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EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INCv54599exv31w2.htm
EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INCv54599exv32w1.htm
EX-12.1 - EX-12.1 - STATER BROS HOLDINGS INCv54599exv12w1.htm
EX-31.1 - EX-31.1 - STATER BROS HOLDINGS INCv54599exv31w1.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 27, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition from                      to                     
Commission file number 001-13222
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
     
Delaware   33-0350671
     
(State or other jurisdiction of incorporation or
organization)
  (IRS Employer Identification No.)
     
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 17, 2009—Class A Common Stock — 35,152 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     11
   
 
   
       
   
 
   
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
      43
 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 28 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. Prior to October 11, 2009, most of the milk products offered in our stores were manufactured by Santee Dairies, Inc. (“Santee”), a wholly-owned subsidiary of Markets. Santee operated under the name Heartland Farms. In addition to providing Markets with its milk products, Santee sold milk and juice products to a variety of third party companies and organizations. Subsequent to our fiscal 2009 year-end, on October 11, 2009, we sold substantially all of the assets of Santee 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 Santee to SBM Dairies, Inc.
Holdings was incorporated in Delaware in 1989 and through Markets and its predecessor companies have 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 our wholly-owned subsidiary, Stater Bros. Development (“Development”). Development 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 82% 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 and facilities for grocery, grocery deli, produce, meat, meat deli, frozen, bakery, health and beauty care, and general merchandise products.
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.)
Issuance of Debt and Early Extinguishment of Debt
On April 18, 2007, we issued $285.0 million in aggregate principal amount of unregistered and unsecured 7.75% Senior Notes due April 15, 2015 in a private offering. On September 7, 2007, we completed the exchange of the unregistered 7.75% Senior Notes due April 15, 2015 for virtually identical registered $285.0 million unsecured 7.75% Senior Notes due April 15, 2015 collectively (the “7.75% Senior Notes”). We incurred $7.2 million of debt issuance costs related to the issuance of the 7.75% Senior Notes.
On June 18, 2007, we used part of the proceeds from the issuance of the 7.75% Senior Notes to redeem all of our $175.0 million Floating Rate Senior Notes due 2010 (the “Floating Rate Senior Notes”) for $176.8 million which included a redemption premium of $1.8 million, plus accrued interest. In connection with the redemption of the Floating Rate Senior Notes, we expensed approximately $2.2 million of unamortized deferred offering cost related to the Floating Rate Senior Notes.
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 September 27, 2009, 165 supermarkets at September 28, 2008 and 164 supermarkets at September 30, 2007.
Our supermarkets had approximately 5.8 million total square feet at September 27, 2009, 5.6 million total square feet at September 28, 2008 and September 30, 2007.
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 68% 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.
                                         
    Sept. 25,   Sept. 24,   Sept. 30,   Sept. 28,   Sept. 27,
    2005   2006   2007   2008   2009
     
Number of supermarkets:
                                       
Opened
    4       3       3       1       3  
Closed
    (1 )     (2 )     (1 )           (1 )
Total at end of year
    161       162       164       165       167  
Minor remodel
    47       34       6       3       3  
Major remodel
    8       14       12       10       9  
In addition, in fiscal 2009, we replaced a store in Ontario, California with a new supermarket. 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. Approximately 82%, based on sales volume, 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 27, 2009, we operated approximately 124 tractors, 27 of which we owned and 97 we leased. We operated 474 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 nine district managers, each of whom is responsible for an average of 19 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.)
Santee Dairies, Inc
Santee operates one of the largest dairy plants, based on fluid production, in California and provides fluid milk products to Markets and other customers in Southern California. Santee processes, packages and distributes whole, low-fat and non-fat milk, as well as orange juice, fruit drinks and certain other cultured milk products under the Knudsen®, Foremost® and certain other brand names, as well as store brand names. Santee is the exclusive licensee of the Knudsen® trademark from Kraft Foods, Inc. for fluid milk, juices and certain other cultured milk products in the Southern California market. In addition, Santee is the exclusive licensee of the Foremost® trademark for fluid milk in Southern California from Foremost Farms USA. Santee holds the exclusive national license for Arnold Palmer Tee®, a beverage blend of iced tea and lemonade as well as other flavors, from Innovative Flavors, LLC. In fiscal 2009, Santee processed approximately 67.2 million gallons of fluid products, including 53.3 million gallons of fluid milk. During this time period, Markets purchased 35.3 million gallons of fluid products from Santee. Santee’s total revenue in fiscal 2009, excluding sales to Markets, was $96.8 million. Santee also sells to other supermarkets, independent food distributors, military bases and foodservice providers in Southern California.
On October 11, 2009, we sold substantially all of the assets of Santee to Dean Foods and entered into a ten year product purchase agreement to purchase substantially all of our milk products from Dean Foods. As of that date, we discontinued all dairy manufacturing operations.
Employees
We have approximately 17,500 employees. Of which approximately 800 are management and administrative employees and 16,700 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 September 2005 and expires in September 2010.
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, 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, 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 three operating segments: Markets, Super Rx and Santee. Markets and Super Rx provide retail grocery, general merchandise and pharmaceutical products to customers through our supermarkets. Santee processes, packages and distributes milk, fruit drinks and other cultured milk products to Markets and other customers. 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. Aggregating Markets and Super Rx results in two reportable segments: Retail and Dairy Manufacturing. Separate disclosures for the Dairy Manufacturing segment have not been made as sales, profits and total assets for this segment are less than 10% of consolidated sales, profits and total assets. Financial information about our reportable segment is disclosed in “Note 8 — Segment Information” in the Notes to the Audited Consolidated Financial Statements contained herein.
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.
Santee is subject to periodic inspections by personnel from the California Department of Food and Agriculture, as well as the United States Food and Drug Administration, who test, among other things, Santee’s pasteurization and homogenization equipment, storage tanks, and bottling apparatuses to ensure compliance with applicable health and safety regulations. The price of raw milk is regulated by the federal government through federal market orders and price support programs, and by the State of California. The price of raw milk can fluctuate widely.
Environmental
We incurred approximately $198,000 in environmental remediation costs over the past three years. Remediation costs were approximately $41,000 in fiscal 2007, $96,000 in fiscal 2008 and $61,000 in fiscal 2009. 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, 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.

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Table of Contents

Item 1A. Risk Factors (contd.)
Our performance is affected by inflation. During fiscal 2009, we experienced increases in the costs of products we sell in our stores. The increases in our costs are attributed to increases in plastic, grain and other commodity costs. During fiscal 2009, we were unable to pass along the full effect of price increases as our competitors also absorbed some of the costs increases and as our customers disposable income was reduced as a result of current economic conditions. Future recovery of cost increases will be dependent on actions taken by our competitors and by the state of the economy in our marketing area. The economic and competitive environment in Southern California continues to challenge us to become more cost efficient as we have experienced increased gross margin pressures. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as current and future competitive conditions.
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 product classification within our corporate offices and distribution center as of September 27, 2009. Square footage numbers for our dairy manufacturing operations sold on October 11, 2009 are excluded.
         
    Square
    Feet
Grocery goods
    1,078,000  
Refrigerated
    664,000  
Distribution support
    445,000  
Bread
    46,000  
Administrative offices
    176,000  
 
       
Total
    2,409,000  
 
       

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Table of Contents

Item 2. Properties (contd.)
As of September 27, 2009, 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 27, 2009.
                                                                 
    No. of Stores   Total Square Feet
                            Under   25,000-   30,000-   35,000-   Over
County   Total   Owned   Leased   25,000   29,999   34,999   40,000   40,000
San Bernardino
    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.
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 April of 2006, the Landlord under a Ground Lease for a supermarket occupied by Markets in the city of Fountain Valley, California filed an Action against Markets and the Lessee under a Sub-Ground Lease alleging that Markets failed to timely exercise its option to extend the term of the Ground Lease. The original Complaint filed in the California Superior Court for the County of Orange was amended to a Reformation and Declaratory Relief Cause of Action seeking determination of the parties’ rights under the Ground Lease and Sub-Ground Lease including a damage claim for additional rent of approximately $1.4 million. This case was settled in May of 2008 pursuant to a settlement agreement whereby Markets agreed to pay fair market value rent under the Ground Lease commencing June 1, 2008 and continuing through the end of the Lease term in August of 2014, which has been appropriately reflected in the accompanying Audited Consolidated Financial Statements. Markets was not required to pay any additional rent for prior periods under the settlement agreement.
In December 2008, an action by Dennis M. O’Connor, et al. against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) was filed in the Los Angeles Superior Court. This action seeks individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. No date has been set for trial or a hearing for potential class certification and SBM Dairies, Inc. is in the process of conducting discovery. SBM Dairies, Inc. denies it has any liability in this action and intends to vigorously defend its interests. Plaintiffs have not yet made any settlement demand and further evaluation of potential liability will be completed if the Court certifies a class action.

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Table of Contents

Item 4. Submission of Matters to a Vote of Security Holders
     None
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       35,152  
La Cadena holds 35,152 shares, or 100% of Holdings’ outstanding Class A Common Stock.
  (c)   Dividends
Markets’ credit facility, as amended and restated on April 16, 2007, limits our ability to pay dividends. We may declare and pay dividends, but the aggregate amount of the dividend may not exceed, as of any date of determination, an amount equal to the sum of $25.0 million plus 50% of our consolidated net income for the period then ending following June 27, 2004. Our ability to pay dividends is further limited by minimum shareholder equity requirements under our credit agreement. As of September 27, 2009, we had the ability, under the Credit Facility, to make restricted payments, including dividends of up to $23.0 million.
Dividends of $5.0 million were paid in each of the fiscal years of 2008 and 2007. Subsequent to our 2009 fiscal year-end, we paid a dividend of $5.0 million on November 17, 2009.
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 25, 2005, September 24, 2006, September 30, 2007, September 28, 2008 and September 27, 2009. 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. 25, (4)     Sept. 24, (4)     Sept. 30, (4)     Sept. 28, (4)     Sept. 27, (4)  
    2005     2006     2007     2008     2009  
            (In thousands, except per share amounts)          
Statement of Earnings Data:
                                       
Sales
  $ 3,372,844     $ 3,508,794     $ 3,674,427     $ 3,741,254     $ 3,766,040  
Cost of goods sold
    2,468,736       2,578,435       2,674,563       2,743,074       2,764,004  
 
                             
Gross profit
    904,108       930,359       999,864       998,180       1,002,036  
Selling, general and administrative expenses
    772,885       790,756       818,863       829,697       827,192  
Depreciation and amortization
    39,575       46,642       48,715       52,987       53,536  
 
                             
Total operating expenses
    812,460       837,398       867,578       882,684       880,728  
 
                             
Operating profit
    91,648       92,961       132,286       115,496       121,308  
 
                                       
Interest and other income
    5,402       8,288       13,927       8,598       1,194  
Interest expense
    (57,142 )     (57,238 )     (59,586 )     (57,464 )     (68,252 )
Interest expense related to purchase of debt
                (3,953 )            
 
                             
Income before income taxes
    39,908       44,011       82,674       66,630       54,250  
Income taxes
    13,662       17,945       33,279       26,000       19,481  
 
                             
Net income
  $ 26,246     $ 26,066     $ 49,395     $ 40,630     $ 34,769  
 
                             
Earnings per average common shares outstanding
  $ 685.26     $ 697.21     $ 1,356.19     $ 1,136.03     $ 989.10  
 
                             

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Item 6. Selected Financial Data (contd.)
                                         
    Fiscal Year Ended
    Sept. 25,(4)   Sept. 24,(4)   Sept. 30,(4)   Sept. 28,(4)   Sept. 27,(4)
    2005   2006   2007   2008   2009
    (In thousands, except per share amounts)
Balance Sheet Data (end of fiscal year):
                                       
Working capital
  $ 373,123     $ 324,266     $ 322,750     $ 249,474     $ 290,525  
Total assets
    1,055,369       1,058,092       1,270,278       1,276,875       1,314,735  
Long-term debt
    700,000       700,000       810,000       810,000       810,000  
Long-term capitalized lease obligations
    8,146       7,245       6,252       5,104       3,768  
Other long-term liabilities
    90,003       82,021       113,131       113,125       144,228  
Common stockholder’s equity (deficit)
    (13,395 )     (11,079 )     9,279       40,506       63,755  
Dividends paid per share, Class A common stock
  $     $ 135.52     $ 139.78     $ 142.24     $  
 
                                       
Cash Flow Data:
                                       
Cash provided by operating activities
    81,140       87,254       171,356       57,947       116,619  
Cash provided by (used in) financing activities
    (930 )     (24,598 )     81,901       (14,230 )     (1,149 )
Cash used in investing activities
    (118,760 )     (127,508 )     (174,740 )     (175,837 )     (63,498 )
 
                                       
Other Operating and Financial Data:
                                       
Sales increases (decreases):
                                       
Total sales
    (9.0 )%     4.0 %     4.7 %     1.8 %     0.7 %
Like stores sales (comparable 52-weeks)(1)
    (12.1 )%     1.5 %     1.7 %     2.5 %     0.0 %
Operating profit
  $ 91,648     $ 92,961     $ 132,286     $ 115,496     $ 121,308  
Ratio of earnings to fixed charges(2)
    1.47 x     1.47 x     1.77 x     1.61 x     1.58 x
Gross profit as a percentage of sales
    26.81 %     26.52 %     27.21 %     26.68 %     26.61 %
Selling, general and administrative expenses as a percentage of sales
    22.92 %     22.54 %     22.29 %     22.18 %     21.96 %
 
                                       
Store Data:(3)
                                       
Number of stores (at end of fiscal year)
    161       162       164       165       167  
Average sales per store (000’s)
  $ 20,404     $ 20,937     $ 21,860     $ 21,961     $ 21,945  
Average store size:
                                       
Total square feet
    33,474       33,778       34,028       34,178       34,405  
Selling square feet
    23,872       24,028       24,165       24,237       24,340  
Total square feet (at end of fiscal year) (000’s)
    5,415       5,491       5,599       5,644       5,761  
Total selling square feet (at end of fiscal year) (000’s)
    3,860       3,904       3,972       4,001       4,072  
Sales per average square foot
  $ 610     $ 620     $ 642     $ 643     $ 638  
Sales per average selling square foot
  $ 855     $ 871     $ 905     $ 906     $ 902  
 
(1)   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.
(footnotes continued on following page)

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Item 6. Selected Financial Data (contd.)
 
(2)   For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and amortization of previously capitalized interest. Fixed charges consist of interest expense whether expensed or capitalized, amortization of debt issuance costs, and such portion of rental expense as can be deemed by management to be representative of the interest factor in the particular case.
 
(3)   Average sales per store, sales per total square feet and sales per selling square feet are calculated by prorating the number of stores, total square feet and selling square feet by the period of time the store was opened, for new stores, or the period of time the expanded square footage was in service, for expanded stores.
 
(4)   Fiscal years 2005, 2006, 2008 and 2009 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 5.80% for fiscal 2007, 6.25% for fiscal 2008 and 5.50% for fiscal 2009. 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 2009, if a rate of 4.50% was used to discount the reserves, the reserves for self insurance would have been $1.6 million higher than the reserves calculated at a 5.50% discount rate. If a rate of 6.50% was used in fiscal 2009 to discount the reserves, the reserves for self insurance would have been $1.5 million lower than the reserves calculated at a 5.50% 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.)
Employee Benefit Plans (contd.)
For fiscal 2009, the discount rate used to calculate the net periodic pension cost was 5.50%. If the rate used to discount the net periodic pension cost was 4.50%, net periodic pension cost would have been $0.8 million higher than the cost calculated at a 5.50% discount rate. If the rate used to calculate the net periodic pension cost was 6.50%, net periodic pension cost would have been $0.7 million lower than the cost calculated at the 5.50% 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.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When such events occur, we compare the carrying amount of the asset to the net undiscounted cash flows expected to result from the use and eventual disposition of the asset. These cash flows are based on our best estimate of future cash flow. If this comparison indicates that there is an impairment, we record an impairment loss for the excess of net book value over the fair value of the impaired asset. We estimate the fair value based on the best information available, including prices for similar assets and the results of other valuation techniques. We adjust the value of owned property and equipment associated with closed stores to reflect recoverable values based on our prior history of disposing of similar assets and current economic conditions.
Factors such as changes in economic conditions and changes in operating performance significantly affect our judgments and estimates related to the expected useful lives and cash flows of long-lived assets. Adverse changes in these factors could cause us to recognize a material impairment charge.
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.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Critical Accounting Policies (contd.)
Gift Cards
We recognize a liability when gift cards are sold and recognize sales revenue when the gift cards are used to purchase our products. Gift cards do not have an expiration date and we do not charge any service fees that cause a decrement to customer’s balances. While we will indefinitely honor all redeemable gift cards presented for payment, we may determine the likelihood of redemption to be remote for unredeemed card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent there is no requirement for remitting card balances to government agencies under unclaimed property laws, gift card balances will be recognized as income using the redemption method. In our judgment, after reviewing historical trends we have deemed that the threshold for the remote likelihood of redeeming, for book purposes, is typically met after two to three years of issuance.
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
We are the largest privately owned supermarket chain in Southern California. Our revenues are generated primarily from retail sales through our supermarkets. We attribute our success to the execution of our marketing strategy of offering everyday low prices while providing our customers with friendly and outstanding customer service on each of their visits to our stores.
During fiscal 2009, we opened three new supermarkets, replaced one existing supermarket, completed nine major remodels and closed one store. We continually evaluate our stores for profitability, strategic positioning, impact of competition and sales growth potential and make store opening, store remodel and store closure decisions based on such evaluations.
During fiscal 2009, our sales grew 0.66% over the prior fiscal year. Like store sales for fiscal 2009 were comparable to the prior year with like store sales being 0.04% higher than our previous fiscal year.
Our consolidated gross profit margin decreased slightly in the current fiscal year as a result of the continued highly competitive environment in our marketing area and as a result of the continued deterioration of economic conditions both on a national and regional level. Our marketing area of Southern California continues to be highly competitive. We anticipate increased competitive pressures from “big box” formats including Walmart, Costco and Winco, from regional markets and from our traditional grocery format competitors Vons, Albertsons and Ralphs. The “big box” formats and our traditional grocery format competitors continue to be highly competitive on pricing as we and they strive to hold onto customer counts in these tough economic times.
For fiscal 2010, we anticipate lower sales than in fiscal 2009 due to the Dairy Transaction and estimate that our sales level from our supermarkets to be comparable to fiscal 2009. Santee’s sales to third parties in fiscal 2009 was $96.8 million. We do not intend to open any new stores during fiscal 2010.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Results of Operations
Sales and Cost of Sales (in thousands)
                                                         
    Fiscal Year Ended   Change
                            2008 to   2009 to
    Sept. 30,   Sept. 28,   Sept. 27,   2007   2008
    2007   2008   2009   Dollar   %   Dollar   %
Sales
  $ 3,674,427     $ 3,741,254     $ 3,766,040     $ 66,827       1.82 %   $ 24,786       0.66 %
 
                                                       
Gross Profit
  $ 999,864     $ 998,180     $ 1,002,036     $ (1,684 )     (0.17 )%   $ 3,856       0.39 %
as a % of sales
    27.21 %     26.68 %     26.61 %                                
Sales
Fiscal 2009 and fiscal 2008 were 52-week years while fiscal 2007 was a 53-week year. The increase in fiscal 2009 sales over fiscal 2008 is primarily the result of opening new stores. We estimate that the 53rd week in fiscal 2007 added $69.2 million to fiscal 2007 consolidated sales or 1.88% of that years consolidated sales. After removing the effect of the extra week of sales in fiscal 2007, the increase in fiscal 2008 over 2007 sales is attributed primarily to the opening of a new store and increased like store sales of 2.45%.
Like Store Sales
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, deflation, promotional discounting, customer traffic, buying trends, pricing pressures from competitors and competitive openings and closings.
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.
Like store sales between fiscal 2008 and fiscal 2007 were affected by an additional week of sales as fiscal 2007 was a 53-week year whereas fiscal year 2008 was a 52-week year. We estimate that the extra week of sales added approximately $65.1 million to fiscal 2007 like store sales or 1.83% of fiscal 2007 store sales. After removing the effect of the extra week of sales, fiscal 2008 like store sales increased 2.45% over fiscal 2007. While like store sales were positive for fiscal 2008, like stores sales were impacted by recent new store openings. We estimate that newly opened stores drew approximately $12.4 million of their fiscal 2008 sales from existing stores. We opened four new stores from September 24, 2006 through September 28, 2008, which generated approximately $71.0 million in sales in fiscal 2008 of which approximately $41.0 million are not included in like store sales. From September 24, 2006 through fiscal 2008, we closed one store which decreased fiscal 2008 like store sales by approximately $0.8 million.
Santee Sales
In fiscal 2009, Santee sales to third parties decreased approximately $8.3 million. The decrease in sales was due primarily to falling milk prices. In fiscal 2008, sales for Santee to third parties increased approximately $3.8 million, which was attributed to rising milk prices.

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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 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.
The decrease in gross profit as a percentage of sales, in fiscal 2008 compared to fiscal 2007 is due to product cost increases that were not fully passed on to our customers and to our reducing prices on selected items to maintain our customer base and to increase sales. In fiscal 2008, we experienced increases in commodity prices such as fuel, plastics, grains and products associated with these commodities. In addition, we had higher transportation costs in fiscal 2008 during our transition from our old distribution facilities to our new distribution center at Norton.
Operating Expenses and Income (in thousands)
                                                         
    Fiscal Year Ended   Change
                2008 to   2009 to
    Sept. 30,   Sept. 28,   Sept. 27,   2007   2008
    2007   2008   2009   Dollar   %   Dollar   %
Operating Expenses:
                                                       
Selling, general and administrative expenses
  $ 818,863     $ 829,697     $ 827,192     $ 10,834       1.32 %   $ (2,505 )     (0.30 )%
as a % of sales
    22.28 %     22.17 %     21.97 %                                
 
Depreciation and amortization
  $ 48,715     $ 52,987     $ 53,536     $ 4,272       8.77 %   $ 549       1.04 %
as a % of sales
    1.33 %     1.42 %     1.42 %                                
 
Operating profit
  $ 132,286     $ 115,496     $ 121,308     $ (16,790 )     (12.69 )%   $ 5,812       5.03 %
as a % of sales
    3.60 %     3.09 %     3.22 %                                
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses, as a percentage of sales, in fiscal 2009 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 decrease, as a percentage of sales, in selling, general and administrative expenses in fiscal 2008 is attributed to several factors. Payroll related expenses, in total, decreased 0.30%, as a percentage of sales, with decreases in workers’ compensation insurance expense of 0.16%, as a percentage of sales, managers incentive bonuses of 0.14%, as a percentage of sales, and union insurance of 0.12%, as a percentage of sales, being partially offset by an increase in direct labor costs of 0.16%, as a percentage of sales. Workers’ compensation insurance expense decreased as we continued to focus on safety programs to reduce workers compensation expense. Managers’ incentive bonuses decreased in fiscal 2008 due to reduction in net income in fiscal 2008. Union insurance, as a percentage of sales, decreased as a result of the UFCW contract, while direct labor cost increased under the UFCW contract. We were able to reduce advertising expense in fiscal 2008 by 0.13%, as a percentage of sales, due to negotiating lower production cost on our twice weekly print-ad.
The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses in both fiscal 2009 and fiscal 2008 was $1.2 million and was $1.0 million in fiscal 2007.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Results of Operations (contd.)
Depreciation and Amortization
Depreciation expense, as a percentage of sales, for fiscal 2009 was comparable to fiscal 2008. The increase in depreciation expense in fiscal 2008 over fiscal 2007 was due primarily to depreciation on our new corporate offices, new store construction, store remodels and other capital expenditures. Included in cost of goods sold is depreciation expense related to our warehousing and distribution activities and our dairy production of $14.6 million, $14.0 million and $11.7 million in fiscal years 2009, 2008 and 2007, respectively. In fiscal 2009, depreciation included in cost of goods sold was approximately $3.1 million lower due to our not incurring depreciation expense on assets held for sale related to the Dairy Transaction in the final six months of fiscal 2009.
Interest Income
Interest income was $0.5 million, $5.7 million and $14.2 million in fiscal years 2009, 2008 and 2007, respectively. Interest income has decreased year-over-year as the interest rate realized on our short-term investments has decreased and as we have expended cash on-hand to construct our distribution center.
Interest Expense
Interest expense amounted to $68.3 million, $57.5 million and $59.6 million for the 2009, 2008 and 2007 fiscal years, respectively. Prior to the recognition of capitalized interest, interest expense was comparable in fiscal 2009 to fiscal 2008 and decreased $0.6 million in fiscal 2008 compared to fiscal 2007. Interest capitalized during construction projects amounted to $0.5 million, $11.3 million and $9.8 million in fiscal years 2009, 2008 and 2007, respectively. The change in capitalized interest in fiscal 2009 over fiscal 2008 and fiscal 2008 over fiscal 2007 is primarily attributed to the timing of construction of our corporate offices and distribution center. The decrease in interest expense in fiscal 2008 from fiscal 2007 is due to the amount of debt outstanding during a portion of fiscal 2007. From April 18, 2007 to June 18, 2007, we had both the Floating Rate Senior Notes and the 7.75% Senior Notes outstanding. The $175.0 million aggregate outstanding Floating Rate Senior Notes were retired using proceeds from the issuance of the 7.75% Senior Notes.
Interest Expense Related to Purchase of Debt
In fiscal 2007, we incurred $4.0 million of interest from the purchase of debt related to the redemption of all of the aggregate outstanding $175.0 million of our Floating Rate Senior Notes. We paid a $1.8 million premium for the early retirement of debt and we incurred $2.2 million of previously unamortized deferred offering cost related to our Floating Rate Senior Notes.
Income Before Income Taxes
Income before income taxes amounted to $54.3 million, $66.6 million and $82.7 million in fiscal 2009, fiscal 2008 and fiscal 2007, respectively.
Income Taxes
Income taxes amounted to $19.5 million, $26.0 million and $33.3 million in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Our effective tax rate was 35.9%, 39.0% and 40.3% for fiscal years 2009, 2008 and 2007, respectively. The decrease in our effective tax rate in fiscal 2009 compared to fiscal 2008 is attributed to a previously unrecognized tax benefit associated with Santee. The decrease in the effective tax rate in fiscal 2008 over fiscal 2007 is due primarily to our ability to record additional tax credits related to our corporate office and distribution center.
Net Income
Net income for fiscal 2009 amounted to $34.8 million, compared to $40.6 million in fiscal 2008 and $49.4 million in fiscal 2007.

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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 and we may fund our requirements through borrowings from short-term revolving credit facilities. Markets’ credit agreement, as amended and restated on April 16, 2007, expires in May 2010 and consists of a revolving loan facility for working capital and letters of credit of $100.0 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements and for other corporate purposes.
We are currently in the process of documenting an amendment to Markets’ credit facility with Bank of America which would provide terms similar to those currently in place and would extend the maturity date to October 31, 2012.
In connection with the Dairy Transaction, Santee’s $5.0 million revolver with Bank of America was terminated and approximately $2.9 million of outstanding letters of credit used as collateral against Santee’s workers’ compensation reserves were re-issued under Markets’ credit facility. After the Dairy Transaction, on October 11, 2009, we had $49.8 million of outstanding letters of credit and we had $50.2 million available under Markets’ credit facility.
We had no short-term borrowings as of September 27, 2009. We did not incur any short-term borrowings during fiscal year 2009.
Working capital amounted to $290.5 million at September 27, 2009 and $249.5 million at September 28, 2008. Our current ratios were 1.99:1 and 1.81:1 at September 27, 2009 and September 28, 2008, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.
Net cash provided by operating activities for fiscal 2009 was $116.6 million compared to $57.9 million for fiscal 2008 and $171.4 million for fiscal 2007. 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.
Significant sources of cash from operating activities in fiscal 2008 included our net income adjustment for non-cash depreciation and amortization offset in part by uses of cash for increased inventory levels and decreases in accounts payable. Our inventory levels increased due to our taking additional advantage of forward buying opportunities, buying inventory levels ahead of price increases, inflation in fiscal 2008 and to our transitioning in fiscal 2008 of some direct store delivered items to being received and shipped through our distribution center. The change in accounts payable in fiscal 2008 was attributed to normal timing of payments on purchases. On September 25, 2008, we redeemed 618 shares of our Class A Common Stock for $8.2 million. The redemption was for shares distributed to the Mosely Family Revocable Trust (the “Moseley Trust”) by La Cadena. On September 25, 2008, we also paid a $5.0 million dividend to La Cadena the sole owner of our stock. During fiscal 2008, we expended $168.9 million in capital expenditures which included $112.2 million for our distribution center and $56.7 million on normal capital expenditures which included new store construction, store remodels and equipment purchases. During fiscal 2008, we recognized $3.8 million, net of tax of $2.6 million, in other comprehensive income from gains, net of prior service costs, in our pension and medical plan benefits.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Liquidity and Capital Resources (contd.)
We believe that capital expenditures for fiscal 2010 will be approximately $35.3 million and we expect to finance the expenditures from cash on-hand and cash from operating activities. The following table sets forth the major components of expected fiscal 2010 capital expenditures.
Expected Capital Expenditures Fiscal 2010
(In thousands)
         
Store remodels
  $ 15,185  
MIS equipment and software
    8,800  
Store equipment
    8,026  
Transportation equipment
    2,451  
Distribution equipment
    805  
Office equipment and other
    77  
 
     
 
  $ 35,344  
 
     
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.
Credit Facilities
Markets’ Credit Facility
On April 16, 2007, the Company and Markets entered into a Second 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 Markets’ existing credit facility.
Markets is the borrower under the Credit Facility. The Credit Facility is guaranteed by the Company and all of its existing and future material subsidiaries, including Development and its indirect subsidiaries Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events). 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 “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Markets, of one, two, three or six months.
The Credit Facility requires Markets to meet certain financial tests, including minimum net worth and the maintenance of minimum earning levels. The Credit Facility contains covenants which, among other things, limit the ability of Markets and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, and (iii) make restricted payments.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Credit Facilities (contd.)
Markets’ Credit Facility (contd.)
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 amendments to the Indenture governing the 8.125% Senior Notes and the 7.75% Senior Notes.
The Credit Facility matures on May 31, 2010 and we are currently in the process of documenting an amendment to the facility with Bank of America which would provide terms similar to those currently in place and would extend the maturity date to October 31, 2012.
Santee’s Revolver
On April 16, 2007, Santee entered into a Second Amended and Restated Business Loan Agreement (Receivables) with Bank of America, as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving line of credit in a principal amount of up to $5.0 million (the “Santee Revolver”), which replaced Santee’s existing revolver. Markets has guaranteed the obligations of Santee under the Santee Revolver. Under the Santee Revolver, Santee may borrow up to $5.0 million, all of which may be used to secure letters of credit. Letters of credit under the Santee Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Santee Revolver are secured by the receivables of Santee.
Loans under the Santee Revolver bear interest at a rate based upon either (i) Bank of America’s prime rate plus 0.50%, or (ii) the “LIBOR Rate” (defined as the interest rate at which Bank of America’s Cayman branch would offer U.S. dollar deposits for the applicable interest period to other banks, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. The applicable interest periods for LIBOR rate loans will be between 30 and 180 days.
Under the Santee Revolver, Santee is required to comply with certain financial covenants, which include certain financial ratios.
In connection with the Dairy Transaction, the Santee Revolver with Bank of America was terminated and approximately $2.9 million of outstanding letters of credit used as collateral against Santee’s workers’ compensation reserves were re-issued under Markets’ credit facility.
As of September 27, 2009, for purposes of the credit facilities with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
We had no short-term borrowings outstanding at the end of fiscal years 2008 and 2009. We did not incur any short-term borrowings during fiscal 2009.
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 September 2005 and expires in September 2010.
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 27, 2009. Contractual cash obligation for our dairy manufacturing operations sold on October 11, 2009 are excluded as they were assumed by Dean Foods as part of the Dairy Transaction.
                                         
    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
                                       
Principal
  $ 525,000     $     $ 525,000     $     $  
Interest
    127,969       42,656       85,313              
 
                             
 
    652,969       42,656       610,313              
7.75% Senior Notes due 2015
                                       
Principal
    285,000                         285,000  
Interest
    132,526       22,088       44,175       44,175       22,088  
 
                             
 
    417,526       22,088       44,175       44,175       307,088  
Capital lease obligations (1)
                                       
Principal
    5,104       1,336       2,669       1,099        
Interest
    1,747       758       829       160        
 
                             
 
    6,851       2,094       3,498       1,259        
 
                                       
Operating leases (1)
    357,969       37,185       64,888       50,936       204,960  
 
                             
Total contractual cash obligations
  $ 1,435,315     $ 104,023     $ 722,874     $ 96,370     $ 512,048  
 
                             
 
    Other Commercial Commitments  
    (in thousands)  
            Less than                     After  
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
     
 
                                       
Standby letters of credit (2)
  $ 49,762     $ 49,762     $     $     $  
 
                             
Total other commercial commitments
  $ 49,762     $ 49,762     $     $     $  
 
                             
 
(1)   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.
 
(2)   Standby letters of credit are committed as security for workers’ compensation. Outstanding letters of credit expire between December 2009 and October 2010.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (contd.)
Recent Accounting Pronouncements
See “Note 1 — The Company and Summary of Significant Accounting Policies” to our Audited Consolidated Financial Statements contained herein for disclosures regarding recent accounting pronouncements.
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. 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 27, 2009. Capital lease obligations for our dairy manufacturing operations sold on October 11, 2009 are excluded as they were assumed by Dean Foods as part of the Dairy Transaction.
                                                         
    Expected Year of Maturity
    (In thousands)
                                                    Fair
    2010   2011   2012   2013   2014   Thereafter   Value
Long-term debt and capital lease obligations
  $ 1,336     $ 1,562     $ 526,107     $ 799     $ 300     $ 285,000     $ 811,206  
Average interest rate
    8.04 %     8.03 %     7.99 %     7.78 %     7.75 %     7.75 %        

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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
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 believe that the Company’s disclosure controls and procedures were effective as of September 27, 2009.
Changes in Internal Controls Over Financial Reporting
During the year ended September 27, 2009, 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(e) and 15d-15(e) 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 believes that the Company maintained effective internal control over financial reporting as of September 27, 2009.
Attestation Report of Independent Registered Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
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
    71     Chairman of the Board, President and Chief Executive Officer
Phillip J. Smith
    62     Executive Vice President and Chief Financial Officer
James W. Lee
    58     President and Chief Operating Officer of Markets
Dennis L. McIntyre
    49     Executive Vice President of Marketing of Markets
George A. Frahm
    56     Executive Vice President of Retail Operations and Administration of Markets
Bruce D. Varner
    73     Director and Secretary
Thomas W. Field, Jr.
    76     Vice Chairman of the Board of Directors
Ronald G. Skipper
    69     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 56 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 34 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 35 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 32 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 33 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 49 years.
     Ronald G. Skipper has been a Director of Holdings since April 2007. Mr. Skipper is an attorney and has practiced law for over 41 years in San Bernardino, California where he has resided for over 56 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 eleven 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 2009
                         
    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 2009.
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.
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. The 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 2009, the units in this plan appreciated by 68% of stated value for units issued prior to 2009 and appreciated 39% for units issued in March 2009. The units for the above named executives increased by a total of $2.3 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.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code limits the deductibility of compensation paid to named executives officers to $1,000,000 annually. Compensation that is “qualified performance-based compensation” generally is not subject to this $1,000,000 deduction limit. The committee’s policy is to generally preserve corporate tax deductions by qualifying compensation paid to named executive officers that is over $1,000,000 as performance-based compensation. As a general practice the only elements of the multi-faceted Stater Bros. Markets executive compensation program that currently do not comply with the deduction rules of Section 162(m) are any base salaries above $1,000,000 (which applies only to Mr. Brown).
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.   All Other    
                            Def. Comp   Compensation    
Name & Principal Position   Year   Salary   Bonus (1)   Earnings (2)   (3)   Total
Jack H. Brown
                                               
Chairman, President and
    2009     $ 1,901,365     $     $ 227,755     $ 51,500     $ 2,180,620  
Chief Executive Officer
    2008     $ 1,847,233     $ 1,700,000     $ (108,506 )   $ 51,000     $ 3,489,727  
 
    2007     $ 1,651,058     $ 2,900,000     $ (45,249 )   $ 51,500     $ 4,557,309  
 
                                               
Phillip J. Smith
                                               
Executive Vice President and
    2009     $ 356,715     $     $ 1,187,697     $     $ 1,544,412  
Chief Financial Officer
    2008     $ 346,160     $ 100,000     $ 977,318     $     $ 1,423,478  
 
    2007     $ 310,714     $ 145,000     $ 618,540     $     $ 1,074,254  
 
                                               
James W. Lee
                                               
President and Chief Operating
    2009     $ 406,301     $     $ 766,141     $     $ 1,172,442  
Officer of Markets
    2008     $ 400,169     $ 100,000     $ 672,738     $     $ 1,172,907  
 
    2007     $ 373,365     $ 150,000     $ 750,667     $ 250,000     $ 1,524,032  
 
                                               
Dennis L. McIntyre
                                               
Executive Vice President of
    2009     $ 358,730     $     $ 641,236     $     $ 999,966  
Marketing of Markets
    2008     $ 347,529     $ 85,000     $ 480,960     $     $ 913,489  
 
    2007     $ 313,708     $ 115,000     $ 496,649     $ 250,000     $ 1,175,357  
 
                                               
George A. Frahm
                                               
Executive Vice President of Retail
    2009     $ 302,581     $     $ 565,773     $     $ 868,354  
Operations and Administration of
    2008     $ 292,283     $ 55,000     $ 384,169     $     $ 731,452  
Markets
    2007     $ 256,482     $ 85,000     $ 427,273     $     $ 768,755  
 
(1)   There will be no annual bonuses paid to the named executive officers for fiscal 2009.
 
(2)   The amount shown represents the change in pension value and change in nonqualified deferred compensation during fiscal 2009, fiscal 2008 and fiscal year 2007, 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 2009 of $51,500, fiscal 2008 of $51,000 and fiscal year 2007 of $51,500. Amounts shown for Mr. Lee and Mr. McIntyre represent a one-time withdrawal from their deferred compensation plan account.

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Item 11. Executive Compensation (contd.)
PENSION BENEFITS AT SEPTEMBER 27, 2009
                                 
            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     28     $ 1,495,213      
Phillip J. Smith
Executive Vice President and
  Pension Plan for                        
Chief Financial Officer
  Salaried Employees     23     $ 606,935      
James W. Lee
President and Chief Operating
  Pension Plan for                        
Officer of Markets
  Salaried Employees     7     $ 184,154      
Dennis L. McIntyre
Executive Vice President of
  Pension Plan for                        
Marketing of Markets
  Salaried Employees     32     $ 243,155      
George A. Frahm
Executive Vice President of Retail
  Pension Plan for                        
Operations and Administration of Markets
  Salaried Employees     33     $ 384,672      

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Item 11. Executive Compensation (contd.)
NONQUALIFIED DEFERRED COMPENSATION FOR FY2009
                                         
    Executive   Registrant   Aggregate   Aggregate   Aggregate
    Contributions in   Contributions in   Earnings   Withdrawals   Balance at
Name   Last FY   Last FY (1)   in 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
  $  —     $ 994,976     $  —     $ 300,000     $ 5,217,368  
James W. Lee
President and Chief Operating Officer of Markets
  $  —     $ 686,345     $  —     $ 250,000     $ 3,815,882  
Dennis L. McIntyre
Executive Vice President of Marketing of Markets
  $  —     $ 525,944     $  —     $ 250,000     $ 3,333,864  
George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets
  $  —     $ 413,373     $  —     $ 150,000     $ 2,316,349  
 
(1)   These amounts represent the Company’s contribution in fiscal year 2009 to the named executive officer’s deferred compensation. This includes 20% vesting for units awarded prior to fiscal year 2009 to Mr. Lee, Mr. Smith, Mr. McIntyre and Mr. Frahm and appreciation of 68% for units issued prior to 2009; and 10% vesting and 39% appreciation for units issued in March 2009.
 
(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 27, 2009. This balance represents the vested portion of all units plus appreciation, less any withdrawals.

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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
                                           
    TERMINATION     CHANGE IN CONTROL
                      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
  $ 438,777       $ 20,621,023     $     $ 74,276     $ 20,695,299  
Phillip J. Smith
Executive Vice President and Chief Financial Officer
  $ 82,319       $ 1,511,727     $ 5,707,368     $ 28,368     $ 7,247,463  
James W. Lee
President and Chief Operating Officer of Markets
  $ 93,762       $ 1,675,856     $ 4,147,882     $ 28,368     $ 5,852,106  
Dennis L. McIntyre
Executive Vice President of Marketing of Markets
  $ 82,784       $ 1,468,746     $ 3,573,864     $ 44,565     $ 5,087,175  
George A. Frahm
Executive Vice President of Retail Operations and Administration of Markets
  $ 69,826       $ 1,183,593     $ 2,518,349     $ 28,368     $ 3,730,310  
 
(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)   Per 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 27, 2009.
 
(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 27, 2009: Jack H. Brown — 28 years, Phillip J. Smith — 23 years, James W. Lee — 7 years, Dennis L. McIntyre — 32 years and George A. Frahm — 33 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 2009 retirees with ten or more years of service at retirement is $185,000. The maximum annual compensation that may be considered for 2009 retirees is $230,000.
                                             
        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  
  230,000       60,315       80,420       100,525       120,630       140,735  
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 43 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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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 28, 2008 and September 27, 2009, there were 748,000 and 899,600 units outstanding, respectively.
Board of Directors
The Board had two standing committees during fiscal 2009.
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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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 18, 2009, 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)
    35,152       100 %
Jack H. Brown(1)(2)
    35,152       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)
    35,152       100 %
 
(1)   The 35,152 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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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 $2.4 million, $2.8 million and $1.8 million in fiscal 2007, 2008 and 2009, respectively. In addition, Mr. Varner was paid Director fees of $53,500, $54,000 and $54,000 in fiscal 2007, 2008 and 2009, respectively. 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 April 27, 2007 and September 25, 2008, we paid a $5.0 million dividend to La Cadena. Subsequent to fiscal 2009, we paid a $5.0 million dividend to La Cadena on November 17, 2009.
The 35,152 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 $695,000 in fiscal 2009 and $686,000 in fiscal 2008 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 2009 for online subscriptions and $2,000 in fiscal 2008 for online subscriptions
Tax Fees
Ernst & Young LLP billed us in aggregate $38,000 in fiscal 2009 and $40,000 in fiscal 2008 for tax compliance, tax advice and tax planning services.
All Other Fees
Ernst & Young LLP billed us an aggregate of $125,000 in fiscal 2009 related to LAMBRA tax credits and a review of the Dairy Transaction and an aggregate of $95,000 in fiscal 2008 related to changes in tax methods for gift cards and for liquor licenses and LAMBRA tax credits.

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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
 
           
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
 
           
12.1
    (12 )   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
    (12 )   Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
 
           
31.2
    (12 )   Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
 
           
32.1
    (12 )   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
 
(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)   Filed with the Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K for the fiscal year ended September 28, 2008

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STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2009
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 17, 2009
                  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 17, 2009
 
       
/s/ Thomas W. Field, Jr.
 
Thomas W. Field, Jr.
  Vice Chairman of the Board and Director   December 17, 2009
 
       
/s/ Ronald G. Skipper
 
Ronald G. Skipper
  Director    December 17, 2009
 
       
/s/ Bruce D. Varner
 
Bruce D. Varner
  Secretary and Director    December 17, 2009
 
       
/s/ Phillip J. Smith
 
Phillip J. Smith
  Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
  December 17, 2009

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     
    Page Number
 
   
  F-2
 
   
  F-3
 
   
Fiscal years ended September 30, 2007, September 28, 2008 and September 27, 2009:
   
 
   
  F-5
 
   
  F-6
 
   
  F-7
 
   
  F-8

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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 28, 2008 and September 27, 2009, and the related consolidated statements of income, stockholder’s equity (deficit), and cash flows for the 53-week period ended September 30, 2007 and the 52-week periods ended September 28, 2008 and September 27, 2009. 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 28, 2008 and September 27, 2009, and the consolidated results of its operations and its cash flows for the 53-week period ended September 30, 2007 and the 52-week periods ended September 28, 2008 and September 27, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst &Young LLP
Irvine, California
December 17, 2009

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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS

(In thousands)
ASSETS
                 
    Sept. 28,     Sept. 27,  
    2008     2009  
 
               
Current assets
               
Cash and cash equivalents
  $ 144,942     $ 196,914  
Restricted cash
    5,621       3,121  
Receivables, net of allowance of $840 and $759
    40,198       36,671  
Income tax receivables
    4,636       4,049  
Inventories
    230,218       212,856  
Prepaid expenses
    8,826       9,330  
Deferred income taxes
    27,999       29,809  
Assets held for sale
    95,174       90,459  
Note receivable, current portion
          300  
 
           
Total current assets
    557,614       583,509  
 
               
Property and equipment
               
Land
    95,144       97,430  
Buildings and improvements
    529,993       544,440  
Store fixtures and equipment
    378,658       428,431  
Property subject to capital leases
    9,983       9,983  
 
           
 
    1,013,778       1,080,284  
 
               
Less accumulated depreciation and amortization
    353,715       408,791  
 
           
 
    660,063       671,493  
 
               
Deferred income taxes, long-term
    13,276       19,842  
Deferred debt issurance costs, net
    14,478       11,276  
Note receivable, less current portion
          493  
Long-term receivable
    22,228       18,867  
Goodwill
    2,894       2,894  
Other assets
    6,322       6,361  
 
           
 
    59,198       59,733  
 
           
Total assets
  $ 1,276,875     $ 1,314,735  
 
           
See accompanying notes to consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
                 
    Sept. 28,     Sept. 27,  
    2008     2009  
 
               
Current liabilities
               
Accounts payable
  $ 154,283     $ 153,083  
Accrued payroll and related expenses
    59,560       53,313  
Other accrued liabilities
    76,639       79,618  
Liabilities held for sale
    16,509       5,634  
Current portion of capital lease obligations
    1,149       1,336  
 
           
Total current liabilities
    308,140       292,984  
Long-term debt
    810,000       810,000  
Capital lease obligations, less current portion
    5,104       3,768  
Long-term portion of self-insurance and other reserves
    35,164       36,227  
Long-term deferred benefits
    66,340       77,396  
Other long-term liabilities
    11,621       30,605  
 
           
Total liabilities
    1,236,369       1,250,980  
Commitments and contingencies
               
Stockholder’s equity
               
Common Stock, $.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 0 in 2008 and 2009
           
Class A Common Stock, $.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 35,152 in 2008 and 2009
           
Additional paid-in capital
    8,939       8,939  
Accumulated other comprehensive loss
    (5,200 )     (16,720 )
Retained earnings
    36,767       71,536  
 
           
Total stockholder’s equity
    40,506       63,755  
 
           
Total liabilities and stockholder’s equity
  $ 1,276,875     $ 1,314,735  
 
           
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. 30,     Sept. 28,     Sept. 27,  
    2007     2008     2009  
    (53 weeks)     (52 weeks)     (52 weeks)  
 
                       
Sales
  $ 3,674,427     $ 3,741,254     $ 3,766,040  
Cost of goods sold
    2,674,563       2,743,074       2,764,004  
 
                 
 
                       
Gross profit
    999,864       998,180       1,002,036  
 
                       
Operating expenses:
                       
Selling, general and administrative expenses
    818,863       829,697       827,192  
Depreciation and amortization
    48,715       52,987       53,536  
 
                 
 
                       
Total operating expenses
    867,578       882,684       880,728  
 
                 
 
                       
Operating profit
    132,286       115,496       121,308  
 
                       
Interest income
    14,151       5,735       471  
Interest expense
    (59,586 )     (57,464 )     (68,252 )
Interest expense related to purchase of debt
    (3,953 )            
Other income (expenses), net
    (224 )     2,863       723  
 
                 
 
                       
Income before income taxes
    82,674       66,630       54,250  
 
                       
Income taxes
    33,279       26,000       19,481  
 
                 
Net income
  $ 49,395     $ 40,630     $ 34,769  
 
                 
 
                       
Earnings per average common shares outstanding
  $ 1,356.19     $ 1,136.03     $ 989.10  
 
                 
 
                       
Dividends per common share outstanding at end of year
  $ 139.78     $ 142.24     $  
 
                 
 
                       
Average common shares outstanding
    36,422       35,765       35,152  
 
                 
 
                       
Common shares outstanding at end of year
    35,770       35,152       35,152  
 
                 
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. 30,     Sept. 28,     Sept. 27,  
    2007     2008     2009  
    (53 weeks)     (52 weeks)     (52 weeks)  
Operating activities:
                       
Net income
  $ 49,395     $ 40,630     $ 34,769  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    60,395       66,960       68,179  
Amortization of debt issuance costs
    5,496       3,193       3,202  
Premium paid on purchase of debt
    (1,750 )            
Deferred income taxes
    (11,576 )     (3,121 )     (8,376 )
(Gain) loss on disposals of assets
    404       (1,918 )     (543 )
Changes in operating assets and liabilities:
                       
Decrease in restricted cash
    16,000       2,500       2,500  
(Increase) decrease in receivables
    (7,425 )     1,878       (6,387 )
(Increase) decrease in income tax receivables
    3,863       (4,727 )     587  
(Increase) decrease in inventories
    (5,406 )     (31,435 )     17,362  
(Increase) decrease in prepaid expenses
    (4,066 )     1,655       (504 )
(Increase) decrease in assets held for sale
    (6,284 )     2,026       1,629  
(Increase) decrease in other assets
    (33 )     18       (39 )
Increase (decrease) in accounts payable
    26,326       (17,795 )     (1,200 )
Increase (decrease) in accrued income taxes
    4,727       (4,636 )      
Increase (decrease) in liabilities held for sale
    7,309       (2,328 )     (10,875 )
Increase (decrease) in other accrued liabilities
    14,913       1,216       (3,268 )
Increase in long-term reserves
    19,068       3,831       19,583  
 
                 
 
                       
Net cash provided by operating activities
    171,356       57,947       116,619  
 
                 
Financing activities:
                       
Proceeds from issuance of long-term debt
    285,000              
Debt issuance costs
    (7,195 )            
Dividends paid
    (5,000 )     (5,000 )      
Stock redemption
    (15,000 )     (8,240 )      
Principal payment on long-term debt
    (175,000 )            
Principal payments on capital lease obligations
    (904 )     (990 )     (1,149 )
 
                 
 
                       
Net cash provided by (used in) financing activities
    81,901       (14,230 )     (1,149 )
 
                 
Investing activities:
                       
Decrease in short-term investments
    26,849              
(Increase) decrease in store reimbursement
    145       (9,427 )     9,914  
Increase in note receivable
                (793 )
(Increase) decrease in long-term receivable
    (10,068 )           3,361  
Purchase of property and equipment
    (191,873 )     (168,886 )     (76,970 )
Proceeds from sale of property and equipment
    207       2,476       990  
 
                 
 
                       
Net cash used in investing activities
    (174,740 )     (175,837 )     (63,498 )
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    78,517       (132,120 )     51,972  
Cash and cash equivalents at beginning of period
    198,545       277,062       144,942  
 
                 
 
                       
Cash and cash equivalents at end of period
  $ 277,062     $ 144,942     $ 196,914  
 
                 
Interest paid
  $ 57,587     $ 65,707     $ 65,723  
Income taxes paid
  $ 34,850     $ 39,300     $ 19,425  
See accompanying notes to consolidated financial statements.

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

(In thousands except shares)
                                                                 
                                    Accumulated             Total     Comp-  
            Class A     Additional     Other Comp-     Retained     Stockholder’s     rehensive  
    Common     Common Stock     Paid-in     rehensive     Earnings     Equity     Income  
    Stock     Shares     Amount     Capital     Gain (Loss)     (Deficit)     (Deficit)     (Loss)  
Balance at September 24, 2006
          36,895     $     $ 9,382     $     $ (20,461 )   $ (11,079 )        
 
                                                               
Net income for 53 weeks ended September 30, 2007
                                  49,395       49,395     $ 49,395  
Cummulative other comprehensive loss (net of tax of $6,214)
                            (9,037 )           (9,037 )      
Dividend paid
                                  (5,000 )     (5,000 )      
Stock redemption
          (1,125 )           (286 )           (14,714 )     (15,000 )      
 
                                               
 
                                                               
Balance at September 30, 2007
          35,770             9,096       (9,037 )     9,220       9,279     $ 49,395  
 
                                                             
 
                                                               
Net income for 52 weeks ended September 28, 2008
                                  40,630       40,630     $ 40,630  
Other comprehensive income (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  
Other comprehensive loss (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  
 
                                               
See accompanying notes to consolidated financial statements.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2009
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 27, 2009, 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.
     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 Santee Dairies, Inc. (“Santee”). Santee does business under the name Heartland Farms. The Company has changed the legal name of Santee to SBM Dairies, Inc. All significant inter-company transactions have been eliminated in consolidation. The Company has evaluated subsequent events through December 17, 2009, the issuance date of its consolidated financial statements. Other than as described in “Note 15 — Asset Sale” regarding the sale of substantially all of the assets of Santee on October 11, 2009 to subsidiaries of Dean Foods (“Dean Foods”) (the “Dairy Transaction”), the Company entering into a ten year product purchase agreement (the “PPA”) to purchase substantially all of the Company’s milk products from Dean Foods, and the payment on November 11, 2009 of a $5.0 million dividend to La Cadena Investments (“La Cadena”), the sole shareholder of the Company, the Company did not have any other material subsequent events that need to be disclosed.
     Reclassifications
     Certain amounts in the prior periods have been reclassified to conform to the current period financial statement presentation. The reclassification has been made as substantially all of Santee’s assets and liabilities have been classified as “Held for Sale” in connection with the Dairy Transaction. The assets sold consist primarily of accounts receivables, inventory and property and equipment. Also, Dean Foods assumed substantially all of the current liabilities of Santee including accounts payables with the exception of the current portion of self insured workers’ compensation reserves.
     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. The fiscal years ended September 28, 2008 and September 27, 2009 were 52-week fiscal years while the year ended September 30, 2007 was a 53-week fiscal year.
     Cash and Cash Equivalents
     Cash and cash equivalents are reflected at cost, which approximates their fair value, and consist primarily of overnight repurchase agreements, certificates of deposit and money market funds with maturities of less than three months when purchased.
     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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Table of Contents

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 6.25% in fiscal 2008 and 5.50% in fiscal 2009. 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 discounts given to the customer. The Company recognizes a liability when 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 the Company does not charge any service fees that cause a reduction to gift card balances. Gift cards whose likelihood of redemption is deemed to be remote, due primarily to periods of inactivity, are recognized into income. Santee recognizes revenue as shipments are received by its customers. Sales are recognized net of promotional discounts. Prescription sales are recognized when prescriptions are adjudicated by the third party insurer and when co-payment is received.
     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. Also included in cost of goods sold are Santee’s shipping and handling costs incurred related to delivering product to its customers. Santee’s shipping and handling costs billed to customers are included in sales. 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 2007, fiscal 2008 and fiscal 2009 is $5.3 million, $5.8 million and $4.6 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 $1.0 million in fiscal 2007 and $1.2 million in both fiscal 2008 and fiscal 2009.
     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 $28.1 million, $23.7 million and $22.2 million in fiscal 2007, 2008 and 2009, 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 $6.1 million in fiscal 2007, $4.4 million in fiscal 2008 and $2.6 million in fiscal 2009. 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.
     Recent Accounting Pronouncements
     In June 2009, the Financial Accounting Standards Board (“FASB”) issued a new standard that changes the referencing and organization of accounting guidance and establishes the FASB Accounting Standards codification as the single source of authoritative non-governmental generally accepted accounting principles (“GAAP”). Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Due to the adoption of this standard during the quarter and fiscal year ended September 27, 2009, the Company’s financial statements will no longer cite specific GAAP references. The adoption of this standard had no effect on the Company’s consolidated financial statements.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 2 — Goodwill
     The Company tests its goodwill by comparing the fair value, calculated using a discounted cash flow method for the Company’s Retail reporting segment, the only reporting segment which has goodwill, to the respective carrying value of the Retail reporting segment. The Retail reporting segment is composed of the operating segments Markets and Super Rx. The Company has identified the assets and liabilities of the Retail reporting segment, including goodwill, to determine its carrying value. Goodwill is considered impaired if the carrying value exceeds the fair value of the reporting segment. As of September 27, 2009, the Company performed this assessment and determined there was no indication of goodwill impairment.
Note 3 — Debt
     Long-term debt consisted of the following:
                 
    Fiscal Year Ended  
    Sept. 28,     Sept. 27,  
    2008     2009  
    (In thousands)  
 
               
8.125% Senior Notes due 2012
  $ 525,000     $ 525,000  
7.75% Senior Notes due 2015
    285,000       285,000  
 
           
Total long-term debt
  $ 810,000     $ 810,000  
 
           
     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 years 2007, 2008 and 2009 amounted to $9.8 million, $11.3 million and $0.5 million, respectively. Interest expense incurred, before the effect of capitalized interest, during fiscal year 2007 amounted to $69.4 million and to $68.8 million in both fiscal year 2008 and fiscal year 2009, respectively.
     The Company is subject to certain covenants associated with its 8.125% Senior Notes and its 7.75% Senior Notes. As of September 27, 2009, 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 Santee (each a “subsidiary guarantor”, and collectively, the “subsidiary guarantors”). Condensed consolidating financial information with respect to the subsidiary guarantors is not provided because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and there are no 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 3 — Debt (contd.)
     On June 18, 2007, the Company used part of the proceeds from the issuance of the 7.75% Senior Notes to redeem all of its $175.0 million Floating Rate Senior Notes due 2010 (the “Floating Rate Senior Notes”) for $176.8 million which included a redemption premium of $1.8 million, plus accrued interest. In connection with the redemption of the Floating Rate Senior Notes, the Company expensed approximately $2.2 million of unamortized deferred offering costs related to the Floating Rate Senior Notes. The $1.8 million redemption premium and the $2.2 million of unamortized deferred offering costs were expensed to interest related to purchase of debt.
Note 4 — Credit Facilities
     Markets’ Credit Facility
     On April 16, 2007, the Company and Markets entered into a Second 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 Markets’ existing credit facility.
     Markets is the borrower under the Credit Facility. The Credit Facility is guaranteed by the Company and all of its existing and future material subsidiaries, including Development and its indirect subsidiaries Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events). 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 “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Markets, of one, two, three or six months.
     The Credit Facility requires Markets to meet certain financial tests, including minimum net worth and the maintenance of minimum earning levels. The Credit Facility contains covenants which, among other things, limit the ability of Markets and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, and (iii) make restricted payments. The 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 amendments to the Indenture governing the 8.125% Senior Notes and the 7.75% Senior Notes.
     The Credit Facility will mature on May 31, 2010. The Company is currently in the process of documenting an amendment to the facility with Bank of America which would provide terms similar to those currently in place and would extend the maturity date.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 4 — Credit Facilities (contd.)
     Santee’s Revolver
     On April 16, 2007, Santee entered into a Second Amended and Restated Business Loan Agreement (Receivables) with Bank of America, as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving line of credit in a principal amount of up to $5.0 million (the “Santee Revolver”), which replaced Santee’s existing revolver. Markets has guaranteed the obligations of Santee under the Santee Revolver. Under the Santee Revolver, Santee may borrow up to $5.0 million all of which may be used to secure letters of credit. Letters of credit under the Santee Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Santee Revolver are secured by the receivables of Santee.
     Loans under the Santee Revolver bear interest at a rate based upon either (i) Bank of America’s prime rate plus 0.50%, or (ii) the “LIBOR Rate” (defined as the interest rate at which Bank of America’s Cayman branch would offer U.S. dollar deposits for the applicable interest period to other banks, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. The applicable interest periods for LIBOR rate loans will be between 30 and 180 days.
     Under the Santee Revolver, Santee is required to comply with certain financial covenants, which include certain financial ratios.
     In connection with the Dairy Transaction, the Santee Revolver with Bank of America was terminated and approximately $2.9 million of outstanding letters of credit used as collateral against Santee’s workers’ compensation reserves were re-issued under Markets credit facility.
     As of September 27, 2009, for purposes of the credit facilities with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
          After the Dairy Transaction, the Company had $49.8 million of outstanding letters of credit and it had $50.2 million available under Markets’ credit facility.
     The Company had no short-term borrowings outstanding at the end of fiscal years 2008 and 2009.
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.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 5 — Leases (contd.)
     Following is a summary of future minimum lease payments as of September 27, 2009:
                         
            Operating        
            Leases     Noncancelable  
    Capital     Minimum     Sublease  
    Leases   Payments   Income  
    (In thousands)  
 
                       
2010
  $ 2,095     $ 37,185     $ 4,350  
2011
    2,095       34,238       4,258  
2012
    1,403       30,650       3,302  
2013
    943       28,339       3,131  
2014
    315       22,597       2,456  
Thereafter
          204,960       21,199  
 
                 
Total minimum lease payments
    6,851     $ 357,969     $ 38,696  
 
                   
Less amounts representing interest
    1,747                  
 
                     
Present value of minimum lease payments
    5,104                  
Less current portion
    1,336                  
 
                     
Long-term portion
  $ 3,768                  
 
                     
Rental expense and sublease income were as follows:
                         
    Fiscal Year Ended
    Sept. 30, 2007   Sept. 28, 2008   Sept. 27, 2009
    (In thousands)
Minimum rentals
  $ 33,014     $ 33,454     $ 30,326  
Rentals based on sales
  $ 14,368     $ 15,020     $ 16,210  
Sublease income
  $ 1,303     $ 1,383     $ 4,092  
     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.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 6 — Income Taxes
     The provision for income taxes consisted of the following:
                         
    Sept. 30, 2007     Sept. 28, 2008     Sept. 27, 2009  
    (in thousands)  
 
                       
Current
                       
Federal
  $ 34,141     $ 23,756     $ 16,302  
State
    8,876       6,095       3,710  
 
                 
 
    43,017       29,851       20,012  
 
                 
 
                       
Deferred
                       
Federal
    (8,209 )     (2,826 )     (152 )
State
    (1,529 )     (1,025 )     (379 )
 
                 
 
    (9,738 )     (3,851 )     (531 )
 
                 
Income tax expense
  $ 33,279     $ 26,000     $ 19,481  
 
                 
A reconciliation of the provision for income taxes to amounts computed at the federal statutory rate is as follows:
                         
    Sept. 30, 2007     Sept. 28, 2008     Sept. 27, 2009  
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
    (1.1 )     (2.3 )     (2.2 )
Other
    0.6       0.5       (2.7 )
 
                 
Effective tax rate
    40.3 %     39.0 %     35.9 %
 
                 

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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. 28, 2008     Sept. 27, 2009  
    (In thousands)  
Deferred income tax assets:
               
Self-insurance reserves
  $ 23,486     $ 25,252  
Deferred compensation
    28,488       31,504  
Payroll liabilities
    14,812       20,447  
State franchise tax
    2,282       1,377  
Inventories
    2,248       2,254  
Income deferred for book purposes
    2,230       2,602  
Tax credits and operating loss carry forwards
    3,261       2,561  
Other, net
    904       2,144  
 
           
Total deferred income tax assets
    77,711       88,141  
 
               
Deferred income tax liabilities:
               
Property and equipment
    (32,602 )     (36,235 )
Other assets
    (2,153 )     (2,255 )
Investment in unconsolidated affiliate
    (1,681 )      
 
           
Total deferred income tax liabilities
    (36,436 )     (38,490 )
 
           
Net deferred income tax assets
  $ 41,275     $ 49,651  
 
           
     As of September 27, 2009, the Company had approximately $6.8 million of federal net operating loss carryforwards which expire between 2011 through 2019 if not utilized. Although there can be no assurances as to future taxable income of the Company, the Company believes that its expectations of future taxable income, when combined with the income taxes paid in prior years and established valuation reserves, will be adequate to realize the deferred income tax assets.
     The Company establishes deferred tax liabilities for anticipated tax timing differences where payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and the amounts may be adjusted over time as additional information becomes known.
     The Company does not have any material tax positions that meet a less than a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During fiscal 2009, 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.
     During fiscal 2008, the Internal Revenue Service (“IRS”) concluded their review of the federal tax returns for the Company’s fiscal 2004 and fiscal 2005 tax returns and the IRS made no changes to the Company’s reported taxes. For federal tax purposes, the Company is subject to review on its fiscal 2006 through fiscal 2008 tax returns. During fiscal 2009, the State of California Franchise Tax Board (“FTB”) concluded their review of the Company’s fiscal 2005 state return and the FTB made no changes to the Company’s reported taxes. The Company is currently under audit for its fiscal 2006 and fiscal 2007 state tax returns by the FTB. To date, the FTB has only made information document requests related to those years. For state tax purposes, the Company is also subject to review of its fiscal 2006 through fiscal 2008 state tax returns.

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Table of Contents

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.
     In September 2006, an amendment to existing accounting standards regarding accounting for defined benefit pension and other post retirement plans was issued that required, among other things, the recognition of the funded status of the pension plan on the balance sheet. The impact of the implementation of the standard due to previously unrecognized prior service cost and actuarial gains/losses were recognized in fiscal 2007 in accumulated other comprehensive loss, a component of shareholder’s equity:
                         
    Retirement Benefits
    Before   Change due to   After
    Implementation   Implementation   Implementation
            (in thousands)        
Deferred tax assets
  $ 40,614     $ 6,214     $ 46,828  
Pre-paid pension
  $ 1,904     $ (1,904 )   $  
Total assets
  $ 1,265,968     $ 4,310     $ 1,270,278  
Pension liability
  $     $ 12,403     $ 12,403  
Other post retirement liability
  $ 496     $ 944     $ 1,440  
Total liabilities
  $ 1,247,652     $ 13,347     $ 1,260,999  
Accumulated other comprehensive loss, net of tax
  $     $ (9,037 )   $ (9,037 )
Total stockholder’s equity
  $ 18,316     $ (9,037 )   $ 9,279  
Total liabilities and stockholder’s equity
  $ 1,265,968     $ 4,310     $ 1,270,278  
Amounts recognized in accumulated other comprehensive gain/loss for the qualified defined pension plan:
                                 
    Pension Plan     Medical Plan  
    Sept. 28,     Sept. 27,     Sept. 28,     Sept. 27,  
    2008     2009     2008     2009  
    (in thousands)  
Prior service cost
  $ 2     $ 2     $ (78 )   $ (78 )
Net actuarial (gain) loss
    (6,269 )     19,258       (130 )   $ 260  
 
                       
Total recognized in accumulated other comprehensive (gain) loss, before tax
  $ (6,267 )   $ 19,260     $ (208 )   $ 182  
 
                       

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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 28, 2008 and September 27, 2009:
                                 
    Pension Plan     Medical Plan  
    Sept. 28,     Sept. 27,     Sept. 28,     Sept. 27,  
    2008     2009     2008     2009  
    (in thousands)  
Change in benefit obligation:
                               
Beginning balance
  $ 58,273     $ 52,850     $ 1,440     $ 1,364  
Service cost
    2,632       2,294       41       34  
Interest cost
    3,504       3,857       88       98  
Actuarial (gain) loss
    (10,173 )     18,318       (123 )     260  
Benefit payments
    (1,386 )     (1,215 )     (82 )     (58 )
 
                       
Ending balance
  $ 52,850     $ 76,104     $ 1,364     $ 1,698  
 
                       
 
                               
Change in fair value of plan assets:
                               
Beginning balance
  $ 45,870     $ 47,997     $     $  
Actual return on plan assets
    (1,413 )     2,064              
Employer contributions
    4,926       4,434       82       58  
Benefit payments
    (1,386 )     (1,215 )     (82 )     (58 )
 
                       
Ending balance
  $ 47,997     $ 53,280     $     $  
 
                       
 
                               
Funded status:
                               
Fair value of plan assets
  $ 47,997     $ 53,280     $     $  
Projected benefit obligation
    52,850       76,104       1,364       1,698  
 
                       
Under funded
  $ (4,853 )   $ (22,824 )   $ (1,364 )   $ (1,698 )
 
                       
     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, all of which have quoted market values.

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Table of Contents

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 2007, 2008 and 2009 net pension expense:
                         
    Sept. 30,     Sept. 28,     Sept. 27,  
    2007     2008     2009  
    (in thousands)  
Expected return on assets
  $ (2,652 )   $ (3,076 )   $ (3,201 )
Service cost
    2,659       2,632       2,294  
Interest cost
    3,250       3,504       3,857  
Amortization of prior service cost
    (2 )     (2 )     (2 )
Amortization of recognized losses
    892       584       197  
 
                 
Net pension expense
  $ 4,147     $ 3,642     $ 3,145  
 
                 
Actuarial assumptions used to determine net pension expense were:
                         
Discount rate
    5.80 %     6.25 %     7.50 %
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
    6.25 %     7.50 %     5.50 %
Weighted-average rate of compensation increase
    3.00 %     3.00 %     3.00 %
     Expenses recognized for this retirement plan were $4.7 million, $4.2 million and $3.8 million in 2007, 2008 and 2009, 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. The following table summarizes actual allocations for the Company’s plan at the end of fiscal 2008 and fiscal 2009:
                         
            Sept. 28,   Sept. 27,
    Target   2008   2009
Asset category:
                       
Fixed income
    65 %     67 %     70 %
Equity
    35 %     33 %     28 %
Cash and other
    0 %     0 %     2 %
 
                       
Total
    100 %     100 %     100 %
 
                       

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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.)
     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 principle is the focus of the investment policy.
     The Company expects to contribute approximately $3.2 million to its defined benefit pension plan during fiscal 2010.
     Estimated Future Benefit Payments
     The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
         
    Pension
    Benefits
    (in thousands)
 
       
2010
  $ 2,604  
2011
  $ 2,709  
2012
  $ 3,113  
2013
  $ 4,073  
2014
  $ 3,796  
2015 - 2019
  $ 26,846  
     Medical Plan
     The following table provides the components of fiscal 2007, 2008 and 2009 net periodic benefit costs:
                         
    Sept. 30,     Sept. 28,     Sept. 27,  
    2007     2008     2009  
    (in thousands)  
Service cost
  $ 43     $ 41     $ 34  
Interest cost
    81       88       98  
Amortization of prior service cost
    78       78       78  
Amortization of recognized losses
    10       7        
 
                 
Net periodic benefit costs
  $ 212     $ 214     $ 210  
 
                 
 
                       
Actuarial assumptions used to determine net periodic benefit costs were:        
Discount rate
    5.80 %     6.25 %     7.50 %
 
                       
Actuarial assumptions used to determine year-end projected benefit obligation were:        
Weighted-average discount rate
    6.25 %     7.50 %     5.50 %

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Table of Contents

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 $0.6 million in fiscal 2007and $0.2 million in both fiscal 2008 and fiscal 2009.
     The Company expects to contribute approximately $0.1 million to the medical plan during fiscal 2010.
     Estimated Future Benefit Payments
     The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
         
    Medical
    Benefits
    (in thousands)
 
       
2010
  $ 95  
2011
  $ 109  
2012
  $ 122  
2013
  $ 135  
2014
  $ 135  
2015 - 2019
  $ 644  
     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 $1.1 million in fiscal year 2007, $1.2 million in fiscal 2008 and $1.0 million in the fiscal year 2009.
     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. 30,     Sept. 28,     Sept. 27,  
    2007     2008     2009  
    (in thousands)  
 
Multi-Employer Pension Plans
  $ 38,548     $ 40,508     $ 40,294  
Multi-Employer Health and Welfare
    74,376       71,342       73,459  
 
                 
Total Multi-Employer Benefits
  $ 112,924     $ 111,850     $ 113,753  
 
                 
     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 — Segment Information
     The Company has three operating segments: Markets, Super Rx and Santee. Markets and Super Rx provide retail grocery, general merchandise and pharmaceutical products to customers through the Company’s supermarkets. Santee processes, packages and distributes milk, fruit drinks and cultured milk products to Markets and other customers. 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. Aggregating Markets and Super Rx results in two reportable segments for the Company: Retail and Dairy Manufacturing. Separate disclosures for the Dairy Manufacturing segment have not been made as sales, profits and total assets for this segment are less than 10% of consolidated sales, profits and total assets of the Company. On October 11, 2009, the Company sold substantially all of the assets of Santee to Dean Foods (see “Note 15 — Asset Sale”). Subsequent to October 11, 2009, the Company ceased all dairy manufacturing operations . The assets and liabilities associated with the Dairy Transaction have been classified as held for sale as of September 27, 2009 and “Total assets” and “Capital expenditures” shown herein reflect that classification. Dairy manufacturing operations results are included in “All Other” in the schedules below.
                         
    Retail     All Other     Total  
    (in thousands)  
Fiscal year ended September 30, 2007
                       
Sales to external customers
  $ 3,573,075     $ 101,352     $ 3,674,427  
Intersegment sales
  $     $ 88,337     $ 88,337  
Depreciation and amortization
  $ 48,597     $ 118     $ 48,715  
Operating profit (loss)
  $ 133,882     $ (1,596 )   $ 132,286  
Interest income
  $ 10,536     $ 3,615     $ 14,151  
Interest expense
  $ (1,237 )   $ (62,302 )   $ (63,539 )
Income tax expense (benefit)
  $ 58,692     $ (25,413 )   $ 33,279  
Net income (loss)
  $ 84,085     $ (34,690 )   $ 49,395  
Total assets
  $ 1,588,772     $ (318,494 )   $ 1,270,278  
Capital expenditures
  $ 191,873     $     $ 191,873  
                         
    Retail     All Other     Total  
    (in thousands)  
Fiscal year ended September 28, 2008
                       
Sales to external customers
  $ 3,636,125     $ 105,129     $ 3,741,254  
Intersegment sales
  $     $ 100,745     $ 100,745  
Depreciation and amortization
  $ 52,898     $ 89     $ 52,987  
Operating profit (loss)
  $ 115,499     $ (3 )   $ 115,496  
Interest income
  $ 3,184     $ 2,551     $ 5,735  
Interest expense
  $ (1,103 )   $ (56,361 )   $ (57,464 )
Income tax expense (benefit)
  $ 48,381     $ (22,381 )   $ 26,000  
Net income (loss)
  $ 71,117     $ (30,487 )   $ 40,630  
Total assets
  $ 1,659,996     $ (383,121 )   $ 1,276,875  
Capital expenditures
  $ 168,886     $     $ 168,886  

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 8 — Segment Information (contd.)
                         
    Retail     All Other     Total  
    (in thousands)  
Fiscal year ended September 27, 2009
                       
Sales to external customers
  $ 3,669,251     $ 96,789     $ 3,766,040  
Intersegment sales
  $     $ 80,676     $ 80,676  
Depreciation and amortization
  $ 53,210     $ 326     $ 53,536  
Operating profit
  $ 120,147     $ 1,161     $ 121,308  
Interest income
  $ 313     $ 158     $ 471  
Interest expense
  $ (946 )   $ (67,306 )   $ (68,252 )
Income tax expense (benefit)
  $ 47,051     $ (27,570 )   $ 19,481  
Net income (loss)
  $ 73,006     $ (38,237 )   $ 34,769  
Total assets
  $ 1,690,030     $ (375,295 )   $ 1,314,735  
Capital expenditures
  $ 76,970     $     $ 76,970  
Note 9 — 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 September 2005 and expires in September 2010. Substantially all of our employees are covered by collective bargaining agreements.
Note 10 — 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.
     Note Receivable
     Although a market quote for the fair value of the Company’s note receivable is not readily available, the Company believes the stated value approximates fair value.
     Long-Term Receivable
     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 thet approximates long-term Market rates.

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Table of Contents

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)
Note 10 — Fair Value of Financial Instruments (contd.)
     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 27, 2009
    (In thousands)
    Carrying   Fair
    Amount   Value
Cash and cash equivalents
  $ 196,914     $ 196,914  
Receivables
  $ 40,720     $ 40,720  
Note Receivable
  $ 793     $ 793  
Long-term receivable
  $ 18,867     $ 18,867  
Long-term debt
  $ 810,000     $ 806,101  
Capitalized lease obligations
  $ 5,104     $ 5,104  
Note 11 — Litigation Matters
     In the ordinary course of business, the Company is party to various legal actions which the Company believes are incidental to the operation of the business of the Company and its subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. The Company believes that the outcome of such legal proceedings to which the Company is currently a party will not have a material adverse effect upon its results of operations or its consolidated financial condition.
     In April of 2006, the Landlord under a Ground Lease for a supermarket occupied by Markets in the city of Fountain Valley, California filed an Action against Markets and the Lessee under a Sub-Ground Lease alleging that Markets failed to timely exercise its option to extend the term of the Ground Lease. The original Complaint filed in the California Superior Court for the County of Orange was amended to a Reformation and Declaratory Relief Cause of Action seeking determination of the parties’ rights under the Ground Lease and Sub-Ground Lease including a damage claim for additional rent of approximately $1.4 million. This case was settled in May of 2008 pursuant to a settlement agreement whereby Markets agreed to pay fair market value rent under the Ground Lease commencing June 1, 2008 and continuing through the end of the Lease term in August of 2014, which has been appropriately reflected in the consolidated financial statements. Markets was not required to pay any additional rent for prior periods under the settlement agreement.
     In December 2008, an action by Dennis M. O’Connor, et al. against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) was filed in the Los Angeles Superior Court. This action seeks individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. No date has been set for trial or a hearing for potential class certification and SBM Dairies, Inc. is in the process of conducting discovery. SBM Dairies, Inc. denies it has any liability in this action and intends to vigorously defend its interests. Plaintiffs have not yet made any settlement demand and further evaluation of potential liability will be completed if the Court certifies a class action.

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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 28, 2008 and September 27, 2009, there were 748,000 and 899,600 units outstanding, respectively. The Company recognized an expense for the plan of $14.5 million, $12.1 million and $11.0 million in 2007, 2008 and 2009, respectively.
Note 13 — Related Party Transactions
     On both April 27, 2007 and September 25, 2008, the Company paid a $5.0 million dividend to La Cadena. Subsequent to fiscal year-end 2009, the Company paid a $5.0 million dividend to La Cadena on November 17, 2009.
     The Company paid legal fees of $2.4 million, $2.8 million and $1.8 million in fiscal 2007, 2008 and 2009, 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 $53,500, $54,000 and $54,000 in 2007, 2008 and 2009, respectively.
Note 14 — Stock Redemption
     On April 27, 2007, the Company redeemed 1,125 shares of its Class A Common Stock for $15.0 million. The redemption was for shares distributed to the Moseley Trust by La Cadena.
     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.
     As of September 27, 2009, the Company had the ability, under the Credit Facility, to make restricted payments, including dividends of up to $23.0 million.
Note 15 — Asset Sale
     On April 9, 2009, Markets signed a definitive sales agreement with Dean Foods to sell substantially all of the assets of Santee. Accordingly, the assets and liabilities of Santee to be sold have been classified as held for sale in the accompanying consolidated balance sheet and consisted primarily of accounts receivable, inventory, property and equipment and the assumption of certain current liabilities including accounts payable. Subsequent to the 2009 fiscal year end, the Dairy Transaction closed on October 11, 2009 and the Company received cash proceeds of approximately $88.0 million and incurred closing costs of approximately $2.6 million. The Company expects to recognize a gain, net of tax, of approximately $3.3 million, net of tax. Also on October 11, 2009, the Company entered into a ten year product purchase agreement with Dean Foods to purchase substantially all of its milk products from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing.

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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 2007, 2008 and 2009 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 2007 Quarters
                                               
13 weeks ended 12/24/06
  $ 904,354     $ 241,890     $ 28,205     $ 9,902       36,895     $ 268.38  
13 weeks ended 03/25/07
    866,062       249,444       33,674       13,460       36,895       364.82  
13 weeks ended 06/24/07
    910,229       253,787       41,625       15,602       36,178       431.26  
14 weeks ended 09/30/07
    993,782       254,743       28,782       10,431       35,770       291.61  
 
                                     
 
                                               
 
  $ 3,674,427     $ 999,864     $ 132,286     $ 49,395       36,422     $ 1,356.19  
 
                                     
 
                                               
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  
 
                                     

F-27