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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X)QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: OCTOBER 9, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 33-22998
RALPHS GROCERY COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 31-1241926
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1100 WEST ARTESIA BOULEVARD, COMPTON, CALIFORNIA, 90220
(Address of principal executive offices)
(310) 884-9000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report)
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 ( )
NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS
OF OCTOBER 9, 1994-100.
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RALPHS GROCERY COMPANY
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Balance Sheets . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations . . . . . 2
Unaudited Consolidated Statements of Cash Flows . . . . . 4
Notes to Unaudited Consolidated Financial Statements . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 6
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports of Form 8-K . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RALPHS GROCERY COMPANY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
JANUARY 30, OCTOBER 9,
ASSETS 1994 1994
- ------ ---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 55,080 $ 33,305
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 30,420 45,182
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,354 217,186
Prepaid expenses and other current assets . . . . . . . . . . . . . 18,111 18,321
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 305,965 313,994
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 601,897 611,642
Excess of cost over net assets acquired, net . . . . . . . . . . . . . 376,414 368,801
Beneficial lease rights, net . . . . . . . . . . . . . . . . . . . . . 55,553 50,733
Deferred debt issuance costs, net . . . . . . . . . . . . . . . . . . 26,583 22,568
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 109,125 113,639
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,113 9,985
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $1,483,650 $1,491,362
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . $ 70,975 $ 79,865
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . -- 37,400
Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . 37,716 35,784
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 138,554 141,775
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 101,543 109,273
Current portion of self-insurance reserves . . . . . . . . . . . . 30,138 28,209
---------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 378,926 432,306
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 927,909 883,377
Self-insurance reserves . . . . . . . . . . . . . . . . . . . . . . 49,872 46,025
Lease valuation reserve . . . . . . . . . . . . . . . . . . . . . . 32,575 30,096
Other non-current liabilities . . . . . . . . . . . . . . . . . . . 89,299 84,593
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,478,581 1,476,397
---------- ----------
Stockholder's equity:
Common stock, $1 par value per share Authorized
1,000 shares; issued and outstanding, 100 shares at
January 30, 1994 and October 9, 1994 . . . . . . . . . . . . . . . -- --
Additional paid in capital . . . . . . . . . . . . . . . . . . . . 175,548 175,548
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (170,479) (160,583)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . 5,069 14,965
---------- ----------
Total liabilities and stockholder's equity . . . . . . . . . . . . . . $1,483,650 $1,491,362
========== ==========
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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RALPHS GROCERY COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
12 WKS ENDED 12 WKS ENDED
OCTOBER 10, 1993 OCTOBER 9, 1994
$ % $ %
------- ----- ------- -----
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . 612,786 100.0 615,396 100.0
Cost of sales . . . . . . . . . . . . . . . . . . . . 471,326 76.9 476,617 77.5
------- ----- ------- -----
Gross profit . . . . . . . . . . . . . . . . . . 141,460 23.1 138,779 22.5
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . . 106,511 17.4 104,817 17.0
Amortization of excess of cost over
net assets acquired . . . . . . . . . . . . . . 2,538 0.4 2,538 0.4
Provision for postretirement benefits
other than pension . . . . . . . . . . . . . . . 693 0.1 607 0.1
------- ----- ------- -----
Operating income . . . . . . . . . . . . . . . . 31,718 5.2 30,817 5.0
Other expenses:
Interest expense, net . . . . . . . . . . . . . . . 24,527 4.0 25,746 4.2
(Gain) loss on disposal of assets . . . . . . . . . 234 0.1 766 0.1
------- ----- ------- -----
Earnings before income taxes . . . . . . . . . . . . 6,957 1.1 4,305 0.7
Income tax expense . . . . . . . . . . . . . . . . . -- -- -- --
------- ----- ------- -----
Net earnings . . . . . . . . . . . . . . . . . . . . 6,957 1.1 4,305 0.7
======= ===== ======= =====
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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RALPHS GROCERY COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
36 WKS ENDED 36 WKS ENDED
OCTOBER 10, 1993 OCTOBER 9, 1994
$ % $ %
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . 1,874,222 100.0 1,856,341 100.0
Cost of sales . . . . . . . . . . . . . . . . . . . . 1,445,171 77.1 1,433,008 77.2
--------- ----- --------- -----
Gross profit . . . . . . . . . . . . . . . . . . 429,051 22.9 423,333 22.8
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . . 319,417 17.1 316,045 17.0
Amortization of excess of cost over
net assets acquired . . . . . . . . . . . . . . 7,614 0.4 7,613 0.4
Provision for postretirement benefits
other than pension . . . . . . . . . . . . . . . 2,079 0.1 1,821 0.1
--------- ----- --------- -----
Operating income . . . . . . . . . . . . . . . . 99,941 5.3 97,854 5.3
Other expenses:
Interest expense, net . . . . . . . . . . . . . . . 75,748 4.0 77,162 4.2
(Gain) loss on disposal of assets . . . . . . . . . 422 -- 796 --
--------- ----- --------- -----
Earnings before income taxes . . . . . . . . . . . . 23,771 1.3 19,896 1.1
Income tax expense . . . . . . . . . . . . . . . . . -- -- -- --
--------- ----- --------- -----
Net earnings . . . . . . . . . . . . . . . . . . . . 23,771 1.3 19,896 1.1
========= ===== ========= =====
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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RALPHS GROCERY COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
36 WKS ENDED 36 WKS ENDED
OCTOBER 10, 1993 OCTOBER 9, 1994
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,771 $ 19,896
Adjustments to reconcile net earnings to
net cash provided (used in) by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 51,704 51,929
Amortization of discounts and deferred
debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . 6,715 6,322
LIFO charge . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,615 1,897
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . 422 796
Provision for postretirement benefits . . . . . . . . . . . . . . . . 2,079 1,821
Other changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (7) (14,763)
Inventories at replacement cost . . . . . . . . . . . . . . . . . . . 6,058 (16,728)
Prepaid expenses and other current assets . . . . . . . . . . . . . . 1,915 (210)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,353 (1,993)
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . (4,226) (11,089)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . (771) 23,579
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,514)
Self insurance reserves . . . . . . . . . . . . . . . . . . . . . . . 3,860 (5,776)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (6,957) (7,635)
-------- ---------
Cash provided by operating activities . . . . . . . . . . . . . . . . . 89,531 43,532
--------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (46,827) (44,544)
Proceeds from sale of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,968 6,362
---------- ---------
Cash used in investing activities . . . . . . . . . . . . . . . . . . . (43,859) (38,182)
------- --------
Cash flows from financing activities:
Capitalized financing and acquisition costs . . . . . . . . . . . . (5,717) (246)
Decrease in bank overdrafts . . . . . . . . . . . . . . . . . . . . (751) (1,932)
Net borrowings under lines-of-credit . . . . . . . . . . . . . . . (31,100) 37,400
Proceeds from issuance of long-term debt . . . . . . . . . . . . . 150,000 --
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . -- (10,000)
Principal payments on long-term debts . . . . . . . . . . . . . . . (157,963) (52,347)
-------- -------
Cash used in financing activities . . . . . . . . . . . . . . . . . . . (45,531) (27,125)
Net decrease in cash and cash equivalents . . . . . . . . . . . . . 141 (21,775)
Cash and cash equivalents at beginning of period . . . . . . . . . 46,192 55,080
-------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 46,333 $ 33,305
======== ========
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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RALPHS GROCERY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim financial statements included herein have been
prepared by Ralphs Grocery Company ("Ralphs" or the "Company") without audit,
pursuant to the rules and regulations promulgated by the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been omitted
pursuant to Commission rules and regulations; nevertheless, Ralphs believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's latest annual report filed on Form 10-K. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of Ralphs with respect to
the interim financial statements, and of the results of Ralphs' operations for
the thirty-six weeks and the twelve weeks ended October 9, 1994 and cash flows
for the thirty-six weeks ended October 9, 1994 and the results of Ralphs'
operations for the thirty-six weeks and the twelve weeks ended October 10, 1993
and cash flows for the thirty-six weeks ended October 10, 1993, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the full year.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
(dollars in thousands)
<TABLE>
<CAPTION>
36 WKS ENDED 36 WKS ENDED
OCTOBER 10, 1993 OCTOBER 9, 1994
---------------- ---------------
<S> <C> <C>
Supplemental cash flow disclosure:
Interest paid, net of amounts capitalized . . . . . . . . $65,148 $65,969
Income taxes paid . . . . . . . . . . . . . . . . . . . . $ 2,196 $ 4,750
</TABLE>
Disclosure of accounting policy:
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity of three months or
less to be cash equivalents.
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of approximately $17.6 million and
$0.1 million were incurred for the respective thirty-six weeks ended October 9,
1994 and the thirty-six weeks ended October 10, 1993 when the Company entered
into lease agreements for new equipment.
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<PAGE> 8
(3) PROVISION FOR INCOME TAXES
The provision for income taxes for the thirty-six weeks ended October
10, 1993 and the thirty-six weeks ended October 9, 1994 and for the twelve
weeks ended October 10, 1993 and the twelve weeks ended October 9, 1994
consists of the following:
<TABLE>
<CAPTION>
36 WKS ENDED 12 WKS ENDED
OCTOBER 10, OCTOBER 9, OCTOBER 10, OCTOBER 9,
1993 1994 1993 1994
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Federal Income Taxes . . . . . . . . . . $ 3,121 $ 836 $ 338 $ 250
State Income Taxes . . . . . . . . . . . 1,290 3,678 563 1,064
Adjustment to Valuation Allowance
for Deferred Tax Assets . . . . . . . . (4,411) (4,514) (901) (1,314)
------- ------- ------ -------
Total Income Tax Provision . . . . . . . $ -- $ -- $ -- $ --
======= ======= ====== =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Twelve Weeks Ended October 9, 1994 compared with the Twelve Weeks Ended October
10, 1993.
SALES
For the third quarter 1994 (the twelve weeks ended October 9, 1994),
sales were $615.4 million, an increase of $2.6 million or 0.4% from the third
quarter 1993 (the twelve weeks ended October 10, 1993).
During the third quarter 1994, Ralphs opened two new stores (one in
Los Angeles County and one in San Diego County) and closed one store (in
conjunction with a new store opening in the same area) and completed one store
remodel.
Comparable store sales decreased 3.1%, which included an increase of
0.1% for replacement store sales, from $609.2 million in the third quarter 1993
to $590.1 million in the third quarter 1994. Ralphs' sales continue to be
adversely affected by the significant recession in Southern California,
continuing competitive new store and remodeling activity and recent pricing and
promotional changes by competitors.
Ralphs continued to take steps to attempt to mitigate the impact of
the weak retailing environment in its markets. These actions included
continuing the new store and remodeling program and the Ralphs Savings Plan
initiated in February 1994. The Ralphs Savings Plan is a new marketing
campaign specifically designed to enhance customer value. The Ralphs Savings
Plan is comprised of six major components: Guaranteed Low Prices (GLPs), Price
Breakers, Big Buys, Multi-Buys, Ralphs Brand Products and Double Coupons. GLPs
guarantee low prices on certain high volume items that are surveyed and updated
every four weeks. Price Breakers are weekly advertised items that offer
significant savings. Big Buys are club size items at prices competitive to
club store prices and Multi-Buys offer Ralphs' shoppers the opportunity to
purchase club store quantities of regular sized items at prices competitive to
club store prices. In conjunction with this new campaign Ralphs private label
offering of approximately 2,800 products provides value to the customer. Ralphs
continues to aggressively promote perishables through weekly ad features and
lower prices.
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<PAGE> 9
COST OF SALES
Cost of sales increased $5.3 million or 1.1% from $471.3 million in
the third quarter 1993 to $476.6 million in the third quarter 1994. As a
percentage of sales, cost of sales increased to 77.5% in the third quarter 1994
from 76.9% in the third quarter 1993. The increase in cost of sales as a
percentage of sales included a one-time charge for Teamsters Union sick pay
benefits, pursuant to a new contract ratified in August 1994 with the
Teamsters. The total charge was $2.5 million, of which, $2.1 million is
included in cost of sales and $0.4 million is included in selling, general and
administrative expense. Increases in cost of sales were partially offset by
savings in warehousing and distribution costs, the pass-through of increased
operating costs, increases in relative margins where allowed by competitive
conditions and a reduction in self insurance costs. The reduction in self
insurance accruals for the third quarter 1994 was approximately $3.9 million,
of which, $1.4 million is included in cost of sales and $2.5 million is
included in selling, general and administrative expense.
Warehousing and distribution cost savings were mainly attributable to
Ralphs' automated storage and retrieval system warehouse (the "ASRS") and
perishable service center (the "PSC") facilities. The ASRS facility can hold
substantially more inventory and requires fewer employees to operate than does
a conventional warehouse of equal size. This facility has reduced Ralphs'
warehousing costs of non-perishable items markedly, enabling it to take
advantage of advance buying opportunities and minimize "out-of-stocks." Ralphs
engages in forward-buy purchases to take advantage of special prices or to
delay the impact of upcoming price increases by purchasing and warehousing
larger quantities of merchandise than immediately required. The PSC facility
has consolidated the operations of three existing facilities and holds more
inventory than the facilities it replaced, thereby reducing Ralphs' warehouse
distribution costs.
The Company believes that through achieving costs savings and applying
effective pricing policies both costs and gross margins can be improved.
However, given the highly competitive nature of the Southern California grocery
market, such cost and gross margin improvements cannot be assured.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased $1.7 million or
1.6% from $106.5 million in the third quarter 1993 to $104.8 million in the
third quarter 1994. As a percentage of sales, selling, general and
administrative expense decreased from 17.4% in the third quarter 1993 to 17.0%
in the third quarter 1994. The decrease in selling, general and administrative
expense was primarily due to a reduction in contributions to the United Food
and Commercial Workers ("UFCW") health care benefit plans, due to an excess
reserve in these plans, the reduction in self insurance costs described above
and the results of cost savings programs instituted by Ralphs. Decreases in
expense were partially offset by increases in union wage rates, a one-time
charge for Teamsters Union sick pay benefits and increased rent expense
resulting from additional new stores, including fixture and equipment financing.
Ralphs participates in multi-employer pension plans and health and
welfare plans administered by various trustees for substantially all union
employees. Contributions to these plans are based upon negotiated contractual
rates. In both Fiscal 1992 (the fifty-two weeks ended January 31, 1993) and
Fiscal 1993 (the fifty-two weeks ended January 30, 1994) the multi-employer
pension plan was deemed to be overfunded based upon the collective bargaining
agreement then currently in force. During Fiscal 1993 the agreement called for
pension benefits which resulted in additional required expense. The UFCW
health and welfare benefit plans were overfunded and those employers who
contributed to these plans are to receive a pro rata share of the excess
reserve in these health care benefit plans through a reduction in current
maintenance payments. Ralphs' share of the excess reserve was approximately
$24.5 million of which $11.8 million was recognized in Fiscal 1993 and the
remainder will be recognized in the fiscal year ending January 29, 1995. In
the third quarter 1994 $2.9 million of the excess reserve was recognized.
Since employers are required to make contributions to the benefit funds at
whatever level is necessary to maintain plan benefits, there can be no
assurance that plan maintenance payments will remain at current levels.
-7-
<PAGE> 10
OPERATING INCOME
Operating income in the third quarter 1994 decreased 2.8% to $30.8
million from $31.7 million in the third quarter 1993. Operating margin,
defined as operating income as a percentage of sales, decreased in the third
quarter 1994 to 5.0% from 5.2% in the third quarter 1993. EBITDA, defined as
earnings before interest, taxes, depreciation, amortization, provision for
postretirement benefits, gain/loss on disposal of assets, a one-time charge for
Teamsters Union sick pay benefits and LIFO charges, increased to 8.5% of sales
or $52.0 million in the third quarter 1994 from 8.1% of sales or $49.6 million
in the third quarter 1993.
INTEREST EXPENSE
Net interest expense for the third quarter 1994 was $25.7 million
versus $24.5 million for the third quarter 1993. Interest expense increased
due to increases in interest rates. Included as interest expense during the
third quarter 1994 was $22.3 million, representing interest expense for the 10
1/4% Senior Subordinated Notes due 2002, the 9% Senior Subordinated Notes due
2003 (the "Initial Notes"), the 9% Series B Senior Subordinated Notes due 2003
(the "Exchange Notes"), a $470.0 million bank facility (consisting of a $350.0
million term loan facility (the "1992 Term Loan Facility") and a $120.0 million
working capital facility (the "1992 Working Capital Facility" ) and, together
with the 1992 Term Loan Facility and amendments, the "1992 Credit Agreement"),
promissory notes to Metropolitan Life Insurance Company in the aggregate amount
of $175.1 million, interest on capitalized leases and expense related to a swap
agreement. Comparable interest expense for the third quarter 1993 was $20.9
million. Also included in interest expense for the third quarter 1994 period
was $3.4 million representing certain other charges relating to amortization of
debt issuance costs, self-insurance discount, lease valuation reserves and
other miscellaneous charges (categorized by Ralphs as non-cash interest
expense) as compared to $3.6 million for the third quarter 1993. Investment
income, which is immaterial, has been offset against interest expense.
During Fiscal 1992 the Company entered into an interest rate cap
agreement and an interest rate swap agreement. The interest rate cap agreement
hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal
amount against increases in the short-term rates. In addition, Ralphs entered
into an interest rate swap agreement on $150.0 million notional principal
amount. Under the interest rate swap agreement, Ralphs is required to pay
interest based on LIBOR at the end of each six month calculation period and
Ralphs will receive interest payments based on LIBOR at the beginning of each
six month calculation period.
NET EARNINGS
For the third quarter 1994, Ralphs reported net earnings of $4.3
million compared to net earnings of $7.0 million for the third quarter 1993.
The decrease in net earnings is primarily the result of decreased operating
income and higher interest expense due to increases in interest rates.
Thirty-Six Weeks Ended October 9, 1994 compared with the Thirty-Six Weeks Ended
October 10, 1993.
SALES
For the first three quarters 1994 (the thirty-six weeks ended October
9, 1994), sales were $1,856.3 million, a decrease of $17.9 million or 1.0% from
the first three quarters 1993 (the thirty-six weeks ended October 10, 1993).
During the first three quarters 1994, Ralphs opened five new stores
(three in Los Angeles County, one in San Diego County and one in Riverside
County) and closed two stores (in conjunction with new stores opening in the
same areas) and completed three store remodels.
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<PAGE> 11
Comparable store sales decreased 3.8%, which included an increase of
0.3% for replacement store sales, from $1,855.0 million in the first three
quarters 1993 to $1,784.4 million in the first three quarters 1994. Ralphs'
sales continue to be adversely affected by the significant recession in
Southern California, continuing competitive new store and remodeling activity
and recent pricing and promotional changes by competitors.
Ralphs continued to take steps to attempt to mitigate the impact of the
weak retailing environment in its markets. These actions included continuing
the new store and remodeling program and the Ralphs Savings Plan. In February,
1994, Ralphs launched the Ralphs Savings Plan, a new marketing campaign
specifically designed to enhance customer value. The Ralphs Savings Plan is
comprised of six major components: Guaranteed Low Prices (GLPs), Price
Breakers, Big Buys, Multi-Buys, Ralphs Brand Products and Double Coupons. GLPs
guarantee low prices on certain high volume items that are surveyed and updated
every four weeks. Price Breakers are weekly advertised items that offer
significant savings. Big Buys are club size items at prices competitive to
club store prices and Multi-Buys offer Ralphs shoppers the opportunity to
purchase club store quantities of regular sized items at prices competitive to
club store prices. In conjunction with this new campaign Ralphs private label
offering of approximately 2,800 products provides value to the customer. In
the latter part of the third quarter 1994, Ralphs began more aggressively
promoting perishables through weekly ad features and lower prices. Further, a
mailer program was intensified to highlight the perishable pricing and
increased GLPs.
On January 17, 1994 an earthquake in Southern California caused
considerable damage in Los Angeles and surrounding areas. Several Ralphs
supermarkets suffered earthquake damage with 54 stores completely shutdown on
the morning of January 17th. Thirty-four stores reopened within one day and an
additional 17 stores reopened within three days. Suffering major structural
damage were three stores in the San Fernando Valley area of Los Angeles. All
three stores have since reopened for business with the last reopening on April
15, 1994. Management believes that there was some negative impact on sales
resulting from the temporary disruption of business resulting from the
earthquake.
Ralphs is partially insured for earthquake losses. The pre-tax
financial impact, net of insurance claims, is expected to be approximately
$11.0 million and the Company reserved for this loss in Fiscal 1993. The gross
earthquake loss is approximately $25.3 million and the expected insurance
recovery is approximately $14.3 million.
COST OF SALES
Cost of sales decreased $12.2 million or 0.8% from $1,445.2 million in
the first three quarters 1993 to $1,433.0 million in the first three quarters
1994. As a percentage of sales, cost of sales increased to 77.2% in the first
three quarters 1994 from 77.1% in the first three quarters 1993. The increase
in cost of sales as a percentage of sales included a one-time charge for
Teamsters Union sick pay benefits, per a new contract ratified in August 1994
with the Teamsters. The total charge was $2.5 million, of which, $2.1 million
is included in cost of sales and $0.4 million is included in selling, general
and administrative expense. Increases in cost of sales were partially offset by
savings in warehousing and distribution costs, reductions in self insurance
costs, the pass-through of increased operating costs and increases in relative
margins where allowed by competitive conditions. The reduction in self
insurance accruals for the first three quarters 1994 was approximately $11.7
million, of which, $4.3 million is included in cost of sales and $7.4 million
is included in selling, general and administrative expense.
-9-
<PAGE> 12
Warehousing and distribution cost savings were mainly attributable to
Ralphs' ASRS and PSC facilities. The ASRS facility can hold substantially more
inventory and requires fewer employees to operate than does a conventional
warehouse of equal size. This facility has reduced Ralphs' warehousing costs
of non-perishable items markedly, enabling it to take advantage of advance
buying opportunities and minimize "out-of-stocks." Ralphs engages in
forward-buy purchases to take advantage of special prices or to delay the
impact of upcoming price increases by purchasing and warehousing larger
quantities of merchandise than immediately required. The PSC facility has
consolidated the operations of three existing facilities and holds more
inventory than the facilities it replaced, thereby reducing Ralphs' warehouse
distribution costs.
The Company believes that through achieving cost savings and applying
effective pricing policies both costs and gross margins can be improved.
However, given the highly competitive nature of the Southern California grocery
market, such cost and gross margin improvements cannot be assured.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased $3.4 million or
1.1% from $319.4 million in the first three quarters 1993 to $316.0 million in
the first three quarters 1994. As a percentage of sales, selling, general and
administrative expense decreased from 17.1% in the first three quarters 1993 to
17.0% in the first three quarters 1994. The decrease in selling, general and
administrative expense was primarily due to a reduction in contributions to the
UFCW health care benefit plans, due to an excess reserve in these plans,
reductions in self insurance costs described above and the results of cost
savings programs instituted by Ralphs. The Company is continuing its expense
reduction program. The decrease in selling, general and administrative
expense was partially offset by several factors including increases in union
wage rates, a one-time charge for Teamsters Union sick pay benefits and
increased rent expense resulting from new stores, including fixture and
equipment financing.
Ralphs participates in multi-employer pension plans and health and
welfare plans administered by various trustees for substantially all union
employees. Contributions to these plans are based upon negotiated contractual
rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan
was deemed to be overfunded based upon the collective bargaining agreement then
currently in force. During Fiscal 1993 the agreement called for pension
benefits which resulted in additional required expense. The UFCW health and
welfare benefit plans were overfunded and those employers who contributed to
these plans are to receive a pro rata share of the excess reserve in these
health care benefit plans through a reduction in current maintenance payments.
Ralphs' share of the excess reserve was approximately $24.5 million of which
$11.8 million was recognized in Fiscal 1993 and the remainder will be
recognized in the fiscal year ending January 29, 1995. In the first three
quarters 1994 $8.7 million of the excess reserve was recognized. Since
employers are required to make contributions to the benefit funds at whatever
level is necessary to maintain plan benefits, there can be no assurance that
plan maintenance payments will remain at current levels.
OPERATING INCOME
Operating income in the first three quarters 1994 decreased 2.0% to
$97.9 million from $99.9 million in the first three quarters 1993. Operating
margin, defined as operating income as a percentage of sales, was 5.3% in the
first three quarters 1994 and in the first three quarters 1993. EBITDA,
defined as earnings before interest, taxes, depreciation, amortization,
provision for postretirement benefits, gain/loss on disposal of assets, a
one-time charge for Teamsters Union sick pay benefits and LIFO charges,
increased to 8.4% of sales or $156.1 million in the first three quarters 1994
from 8.3% of sales or $155.9 million in the first three quarters 1993.
-10-
<PAGE> 13
INTEREST EXPENSE
Net interest expense for the first three quarters 1994 was $77.2
million versus $75.7 million for the first three quarters 1993. Interest
expense increased due to increases in interest rates. Included as interest
expense during the first three quarters 1994 was $66.5 million, representing
interest expense for the 10 1/4% Senior Subordinated Notes due 2002, the
Initial Notes, the Exchange Notes, the 1992 Credit Agreement, fee related to
amendment of the 1992 Credit Agreement to allow for payment of a dividend,
promissory notes to Metropolitan Life Insurance Company in the aggregate amount
of $175.1 million, interest on capitalized leases and expense related to a swap
agreement. Comparable interest expense for the first three quarters 1993 was
$64.6 million. Also included in interest expense for the first three quarters
1994 period was $10.7 million representing certain other charges relating to
amortization of debt issuance costs, self-insurance discount, lease valuation
reserves and other miscellaneous charges (categorized by Ralphs as non-cash
interest expense) as compared to $11.1 million for the first three quarters
1993. Investment income, which is immaterial, has been offset against interest
expense.
During Fiscal 1992 the Company entered into an interest rate cap
adjustment and an interest rate swap agreement. The interest rate cap
agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million
principal amount against increases in the short-term rates. In addition,
Ralphs entered into an interest rate swap agreement on $150.0 million notional
principal amount. Under the interest rate swap agreement, Ralphs is required
to pay interest based on LIBOR at the end of each six month calculation period
and Ralphs will receive interest payments based on LIBOR at the beginning of
each six month calculation period.
NET EARNINGS
For the first three quarters 1994, Ralphs reported net earnings of
$19.9 million compared to net earnings of $23.8 million for the first three
quarters 1993. The decrease in net earnings is primarily the result of
decreased operating income and higher interest expense due to increases in
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Ralphs' total long-term debt (including current maturities) at October
9, 1994 was $963.2 million. All mandatory principal reductions required by the
various agreements during the thirty-six weeks ended October 9, 1994 were
satisfied. Management believes that operating cash flow, supplemented by
capital and operating leases, will be sufficient to meet Ralphs' operating
needs and scheduled capital expenditures and will enable Ralphs to service its
debt in accordance with its terms. It is possible, however, that additional
financing may be required and there can be no assurance that such financing
will be available, or, if available, will be on terms favorable to Ralphs.
Working capital was a deficit of $118.3 million at October 9, 1994.
Supermarket operators typically require small amounts of working capital since
inventory is generally sold prior to the time that payments to suppliers are
due. Therefore, cash provided from operations is frequently used for
non-current purposes such as investing and financing activities. Included in
working capital was $37.4 million in short-term debt and $79.9 million in
current maturities of long-term debt. Ralphs' primary sources of liquidity
during the thirty-six weeks ended October 9, 1994 were cash flow from
operations, and borrowings under the 1992 Credit Agreement. Cash flow provided
from operating activities after payment of interest expense and before capital
expenditures was $43.5 million for the thirty-six weeks ended October 9, 1994.
Capital expenditures for the thirty-six weeks ended October 9, 1994, was $44.5
million.
-11-
<PAGE> 14
The 1992 Working Capital Facility is a $120.0 million credit line
which is available for working capital requirements and general corporate
purposes. Up to $60.0 million of the 1992 Working Capital Facility may be used
to support standby letters of credit and up to $10.0 million in the aggregate
may be borrowed on same-day notice as swing-line loans. The letters of credit
may be used to cover workers' compensation contingencies and for such other
purposes as are permitted under the 1992 Credit Agreement. The 1992 Working
Capital Facility is a non-amortizing line of credit available through the
earlier of June 30, 1998 or the date the 1992 Credit Agreement is paid in full.
Borrowings under the 1992 Working Capital Facility generally are required to be
reduced to zero for 30 consecutive days in each period of twelve consecutive
months. The amount available under the 1992 Credit Agreement's working capital
facility was $67.6 million at October 9, 1994.
During the thirty-six weeks ended October 9, 1994, cash used in
investing activities was $38.2 million. This amount reflects increased capital
expenditures related to store remodels and new store openings (including store
acquisitions) and, to a lesser extent, expansion of other warehousing,
distribution and manufacturing facilities and equipment, including data
processing and computer systems.
Cash used in financing activities was approximately $27.1 million for
the thirty-six weeks ended October 9, 1994. Reductions of capital lease
obligations of $8.7 million and the payment of a $10.0 million dividend
(discussed below) reduced cash flow.
During the thirty-six weeks ended October 9, 1994 cash provided from
operating activities of $43.5 million, cash used in investing activities of
$38.2 million and cash used in financing activities of $27.1 million, resulted
in a net decrease in cash and cash equivalents of $21.8 million at October 9,
1994 as compared to January 30, 1994.
DIVIDENDS
In February 1994, the Board of Directors of the Company authorized a
dividend of $10.0 million to be paid to the Holding Company and the Board of
Directors of the Holding Company authorized distribution of this dividend to
its shareholders subject to certain restrictive covenants in the instruments
governing certain of Ralphs' indebtedness that impose limitation on the
declarations or payment of dividends. The 1992 Credit Agreement was amended to
allow the payment of the dividend to the Holding Company for distribution to
the Holding Company's shareholders. The fee for the amendment was
approximately $500,000. The dividend was distributed to the shareholders of
the Holding Company in the second quarter 1994.
RETIREMENT PLAN
During the second quarter 1994, the Company approved and adopted a new
non-qualified retirement plan, the Ralphs Grocery Company Retirement Supplement
Plan ("Retirement Supplement Plan") effective January 1, 1994 and amended the
existing Supplemental Executive Retirement Plan effective April 9, 1994. These
changes to the retirement plans were made pursuant to the enactment of the
Omnibus Budget Reconciliation Act of 1993.
Under the provisions of the Retirement Supplement Plan, participants
are entitled to receive benefits based on earnings over the indexed amount of
$150,000.
The ultimate impact of these changes in the retirement plans are not
expected to have a material effect on the consolidated financial statements.
-12-
<PAGE> 15
NEGOTIATION UPDATE
On September 14, 1994 Ralphs parent company, Ralphs Supermarkets, Inc.
(the "Holding Company") entered into a definitive Agreement and Plan of Merger
(the "Merger") with Food 4 Less, Inc. ("FFL"), Food 4 Less Holdings ("FFL
Holdings") and Food 4 Less Supermarkets, Inc. ("FFL Supermarkets"). Pursuant
to the terms of the Merger Agreement, Ralphs Supermarkets, Inc. will merge with
FFL Supermarkets and become a wholly owned subsidiary of FFL Holdings.
Conditions to the consummation of the Merger include, among other things,
receipt of regulatory approvals and other necessary consents and the
completion of financing for the transactions. The consideration price paid for
the Company approximates $1.5 billion, including assumption of debt.
Upon the effectiveness of the Merger, each outstanding share of common
stock, par value $0.01 per share, of the Holding Company will be converted into
and become a right to receive (a) approximately $16.61 in cash and (b)
approximately $3.91 principal amount of 13% Senior Subordinated Pay-In Kind
Debentures due 2006 issued by FFL Holdings (the "Debentures"). This represents
aggregate consideration, payable to the stockholders of the Holding Company of
$425 million in cash and $100 million initial principal amount of Debentures.
Upon consummation of the Merger, the operations and activities of
Ralphs will be significantly impacted due to conversions of some existing
stores to Food 4 Less warehouse stores as well as the consolidation of various
operating functions and departments. This consolidation may result in a
restructuring charge for the merged entity. The amount of the restructuring
charge is not presently determinable due to various factors, including
uncertainties inherent in the completion of the Merger; however, the
restructuring charge may be material in relation to the stockholders' equity
and financial position of Ralphs at October 9, 1994 and to the merged entity.
-13-
<PAGE> 16
PART II. OTHER INFORMATION
References throughout this report to "the Company" and "Ralphs" shall
be deemed to refer to the registrant, Ralphs Grocery Company, and references to
"Ralphs Supermarkets" and "the Holding Company" shall be deemed to refer to
Ralphs Supermarkets, Inc., the sole stockholder of Ralphs.
ITEM 1. LEGAL PROCEEDINGS
In April 1994, the Company was served with a complaint filed
by over 240 former employees at Ralphs' bakery in the Atwater
district of Los Angeles (the "Bakery Plaintiffs"). The action
was commenced in the United States District Court for the
Central District of California, and, among other claims, the
Bakery Plaintiffs alleged that the Company breached its
collective bargaining agreement and violated the Workers
Adjustment Retraining Notification Act (the "WARN Act") when
it downsized and subsequently closed the bakery. In their
complaint, the Bakery Plaintiffs are seeking damages for lost
wages and benefits as well as punitive damages. The Bakery
Plaintiffs also named the Company and two of its management
employees in fraud, conspiracy and emotional distress causes
of action. In addition, the Bakery Plaintiffs sued their union
local for breach of its duty of fair representation and other
alleged misconduct, including fraud and conspiracy. The
defendants have answered the complaint and discovery is
ongoing. Trial is set for February, 1996, and the Company is
vigorously defending this suit. Management believes, based
upon its assessment of the facts, that the resolution of this
case will not have a material effect on the Company's
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For the exhibits incorporated by reference and for the
exhibits filed as part of this Quarterly Report on Form
10-Q, see the Exhibit Index appearing on page 16 hereof.
(b) Reports on Form 8-K.
On September 14, 1994, Ralphs Supermarkets, Inc. and
Food 4 Less Supermarkets, Inc., an operator of
supermarkets located primarily in Southern California,
entered into a definitive Agreement and Plan of Merger.
Pursuant to the terms of the Merger Agreement, Food 4
Less Supermarkets will, subject to certain conditions
being satisfied or waived, be merged with and into
Ralphs Supermarkets, Inc. and Ralphs Supermarkets, Inc.
will survive the merger and become a wholly owned
subsidiary of Food 4 Less Holdings, Inc. Conditions to
the consummation of the merger include the receipt of
regulatory approvals and other necessary consents and
the completion of financing.
-14-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RALPHS GROCERY COMPANY
(Registrant)
Date: November 14, 1994
-----------------------
/s/ Alan J. Reed
--------------------------------------
Alan J. Reed
Senior Vice President,
Chief Financial Officer
/s/ Jan Charles Gray
--------------------------------------
Jan Charles Gray
Senior Vice President,
General Counsel and Secretary
/s/ Robert W. Gossman
--------------------------------------
Group Vice President,
Controller
-15-
<PAGE> 18
RALPHS GROCERY COMPANY
INDEX TO EXHIBITS
The following exhibits are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY
NO. DESCRIPTION OF EXHIBIT REFERENCE
- ------- ---------------------------------------------------------- ---------------------------------
<S> <C> <C>
4.1 Indenture between Ralphs Grocery Company and United States Exhibit 4.3 to Registrant's
Trust Company, as Trustee, dated as of July 29, 1992, with Quarterly Report on Form 10-Q
respect to the 10 1/4% Senior Subordinated Notes due 2002. dated September 1, 1992 and filed
on September 2, 1992.
4.2 Indenture between Ralphs Grocery Company and United States Exhibit 4.1 to Registration
Trust Company, as Trustee, dated as of March 30, 1993 (the Statement No. 33-61812 on Form
"1993 Indenture"), with respect to the Initial Notes and S-4.
Exchange Notes.
4.3 Form of Supplemental Indenture, dated as of June 23, 1993, Exhibit 4.2 to Registration
to the 1993 Indenture. Statement No. 33-61812 on Form
S-4.
</TABLE>
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Unaudited
Consolidated Balance Sheets and Unaudited Consolidated Statements of Operations
and is qualified in its entirety by reference to such 3rd Quarter 10-Q ended
October 9, 1994.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-END> OCT-09-1994
<CASH> 33,305
<SECURITIES> 0
<RECEIVABLES> 45,182
<ALLOWANCES> 0
<INVENTORY> 217,186
<CURRENT-ASSETS> 313,994
<PP&E> 611,642<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,491,362
<CURRENT-LIABILITIES> 432,306
<BONDS> 883,377
<COMMON> 0
0
0
<OTHER-SE> 14,965
<TOTAL-LIABILITY-AND-EQUITY> 1,491,362
<SALES> 1,856,341
<TOTAL-REVENUES> 1,856,341
<CGS> 1,433,008
<TOTAL-COSTS> 1,433,008
<OTHER-EXPENSES> 325,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,162
<INCOME-PRETAX> 19,896
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,896
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>PPE,net
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</TABLE>
