<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
October 12, 1997 33-46750
RALPHS GROCERY COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 95-4356030
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
1100 West Artesia Boulevard
Compton, California 90220
(Address of principal executive offices) (Zip code)
(310) 884-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
At November 26, 1997, there were 1,513,938 shares of Common Stock
outstanding. As of such date, all of the outstanding shares of Common Stock were
held by Food 4 Less Holdings, Inc., and there was no public market for the
Common Stock.
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RALPHS GROCERY COMPANY
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of
February 2, 1997 and October 12, 1997 ........................ 2
Consolidated statements of operations for the 12 weeks ended
October 6, 1996 and October 12, 1997.......................... 4
Consolidated statements of operations for the 36 weeks ended
October 6, 1996 and October 12, 1997.......................... 5
Consolidated statements of cash flows for the 36 weeks ended
October 6, 1996 and October 12, 1997.......................... 6
Consolidated statements of stockholder's deficit as of
February 2, 1997 and October 12, 1997......................... 8
Notes to consolidated financial statements....................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures....................................................... 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE> 4
RALPHS GROCERY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
February 2, October 12,
ASSETS 1997 1997
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,589 $ 63,524
Trade receivables, less allowances of
$4,057 and $3,630 at February 2, 1997 and
October 12, 1997, respectively 46,560 42,078
Notes and other receivables 531 520
Inventories 502,095 492,894
Patronage receivables from suppliers 4,433 3,532
Prepaid expenses and other 21,925 23,713
---------- ----------
Total current assets 643,133 626,261
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 7,020 6,797
Certified Grocers of California and others 4,945 4,945
PROPERTY AND EQUIPMENT:
Land 173,803 173,878
Buildings 188,311 193,947
Leasehold improvements 226,159 257,383
Fixtures and equipment 401,716 448,970
Construction in progress 51,117 37,686
Leased property under capital leases 200,199 225,322
Leasehold interests 112,398 110,673
---------- ----------
1,353,703 1,447,859
Less: Accumulated depreciation and amortization 301,477 367,171
---------- ----------
Net property and equipment 1,052,226 1,080,688
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $17,615 and $8,605 at February 2, 1997 and
October 12, 1997, respectively 88,889 50,764
Goodwill, less accumulated amortization of $99,057
and $123,453 at February 2, 1997 and
October 12, 1997, respectively 1,310,956 1,286,560
Other, net 24,824 20,753
---------- ----------
$3,131,993 $3,076,768
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
2
<PAGE> 5
RALPHS GROCERY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
February 2, October 12,
LIABILITIES AND STOCKHOLDER'S DEFICIT 1997 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 343,704 $ 302,081
Accrued payroll and related liabilities 106,764 110,476
Accrued interest 31,011 58,247
Other accrued liabilities 261,582 216,889
Income taxes payable 1,956 1,929
Current portion of self-insurance liabilities 48,251 48,251
Current portion of long-term debt 4,465 6,409
Current portion of obligations under capital leases 28,041 32,047
----------- -----------
Total current liabilities 825,774 776,329
SENIOR DEBT, net of current portion 1,263,142 1,314,024
OBLIGATIONS UNDER CAPITAL LEASES 126,336 133,177
SENIOR SUBORDINATED DEBT 671,222 689,379
DEFERRED INCOME TAXES 21,074 20,874
SELF-INSURANCE LIABILITIES 91,332 87,758
LEASE VALUATION RESERVE 62,389 56,314
OTHER NON-CURRENT LIABILITIES 106,286 108,416
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 5,000,000 shares
authorized; 1,513,938 shares issued and
outstanding at February 2, 1997 and October 12, 1997,
respectively 15 15
Additional capital 466,783 466,933
Notes receivable from stockholders of parent (592) (584)
Retained deficit (501,768) (575,867)
----------- -----------
Total stockholder's deficit (35,562) (109,503)
----------- -----------
$ 3,131,993 $ 3,076,768
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
3
<PAGE> 6
RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
October 6, October 12,
1996 1997
----------- -----------
<S> <C> <C>
SALES $ 1,221,018 $ 1,230,522
COST OF SALES (including purchases from related
parties of $19,829 and $16,453 for the 12 weeks
ended October 6, 1996 and the 12 weeks ended
October 12, 1997, respectively) 957,086 976,662
----------- -----------
GROSS PROFIT 263,932 253,860
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 211,064 200,867
AMORTIZATION OF GOODWILL 8,218 8,132
----------- -----------
OPERATING INCOME 44,650 44,861
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 53,721 52,637
Amortization of deferred financing costs 2,794 916
----------- -----------
56,515 53,553
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY CHARGES (11,865) (8,692)
PROVISION FOR INCOME TAXES -- --
----------- -----------
LOSS BEFORE EXTRAORDINARY CHARGES (11,865) (8,692)
EXTRAORDINARY CHARGES -- --
----------- -----------
NET LOSS $ (11,865) $ (8,692)
=========== ===========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (7.84) $ (5.74)
Extraordinary charges -- --
----------- -----------
Net loss $ (7.84) $ (5.74)
=========== ===========
Average Number of Common Shares Outstanding 1,513,938 1,513,938
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
4
<PAGE> 7
RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 6, October 12,
1996 1997
----------- -----------
<S> <C> <C>
SALES $ 3,695,594 $ 3,778,470
COST OF SALES (including purchases from related
parties of $67,694 and $48,958 for the 36 weeks
ended October 6, 1996 and the 36 weeks ended
October 12, 1997, respectively) 2,941,360 3,000,531
----------- -----------
GROSS PROFIT 754,234 777,939
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 626,809 615,933
AMORTIZATION OF GOODWILL 24,403 24,396
----------- -----------
OPERATING INCOME 103,022 137,610
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 160,545 159,320
Amortization of deferred financing costs 7,862 4,406
----------- -----------
168,407 163,726
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY CHARGES (65,385) (26,116)
PROVISION FOR INCOME TAXES -- --
----------- -----------
LOSS BEFORE EXTRAORDINARY CHARGES (65,385) (26,116)
EXTRAORDINARY CHARGES -- 47,983
----------- -----------
NET LOSS $ (65,385) $ (74,099)
=========== ===========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (43.19) $ (17.25)
Extraordinary charges -- (31.69)
----------- -----------
Net loss $ (43.19) $ (48.94)
=========== ===========
Average Number of Common Shares Outstanding 1,513,938 1,513,938
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
5
<PAGE> 8
RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 6, October 12,
1996 1997
----------- -----------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $ 3,695,594 $ 3,778,470
Cash paid to suppliers and employees (3,443,282) (3,592,757)
Interest paid (128,831) (132,452)
Income taxes paid -- (27)
Interest received 1,610 322
Other, net (276) (8,861)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,815 44,695
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 23,680 25,736
Payment for purchase of property and equipment (74,328) (111,154)
Payment of acquisition costs, net of cash acquired (5,573) (6,823)
Other, net (2,530) (1,959)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (58,751) (94,200)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 94,625 721,961
Payments of long-term debt (58,284) (688,432)
Payments of capital lease obligations (18,730) (20,344)
Increase (decrease) in revolving loan, net (79,400) 37,500
Capital contribution from parent -- 150
Deferred financing costs and other (5,236) (5,395)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (67,025) 45,440
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (961) (4,065)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67,983 67,589
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,022 $ 63,524
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
6
<PAGE> 9
RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 6, October 12,
1996 1997
--------- ---------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (65,385) $ (74,099)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 119,487 121,047
Non-cash extraordinary charges -- 39,122
Amortization of debt discount 103 322
Amortization of debt premium -- (368)
Loss (gain) on sale of assets 276 (10)
Change in assets and liabilities, net of effects
from acquisition of business:
Accounts and notes receivable 1,858 5,394
Inventories 19,864 9,201
Prepaid expenses and other (906) (9,482)
Accounts payable and accrued liabilities 44,285 (42,630)
Self-insurance liabilities 5,233 (3,575)
Deferred income taxes -- (200)
Income taxes payable -- (27)
--------- ---------
Total adjustments 190,200 118,794
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 124,815 $ 44,695
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Fixed assets acquired through the issuance of
capital leases $ 23,912 $ 36,084
========= =========
Retirement of capital leases $ -- $ 4,893
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
7
<PAGE> 10
RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number Total
of Stockholder's Additional Retained Stockholder's
Shares Amount Notes Capital Deficit Deficit
--------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 2, 1997 1,513,938 $ 15 $ (592) $ 466,783 $(501,768) $ (35,562)
Payments on Stockholder's Notes -- -- 8 -- -- 8
Capital contribution by F4L Holdings, Inc. -- -- -- 150 -- 150
Net loss (unaudited) -- -- -- -- (74,099) (74,099)
--------- --------- --------- --------- --------- ---------
BALANCES AT OCTOBER 12, 1997 (unaudited) 1,513,938 $ 15 $ (584) $ 466,933 $(575,867) $(109,503)
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
8
<PAGE> 11
RALPHS GROCERY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 12, 1997
(UNAUDITED)
1. ORGANIZATION AND ACQUISITION
Ralphs Grocery Company (the "Company"), a wholly-owned subsidiary
of Food 4 Less Holdings, Inc. ("Holdings"), is a retail supermarket
company with a total of 406 stores which are located in Southern
California (342), Northern California (27) and certain areas of the
Midwest (37). The Company is the largest supermarket operator in
Southern California. The Company operates the second largest
conventional supermarket chain in the region under the "Ralphs" name and
the largest warehouse supermarket chain in the region under the "Food 4
Less" name.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet and statement of
stockholder's deficit of the Company as of October 12, 1997 and the
consolidated statements of operations and cash flows for the interim
periods ended October 6, 1996 and October 12, 1997 are unaudited, but
include all adjustments (consisting of only normal recurring accruals)
which the Company considers necessary for a fair presentation of its
consolidated financial position, results of operations and cash flows
for these periods. These interim financial statements do not include all
disclosures required by generally accepted accounting principles and,
therefore, should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended February 2, 1997. The results of
operations for the interim periods are not necessarily indicative of the
results for a full fiscal year.
Inventories
Inventories, which consist primarily 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 $24.3 million and $26.6 million at
February 2, 1997 and October 12, 1997, respectively, and gross profit
and operating income would have been greater by $3.7 million and $2.2
million for the 36 weeks ended October 6, 1996 and October 12, 1997,
respectively.
Income Taxes
The Company provides for income taxes in interim periods based on
the estimated effective income tax rate for the complete fiscal year.
Deferred taxes result from the future tax consequences associated with
temporary differences between the amount of assets and liabilities
recorded for tax and financial accounting purposes. A valuation
allowance for deferred tax assets is recorded to the extent the Company
cannot determine, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
that the ultimate realization of net deferred tax assets is more likely
than not.
For the period ended October 12, 1997, the estimated effective
income tax rate is less than the U.S. statutory rate primarily due to a
100% valuation allowance provided against the additional deferred tax
assets that arose from the current operating loss.
9
<PAGE> 12
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.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the October 12, 1997
presentation.
New Accounting Standards
In February 1997, Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128") was issued. SFAS No. 128 is
effective for earnings per share calculations for periods ending after
December 15, 1997. The new method of calculating earnings per share
will have no effect on the Company's historical earnings per share.
In June 1997, Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") was issued.
Adoption of this statement will not have a material effect on
historical results of operations.
3. RESTRUCTURING CHARGE
During the 36 weeks ended October 12, 1997, the Company utilized
$2.8 million and $2.9 million of the remaining restructuring reserve
related to the fiscal 1995 $75.2 and $47.9 million restructuring
charges, respectively. The amounts utilized primarily include
write-downs of property and equipment ($1.6 million) and payments for
lease obligations ($3.6 million). At October 12, 1997 approximately
$19.6 million of the restructuring accrual related to the $75.2 million
charge and $14.1 million of the restructuring accrual related to the
$47.9 million charge remained accrued on the Company's balance sheet
consisting primarily of provisions for lease obligations. As of February
2, 1997 the Company has completed a majority of the restructuring
actions, although certain lease obligations will continue through 2010.
4. DEBT
During the first quarter of fiscal 1997, the Company issued $155
million principal amount of 11% Senior Subordinated Notes due 2005 (the
"1997 11% Senior Subordinated Notes") with terms substantially identical
to the Company's existing 11% Senior Subordinated Notes at a price of
105.5% of their principal amount, resulting in gross proceeds of $163.5
million. The proceeds were used to redeem all of the Company's $145
million principal amount of 13.75% Senior Subordinated Notes at a price
of 106.1% of their principal amount and to pay the related accrued
interest through the redemption date, which was April 28, 1997. The
remaining proceeds were used to pay fees and expenses associated with
the issuance of the 1997 11% Senior Subordinated Notes.
During the first quarter of fiscal 1997, the Company also amended
and restated its existing credit facility ("Old Credit Facility") to
lower interest margins and allow more flexibility with respect to
application of proceeds from certain asset sales and capital
expenditures. The amended and restated credit facility (the "New Credit
Facility") consists of a $200.0 million Term Loan A Facility and a
$350.0 million Term Loan B Facility (together, the "Term Loans") and a
$325.0 million Revolving Credit Facility ("Revolving Facility") under
which working capital loans may be made and commercial or standby
letters of credit in the maximum of $150.0 million may be issued.
10
<PAGE> 13
Borrowings under the New Credit Facility bear interest at the
bank's Base Rate (as defined) plus a margin ranging from 0.25 percent to
1.75 percent or the Eurodollar Rate (as defined) plus a margin ranging
from 1.25 percent to 2.75 percent. At October 12, 1997, $548.3 million
was outstanding under the Term Loans, $136.9 million was outstanding
under the Revolving Facility, and $75.5 million of standby Letters of
Credit had been issued on behalf of the Company. At October 12, 1997,
the weighted average interest rates on the Term Loans and on the
Revolving Facility were 7.82 percent and 7.83 percent, respectively.
Quarterly principal installments on the Term Loans continue to 2004,
with principal amounts due as follows: $2.6 million in fiscal 1997, $3.5
million in fiscal 1998, $25.5 million in fiscal 1999, $62.6 million in
fiscal 2000, $87.5 million in fiscal 2001 and $368.3 million thereafter.
As a result of the refinancings described above, the Company
recorded extraordinary charges in the first quarter of fiscal 1997 of
approximately $48.0 million, consisting of the call premium on the
13.75% Senior Subordinated Notes and the write-off of deferred financing
costs associated with the Old Credit Facility and the 13.75% Senior
Subordinated Notes.
5. RELATED PARTY TRANSACTIONS
During the 12 weeks ended October 12, 1997 and October 6, 1996,
the Company purchased $16.5 million and $19.8 million, respectively, in
inventory from Certified Grocers. During the 36 weeks ended October 12,
1997 and October 6, 1996, the Company purchased $49.0 million and $67.7
million, respectively, in inventory from Certified Grocers.
6. SUBSEQUENT EVENT
On November 6, 1997, Holdings, which is the parent of the
Company, Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"), and
FFL Acquisition Corp., a Delaware corporation and wholly owned
subsidiary of Fred Meyer ("Acquisition"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the
Merger Agreement, Acquisition would merge with and into Holdings (the
"Merger"), subject to certain conditions being satisfied or waived.
Pursuant to the Merger Agreement, the stockholders of Holdings would
receive an aggregate of the greater of (i) 22.5 million shares of Fred
Meyer Common Stock or (ii) the lesser of (A) the number of shares of
Fred Meyer Common Stock equal to $600 million divided by the average
closing price of the Fred Meyer Common Stock on the New York Stock
Exchange for 15 out of the 35 trading days ending on the second trading
day preceding the effective date of the Merger or (B) 24 million shares
of Fred Meyer Common Stock; provided, however, that such aggregate
number of shares of Fred Meyer Common Stock will be reduced (i) to the
extent necessary to terminate or otherwise satisfy Holdings' obligations
under existing stock options and warrants and (ii) upon the occurrence
of certain other events, in each case, as specified in the Merger
Agreement. In addition, Fred Meyer would assume or refinance the debt of
Holdings and the Company. Conditions to the consummation of the Merger
include the receipt of regulatory approvals and approval by the
stockholders of Fred Meyer and Holdings. Certain shareholders of
Holdings holding approximately 64.3% of the aggregate voting power of
Holdings have entered into agreements to vote their Holdings shares in
favor of the Merger.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT EVENTS
On November 6, 1997, Food 4 Less Holdings, Inc. ("Holdings"), which is
the parent of Ralphs Grocery Company (the "Company"), Fred Meyer, Inc. ("Fred
Meyer"), and FFL Acquisition Corp., a wholly owned subsidiary of Fred Meyer
("Acquisition"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement, Acquisition would
merge with and into Holdings (the "Merger"), subject to certain conditions being
satisfied or waived. Pursuant to the Merger Agreement, the stockholders of
Holdings would receive an aggregate of the greater of (i) 22.5 million shares of
Fred Meyer Common Stock or (ii) the lesser of (A) the number of shares of Fred
Meyer Common Stock equal to $600 million divided by the average closing price of
the Fred Meyer Common Stock on the New York Stock Exchange for 15 out of the 35
trading days ending on the second trading day preceding the effective date of
the Merger or (B) 24 million shares of Fred Meyer Common Stock; provided,
however, that such aggregate number of shares of Fred Meyer Common Stock will be
reduced (i) to the extent necessary to terminate or otherwise satisfy Holdings'
obligations under existing stock options and warrants and (ii) upon the
occurrence of certain other events, in each case, as specified in the Merger
Agreement. In addition, Fred Meyer will assume or refinance the debt of Holdings
and the Company. Conditions to the consummation of the Merger include the
receipt of regulatory approvals and approval by the stockholders of Fred Meyer
and Holdings. Certain shareholders of Holdings holding approximately 64.3% of
the aggregate voting power of Holdings have entered into agreements to vote
their Holdings shares in favor of the Merger. Concurrently with the execution of
the Merger Agreement, Fred Meyer executed an agreement and plan of merger with
Quality Food Centers, Inc. ("QFC") pursuant to which QFC will become a
wholly-owned subsidiary of Fred Meyer. QFC operates retail supermarkets in the
State of Washington and in Southern California. The Merger is an independent
transaction and is not conditioned on the consummation of Fred Meyer's merger
with QFC.
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating results
of the Company for the 12 and 36 weeks ended October 6, 1996 and October 12,
1997, respectively:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------------------------------------- ----------------------------------------
October 6, 1996 October 12, 1997 October 6, 1996 October 12, 1997
--------------- ---------------- --------------- ----------------
(in millions)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 1,221.0 100.0% $ 1,230.5 100.0% $ 3,695.6 100.0% $ 3,778.5 100.0%
Gross profit 263.9 21.6 253.9 20.6 754.2 20.4 777.9 20.6
Selling, general and
administrative
expenses 211.1 17.3 200.9 16.3 626.8 17.0 615.9 16.3
Amortization
of goodwill 8.2 0.7 8.1 0.7 24.4 0.7 24.4 0.6
Operating income 44.7 3.7 44.9 3.6 103.0 2.8 137.6 3.6
Interest expense 56.5 4.6 53.6 4.4 168.4 4.6 163.7 4.3
Provision for
income taxes -- -- -- -- -- -- -- --
Loss before
extraordinary charges (11.9) (1.0) (8.7) (0.7) (65.4) (1.8) (26.1) (0.7)
Extraordinary
charges -- -- -- -- -- -- 48.0 1.3
Net loss $ (11.9) (1.0)% $ (8.7) (0.7)% $ (65.4) (1.8)% $ (74.1) (2.0)%
</TABLE>
Sales. Sales for the 12 weeks ended October 12, 1997 increased $9.5
million to $1,230.5 million from $1,221.0 million for the 12 weeks ended October
6, 1996 and increased $82.9 million to $3,778.5 million in the 36 weeks ended
October 12, 1997 from $3,695.6 million in the 36 weeks ended October 6, 1996.
The increases in sales were primarily attributable to 0.4 percent and 2.2
percent increases in comparable store sales for the 12 and 36 week periods ended
October 12, 1997, respectively, and the continued success of new store openings,
partially offset by store closings and the recent deflationary environment.
Since the beginning of fiscal 1996, 32 stores have
12
<PAGE> 15
been opened and 35 stores have been closed and a total of 58 stores have been
remodeled. The third quarter of fiscal 1997 represents the sixth consecutive
quarter that the Company has achieved positive comparable store sales. The
increases in comparable store sales reflect consumers' favorable response to the
Company's "First in Southern California" marketing program, which focuses on the
Company's lower price program in conjunction with its premier offering of
quality, selection and customer service, as well as its continuing remodeling
program.
During the third quarter, the Company completed the development of the
first phase of its "Ralphs Club Card" program and launched the marketing program
shortly after the quarter ended. The "Ralphs Club Card" program is a frequent
shopper program designed to increase customer shopping frequency and transaction
size and to provide valuable information about consumer shopping habits. The
Company estimates that it will incur one-time costs of approximately $10 million
to develop and launch the program, $2 million of which was incurred in the third
quarter.
Gross Profit. Gross profit decreased as a percentage of sales from 21.6
percent in the 12 weeks ended October 6, 1996 to 20.6 percent in the 12 weeks
ended October 12, 1997 and increased as a percentage of sales from 20.4 percent
in the 36 weeks ended October 6, 1996 to 20.6 percent in the 36 weeks ended
October 12, 1997. The decrease in gross profit margin in the 12 weeks ended
October 12, 1997 is primarily attributable to competitive promotional activity
and higher advertising costs as the Company prepares to launch the Ralphs Club
Card. The increase in gross profit margin in the 36 weeks ended October 12, 1997
reflects a reduction in warehousing and distribution costs as a result of the
consolidation of the Company's distribution operations, as well as a reduction
in the cost of goods sold as the benefits of product procurement programs
instituted by the Company are realized, partially offset by the factors
discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $211.1 million and $200.9 million for the
12 weeks ended October 6, 1996 and October 12, 1997, respectively, and were
$626.8 million and $615.9 million for the 36 weeks ended October 6, 1996 and
October 12, 1997, respectively. SG&A decreased as a percentage of sales from
17.3 percent to 16.3 percent for the 12 weeks ended October 6, 1996 and October
12, 1997, respectively, and decreased as a percentage of sales from 17.0 percent
to 16.3 percent for the 36 weeks ended October 6, 1996 and October 12, 1997,
respectively. The reduction in SG&A as a percentage of sales reflects the
continued results of tighter expense and labor controls at the store level and
continued administrative cost reductions, partially offset by start-up costs
associated with the launch of the "Ralphs Club Card" program in Southern
California. Additionally, the Company participates in multi-employer health and
welfare plans for its store employees who are members of the United Food and
Commercial Workers Union ("UFCW") and recognized pension suspension credits of
$11.5 million and $11.8 million in the 36 weeks ended October 6, 1996 and the 36
weeks ended October 12, 1997, respectively.
Operating Income. Primarily as a result of the factors discussed above,
the Company's operating income increased slightly from $44.7 million in the 12
weeks ended October 6, 1996 to $44.9 million in the 12 weeks ended October 12,
1997 and increased from $103.0 million in the 36 weeks ended October 6, 1996 to
$137.6 million in the 36 weeks ended October 12, 1997.
Loss Before Extraordinary Charges. Primarily as a result of the factors
discussed above, the Company's loss before extraordinary charges decreased from
$11.9 million in the 12 weeks ended October 6, 1996 to $8.7 million in the 12
weeks ended October 12, 1997 and decreased from $65.4 million in the 36 weeks
ended October 6, 1996 to $26.1 million in the 36 weeks ended October 12, 1997.
Extraordinary Charges. Extraordinary charges of $48.0 million were
recorded during the 12 weeks ended April 27, 1997. These charges relate to the
call premium on the 13.75% Senior Subordinated Notes and the write-off of
deferred financing costs associated with the Old Credit Facility and the 13.75%
Senior Subordinated Notes.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the Company's $325.0
million revolving facility ("Revolving Facility") and lease financing are the
Company's principal sources of liquidity. The Company believes that these
sources will be adequate to meet its anticipated capital expenditure, working
capital and debt service requirements for the remainder of fiscal 1997.
At October 12, 1997, borrowings of $136.9 million under the Revolving
Facility and $75.5 million of standby letters of credit were outstanding. The
level of borrowings under the Company's Revolving Facility is dependent upon
cash flows from operations, the timing of disbursements, seasonal requirements
and capital expenditure activity. The Company is required to reduce loans
outstanding under the Revolving Facility to $110.0 million for a period of not
less than 30 consecutive days during the twelve consecutive month-period ended
on the last day of fiscal 1997. The Company complied with this requirement in
the second quarter of fiscal 1997. At November 14, 1997, the Company had $127.7
million available for borrowing under the Revolving Facility.
During the 36-week period ending October 12, 1997, cash provided by
operating activities was approximately $44.7 million compared to $124.8 million
in the 36-week period ending October 6, 1996. The decline in cash from operating
activities in the 36-week period ending October 12, 1997 is primarily due to the
timing of payments of accounts payable and accrued liabilities and prepaid
expenses. These reductions in cash were partially offset by an improvement in
operating income of approximately $34.6 million. The improvement in operating
income can primarily be attributed to strong comparable store sales, a reduction
in warehousing and distribution costs resulting from the consolidation of the
Company's distribution operations, and a reduction in cost of goods sold as the
benefits of product procurement programs are realized. The Company's principal
use of cash in its operating activities is inventory purchases. The Company's
high inventory turnover rate generally allows it to finance a substantial
portion of its inventory through trade payables, thereby reducing its short-term
borrowing needs.
Cash used by investing activities was $94.2 million for the 36-week
period ending October 12, 1997. Investing activities consisted primarily of
capital expenditures of $111.2 million to build 16 new stores (6 of which had
been completed at October 12, 1997) and the remodeling of 61 stores (38 of which
had been completed at October 12, 1997). The Company currently anticipates that
its aggregate capital expenditures for fiscal 1997 will be approximately $140.0
million (net of expected capital leases) and will include ten new stores and 45
remodels. Consistent with past practices, the Company intends to finance these
capital expenditures primarily with cash provided by operations, borrowings
under the Revolving Facility and through leasing transactions. At November 14,
1997, the Company had approximately $6.0 million of unused equipment leasing
facilities. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient to finance its anticipated capital
expenditure requirements; however, management believes the capital expenditure
program has substantial flexibility and is subject to revision based on various
factors, including changes in business conditions and cash flow requirements.
Management believes that if the Company were to substantially reduce or postpone
these programs, there would be no substantial impact on short-term operating
profitability. However, management also believes that the construction of new
stores is an important component of its future operating strategy. Consequently,
management believes that if these programs were substantially reduced, future
operating results, and ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include any costs
associated with the Merger or any other potential acquisitions which the Company
could make to expand within its existing markets or to enter other markets. The
Company has grown through acquisitions in the past and from time to time engages
in discussions with potential sellers of individual stores, groups of stores or
other retail supermarket chains.
14
<PAGE> 17
The Company continues to monitor and evaluate the performance of
individual stores as well as operating markets in relation to its overall
business objectives. As a result of this evaluation, alternative strategies may
be considered by the Company which could result in the disposition of certain
assets.
Cash provided by financing activities was $45.4 million for the 36-week
period ending October 12, 1997, resulting primarily from refinancing activities.
Refinancing activities consisted of the issuance of the 1997 11% Senior
Subordinated Notes to refinance the Company's 13.75% Senior Subordinated Notes
and the refinancing and amendment of the Old Credit Facility. In total,
financing activities consisted primarily of proceeds of $722.0 million from the
issuance of long-term debt and net borrowings of $37.5 million under the
Revolving Facility, partially offset by principal payments of long-term debt of
$688.4 million and capital lease payments of $20.3 million.
During the first quarter of fiscal 1997, the Company issued the 1997 11%
Senior Subordinated Notes with terms substantially identical to the Company's
existing 11% Senior Subordinated Notes at a price of 105.5% of their principal
amount, resulting in gross proceeds of $163.5 million. The proceeds were used to
redeem all of the Company's $145 million principal amount of 13.75% Senior
Subordinated Notes at a price of 106.1% of their principal amount and to pay the
related accrued interest through the redemption date, which was April 28, 1997.
The remaining proceeds were used to pay fees and expenses associated with the
issuance of the 1997 11% Senior Subordinated Notes.
During the first quarter, the Company also amended and restated its Old
Credit Facility to lower interest margins and allow more flexibility with
respect to application of proceeds from certain asset sales and capital
expenditures. The amended and restated credit facility (the "New Credit
Facility") consists of a $200.0 million Term Loan A Facility and a $350.0
million Term Loan B Facility (together, the "Term Loans") and a $325.0 million
Revolving Credit Facility ("Revolving Facility") under which working capital
loans may be made and commercial or standby letters of credit in the maximum of
$150.0 million may be issued.
Quarterly principal installments on the Term Loans continue to 2004,
with principal amounts due as follows: $2.6 million in fiscal 1997, $3.5 million
in fiscal 1998, $25.5 million in fiscal 1999, $62.6 million in fiscal 2000,
$87.5 million in fiscal 2001 and $368.3 million thereafter.
As a result of the refinancings described above, the Company recorded
extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0
million, consisting of the call premium on the 13.75% Senior Subordinated Notes
and write-off of deferred financing costs associated with the Old Credit
Facility and the 13.75% Senior Subordinated Notes.
The Company is a wholly-owned subsidiary of Holdings. Holdings has
outstanding $135.7 million accreted value of Discount Debentures and $175.8
million principal amount of Pay-In-Kind Debentures. Holdings is a holding
company which has no assets other than the capital stock of the Company.
Holdings will be required to commence semi-annual cash payments of interest on
the Discount Debentures and the Pay-In-Kind Debentures commencing December 15,
2000 in the amount of approximately $61 million per annum. Subject to the
limitations contained in its debt instruments, the Company intends to make
dividend payments to Holdings in amounts which are sufficient to permit Holdings
to service its cash interest requirements. The Company may pay other dividends
to Holdings in connection with certain employee stock repurchases and for
routine administrative expenses.
The Company is highly leveraged. At October 12, 1997, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $2.2 billion and $109.5 million, respectively. Based upon current
levels of operations and anticipated cost savings and future growth, the Company
believes that its cash flow from operations, together with available borrowings
under the Revolving Facility and its other sources of liquidity (including lease
financing), will be adequate to meet its anticipated requirements for working
capital, capital expenditures, other
15
<PAGE> 18
long-term liabilities and debt service payments. There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that future cost savings and growth can be achieved.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this report, the words "believe," "estimate," "expect,"
"project" and similar expressions, together with other discussion of future
trends or results, are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from those projected. These forward-looking statements
speak only as of the date hereof. All of these forward-looking statements are
based on estimates and assumptions made by management of the Company which,
although believed to be reasonable, are inherently uncertain and difficult to
predict; therefore, undue reliance should not be placed upon such estimates. The
following important factors, among others, could cause the Company's results of
operations to be adversely affected in future periods: (i) increased competitive
pressures from existing competitors and new entrants, including price-cutting
strategies, store openings and remodels; (ii) loss or retirement of key members
of management or the termination of the Company's Consulting Agreement with
Yucaipa; (iii) inability to negotiate more favorable terms with suppliers; (iv)
increases in interest rates or the Company's cost of borrowing or a default
under any material debt agreements; (v) inability to develop new stores in
advantageous locations or to successfully convert or remodel additional stores;
(vi) prolonged labor disruption; (vii) deterioration in general or regional
economic conditions, particularly in Southern California, the Company's
principal operating region; (viii) adverse state or federal legislation or
regulation that increases the costs of compliance, or adverse findings by a
regulator with respect to existing operations; (ix) loss of customers or sales
weakness; (x) adverse determinations in connection with pending or future
litigation or other material claims against the Company; (xi) inability to
achieve future sales levels or other operating results that support its programs
to reduce costs; (xii) the unavailability of funds for capital expenditures;
(xiii) increases in labor costs; (xiv) inability to control inventory levels;
(xv) operational inefficiencies in distribution or other Company systems and
(xvi) any failure to consummate the Merger on a timely basis. Many of such
factors are beyond the control of the Company. There can be no assurance that
the Company will not incur new or additional unforeseen costs in connection with
the ongoing conduct of its business. Accordingly, any forward-looking statements
included herein do not purport to be predictions of future events or
circumstances and may not be realized. In addition, assumptions relating to
budgeting, marketing, advertising, litigation and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its marketing, capital expenditure or other
budgets, which may in turn affect the Company's financial position and results
of operations.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated November
13, 1997 with respect to the acquisition by Fred Meyer, Inc. and
FFL Acquisition Corp. ("Acquisition") of Food 4 Less Holdings,
Inc. ("Holdings") pursuant to a merger of Acquisition with and
into Holdings.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Los Angeles, State
of California.
Dated: November 26, 1997 RALPHS GROCERY COMPANY
/s/ John T. Standley
---------------------------------------
John T. Standley
Senior Vice President and
Chief Financial Officer
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
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