<PAGE> 1
SUPPLEMENT TO AMENDED AND RESTATED PROSPECTUS AND SOLICITATION STATEMENT
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 33-56451
FOOD 4 LESS SUPERMARKETS, INC.
[F4L LOGO] TO BE COMBINED THROUGH MERGER WITH [RALPHS LOGO]
RALPHS GROCERY COMPANY
OFFERS TO EXCHANGE
UP TO
$175,000,000 OF ITS NEW 10.45% SENIOR NOTES DUE JUNE 15, 2004
FOR ITS
10.45% SENIOR NOTES DUE APRIL 15, 2000
AND UP TO
$145,000,000 OF ITS NEW 13.75% SENIOR SUBORDINATED NOTES DUE JUNE 15, 2005
FOR ITS
13.75% SENIOR SUBORDINATED NOTES DUE JUNE 15, 2001
AND SOLICITATION OF CONSENTS
------------------------
This Supplement to Amended and Restated Prospectus and Solicitation
Statement (the "Supplement") supplements certain information contained in, and
describes certain modifications to, the Amended and Restated Prospectus and
Solicitation Statement dated May 12, 1995 (the "Prospectus") with respect to the
Exchange Offers and the Solicitation by Food 4 Less Supermarkets, Inc. ("Food 4
Less") (i) to holders of its 10.45% Senior Notes due 2000 (the "Old F4L Senior
Notes") to exchange such Old F4L Senior Notes for new 10.45% Senior Notes due
2004 (the "New F4L Senior Notes") plus $5.00 in cash for each $1,000 principal
amount tendered for exchange and (ii) to holders of its 13.75% Senior
Subordinated Notes due 2001 (the "Old F4L Senior Subordinated Notes," and
together with the Old F4L Senior Notes, the "Old F4L Notes") to exchange such
Old F4L Senior Subordinated Notes for new 13.75% Senior Subordinated Notes due
2005 (the "New F4L Senior Subordinated Notes," and together with the New F4L
Senior Notes, the "New F4L Notes") plus $20.00 in cash for each $1,000 principal
amount tendered for exchange, in each case as more fully described in the
Prospectus.
The supplemental information contained herein (i) sets forth the interest
rate on and the redemption prices for the New F4L Senior Notes being offered for
exchange in the Exchange Offers that have been established as a result of the
pricing of the Senior Note Public Offering and sets forth certain revisions to
covenants contained in the New F4L Indentures, (ii) presents a revised sources
and uses table that reflects revised assumptions of the participation levels in
the Exchange Offers, the RGC Offers and the Holdings Offer to Purchase and the
revised amount of New F4L Senior Notes and New RGC Notes being offered in the
Public Offerings as well as certain changes in the fees payable in connection
with the Merger and the Financing, (iii) sets forth the results of operations of
Food 4 Less for the 31 weeks ended January 29, 1995 prepared in connection with
Food 4 Less' adoption of Ralphs' fiscal year end for financial reporting
purposes as well as other recent results of operations, and (iv) sets forth
revised pro forma financial information. The Prospectus is hereby amended by the
terms of this Supplement and the information set forth herein supersedes any
contrary statements contained in the Prospectus. Except as set forth herein, the
terms and conditions of the Exchange Offers, the Solicitation and the other
financing transactions described in the Prospectus remain as set forth therein.
Unless otherwise defined, capitalized terms used herein have the same meanings
as are assigned to them in the Prospectus.
THE EXCHANGE OFFERS AND THE SOLICITATION HAVE BEEN EXTENDED UNTIL AND WILL
EXPIRE AT 9:00 A.M., NEW YORK CITY TIME, ON JUNE 14, 1995, UNLESS FURTHER
EXTENDED (THE "EXPIRATION DATE"). THE REQUISITE CONSENTS WITH RESPECT TO EACH
ISSUE OF OLD F4L NOTES HAVE BEEN RECEIVED AND THE SUPPLEMENTAL INDENTURE FOR
EACH SUCH ISSUE HAS BEEN EXECUTED. AS A RESULT, PURSUANT TO THE TERMS OF THE
EXCHANGE OFFERS TENDERS MAY BE WITHDRAWN AND CONSENTS MAY BE REVOKED ONLY IF THE
EXCHANGE OFFER WITH RESPECT TO THE APPLICABLE ISSUE OF OLD F4L NOTES IS
TERMINATED WITHOUT ANY OLD F4L NOTES BEING ACCEPTED FOR EXCHANGE THEREUNDER.
------------------------
SEE THE PROSPECTUS UNDER "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED
IN EVALUATING THE EXCHANGE OFFERS AND THE SOLICITATION.
------------------------
The Dealer Managers for the Exchange Offers and the Solicitation are:
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
------------------------
The date of this Supplement to Amended and Restated Prospectus and Solicitation
Statement is May 31, 1995
<PAGE> 2
(cover page continued)
As described in the Prospectus, the Exchange Offers and the Solicitation
are part of the financing required to consummate the proposed merger (the "RSI
Merger") of Food 4 Less with and into Ralphs Supermarkets, Inc. ("RSI").
Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), a
wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger,"
and together with the RSI Merger, the "Merger") and RSI will change its name to
Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). As a result
of the Merger, the New F4L Notes and any Old F4L Notes not exchanged in the
Exchange Offers will be the obligations of the Company.
The interest rate on the New F4L Senior Notes being offered in the Senior
Note Public Offering has been established at 10.45% per annum. Accordingly, the
New F4L Senior Notes being offered for exchange in the Exchange Offers also will
bear interest at the rate of 10.45% per annum. Interest on the New F4L Notes
will be payable semi annually on each June 15 and December 15, commencing on
December 15, 1995, at the rate set forth above. The New F4L Senior Notes will
mature on June 15, 2004 and the New F4L Senior Subordinated Notes will mature on
June 15, 2005. On or after June 15, 2000, the New F4L Senior Notes may be
redeemed in whole at any time or in part from time to time, at the option of the
Company, at a redemption price equal to the applicable percentage of the
principal amount thereof set forth below, plus accrued and unpaid interest to
the redemption date, if redeemed during the 12 months commencing on June 15 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------ ----------
<S> <C>
2000...................................... 105.225%
2001...................................... 103.483%
2002...................................... 101.742%
2003 and thereafter....................... 100.000%
</TABLE>
In addition, on or prior to June 15, 1998, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings to redeem up to an
aggregate of 35% of the New F4L Senior Notes originally issued, at a redemption
price equal to 110.450% of the principal amount thereof if redeemed during the
12 months commencing on June 15, 1995, 108.957% of the principal amount thereof
if redeemed during the 12 months commencing on June 15, 1996 and 107.464% of the
principal amount thereof if redeemed during the 12 months commencing on June 15,
1997, in each case plus accrued and unpaid interest, if any, to the redemption
date.
In anticipation of the Merger, and in order to align its fiscal year end
with the fiscal year end of Ralphs, Food 4 Less has adopted Ralphs' fiscal year
end for financial reporting purposes and in connection therewith Food 4 Less
filed with the Securities and Exchange Commission its annual report on Form 10-K
for the 31 weeks ended January 29, 1995. Food 4 Less' revised historical
financial information set forth herein has been drawn from such Form 10-K.
At the close of business on May 30, 1995, tenders and Consents for $143.1
million principal amount of Old F4L Senior Notes, representing over 81.7% of the
outstanding principal amount of Old F4L Senior Notes, and tenders and Consents
for $140.1 million principal amount of Old F4L Senior Subordinated Notes,
representing over 96.6% of the outstanding principal amount of Old F4L Senior
Subordinated Notes (collectively representing over 88.4% of the aggregate
outstanding principal amount of all Old F4L Notes), had been received and not
withdrawn or revoked. In addition, as of the close of business on May 30, 1995,
tenders and consents had been received with respect to $149.3 million principal
amount of Old RGC Notes, representing over 99.5% of the outstanding principal
amount of Old RGC 9% Notes, $290.7 million principal amount of Old RGC 10 1/4%
Notes, representing over 96.9% of the outstanding principal amount of Old RGC
10 1/4% Notes, and $74.8 million principal amount (at maturity) of Discount
Notes, representing over 72.2% of the outstanding principal amount (at maturity)
of Discount Notes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS SUPPLEMENT TO AMENDED AND RESTATED
PROSPECTUS AND SOLICITATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE EXCHANGE OFFERS ARE NOT BEING MADE TO, AND NO CONSENTS ARE BEING
SOLICITED FROM, HOLDERS OF OLD F4L NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFERS OR THE ISSUANCE OF ANY SECURITY UPON
ACCEPTANCE OF TENDERS WOULD NOT BE IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
Investors in the New F4L Notes in California will be able to transfer their
New F4L Notes in California only to institutional investors (as defined under
applicable California securities laws, and subject to any
ii
<PAGE> 3
(cover page continued)
conditions set forth therein) or pursuant to another exemption under California
securities laws. Such investors will be able to transfer their New F4L Notes to
persons outside California, provided the transaction is effected through a
broker-dealer registered in California and complies with the securities laws of
the state in which the New F4L Notes will be offered and sold.
The New F4L Notes have not been registered under the securities laws of all
states. In certain jurisdictions in which the New F4L Notes have been
registered, permits and orders issued in connection with such registrations
typically expire after a period of time and the securities may not be offered
and sold by certain holders without registration under the securities laws of
such jurisdictions unless an exemption is available under such securities laws.
Holders must use the form of Letter of Transmittal circulated along with
the Prospectus or the form circulated with the Prospectus and Solicitation
Statement, dated as of January 25, 1995, to effect valid tenders of Old F4L
Notes and valid deliveries of Consents. Any holder who previously has validly
tendered any Old F4L Notes and has delivered a valid Consent need not take any
further action to receive, subject to the terms and conditions of the Exchange
Offers, the New F4L Notes and the Exchange Payment.
Questions and requests for assistance or for additional copies of the
Supplement, the Prospectus or the Letter of Transmittal or any other required
documents may be directed to the Dealer Managers or the Information Agent at the
addresses and telephone numbers set forth on the back cover hereof. Food 4 Less
will furnish to any holder free of charge a copy of the Prospectus and any other
required documents via overnight delivery upon request to D.F. King & Co., Inc.,
which is serving as Information Agent in connection with the Exchange Offers and
the Solicitation, by telephone toll free at (800) 669-5550 or otherwise at its
address set forth on the back cover page of this Supplement.
This Supplement is being sent to holders of Old F4L Notes who are
registered holders as of May 30, 1995.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOURCES AND USES...................................................................... 1
PRO FORMA CAPITALIZATION.............................................................. 3
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 4
SELECTED HISTORICAL FINANCIAL DATA OF FOOD 4 LESS..................................... 13
UPDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 15
REVISIONS TO THE NEW F4L NOTES........................................................ 18
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
iii
<PAGE> 4
SOURCES AND USES
The following revised table illustrates the sources and uses of funds to
consummate the Merger, assuming the transaction occurs as of June 15, 1995.
Based upon tenders received through May 26, 1995 (and, in the case of the
Discount Notes, anticipated tenders as of the Closing Date), this presentation
assumes that $423.0 million principal amount of Old RGC Notes is tendered into
the RGC Offers in exchange for New Senior Subordinated Notes (representing 94.0%
of the outstanding aggregate principal amount of Old RGC Notes), $27.0 million
principal amount of Old RGC Notes is tendered into the RGC Offers for cash
(representing 6.0% of the outstanding aggregate principal amount of Old RGC
Notes), $145.3 million principal amount of Old F4L Senior Notes and $140.7
million principal amount of Old F4L Senior Subordinated Notes are tendered into
the Exchange Offers (representing 83.0% and 97.0% of the outstanding aggregate
principal amount of Old F4L Senior Notes and Old F4L Senior Subordinated Notes,
respectively) and $103.6 million principal amount (at maturity) of Discount
Notes is tendered into the Holdings Offer to Purchase (representing 100% of the
outstanding aggregate principal amount (at maturity) of Discount Notes).
Although management believes such assumptions are reasonable under the
circumstances, actual sources and uses may differ from those set forth below
depending upon the outcome of the Exchange Offers, the RGC Offers and the
Holdings Offer to Purchase.
SOURCES AND USES
(in millions)
<TABLE>
<S> <C> <C> <C>
CASH SOURCES CASH USES
- --------------------------------------------- ---------------------------------------------
New Term Loans(a).................. $ 600.0 Purchase RSI Common Stock(j)....... $ 375.9
New Revolving Facility(b).......... 6.5 Purchase Old RGC Notes(k).......... 27.3
New Senior Notes(c)................ 350.0 Purchase Discount Notes............ 84.4
New Senior Subordinated Notes(d)... 100.0 Repay Ralphs 1992 Credit 238.2
Agreement..........................
New Equity Investment(e)........... 140.0 Repay F4L Credit Agreement......... 160.8
New Discount Debentures(f)......... 59.0 Pay Accrued Interest(l)............ 34.4
EAR Related Payments(m)............ 22.8
Repay Mortgage Indebtedness(n)..... 194.4
Purchase New Holdings Common
Stock(o)........................... 3.7
Fees and Expenses(p)............... 113.6
-------- --------
Total Cash Sources............ $1,255.5 Total Cash Uses.................... $1,255.5
======== ========
NON-CASH SOURCES NON-CASH USES
- --------------------------------------------- ---------------------------------------------
New F4L Senior Notes(g)............ $ 145.3 Old F4L Senior Notes Exchanged..... $ 145.3
Assumed Old F4L Senior Notes....... 29.7 Assumed Old F4L Senior Notes....... 29.7
New F4L Senior Subordinated Old F4L Senior Subordinated Notes
Notes............................ 140.7 Exchanged.......................... 140.7
Assumed Old F4L Senior Subordinated Assumed Old F4L Senior
Notes............................ 4.3 Subordinated Notes................. 4.3
New RGC Notes(h)................... 423.0 Old RGC Notes Exchanged............ 423.0
New Discount Debentures(f)......... 41.0 Fees and Expenses(p)............... 22.5
Assumed Capital Leases and Other Assumed Capital Leases and Other
Debt............................. 162.9 Debt............................... 162.9
Seller Debentures(i)............... 131.5 Purchase RSI Common Stock(i)....... 150.0
-------- --------
Total Non-Cash Sources........ $1,078.4 Total Non-Cash Uses................ $1,078.4
======== ========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company $925 million of financing under the New Credit Facility. It is
anticipated that the New Credit Facility will be syndicated to a number of
financial institutions for whom Bankers Trust will act as agent. The New
Credit Facility will provide for (i) the New Term Loans in the aggregate
amount of up to $600 million, comprised of the $275 million Tranche A Loan,
the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan, and
the $108.4 million Tranche D Loan and (ii) the $325 million New Revolving
Facility. The Tranche A Loan may not be fully funded at the Closing Date.
The New Credit Facility will provide that the portion of the Tranche A Loan
not funded at the Closing Date will be available for a period of 91 days
following the Closing Date to fund the Change of Control Offer. See the
Prospectus under "Description of the New Credit Facility."
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The letters of credit will be
used to cover workers' compensation contingencies and for other purposes
permitted under the New
1
<PAGE> 5
Revolving Facility. The Company anticipates that letters of credit for
approximately $92.6 million will be issued under the New Revolving Facility
at closing, in replacement of existing letters of credit, primarily to
satisfy the State of California's requirements relating to workers
compensation self-insurance.
(c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public
Offering.
(d) Represents New RGC Notes issued pursuant to the Subordinated Note Public
Offering.
(e) Does not include the $10 million equity contribution by Ralphs management.
See note (m) below. Concurrently with the New Equity Investment, certain
existing stockholders of New Holdings (formerly stockholders of FFL),
including affiliates of George Soros, will sell outstanding shares of New
Holdings stock to CLH, which in turn will sell such shares to the New
Equity Investors for an aggregate purchase price of $57.8 million (which
represents the same price per share as will be paid in the New Equity
Investment). In connection with the New Equity Investment, the New Equity
Investors will contribute the common stock so acquired to New Holdings in
consideration for newly-issued preferred shares. See the Prospectus under
"Description of Capital Stock -- New Equity Investment."
(f) Represents a portion of the New Discount Debentures having an aggregate
initial accreted value of $100 million, $59 million of which will be issued
for cash, and $18.5 million of which will be issued to the RSI stockholders
as Merger consideration and $17.5 million, $2.5 million and $2.5 million of
which will be issued to Yucaipa, BT Securities and Apollo, respectively, in
satisfaction of fees otherwise payable by the Company and New Holdings in
connection with the Merger and the Financing.
(g) Represents New F4L Senior Notes issued pursuant to the Exchange Offers,
which will be part of the same issue as the New F4L Senior Notes issued
pursuant to the Senior Note Public Offering.
(h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be
part of the same issue as the New RGC Notes issued pursuant to the Senior
Subordinated Public Offering.
(i) In connection with the RSI Merger, New Holdings will issue $18.5 million
initial accreted value of New Discount Debentures and $131.5 million
principal amount of the Seller Debentures as part of the purchase price for
the RSI common stock, up to $10 million of which Seller Debentures may be
put to Yucaipa on the Closing Date at a purchase price equal to their
principal amount pursuant to the Put Agreement. In addition, Yucaipa will
be reimbursed by the Company for (i) any losses incurred upon the resale of
the $10 million principal amount of Seller Debentures which may be put to
it pursuant to the Put Agreement and (ii) its expenses in connection with
the Merger and the related transactions. See the Prospectus under "Certain
Relationships and Related Transactions -- Food 4 Less."
(j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9
million to be paid in cash to holders of RSI management stock options. See
the Prospectus under "Executive Compensation -- New Management Stock Option
Plan and Management Investment." The termination date for the Merger
Agreement has been extended through the Closing Date.
(k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the
RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding
following consummation of the RGC Offers, a portion of the Tranche A Loan
not fully funded at the Closing Date will be available to fund the purchase
of Old RGC Notes pursuant to the Change of Control Offer.
(l) Represents accrued interest payable on all debt securities assumed to be
tendered pursuant to the Exchange Offers and the RGC Offers.
(m) Represents payments to or for the benefit of Ralphs management with respect
to outstanding EARs in connection with the Merger. Ralphs management will
receive New Holdings stock options in exchange for the cancellation of the
remaining EAR liability of $10 million. See the Prospectus under "Executive
Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships
and Related Transactions -- Food 4 Less."
(n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in
the principal amount of $174.0 million, plus the estimated amount of the
prepayment fees payable with respect thereto.
(o) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(p) The $136.1 million in total cash and non-cash fees and expenses includes
advisory fees of $21.5 million to be paid to Yucaipa, other fees of $2.5
million to be paid to BT Securities and commitment fees of $5 million to be
paid to Apollo upon the closing of the Merger. Of such amounts, $17.5
million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee
and BT Securities' $2.5 million fee will be paid through the issuance of
New Discount Debentures in lieu of cash. Such New Discount Debentures will
be contributed by them to the partnership that will acquire all of the New
Discount Debentures. Yucaipa anticipates that it in turn will pay a cash
fee of approximately $3.5 million to Soros Fund Management in consideration
for advisory services which Soros Fund Management has rendered since 1991.
See the Prospectus under "Certain Relationships and Related
Transactions -- Food 4 Less."
For additional information, see the Prospectus under "Description of the New
Credit Facility," "The RGC Offers and the Public Offerings" and "Description of
Holding Company Indebtedness."
2
<PAGE> 6
PRO FORMA CAPITALIZATION
The following revised table sets forth the pro forma combined
capitalization of the Company as of January 29, 1995, adjusted to give effect to
the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and
certain related assumptions) and the application of the proceeds therefrom.
Based upon tenders received through May 26, 1995 (and, in the case of the
Discount Notes, anticipated tenders as of the Closing Date), this presentation
assumes that $423.0 million principal amount of Old RGC Notes is tendered into
the RGC Offers in exchange for New Senior Subordinated Notes, $27.0 million
principal amount of Old RGC Notes is tendered into the RGC Offers for cash,
$145.3 million principal amount of Old F4L Senior Notes and $140.7 million
principal amount of old F4L Senior Subordinated Notes are tendered into the
Exchange Offers and $103.6 million principal amount (at maturity) of Discount
Notes is tendered into the Holdings Offer to Purchase. This presentation also
assumes that any Old RGC Notes not tendered into the RGC Offers are repurchased
after the Closing Date pursuant to the Change of Control Offer. The table should
be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the historical consolidated financial statements of Ralphs and
Food 4 Less and related notes thereto included elsewhere in this Supplement and
in the Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION
---------------
(IN MILLIONS)
<S> <C>
Cash........................................................................ $ 54.7
========
Short-term and current portion of long-term debt:
New Term Loans............................................................ $ 3.3
Other indebtedness........................................................ 24.3
--------
Total short-term and current portion of long-term debt............. $ 27.6
========
Long-term debt:
New Term Loans(a)......................................................... $ 596.7
New Revolving Facility(b)................................................. 35.5
Other indebtedness........................................................ 131.9
New Senior Notes(c)....................................................... 495.3
Old F4L Senior Notes...................................................... 29.7
New Senior Subordinated Notes(d).......................................... 523.0
New F4L Senior Subordinated Notes......................................... 140.7
Old F4L Senior Subordinated Notes......................................... 4.3
--------
Total long-term debt............................................... 1,957.1
--------
Stockholder's equity:
Common stock, $.01 par value.............................................. 0.0
Additional paid-in capital................................................ 464.4
Notes receivable(e)....................................................... (0.7)
Retained deficit.......................................................... (178.1)
Treasury stock............................................................ (5.8)
--------
Total stockholder's equity.............................................. 279.8
--------
Total capitalization............................................... $2,236.9
========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company $925 million of financing under the New Credit Facility. It is
anticipated that the New Credit Facility will be syndicated to a number of
financial institutions for whom Bankers Trust will act as agent. The New
Credit Facility will provide for (i) the New Term Loans in the aggregate
amount of up to $600 million, comprised of the $275 million Tranche A Loan,
the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan and the
$108.4 million Tranche D Loan and (ii) the $325 million New Revolving
Facility. The Tranche A Loan may not be fully funded at the Closing Date.
The New Credit Facility will provide that the portion of the Tranche A Loan
not funded at the Closing Date will be available for a period of 91 days
following the Closing Date to fund the Change of Control Offer. See the
Prospectus under "Description of the New Credit Facility."
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The letters of credit will be
used to cover workers' compensation contingencies and for other purposes
permitted under the New Revolving Facility. The Company anticipates that
letters of credit for approximately $92.6 million will be issued under the
New Revolving Facility at closing, in replacement of existing letters of
credit, primarily to satisfy the State of California's requirements relating
to workers' compensation self-insurance.
(c) Includes the New F4L Senior Notes issued pursuant to the Senior Note Public
Offering and the New F4L Senior Notes issued pursuant to the Exchange
Offers.
(d) Includes the New RGC Notes issued pursuant to the Subordinated Note Public
Offering and the New RGC Notes issued pursuant to the RGC Offers. In
accordance with the terms of the Old RGC Indentures, holders of Old RGC
Notes not exchanged for New Senior Subordinated Notes or purchased pursuant
to the RGC Offers will be entitled to have such Old RGC Notes repurchased by
the Company pursuant to the Change of Control Offer which will occur up to
91 days following the closing of the Merger. A portion of the Tranche A Loan
not fully funded at the Closing Date will be available to fund the purchase
of Old RGC Notes pursuant to the Change of Control Offer.
(e) Represents notes receivable from shareholders of Holdings with respect to
the purchase of Holdings' common stock. See the Prospectus under "Executive
Compensation -- Food 4 Less Stock Plan."
3
<PAGE> 7
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following revised unaudited pro forma combined financial statements of
the Company for the 52 weeks ended June 25, 1994 and as of and for the 31 weeks
ended January 29, 1995, give effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related assumptions set
forth below) and the application of the proceeds therefrom as if such
transactions occurred on June 27, 1993, with respect to the pro forma operating
and other data, and as of January 29, 1995, with respect to the pro forma
balance sheet data. Such pro forma information combines the results of
operations of Food 4 Less for the 52 weeks ended June 25, 1994 and the results
of operations and balance sheet data as of and for the 31 weeks ended January
29, 1995, with the results of operations of Ralphs for the 52 weeks ended July
17, 1994 and the results of operations and balance sheet data as of and for the
32 weeks ended January 29, 1995, respectively. For information regarding the
Merger and the Financing, see the Prospectus under "The Merger and the
Financing."
Reflecting tenders received through May 26, 1995 (and, in the case of the
Discount Notes, anticipated tenders as of the Closing Date), the pro forma
adjustments are based upon the following assumptions: (i) $423.0 million
principal amount of Old RGC Notes are tendered into the RGC Offers in exchange
for New Senior Subordinated Notes, (ii) $27.0 million principal amount of Old
RGC Notes are tendered into the RGC Offers for cash, (iii) $145.3 million
principal amount of Old F4L Senior Notes and $140.7 million principal amount of
old F4L Senior Subordinated Notes are tendered into the Exchange Offers and (iv)
$103.6 million principal amount (at maturity) of Discount Notes are tendered
into the Holdings Offer to Purchase. The presentation also assumes that $100
million principal amount of New RGC Notes are issued pursuant to the
Subordinated Note Public Offering and that $350 million principal amount of New
F4L Senior Notes are issued pursuant to the Senior Note Public Offering. In
addition, the unaudited pro forma combined financial statements have been
prepared based upon the assumption that upon consummation of the Merger, the
Company will divest or close 32 stores.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management believes are reasonable. The Merger
will be accounted for by the Company as a purchase of Ralphs by Food 4 Less and
Ralphs' assets and liabilities will be recorded at their estimated fair market
values at the date of the Merger. The adjustments included in the unaudited pro
forma combined financial statements represent the Company's preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not differ significantly from
the pro forma adjustments reflected in the pro forma financial information.
The unaudited pro forma combined financial statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transactions had been consummated as of the
indicated dates. The unaudited pro forma combined financial statements should be
read in conjunction with the historical consolidated financial statements of
Food 4 Less and Ralphs, together with the related notes thereto, included
elsewhere in this Supplement and in the Prospectus.
4
<PAGE> 8
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
--------------------------
RALPHS FOOD 4 LESS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (AUDITED)
JULY 17, JUNE 25, PRO FORMA PRO FORMA
1994 1994 ADJUSTMENTS COMBINED
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales........................................... $2,709.7 $2,585.2 $(241.4)(a) $5,053.5
Cost of sales................................... 2,076.3 2,115.9 (194.7)(a) 4,005.3
4.2(b)
2.8(c)
0.8(d)
-------- -------- ------- --------
Gross profit............................... 633.4 469.3 (54.5) 1,048.2
Selling, general and administrative
expenses(m)................................... 469.1 388.8 (36.4)(a) 833.1
8.1(b)
1.4(d)
1.6(e)
0.5(f)
Amortization of excess cost over net assets
acquired...................................... 11.0 7.7 10.6(g) 29.3
Provision for restructuring..................... 2.4 0.0 -- 2.4
-------- -------- ------- --------
Operating income........................... 150.9 72.8 (40.3) 183.4
Other expenses:
Interest expense -- cash...................... 93.2 57.0 69.9(h) 220.1
Interest expense -- non-cash.................. 9.4 5.8 -- 15.2
Amortization of debt issuance costs........... 6.4 5.5 1.8(h) 13.7
Loss on disposal of assets...................... 1.8 -- -- 1.8
Provision for earthquake loss................... 11.0 4.5 -- 15.5
-------- -------- ------- --------
Earnings (loss) before income tax
provision(n)............................. 29.1 (0.0) (112.0) (82.9)
Income tax expense (benefit).................... (108.0) 2.7 105.3(i) --
-------- -------- ------- --------
Net earnings (loss)(l)..................... $ 137.1 $ (2.7) $(217.3) $ (82.9)
======== ======== ======= ========
Preferred stock accretion....................... -- 8.8 (8.8)(j) --
Earnings (loss) applicable to common
shares................................... $ 137.1 $ (11.5) $(208.5) $ (82.9)
======== ======== ======= ========
Ratio of earnings to fixed charges(k)...... 1.2x 1.0x --
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
5
<PAGE> 9
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
32 WEEKS 31 WEEKS
ENDED ENDED
----------- -------------
RALPHS FOOD 4 LESS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (AUDITED)
JANUARY 29, JANUARY 29, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Sales.......................................... $ 1,695.8 $ 1,556.5 $(131.3)(a) $3,121.0
Cost of sales.................................. 1,304.5 1,294.1 (107.6)(a) 2,493.3
2.5 (b)
(1.0)(c)
0.8 (d)
--------- --------- ------- --------
Gross profit.............................. 391.3 262.4 (26.0) 627.7
Selling, general and administrative
expenses(m).................................. 294.8 222.4 (18.3)(a) 506.4
4.8 (b)
1.4 (d)
1.0 (e)
0.3 (f)
Amortization of excess cost over net assets
acquired..................................... 6.8 4.6 6.0 (g) 17.4
Provision for restructuring.................... 0.0 5.1 -- 5.1
--------- --------- ------- --------
Operating income.......................... 89.7 30.3 (21.2) 98.8
Other expenses:
Interest expense -- cash..................... 60.5 35.3 37.3 (h) 133.1
Interest expense -- non-cash................. 5.6 3.5 -- 9.1
Amortization of debt issuance costs.......... 3.6 3.4 1.1 (h) 8.1
Loss (gain) on disposal of assets............ 0.8 (0.4) -- 0.4
--------- --------- ------- --------
Earnings (loss) before income tax
provision(n)............................ 19.2 (11.5) (59.6) (51.9)
Income tax expense (benefit)................... 0.0 0.0 -- 0.0
--------- --------- ------- --------
Net earnings (loss)(l).................... $ 19.2 $ (11.5) $ (59.6) $ (51.9)
========= ========= ======= ========
Preferred stock accretion...................... -- 6.1 (6.1)(j) --
Earnings (loss) applicable to common
shares.................................. $ 19.2 $ (17.6) $ (53.5) $ (51.9)
========= ========= ======= ========
Ratio of earnings to fixed charges(k)..... 1.2x -- --
========= ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
6
<PAGE> 10
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
(a) Reflects the anticipated closing or divestiture of 32 stores. Does not give
effect to the closure of 2 Food 4 Less stores open at October 1, 1994 which
were subsequently closed. Food 4 Less has determined that there is no
impairment of existing goodwill related to the store closures based on its
projection of future undiscounted cash flows.
(b) Represents the additional depreciation expense associated with the purchase
price allocation to property, plant and equipment of $160.0 million based on
the current estimate of fair market value. Property, plant and equipment is
being depreciated over an average useful life of 13 years. Depreciation
expense has been allocated among cost of sales and selling, general and
administrative expenses.
(c) Reflects the elimination of Ralphs historical LIFO provision.
(d) Reflects depreciation expense associated with approximately $36.8 million of
additional fixed assets required for the conversion of 23 Ralphs stores to
the Food 4 Less warehouse format and 122 Alpha Beta, Boys and Viva stores to
the Ralphs format.
(e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks
ended June 25, 1994 and $1.2 million for the 31 weeks ended January 29,
1995) and the elimination of an annual guarantee fee ($0.4 million for the
52 weeks ended June 25, 1994 and $0.2 million for the 31 weeks ended January
29, 1995) paid by Ralphs to EJDC.
(f) Reflects increased compensation resulting from new employment agreements
with certain of the current executive officers of Ralphs.
(g) Reflects the amortization of the excess of cost over net assets acquired in
the Merger ($21.6 million for the 52 weeks ended June 25, 1994 and $12.8
million for the 31 weeks ended January 29, 1995) and elimination of Ralphs'
historical amortization ($11.0 million for the 52 weeks ended June 25, 1994
and $6.8 million for the 31 weeks ended January 29, 1995). Amortization has
been calculated on the straight line basis over a period of 40 years.
(h) The following table presents a reconciliation of pro forma interest expense
and amortization of deferred financing costs:
<TABLE>
<CAPTION>
52 WEEKS 31 WEEKS
ENDED ENDED
JUNE 25, JANUARY 29,
1994 1995
-------- -----------
<S> <C> <C>
Historical interest expense -- cash.......................................... $150.2 $ 95.8
------ ------
Plus: Interest on borrowings under:
New Credit Facility...................................................... 63.2 37.2
New F4L Senior Notes..................................................... 36.6 21.8
New RGC Notes............................................................ 57.5 34.3
Other bank fees.......................................................... 3.9 2.3
Other debt............................................................... 2.0 2.1
Less: Interest on borrowings under:
Old bank term loans:
Ralphs................................................................. (21.3) (15.5)
Food 4 Less............................................................ (11.5) (7.7)
Old RGC Notes............................................................ (43.9) (27.0)
Other debt............................................................... (16.6) (10.2)
------ ------
Pro forma adjustment....................................................... 69.9 37.3
------ ------
Pro forma interest expense -- cash........................................... $220.1 $133.1
====== ======
Historical amortization of debt issuance costs............................... $ 11.9 $ 7.0
Plus:
Financing and exchange/consent fees...................................... 8.6 5.1
Other fees and expenses.................................................. 4.6 2.7
Less:
Historical financing costs:
Ralphs................................................................... (6.1) (3.6)
Food 4 Less.............................................................. (5.3) (3.1)
------ ------
Pro forma adjustment....................................................... 1.8 1.1
------ ------
Pro forma amortization of debt issuance costs................................ $ 13.7 $ 8.1
====== ======
</TABLE>
(i) Represents the elimination of the historical income tax benefit of Ralphs
($108.0 million for the 52 weeks ended June 25, 1994) and Food 4 Less
income tax expense ($2.7 million for the 52 weeks ended June 25, 1994)
given expected pro forma losses. The Company's ability to recognize income
tax benefits may be limited in accordance with Financial Accounting
Standard No. 109 "Accounting for Income Taxes." As such, no income tax
benefit has been reflected in these pro forma financial statements. See the
Prospectus under "Certain Federal Income Tax Considerations."
(j) Reflects cancellation of cumulative convertible preferred stock of Food 4
Less held by Holdings.
(k) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, cumulative effect of
change in accounting principles, extraordinary item and fixed charges
before capitalized interest. "Fixed charges" consist of interest expense
(including amortization of self-insurance reserves discount), capitalized
interest, amortization of deferred debt issuance costs and one-third of
rental expense (the portion deemed representative of the interest factor).
The Company's pro forma earnings were inadequate to cover pro forma fixed
charges for the 52 weeks ended June 25, 1994 and for the 31 weeks ended
January 29, 1995 by approximately $82.9 million and $51.9 million,
respectively. However, such pro forma earnings included non-
7
<PAGE> 11
cash charges of $189.2 million for the 52 weeks ended June 25, 1994 and
$114.0 million for the 31 weeks ended January 29, 1995, primarily consisting
of depreciation and amortization.
(l) The unaudited pro forma results of operations for the 52 weeks ended June
25, 1994 and the 31 weeks ended January 29, 1995 do not include certain
one-time non-recurring costs related to (i) severance payments under
certain employment contracts with Food 4 Less management totalling $1.4
million that are subject to change of control provisions and the
achievement of earnings and sales targets, (ii) costs related to the
integration of the Company's operations which are estimated to be $50.0
million over a three-year period, (iii) $1.8 million in costs related to
the cancellation of an employment agreement, or (iv) other costs related to
warehouse closures, which costs are not presently determinable.
(m) Pro forma combined cost of sales and selling, general and administrative
expenses for the 52 weeks ended June 25, 1994 and the 31 weeks ended January
29, 1995 include reduced employer contributions of $25.8 million and $22.1
million, respectively, related to union health and welfare benefit plans.
(n) The pro forma combined loss before income tax provision for the 52 weeks
ended June 25, 1994 and the 31 weeks ended January 29, 1995 includes
reductions in self insurance reserves of $26.4 million and $28.0 million,
respectively.
(o) "EBITDA," as defined and presented historically by RGC, represents net
earnings before interest expense, income tax expense (benefit), depreciation
and amortization expense, post-retirement benefits, the LIFO charge,
provision for restructuring, provision for earthquake losses, a one-time
charge for Teamsters Union sick pay benefits, transition expense and gains
and losses on disposal of assets. EBITDA is a widely accepted financial
indicator of a company's ability to service debt. However, EBITDA should not
be construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of the
Company's operating performance or as a measure of liquidity. See the
Prospectus under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED
JUNE 25, 1994 JANUARY 29, 1995
-------------- --------------
<S> <C> <C>
Historical EBITDA:
Ralphs EBITDA............................................................ $228.1 $143.5
EBITDA margin(1)....................................................... 8.4% 8.5%
Food 4 Less EBITDA....................................................... $130.5 $ 76.9
EBITDA margin.......................................................... 5.0% 4.9%
Less: Pro Forma Adjustments(2)............................................. $(16.1) $ (9.1)
------ ------
Pro Forma EBITDA........................................................... $342.5 $211.3
====== ======
Pro Forma EBITDA margin.................................................. 6.8% 6.8%
====== ======
</TABLE>
-------------------
(1) EBITDA margin represents EBITDA (as defined) as a percentage of
sales.
(2) Reflects primarily EBITDA (as defined) associated with closed or
divested stores and the adjustments referred to in notes (e) and (f)
above.
8
<PAGE> 12
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RALPHS FOOD 4 LESS
(HISTORICAL) (HISTORICAL)
(AUDITED) (AUDITED)
JANUARY 29, JANUARY 29, PRO FORMA
1995 1995 ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 35.1 $ 19.6 $ 0.0(a) $ 54.7
Accounts receivable........................... 43.6 23.4 -- 67.0
Inventories................................... 221.4 224.7 39.9(b) 486.0
Prepaid expense and other current assets...... 19.8 22.2 -- 42.0
-------- -------- ------- --------
Total current assets.................. 319.9 289.9 39.9 649.7
Investments..................................... 0.0 12.4 -- 12.4
Property, plant and equipment................... 624.7 380.4 160.0(c) 1,140.3
(22.8)(d)
(2.0)(e)
Excess of cost over net assets acquired, net.... 365.4 263.1 496.7(f) 1,125.2
Beneficial lease rights......................... 49.2 0.0 -- 49.2
Deferred debt issuance costs, net............... 23.0 25.5 94.8(g) 99.4
(43.9)(h)
Deferred income taxes........................... 112.5 0.0 (112.5)(i) 0.0
Other assets.................................... 15.2 29.4 (12.9)(d) 36.7
5.0(j)
-------- -------- ------- --------
Total assets.......................... $1,509.9 $1,000.7 $ 602.3 $3,112.9
======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.......... $ 84.0 $ 27.2 $ (83.6)(k) $ 27.6
Short-term debt............................... 51.5 0.0 (51.5)(l) 0.0
Accounts payable.............................. 176.6 190.5 -- 367.1
Accrued expenses.............................. 99.8 118.3 (17.6)(m) 207.0
4.7(d)
1.8(n)
Current portion of self-insurance reserves.... 27.5 28.6 -- 56.1
-------- -------- ------- --------
Total current liabilities............. 439.4 364.6 (146.2) 657.8
Long-term debt.................................. 883.0 506.6 567.5(o) 1,957.1
Self-insurance reserves......................... 44.9 44.1 -- 89.0
Deferred income taxes........................... 0.0 17.5 -- 17.5
Lease valuation reserve......................... 29.0 0.0 -- 29.0
Other non-current liabilities................... 86.4 10.1 (27.8)(p) 82.7
11.0(q)
3.0(e)
-------- -------- ------- --------
Total liabilities..................... 1,482.7 942.9 407.5 2,833.1
-------- -------- ------- --------
Stockholder's equity:
Preferred Stock............................... 0.0 65.1 (65.1)(r) 0.0
Common Stock.................................. 0.3 0.0 (0.3)(v) 0.0
Additional paid-in capital.................... 175.2 107.7 65.1(r) 464.4
10.0(p)
100.0(t)
31.6(u)
150.0(s)
(175.2)(v)
Notes receivable from shareholders of
parent..................................... 0.0 (0.7) -- (0.7)
Retained deficit.............................. (148.3) (112.2) (23.7)(w) (178.1)
148.3(v)
(40.4)(d)
(1.8)(n)
Treasury stock................................ 0.0 (2.1) (3.7)(x) (5.8)
-------- -------- ------- --------
Total stockholder's equity(y)......... 27.2 57.8 194.8 279.8
-------- -------- ------- --------
Total liabilities and stockholder's
equity.............................. $1,509.9 $1,000.7 $ 602.3 $3,112.9
======== ======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
9
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects gross proceeds received from (i) the New Term Loans, (ii) the New
Revolving Facility, (iii) the New Equity Investment and (iv) the Offering
used to retire certain debt and liabilities and to pay financing costs and
other related fees as set forth in the following table:
<TABLE>
<S> <C>
New Term Loans............................................................................ $ 600.0
New Revolving Facility.................................................................... 35.5
New F4L Senior Notes...................................................................... 350.0
New RGC Notes............................................................................. 100.0
New Equity Investment..................................................................... 140.0
New Discount Debentures................................................................... 59.0
Purchase Discount Notes................................................................... (84.4)
Purchase RSI Common Stock................................................................. (375.9)
Repay Ralphs 1992 Credit Agreement........................................................ (297.4)
Repay F4L Credit Agreement................................................................ (153.0)
Purchase Old RGC Notes.................................................................... (27.3)
Pay EAR liability......................................................................... (17.8)
Loan to affiliate......................................................................... (5.0)
Repay other Ralphs debt................................................................... (188.8)
Purchase New Holdings Common Stock........................................................ (3.7)
Accrued Interest.......................................................................... (17.6)
Fees and Expenses......................................................................... (113.6)
-------
Pro forma adjustment.............................................................. $ 0.0
=======
</TABLE>
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million)
and the write-up of merchandise inventory ($22.5 million); both to reflect
current estimated selling prices less costs of disposal and a reasonable
profit allowance for the selling effort of the acquiring company.
(c) Reflects the estimated write-up to fair value of Ralphs property, plant and
equipment as of the date of the Merger.
(d) Reflects estimated restructuring charge associated with closing 29 Food 4
Less conventional supermarkets or warehouse stores and converting 5 Food 4
Less conventional supermarkets to warehouse stores. Pursuant to the
settlement agreement with the State of California, 24 Food 4 Less stores (as
well as 3 Ralphs stores) must be closed by December 31, 1995. See the
Prospectus "Business -- California Settlement Agreement." Although not
required by such settlement agreement, an additional 5 under-performing
stores selected by the Company also are scheduled to be closed by December
31, 1995. The restructuring charge consists of write-downs of property,
plant and equipment ($22.8 million), write-off of the Alpha Beta trademark
($8.6 million), write-off of other assets ($4.3 million), lease termination
expenses ($3.1 million), and miscellaneous expense accruals ($1.6 million).
The expected cash payments to be made in connection with the restructuring
charge total $7.1 million. It is expected that such cash payments will be
made by December 31, 1995. The estimated restructuring charge will be
recorded as an expense once the Merger is completed. No additional expenses
are expected to be incurred in future periods in connection with these
closings. Food 4 Less has determined that there is no impairment of existing
goodwill related to the store closures based on its projections of future
undiscounted cash flows.
(e) Reflects the anticipated closing of 3 Ralphs stores.
(f) Reflects the excess of costs over the fair value of the net assets of Ralphs
acquired in connection with the Merger ($862.1 million) and the elimination
of Ralphs historical excess of costs over the fair value of the net assets
acquired ($365.4 million). The purchase price and preliminary calculation of
the excess of cost over the net book value of assets acquired is as follows:
<TABLE>
<S> <C>
Purchase price:
Purchase of outstanding common equity.................................................. $525.9
Fees and expenses...................................................................... 51.1
------
Total purchase price................................................................... $577.0
======
Purchase price is financed by:
Seller Debentures...................................................................... $131.5
New Discount Debentures................................................................ 18.5
New Equity Investment.................................................................. 140.0
New borrowings......................................................................... 287.0
------
$577.0
======
</TABLE>
Preliminary calculation of purchase price allocated to assets and
liabilities based on
management's estimate of fair values as of January 29, 1995:
<TABLE>
<S> <C>
Cash................................................................................... $ 35.1
Receivables............................................................................ 43.6
Inventories............................................................................ 261.3
Other current assets................................................................... 19.8
Property, fixtures and equipment....................................................... 782.7
Beneficial lease rights................................................................ 49.2
Goodwill............................................................................... 862.1
Other assets........................................................................... 18.0
Current liabilities.................................................................... (424.8)
Obligations under capital leases....................................................... (89.1)
Long-term debt......................................................................... (806.6)
Other non-current liabilities.......................................................... (174.3)
-------
$ 577.0
=======
</TABLE>
10
<PAGE> 14
<TABLE>
<S> <C> <C>
Pro forma book value of historical assets acquired:
Historical net book value at January 29, 1995:.................................. $ 27.2
Less book value of historical assets with no value at the acquisition date:
Historical deferred tax asset............................................... 112.5
Historical goodwill......................................................... 365.4
Historical deferred debt costs.............................................. 20.2 (498.1)
------ --------
Negative pro forma book value of net assets acquired........................ 470.9
Purchase price.................................................................. 577.0
--------
Excess of purchase price to be allocated...................................... $1,047.9
========
Excess allocated to:
Inventories..................................................................... $ 39.9
Property, fixtures and equipment................................................ 160.0
Goodwill........................................................................ 862.1
Other non-current liabilities................................................... (14.1)
--------
$1,047.9
========
</TABLE>
(g) Reflects the debt issuance costs associated with the New Credit Facility,
($29.4 million), the RGC Offers ($4.2 million), the Exchange Offers ($2.9
million), the New F4L Senior Notes ($10.5 million) and the New RGC Notes
($3.0 million), the cash exchange payments associated with the RGC Offers
($8.5 million) and the Exchange Offers ($3.5 million) and other financing
costs ($32.8 million). These amounts have been capitalized as deferred
financing costs.
(h) Reflects the elimination of deferred debt issuance costs associated with the
Ralphs 1992 Credit Agreement (as defined) ($6.3 million), the F4L Credit
Agreement (as defined) ($9.0 million), the Old RGC Notes ($10.4 million) and
the Old F4L Notes ($14.7 million) and other indebtedness of RGC and Food 4
Less ($3.5 million) to be repaid in connection with the Merger.
(i) Reflects the elimination of Ralphs deferred tax asset associated with
changes in the financial reporting basis of assets. The combined Company may
be required to record a valuation allowance on all or some deferred tax
assets in compliance with Financial Accounting Standard No. 109 "Accounting
for Income Taxes." This determination may be based, in part, on historical
or expected earnings. For purposes of these pro forma financial statements
it has been assumed that all deferred net tax assets have been fully
reserved.
(j) Represents a loan to a corporation owned by Yucaipa affiliates. The
corporation will invest the loan proceeds in a partnership that will
purchase New Discount Debentures. All proceeds received by the Company from
the repayment of the loan will be paid to former holders of Ralphs EARs in
satisfaction of the deferred EAR liability. See the Prospectus under
"Certain Relationships and Related Transactions -- Food 4 Less."
(k) Reflects the repayment and cancellation of the current maturities of Ralphs
1992 Credit Agreement ($65.0 million), the F4L Credit Agreement ($19.8
million), certain other Ralphs debt ($2.1 million) and the recording of the
current maturities of the New Credit Facility ($3.3 million).
(l) Reflects the repayment of Ralphs' old revolving credit facility.
(m) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement
($1.5 million), the F4L Credit Agreement ($2.7 million), the Old RGC Notes
($5.5 million), the Old F4L Notes ($6.3 million) and other indebtedness of
RGC and Food 4 Less ($1.6 million) to be repaid in connection with the
Merger.
(n) Represents the liability to an executive under his employment contract due
to a change of control provision.
(o) Reflects the repayment and cancellation of the Ralphs 1992 Credit Agreement
and the F4L Credit Agreement, and the repayment of certain other Ralphs
debt, and records borrowings under the New Credit Facility as set forth in
the table below:
<TABLE>
<S> <C>
New Term Loans............................................................................ $ 596.7
New Revolving Facility.................................................................... 35.5
New F4L Senior Notes...................................................................... 350.0
New RGC Notes............................................................................. 100.0
Repay Ralphs 1992 Credit Agreement........................................................ (180.0)
Repay F4L Credit Agreement................................................................ (133.2)
Purchase Old RGC Notes.................................................................... (27.0)
Repay other Ralphs debt................................................................... (174.5)
-------
Net pro forma adjustment.......................................................... $ 567.5
=======
</TABLE>
(p) Reflects payments with respect to a portion of the Ralphs EAR liability
($17.8 million) and the issuance of New Holdings stock options in
consideration of the cancellation of the remaining Ralphs EAR liability
($10.0 million). See "Executive Compensation -- Equity Appreciation Rights
Plan." No future compensation expense will be recorded as the cancellation
of certain EAR liabilities ($10.0 million) in consideration for the issuance
of New Holdings stock options is deemed to reflect fair value.
(q) Reflects a reserve for Ralphs unfunded defined benefit pension plan,
determined as the difference between the projected benefit obligation of the
plans as compared to the fair value of plan assets, less amounts previously
accrued.
(r) Reflects cancellation of cumulative convertible preferred stock of Food 4
Less held by Holdings.
(s) Reflects the contribution by New Holdings of RSI stock acquired through the
issuance of $131.5 million aggregate principal amount of the Seller
Debentures and $18.5 million initial accreted value of the New Discount
Debentures.
(t) Reflects the contribution by New Holdings of RSI stock acquired with $100
million of the cash proceeds from the New Equity Investment.
(u) Reflects the contribution by New Holdings of $11.6 million in cash proceeds
from the New Equity Investment and the satisfaction by New Holdings, through
the issuance of New Discount Debentures, of $20.0 million in fees otherwise
payable by the Company in connection with the Merger and the Financing.
11
<PAGE> 15
(v) Reflects the elimination of Ralphs historical equity.
(w) Represents the write-off of the historical deferred debt issuance costs of
Food 4 Less related to its refinanced debt.
(x) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(y) The unaudited pro forma combined balance sheet as of January 29, 1995 does
not include certain one-time non-recurring costs related to (i) severance
payments under certain employment contracts with Food 4 Less management
totaling $1.4 million that are subject to change of control provisions and
the achievement of earnings and sales targets, (ii) costs related to the
integration of the Company's operations which are estimated to be $50.0
million (includes an estimated $12.0 million related to termination and
severance costs) over a three-year period, (iii) other costs related to
warehouse closures, which costs are not presently determinable, or (iv) any
contingent liability to reimburse Yucaipa in the event it incurs a loss on
the resale of $10 million principal amount of the Seller Debentures.
12
<PAGE> 16
SELECTED HISTORICAL FINANCIAL DATA OF FOOD 4 LESS
The following table presents selected historical financial data of Food 4
Less as of and for the 53 weeks ended June 30, 1990 and the 52 weeks ended June
29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks ended
January 29, 1995 which have been derived from the financial statements of Food 4
Less audited by Arthur Andersen LLP, independent public accountants. The summary
historical financial data of Food 4 Less presented below as of and for the 32
weeks ended February 5, 1994 have been derived from unaudited financial
statements of Food 4 Less which, in the opinion of management, reflect all
material adjustments, consisting of only normal recurring adjustments, necessary
for a fair presentation of such data. The following information should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements of Food 4 Less
and related notes thereto included elsewhere in this Supplement and in the
Prospectus.
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1990 1991(A) 1992 1993 1994(B) 1994 1995
-------- -------- -------- -------- -------- ----------- -----------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales................. $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,616.7 $1,556.5
Cost of sales......... 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,317.2 1,294.1
-------- -------- -------- -------- -------- -------- --------
Gross profit.......... 204.8 265.7 520.8 484.2 469.3 299.5 262.4
Selling, general,
administrative and
other expenses...... 157.8 213.1 469.7 434.9 388.8 252.3 222.4
Amortization of excess
cost over net
assets acquired..... 5.3 5.3 7.8 7.6 7.7 4.7 4.6
Restructuring charge.... -- -- -- -- -- -- 5.1 (d)
-------- -------- -------- -------- -------- -------- --------
Operating income...... 41.7 47.3 43.3 41.7 72.8 42.5 30.3
Interest expense(c)... 50.8 50.1 70.2 69.8 68.3 42.2 42.2
Loss (gain) on
disposal of assets.. -- 0.6 (1.3) (2.1) -- 0.1 (0.4)
Provision for
earthquake losses... -- -- -- -- 4.5 -- --
Provision for
income taxes........ 1.0 2.5 3.4 1.4 2.7 1.0 --
Extraordinary charge.... -- 3.7 (f) 4.8 (g) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss(e)........... $ (10.1) $ (9.6) $ (33.8) $ (27.4) $ (2.7) $ (0.8) $ (11.5)
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges(h).... -- (h) -- (h) -- (h) -- (h) 1.0x 1.0x -- (h)
BALANCE SHEET DATA (end of period)(i):
Working capital
surplus (deficit)... $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (13.8) $ (74.8)
Total assets.......... 574.7 980.0 998.5 957.8 980.1 957.4 1,000.7
Total debt(j)......... 360.7 558.9 525.3 538.1 517.9 526.3 533.8
Redeemable stock...... 5.1 -- -- -- -- -- --
Stockholder's equity.... 20.6 84.6 50.8 72.9 69.0 71.4 57.8
OTHER DATA:
Depreciation and
amortization(k)..... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 34.8 $ 36.6
Capital expenditures.. 36.4 34.7 60.3 53.5 57.5 29.1 49.0
Stores open at end
of period........... 115 259 249 248 258 249 267
EBITDA (as defined)(l) $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 79.8 $ 76.9
EBITDA margin(m)...... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 29, 1991 include the results of
Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha
Beta's sales for the two weeks ended June 29, 1991 were $59.2 million.
(b) Operating data for the 52 weeks ended June 25, 1994 include the results of
the Food Barn stores, which were not material, from March 29, 1994, the date
of the acquisition of the Food Barn stores.
(c) Interest expense includes non-cash charges related to the amortization of
deferred financing costs of $4.1 million for the 53 weeks ended June 30,
1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for
the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June
26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $3.4 million
for the 32 weeks ended February 5, 1994 and $3.4 million for the 31 weeks
ended January 29, 1995.
(d) Represents the recording of a restructuring charge for the write-off of
property and equipment in connection with the conversion of 11 conventional
format supermarkets to warehouse format stores.
(e) Net loss includes a pre-tax provision for self insurance, which is
classified in cost of sales, selling, general and administrative expenses
and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9
million, $25.7 million, $24.8 million, and $9.8 million for the 53 weeks
ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended
June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25,
1994, the 32 weeks ended
13
<PAGE> 17
February 5, 1994 and the 31 weeks ended January 29, 1995, respectively.
Included in the 52 weeks ended June 25, 1994, the 32 weeks ended February 5,
1994 and the 31 weeks ended January 29, 1995 are reduced employer
contributions of $8.1 million, $3.7 million and $14.3 million, respectively,
related to union health and welfare benefit plans.
(f) Represents an extraordinary charge of $3.7 million (net of related income
tax benefit of $2.5 million) relating to the refinancing of certain
indebtedness in connection with the Alpha Beta acquisition and the write-off
of related debt issuance costs.
(g) Represents an extraordinary net charge of $4.8 million reflecting the
write-off of $6.7 million (net of related income tax benefit of $2.5
million) of deferred debt issuance costs as a result of the early redemption
of a portion of Food 4 Less' term loan facility under the F4L Credit
Agreement, partially offset by a $1.9 million extraordinary gain (net of a
related income tax expense of $0.7 million) on the replacement of partially
depreciated assets following the civil unrest in Los Angeles.
(h) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of loss before provision for income taxes and extraordinary charges,
plus fixed charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Earnings were
insufficient to cover fixed charges for the 53 weeks ended June 30, 1990,
the 52 weeks ended June 29, 1991, June 27, 1992 and June 26, 1993 and the 31
weeks ended January 29, 1995 by approximately $9.1 million, $3.4 million,
$25.6 million, $25.9 million and $11.5 million, respectively. However, such
earnings included non-cash charges of $29.9 million for the 53 weeks ended
June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2
million for the 52 weeks ended June 27, 1992 and $62.5 million for the 52
weeks ended June 26, 1993 and $40.0 million for the 31 weeks ended January
29, 1995, primarily consisting of depreciation and amortization.
(i) Balance sheet data as of June 30, 1990 relate to Food 4 Less and include the
effect of the BHC Acquisition, as well as the acquisitions of Bell Markets,
Inc. and certain assets of ABC Market Corp. Balance sheet data as of June
29, 1991, June 27, 1992, June 26, 1993 and February 5, 1994 relate to Food 4
Less and reflect the Alpha Beta acquisition and the financings and
refinancings associated therewith. Balance sheet data as of June 25, 1994
and January 29, 1995 relate to Food 4 Less and reflect the acquisition of
the Food Barn stores.
(j) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(k) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June
27, 1992, June 26, 1993 and June 25, 1994, and the 32 weeks ended February
5, 1994 and the 31 weeks ended January 29, 1995, depreciation and
amortization includes amortization of excess of cost over net assets
acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7
million, $4.7 million and $4.6 million, respectively.
(l) "EBITDA," as defined and presented historically by Food 4 Less, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for incomes taxes, provision for earthquake
losses, provision for restructuring and the one-time adjustment to the
Teamsters Union sick pay accrual. EBITDA is a widely accepted financial
indicator of a company's ability to service debt. However, EBITDA should not
be construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of Food
4 Less' operating performance or as a measure of liquidity. See the
Prospectus under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(m) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
14
<PAGE> 18
UPDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations update the corresponding sections and
information presented in the Prospectus and add a discussion of certain recent
results of operations.
RESULTS OF OPERATIONS OF FOOD 4 LESS
The following table sets forth the historical operating results of Food 4
Less for the 52 weeks ended June 27, 1992 ("Fiscal 1992"), June 26, 1993
("Fiscal 1993") and June 25, 1994 ("Fiscal 1994"), for the 32 weeks ended
February 5, 1994 and for the 31 weeks ended January 29, 1995:
<TABLE>
<CAPTION>
52 WEEKS ENDED 32 WEEKS ENDED 31 WEEKS ENDED
---------------------------------------------------------- ---------------- ----------------
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
---------------- ---------------- ---------------- ---------------- ----------------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales...................... $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,616.7 100.0% $1,556.5 100.0%
Gross profit............... 520.8 17.9 484.2 17.7 469.3 18.1 299.5 18.5 262.4 16.9
Selling, general,
administrative and other,
net...................... 469.7 16.1 434.9 15.9 388.8 15.0 252.3 15.6 222.4 14.3
Amortization of excess
costs over net assets
acquired................. 7.8 0.3 7.6 0.3 7.7 0.3 4.7 0.3 4.6 0.3
Restructuring charge....... -- -- -- -- -- -- -- -- 5.1 0.3
Operating income........... 43.3 1.5 41.7 1.5 72.8 2.8 42.5 2.6 30.3 1.9
Interest expense........... 70.2 2.4 69.8 2.5 68.3 2.6 42.2 2.6 42.2 2.7
Loss (gain) on disposal of
assets................... (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.4) --
Provision for earthquake
losses................... -- -- -- -- 4.5 0.2 -- -- -- --
Provision for income
taxes.................... 3.4 0.1 1.4 0.1 2.7 0.1 1.0 0.1 -- --
(Loss) before extraordinary
charges.................. (29.0) (1.0) (27.4) (1.0) (2.7) (0.1) (0.8) -- (11.5) (0.7)
Extraordinary charges...... 4.8 0.2 -- -- -- -- -- -- -- --
Net loss................... (33.8) (1.2) (27.4) (1.0) (2.7) (0.1) (0.8) -- (11.5) (0.7)
</TABLE>
COMPARISON OF FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 31 WEEKS ENDED JANUARY
29, 1995 WITH FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 32 WEEKS ENDED FEBRUARY
5, 1994
Sales
Sales per week decreased $0.3 million, or 0.6%, from $50.5 million per week
in the 32 weeks ended February 5, 1994, to $50.2 million per week in the 31
weeks ended January 29, 1995, primarily as a result of a 4.6% decline in
comparable store sales, partially offset by sales from new and acquired stores
opened since February 5, 1994. Management believes that the decline in
comparable store sales is attributable to the weak economy in Southern
California and, to a lesser extent, in Food 4 Less' other operating areas, and
competitive store openings and remodels in Southern California.
Gross Profit
Gross profit decreased as a percentage of sales from 18.5% in the 32 weeks
ended February 5, 1994, to 16.9% in the 31 weeks ended January 29, 1995. The
decrease in gross profit margin resulted primarily from pricing and promotional
activities related to Food 4 Less' "Total Value Pricing" program and an increase
in the number of warehouse format stores (which have lower gross margins
resulting from prices that are generally 5-12% below the prices in Food 4 Less'
conventional stores) from 48 at February 5, 1994, to 89 at January 29, 1995. The
decrease in the gross profit margin was partially offset by improvements in
product procurement.
15
<PAGE> 19
Selling, General, Administrative and Other, Net
Selling, general, administrative and other expenses, net ("SG&A") were
$252.3 million and $222.4 million for the 32 weeks ended February 5, 1994 and
the 31 weeks ended January 29, 1995, respectively. SG&A decreased as a
percentage of sales from 15.6% to 14.3% for the same periods. Food 4 Less
experienced a reduction of workers' compensation and general liability
self-insurance costs of $14.8 million during the 31 weeks ended January 29, 1995
due to continued improvement in the cost and frequency of claims. The improved
experience was due primarily to cost control programs implemented by Food 4
Less, including awards for stores with the best loss experience, specific
achievable goals for each store, and increased monitoring of third-party
administrators. In addition, Food 4 Less maintained tight control of
administrative expenses and store level expenses, including payroll (due
primarily to increased productivity), advertising and other controllable store
expenses. Because Food 4 Less' warehouse stores have lower SG&A than
conventional stores, the increase in the number of warehouse stores, from 48 at
February 5, 1994, to 89 at January 29, 1995, also contributed to decreased SG&A.
Food 4 Less participates in multi-employer health and welfare plans for its
store employees who are members of the UFCW. As part of the renewal of the
Southern California UFCW contract in October 1993, employers contributing to
UFCW health and welfare plans are to receive a pro rata share of the excess
reserves in the plans through a reduction of current employer contributions.
Food 4 Less' share of the excess reserves was $24.2 million, of which Food 4
Less recognized $3.7 million in the 32 weeks ended February 5, 1994 and $14.3
million in the 31 weeks ended January 29, 1995, respectively. An additional $4.4
million of credits was recognized during the period from February 6, 1994
through the end of Fiscal 1994. The remainder of the excess reserves will be
recognized as the credits are taken in fiscal 1995.
On August 28, 1994, the Teamsters and Food 4 Less ratified a new contract
which, among other things, provided for the vesting of sick pay benefits
resulting in a one-time charge of $2.1 million which was recorded in the 31
weeks ended January 29, 1995.
Restructuring Charge
Food 4 Less has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 31 weeks ended January 29, 1995, Food 4 Less
recorded a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
Interest Expense
Interest expense (including amortization of deferred financing costs) was
$42.2 million for the 32 weeks ended February 5, 1994 and the 31 weeks ended
January 29, 1995. The increase in interest expense was primarily due to higher
interest rates on the term loan portion (the "Term Loan") of Food 4 Less' credit
agreement dated as of June 17, 1991, as amended (the "F4L Credit Agreement") and
on the revolving credit portion of the F4L Credit Agreement (the "Revolving
Credit Facility"). The increase was partially offset by the reduction of
indebtedness under the Term Loan as a result of amortization payments. Food 4
Less increased its borrowing under the F4L Credit Agreement as a result of
higher capital expenditures during the 31 weeks ended January 29, 1995. As a
result of capital expenditures subsequent to January 29, 1995, Food 4 Less has
increased its borrowing under the F4L Credit Agreement, which, coupled with
increased rates, has increased its interest expense and net loss during such
period.
Net Loss
Primarily as a result of the factors discussed above, Food 4 Less' net loss
increased from $760,000 in the 32 weeks ended February 5, 1994, to $11.5 million
in the 31 weeks ended January 29, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the New Credit Facility, the New Term Loans will be issued in
four tranches: (i) Tranche A, in the amount of $275 million, will have a
six-year term; (ii) Tranche B, in the amount of $108.3 million, will have a
seven-year term; (iii) Tranche C, in the amount of $108.3 million, will have an
eight-year term; and (iv) Tranche D, in the amount of $108.4 million, will have
a nine-year term. The Tranche A Loan may not be fully funded at the Closing
Date. The New Credit Facility will provide that the portion of the Tranche A
Loan
16
<PAGE> 20
not funded at the Closing Date will be available for a period of 91 days
following the Closing Date to fund the Change of Control Offer. The New Term
Loans will require quarterly amortization payments aggregating $3.3 million in
the first year, $36.3 million in the second year and increasing thereafter. See
the Prospectus under "Description of the New Credit Facility."
Food 4 Less generated $17.6 million of cash from operating activities
during the 31 weeks ended January 29, 1995 (as compared to generating $30.2
million of cash from operating activities during the 32 weeks ended February 5,
1994). The decrease in cash from operating activities is due primarily to
changes in operating assets and liabilities and a decrease in operating income.
The Company anticipates that one of the principal uses of cash in its operating
activities will be inventory purchases. However, supermarket operators typically
require small amounts of working capital since inventory is generally sold prior
to the time that payments to suppliers are due. This reduces the need for
short-term borrowings and allows cash from operations to be used for non-current
purposes such as financing capital expenditures and other investing activities.
Consistent with this pattern, Food 4 Less had a working capital deficit of $74.8
million at January 29, 1995. Subsequent to January 29, 1995, Food 4 Less
continued its practice of using cash from operations for non-current purposes
which increased the working capital deficit.
For the 31 weeks ended January 29, 1995, Food 4 Less' cash used in
investing activities was $42.6 million. Investing activities consisted primarily
of capital expenditures of $49.0 million, partially offset by $6.5 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds from
sale/leaseback transactions, were financed primarily with cash provided by
operating activities. The capital expenditures included the costs associated
with the conversion of 11 conventional format stores to the Food 4 Less
warehouse format. See the Prospectus under "Business -- The Merger -- Two
Leading Complementary Formats." In May 1995, the F4L Credit Agreement was
further amended in order to, among other things, accommodate Food 4 Less' new
fiscal year end for financial reporting purposes and to make adjustments to Food
4 Less' financial covenants.
Food 4 Less' cash provided by financing activities was $11.6 million for
the 31 weeks ended January 29, 1995, which consisted primarily of $27.3 million
of borrowings outstanding on the Revolving Credit Facility at January 29, 1995
partially offset by a $11.3 million repayment of the Term Loan. At January 29,
1995, $48.6 million of standby letters of credit had been issued under Food 4
Less' existing letter of credit facility.
RECENT RESULTS
Ralphs. Ralphs sales for the 12 weeks ended April 23, 1995 (the "first
quarter") increased $21.5 million, or 3.5%, to $637.5 million from $616.0
million in the 12 weeks ended April 24, 1994. Comparable store sales in the
first quarter decreased 2.2% from the corresponding period in the prior year.
Operating income for the 12 weeks ended April 23, 1995 decreased $2.8 million to
$31.3 million from $34.1 million in the 12 weeks ended April 24, 1994. EBITDA
(as defined) in the first quarter of the current fiscal year decreased to $52.3
million from $52.7 million in the comparable period of the prior year. Ralphs
net earnings in the first quarter of the current fiscal year declined $3.5
million from $8.4 million in the first quarter of Fiscal 1994 to $4.9 million in
the first quarter of the current fiscal year. The decline in net earnings was
largely attributable to an increased level of union health and welfare benefit
credits in the prior fiscal year. Such conditions continue to cause similar
decreases in operating income and net income through the period ended May 26,
1995 as compared to the same period in the preceding year.
Food 4 Less. Food 4 Less' sales for the 12 weeks ended April 23, 1995
increased $35.7 million, or 6.1% to $623.6 million from $587.9 million in the 12
weeks period ended April 2, 1994. Comparable store sales decreased approximately
2.2% from the 12 week period in the prior year. EBITDA (as defined) in the first
quarter of the current fiscal year decreased slightly to $30.1 million from
$30.2 million in the prior year's period. Food 4 Less' net loss decreased from
$4.3 million for the 12 weeks ended April 2, 1994 to $2.8 million for the 12
weeks ended April 23, 1995; however, Food 4 Less' net loss for the 1994 period
reflected a charge of $4.5 million related to earthquake damage. Food 4 Less'
increased borrowings for capital expenditures in the current fiscal year and the
resulting increased interest expense contributed to the net loss in the first
quarter of the current year.
17
<PAGE> 21
REVISIONS TO THE NEW F4L NOTES
The following sections of Revisions to the New F4L Notes update the
corresponding sections presented in the Prospectus.
GENERAL
The New F4L Senior Notes will be issued under an indenture, to be dated as
of June 1, 1995, by and among the Company, the Subsidiary Guarantors and Norwest
Bank Minnesota, N.A., as Trustee.
The following summary of certain provisions of the New F4L Notes and the
New Senior Note Indenture does not purport to be complete and is subject to, and
is qualified in its entirety by reference to the "Description of the New F4L
Notes" set forth in the Prospectus as well as by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the New F4L Notes and the New Senior Note Indenture, including the definitions
of certain terms therein and those terms made a part of the New Senior Note
Indenture by reference to the TIA.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW F4L SENIOR NOTES
The New F4L Senior Notes will mature on June 15, 2004. The up to $175
million principal amount of New F4L Senior Notes offered for exchange hereby
will be part of an issue of $525 million aggregate principal amount of New F4L
Senior Notes, $350 million principal amount of which will be issued pursuant to
the Senior Note Public Offering. The interest rate on the New F4L Senior Notes
offered pursuant to the Senior Note Public Offering has been established at
10.45% per annum. Accordingly, the New F4L Senior Notes offered for exchange in
the Exchange Offers also will bear interest at a rate of 10.45% per annum.
Interest on the New F4L Senior Notes will be payable semi-annually on each June
15 and December 15, commencing on December 15, 1995, to the New F4L Senior
Noteholders of record on the immediately preceding June 1 and December 1.
Interest on the New F4L Senior Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW F4L SENIOR SUBORDINATED NOTES
The New F4L Senior Subordinated Notes are limited in aggregate principal
amount to $145 million and will mature on June 15, 2005. Interest on the New F4L
Senior Subordinated Notes will accrue at the rate of 13.75% per annum and will
be payable semi-annually on each June 15 and December 15, commencing on December
15, 1995, to the Senior Subordinated Noteholders of record on the immediately
preceding June 1 and December 1. Interest on the New F4L Senior Subordinated
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
OPTIONAL REDEMPTION OF THE NEW F4L SENIOR NOTES
The New F4L Senior Notes will be redeemable, at the option of the Company,
in whole at any time or in part from time to time, on and after June 15, 2000,
at the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on June 15 of the
year set forth below, plus, in each case, accrued and unpaid interest to the
date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------- ----------
<S> <C>
2000.............................................. 105.225%
2001.............................................. 103.483%
2002.............................................. 101.742%
2003 and thereafter............................... 100.000%
</TABLE>
In addition, on or prior to June 15, 1998, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the New F4L Senior Notes originally issued, at a
redemption price equal to 110.450% of the principal amount thereof if redeemed
during the 12 months commencing on June 15, 1995, 108.957% of the principal
amount thereof if redeemed during
18
<PAGE> 22
the 12 months commencing on June 15, 1996 and 107.464% of the principal amount
thereof if redeemed during the 12 months commencing on June 15, 1997, in each
case plus accrued and unpaid interest, if any, to the redemption date. In order
to effect the foregoing redemption with the proceeds of a Public Equity
Offering, the Company shall send the redemption notice not later than 60 days
after the consummation of such Public Equity Offering.
CERTAIN COVENANTS
Limitation on Restricted Payments. Each of the New Indentures will provide
that the Company shall not, and shall cause each of its Subsidiaries not to,
directly or indirectly, make any Restricted Payment if, at the time of such
proposed Restricted Payment, or after giving effect thereto, (a) a Default or an
Event of Default shall have occurred and be continuing, (b) the Company could
not incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "-- Limitation on Incurrences of
Additional Indebtedness" below or (c) the aggregate amount expended for all
Restricted Payments, including such proposed Restricted Payment (the amount of
any Restricted Payment, if other than cash, to be the fair market value thereof
at the date of payment as determined in good faith by the Board of Directors of
the Company), subsequent to the Issue Date, shall exceed the sum of (i) 50% of
the aggregate Consolidated Net Income (or if such aggregate Consolidated Net
Income is a loss, minus 100% of such loss) of the Company earned subsequent to
the Issue Date and on or prior to the date of the proposed Restricted Payment
(the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by
the Company from any person (other than a Subsidiary of the Company) from the
issuance and sale (including upon exchange or conversion for other securities of
the Company) subsequent to the Issue Date and on or prior to the Reference Date
of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a
dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net
Proceeds from issuances and sales financed directly or indirectly using funds
borrowed from the Company or any Subsidiary, until and to the extent such
borrowing is repaid), plus (iii) 100% of the aggregate net cash proceeds
received by the Company as capital contributions to the Company after the Issue
Date, plus (iv) $25 million.
The New Indentures will provide that if no Default or Event of Default
shall have occurred and be continuing as a consequence thereof, the provisions
set forth in the immediately preceding paragraph will not prevent (1) the
payment of any dividend within 60 days after the date of its declaration if the
dividend would have been permitted on the date of declaration, (2) the
acquisition of any shares of Capital Stock of the Company or the repurchase,
redemption or other repayment of any Subordinated Indebtedness in exchange for
or solely out of the proceeds of the substantially concurrent sale (other than
to a Subsidiary) of shares of Qualified Capital Stock of the Company, (3) the
repurchase, redemption or other repayment of any Subordinated Indebtedness in
exchange for or solely out of the proceeds of the substantially concurrent sale
(other than to a Subsidiary) of Subordinated Indebtedness of the Company with an
Average Life equal to or greater than the then remaining Average Life of the
Subordinated Indebtedness repurchased, redeemed or repaid, (4) any payments by
the Company or any Subsidiary, or any dividend by the Company or any Subsidiary
to New Holdings the proceeds of which are used by New Holdings to make payments,
required to be made due to the exercise of statutory dissenters', appraisal or
similar rights by holders of common stock of FFL in connection with the FFL
Merger and (5) Permitted Payments; provided, however, that the declaration of
each dividend paid in accordance with clause (1) above, each acquisition,
repurchase, redemption or other repayment made in accordance with, or of the
type set forth in, clause (2) above, and each payment described in clause (iii),
(iv), (vii) and (ix) of the definition of the term "Permitted Payments" shall
each be counted for purposes of computing amounts expended pursuant to subclause
(c) in the immediately preceding paragraph, and no amounts expended pursuant to
clause (3) or (4) above or pursuant to clause (i), (ii), (v), (vi), (viii), (x),
(xi) or (xii) of the definition of the term "Permitted Payments" shall be so
counted; provided further that to the extent any payments made pursuant to
clause (vii) of the definition of the term "Permitted Payments" are deducted for
purposes of computing the Consolidated Net Income of the Company, such payments
shall not be counted for purposes of computing amounts expended as Restricted
Payments pursuant to subclause (c) in the immediately preceding paragraph.
19
<PAGE> 23
"Permitted Payments" means (i) any payment by the Company or any
Subsidiary, or any dividend by the Company or any Subsidiary to New
Holdings the proceeds of which are utilized by New Holdings to make
payments, to The Yucaipa Companies or the principals or any Affiliates
thereof for consulting, management, investment banking or similar services,
or for reimbursement of losses, costs and expenses pursuant to the
Consulting Agreement, (ii) any payment by the Company or any Subsidiary
pursuant to the Second Amended and Restated Tax Sharing Agreement, dated as
of the Closing Date, by and among Food 4 Less, all direct and indirect
subsidiaries and New Holdings, as such Tax Sharing Agreement may be amended
from time to time, so long as the payment thereunder by the Company and its
Subsidiaries shall not exceed the amount of taxes the Company would be
required to pay if it were the filing person for all applicable taxes,
(iii) any payment by the Company or any Subsidiary pursuant to the Transfer
and Assumption Agreement, dated as of June 23, 1989, between Food 4 Less
and Holdings, as in effect on the Issue Date, (iv) any payment by the
Company or any Subsidiary, or any dividend by the Company or any Subsidiary
to New Holdings the proceeds of which are used by New Holdings to make
payments, (a) in connection with repurchases of outstanding shares of the
Company's or New Holdings' Common Stock following the death, disability or
termination of employment of management stockholders, and (b) of amounts
required to be paid by New Holdings, the Company or any of its Subsidiaries
to participants or former participants in employee benefit plans upon
termination of employment by such participants, as provided in the
documents related thereto, in an aggregate amount (for both clauses (a) and
(b)) not to exceed $10 million in any Yearly Period (provided that any
unused amounts may be carried over to any subsequent Yearly Period subject
to a maximum amount of $20 million in any Yearly Period), (v) from and
after June 30, 1998, payments of cash dividends or loans to New Holdings in
an amount sufficient to enable New Holdings to make payments of interest
required to be made in respect of the Discount Notes in an amount not to
exceed the amount payable thereunder in accordance with the terms thereof
in effect on the Issue Date, (vi) from and after June 1, 2000, payments of
cash dividends to New Holdings in an amount sufficient to enable New
Holdings to make payments of interest required to be made in respect of the
Seller Debentures and the New Discount Debentures in an amount not to
exceed the amount payable thereunder in accordance with the terms thereof
in effect on the Issue Date, (vii) dividends or other payments to New
Holdings sufficient to enable New Holdings to perform accounting, legal,
corporate reporting and administrative functions in the ordinary course of
business or to pay required fees and expenses in connection with the
Merger, the FFL Merger, the Reincorporation Merger and the registration
under applicable laws and regulations of its debt or equity securities,
(viii) dividends or other distributions by the Company to New Holdings on
the Issue Date of shares of New Holdings common stock owned by the Company,
(ix) dividends by the Company to New Holdings of the Net Cash Proceeds of
an Asset Sale to the extent that (a) the Company nor any of the
Subsidiaries is required pursuant to the applicable New Indenture to
utilize such Net Cash Proceeds to repay (or offer to repay) the New Notes
issued under such New Indenture (and has complied with all such
requirements), (b) such Net Cash Proceeds are not required to be and have
not been utilized to repay outstanding Indebtedness of the Company or any
of the Subsidiaries and (c) New Holdings is required pursuant to the
documents governing any outstanding Indebtedness of New Holdings to utilize
such Net Cash Proceeds to repay such Indebtedness (it being understood that
only the amounts not utilized as described in clauses (a) and (b) of this
clause (ix) shall be permitted to be distributed to New Holdings pursuant
to this clause (ix)), (x) in the case of the New Senior Note Indenture, (A)
the exchange by the Company of Old RGC Notes for New RGC Notes, or the
purchase for cash of up to $27.0 million aggregate principal amount of Old
RGC Notes, in each case, in accordance with the terms of the RGC Offers,
(B) the exchange by the Company of Old F4L Senior Subordinated Notes for
New F4L Senior Subordinated Notes in accordance with the terms of the F4L
Exchange Offers and (C) the repurchase by the Company of up to $10.0
million aggregate principal amount of Old RGC Notes, at a repurchase price
of 101% of the principal amount thereof plus accrued interest to the
repurchase date, pursuant to the "change of control purchase offer"
provisions set forth in section 1014 of the Old RGC Indentures as in effect
on the Issue Date, (xi) the loan by the Company on the Issue Date to RGC
Investment Co. of not more than $5 million and (xii) for so long as the
sole business activity of such partnership is to acquire, hold, sell,
exchange, transfer or otherwise dispose of all or any portion of the New
Discount Debentures and to manage its investment in the New Discount
Debentures, any payment by the
20
<PAGE> 24
Company or any Subsidiary, or any dividend or loan to New Holdings, the
proceeds of which are utilized by New Holdings to fund ongoing costs and
expenses of RGC Partners, L.P. pursuant to the Subscription Agreement and
the Registration Rights Agreement.
"Registration Rights Agreement" means that certain Registration Rights
Agreement by and between RGC Partners, L.P., New Holdings and Food 4 Less,
as such Registration Rights Agreement may be amended or replaced, so long
as any amounts paid by New Holdings and the Company under any amended or
replacement agreement do not exceed the amounts payable by New Holdings and
the Company under such Registration Rights Agreement as in effect on the
Issue Date.
"Subscription Agreement" means that certain Subscription Agreement
between RGC Partners, L.P., New Holdings, Food 4 Less and the partnership
investors listed on Exhibit A thereto, as such Subscription Agreement may
be amended or replaced, so long as any amounts paid by New Holdings and the
Company under any amended or replacement agreement do not exceed the
amounts payable by New Holdings and the Company under such Subscription
Agreement as in effect on the Issue Date.
Limitation on Asset Sales. Each of the New Indentures will provide that
neither the Company nor any of its Subsidiaries shall consummate an Asset Sale
unless (a) the Company or the applicable Subsidiary receives consideration at
the time of such Asset Sale at least equal to the fair market value of the
assets sold and (b) upon consummation of an Asset Sale, the Company will within
365 days of the receipt of the proceeds therefrom, either: (i) apply or cause
its Subsidiary to apply the Net Cash Proceeds of any Asset Sale to (A) a Related
Business Investment, (B) an investment in properties and assets that replace the
properties and assets that are the subject of such Asset Sale or (C) an
investment in properties and assets that will be used in the business of the
Company and its Subsidiaries existing on the Issue Date or in businesses
reasonably related thereto; (ii) in the case of a sale of a store or stores,
deem such Net Cash Proceeds to have been applied to the extent of any capital
expenditures made to acquire or construct a replacement store in the general
vicinity of the store sold within 365 days preceding the date of the Asset Sale;
(iii) apply or cause to be applied such Net Cash Proceeds to the permanent
repayment of Pari Passu Indebtedness or, in the case of the New Senior
Subordinated Note Indenture, Senior Indebtedness; provided, however, that the
repayment of any revolving loan (under the Credit Agreement or otherwise) shall
result in a permanent reduction in the commitment thereunder; (iv) use such Net
Cash Proceeds to secure Letter of Credit Obligations to the extent the related
letters of credit have not been drawn upon or returned undrawn; or (v) after
such time as the accumulated Net Cash Proceeds equals or exceeds $20 million,
apply or cause to be applied such Net Cash Proceeds to the purchase of New Notes
issued under such New Indenture tendered to the Company for purchase at a price
equal to 100% of the principal amount thereof plus accrued interest to the date
of purchase pursuant to an offer to purchase made by the Company as set forth
below (a "Net Proceeds Offer"); provided, however, that the Company shall have
the right to exclude from the foregoing provisions Asset Sales subsequent to the
Issue Date, the proceeds of which are derived from the sale and substantially
concurrent lease-back of a supermarket and/or related assets or equipment which
are acquired or constructed by the Company or a Subsidiary subsequent to the
date that is six months prior to the Issue Date, provided that such sale and
substantially concurrent lease-back occurs within 270 days following such
acquisition or the completion of such construction, as the case may be. Pending
the utilization of any Net Cash Proceeds in the manner (and within the time
period) described above, the Company may use any such Net Cash Proceeds to repay
revolving loans (under the Credit Agreement or otherwise) without a permanent
reduction of the commitment thereunder.
Each Net Proceeds Offer will be mailed to the record Holders of New Senior
Notes or New Senior Subordinated Notes, as the case may be, as shown on the
register of Holders of such New Notes not less than 325 nor more than 365 days
after the relevant Asset Sale, with a copy to the applicable New Trustee, shall
specify the purchase date (which shall be no earlier than 30 days nor later than
40 days from the date such notice is mailed) and shall otherwise comply with the
procedures set forth in the applicable New Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders of New Senior Notes or New Senior Subordinated
Notes, as the case may be, may elect to tender their New Notes in whole or in
part in integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender New Senior Notes or New Senior Subordinated Notes, as the case
may be, in an amount exceeding the Net Proceeds Offer, New Notes of
21
<PAGE> 25
tendering Holders will be repurchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of New Notes pursuant to a Net Proceeds Offer.
DEFINITION OF "PERMITTED INDEBTEDNESS"
In addition to the foregoing changes, the additional Indebtedness basket
(subclause (m)) of the definition of Permitted Indebtedness set forth in the
Prospectus under "Description of the New F4L Notes" has been decreased from $200
million to $175 million.
22
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FOOD 4 LESS SUPERMARKETS, INC.:
Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-2
Consolidated balance sheets as of June 26, 1993, June 25, 1994 and January 29, 1995... F-3
Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31
weeks ended January 29, 1995........................................................ F-5
Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31
weeks ended January 29, 1995........................................................ F-6
Consolidated statements of stockholder's equity for the 52 weeks ended June 27, 1992,
June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995............. F-8
Notes to consolidated financial statements............................................ F-9
</TABLE>
F-1
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholder of Food 4 Less Supermarkets, Inc.:
We have audited the accompanying consolidated balance sheets of Food 4 Less
Supermarkets, Inc. (a Delaware corporation) and subsidiaries (the Company) as of
June 26, 1993 and June 25, 1994 and January 29, 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows for
the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31
weeks ended January 29, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Food 4 Less
Supermarkets, Inc. and subsidiaries as of June 26, 1993, June 25, 1994 and
January 29, 1995, and the results of their operations and their cash flows for
the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31
weeks ended January 29, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 18, 1995
F-2
<PAGE> 28
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
-------- -------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 25,089 $ 32,996 $ 19,560
Trade receivables, less allowances of $1,919, $1,386 and
$1,192 at June 26, 1993, June 25, 1994 and January
29, 1995, respectively............................... 22,048 25,039 23,377
Notes and other receivables............................. 1,278 1,312 3,985
Inventories............................................. 191,467 212,892 224,686
Patronage receivables from suppliers.................... 2,680 2,875 5,173
Prepaid expenses and other.............................. 6,011 6,323 13,051
-------- -------- ----------
Total current assets............................ 248,573 281,437 289,832
INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER
COOPERATIVES:
A.W.G................................................... 6,693 6,718 6,718
Certified and Other..................................... 6,657 5,984 5,686
PROPERTY AND EQUIPMENT:
Land.................................................... 23,912 23,488 23,488
Buildings............................................... 12,827 12,827 24,172
Leasehold improvements.................................. 81,049 97,673 110,020
Store equipment and fixtures............................ 129,178 148,249 157,607
Transportation equipment................................ 31,758 32,259 32,409
Construction in progress................................ 757 12,641 8,042
Leased property under capital leases.................... 77,553 78,222 82,526
Leasehold interests..................................... 93,863 93,464 96,556
-------- -------- ----------
450,897 498,823 534,820
Less: Accumulated depreciation and amortization......... 96,948 134,089 154,382
-------- -------- ----------
Net property and equipment........................... 353,949 364,734 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $11,611, $17,083 and $20,496 at June 26, 1993,
June 25, 1994 and January 29, 1995, respectively..... 33,778 28,536 25,469
Goodwill, less accumulated amortization of $26,254,
$33,945 and $38,560 at June 26, 1993, June 25, 1994
and January 29, 1995, respectively................... 280,895 267,884 263,112
Other, net.............................................. 27,295 24,787 29,440
-------- -------- ----------
$957,840 $980,080 $1,000,695
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 29
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
-------- -------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................ $140,468 $180,708 $ 190,455
Accrued payroll and related liabilities................. 40,319 42,805 42,007
Accrued interest........................................ 5,293 5,474 10,730
Other accrued liabilities............................... 40,467 53,910 65,279
Income taxes payable.................................... 2,053 2,000 293
Current portion of self-insurance liabilities........... 23,552 29,492 28,616
Current portion of long-term debt....................... 12,778 18,314 22,263
Current portion of obligations under capital leases..... 2,865 3,616 4,965
-------- -------- ----------
Total current liabilities....................... 267,795 336,319 364,608
LONG-TERM DEBT............................................ 335,576 310,944 320,901
OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 40,675
SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000
DEFERRED INCOME TAXES..................................... 22,429 14,740 17,534
SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 54,174
COMMITMENTS AND CONTINGENCIES............................. -- -- --
STOCKHOLDER'S EQUITY:
Cumulative convertible preferred stock, $.01 par value,
200,000 shares authorized and 50,000 shares issued at
June 26, 1993, June 25, 1994 and January 29, 1995
(aggregate liquidation value of $53.8 million, $62.2
million and $67.9 million at June 26, 1993, June 25,
1994 and January 29, 1995, respectively)............. 50,230 58,997 65,136
Common stock, $.01 par value, 1,600,000 shares
authorized and 1,519,632 shares issued at June 26,
1993, June 25, 1994 and January 29, 1995............. 15 15 15
Additional paid-in capital.............................. 107,650 107,650 107,650
Notes receivable from shareholders of parent............ (714) (586) (702)
Retained deficit........................................ (83,119) (94,586) (112,225)
-------- -------- ----------
74,062 71,490 59,874
Treasury stock: 13,249 shares, 16,732 shares and 12,345
shares of common stock at June 26, 1993, June 25,
1994 and January 29, 1995, respectively.............. (1,199) (2,469) (2,071)
-------- -------- ----------
Total stockholder's equity...................... 72,863 69,021 57,803
-------- -------- ----------
$957,840 $980,080 $1,000,695
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 30
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES....................................... $2,913,493 $2,742,027 $2,585,160 $1,616,720 $1,556,522
COST OF SALES (including purchases from
related parties of $277,812, $204,028,
$175,929, $108,264 (unaudited) and
$104,407 for the 52 weeks ended June 27,
1992, June 26, 1993, and June 25, 1994,
the 32 weeks ended February 5, 1994 and
the 31 weeks ended January 29, 1995,
respectively)............................. 2,392,655 2,257,835 2,115,842 1,317,216 1,294,147
----------- ----------- ----------- ----------- -----------
GROSS PROFIT................................ 520,838 484,192 469,318 299,504 262,375
SELLING, GENERAL, ADMINISTRATIVE AND OTHER,
NET....................................... 469,751 434,908 388,836 252,313 222,359
AMORTIZATION OF EXCESS COST OVER NET ASSETS
ACQUIRED.................................. 7,795 7,571 7,691 4,723 4,615
RESTRUCTURING CHARGE........................ -- -- -- -- 5,134
----------- ----------- ----------- ----------- -----------
OPERATING INCOME............................ 43,292 41,713 72,791 42,468 30,267
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs............ 63,907 64,831 62,778 38,800 38,809
Amortization of deferred financing
costs.................................. 6,304 4,901 5,472 3,368 3,413
----------- ----------- ----------- ----------- -----------
70,211 69,732 68,250 42,168 42,222
LOSS (GAIN) ON DISPOSAL OF ASSETS........... (1,364) (2,083) 37 60 (455)
PROVISION FOR EARTHQUAKE LOSSES............. -- -- 4,504 -- --
----------- ----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY CHARGES..................... (25,555) (25,936) -- 240 (11,500)
PROVISION FOR INCOME TAXES.................. 3,441 1,427 2,700 1,000 --
----------- ----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY CHARGES........... (28,996) (27,363) (2,700) (760) (11,500)
EXTRAORDINARY CHARGES:
Loss on extinguishment of debt, net of
income tax benefit of $2,484........... 6,716 -- -- -- --
Gain on partially depreciated assets
replaced by insurance companies, net of
income tax expense of $702............. (1,898) -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS.................................... $ (33,814) $ (27,363) $ (2,700) $ (760) $ (11,500)
========== ========== ========== ========== ==========
PREFERRED STOCK ACCRETION................... -- 3,882 8,767 5,395 6,139
LOSS APPLICABLE TO COMMON SHARES............ $ (33,814) $ (31,245) $ (11,467) $ (6,155) $ (17,639)
========== ========== ========== ========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges......... $ (20.74) $ (21.52) $ (7.63) $ (4.09) $ (11.72)
Extraordinary charges..................... (3.45) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss.................................. $ (24.19) $ (21.52) $ (7.63) $ (4.09) $ (11.72)
========== ========== ========== ========== ==========
Average Number of Common Shares
Outstanding............................ 1,397,939 1,452,184 1,503,828 1,504,172 1,504,425
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 31
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Cash received from customers............. $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 1,616,720 $ 1,556,522
Cash paid to suppliers and employees..... (2,752,442) (2,711,779) (2,441,353) (1,561,092) (1,507,523)
Interest paid............................ (56,234) (58,807) (56,762) (29,743) (33,553)
Income taxes (paid) refunded............. (4,665) 2,971 (247) 1,652 1,087
Interest received........................ 1,266 993 903 544 867
Other, net............................... 4,734 8,093 121 2,108 221
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................... 106,152 (16,502) 87,822 30,189 17,621
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment............................. 17,395 15,685 11,953 12,337 7,199
Payment for purchase of property and
equipment............................. (60,263) (53,467) (57,471) (29,090) (49,023)
Business acquisition costs, net of cash
acquired.............................. (27,563) -- (11,050) -- --
Receivable received from seller of
business acquired..................... 12,259 -- -- -- --
Other, net............................... (4,754) (18) 813 718 (797)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES...... (62,926) (37,800) (55,755) (16,035) (42,621)
CASH PROVIDED (USED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
debt.................................. 177,500 26,557 28 28 --
Net increase (decrease) in revolving
loan.................................. (23,900) 4,900 (4,900) 600 27,300
Payments of long-term debt............... (184,389) (14,319) (14,224) (10,571) (13,394)
Proceeds from the issuance of preferred
stock................................. -- 46,348 -- -- --
Proceeds from issuance of common stock,
net................................... 341 3,652 -- -- 269
Purchase (sale) of treasury stock, net... (313) (545) (1,192) (726) (57)
Payments of capital lease obligation..... (2,814) (2,840) (3,693) (1,791) (2,278)
Deferred financing costs and other....... (6,656) (8,839) (179) (161) (276)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES............................... (40,231) 54,914 (24,160) (12,621) 11,564
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 2,995 612 7,907 1,533 (13,436)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD................... 21,482 24,477 25,089 25,089 32,996
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD......................... $ 24,477 $ 25,089 $ 32,996 $ 26,622 $ 19,560
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 32
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss................................ $(33,814) $(27,363) $ (2,700) $ (760) $(11,500)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization........ 61,181 62,541 62,555 38,123 40,036
Extraordinary charge................. 4,818 -- -- -- 5,134
Restructuring charge................. -- -- -- -- --
Loss (gain) on sale of assets........ (1,364) (4,613) 65 60 (455)
Equity loss on investments in
supplier cooperative............... 472 207 -- -- --
Change in assets and liabilities, net
of effects from acquisition of
businesses:
Accounts and notes receivable...... (7,688) 17,145 (3,220) (2,139) (3,398)
Inventories........................ 202 17,697 (17,125) (10,254) (11,794)
Prepaid expenses and other......... (2,834) (6,163) (5,717) (6,701) (11,239)
Accounts payable and accrued
liabilities..................... 71,369 (83,286) 55,301 5,614 18,715
Self-insurance liabilities......... 15,034 2,935 (3,790) 3,594 (8,965)
Deferred income taxes.............. 2,033 4,004 2,506 1,714 2,794
Income taxes payable............... (3,257) 394 (53) 938 (1,707)
-------- -------- -------- -------- --------
Total adjustments.................... 139,966 10,861 90,522 30,949 29,121
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES.............................. $106,152 $(16,502) $ 87,822 $ 30,189 $ 17,621
======== ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of property and equipment
through issuance of capital lease
obligation........................... -- -- $ 2,575 -- $ 4,304
======== ======== ======== ======== ========
Reduction of goodwill and deferred
income taxes......................... -- -- $ 9,896 -- --
======== ======== ======== ======== ========
Acquisition of businesses:
Fair value of assets acquired........ -- -- $ 11,241 -- --
Net cash paid in acquisition......... -- -- (11,050) -- --
-------- -------- -------- -------- --------
Liabilities assumed.................. -- -- $ 191 -- --
======== ======== ======== ======== ========
Final purchase price allocation for the
Alpha Beta Acquisition:
Property and equipment valuation
adjustment......................... $ 44,231 -- -- -- --
======== ======== ======== ======== ========
Additional acquisition liabilities... $ 14,305 -- -- -- --
======== ======== ======== ======== ========
Deferred tax benefit................. $ 12,800 -- -- -- --
======== ======== ======== ======== ========
Accretion of preferred stock............ $ -- $ 3,882 $ 8,767 $ 5,395 $ 6,139
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 33
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
---------------- ------------------ ----------------- TOTAL
NUMBER NUMBER NUMBER SHARE- ADD'L STOCK-
OF OF OF HOLDERS' PAID-IN RETAINED HOLDER'S
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) EQUITY
------ ------- --------- ------ ------- ------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 29,
1991................... -- $ -- 1,396,878 $ 14 (1,250) $ (125) $ (930) $103,658 $ (18,060) $ 84,557
Net loss............... -- -- -- -- -- -- -- -- (33,814) (33,814)
Issuance of Common
Stock................ -- -- 1,636 -- -- -- (190) 341 -- 151
Purchase of Treasury
Stock................ -- -- -- -- (3,947) (463) 131 -- -- (332)
Sale of Treasury
Stock................ -- -- -- -- 1,560 159 (50) -- -- 109
Payments of
Shareholders'
Notes................ -- -- -- -- -- -- 100 -- -- 100
------ ------- --------- ---- ------- ------- ------ -------- --------- --------
BALANCES AT JUNE 27,
1992................... -- -- 1,398,514 14 (3,637) (429) (939) 103,999 (51,874) 50,771
Net loss............... -- -- -- -- -- -- -- -- (27,363) (27,363)
Issuance of Common
Stock................ -- -- 121,118 1 -- -- -- 3,651 -- 3,652
Purchase of Treasury
Stock................ -- -- -- -- (9,612) (770) 225 -- -- (545)
Issuance of Cumulative
Convertible Preferred
Stock................ 50,000 46,348 -- -- -- -- -- -- -- 46,348
Accretion of Preferred
Stock................ -- 3,882 -- -- -- -- -- -- (3,882) --
------ ------- --------- ---- ------- ------- ------ -------- --------- --------
BALANCES AT JUNE 26,
1993................... 50,000 50,230 1,519,632 15 (13,249) (1,199) (714) 107,650 (83,119) 72,863
Net loss............... -- -- -- -- -- -- -- -- (2,700) (2,700)
Purchase of Treasury
Stock................ -- -- -- -- (3,483) (1,270) 78 -- -- (1,192)
Payments of
Shareholders'
Notes................ -- -- -- -- -- -- 50 -- -- 50
Accretion of Preferred
Stock................ -- 8,767 -- -- -- -- -- -- (8,767) --
------ ------- --------- ---- ------- ------- ------ -------- --------- --------
BALANCES AT JUNE 25,
1994................... 50,000 58,997 1,519,632 15 (16,732) (2,469) (586) 107,650 (94,586) 69,021
Net loss............... -- -- -- -- -- -- -- -- (11,500) (11,500)
Payment of
Shareholders'
Notes................ -- -- -- -- -- -- 70 -- -- 70
Issuance of Treasury
Stock................ -- -- -- -- 5,504 460 (191) -- -- 269
Purchase of Treasury
Stock................ -- -- -- -- (1,117) (62) 5 -- -- (57)
Accretion of Preferred
Stock................ -- 6,139 -- -- -- -- -- -- (6,139) --
------ ------- --------- ---- ------- ------- ------ -------- --------- --------
BALANCES AT JANUARY 29,
1995................... 50,000 $65,136 1,519,632 $ 15 (12,345) $(2,071) $ (702) $107,650 $(112,225) $ 57,803
====== ======= ========= ==== ======= ======= ====== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 34
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND ACQUISITIONS
Food 4 Less Supermarkets, Inc. (the "Company"), a wholly-owned subsidiary
of Food 4 Less Holdings, Inc. ("Holdings"), is a multiple format supermarket
operator that tailors its retail strategy to the particular needs of the
individual communities it serves. Holdings is a majority-owned subsidiary of
Food 4 Less, Inc. ("FFL"). The Company operates in three geographic areas:
Southern California, Northern California and certain areas of the Midwest. The
Company has three first-tier subsidiaries: Cala Co. ("Cala"), Falley's, Inc.
("Falley's") and Food 4 Less of Southern California, Inc. ("F4L-SoCal"),
formerly known as Breco Holding Company, Inc. ("BHC"). Cala Foods, Inc. ("Cala
Foods") and Bell Markets, Inc. ("Bell") are subsidiaries of Cala, and Alpha Beta
Company ("Alpha Beta") is a subsidiary of F4L-SoCal.
(a) Acquisitions
On March 29, 1994, the Company purchased certain operating assets formerly
owned by Food Barn Stores, Inc. (the "Food Barn Stores") from Associated
Wholesale Grocers, Inc. ("AWG") (the "Food Barn Acquisition") for $11,241,000
(including acquisition costs of $180,000). The financial statements reflect the
preliminary allocation of the purchase price as the purchase price allocation
has not been finalized. The effect of the acquisition was not material to the
Company's financial position and results of operations. Falley's has agreed to
purchase merchandise (as defined) for the Food Barn Stores from AWG through
March 24, 2001. Falley's has pledged its patronage dividends and notes
receivable from AWG as security under this supply agreement.
On June 17, 1991, the Company acquired all of the common stock of Alpha
Beta for $270,513,000 (including acquisition costs of $41,477,000) in a
transaction accounted for as a purchase.
In January 1990, the Company purchased certain operating assets of ABC
Market Corp. ("ABC") for $14,675,000, plus approximately $1,000,000 in fees and
expenses.
On June 30, 1989, the Company acquired Bell for approximately $13,700,000,
which includes $8,000,000 of notes and the assumption of Bell's long-term debt.
The transaction was accounted for as a purchase. Certified Grocers of
California, Ltd. ("Certified") has guaranteed up to $4,000,000 of notes issued
by the Company to the seller in connection with the purchase and the performance
of a lease.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
The Company is engaged primarily in the operation of retail supermarkets.
(b) Basis of Presentation
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. The results of operations of Alpha Beta, F4L-SoCal (BHC), Bell,
ABC and the Food Barn Stores have been excluded from the consolidated financial
statements prior to their respective acquisition dates. The excess of the
purchase price over the fair value of the net assets acquired is classified as
goodwill. All intercompany transactions have been eliminated in consolidation.
(c) Fiscal Years
In anticipation of the Merger (as defined in Note 14 -- Ralphs Merger), and
in order to align the Company's fiscal year end with the fiscal year end of RSI
(as defined in Note 14 -- Ralphs Merger), the Company, together with its
subsidiaries, changed its fiscal year end from the 52 or 53-week period which
ends on the last Saturday in June to the 52 or 53-week period which ends on the
Sunday closest to January 31,
F-9
<PAGE> 35
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulting in a 31-week transition period ended January 29, 1995. As a result of
the fiscal year end change, the 52-week period ended June 27, 1992 is referred
to as fiscal year 1992, the 52-week period ended June 26, 1993 is referred to as
fiscal year 1993, the 52-week period ended June 25, 1994 is referred to as
fiscal year 1994, the 32-week period ended February 5, 1994 is referred to as
the 1994 transition period, and the 31-week period ended January 29, 1995 is
referred to as the 1995 transition period. In addition, information presented
below concerning subsequent fiscal years starts with fiscal year 1995, which
will cover the 52 weeks ended January 28, 1996, and will proceed sequentially
forward.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
(e) Inventories
Inventories, which consist of grocery products, are stated at the lower of
cost or market. Cost has been principally determined using the last-in,
first-out ("LIFO") method. If inventories had been valued using the first-in,
first-out ("FIFO") method, inventories would have been higher by $13,103,000,
$13,802,000 and $16,531,000 at June 26, 1993, June 25, 1994 and January 29,
1995, respectively, and gross profit and operating income would have been
greater by $3,554,000, $4,441,000, $699,000, $2,565,000 (unaudited) and
$2,729,000 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25,
1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29,
1995, respectively.
(f) Pre-opening Costs
The costs associated with opening new stores are deferred and amortized
over one year following the opening of each new store.
(g) Closed Store Reserves
When a store is closed, the Company provides a reserve for the net book
value of any store assets, net of salvage value, and the net present value of
the remaining lease obligation, net of sublease income. For the 52 weeks ended
June 27, 1992, June 26, 1993, and June 25, 1994, the 32 weeks ended February 5,
1994 and the 31 weeks ended January 29, 1995, utilization of this reserve was
$4.0 million, $2.4 million, $1.1 million, $579,000 (unaudited) and $573,000,
respectively.
(h) Investments in Supplier Cooperatives
The investment in Certified is accounted for on the cost method. There are
certain restrictions on the sale of this investment.
(i) Investment in Food 4 Less of Modesto, Inc.
During the 52 weeks ended June 26, 1993, the Company sold its 20%
investment in Food 4 Less of Modesto, Inc. ("Modesto") for gross proceeds of
$4.5 million, which included a $1.5 million note receivable, resulting in a gain
of $2.5 million. The Company previously accounted for this investment using the
cost method.
F-10
<PAGE> 36
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Property and Equipment
Property and equipment are stated at cost and are depreciated principally
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C> <C>
Buildings and improvements.................. 5-40 years
Equipment and fixtures...................... 3-10 years
Property under capital leases and leasehold
interests................................. 3-45 years (lease term)
</TABLE>
(k) Deferred Financing Costs
Costs incurred in connection with the issuance of debt are amortized over
the term of the related debt using the effective interest method.
(l) Goodwill and Covenants Not to Compete
The excess of the purchase price over the fair value of the net assets of
businesses acquired is amortized on a straight-line basis over 40 years
beginning at the date of acquisition. Current and undiscounted future operating
cash flows are compared to current and undiscounted future goodwill amortization
to determine if an impairment of goodwill has occurred and is continuing. As of
January 29, 1995, no impairment existed.
Covenants not to compete, which are included in Other Assets, are amortized
on a straight-line basis over the term of the covenant.
(m) Income Taxes
On June 27, 1993, the Company prospectively adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts.
Under SFAS 109, the Company recognizes to a greater degree the future tax
benefits of expenses which have been recognized in the financial statements.
The implementation of SFAS No. 109 did not have a material effect on the
accompanying consolidated financial statements.
(n) Notes Receivable from Shareholders of Parent
Notes receivable from shareholders of parent represent loans to employees
of the Company for purchases of Holdings' stock. The notes are due over various
periods, bear interest at the prime rate, and are secured by each shareholder's
shares of common stock.
(o) Self-Insurance
Certain of the Company's subsidiaries are self-insured for a portion of
workers' compensation, general liability and automobile accident claims. The
Company establishes reserves based on an independent actuary's review of claims
filed and an estimate of claims incurred but not yet filed.
F-11
<PAGE> 37
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(p) Discounts and Promotional Allowances
Promotional allowances and vendor discounts are recorded as a reduction of
cost of sales in the accompanying consolidated statements of operations.
Allowance proceeds received in advance are deferred and recognized over the
period earned.
(q) Provision for Earthquake Losses
On January 17, 1994, Southern California was struck by a major earthquake
which resulted in the temporary closing of 31 of the Company's stores. The
closures were caused primarily by loss of electricity, water, inventory, or
structural damage. All but one of the closed stores reopened within a week of
the earthquake. The final closed store reopened on March 24, 1994. The Company
is insured against earthquake losses (including business interruption), subject
to certain deductibles. The pre-tax financial impact, net of insurance claims,
was approximately $4.5 million. At June 25, 1994, the Company had received all
expected insurance proceeds related to this claim.
(r) Extraordinary Items
For the 52 weeks ended June 27, 1992, the Company classified the write-off
of deferred financing costs associated with the early extinguishment of debt as
an extraordinary item. For the 52 weeks ended June 27, 1992, the Company also
classified the difference between the net book value and replacement cost of
property and equipment destroyed during the April 1992 civil unrest in Los
Angeles and replaced by insurance companies as an extraordinary item. Proceeds
received from insurance companies for business interruption related to the civil
unrest are included as a component of selling, general, administrative and other
expenses.
(s) Loss Per Common Share
Loss per common share is computed based on the weighted average number of
shares outstanding during the applicable period. Fully diluted loss per share
has been omitted as it is anti-dilutive for all periods presented.
(t) Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the January 29, 1995 presentation.
(3) PREFERRED STOCK
On December 31, 1992, the Company issued 50,000 shares of $.01 par value
Series A cumulative convertible preferred stock (the "Preferred Stock") with a
liquidation value of $1,000 per share and 121,118 shares of its $.01 par value
common stock (the "Common Stock") to its parent company, Food 4 Less Holdings,
Inc. ("Holdings") in exchange for gross proceeds of $50.0 million. The Preferred
Stock is convertible into common stock at the option of the holder based upon a
conversion price which results in a one-for-one exchange. The Preferred Stock
has a stated dividend rate of $152.50 per share, per annum, and is
anti-dilutive. The Company may pay dividends on or before December 31, 1997 only
by issuing additional shares of Preferred Stock. The Company may redeem the
Preferred Stock at any time after December 31, 1997 for its liquidation value.
At January 29, 1995, the Company had accrued approximately $18,788,000 for the
Preferred Stock dividends earned but not yet declared.
In order to finance the purchase of the Preferred and Common Stock from the
Company, Holdings issued $103.6 million aggregate principal amount of 15.25%
Senior Discount Notes due 2004 (the "Holdings
F-12
<PAGE> 38
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes") and 121,118 Common Stock Purchase Warrants (the "Warrants") for gross
proceeds of $50.0 million. No cash interest is payable on the Notes until June
15, 1998.
At the present time, Holdings has no other income or assets other than its
investment in the Company's Common and Preferred Stock and intends to service
the interest payments on the Holdings Notes when they become payable in cash (in
fiscal 1998) through dividends it receives on the Company's capital stock.
(4) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT
Long Term Debt
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Bank Term Loan, principal due quarterly through
January 1999, with interest payable monthly
in arrears................................... $148,478,000 $137,064,000 $125,732,000
10.45 percent Senior Notes principal due 2000
with interest payable semi-annually in
arrears...................................... 175,000,000 175,000,000 175,000,000
Revolving Loan................................. 4,900,000 -- 27,300,000
10.625 percent first real estate mortgage due
1998, $12,000 of principal plus interest
payable monthly secured by land and building
with a net book value of $2,104,000.......... 1,558,000 1,521,000 1,498,000
9.2 to 9.25 percent notes payable,
collateralized by equipment, due September
1994, $67,000 of principal plus interest
payable monthly, plus balloon payment of
$992,000..................................... 1,772,000 1,103,000 --
10.8 percent notes payable, collateralized by
equipment, due September 1995, $72,000 of
principal plus interest payable monthly, plus
balloon payment of $1,004,000................ 2,447,000 1,819,000 1,420,000
10.0 percent secured promissory note,
collateralized by the stock of Bell, due
1996, interest payable quarterly through June
1996......................................... 8,000,000 8,000,000 8,000,000
10.08 percent notes payable, collateralized by
equipment, due November 1996, $34,000 of
principal plus interest payable monthly, plus
balloon payment of $493,000.................. 1,515,000 1,242,000 1,070,000
10.15 percent notes payable, collateralized by
equipment, due December 1996, $45,000 of
principal and interest payable monthly, plus
balloon payment of $640,000.................. 1,994,000 1,675,000 1,422,000
10.0 percent real estate mortgage due 2000,
$8,000 of principal and interest payable
monthly...................................... 474,000 419,000 392,000
Other long-term debt........................... 2,216,000 1,415,000 1,330,000
------------ ------------ ------------
348,354,000 329,258,000 343,164,000
Less -- current portion........................ 12,778,000 18,314,000 22,263,000
------------ ------------ ------------
$335,576,000 $310,944,000 $320,901,000
============ ============ ============
</TABLE>
In June 1991, the Company and certain of its subsidiaries entered into a
Credit Agreement (the "Credit Agreement") with certain banks, comprised of a
$315,000,000 Term Loan (the "Bank Term Loan") facility, a $70,000,000 Revolving
Loan (the "Revolving Loan") facility and a $55,000,000 standby letter of credit
facility (the "Letter of Credit Facility"). At January 29, 1995, $125.7 million
was outstanding under the Bank
F-13
<PAGE> 39
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Term Loan, $27.3 million was outstanding under the Revolving Loan and $48.6
million of standby letters of credit had been issued on behalf of the Company. A
commitment fee of 1/2 of 1 percent is charged on the average daily unused
portion of the Revolving Loan and the Letter of Credit Facility; such commitment
fees are due quarterly in arrears. Interest on borrowings under the Bank Term
Loan is at the bank's Base Rate (as defined) plus 1.25 percent or the Eurodollar
Rate (as defined) plus 2.5 percent. At January 29, 1995, the weighted average
interest rate on the Bank Term Loan was 8.3 percent. Quarterly principal
installments on the Bank Term Loan continue to December 1998, with $19,829,000
payable in fiscal year 1995, $22,661,000 payable in fiscal year 1996,
$33,792,000 payable in fiscal year 1997, and $49,450,000 payable in fiscal year
1998. Interest on borrowings under the Revolving Loan is at the bank's Base Rate
(as defined) plus 1.25 percent. At January 29, 1995, the interest rate on the
Revolving Loan was 9.75 percent. To the extent borrowings under the Revolving
Loan are not paid earlier, they are due in June 1996. The common stock of
F4L-SoCal, Falley's, Cala and certain of their direct and indirect subsidiaries
has been pledged as security under the Credit Agreement. The Credit Agreement
has been amended to, among other things, allow for the acceleration of the
capital expenditures and other costs associated with the conversion of 11
conventional stores to the warehouse format. In May 1995, the Credit Agreement
was further amended in order to, among other things, accommodate the Company's
new fiscal year end for financial reporting purposes and to make adjustments to
financial covenants of the Company.
In April 1992, the Company and its wholly-owned subsidiaries issued
$175,000,000 of 10.45 percent Senior Notes (the "Senior Notes"). These notes are
due in two equal sinking fund payments on April 15, 1999 and 2000. They are
general unsecured obligations of the Company and rank senior in right of payment
to all subordinated indebtedness (as defined). The Senior Notes rank "pari
passu" in right of payment with all borrowings and other obligations of the
Company under its bank Credit Agreement; however, the obligations under the
Credit Agreement are secured by substantially all the assets of the Company and
its subsidiaries. The Senior Notes may be redeemed beginning in 1996 at 104.5
percent, declining ratably to 100 percent in 1999. The proceeds received, net of
issuance costs, were used to pay down borrowings under the Bank Term Loan.
Deferred financing costs related to the portion of the Bank Term Loan that was
retired of $6.7 million, net of related tax benefit of $2.5 million, are
classified as an extraordinary item in the Company's consolidated statement of
operations for the 52 weeks ended June 27, 1992.
The debt agreements, among other things, require the Company to maintain
minimum levels of net worth (as defined), to maintain minimum levels of earnings
(as defined), to maintain a hedge agreement to provide interest rate protection,
and to comply with certain ratios related to interest expense (as defined),
fixed charges (as defined), working capital and indebtedness. In addition, the
debt agreements limit, among other things, additional borrowings, dividends on,
and redemption of, capital stock, capital expenditures, incurrence of lease
obligations, and the acquisition and disposition of assets. At January 29, 1995,
the Company was in compliance with the financial covenants of its debt
agreements. At January 29, 1995, dividends and certain other payments are
restricted based on terms in the debt agreements.
Scheduled maturities of principal of Long-Term Debt at January 29, 1995 are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995................................................... $ 22,263,000
1996................................................... 59,902,000
1997................................................... 33,991,000
1998................................................... 49,673,000
1999................................................... 88,976,000
Later years............................................ 88,359,000
------------
$343,164,000
============
</TABLE>
F-14
<PAGE> 40
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Debt
The Company issued $145,000,000 principal amount of Senior Subordinated
Notes (the "Subordinated Notes") in connection with the acquisition of Alpha
Beta as described in Note 1. The Subordinated Notes bear interest, payable
semi-annually on June 15 and December 15, at an annual rate of 13.75 percent.
The Subordinated Notes, which are due June 15, 2001, are subordinated to all
Senior Indebtedness (as defined) of the Company, and may be redeemed beginning
in 1996 at a redemption price of 106 percent. The redemption price declines
ratably to 100 percent in 2000.
(5) LEASES
The Company's operations are conducted primarily in leased properties.
Substantially all leases contain renewal options. Rental expense under operating
leases was as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rents.......... $46,706,000 $44,504,000 $49,788,000 $29,830,000 $35,458,000
Rents based on sales... 7,656,000 5,917,000 3,806,000 2,716,000 1,999,000
</TABLE>
Following is a summary of future minimum lease payments under operating
leases at January 29, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995................................................... $ 62,120,000
1996................................................... 58,163,000
1997................................................... 53,432,000
1998................................................... 47,064,000
1999................................................... 44,680,000
Later years............................................ 406,897,000
------------
$672,356,000
============
</TABLE>
The Company has entered into lease agreements for new supermarket sites
which were not in operation at January 29, 1995. Future minimum lease payments
under such operating leases generally begin when such supermarkets open and at
January 29,1995 are: 1995 -- $2,170,000; 1996 -- $6,640,000; 1997 -- $6,890,000;
1998 -- $6,890,000; 1999 -- $6,890,000; later years -- $145,425,000.
Certain leases qualify as capital leases under the criteria established in
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and
are classified on the consolidated balance sheets as leased property under
capital leases. Future minimum lease payments for the property under capital
leases at January 29, 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995.................................................... $ 9,564,000
1996.................................................... 8,957,000
1997.................................................... 8,050,000
1998.................................................... 6,236,000
1999.................................................... 5,739,000
Later years............................................. 40,841,000
-----------
Total minimum lease payments.................. 79,387,000
Less: amounts representing interest..................... 33,747,000
-----------
Present value of minimum lease payments................. 45,640,000
Less: current portion................................... 4,965,000
-----------
$40,675,000
===========
</TABLE>
F-15
<PAGE> 41
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated depreciation related to capital leases was $20,356,000,
$24,041,000, and $27,623,000 at June 26, 1993, June 25, 1994 and January 29,
1995, respectively.
The Company is leasing a distribution facility and four store locations
from the previous owner of Alpha Beta. The agreement contains a purchase option
for the land, buildings and improvements and equipment at a price that equals or
exceeds the estimated fair market value throughout the term of the lease.
(6) INVESTMENT IN A.W.G.
The investment in Associated Wholesale Grocers ("A.W.G.") consists
principally of the cooperative's six percent interest-bearing seven and
eight-year patronage certificates received in payment of certain rebates.
Following is a summary of future maturities based upon current redemption terms:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995..................................................... $ --
1996..................................................... 795,000
1997..................................................... 1,420,000
1998..................................................... 1,520,000
1999..................................................... 1,504,000
Later years.............................................. 1,479,000
----------
$6,718,000
==========
</TABLE>
(7) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal............................... $2,507,000 $ -- $ 3,251,000 $(2,894,000)
State and other....................... 934,000 82,000 712,000 100,000
---------- ---------- ----------- -----------
3,441,000 82,000 3,963,000 (2,794,000)
---------- ---------- ----------- -----------
Deferred:
Federal............................... -- 1,345,000 (70,000) 2,794,000
State and other....................... -- -- (1,193,000) --
---------- ---------- ----------- -----------
-- 1,345,000 (1,263,000) 2,794,000
---------- ---------- ----------- -----------
$3,441,000 $1,427,000 $ 2,700,000 $ --
========== ========== =========== ===========
</TABLE>
F-16
<PAGE> 42
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision (benefit) for income taxes to amounts
computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35%
for fiscal 1994 and the 1995 transition period is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate
on loss before provision for income
taxes and extraordinary charges...... $(8,689,000) $(8,818,000) $ -- $(4,025,000)
State and other taxes, net of federal
tax benefit.......................... 934,000 82,000 (1,000) 65,000
Alternative minimum tax................ 2,507,000 -- -- --
Effect of permanent differences
resulting primarily from amortization
of goodwill.......................... 2,706,000 2,850,000 2,820,000 1,701,000
Accounting limitation (recognition) of
deferred tax benefit................. 5,983,000 7,313,000 (119,000) 2,259,000
----------- ----------- ---------- -----------
$ 3,441,000 $ 1,427,000 $2,700,000 $ --
=========== =========== ========== ===========
</TABLE>
The provision (benefit) for deferred taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Depreciation......................... $ 6,282,000 $ 7,756,000 $ 2,536,000 $(1,513,000)
Difference between book and tax basis
of assets sold..................... 2,514,000 3,198,000 (4,223,000) 2,505,000
Deferred revenues and allowances..... (7,028,000) 40,000 (2,349,000) 707,000
Pre-opening costs.................... 1,072,000 (512,000) 174,000 784,000
Accounts receivable reserves......... -- (270,000) 249,000 80,000
Unicap............................... (124,000) (5,000) (536,000) (755,000)
Capital lease obligation............. (2,010,000) (1,385,000) 2,792,000 527,000
Self-insurance reserves.............. (13,558,000) (4,082,000) (535,000) 5,523,000
Inventory shrink reserve............. (528,000) 777,000 (869,000) (569,000)
LIFO................................. 7,104,000 (554,000) (1,010,000) (1,303,000)
Closed store reserve................. 964,000 1,092,000 440,000 176,000
Accrued expense...................... -- -- (582,000) 350,000
Accrued payroll and related
liabilities........................ (2,656,000) 193,000 1,721,000 (3,879,000)
Damaged inventory reimbursement...... 1,195,000 -- -- --
Acquisition costs.................... 4,974,000 2,626,000 1,397,000 (5,444,000)
Sales tax reserves................... -- (715,000) (418,000) 433,000
Deferred rent subsidy................ -- (483,000) (624,000) (29,000)
Net operating loss usage............. -- -- 5,782,000 (6,963,000)
Tax credits benefited................ -- (1,392,000) (4,477,000) 1,711,000
Accounting limitation (recognition)
of deferred tax benefit 1,588,000 (4,591,000) (1,085,000) 10,494,000
Other, net........................... 211,000 (348,000) 354,000 (41,000)
------------ ----------- ----------- -----------
$ -- $ 1,345,000 $(1,263,000) $ 2,794,000
============ =========== =========== ===========
</TABLE>
F-17
<PAGE> 43
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related
liabilities......................... $ 4,064,000 $ 2,448,000 $ 6,248,000
Other accrued liabilities.............. 13,488,000 13,953,000 12,080,000
Property and equipment................. 9,674,000 2,997,000 --
Self-insurance liabilities............. 30,907,000 27,744,000 25,204,000
Loss carryforwards..................... 27,863,000 20,675,000 27,638,000
Tax credit carryforwards............... 1,392,000 5,869,000 4,157,000
Other.................................. 1,223,000 580,000 570,000
------------ ------------ ------------
Gross deferred tax assets........... 88,611,000 74,266,000 75,897,000
Valuation allowance.................... (45,008,000) (31,149,000) (41,643,000)
------------ ------------ ------------
Net deferred tax assets............. $ 43,603,000 $ 43,117,000 $ 34,254,000
------------ ------------ ------------
Deferred tax liabilities:
Inventories............................ $(20,243,000) $(16,738,000) $(11,690,000)
Property and equipment................. (38,298,000) (30,516,000) (28,527,000)
Obligations under capital leases....... (5,802,000) (8,733,000) (9,261,000)
Other.................................. (1,689,000) (1,870,000) (2,310,000)
------------ ------------ ------------
Gross deferred tax liability........ (66,032,000) (57,857,000) (51,788,000)
------------ ------------ ------------
Net deferred tax liability.......... $(22,429,000) $(14,740,000) $(17,534,000)
============ ============ ============
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its
gross deferred tax assets at January 29, 1995 due primarily to financial and tax
losses in recent years. Under SFAS 109, this valuation allowance will be
adjusted in future periods as appropriate. However, the timing and extent of
such future adjustments to the allowance cannot be determined at this time.
At January 29, 1995, approximately $8,864,000 of the valuation allowance
for deferred tax assets will reduce goodwill when the allowance is no longer
required.
At January 29, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of $77,360,000, which expire in 2007 through 2009.
The Company has federal Alternative Minimum Tax ("AMT") credit carryforwards of
approximately $556,000 which are available to reduce future regular taxes in
excess of AMT. Currently, there is no expiration date for these credits.
FFL files a consolidated federal income tax return, under which the federal
income tax liability of FFL and its subsidiaries (which since June 23, 1989
include the Company) is determined on a consolidated basis. FFL has entered into
a federal income tax sharing agreement with the Company and certain of its
subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides
that in any year in which the Company is included in any consolidated tax
liability of FFL and has taxable income, the Company will pay to FFL the amount
of the tax liability that the Company would have had on such due date if it had
been filing a separate return. Conversely, if the Company generates losses or
credits which actually reduce the consolidated tax liability of FFL and its
other subsidiaries, FFL will credit to the Company the amount of such reduction
in the consolidated tax liability. These credits are passed between FFL and the
Company in the form of cash payments. In the event any state and local income
taxes are determinable on a combined or consolidated basis, the Tax Sharing
Agreement provides for a similar allocation between FFL and the Company of such
state and local taxes.
F-18
<PAGE> 44
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company currently has an Internal Revenue Service examination in
process covering its 1990 and 1991 fiscal years. The Internal Revenue Service
has not yet made any additional tax assessments related to these years.
(8) RELATED PARTY TRANSACTIONS
The Company has a five-year consulting agreement with an affiliated company
effective June 17, 1991 for management, financing, acquisition and other
services. The agreement is automatically renewed on January 1 of each year for
the five-year term unless ninety (90) days' notice is given by either party. The
contract provides for annual management fees equal to $2 million plus an
additional amount based on the Company's performance and advisory fees for
acquisition and financing transactions.
Fees paid or accrued associated with management services were $1,167,000
during the 31 weeks ended January 29, 1995, $1,231,000 (unaudited) during the 32
weeks ended February 5, 1994, $2,270,000 during the 52 weeks ended June 25,
1994, $2,000,000 during the 52 weeks ended June 26, 1993, and $2,000,000 during
the 52 weeks ended June 27, 1992. Advisory fees paid or accrued were $170,000
during the 52 weeks ended June 25, 1994, $1,795,000 for the 52 weeks ended June
26, 1993, and $116,000 for the 52 weeks ended June 27, 1992. There were no such
advisory fees paid or accrued for the 31 weeks ended January 29, 1995 or for the
32 weeks ended February 5, 1994. Advisory fees paid or accrued for financing
transactions are capitalized and amortized over the term of the related
financing. In connection with the acquisitions of Alpha Beta, ABC and the Food
Barn Stores, the Company capitalized fees of $8,000,000, $500,000 and $92,000,
respectively, which were paid to this affiliated company for acquisition
services.
(9) COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to former stockholders of certain
predecessors for any prorated gains which may be realized within ten years of
the acquisition of the respective companies resulting from the sale of the
Certified stock. Such gains are only payable if Certified is purchased or
dissolved, or if the Company sells the shares to Certified within the period
noted above.
The Company is a partner in a supplier partnership, in which it is
contingently liable for the partnership's long-term debt. The Company's portion
of such debt is approximately $1,818,000.
The Company has entered into lease agreements with the developers of
several new sites in which the Company has agreed to provide construction
financing. At January 29, 1995, the Company had capitalized construction costs
of $15,081,000 on total commitments of $19,250,000.
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against the Company and other major
supermarket chains located in Southern California, alleging that they conspired
to refrain from competing in and to fix the price of fluid milk above
competitive prices. Specifically, class actions were commenced by Diane Barela
and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and
December 23, 1992, respectively. To date, the Court has yet to certify any of
these classes, while a demurrer to the complaints was denied. The Company will
vigorously defend itself in these class action suits.
In addition, the Company or its subsidiaries are defendants in a number of
other cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion of
management, the resolutions of these matters will not have a material effect on
the Company's financial position or results of operations.
The Company self-insures its workers compensation and general liability.
For the 31 weeks ended January 29, 1995, the 32 weeks ended February 5, 1994,
the 52 weeks ended June 25, 1994, June 26, 1993 and June 27, 1992,
self-insurance loss provisions were $6,304,000, $21,064,000 (unaudited),
$19,880,000,
F-19
<PAGE> 45
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$38,040,000 and $46,140,000, respectively. During the 52 weeks ended June 27,
1997, June 26, 1993 and June 25, 1994, the Company discounted its self-insurance
liability using a 7.0% discount rate. In the 1995 transition period, the Company
changed the discount rate to 7.5%. Management believes that this rate
approximates the time value of money over the anticipated payout period
(approximately 10 years) for essentially risk-free investments. The net
self-insurance liability would have been greater by $794,000 had the 7.0%
discount rate been applied during the 31 weeks ended January 29, 1995, as
opposed to the 7.5% discount rate.
The Company's historical self-insurance liability for the three most recent
fiscal years is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Self-insurance liability... $ 95,605,000 $100,773,000 $90,898,000 $ 84,286,000
Less: Discount............. (13,046,000) (15,279,000) (9,194,000) (11,547,000)
------------ ------------ ----------- ------------
Net self-insurance
liability................ $ 82,559,000 $ 85,494,000 $81,704,000 $ 72,739,000
============ ============ =========== ============
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $10 million, $14 million, $13 million, $15 million and $5 million
for its fiscal years 1995, 1996, 1997, 1998 and 1999, respectively.
(10) EMPLOYEE BENEFIT PLANS
The Company implemented Statement of Position ("SOP") No. 93-6, "Employer
Accounting for Employee Stock Ownership Plans", effective June 26, 1994. The
implementation of SOP No. 93-6 did not have a material effect on the
accompanying unaudited consolidated financial statements.
The Company and its subsidiaries sponsor several defined contribution
benefit plans. The full-time employees of Falley's who are not members of a
collective bargaining agreement are covered under a 401(k) plan under which the
Company matches certain employee contributions with cash or FFL stock (the
"Falley's ESOP"). As part of the original stock sale agreement between FFL and
the Falley's ESOP, which has been amended from time to time, a partnership which
owns stock of FFL has assumed the obligation to purchase any FFL shares as to
which terminated plan participants exercise a put option under the terms of
Falley's ESOP. The Company is not required to make cash payments to redeem the
shares. As part of that agreement, the Company may elect, after providing a
right of first refusal to the partnership, to purchase FFL shares put under the
provisions of the plan. However, the partnership's obligation to purchase such
FFL shares is unconditional, and any repurchase of shares by the Company is at
the Company's sole election. During the 31-week period ended January 29, 1995,
the Company did not purchase any of the FFL shares. FFL shares purchased by the
Company are classified as treasury stock. As of April 30, 1994, the fair value
of the shares allocated which are subject to a repurchase obligation by the
partnership referred to above was approximately $15,170,000.
The Company also sponsors two ESOPs for employees of the Company who are
members of certain collective bargaining agreements (the "Union ESOPs"). The
Union ESOPs provide for annual contributions based on hours worked at a rate
specified by the terms of the collective bargaining agreements. The Company
contributions are made in the form of Holdings stock or cash for the purchase of
Holdings stock and are to be allocated to participants based on hours worked.
During the 31 weeks ended January 29, 1995, the Company recorded a charge
against operations of approximately $286,000 for benefits under the Union ESOPs.
There were no shares issued to the Union ESOPs at January 29, 1995.
All other full-time employees of the Company who are not members of a
collective bargaining agreement are covered under a separate 401(k) plan (the
"Management Plan"). The Management Plan provides for annual contributions which
are determined at the discretion of the Company. The Company contributions are
F-20
<PAGE> 46
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocated to participants based on employee compensation and matching of certain
employee contributions. A portion of the Company contribution allocated based on
compensation is made in the form of stock or cash for the purchase of stock.
Total charges against operations related to all employee benefit plans
sponsored by the Company and its subsidiaries were $337,000, $284,000, $103,000
(unaudited) and $699,000 for the 52 weeks ended June 27, 1992, the 52 weeks
ended June 26, 1993, the 32 weeks ended February 5, 1994 and the 52 weeks ended
June 25, 1994, respectively, and there were no such charges for the 31 weeks
ended January 29, 1995. No contributions were made with stock and no stock was
acquired by any plans in fiscal 1992, fiscal 1993, fiscal 1994 or in the 1995
transition period.
The Company contributes to multi-employer pension plans administered by
various trustees. Contributions to these plans are based upon negotiated wage
contracts. These plans may be deemed to be defined benefit plans. Information
related to accumulated plan benefits and plan net assets as they may be
allocated to the Company at January 29, 1995 is not available. The Company
contributed $78.6 million, $69.4 million, $57.2 million, $35.7 million
(unaudited) and $21.6 million to these plans for the 52 weeks ended June 27,
1992, June 26, 1993, June 25, 1994, the 32 weeks ended February 5, 1994 and the
31 weeks ended January 29, 1995, respectively. Management is not aware of any
plans to terminate such plans.
The United Food and Commercial Workers health and welfare plans were
overfunded and those employers who contributed to the plans are to receive a pro
rata share of the excess reserves in these plans through a reduction of current
contributions. The Company's share of the excess reserve was $24.2 million, of
which $8.1 million, $3.7 million (unaudited) and $14.3 million was recognized in
the 52 weeks ended June 25, 1994, the 32 weeks ended February 5, 1994 and the 31
weeks ended January 29, 1995, respectively, with the remainder to be recognized
in future periods as the credits are taken. Offsetting the reduction in employer
contributions was a $5.5 million union contract ratification bonus and
contractual wage increases.
(11) COMMON STOCK
On December 31, 1992, concurrent with the sale of the Preferred Stock, the
Company sold 121,118 shares of common stock to Holdings. Concurrently, the
remaining shares of common stock of the Company were exchanged for shares of
Holdings common stock on a one for one basis.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
(a) Cash and Cash Equivalents
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
(b) Short-Term Notes and Other Receivables
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
(c) Investments In and Notes Receivable From Supplier Cooperatives
The Company maintains a non-current deposit with Certified in the form of
Class B shares of Certified. Certified is not obligated in any fiscal year to
redeem more than a prescribed number of the Class B shares issued. Therefore, it
is not practicable to estimate the fair value of this investment.
F-21
<PAGE> 47
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains a non-current note receivable from A.W.G. There are
no quoted market prices for this investment and a reasonable estimate could not
be made without incurring excessive costs. Additional information pertinent to
the value of this investment is provided in Note 6.
(d) Long-Term Debt
The fair value of the $175.0 million Senior Notes, the $145.0 million
Subordinated Notes and the Bank Term Loan is based on quoted market prices.
Market quotes for the fair value of the remainder of the Company's debt are not
available, and a reasonable estimate of the fair value could not be made without
incurring excessive costs. Additional information pertinent to the value of the
unquoted debt is provided in Note 4.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
JANUARY 29, 1995
-------------------------
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $19,560,000 $19,560,000
Short-term notes and other receivables...................... 6,364,000 6,364,000
Investments in and notes receivable from supplier
cooperatives.............................................. 12,404,000 --
Long-term debt for which it is:
- Practicable to estimate fair values..................... 473,032,000 475,567,000
- Not practicable......................................... 15,132,000 --
</TABLE>
(13) OTHER INCOME, NET
The components of other income items included in SG&A are as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income.............. $1,266,000 $ 993,000 $ 903,000 $ 544,000 $ 867,000
Licensing fees............... 493,000 246,000 270,000 142,000 77,000
Other income (expense)....... 769,000 3,710,000 (177,000) 1,967,000 139,000
---------- ---------- --------- ---------- ----------
$2,528,000 $4,949,000 $ 996,000 $2,653,000 $1,083,000
========== ========== ========= ========== ==========
</TABLE>
(14) RALPHS MERGER
On September 14, 1994, the Company, Holdings and FFL entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") with Ralphs
Supermarkets, Inc. ("RSI") and the stockholders of RSI. Pursuant to the terms of
the Merger Agreement, as amended, the Company will be merged with and into RSI
(the "RSI Merger"). Immediately following the RSI Merger, Ralphs Grocery Company
("RGC"), which is currently a wholly-owned subsidiary of RSI, will merge with
and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger"),
and RSI will change its name to Ralphs Grocery Company ("Ralphs"). Prior to the
Merger, FFL will merge with and into Holdings, which will be the surviving
corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings
will change its jurisdiction of incorporation by merging into a newly-formed,
wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the
"Reincorporation Merger"). As a result of the Merger, the FFL Merger and the
Reincorporation Merger, Ralphs will become a wholly-owned subsidiary of New
Holdings.
F-22
<PAGE> 48
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Conditions to the consummation of the Merger include, among other things,
the completion of financing for the transaction and the receipt of other
necessary consents. The purchase price for RSI is approximately $1.5 billion,
including the assumption of debt.
The aggregate purchase price, payable to the stockholders of RSI in
connection with the Merger, consists of $375 million in cash, $131.5 million
principal amount of New Holdings 13 5/8% Senior Subordinated Pay-in-Kind
Debentures due 2007 and $18.5 million initial accreted value of New Holdings
13 5/8% Senior Discount Debentures due 2005. In addition, Ralphs will enter into
an agreement with a stockholder of RSI pursuant to which such stockholder will
act as a consultant to Ralphs with respect to certain real estate and general
commercial matters for a period of five years from the closing of the Merger in
exchange for the payment of a consulting fee.
The financing required to complete the Merger will include the issuance of
significant additional equity by New Holdings, the issuance of new debt
securities by the Company and New Holdings and the incurrence of additional bank
financing by Ralphs. The equity issuance will be made to a group of investors
led by Apollo Advisors, L.P. and Apollo Advisors II, L.P., which has committed
to purchase up to $140 million in New Holdings stock. The issuance of new debt
securities is expected to consist of up to $295 million principal amount of
Senior Notes due 2004 and up to $200 million principal amount of Senior
Subordinated Notes due 2005 to be issued by the Company. New Holdings will issue
an additional $81.5 million of initial accreted value of New Discount Debentures
for $59.0 million in cash and $22.5 million in lieu of cash for fees associated
with the Merger. Holdings will redeem the Discount Notes, with a book value of
$65.1 million at January 29, 1995, for $83.9 million in cash. The bank financing
will be made pursuant to a commitment by Bankers Trust Company to provide up to
$1,075 million in such financing. In connection with the receipt of new
financing, the Company and Holdings will also be required to complete certain
exchange offers, consent solicitations, offers to repurchase, and other
transactions with the holders of the Company's and Holdings' and RGC's currently
outstanding debt securities.
As of January 29, 1995, Ralphs had outstanding indebtedness of
approximately $1,018.5 million. Ralphs had sales of $2,724.6 million, operating
income of $145.6 million and earnings before income taxes of $32.1 million for
its most recent fiscal year ended January 29, 1995.
Upon consummation of the Merger, management anticipates that certain
non-recurring costs associated with the integration of operations will be
recorded as a restructuring charge. The charge will cover costs associated with
the writedown of property and equipment and related reserves associated with the
conversion of certain of the Company's conventional stores to warehouse stores
and the closure of certain of the Company's conventional stores as well as the
write-off of the Alpha Beta trademark. This restructuring charge has been
estimated at approximately $45.5 million. On December 14, 1994, the Company and
RSI entered into a Settlement Agreement (the "Settlement Agreement") with the
State of California. Under the Settlement Agreement, the Company must divest a
total of 27 stores (23 of the Company's conventional stores, 1 warehouse store
and 3 RGC stores). In addition, although not required pursuant to the Settlement
Agreement, an additional 5 under-performing stores are scheduled to be closed
following the Merger. It is anticipated that such closures and store conversions
will be substantially completed by December 31, 1995. The estimated
restructuring charge aggregating $45.5 million for the Company's 24 stores to be
divested under the Settlement Agreement, the 5 planned closures and the
conversion of 16 of the Company's conventional stores to warehouse stores
reflects (i) the writedown of property, plant and equipment ($27.9 million),
(ii) the write-off of the Alpha Beta trademark ($8.6 million), (iii) the
write-off of other assets ($4.3 million), (iv) lease termination expense ($3.1
million) and (v) miscellaneous expense accruals ($1.6 million). The expected
cash payments to be made in connection with the restructuring charge will total
$7.1 million. It is expected that such cash payments will be made by December
31, 1995. As a result of the completion of 11 of the 16 planned conventional
store conversions by the Company during the second quarter of the 1995
transition period, the Company has recorded a non-cash restructuring charge for
the write-off of property and equipment of $5.1 million in its results of
operations for the 31 weeks ended January 29, 1995. The Company
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<PAGE> 49
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has determined that there is no impairment of existing goodwill related to the
store closures based on its projections of future undiscounted cash flows. The
remaining estimated restructuring charge will be recorded as an expense once the
Merger is completed. The divestiture of the 3 RGC stores pursuant to the
Settlement Agreement will be reflected in the allocation of the purchase price
and, therefore, will not give rise to any restructuring charge.
(15) RESTRUCTURING CHARGE
The Company has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 31 weeks ended January 29, 1995, the Company
recorded a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
F-24
<PAGE> 50
Facsimile copies of the Letters of Transmittal, properly completed and duly
executed, will be accepted, Letters of Transmittal, certificates for the Old F4L
Notes and any other required documents should be sent by each holder or its
broker, dealer, commercial bank, trust company or other nominee to the Exchange
Agent at one of its addresses set forth below.
The Exchange Agent is:
BANKERS TRUST COMPANY
Facsimile Transmission Number:
(212) 250-6275
(212) 250-3290
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By Mail: (For Eligible Institutions Only) By Hand/Overnight Delivery:
Bankers Trust Company Bankers Trust Company
Corporate Trust and Agency Group Confirm by Telephone: Corporate Trust and Agency Group
Reorganization Dept. (212) 250-6270 Receipt & Delivery Window
P.O. Box 1458 123 Washington Street, 1st Floor
Church Street Station New York, New York 10006
New York, New York 10008-1458
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Any questions or requests for assistance or additional copies of this
Supplement, the Prospectus, the Letters of Transmittal and the Notices of
Guaranteed Delivery may be directed to the Information Agent or one of the
Dealer Managers at their respective telephone numbers and locations set forth
below. You may also contact your broker, dealer, commercial bank, trust company
or other nominee for assistance concerning the Exchange Offers and the
Solicitation.
The Information Agent is:
D.F. KING & CO., INC.
Call Toll Free: (800) 669-5550
77 Water Street
New York, NY 10005
(212) 269-5550 (collect)
The Dealer Managers are:
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BT SECURITIES CS FIRST BOSTON DONALDSON, LUFKIN
CORPORATION 55 East 52nd Street & JENRETTE
One Bankers Trust Plaza New York, New York 10055 SECURITIES CORPORATION
130 Liberty Street (212) 909-2873 140 Broadway
New York, New York 10006 New York, New York 10005
(212) 775-2166 (212) 504-4753
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