16,587  
 
                             
Net income
  $ 26,066     $ 49,395     $ 40,630     $ 34,769     $ 24,584  
 
                             
 
                                       
Earnings per average common shares outstanding
  $ 697.21     $ 1,356.19     $ 1,136.03     $ 989.10     $ 708.33  
 
                             

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Item 6.   Selected Financial Data (contd.)
                                         
    Fiscal Year Ended  
    Sept. 24,(5)     Sept. 30,(5)     Sept. 28,(5)     Sept. 27,(5)     Sept. 26,(5)  
    2006     2007     2008     2009     2010  
    (In thousands, except per share amounts)  
 
                                       
Balance Sheet Data (end of fiscal year):(1)
                                       
Working capital
  $ 303,397     $ 304,407     $ 234,032     $ 274,353     $ 206,123  
Total assets
    1,057,585       1,269,825       1,276,227       1,314,735       1,322,787  
Long-term debt
    700,000       810,000       810,000       810,000       677,750  
Long-term capitalized lease obligations
    7,245       6,252       5,104       3,768       2,206  
Other long-term liabilities
    80,084       113,005       113,100       144,228       152,272  
Common stockholder’s equity (deficit)
    (11,079 )     9,279       40,506       63,755       73,133  
Dividends paid per share, Class A common stock
  $ 135.52     $ 139.78     $ 142.24     $     $ 144.71  
 
                                       
Cash Flow Data:(1)
                                       
Cash provided by operating activities
    90,656       171,507       57,466       122,410       87,101  
Cash provided by (used in) financing activities
    (24,598 )     81,901       (14,230 )     (1,149 )     (14,336 )
Cash provided by (used in) investing activities
    (127,508 )     (174,740 )     (175,837 )     (63,498 )     55,326  
 
                                       
Other Operating and Financial Data:
                                       
Sales increases (decreases):
                                       
Total sales
    4.0 %     4.7 %     1.8 %     0.7 %     (4.2 )%
Like stores sales (comparable 52-weeks)(2)
    1.5 %     1.7 %     2.5 %     0.0 %     (2.4 )%
Operating profit
  $ 92,961     $ 132,286     $ 115,496     $ 121,308     $ 108,824  
Fixed charge coverage ratio(3)
    2.74       3.02       2.96       2.95       2.63  
Gross profit as a percentage of sales
    26.52 %     27.21 %     26.68 %     26.61 %     26.89 %
Selling, general and administrative expenses as a percentage of sales
    22.54 %     22.29 %     22.18 %     21.96 %     22.72 %
 
                                       
Store Data:(4)
                                       
Number of stores (at end of fiscal year)
    162       164       165       167       167  
Average sales per store (000’s)
  $ 20,937     $ 21,860     $ 21,961     $ 21,945     $ 21,375  
Average store size:
                                       
Total square feet
    33,778       34,028       34,178       34,405       34,497  
Selling square feet
    24,028       24,165       24,237       24,340       24,386  
Total square feet (at end of fiscal year) (000’s)
    5,491       5,599       5,644       5,761       5,761  
Total selling square feet (at end of fiscal year) (000’s)
    3,904       3,972       4,001       4,072       4,072  
Sales per average square foot
  $ 620     $ 642     $ 643     $ 638     $ 620  
Sales per average selling square foot
  $ 871     $ 905     $ 906     $ 902     $ 877  
 
(1)   Certain balance sheet and corresponding cash flow line items for prior periods have been reclassified to conform with current presentation related to the Dairy Transaction and the presentation of such assets and liabilities as held for sale.
    (footnotes continued on following page)

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Item 6.   Selected Financial Data (contd.)
(2)   We calculate like store sales 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, we only use the current year’s weekly sales that correspond to the weeks the stores were open in the previous year. For replacement store sales, we include sales for the entire year in the like store sales calculation. For stores that were closed during the year, we only include prior year sales that correspond to the week the stores were opened in the current year.
(3)   Fixed charge coverage ratio is calculated based on definitions from the indentures to our Senior Notes. Exhibit 12.1 included in this Form 10-K shows the calculation of the fixed charge coverage ratio.
(4)   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.
(5)   Fiscal years 2006, 2008, 2009 and 2010 were 52-week years while fiscal 2007 was a 53-week year.
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon our Audited Consolidated Financial Statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of the financial statements requires the use of estimates and judgments on the part of management. We base our estimates on our historical experience combined with our understanding of current facts and circumstances. We believe that the following critical accounting policies are the most important to our financial statement presentation and require the most difficult, subjective and complex judgments on the part of management.
Self-Insurance Reserves
We are primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. We are covered by umbrella insurance policies for catastrophic events. We record our self-insurance liability based on claims filed and an estimate of claims incurred but not yet reported. The estimates used by us are based on our historical experiences as well as current facts and circumstances. We use third party actuarial analysis in making our estimates. Actuarial projections and our 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. We discounted our workers’ compensation, automobile and general liability insurance reserves at a discount rate of 6.25% for fiscal 2008, 5.50% for fiscal 2009 and 5.00% for fiscal 2010. The analysis of self-insurance liability is sensitive to the rate used to discount the anticipated future cash flows for the workers’ compensation, automobile and general liability insurance reserves. For fiscal 2010, if a rate of 4.00% was used to discount the reserves, the reserves for self insurance would have been $1.8 million higher than the reserves calculated at a 5.00% discount rate. If a rate of 6.00% was used in fiscal 2010 to discount the reserves, the reserves for self insurance would have been $1.7 million lower than the reserves calculated at a 5.00% discount rate.
Employee Benefit Plans
The determination of our obligation and expense for pension benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions are disclosed in “Note 7 — Retirement Plans” in the accompanying Notes to the Audited Consolidated Financial Statements contained herein and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation changes. In accordance with U.S. generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect our pension obligations and expense for pension benefits.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Critical Accounting Policies (contd.)
Employee Benefit Plans (contd.)
For fiscal 2010, the discount rate used to calculate the net periodic pension cost was 5.00%. If the rate used to discount the net periodic pension cost was 4.00%, net periodic pension cost would have been $1.0 million higher than the cost calculated at a 5.00% discount rate. If the rate used to calculate the net periodic pension cost was 6.00%, net periodic pension cost would have been $0.8 million lower than the cost calculated at the 5.00% discount rate.
We also contribute to various multi-employer defined contribution retirement plans for all of our employees represented by labor unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements, generally based on the number of hours worked. Pension expenses for these plans are recognized as contributions are funded. While we expect contributions to these plans to continue to increase over time, the amount of increase or decrease will depend upon the outcome of collective bargaining, actions taken by trustees and the actual return on assets held in these plans. For these reasons, it is not practicable for us to determine the amount by which multi-employer pension contributions will increase or decrease.
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals and deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Judgment is needed to determine if the recognition threshold is met to recognize the tax position taken or if a liability is needed to record an unrecognized tax liability. We are subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.
Significant Accounting Policies
In addition to the critical accounting policies disclosed above, there are certain accounting policies that we have adopted that may differ from policies of other companies within the supermarket industry. Such differences in the treatment of these policies may be important to the readers of our Form 10-K and our Audited Consolidated Financial Statements contained herein. For further information regarding our accounting policies, refer to “Note 1 — The Company and Summary of Significant Accounting Policies” in the Notes to the Audited Consolidated Financial Statements contained herein.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Ownership of the Company
La Cadena, a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust, holds all of our issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of Holdings, is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our Board of Directors, and any other matters requiring shareholder approval.
Executive Overview
On October 11, 2009, we sold substantially all of the assets of Dairies to subsidiaries of Dean Foods for $88.0 million in cash and assumption of certain liabilities including substantially all of Dairies’ current liabilities, which included accounts payable. In the second quarter of fiscal 2010, the purchase price was adjusted upwards by approximately $1.5 million due to an adjustment for working capital. Dairies’ assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. Also on October 11, 2009, we entered into the PPA with Dean Foods to purchase substantially all fluid milk products sold in our supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing. We incurred approximately $3.8 million in fees related to the Dairy Transaction and recognized a gain, net of tax, of approximately $5.6 million. We retained responsibility for all workers’ compensation claims of Dairies’ employees for events occurring through the transaction date. As of October 11, 2009, the Company ceased all dairy manufacturing operations.
As a result of the Dairy Transaction and the continued decline in the current economy, our net sales were lower in fiscal 2010 than in fiscal 2009. Our strategy in the near term is to retain customer counts during these tough economic times by continuing to provide exceptional customer service and provide value to our customers on their purchases from our supermarkets.
Our marketing area of Southern California continues to be highly competitive and in flux. With the current economic conditions, our marketing area has seen job losses and business closures which will put further pressure on our gross margin as we endeavor to retain our customer base. For the foreseeable future, we anticipate continued competitive pressures from “big box” format competitors including Walmart, Costco, Target and Winco and from our traditional grocery format competitors Vons, Albertsons and Ralphs and from independent supermarket operators.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Results of Operations
Sales and Gross Profit (in thousands)
                                                         
                            Change
    Fiscal Year Ended   2009 to   2010 to
    Sept. 28,   Sept. 27,   Sept. 26,   2008   2009
    2008   2009   2010   Dollar   %   Dollar   %
 
                                                       
Sales
  $ 3,741,254     $ 3,766,040     $ 3,606,839     $ 24,786       0.66 %   $ (159,201 )     (4.23 )%
 
                                                       
Gross Profit
  $ 998,180     $ 1,002,036     $ 969,948     $ 3,856       0.39 %   $ (32,088 )     (3.20 )%
as a % of sales
    26.68 %     26.61 %     26.89 %                                
Sales
Overall, our sales were down $159.2 million in fiscal 2010 versus fiscal 2009. $93.2 million of the decrease in our sales was due to the lost sales from Dairies as a result of the Dairy Transaction. Sales in our supermarkets decreased $66.0 million primarily due to the continued downturn in the economy in our primary marketing areas.
The increase in fiscal 2009 sales over fiscal 2008 is primarily the result of opening new stores in fiscal 2008 and fiscal 2009.
Like Store Sales
Our like store sales have been adversely affected by the downturn in our local economy and by continued competitive pressures. For the foreseeable future, we anticipate that our like store sales will continue to be challenged as we believe that unemployment in our marketing area will continue to be high and competitive pressures will continue.
We calculate like store sales by comparing year-to-year sales for stores that are opened in both years. For stores that were not opened for the entire previous year periods, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year. For stores that have been closed, we only include the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year. Replacement store sales and replaced store sales are included in like store sales.
Like store sales are affected by various factors including, but not limited to, inflation and deflation, promotional discounting, customer traffic, buying trends, pricing pressures from competitors and competitive openings and closings.
Like store sales decreased $89.9 million or 2.45% in fiscal 2010 compared to fiscal 2009. Newly opened stores that were not opened for the full year of fiscal 2009 added $25.0 million to our sales in fiscal 2010. We closed a store in fiscal 2009 which reduced fiscal 2010 sales by approximately $1.2 million.
Like store sales increased $1.5 million or 0.04% in fiscal 2009 over fiscal 2008. We opened three new stores and closed one store in fiscal 2009. The new stores opened in fiscal 2009 added approximately $30.5 million to fiscal 2009 sales. In addition, we estimate that a store opened during fiscal 2008 added approximately $8.2 million to fiscal 2009 sales for the weeks it was not opened in fiscal 2008. While the newly opened stores increased sales in fiscal 2009, we estimate that these stores drew approximately $15.9 million of their sales from existing stores. The store closed in fiscal 2009 reduced sales by approximately $12.2 million.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Results of Operations (contd.)
Gross Profit
The increase in our gross profit margin in fiscal 2010 over fiscal 2009 is primarily due to our suspension in November 2009 of a special produce discounting program which we started in June 2009 and continued until November 2009. Also, during the fourth quarter of fiscal 2010, we consciously focused our promotion dollars to specific product categories.
The decrease in gross margin in fiscal 2009 compared to fiscal 2008 is the result of increased competitive pricing pressures in our marketing area and the result of our efforts, in the current economic environment, to keep prices low in order to retain customers.
Operating Expenses and Income (in thousands)
                                                         
    Fiscal Year Ended   Change
    Sept. 28,   Sept. 27,   Sept. 26,   2009 to   2010 to
    2008   2009   2010   2008   2009
                            Dollar   %   Dollar   %
Operating Expenses:
                                                       
Selling, general and administrative expenses
  $ 829,697     $ 827,192     $ 819,698     $ (2,505 )     (0.30 )%   $ (7,494 )     (0.91 )%
as a % of sales
    22.17 %     21.97 %     22.73 %                                
 
                                                       
Gain on sale of assets
              $ (9,396 )               $ (9,396 )      
as a % of sales
                (0.26 )%                                
 
                                                       
Depreciation and amortization
  $ 52,987     $ 53,536     $ 50,822     $ 549       1.04 %   $ (2,714 )     (5.07 )%
as a % of sales
    1.42 %     1.42 %     1.41 %                                
 
                                                       
Operating profit
  $ 115,496     $ 121,308     $ 108,824     $ 5,812       5.03 %   $ (12,484 )     (10.29 )%
as a % of sales
    3.09 %     3.22 %     3.02 %                                
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses, as a percentage of sales, is attributed primarily to increases, as a percentage of sales, in payroll related costs and to a settlement of an employment related lawsuit for Dairies. Payroll related expenses, as a percentage of sales, increased 0.72% and was primarily comprised of increases of 0.39%, as a percentage of sales, in union insurance benefits and an increase in workers compensation expense, as a percentage of sales, of 0.14% of sales. Union insurance increased approximately $11.6 million over fiscal 2009 primarily as a result of higher insurance rates under our UFCW contracts. Workers’ compensation expense increased approximately $4.2 million over fiscal 2009 due to increases in our self insurance reserves. In fiscal 2010, we settled a lawsuit related to a class action employment claim. See “Item 3 — Legal Proceedings” for further discussion of the claim.
The decrease in selling, general and administrative expenses, as a percentage of sales, in fiscal 2009 versus fiscal 2008 is attributed to several factors. We reduced, as a percentage of sales, professional and legal expenses by 0.10% primarily from the reduction in information technology consultants and reduction in the amount of work needed for financial reporting compliance. We reduced the cost and amount of our print advertising which reduced our advertising expense, as a percentage of sales, by 0.05%. In fiscal 2008, we incurred costs associated with the relocation of our distribution operations to our Distribution Center at Norton that were not present in fiscal 2009 and represented a savings compared to fiscal 2008 of 0.07%, as a percentage of sales.
The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses was $1.2 million in each of the fiscal years 2010, 2009 and 2008.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Results of Operations (contd.)
Gain on Sale of Assets
The pretax gain from the Dairy Transaction was approximately $9.4 million.
Depreciation and Amortization
Depreciation expense was $50.8 million, $53.5 million and $53.0 million in fiscal 2010, 2009 and 2008, respectively. The reduction in depreciation in fiscal 2010 is primarily due to the Dairy Transaction. Included in cost of goods sold is depreciation expense related to our warehousing and distribution activities of $11.3 million, $14.6 million and $14.0 million in fiscal years 2010, 2009 and 2008, respectively. Our fiscal 2009 and 2008 cost of goods sold included depreciation from our dairy operations.
Interest Income
Interest income was $0.4 million, $0.5 million and $5.7 million in fiscal years 2010, 2009 and 2008, respectively. Interest income has decreased year-over-year as the interest rate realized on our short-term investments has decreased.
Interest Expense
Interest expense amounted to $68.5 million, $68.3 million and $57.5 million for the 2010, 2009 and 2008 fiscal years, respectively. Interest capitalized during construction projects, which reduces interest expense, was $0.5 million and $11.3 million in fiscal years 2009 and 2008, respectively. We had no capitalized interest in fiscal 2010 as we didn’t have any new store construction. The change in capitalized interest in fiscal 2009 over fiscal 2008 is primarily attributed to the timing of construction of our corporate offices and Distribution Center.
Income Before Income Taxes
Income before income taxes amounted to $41.2 million, $54.3 million and $66.6 million in fiscal 2010, 2009 and 2008, respectively.
Income Taxes
Income taxes amounted to $16.6 million, $19.5 million and $26.0 million in fiscal 2010, 2009 and 2008, respectively. Our effective tax rate was 40.3%, 35.9% and 39.0% for fiscal years 2010, 2009 and 2008, respectively. The reduced effective tax rate in fiscal 2009 compared to fiscal 2010 and fiscal 2008 was due primarily to a previously unrecognized tax benefit associated with Dairies being able to be taken in fiscal 2009 that was not present in fiscal 2010 and 2008.
Net Income
Net income for fiscal 2010 amounted to $24.6 million, compared to $34.8 million in fiscal 2009 and $40.6 million in fiscal 2008.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Liquidity and Capital Resources
We historically fund our daily cash flow requirements through funds provided by operations. We have the ability to borrow under our short-term revolving credit facility which consists of a revolving loan facility for working capital and letters of credit of $100 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements.
As of September 26, 2010, we had $49.8 million of outstanding letters of credit and we had $50.2 million available under our credit facility.
We had no short-term borrowings outstanding as of September 26, 2010 and we did not incur any short-term borrowings during fiscal 2010.
Working capital amounted to $206.1 million at September 26, 2010 and $274.4 million at September 27, 2009. Our current ratios were 1.49:1 and 1.94:1 at September 26, 2010 and September 27, 2009, respectively. Our working capital and current ratio were affected in fiscal year 2010 by our decision to early extinguish our $525.0 million Senior Notes due 2012. $132.3 million of our previously classified long-term debt has been classified as current on our September 26, 2010 consolidated balance sheet. Fluctuations in working capital and current ratios are not unusual in our industry.
Net cash provided by operating activities for fiscal 2010 was $87.1 million compared to $122.4 million for fiscal 2009 and $57.5 million for fiscal 2008. Significant sources of cash from operating activities in fiscal 2010 included our net income adjustment for non-cash depreciation and amortization and an increase in accrued liabilities offset in part by a decrease in accounts payable. We received approximately $85.8 million, after fees, from the Dairy Transaction. During fiscal 2010, we expended $33.8 million in capital expenditures.
Significant sources of cash from operating activities in fiscal 2009, included our net income adjustment for non-cash depreciation and amortization, increases in our pension liability and decreases in inventory levels. In fiscal 2009, we recognized $11.5 million, net of tax of $7.9 million, in other comprehensive loss from actual losses in our pension and medical plan benefits. Our inventory levels decreased in fiscal 2009 due to the timing of inventory purchases. During fiscal 2009, we expended $77.0 million in capital expenditures.
We believe that capital expenditures for fiscal 2011 will be approximately $52.3 million and we expect to finance the expenditures from cash on-hand and from cash from operating activities. The following table sets forth the major components of expected fiscal 2011 capital expenditures.
         
Expected Capital Expenditures Fiscal 2011  
(In thousands)  
New store construction
  $ 15,458  
Store remodels
    13,872  
MIS equipment and software
    8,573  
Store equipment
    11,984  
Distribution equipment
    1,776  
Transportation equipment
    621  
 
     
 
  $ 52,284  
 
     
We believe that operating cash flows and current cash reserves will be sufficient to meet our currently identified operating needs and scheduled capital expenditures. However, we may elect to fund some capital expenditures through capital leases, operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to us in the future.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Existing Credit Facility
On May 4, 2010, the Company and Markets entered into the Third Amended and Restated Credit Agreement with Bank of America, N.A. (“Bank of America”), as sole and exclusive administrative agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a principal amount of up to $100 million (the “Credit Facility”), which replaced the Company’s previous credit facility.
The Credit Facility is guaranteed by all of the Company’s existing and future material subsidiaries, including Development and the Company’s indirect subsidiary Super Rx. Subject to certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and may be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores and workers’ compensation insurance obligations. The availability of the loans and letters of credit is subject to certain borrowing restrictions.
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 “prime rate”), plus 1.00%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Eurodollar Rate Loans, the Eurodollar Rate will apply for periods, as selected by the Company, of one, two, three or six months (but in any event not later than the maturity date of the Credit Facility).
The Credit Facility requires the Company to meet certain financial tests, including minimum net worth and the maintenance of minimum earnings levels. The Credit Facility contains covenants which, among other things, limit the ability of the Company and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, and (iii) make restricted payments. Markets is not limited in its ability to transfer assets in the form of loans, advances or cash dividends to the Company. The Credit Facility also contains covenants that apply to the Company and its subsidiaries, and the Company is a party to the Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, make restricted payments, enter into transactions with affiliates, and make certain amendments to the Indentures governing the 8.125% Senior Notes and the 7.75% Senior Notes (“Notes Indentures”).
As of September 26, 2010, the Company was in compliance with all restrictive covenants under the Credit Facility. 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.
New Credit Facility
On November 29, 2010, we entered into a new $245 million senior secured credit facility (the “New Credit Facility”) with Bank of America, N.A., as administrative agent and a lender. The New Credit Facility consists of a four-year $145 million term loan (the “Term Loan”) and a $100 million revolving credit facility (the “New Revolving Credit Facility”). The New Credit Facility replaced our existing $100 million credit facility as of November 29, 2010. The New Credit Facility is secured by substantially all of the Company’s personal property excluding certain intangible assets consisting of trademarks and shares of capital stock. The New Credit Facility is guaranteed by the Company, Development, Super Rx and Dairies.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
New Credit Facility (contd.)
The Term Loan bears interest at Eurodollar Rate plus 2.50% or the Base rate plus 1.50% (as defined in the New Credit Facility) and the interest is payable quarterly in arrears and includes mandatory quarterly principal payments of 5.0% in each of the first two years of the agreement and 10.0% in years three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the New Credit Facility”. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the New Credit Facility is held until the Term Loan is paid in full. We incurred $2.1 million of debt issuance cost related to the Term Loan which will be amortized over the term of the Term Loan.
Subject to certain restrictions, the entire amount of the New Revolving Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the New Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used for workers’ compensation insurance obligations and may be used for new store construction and certain other corporate purposes. The availability of the loans and letters of credit is subject to certain borrowing restrictions.
Loans under the New Revolving 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 Bank of America “prime rate”), plus 1.50%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.50%. For Eurodollar Rate loans, we will be entitled to select interest periods of one, two, three, six, nine or twelve months, subject to availability.
The loans under the New Revolving Credit Facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the Eurodollar rate. We may reduce the commitments under the New Revolving Credit Facility. We 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 New Revolving 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. We will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.
The New Revolving Credit Facility requires us to meet minimum shareholder’s equity and EBITDA tests. The New Revolving Credit Facility contains covenants which, among other things, limit our ability to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, (iii) make restricted payments, (iv) enter into transactions with affiliates and (v) make amendments to the Indenture governing our Senior Notes. Markets and our other subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or cash dividends to us.
The New Revolving Credit Facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any guaranty; and change of control.
Our $49.8 million of outstanding letters of credit continue to be issued and outstanding under the New Revolving Credit Facility.
The New Revolving Credit Facility will cease to be available and will be payable in full on November 29, 2014.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Labor Relations
The UFCW’s collective bargaining agreements were renewed in March 2007 and expire in March 2011. The Teamsters’ collective bargaining agreement was renewed in October 2010 and expires in September 2015.
We value our employees and believe our relationship with them is good and that employee loyalty and enthusiasm are key elements of our operating performance.
Off-Balance Sheet Arrangements
We have 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” in the Notes to the Audited Consolidated Financial Statements contained herein, that would have or are reasonably likely to have material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Tabular Disclosure of Contractual Cash Obligations
     The following table sets forth our contractual cash obligations and commercial commitments as of September 26, 2010.
                                         
    Contractual Cash Obligations  
    (in thousands)  
            Less than                     After  
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
     
8.125% Senior Notes due 2012 (1)
                                       
Principal
  $ 525,000     $     $ 525,000     $     $  
Interest
    85,312       42,656       42,656              
 
                             
 
    610,312       42,656       567,656              
7.75% Senior Notes due 2015
                                       
Principal
    285,000                   285,000        
Interest
    110,438       22,088       44,175       44,175        
 
                             
 
    395,438       22,088       44,175       329,175        
Capital lease obligations (2)
                                       
Principal
    3,768       1,562       1,906       300        
Interest
    989       533       440       16        
 
                             
 
    4,757       2,095       2,346       316        
 
                                       
Operating leases (2)
    350,226       38,568       68,631       52,274       190,753  
 
                             
Total contractual cash obligations
  $ 1,360,733     $ 105,407     $ 682,808     $ 381,765     $ 190,753  
 
                             
 
    Other Commercial Commitments  
    (in thousands)  
            Less than                     After  
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
     
 
                                       
Standby letters of credit (3)
  $ 49,762     $ 49,762     $     $     $  
 
                             
Total other commercial commitments
  $ 49,762     $ 49,762     $     $     $  
 
                             
 
(1)   The maturity and interest payment shown here on our 8.125% Senior Notes due 2012 (the “Old Notes”) reflects the contractual due date of June 15, 2012. On November 29, 2010, we early redeemed approximately $477.5 million of the Old Notes and on January 14, 2011 we will call all remaining outstanding Old Notes. See “Note 2 — New Debt and Early Extinguishment of Debt” to our Audited Consolidated Financial Statements contained elsewhere herein.
 
(2)   We lease the majority of our retail stores. We have subleased our former headquarters buildings and certain former distribution facilities located in Colton, California under an initial 15 year term for an amount equal to our lease payments. For purposes of contractual cash obligation shown here, minimum lease payments on this lease are shown without sub-lease offset. Certain of our 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. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.
 
(3)   Letters of credit are committed as security for workers’ compensation. Outstanding letters of credit expire between December 2010 and October 2011. Outstanding letters of credit continue to be issued and outstanding under our New Revolving Credit Facility.

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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 our 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 us) 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 Holdings. 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
We are subject to interest rate risk on our fixed interest rate debt obligations. Our fixed rate debt obligations are comprised of the 8.125% Senior Notes, the 7.75% Senior Notes 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. While interest rate changes will impact the market value risk of our bonds, such changes do not affect our earnings or cash flows. The fair values of the 8.125% Senior Notes and the 7.75% Senior Notes are based upon quoted market prices. Although quoted market prices are not readily available on our capital lease obligations, we believe that stated values approximate the fair value of these obligations. We have 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 our fixed rate debt obligations. The fair value shown here is based upon the quoted market price of the 8.125% Senior Notes and the 7.75% Senior Notes and the stated value of our capital leases as of September 26, 2010. The maturity dates and average interest rates below reflect the contractual due date on our 8.125% Senior Notes of June 15, 2012 and does not reflect our early redemption of debt which took place on November 29, 2010 and the expected call of the remaining outstanding balance of our 8.125% Senior Notes on January 14, 2011. See “Note 2 — New Debt Issuance and Early Extinguishment of Debt” to our Audited Consolidated Financial Statements contained elsewhere herein.
                                                         
    Expected Year of Maturity
    (In thousands)
                                                    Fair
    2011   2012   2013   2014   2015   Thereafter   Value
Long-term debt and capital lease obligations
  $ 1,562     $ 526,107     $ 799     $ 300     $ 285,000     $     $ 819,413  
Average interest rate
    8.03 %     7.99 %     7.78 %     7.75 %     7.75 %     0.00 %        

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Item 8. Financial Statements and Supplementary Data
Information called for by this item is set forth in Holdings’ 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 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
         
    Page Number
 
    F-2  
    F-3  
Fiscal years ended September 28, 2008, September 27, 2009 and September 26, 2010:
       
    F-5  
    F-6  
    F-7  
    F-8  
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the costs and benefits of such controls and procedures. Based on that evaluation our Chief Executive Officer and our Chief Financial Officer, we concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2010.
Changes in Internal Controls Over Financial Reporting
During the fourth quarter ended September 26, 2010, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Item 9A. Controls and Procedures (contd.)
Management’s Report on Internal Control Over financial Reporting
Management of the Company, including our Chief Executive Officer and our Chief Financial Officer, is responsible for the preparation and integrity of the consolidated financial statements appearing in our annual report on Form 10-K. The financial statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.
Based on our assessment, management concluded that the Company maintained effective internal control over financial reporting as of September 26, 2010.
Item 9B. Other Information
None

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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 named executive officers and directors of Holdings, their ages and principal occupations for at least the past five years. Directors of Holdings 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 Holdings.
             
Name   Age   Position
 
           
Jack H. Brown
    72     Chairman of the Board, President and Chief Executive Officer
 
           
Phillip J. Smith
    63     Executive Vice President and Chief Financial Officer
 
           
James W. Lee
    59     President and Chief Operating Officer of Markets
 
           
Dennis L. McIntyre
    50     Executive Vice President of Marketing of Markets
 
           
George A. Frahm
    57     Executive Vice President of Retail Operations and Administration of Markets
 
           
Bruce D. Varner
    74     Director and Secretary
 
           
Thomas W. Field, Jr.
    77     Vice Chairman of the Board of Directors
 
           
Ronald G. Skipper
    70     Director
Background of Directors and Executive Officers
     Jack H. Brown has been President and Chief Executive Officer of Holdings or its predecessor companies since June 1981 and Chairman of the Board since 1989. 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 57 years. Mr. Brown’s Trust is the sole owner of La Cadena.
     Phillip J. Smith was promoted to Executive Vice President and Chief Financial Officer in February 2006. He was Senior Vice President and Chief Financial Officer from November 2000 to February 2006 and was Vice President and Controller of Markets from April 1998 until November 2000. Mr. Smith joined Markets in 1987 as Controller. Mr. Smith has approximately 35 years experience in the supermarket industry. Prior to joining Markets, 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.
     James W. Lee joined Markets in August 2002 as Group Senior Vice President of Retail Operations and was promoted to Executive Vice President of Retail Operations and Administration in January 2006. Mr. Lee was promoted to President and Chief Operating Officer of Markets effective September 30, 2006. Mr. Lee has over 36 years experience in the supermarket industry. Prior to joining Markets, Mr. Lee was employed with Wild Oats Markets, Inc. between 1997 and 2001 as Chief Operating Officer. Mr. Lee was employed in various operating capacities, including Vice President, Retail, with Ralphs Grocery Company, a division of Kroger Co., from 1972 until 1996.

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Item 10. Directors and Executive Officers of the Registrant (contd.)
Background of Directors and Executive Officers (contd.)
     Dennis L. McIntyre has been Executive Vice President of Marketing of Markets since December 2007. Mr. McIntyre has served Markets for 33 years in various capacities including Courtesy Clerk, Assistant Manager, Buyer, Assistant Vice President of Marketing from 1994 until 1999, Vice President of Marketing from 1999 to 2000, Senior Vice President of Marketing from 2000 to 2002 and Group Senior Vice President of Marketing of Markets from 2002 to 2007.
     George A. Frahm has been Executive Vice President of Retail Operations and Administration of Markets since December 2007. Mr. Frahm has served Markets for 34 years in various capacities including Courtesy Clerk and progressed through a range of retail store and district supervision positions. Mr. Frahm was Vice President of Labor Relations from 1996 until 2001, Senior Vice President of Administration from 2001 to March 2006, Group Senior Vice President of Administration from March 2006 to September 2006 and Group Senior Vice President of Retail Operations and Administration of Markets from 2006 to 2007.
     Bruce D. Varner has been a Director of Markets since September 1985 and a Director of Holdings since May 1989. Since February 1997, Mr. Varner has been a partner in the law firm of Varner & 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 & Brandt LLP have performed legal services in the past for us and we expect such services to continue in the future.
     Thomas W. Field, Jr. has been Vice Chairman of the Board of Directors of Holdings since May 1998 and a Director of Holdings 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 and he has served as a director of the Campbell Soup Company. Mr. Field has held various positions in the Supermarket Industry for over 50 years.
     Ronald G. Skipper has been a Director of Holdings since April 2007. Mr. Skipper is an attorney and has practiced law for over 42 years in San Bernardino, California where he has resided for over 57 years. Mr. Skipper specializes in litigation matters. Mr. Skipper serves as a Director for Pacific Premier Bank and has been its Chairman of the Board for the past twelve years.
Director Compensation
Annual compensation for non-employee Directors is comprised of an annual retainer and meeting fees.
Annual Board Retainer
Directors receive an annual cash retainer of $50,000 per year.
Meeting Fees
Directors receive a fee of $500 for attending each Board meeting and an additional fee of $500 per committee meeting attended.

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Item 10. Directors and Executive Officers of the Registrant (contd.)
Director Compensation For fiscal Year 2010
                         
    Director   Meeting    
Name   Fees   Fees   Total
Thomas W. Field, Jr.
  $ 50,000     $ 4,000     $ 54,000  
Bruce D. Varner
  $ 50,000     $ 4,000     $ 54,000  
Ronald G. Skipper
  $ 50,000     $ 4,000     $ 54,000  
Jack H. Brown, our Chairman and Chief Executive Officer, is not included in this table because he is an employee of the Company. Mr. Brown’s compensation is shown in the Summary Compensation Table under Item 11 “Executive Compensation.”
Item 11. Executive Compensation
Compensation Discussion and Analysis
The Compensation Committee of the Board of Directors has the primary responsibility for establishing the compensation paid to our executive officers, including the named executive officers identified in the Summary Compensation table below. This includes base salary, bonus awards, employment agreements, deferred compensation and all other compensation. The Compensation Committee is comprised of Thomas W. Field, Jr., and Bruce D. Varner.
The primary objective of our executive compensation program is to attract, motivate and retain executive officers of outstanding ability. All of the named executive officers with the exception of Mr. Brown have been granted substantial units in our deferred compensation plan and thus have a direct interest in our long-term net profit growth. In light of this participation, there is less need to directly relate salaries and bonuses for the named executive officers to our long-term performance.
Neither management nor the Compensation Committee currently engages any consultant related to executive or director compensation matters. In setting compensation levels, the Compensation Committee considers the overall level of responsibility and performance of the individual executive, our financial performance and other achievements during the most recently completed fiscal year, overall economic conditions, competitive operating conditions and recommendations by the Chief Executive Officer. The Compensation Committee subjectively utilizes the above factors in setting compensation for the named executive officers.
Our executive compensation for the named executive officers includes the following components: base salary, annual bonus plan, deferred compensation awards, retirement benefits, employment agreements and other benefits.

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Item 11. Executive Compensation (contd.)
Compensation Discussion and Analysis (contd.)
Salary
Named executive officers are paid a base salary with annual increases at the discretion of the Compensation Committee and the approval of our Board of Directors. In addition to the items outlined above and our financial performance, individual factors are also considered in setting base salaries, including the executive’s experience, achievements, leadership and value to us. There were no raises given to the named executive officers in fiscal 2010.
Bonus
Our executive compensation program includes an annual non-equity incentive cash bonus designed to reward the named executive officers for individual performance and for our overall success. These amounts are recommended subjectively by the Compensation Committee based on the criteria outlined above. The bonuses recommended by the Compensation Committee and approved by the Board of Directors in fiscal 2008 were based on our improved levels of net income and sales. Although the annual bonus award is not targeted as a percentage of the named executive officer’s base salary, the bonus awards in fiscal 2008 ranged from 19% to 92% of base salary. There will be no annual bonuses paid to the named executive officers for fiscal 2009 and 2010.
Deferred Compensation
We maintain a deferred compensation plan to provide additional retention incentives to certain employees of Markets whose performance is considered especially critical to our business. Units in the deferred compensation plan may be granted to a new class of employees, to promoted employees or as additional incentive to existing plan participants. All units have a stated value of $20, and appreciate as described below. Newly granted units vest over 5 years. With the exception of Mr. Brown, all of the named executive officers have been granted units in the deferred compensation plan. Units of the deferred compensation plan can only be redeemed when a participant reaches normal retirement age, becomes permanently totally disabled or to the beneficiary upon the death of the recipient. Subject to vesting provisions of the plan, units are paid in cash either (i) in a lump sum upon a change in control of Holdings; or (ii) if sooner, in either a lump sum or installments (with interest) over a five-year period (as we may determine) following termination of the participant’s employment by reason of retirement, permanent total disability or death. The deferred compensation plan allows for a one-time payment of up to 50% of the stated value of the unit for units that are fully vested. In the event of a change in control, units of the deferred compensation plan will become fully vested and can be redeemed. During the participant’s employment the value of the units increase or decrease in accordance with our net profits. Units for fully vested participants who separate from the Company prior to normal retirement age appreciate at the 12-month Treasury Average rate and can be redeemed when the participant reaches normal retirement age. If a participant voluntarily terminates his or her employment, or is terminated for cause, any awards not fully vested under the plan will be forfeited and no payment will be made. During fiscal 2010, the units in this plan appreciated by 40% of stated value. The units for the above named executives increased by a total of $1.5 million.
Retirement Benefits
We maintain a defined benefit and a defined contribution plan for our non-union employees. The named executive officers participate in both of these plans. Additional details regarding pension plan benefits can be found in the Pension Plan Table and the accompanying narrative description that follows this discussion and analysis.

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Item 11. Executive Compensation (contd.)
Compensation Discussion and Analysis (contd.)
Other Benefits
Our group health, dental, vision and life insurance plans are available to non-union eligible full-time and part-time employees. These plans do not discriminate in favor of the named executive officers. Non-employee Directors of our Board of Directors do not participate in these plans.
Employment and Severance Agreements
In June of 2000, Markets entered into Employment Agreements (“Agreements”) with Messrs. Brown, Smith, McIntyre and Frahm. 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 Markets and with certain exceptions the Agreements prohibit the employee from employment in any other business except for a parent or subsidiary of Markets. 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. Mr. Smith’s, Mr. McIntyre’s, Mr. Lee’s and Mr. Frahm’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. 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 Market’s earnings. Each of the Agreements may be terminated by Markets with cause and by either party without cause upon ninety (90) days written notice with the exception of Mr. Brown’s. Mr. Brown’s agreement requires 180 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 by Mr. Brown or by the Board of Directors with the consent of Mr. Brown. If the named executive officer is terminated as a result of a change of control, he is entitled to receive all salary, bonuses and benefits provided under his Agreement for the original term.
Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed the analysis with management. Based on its review and discussions with management, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K. The report is provided by the following members, who comprise the committee.

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Item 11.   Executive Compensation (contd.)
SUMMARY COMPENSATION TABLE
                                                 
                            Change in        
                            Pension        
                            Value and        
                            Non-qual.        
                            Def. Comp   All Other    
Name & Principal Position   Year   Salary   Bonus (1)   Earnings (2)   Compensation (3)   Total
Jack H. Brown
Chairman, President and
    2010     $ 1,901,527     $     $ 109,987     $ 52,000     $ 2,054,514  
Chief Executive Officer
    2009     $ 1,901,365     $     $ 227,755     $ 51,500     $ 2,180,620  
 
    2008     $ 1,847,233     $ 1,700,000     $ (108,506 )   $ 51,000     $ 3,489,727  
Phillip J. Smith
Executive Vice President and
    2010     $ 356,848     $     $ 803,950     $     $ 1,160,798  
Chief Financial Officer
    2009     $ 356,715     $     $ 1,187,697     $     $ 1,544,412  
 
    2008     $ 346,160     $ 100,000     $ 977,318     $     $ 1,423,478  
James W. Lee
President and Chief Operating
    2010     $ 406,178     $     $ 539,962     $     $ 946,140  
Officer of Markets
    2009     $ 406,301     $     $ 766,141     $     $ 1,172,442  
 
    2008     $ 400,169     $ 100,000     $ 672,738     $     $ 1,172,907  
Dennis L. McIntyre
Executive Vice President of
    2010     $ 358,172     $     $ 429,100     $     $ 787,272  
Marketing of Markets
    2009     $ 358,730     $     $ 641,236     $     $ 999,966  
 
    2008     $ 347,529     $ 85,000     $ 480,960     $     $ 913,489  
George A. Frahm
Executive Vice President of Retail
    2010     $ 302,568     $     $ 375,318     $     $ 677,886  
Operations and Administration of Markets
    2009     $ 302,581     $     $ 565,773     $     $ 868,354  
 
    2008     $ 292,283     $ 55,000     $ 384,169     $     $ 731,452  
 
(1)   There will be no annual bonuses paid to the named executive officers for fiscal 2010.
 
(2)   The amount shown represents the change in pension value and change in nonqualified deferred compensation during fiscal 2010, fiscal 2009 and fiscal year 2008, respectively.
 
(3)   The value of perquisites and other benefits is only included here if the aggregate amount of such compensation for a named executive officer is greater than $10,000. Mr. Brown is a Director of Holdings and amount shown is the Director fees paid during fiscal 2010 of $52,000, fiscal 2009 of $51,500 and fiscal year 2008 of $51,000.

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Item 11.   Executive Compensation (contd.)
PENSION BENEFITS AT SEPTEMBER 26, 2010
                                   
            Number of   Present Value   Payments  
            Years of   of Accum   During Last  
Name   Plan Name   Credited Service   Benefit   Fiscal Year
Jack H. Brown
Chairman, President and
  Pension Plan for                          
Chief Executive Officer
  Salaried Employees     29     $ 1,596,200        
Phillip J. Smith
Executive Vice President and
  Pension Plan for                        
Chief Financial Officer
  Salaried Employees     24     $ 718,991      
James W. Lee
President and Chief Operating
  Pension Plan for                          
Officer of Markets
  Salaried Employees     8     $ 246,763        
Dennis L. McIntyre
Executive Vice President of
  Pension Plan for                          
Marketing of Markets
  Salaried Employees     33     $ 311,172        
George A. Frahm
Executive Vice President of Retail
  Pension Plan for                          
Operations and Administration of Markets
  Salaried Employees     34     $ 473,178        

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Item 11.   Executive Compensation (contd.)
NONQUALIFIED DEFERRED COMPENSATION FOR FY2010
                                         
    Executive   Registrant   Aggregate   Aggregate   Aggregate
    Contributions in   Contributions in   Earnings in   Withdrawals   Balance at
Name   Last FY   Last FY (1)   Last FY    /Distributions (2)   Last FYE (3)
Jack H. Brown
Chairman, President and
Chief Executive Officer
  $  —     $     $  —     $     $  
Phillip J. Smith
Executive Vice President and
Chief Financial Officer
  $     $ 691,894     $     $ 300,000     $ 5,939,263  
James W. Lee
President and Chief Operating
Officer of Markets
  $     $ 477,353     $     $ 250,000     $ 4,317,236  
Dennis L. McIntyre
Executive Vice President
of Marketing of Markets
  $     $ 361,083     $     $ 250,000     $ 3,714,947  
George A. Frahm
Executive Vice President of Retail
Operations and Administration of Markets
  $     $ 286,812     $     $ 150,000     $ 2,617,161  
 
(1)   These amounts represent the Company’s contribution in fiscal year 2010 to the named executive officer’s deferred compensation. This includes 20% vesting for units awarded prior to fiscal year 2010 to Mr. Lee, Mr. Smith, Mr. McIntyre and Mr. Frahm and appreciation of 40.1% for all units.
 
(2)   These amounts represent the one-time withdrawals of half the stated value of some of the vested units in the deferred compensation plan. The stated value of each unit is $20.
 
(3)   The aggregate balance represents each named executive officer’s deferred compensation balance as of September 26, 2010. This balance represents the vested portion of all units plus appreciation, less any withdrawals.

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Table of Contents

Item 11.   Executive Compensation (contd.)
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The tables below reflect the amount of compensation that would be paid to each of the named executive officers in the event of termination of such executive’s employment under different circumstances. The amounts shown assume that such termination was effective as of the last day of the last completed fiscal year, and thus includes amounts earned through such time and are estimates of the amounts that would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executive’s separation.
                                           
              CHANGE IN CONTROL
    TERMINATION             Deferred   Health &    
    Severance Pay     Salary & Bonus   Compensation   Welfare    
Name & Principal Position   (1)     (2)   (3)   (4)   Total
 
                                         
Jack H. Brown
                                         
Chairman, President and
Chief Executive Officer
  $ 438,814       $ 10,887,936     $     $ 74,276     $ 10,962,212  
Phillip J. Smith
                                         
Executive Vice President and Chief Financial Officer
  $ 82,350       $ 1,181,167     $ 6,269,263     $ 28,368     $ 7,478,798  
James W. Lee
                                         
President and Chief Operating Officer of Markets
  $ 93,733       $ 1,344,449     $ 4,549,236     $ 28,368     $ 5,922,053  
Dennis L. McIntyre
                                         
Executive Vice President of Marketing of Markets
  $ 82,655       $ 1,185,549     $ 3,894,947     $ 44,565     $ 5,125,061  
George A. Frahm
                                         
Executive Vice President of Retail Operations and Administration of Markets
  $ 69,823       $ 1,001,500     $ 2,759,161     $ 28,368     $ 3,789,029  
 
(1)   Termination of employment by Mr. Brown or by the Board of Directors with the consent of Mr. Brown entitles named executive officers to two weeks of severance pay for every year of service to Markets, up to a maximum of twelve weeks. Severance Pay outlined above represents 12 weeks of pay for Messrs. Brown, Smith, Lee, McIntyre and Frahm.
 
(2)   In accordance with each named executive officer’s employment and severance agreements, the salary and bonus payable with a change in control represents the sum of five times the base salary and five times the incentive bonus for Mr. Brown and the sum of three times the base salary and three times the incentive bonus for Messrs. Smith, Lee, McIntyre and Frahm with an estimated increase of 10% per year.
 
(3)   At a change in control, the named executive officer is entitled to the full vested value and appreciation of all deferred compensation, less any withdrawals. The amounts above reflect values as of September 26, 2010.
 
(4)   Represents continued group health benefits (medical, dental and vision) for the executives and current dependents for a period of up to 5 years for Mr. Brown and 3 years for Messrs. Smith, Lee, McIntyre and Frahm.

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Item 11.   Executive Compensation (contd.)
Stock Options and SARs
None
Pension Plan
Our Pension Plan for Salaried Employees (the “Pension Plan”) is a non-contributory, defined benefit plan which applies to all salaried employees who have completed one year of qualified service, including Directors who are employees. For each year of credited service, the annual pension to which an employee is entitled under the Pension Plan upon normal retirement at age 65 is an amount equal to three quarters of one percent of the employee’s compensation for each year up to the social security wage base, plus 2.15 percent of the employee’s compensation for each year in excess of the social security wage base. The named executive officers have the following years of credited service under the Pension Plan as of September 26, 2010: Jack H. Brown — 29 years, Phillip J. Smith — 24 years, James W. Lee — 8 years, Dennis L. McIntyre — 33 years and George A. Frahm — 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 Markets. 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 2010 retirees with ten or more years of service at retirement is $195,000. The maximum annual compensation that may be considered for 2010 retirees is $245,000.
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       10,328       13,770       17,213       20,655       24,098  
  100,000       18,390       24,520       30,650       36,780       42,910  
  125,000       26,453       35,270       44,088       52,905       61,723  
  150,000       34,515       46,020       57,525       69,030       80,535  
  175,000       42,578       56,770       70,963       85,155       99,348  
  200,000       50,640       67,520       84,400       101,280       118,160  
  225,000       58,703       78,270       97,838       117,405       136,973  
  245,000       65,153       86,870       108,588       130,305       152,023  
Employment Agreements
Markets has employment agreements with Messrs. Brown, Lee, Smith, McIntyre and Frahm as described previously. In addition, Markets has entered into employment contracts with 30 additional key members of Management. Mr. Brown has the right to terminate any member of management.
Markets’ severance policies generally provide for two weeks of severance pay to full-time, non-bargaining unit employees for every year of service to Markets, up to a maximum of twelve weeks.

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Table of Contents

Item 11.   Executive Compensation (contd.)
Deferred Compensation Plan
We maintain a deferred compensation plan to provide additional incentive compensation to certain employees of Markets whose performance is considered especially critical to our 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. Mr. Brown is 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 Holdings. Subject to vesting provisions of the plan, units are paid in cash either (i) in a lump sum upon a change in control of Holdings; or (ii) if sooner, in either a lump sum or installments (with interest) over a five-year period (as we 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 awards not fully vested under the plan will be forfeited and no payment will be made.
Payments pursuant to units awarded under the plan are based upon the value of a unit at the last fiscal month-end date prior to 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 plus the amount vested to that date. Upon a change of control, the payment on all units is equal to the full value of the units. The deferred compensation plan allows a one-time payment of up to 50% of the stated value of the unit for units that are fully vested. The stated value of each unit is $20. The election for the one-time payment can be made, at the discretion of the plan beneficiary, annually each October if the election has not been previously made. As of September 27, 2009 and September 26, 2010, there were 899,600 and 889,600 units outstanding, respectively.
Board of Directors
The Board had two standing committees during fiscal 2010.
The Audit Committee recommends the appointment or removal of Holdings’ independent auditors, reviews the scope and results of the independent audit of Holdings, reviews audit fees and reviews changes in accounting policies that have a significant effect on Holdings’ financial statements. The Audit Committee members are Mr. Field, Mr. Varner and Mr. Skipper. Mr. Field is the Chairperson of the Audit Committee and 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 our Senior Management. The Compensation Committee members are Mr. Varner and Mr. Field. Mr. Varner is the Chairperson of the Compensation Committee.
Code of Ethics
We have adopted a Financial Code of Ethics which has been signed by the CEO, CFO, Controllers and other key personnel. A copy of the Code of Ethics was provided as an exhibit to our fiscal 2004 Report on Form 10-K.

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Table of Contents

Item 12.   Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of December 16, 2010, the number and percentage of outstanding shares of Class A Common Stock beneficially owned by (a) each person known by Holdings to beneficially own more than 5% of such stock, (b) each Director of Holdings, (c) each of the named executive officers, and (d) all Directors and named executive officers of Holdings as a group:
                 
    Shares of    
    Class A   Percentage of
    Common Stock   Class A
Name and Address of   Beneficially   Common Stock
Beneficial Owner   Owned   Outstanding
La Cadena(1)
    34,552       100 %
Jack H. Brown(1)(2)
    34,552       100 %
Phillip J. Smith(2)
           
James W. Lee(2)
           
Dennis L. McIntyre(2)
           
George A. Frahm(2)
           
Thomas W. Field, Jr.(2)
           
Bruce D. Varner(2)
           
Ronald G. Skipper(2)
           
All Directors and executive officers as a group (8 persons)(1)
    34,552       100 %
 
(1)   The 34,552 outstanding shares of Holdings’ Class A Common Stock are owned by La Cadena and may be deemed to be beneficially owned by the partners of La Cadena. The sole equity partner of La Cadena is The Jack H. Brown Revocable Trust. Mr. Brown’s Trust has the sole voting interest and Mr. Brown is the Managing General Partner of La Cadena with the power to vote the shares of Holdings owned by La Cadena on all matters. The address of La Cadena is 3750 University Avenue, Suite 610, Riverside, California 92501.
 
(2)   The address of Messrs. Brown, Smith, Lee, McIntyre, Frahm, Field, Varner and Skipper is c/o Stater Bros. at 301 S. Tippecanoe Avenue, San Bernardino, California 92408.
Change of Control Arrangements
None

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Table of Contents

Item 13.   Certain Relationships and Related Transactions
Mr. Bruce D. Varner and the law firm of Varner & Brandt LLP, of which Mr. Varner is the Senior Partner, have performed legal services in the past for Holdings and its subsidiaries. The total cost of such legal services incurred by us was $2.8 million, $1.8 million and $2.4 million in fiscal 2008, 2009 and 2010, respectively. In addition, Mr. Varner was paid Director fees of $54,000 in each of the fiscal years 2008, 2009 and 2010. We believe that the terms and costs of such legal services provided by Mr. Varner and the law firm of Varner & Brandt LLP were at least as fair to us as could have been obtained from unaffiliated law firms. We expect such services to continue in the future.
On both September 25, 2008 and November 17, 2009, we paid a $5.0 million dividend to La Cadena.
The 34,552 outstanding shares of Holdings’ Class A Common Stock are owned by La Cadena and may be deemed to be beneficially owned by the partner of La Cadena. The sole partner of La Cadena is The Jack H. Brown Revocable Trust. Mr. Brown’s Trust has the sole interest and Mr. Brown is the Managing General Partner of La Cadena with the power to vote the shares of Holdings owned by La Cadena on all matters.
Item 14.   Independent Registered Public Accounting Firm Fees and Services
Audit Fees
Ernst & Young LLP fees for audit services aggregated $839,000 in fiscal 2010 and $695,000 in fiscal 2009 for services associated with the annual audit of Holdings and Markets and reviews of Holdings quarterly reports on Form 10-Q.
Audit Related Fees
Ernst & Young LLP billed us in aggregate $2,000 in fiscal 2010 for online subscriptions and $2,000 in fiscal 2009 for online subscriptions
Tax Fees
Ernst & Young LLP billed us in aggregate $34,000 in fiscal 2010 and $38,000 in fiscal 2009 for tax compliance, tax advice and tax planning services.
All Other Fees
Ernst & Young LLP billed us an aggregate of $55,000 in fiscal 2010 related to LAMBRA tax credits and a review of the Dairy Transaction and an aggregate of $125,000 in fiscal 2009 related LAMBRA tax credits and a review of the Dairy Transaction.

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Table of Contents

PART IV
Item 15.   Exhibits and Financial Statement Schedules
  (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
 
   
3.1 (1)
  Certificate of Incorporation of Stater Bros. Holdings Inc.
 
   
3.2 (1)
  By-Laws of Stater Bros. Holdings Inc.
 
   
3.3 (1)
  Articles of Incorporation of Stater Bros. Markets
 
   
3.4 (1)
  By-Laws of Stater Bros. Markets
 
   
3.5 (1)
  Articles of Incorporation of Stater Bros. Development, Inc.
 
   
3.6 (1)
  By-Laws of Stater Bros. Development, Inc.
 
   
3.7 (1)
  Articles of Incorporation of Santee Dairies, Inc
 
   
3.8 (1)
  By-Laws of Santee Dairies, Inc.
 
   
3.9 (2)
  Articles of Incorporation of Super Rx, Inc.
 
   
3.10 (2)
  By-Laws of Super Rx, Inc.
 
   
4.1 (1)
  Indenture dated as of June 17, 2004 among Stater Bros. Holdings Inc. as Issuer, Stater Bros. Markets, Stater Bros. Development, Inc. and Santee Dairies Inc., as Guarantors, and The Bank of New York, as Trustee
 
   
4.2 (1)
  Specimen Form of Fixed Rate Global Note
 
   
4.3 (3)
  Supplemental Indenture dated as of April 16, 2007 among Stater Bros. Holdings Inc., Stater Bros. Markets, Santee Dairies, Inc., Stater Bros. Development, Inc., Super Rx, Inc. and The Bank of New York Trust Company, N.A. (as successor in interest to The Bank of New York), as Trustee
 
   
4.4 (4)
  Indenture dated as of April 18, 2007, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development Inc., Super Rx, Inc., Santee Dairies, Inc. and The Bank of New York Trust Company, N.A.

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Item 15.   Exhibits and Financial Statement Schedules (contd.)
      (a)(3) Exhibits (contd.)
     
EXHIBIT NO.   DESCRIPTION
 
   
4.5 (4)
  Registration Rights Agreement, dated as of April 18, 2007, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., Super Rx, Inc., Santee Dairies, Inc. and Banc of America Securities LLC
 
   
4.6 (4)
  Restricted 144A Global Note
 
   
4.7 (4)
  Restricted Temporary Regulations S Global Note
 
   
4.8 (12)
  Indenture dated as of November 29, 2010, between Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., Super Rx, Inc and SBM Dairies, Inc. and the Bank of New York Mellon Trust Company, N.A., the Trustee.
 
   
4.9 (12)
  Second Supplemental Indenture dated November 26, 2010 between Stater Bros. Holdings Inc. and the Bank of New York Mellon Trust Company, N.A., Trustee.
 
   
5.1 (11)
  Opinion of Gibson, Dunn & Crutcher LLP
 
   
10.1 (5)
  Amended and restated Sublease Agreement dated June 1, 1983, between Wren Leasing Corp., as Lessor, and Stater Bros. Markets, as Lessee
 
   
10.2 (6)
  Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Jack H. Brown
 
   
10.3 (7)
  Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Phillip J. Smith
 
   
10.4 (8)
  Employment contract dated June 1, 2000 by and between Stater Bros. Markets and Dennis L. McIntyre
 
   
10.6 (8)
  Employment contract dated August 1, 2002 by and between Stater Bros. Markets and James W. Lee
 
   
10.7 (11)
  Employment contract dated May 16, 2000 by and between Stater Bros. Markets and George A. Frahm
 
   
10.8 (11)
  Amendment to employment contract dated July 1, 2000 by and between Stater Bros. Markets and George A. Frahm
 
   
10.9 (9)
  Owner Participation Agreement, dated as of April 14, 2004 between Stater Bros. Markets and the Inland Valley Development Agency
 
   
10.10 (9)
  Development Parcel Disposition Agreement, dated as of June 16, 2004 between Stater Bros. Markets and Hillwood/San Bernardino, LLC
 
   
10.11 (10)
  Amendment No. 1 to Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated September 30, 2005
 
   
10.12 (4)
  Second Amended and Restated Credit Agreement, dated as of April 16, 2007, by and among Stater Bros. Markets, Stater Bros. Holdings Inc., and Bank of America, N.A.
 
   
10.13 (4)
  Second Amended and Restated Business Loan Agreement (Receivables) dated as of April 16, 2007, by and among Santee Dairies, Inc., as Borrower, Bank of America, N.A., as Lender, and Stater Bros. Markets, as guarantor.
 
   
10.14 (11)
  Subsidiary Guaranty entered into as of April 16, 2007 by Stater Bros. Holdings Inc., Stater Bros. Development, Inc., Santee Dairies, Inc. and Super Rx, Inc.
 
   
10.15 (11)
  Amended and Restated Stater Bros. Holdings Inc. Phantom Stock Plan dated December 18, 2002

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Item 15.   Exhibits and Financial Statement Schedules (contd.)
      (a)(3) Exhibits (contd.)
     
EXHIBIT NO.   DESCRIPTION
 
   
10.16 (11)
  Amendment No. 2 to amended and restated Stater Bros. Holdings Inc. Phantom Stock Plan dated May 15, 2006
 
   
10.17 (12)
  Registration Rights Agreement dated as of November 29, 2010, among Stater Bros. Holdings Inc., Stater Bros. Markets, Stater Bros. Development, Inc., SBM Dairies, Inc., Super Rx, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
 
   
10.18 (12)
  Fourth Amended and Restated Credit Agreement dated as of November 29, 2010 by and among Stater Bros. Markets, Stater Bros. Holdings Inc., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Suntrust Robinson Humphrey, Inc., Suntrust Bank, “Rabobank International”, New York Branch.
 
   
12.1 (13)
  Computation of ratio of earnings to fixed charges.
 
   
14.1 (11)
  Copy of Key Personnel Code of Ethics.
 
   
21.1 (1)
  Subsidiaries of Stater Bros. Holdings Inc.
 
   
21.2 (2)
  Subsidiaries of Stater Bros. Markets
 
   
31.1 (13)
  Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
 
   
31.2 (13)
  Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
 
   
32.1 (13)
  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. 33-118436 dated August 27, 2004, as amended
 
(2)   Previously filed with the Securities and Exchange Commission as an exhibit to the Annual report on Form 10-K for the fiscal year ended September 25, 2005
 
(3)   Previously filed with the Securities and Exchange Commission as an exhibit to the Current Report on form 8-K dated April 17, 2007
 
(4)   Previously filed with the Securities and Exchange Commission as an exhibit to the Current Report on Form 8-K dated April 20, 2007
 
(5)   Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-77296 dated July 21, 1994
 
(6)   Previous 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)   Previously filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 24, 2000
 
(8)   Previously 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

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Item 15.   Exhibits and Financial Statement Schedules (contd.)
      (a)(3) Exhibits (contd.)
 
(9)   Incorporated by reference to Exhibit 10.35 to the Quarterly Report on Form 10-Q for the quarter ended June 27, 2004
 
(10)   Previously filed with the Securities and Exchange Commission as an exhibit to the Annual Report on Form 10-K for the fiscal year ended September 25, 2005
 
(11)   Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement S-4 No. 33-0350671 dated July 24, 2007
 
(12)   Previously filed with the Securities and Exchange Commission as exhibits to the Current Report on Form 8-K dated November 26, 2010
 
(13)   Filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 26, 2010

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STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 2010
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 15, 2010
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
 
Jack H. Brown
  Chairman of the Board, President and
Chief Executive Officer and Director
(Principal Executive Officer)
  December 15, 2010
 
       
/s/ Thomas W. Field, Jr.
 
Thomas W. Field, Jr.
  Vice Chairman of the Board and Director   December 15, 2010
 
       
/s/ Ronald G. Skipper
 
Ronald G. Skipper
  Director    December 15, 2010
 
       
/s/ Bruce D. Varner
 
Bruce D. Varner
  Secretary and Director    December 15, 2010
 
       
/s/ Phillip J. Smith
 
Phillip J. Smith
  Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
  December 15, 2010

44


 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Stater Bros. Holdings Inc.
     We have audited the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. as of September 27, 2009 and September 26, 2010, and the related consolidated statements of income, stockholder’s equity, and cash flows for the 52-week periods ended September 28, 2008, September 27, 2009 and September 26, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stater Bros. Holdings Inc. at September 27, 2009 and September 26, 2010, and the consolidated results of its operations and its cash flows for the 52-week periods ended September 28, 2008, September 27, 2009 and September 26, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
December 15, 2010

F-2


Table of Contents

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS

(In thousands)
                 
    Sept. 27,     Sept. 26,  
    2009     2010  
 
               
ASSETS
Current assets
               
Cash and cash equivalents
  $ 196,914     $ 325,005  
Restricted cash
    3,121       3,121  
Receivables, net of allowance of $759 and $1,219
    36,671       35,614  
Income tax receivables
    4,049        
Inventories
    212,856       203,702  
Prepaid expenses
    9,330       12,678  
Deferred income taxes
    20,479       27,428  
Assets held for sale
    83,617        
Current portion of long-term receivable
          16,001  
Note receivable, current portion
    300        
 
           
 
               
Total current assets
    567,337       623,549  
 
               
Property and equipment
               
Land
    97,430       97,770  
Buildings and improvements
    544,440       559,500  
Store fixtures and equipment
    428,431       438,306  
Property subject to capital leases
    9,983       9,983  
 
           
 
    1,080,284       1,105,559  
Less accumulated depreciation and amortization
    408,791       461,495  
 
           
 
    671,493       644,064  
Deferred income taxes, long-term
    36,014       38,272  
Deferred debt issuance costs, net
    11,276       8,074  
Note receivable, less current portion
    493        
Long-term receivable, less current portion
    18,867        
Other assets
    9,255       8,828  
 
           
 
    75,905       55,174  
 
           
Total assets
  $ 1,314,735     $ 1,322,787  
 
           
See accompanying notes to consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)

(In thousands, except share amounts)
                 
    Sept. 27,     Sept. 26,  
    2009     2010  
 
               
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
               
Accounts payable
  $ 153,083     $ 135,642  
Accrued payroll and related expenses
    76,717       85,404  
Accrued interest
    22,025       21,845  
Other accrued liabilities
    34,189       40,196  
Accrued income taxes
          527  
Liabilities held for sale
    5,634        
Current portion of capital lease obligations
    1,336       1,562  
Current portion of long-term debt
          132,250  
 
           
 
               
Total current liabilities
    292,984       417,426  
 
               
Long-term debt, less current portion
    810,000       677,750  
Capital lease obligations, less current portion
    3,768       2,206  
Long-term portion of self-insurance and other reserves
    36,227       40,565  
Long-term deferred benefits
    77,396       75,634  
Other long-term liabilities
    30,605       36,073  
 
           
 
               
Total liabilities
    1,250,980       1,249,654  
 
               
Commitments and contingencies
               
 
               
Stockholder’s equity
               
Common Stock, $.01 par value:
               
Authorized shares — 100,000
               
Issued and outstanding shares — 0 in 2009 and 2010
           
Class A Common Stock, $.01 par value:
               
Authorized shares — 100,000
               
Issued and outstanding shares — 35,152 in 2009 and 34,552 in 2010
           
Additional paid-in capital
    8,939       8,786  
Accumulated other comprehensive loss
    (16,720 )     (18,926 )
Retained earnings
    71,536       83,273  
 
           
Total stockholder’s equity
    63,755       73,133  
 
           
Total liabilities and stockholder’s equity
  $ 1,314,735     $ 1,322,787  
 
           
See accompanying notes to consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share and share amounts)
                         
    Fiscal Year Ended  
    Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010  
 
                       
Sales
  $ 3,741,254     $ 3,766,040     $ 3,606,839  
Cost of goods sold
    2,743,074       2,764,004       2,636,891  
 
                 
 
                       
Gross profit
    998,180       1,002,036       969,948  
 
                       
Operating expenses:
                       
Selling, general and administrative expenses
    829,697       827,192       819,698  
Gain on sale of dairy assets
                (9,396 )
Depreciation and amortization
    52,987       53,536       50,822  
 
                 
 
                       
Total operating expenses
    882,684       880,728       861,124  
 
                 
 
                       
Operating profit
    115,496       121,308       108,824  
 
                       
Interest income
    5,735       471       366  
Interest expense
    (57,464 )     (68,252 )     (68,516 )
Other income, net
    2,863       723       497  
 
                 
 
                       
Income before income taxes
    66,630       54,250       41,171  
 
                       
Income taxes
    26,000       19,481       16,587  
 
                 
 
                       
Net income
  $ 40,630     $ 34,769     $ 24,584  
 
                 
 
                       
Earnings per average common shares outstanding
  $ 1,136.03     $ 989.10     $ 708.33  
 
                 
 
                       
Dividends per common share outstanding at end of year
  $ 142.24     $     $ 144.71  
 
                 
 
                       
Average common shares outstanding
    35,765       35,152       34,707  
 
                 
 
                       
Common shares outstanding at end of year
    35,152       35,152       34,552  
 
                 
See accompanying notes to consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                         
    Fiscal Year Ended  
    Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010  
Operating activities:
                       
Net income
  $ 40,630     $ 34,769     $ 24,584  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    66,960       68,179       62,090  
Amortization of debt issuance costs
    3,193       3,202       3,202  
Deferred income taxes
    695       (1,686 )     (9,207 )
Gain on sale of dairy assets
                (9,396 )
Gain on disposals of assets
    (1,918 )     (543 )     (495 )
Changes in operating assets and liabilities:
                       
Decrease in restricted cash
    2,500       2,500        
(Increase) decrease in receivables
    1,907       (6,071 )     1,057  
(Increase) decrease in income tax receivables
    (4,727 )     587       4,049  
(Increase) decrease in inventories
    (31,435 )     17,362       9,154  
(Increase) decrease in prepaid expenses
    1,717       (723 )     (3,348 )
(Increase) decrease in assets held for sale
    (2,159 )     372       215  
(Increase) decrease in other assets
    10       (426 )     744  
Decrease in accounts payable
    (17,795 )     (1,200 )     (17,441 )
Increase (decrease) in accrued income taxes
    (4,636 )           527  
Increase (decrease) in liabilities held for sale
    (2,624 )     (10,252 )     1,014  
Increase (decrease) in other accrued liabilities
    1,216       (3,268 )     14,514  
Increase in long-term reserves
    3,932       19,608       5,838  
 
                 
 
                       
Net cash provided by operating activities
    57,466       122,410       87,101  
 
                 
 
                       
Financing activities:
                       
Dividends paid
    (5,000 )           (5,000 )
Stock redemption
    (8,240 )           (8,000 )
Principal payments on capital lease obligations
    (990 )     (1,149 )     (1,336 )
 
                 
 
                       
Net cash used in financing activities
    (14,230 )     (1,149 )     (14,336 )
 
                 
 
                       
Investing activities:
                       
(Increase) decrease in store reimbursement
    (9,427 )     9,914        
(Increase) decrease in note receivable
          (793 )     793  
Decrease in long-term receivable
          3,361       1,740  
Proceeds from sale of dairy assets, net of fees
                85,833  
Purchase of property and equipment
    (168,886 )     (76,970 )     (33,750 )
Proceeds from sale of property and equipment
    2,476       990       710  
 
                 
 
                       
Net cash provided by (used in) investing activities
    (175,837 )     (63,498 )     55,326  
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    (132,601 )     57,763       128,091  
Cash and cash equivalents at beginning of period
    271,752       139,151       196,914  
 
                 
 
                       
Cash and cash equivalents at end of period
  $ 139,151     $ 196,914     $ 325,005  
 
                 
 
                       
Interest paid
  $ 65,707     $ 65,723     $ 65,510  
Income taxes paid
  $ 39,300     $ 19,425     $ 19,700  
 
                       
See accompanying notes to consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(In thousands except shares)
                                                                 
                                    Accumulated                     Comp-  
            Class A     Additional     Other Comp-             Total     rehensive  
    Common     Common Stock     Paid-in     rehensive     Retained     Stockholder’s     Income  
    Stock     Shares     Amount     Capital     Gain (Loss)     Earnings     Equity     (Loss)  
Balance at September 30, 2007
          35,770     $     $ 9,096     $ (9,037 )   $ 9,220     $ 9,279          
 
                                                               
Net income for 52 weeks ended September 28, 2008
                                  40,630       40,630     $ 40,630  
Minimum pension liability adjustment (net of tax of $2,638)
                            3,837             3,837       3,837  
Dividend paid
                                  (5,000 )     (5,000 )      
Stock redemption
          (618 )           (157 )           (8,083 )     (8,240 )      
 
                                               
 
                                                               
Balance at September 28, 2008
          35,152             8,939       (5,200 )     36,767       40,506     $ 44,467  
 
                                                             
 
                                                               
Net income for 52 weeks ended September 27, 2009
                                  34,769       34,769     $ 34,769  
Minimum pension liability adjustment (net of tax of $7,922)
                            (11,520 )           (11,520 )     (11,520 )
 
                                               
 
                                                               
Balance at September 27, 2009
          35,152             8,939       (16,720 )     71,536       63,755     $ 23,249  
 
                                                             
 
                                                               
Net income for 52 weeks ended September 26, 2010
                                  24,584       24,584     $ 24,584  
Minimum pension liability adjustment (net of tax of $1,517)
                            (2,206 )           (2,206 )     (2,206 )
Dividend paid
                                  (5,000 )     (5,000 )      
Stock Redemption
          (600 )           (153 )           (7,847 )     (8,000 )      
 
                                               
 
                                                               
Balance at September 26, 2010
          34,552     $     $ 8,786     $ (18,926 )   $ 83,273     $ 73,133     $ 22,378  
 
                                               
See accompanying notes to consolidated financial statements.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2010
Note 1 — The Company and Summary of Significant Accounting Policies
     Description of Business
     Stater Bros. Holdings Inc. (the “Company”) is engaged primarily in the operation of retail supermarkets. As of September 26, 2010, the Company operated 167 retail grocery supermarkets under the name “Stater Bros. Markets.” The Company’s supermarkets are located in the Southern California counties of San Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern. The Company and its predecessor companies have operated retail grocery stores under the “Stater Bros. Markets” name in Southern California since 1936.
     Ownership of the Company
     La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust, holds all of the Company’s issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of the Company, is the Managing General Partner of La Cadena.
     Principles of Consolidation and Subsequent Events
     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stater Bros. Markets (“Markets”) and Stater Bros. Development, Inc. (“Development”) and Markets’ wholly-owned subsidiaries, Super Rx, Inc. (“Super Rx”) and SBM Dairies, Inc. (“Dairies”). During fiscal year 2010, the Company changed the legal name of Dairies from Santee Dairies, Inc. to SBM Dairies, Inc. All significant inter-company transactions have been eliminated in consolidation. The Company has evaluated the impact of subsequent events and determined that, other than its debt refinancing as disclosed in “Note 2 — New Debt Issuance and Early Extinguishment of Debt”, it did not have any subsequent events that needed to be disclosed in its consolidated financial statements.
     Reclassifications
     Certain line items in the prior periods balance sheet and cash flow statements have been reclassified to conform to the current presentation related to Dairies’ asset sale, accrued interest and accrued payroll and related expenses. Substantially all of the assets and certain liabilities of Dairies had been classified as “Held for Sale” prior to their disposal on October 11, 2009 as described in “Note 15 — Asset Sale” in the notes to these consolidated financial statements.
     Use of Estimates
     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
     Fiscal Year
     The Company’s fiscal year ends on the last Sunday in September.
     Cash and Cash Equivalents
     Cash and cash equivalents are reflected at cost, which approximates their fair value, and consist primarily of overnight repurchase agreements, certificates of deposit and money market funds with maturities of less than three months when purchased.
     Restricted Cash
     Restricted cash represents cash that has been set aside as collateral on certain workers’ compensation and general liability self-insurance reserves. Interest earned on the restricted cash is controlled by the Company and is included in cash and cash equivalents.
     Inventories
     Inventories are stated at the lower of cost (first-in, first-out) or market.

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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.)
     Receivables
     Receivables represent amounts expected to be received during the next operating cycle of the Company, net of allowance for doubtful accounts. The Company provides specific reserves for accounts deemed to be uncollectible and provides general reserves based on historical experiences. The carrying amount reported in the balance sheet for receivables approximates their fair value.
     Long-Lived Assets
     The Company reviews the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the estimated future, undiscounted cash flows from the use of an asset are less than its carrying value, a write-down is recorded to reduce the related asset to estimated fair value.
     Property and Equipment
     Property and equipment are stated at cost and are depreciated or amortized, principally on the straight-line basis, over the estimated useful lives of the assets. Leasehold improvements placed in service at the commencement of the lease are amortized over the lesser of their economic useful lives or the initial term of the lease. Other leasehold improvements are amortized over the lesser of their economic useful lives or the remaining lease term including any option period that is reasonably assured of being exercised. Assets under capital leases are amortized over the lesser of their estimated economic useful life or the initial lease term.
     The estimated economic lives are as follows:
                 
    Range   Most Prevalent
Buildings and improvements
  5 - 40 Years   20 Years  
Store furniture and equipment
  3 - 10 Years   8 Years  
Property subject to capital leases
  Life of Lease   20 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.
     Deferred Compensation Plan
     The Company maintains the Stater Bros Holdings Inc. Phantom Stock Plan (the “deferred compensation plan”). It is the Company’s policy to expense awarded units under the deferred compensation plan 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. The Company discounted its workers’ compensation, automobile and general liability insurance reserves at a discount rate of 5.50% in fiscal 2009 and 5.00% in fiscal 2010. 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. The Company records a valuation allowance to reflect the estimated amount of deferred tax assets that more-likely-than-not will not be realized.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 1 — The Company and Summary of Significant Accounting Policies (contd.)
     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 promotional discounts given to the customer. Prescription sales are recognized when prescriptions are adjudicated by the third party insurer and when co-payment is received. The Company recognizes a liability when Stater Bros.’ gift cards (“gift cards”) are sold and recognizes sales revenue when the gift cards are used to purchase its products. Gift cards do not have an expiration date and gift card balances do not reduce because of inactivity or time. The Company does not charge service fees on the gift cards. Gift cards whose likelihood of redemption is deemed to be remote, due primarily to periods of inactivity, are recognized into income.
     Cost of Goods Sold
     Included in cost of goods sold are direct product purchase costs, all in-bound freight costs, all direct receiving and inspection costs, all quality assurance costs, all warehousing costs and all costs associated with transporting goods from the Company’s distribution center 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 2008, 2009 and 2010 is $5.8 million, $4.6 million and $2.9 million, respectively, of advertising costs in excess of the fair value of the co-operative advertising.
     Selling, General and Administrative Expenses
     Included in selling, general and administrative expenses are all store operation costs which include all store labor costs associated with receiving, displaying and selling the Company’s products at the store level; all advertising costs, net of the portion of co-operative advertising allowances directly related to the fair value of the advertising; certain salary, wages and administrative costs associated with the purchasing of the Company’s products and all security, management information services, accounting and corporate management costs.
     As noted under “Cost of Goods Sold”, the Company includes all purchasing and distribution costs to deliver the product for sale to its stores in cost of goods sold, except for certain salary, wages and administrative costs associated with the purchasing of its products. The amount of salary, wages and administrative costs associated with the purchase of its products included in selling, general and administrative costs was $1.2 million in each fiscal year 2008, 2009 and 2010.
     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
     The Company’s advertising costs, net of vendor allowances for co-operative advertising, are recognized in the period the advertising is incurred and are included in selling, general and administrative expenses. Advertising costs, net of vendor allowances, were $23.7 million, $22.2 million and $20.4 million in fiscal 2008, 2009 and 2010, respectively.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 1 — The Company and Summary of Significant Accounting Policies (contd.)
     Advertising Allowances
     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 receives co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. The Company recognized the portion of co-operative advertising allowances directly related to the fair value of advertising as a reduction in advertising costs. The Company analyzes, on a monthly basis, the direct out-of-pocket costs for printing and distributing its print ads. Using the number of ads in a typical twice weekly advertisement, the actual direct costs of an individual advertisement is determined. The cost determined is deemed to be the fair value of advertising. The amount of co-operative advertising allowance recognized as a reduction in advertising expense was $4.4 million in fiscal 2008, $2.6 million in fiscal 2009 and $1.6 million in fiscal 2010. The amount of advertising costs in excess of the fair value of advertising is recorded as a reduction in cost of goods sold.
     Leases
     Certain of the Company’s operating leases provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for minimum step rents when the amount of rent expense exceeds the actual lease payments and it reduces the deferred rent liability when the actual lease payments exceeds the amount of straight-line rent expense. Rent holidays and tenant improvement allowances for store remodels are amortized on the straight-line basis over the initial term of the lease and any option period that is reasonably assured of being exercised.
Note 2 — New Debt Issuance and Early Extinguishment of Debt
     Issuance of New Notes
     On November 29, 2010, the Company completed the sale of $255 million in aggregate principal amount of 7 3/8% Senior Notes due November 15, 2018 (the “New Notes”) in a private offering.
     The New Notes are unregistered and unsecured obligations of the Company and are guaranteed by Markets and Development and the Company’s indirect subsidiaries, Dairies and Super Rx. The Company incurred $6.4 million of debt issuance costs related to the issuance of the 7 3/8% Senior Notes, which will be amortized over the term of the New Notes to interest expense.
     Issuance of New Credit Facility
     On November 29, 2010, the Company entered into a new $245 million senior secured credit facility (the “New Credit Facility”) with Bank of America, N.A., as administrative agent and a lender. The New Credit Facility consists of a four-year $145 million term loan (the “Term Loan”) and a $100 million revolving credit facility (the “New Revolving Credit Facility”). The New Credit Facility replaced the Company’s existing $100 million credit facility as of November 29, 2010. The New Credit Facility is secured by substantially all of the Company’s personal property excluding certain intangible assets consisting of trademarks and shares of capital stock. The New Credit Facility is guaranteed by the Company, Development, Super Rx and Dairies.
     The Term Loan bears interest at Eurodollar Rate plus 2.50% or the Base rate plus 1.50% (as defined in the New Credit Facility) and the interest is payable quarterly in arrears and includes mandatory quarterly principal payments of 5.0% in each of the first two years of the agreement and 10.0% in each year three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the New Credit Facility”. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the New Credit Facility is held until the Term Loan is paid in full. The Company incurred $2.1 million of debt issuance cost related to the Term Loan which will be amortized over the term of the Term Loan.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 2 — New Debt Issuance and Early Extinguishment of Debt (contd.)
     Issuance of New Credit Facility (contdl)
     Subject to certain restrictions, the entire amount of the New Revolving Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the New Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used for workers’ compensation insurance obligations and may be used for new store construction and certain other corporate purposes. The availability of the loans and letters of credit is subject to certain borrowing restrictions.
     Loans under the New Revolving 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 Bank of America “prime rate”), plus 1.50%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.50%. For Eurodollar Rate loans, the Company will be entitled to select interest periods of one, two, three, six, nine or twelve months, subject to availability.
     The terms and provisions relating to covenants, including restricted payments, and events of defaults under the New Revolving Credit Facility are consistent with those of the existing credit facility.
     The Company’s $49.8 million of outstanding letters of credit continue to be issued and outstanding under the New Revolving Credit Facility.
     The New Revolving Credit Facility will cease to be available and will be payable in full on November 29, 2014.
     Early Extinguishment of Debt
     On November 29, 2010, the Company used the proceeds from the New Notes and the New Term Loan and cash on hand to make a payment of $496.9 million to purchase and make tender payments on approximately $477.5 million of outstanding principal of its $525 million outstanding aggregate principal amount of 8.125% Senior Notes due 2012 (the “Old Notes”) that were validly tendered as of November 26, 2010. The tender payment included a consent fee of $10 per $1,000 of the Old Notes tendered. The Company will record $1.8 million as interest expense related to debt purchase for the consent fee paid on the Old Notes that were validly tendered. The Company also paid $17.7 million of accrued interest related to the tendered Old Notes. On December 13, 2010, the Company completed its tender offer on the Old Notes and made a payment of $2.4 million to redeem $2.4 million of Old Notes that were validly tendered. Also the Company paid $0.1 million of accrued interest on these tendered Notes.
     In connection with the Old Notes that were tendered and purchased, the Company will expense approximately $3.2 million of unamortized deferred offering costs related to the Old Notes in the first quarter of fiscal 2011.
     On November 29, 2010, the Company issued a call notice to early redeem and retire all of the remaining approximately $47.5 million outstanding Old Notes. The call date for redemption of the remaining outstanding Old Notes is January 14, 2011.
     As a result of the early extinguishment of debt, $132.3 million of previously long-term debt has been classified as current portion of long-term debt on the September 26, 2010 consolidated balance sheet.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 3 — Debt
     Long-term debt consisted of the following:
                 
    Fiscal Year Ended  
    Sept. 27,     Sept. 26,  
    2009     2010  
    (In thousands)  
 
               
8.125% Senior Notes due 2012
  $ 525,000     $ 525,000  
7.75% Senior Notes due 2015
    285,000       285,000  
 
           
 
    810,000       810,000  
Less current portion of long-term debt
          132,250  
 
           
Long-term debt, less current portion
  $ 810,000     $ 677,750  
 
           
     Interest on the 8.125% Senior Notes due June 2012 (the “8.125% Senior Notes”), is payable semi-annually in arrears on June 15 and December 15. Principal on the 8.125% Senior Notes is due in fiscal 2012.
     Interest on the 7.75% Senior Notes is payable semi-annually in arrears on April 15 and October 15. Principal on the 7.75% Senior Notes is due in fiscal 2015.
     Interest capitalized during fiscal 2008 and 2009 amounted to $11.3 million and $0.5 million, respectively. There was no capitalized interest in fiscal 2010. Interest expense incurred, before the effect of capitalized interest, amounted to $68.8 million in both fiscal years 2008 and 2009 and amounted to $68.5 million in fiscal year 2010.
     The Company is subject to certain covenants associated with its 8.125% Senior Notes and its 7.75% Senior Notes. As of September 26, 2010, the Company was in compliance with all such covenants.
     The Notes are guaranteed by the Company’s subsidiaries Markets and Development, and the Company’s indirect subsidiaries Super Rx and Dairies (each a “subsidiary guarantor”, and collectively, the “subsidiary guarantors”). Condensed consolidating financial information with respect to the subsidiary guarantors is not provided because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and there are no subsidiaries of the Company other than the subsidiary guarantors.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 4 — Credit Facilities
     On May 4, 2010, the Company and Markets entered into the Third Amended and Restated Credit Agreement with Bank of America, N.A. (“Bank of America”), as sole and exclusive administrative agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a principal amount of up to $100 million (the “Credit Facility”), which replaced the Company’s previous credit facility.
     The Credit Facility is guaranteed by all of the Company’s existing and future material subsidiaries, including Development and the Company’s indirect subsidiary Super Rx. Subject to certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and may be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores and workers’ compensation insurance obligations. The availability of the loans and letters of credit is subject to certain borrowing restrictions.
     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 “prime rate”), plus 1.00%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Eurodollar Rate Loans, the Eurodollar Rate will apply for periods, as selected by the Company, of one, two, three or six months (but in any event not later than the maturity date of the Credit Facility).
     The Credit Facility requires the Company to meet certain financial tests, including minimum net worth and the maintenance of minimum earnings levels. The Credit Facility contains covenants which, among other things, limit the ability of the Company and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, and (iii) make restricted payments. Markets is not limited in its ability to transfer assets in the form of loans, advances or cash dividends to the Company. The Credit Facility also contains covenants that apply to the Company and its subsidiaries, and the Company is a party to the Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, make restricted payments, enter into transactions with affiliates, and make certain amendments to the Indentures governing the 8.125% Senior Notes and the 7.75% Senior Notes (“Notes Indentures”).
     As of September 26, 2010, the Company had $49.8 million of outstanding letters of credit and it had $50.2 million available under the Credit Facility and the Company was in compliance with all restrictive covenants under the Credit Facility. However, there can be no assurance that the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
     The Company had no short-term borrowings outstanding as of September 26, 2010 and the Company did not incur any short-term borrowings during the fiscal year ended September 26, 2010.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 5 — Leases
     The Company leases the majority of its retail stores. Certain of the operating leases provide for minimum annual payments that change over the life of the lease. The Company expenses rental costs that are incurred during new store construction in the period incurred.
     The aggregate minimum annual lease payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for minimum step rents when the amount of rent expense exceeds the actual lease payment and it reduces the deferred rent liability when the actual lease payment exceeds the amount of straight line rent expense. Rent holidays and tenant improvement allowances for store remodels are amortized on the straight-line basis over the initial term of the lease and any option period that is reasonably assured of being exercised. Certain of the Company’s operating leases are subject to contingent rent based upon the sales volume of the store subject to the lease. The Company accrues for contingent rent when the amount of contingent rent exceeds minimum lease payments. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.
Following is a summary of future minimum lease payments as of September 26, 2010:
                         
            Operating        
            Leases     Noncancelable  
    Capital     Minimum     Sublease  
    Leases     Payments     Income  
    (In thousands)  
 
                       
2011
  $ 2,095     $ 38,568     $ 5,242  
2012
    1,403       35,528       4,151  
2013
    943       33,103       3,724  
2014
    316       27,065       2,878  
2015
          25,209       2,506  
Thereafter
          190,753       18,795  
 
                 
Total minimum lease payments
    4,757     $ 350,226     $ 37,296  
 
                   
Less amounts representing interest
    989                  
 
                     
Present value of minimum lease payments
    3,768                  
Less current portion
    1,562                  
 
                 
Long-term portion
  $ 2,206                  
 
                     

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 5 — Leases (contd.)
Rental expense and sublease income were as follows:
                         
    Fiscal Year Ended
    Sept. 28, 2008     Sept. 27, 2009     Sept. 26, 2010  
    (In thousands)  
Minimum rentals
  $ 33,454     $ 30,326     $ 29,087  
Rentals based on sales
  $ 15,020     $ 16,210     $ 16,221  
Sublease income
  $ 2,235     $ 4,919     $ 5,586  
     The Company has a fifteen year sublease with a third party (the “sublessee”) ending in May 2023, which contains three, five year lease options, for the lease of the Company’s former headquarters building and certain former distribution facilities located in Colton, California (the “Former Facilities”). The current lease on the Former Facilities contains multiple lease options that gives the Company the right to control the property through May 2038. The sublessee assumed all lease payments and other liabilities under the lease. The Company’s lease payments on the Former Facilities are included in the “Operating leases minimum payments” and the sublessee’ lease payments are included in “Noncancelable sublease income” in the schedule above.
Note 6 — Income Taxes
The provision for income taxes consisted of the following:
                         
    Sept. 28, 2008     Sept. 27, 2009     Sept. 26, 2010  
    (in thousands)  
Current
                       
Federal
  $ 23,756     $ 16,302     $ 18,816  
State
    6,095       3,710       5,460  
 
                 
 
    29,851       20,012       24,276  
 
                 
Deferred
                       
Federal
    (2,826 )     (152 )     (5,827 )
State
    (1,025 )     (379 )     (1,862 )
 
                 
 
    (3,851 )     (531 )     (7,689 )
 
                 
 
Income tax expense
  $ 26,000     $ 19,481     $ 16,587  
 
                 
 
A reconciliation of the provision for income taxes to amounts computed at the federal statutory rate is as follows:
 
    Sept. 28, 2008     Sept. 27, 2009     Sept. 26, 2010  
Federal statutory 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
    (2.3 )     (2.2 )     (1.2 )
Other
    0.5       (2.7 )     0.7  
 
                       
 
Effective tax rate
    39.0 %     35.9 %     40.3 %
 
                       

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 6 — Income Taxes (contd.)
     Components of deferred income taxes are as follows:
                 
    Sept. 27, 2009     Sept. 26, 2010  
    (In thousands)  
 
Deferred income tax assets:
               
Self-insurance reserves
  $ 25,252     $ 27,756  
Deferred compensation
    31,504       34,209  
Payroll liabilities
    20,447       24,123  
State franchise tax
    1,377       1,860  
Inventories
    2,217       2,033  
Income deferred for book purposes
    2,602       2,074  
Tax credits and operating loss carry forwards
    2,561       180  
Other, net
    1,708       1,881  
 
           
 
               
Total deferred income tax assets
    87,668       94,116  
 
               
Deferred income tax liabilities:
               
Property and equipment
    (28,920 )     (26,133 )
Other assets
    (2,255 )     (2,283 )
 
           
Total deferred income tax liabilities
    (31,175 )     (28,416 )
 
           
 
Net deferred income tax assets
  $ 56,493     $ 65,700  
 
           
     The Company establishes deferred tax liabilities for anticipated tax timing differences where payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and the amounts may be adjusted over time as additional information becomes known.
     The Company does not have any material tax positions that did not meet a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During fiscal 2010, there have been no material changes to the amount of uncertain tax positions.
     The Company recognizes interest and penalties related to income tax deficiencies or assessments by taxing authorities for any underpayment of income taxes separately from income tax expenses as either interest expense or other operating expenses.
     For federal tax purposes, the Company is subject to review on its fiscal 2007 through fiscal 2010 tax returns. During fiscal 2010, the State of California Franchise Tax Board (“FTB”) concluded their review of the Company’s fiscal 2006 state return and made no changes to the Company’s reported taxes. For state tax purposes, the Company is subject to review by the FTB of its fiscal 2007 through fiscal 2010 tax returns.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans
     Pension and Medical Plans
     The Company has a Noncontributory Defined Benefit Pension Plan (the “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.
     The Company also maintains an Early Retiree Medical Premium Reimbursement Plan (the “Medical Plan”) to provide reimbursement for medical insurance premiums for employees who retire before their Social Security retirement age. The maximum benefit under the plan is $500 per month per retired employee for a maximum of 120 months.
Amounts recognized in accumulated other comprehensive income/loss for the qualified defined pension plan:
                                                 
    Pension Plan     Medical Plan  
    Sept. 28,     Sept. 27,     Sept. 26,     Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010     2008     2009     2010  
    (in thousands)  
Prior service cost
  $ 2     $ 2     $ 2     $ (78 )   $ (78 )   $ (78 )
Net actuarial gain/(loss)
    (6,269 )     19,258       3,653     $ (130 )   $ 260     $ 143  
 
                                   
Total recognized in accumulated other comprehensive gain/(loss), before tax
  $ (6,267 )   $ 19,260     $ 3,655     $ (208 )   $ 182     $ 65  
 
                                   

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans (contd.)
     Pension and Medical Plans (contd.)
     The following tables provide a reconciliation of the changes in the pension plan’s benefit obligation and fair value of assets for fiscal years ending and a statement of the funded status as of the fiscal years ended September 27, 2009 and September 26, 2010:
                                 
    Pension Plan     Medical Plan  
    Sept. 27,     Sept. 26,     Sept. 27,     Sept. 26,  
    2009     2010     2009     2010  
    (in thousands)  
 
Change in benefit obligation:
                               
Beginning balance
  $ 52,850     $ 76,104     $ 1,364     $ 1,698  
Service cost
    2,294       3,302       34       47  
Interest cost
    3,857       4,002       98       91  
Actuarial loss
    18,318       6,551       260       157  
Benefit payments
    (1,215 )     (1,651 )     (58 )     (65 )
 
                       
 
Ending balance
  $ 76,104     $ 88,308     $ 1,698     $ 1,928  
 
                       
 
                               
Change in fair value of plan assets:
                               
Beginning balance
  $ 47,997     $ 53,280     $     $  
Actual return on plan assets
    2,064       4,964              
Employer contributions
    4,434       3,160       58       65  
Benefit payments
    (1,215 )     (1,651 )     (58 )     (65 )
 
                       
 
Ending balance
  $ 53,280     $ 59,753     $     $  
 
                       
 
                               
Funded status:
                               
Fair value of plan assets
  $ 53,280     $ 59,753     $     $  
Projected benefit obligation
    76,104       88,308       1,698       1,928  
 
                       
 
Under funded
  $ (22,824 )   $ (28,555 )   $ (1,698 )   $ (1,928 )
 
                       
     Market related value of plan assets is calculated using fair market value, as provided by a third-party trustee. The plan’s investments include cash, which earns interest, governmental securities and corporate bonds and securities.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans (contd.)
     Pension Plan
     The following table provides the components of fiscal 2008, 2009 and 2010 net pension expense:
                         
    Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010  
    (in thousands)  
 
Expected return on assets
  $ (3,076 )   $ (3,201 )   $ (3,463 )
Service cost
    2,632       2,294       3,302  
Interest cost
    3,504       3,857       4,002  
Amortization of prior service cost
    (2 )     (2 )     (2 )
Amortization of recognized losses
    584       197       1,397  
 
                 
 
Net pension expense
  $ 3,642     $ 3,145     $ 5,236  
 
                 
 
                       
Actuarial assumptions used to determine net pension expense were:
Discount rate
    6.25 %     7.50 %     5.50 %
Rate of increase in compensation levels
    3.00 %     3.00 %     3.00 %
Expected long-term rate of return on assets
    6.50 %     6.50 %     6.50 %
Actuarial assumptions used to determine year-end projected benefit obligation were:
Weighted-average discount rate
    7.50 %     5.50 %     5.00 %
Weighted-average rate of compensation increase
    3.00 %     3.00 %     3.00 %
     Expenses recognized for the Pension Plan were $4.0 million, $3.6 million and $5.7 million in fiscal years 2008, 2009 and 2010, respectively. Pension expenses included trustee and administrative expenses for the Pension Plan of $0.3 million, $0.4 million and $0.4 million in fiscal years 2008, 2009 and 2010, respectively.
     The Company has adopted and implemented an investment policy for the defined benefit pension plan that incorporates a strategic long-term asset allocation mix designed to meet the Company’s long-term pension requirements. This asset allocation policy is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. As of September 26, 2010, the strategic target asset allocation is 67% fixed income and 33% equity. The following table summarizes actual allocations for the Company’s plan at the end of fiscal 2009 and fiscal 2010:
                 
    Sept. 27,     Sept. 26,  
    2009     2010  
    (in thousands)  
Asset category:
               
Fixed income
  $ 37,053     $ 41,924  
Equity
    14,537       16,204  
Cash and accrued income
    1,690       1,625  
 
           
Total
  $ 53,280     $ 59,753  
 
           

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans (contd.)
     Pension Plan (contd.)
                                 
    As of September 26, 2010  
    Quoted Prices in                      
    Active Markets for             Significant        
    Identical     Significant Other     Unobservable        
    Assets/Liabilities     Observable Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
    (in thousands)  
Asset category:
                               
Fixed income
  $ 11,644     $ 30,280     $     $ 41,924  
Equity:
                               
Small cap enhanced core fund
                2,575       2,575  
Mid cap enhanced core fund
                3,927       3,927  
Large cap enhanced core fund
                9,702       9,702  
Cash and accrued income
    1,625                   1,625  
 
                       
 
  $ 13,269     $ 30,280     $ 16,204     $ 59,753  
 
                       
     The above table sets forth by level, within the fair value hierarchy, the Pension Plan’s assets at fair value. The Company was unable to obtain the information necessary to prepare a reconciliation of the beginning and ending balances for investments classified as Level 3.
     Generally accepted accounting principals (“GAAP”) establishes a fair value hierarchy that priorities the inputs used to measure fair value. The three levels of the fair value hierarchy defined in the standards are as follows:
Level 1 — Quoted prices are available in active markets for identical assets or liabilities;
Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 — Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans (contd.)
     Pension Plan (contd.)
     The investment policy is for the fund to earn long-term investment returns in excess of inflation, which is at least equal to the actuarial discount rate used to calculate the plan’s liability. The protection of principal is the focus of the investment policy.
     The Company expects to contribute approximately $2.6 million to its defined benefit pension plan during fiscal 2011.
     Estimated Future Benefit Payments
     The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
         
    Pension
    Benefits
    (in thousands)
 
2011
  $ 2,933  
2012
  $ 3,538  
2013
  $ 4,317  
2014
  $ 3,966  
2015
  $ 4,211  
2016 - 2020
  $ 27,908  
     Medical Plan
     The following table provides the components of fiscal 2008, 2009 and 2010 net periodic benefit costs:
                         
    Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010  
    (in thousands)  
 
Service cost
  $ 41     $ 34     $ 47  
Interest cost
    88       98       91  
Amortization of prior service cost
    78       78       78  
Amortization of recognized losses
    7             13  
 
                 
 
Net periodic benefit costs
  $ 214     $ 210     $ 229  
 
                 
 
                       
Actuarial assumptions used to determine net periodic benefit costs were:
Discount rate
    6.25 %     7.50 %     5.50 %
Actuarial assumptions used to determine year-end projected benefit obligation were:
Weighted-average discount rate
    7.50 %     5.50 %     4.50 %

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 7 — Retirement Plans (contd.)
     Medical Plan (contd.)
     Expenses recognized for the medical plan were $0.2 million in each fiscal year 2008, 2009 and 2010.
     The Company expects to contribute approximately $0.1 million to the medical plan during fiscal 2011.
     Estimated Future Benefit Payments
     The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
         
    Medical
    Benefits
    (in thousands)
 
2011
  $ 106  
2012
  $ 122  
2013
  $ 137  
2014
  $ 139  
2015
  $ 129  
2016 - 2020
  $ 686  
     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 $1.2 million in fiscal 2008, $1.0 million in fiscal 2009 and $0.5 million in fiscal 2010.
     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.
     The Company’s expense for these retirement plans and health and welfare plans consisted of the following:
                         
    Sept. 28,     Sept. 27,     Sept. 26,  
    2008     2009     2010  
    (in thousands)  
 
Multi-Employer Pension Plans
  $ 40,508     $ 40,294     $ 37,567  
Multi-Employer Health and Welfare
    71,342       73,459       83,437  
 
                 
 
Total Multi-Employer Benefits
  $ 111,850     $ 113,753     $ 121,004  
 
                 
     The Company’s employer contributions fluctuate as a result of changes to employer contributions outlined in collective bargaining agreements.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 8 — Labor Relations
     The Company’s collective bargaining agreements with the UFCW were renewed in March 2007 and extends through March 2011. The Company’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in October 2010 and expires in September 2015. Substantially all of our employees are covered by collective bargaining agreements.
Note 9 — Fair Value of Financial Instruments
     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
     Cash and Cash Equivalents
     The carrying amount approximates fair value because of the short-term maturity of these instruments.
     Receivables
     The carrying amount approximates fair value because of the short-term maturity of these instruments.
     Long-Term Receivable, Current Portion
     Although market quotes for the fair value of the Company’s long-term receivable are not readily available, the Company valued its long-term receivable based on a discounted cash flow approach applying a discount rate that approximates long-term market rates.
     Long-Term Debt and Capital Lease Obligations
     The fair value of the 8.125% Senior Notes and the 7.75% Senior Notes, are based on quoted market prices. Although market quotes for the fair value of the Company’s capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.
     The estimated fair values of the Company’s financial instruments are as follows:
                 
    As of  
    September 26, 2010  
    (In thousands)  
    Carrying     Fair  
    Amount     Value  
 
               
Cash and cash equivalents
  $ 325,005     $ 325,005  
Receivables
  $ 35,614     $ 35,614  
Long-term receivable, current portion
  $ 16,001     $ 16,001  
Long-term debt
  $ 810,000     $ 819,413  
Capitalized lease obligations
  $ 3,768     $ 3,768  

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 10 — Litigation Matters
     In the ordinary course of business, the Company is party to various legal actions which it believes are incidental to the operation of its business and the business of 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 it is currently a party will not have a material adverse effect upon its results of operations or its consolidated financial condition.
In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010 following mediation the case was settled. Under the settlement agreement, the settlement amount will be paid pursuant to procedures for filing and approval of claims for members of the certified class with a portion of any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount has been recorded in the Company’s consolidated financial statements.
Note 11 — Long-Term Receivable
     During the second quarter of fiscal 2010, Markets entered into the Comprehensive Tri-Party Termination Infrastructure Reimbursement Agreement (the “Termination Agreement”) with the Inland Valley Development Agency (the “IVDA”) and Hillwood/San Bernardino, LLC (“Hillwood”) to terminate commitments with Hillwood under certain obligations and settle outstanding financial issues among the parties arising from several agreements previously entered into with Hillwood and the IVDA in connection with the development of the Distribution Center. As part of the Termination Agreement, the amount previously due from the IVDA for tax increment reimbursement related to the construction of the Distribution Center was negotiated downward from $18.9 million to $17.7 million. The $17.7 million receivable was classified as a current asset and the $1.2 million adjustment out of long-term receivable was recorded to “Building and improvements” in the Company’s June 27, 2010 consolidated balance sheet. Under the Termination Agreement, Markets paid approximately $0.7 million to Hillwood as reimbursement for shared improvement costs and any further financial commitments between Markets and Hillwood were terminated. The $0.7 million reimbursement was recorded to “Buildings and improvements” in the Company’s consolidated balance sheet.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 12 — Deferred Compensation Plan
     The Company maintains a deferred compensation plan for certain executives of Markets. Mr. Jack H. Brown is 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 awards not fully vested under the plan will terminate and no payment will be made. As of September 27, 2009 and September 26, 2010, there were 899,600 and 889,600 units outstanding, respectively. The Company recognized an expense for the plan of $12.1 million, $11.0 million and $7.9 million in 2008, 2009 and 2010, respectively.
Note 13 — Related Party Transactions
     On both September 25, 2008 and November 17, 2009, the Company paid a $5.0 million dividend to La Cadena.
     The Company paid legal fees of $2.8 million, $1.8 million and $2.4 million in fiscal 2008, 2009 and 2010, respectively, to the law firm of Varner & Brandt LLP. Mr. Bruce D. Varner is the Senior Partner of Varner & Brandt LLP and is also a director of the Company. Mr. Varner received director fees of $54,000 in each fiscal year 2008, 2009 and 2010.
Note 14 — Stock Redemption
     On September 25, 2008, the Company redeemed 618 shares of its Class A Common Stock for $8.2 million. The redemption was for shares distributed to the Moseley Trust by La Cadena.
     On December 28, 2009, the Company redeemed 600 shares of its Class A Common Stock for $8.0 million. The redemption was for shares distributed to the Moseley Trust by La Cadena.
     As of September 26, 2010, the Company had the ability under the Credit Facility to make restricted payments, including dividends of up to $38.0 million.
Note 15 — Asset Sale
     On October 11, 2009, the Company sold substantially all of the assets of Dairies to subsidiaries of Dean Foods (“Dean Foods”) for $88.0 million in cash, subject to a working capital adjustment, and assumption of certain liabilities including substantially all of Dairies’ current liabilities, which included accounts payable. In the second quarter of fiscal 2010, the purchase price was adjusted upward by approximately $1.5 million due to an adjustment made for working capital. Dairies’ assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. The Company incurred approximately $3.8 million in transaction and other fees related to the transaction and recognized a gain, net of tax, of approximately $5.6 million. The pre-tax gain from the sale of Dairies’ assets is included in “Gain on sale of dairy assets” within the consolidated statements of income. Dairies retained responsibility for all workers compensation claims through the date of the transaction.
     Also on October 11, 2009, the Company entered into a ten year Product Purchase Agreement (the “PPA”) with Dean Foods to purchase substantially all of its milk products sold in its supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing.
     As of October 11, 2009, the Company ceased all dairy manufacturing operations.
     Markets and Super Rx have similar customers, regulatory requirements and delivery methods to customers and are included together as one reportable segment. Prior to the Dairy Transaction, Dairies was a separate reportable segment of the Company. As operating activities of Dairies have ceased and operating results from September 28, 2009 to October 11, 2009 are not material to the overall financial statements of the Company taken as a whole, the Company no longer has separate reportable segments to disclose.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 16 — Quarterly Results (unaudited)
     Quarterly results for fiscal 2008, 2009 and 2010 are as follows (in thousands except share and per share amounts):
                                                 
                                    Average        
            Gross     Operating     Net     Shares     Earnings  
    Sales     Profit     Profit     Income     Outstanding     Per Share  
Fiscal 2008 Quarters
                                               
13 weeks ended 12/30/07
  $ 943,030     $ 244,429     $ 27,203     $ 10,751       35,770     $ 300.56  
13 weeks ended 03/30/08
    925,361       256,278       34,581       13,531       35,770       378.28  
13 weeks ended 06/29/08
    932,668       249,221       28,372       9,179       35,770       256.61  
13 weeks ended 09/28/08
    940,195       248,252       25,340       7,169       35,750       200.53  
 
                                     
 
                                               
 
  $ 3,741,254     $ 998,180     $ 115,496     $ 40,630       35,765     $ 1,136.03  
 
                                     
 
                                               
Fiscal 2009 Quarters
                                               
13 weeks ended 12/28/08
  $ 959,253     $ 246,862     $ 22,498     $ 3,541       35,152     $ 100.73  
13 weeks ended 03/29/09
    930,996       255,826       35,962       11,121       35,152       316.37  
13 weeks ended 06/28/09
    928,641       254,216       37,793       15,142       35,152       430.76  
13 weeks ended 09/27/09
    947,150       245,132       25,055       4,965       35,152       141.24  
 
                                     
 
                                               
 
  $ 3,766,040     $ 1,002,036     $ 121,308     $ 34,769       35,152     $ 989.10  
 
                                     
 
                                               
Fiscal 2010 Quarters
                                               
13 weeks ended 12/27/09
  $ 923,864     $ 238,150     $ 28,146     $ 6,711       35,152     $ 190.91  
13 weeks ended 03/28/10
    885,537       236,445       27,085       5,967       34,572       172.60  
13 weeks ended 06/27/10
    900,044       245,657       27,474       5,982       34,552       173.13  
13 weeks ended 09/26/10
    897,394       249,696       26,119       5,924       34,552       171.45  
 
                                     
 
                                               
 
  $ 3,606,839     $ 969,948     $ 108,824     $ 24,584       34,707     $ 708.33  
 
                                     

F-27