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PROSPECTUS AND SOLICITATION STATEMENT
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 88894
FOOD 4 LESS HOLDINGS, INC.
[Food 4 Less logo] [Ralphs logo]
PROSPECTUS
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FOOD 4 LESS, INC.
FOOD 4 LESS HOLDINGS, INC.
SOLICITATION OF CONSENTS
OF STOCKHOLDERS
------------------------------
This Prospectus and Solicitation Statement is being furnished in connection
with the solicitation (the "Solicitation") of consents (the "Consents") by Food
4 Less, Inc., a Delaware corporation ("FFL"), and its majority-owned subsidiary,
Food 4 Less Holdings, Inc., a California corporation ("Holdings"), to certain
proposed mergers and to the replacement of certain existing stockholders' and
related agreements, including:
(i) a proposed merger between FFL and Holdings, pursuant to which FFL will
merge (the "FFL Merger") with and into Holdings, with Holdings being the
surviving corporation, and each outstanding share of common stock, par value
$.01 per share, of FFL ("FFL Common Stock") will be converted into the right to
receive 2.082 shares of common stock, par value $.01 per share, of Holdings
("Holdings Common Stock");
(ii) a proposed merger (the "Reincorporation Merger" and, together with the
FFL Merger, the "Proposed Mergers") of Holdings with and into a newly-formed,
wholly-owned subsidiary of Holdings, Food 4 Less Holdings, Inc., incorporated in
Delaware ("New Holdings"), to take place immediately following the FFL Merger,
pursuant to which each outstanding share of Holdings Common Stock will be
converted into the right to receive one share of common stock, par value $.01
per share, of New Holdings ("New Holdings Common Stock"); and
(iii) a proposal (the "Stockholders Agreement Proposal") to amend or
terminate certain existing agreements to which FFL stockholders are parties and
to which Holdings warrantholders are parties, and to have FFL stockholders and
Holdings warrantholders become party to (a) a new stockholders agreement (the
"1995 Stockholders Agreement") which will be entered into by New Holdings and
certain other parties who are investing in newly-issued preferred stock of New
Holdings and (b) in the case of FFL stockholders, a related registration rights
agreement (the "1995 Registration Rights Agreement"). The 1995 Stockholders
Agreement and 1995 Registration Rights Agreement will replace the FFL Holdings
Corporation Stock Purchase and Shareholders' Agreement dated as of May 23, 1987
(the "1987 Stockholders Agreement"), the Food 4 Less, Inc. Stockholders
Agreement and related Registration Rights Agreement, each dated as of June 17,
1991 (the "1991 Stockholders Agreement" and "1991 Registration Rights
Agreement," respectively), and the Food 4 Less Holdings, Inc. Warrantholders
Agreement dated as of December 31, 1992 (the "Warrantholders Agreement").
The Proposed Mergers and the Stockholders Agreement Proposal are being
undertaken at the request of certain investors who will purchase a minimum of
$140 million of preferred stock of New Holdings in connection with New Holdings'
acquisition of Ralphs Supermarkets, Inc. ("RSI"). The Proposed Mergers will
simplify the holding company structure of the combined entities by consolidating
all of the existing stockholders of FFL and Holdings, as well as the new
preferred stockholders, at the same corporate level. This streamlining of the
corporate structure will serve to facilitate the acquisition of RSI. In
addition, approval of the Stockholders Agreement Proposal will eliminate
conflicting contractual obligations of New Holdings and provide significant
benefits to existing stockholders and warrantholders. Following its acquisition
of RSI, New Holdings will operate the largest supermarket chain in Southern
California, consisting of 332 stores with combined pro forma annual sales in
excess of $5 billion.
THE SOLICITATION WITH RESPECT TO THE FFL MERGER AND THE STOCKHOLDERS
AGREEMENT PROPOSAL WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON JUNE 2, 1995,
UNLESS EXTENDED, AND THE SOLICITATION WITH RESPECT TO THE REINCORPORATION MERGER
WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON THE DATE OF EFFECTIVENESS OF THE
FFL MERGER, UNLESS EXTENDED (IN EITHER CASE, THE "EXPIRATION DATE"). CONSENTS
MAY BE REVOKED AT ANY TIME PRIOR TO THE APPLICABLE EXPIRATION DATE.
------------------------------
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN
EVALUATING THE PROPOSED MERGERS AND THE STOCKHOLDERS AGREEMENT PROPOSAL.
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The proposed acquisition of RSI will be effected through the merger (the
"RSI Merger") of Holdings' subsidiary Food 4 Less Supermarkets, Inc. ("Food 4
Less") with and into RSI, and the immediately subsequent merger (the "RGC
Merger," and together with the RSI Merger, the "Merger") of Ralphs Grocery
Company ("RGC"), a wholly-owned subsidiary of RSI, with and into RSI, after
which RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery
Company" or the "Company"). A detailed description of the Merger is set forth in
this Prospectus and Solicitation Statement.
The FFL Merger and the Reincorporation Merger will require approval by at
least a majority of the outstanding shares of the parent corporation in each
such merger (i.e. by FFL stockholders in the FFL Merger and by Holdings
stockholders in the Reincorporation Merger). Accordingly, this Prospectus and
Solicitation Statement, together with the accompanying Consent Form, is being
sent to persons and entities who are registered stockholders of FFL as of May
15, 1995, which has been fixed as the record date for determining the
stockholders entitled to consent to the FFL Merger. As of May 15, 1995, there
were outstanding 10,634,357 shares of FFL Common Stock entitled to voting rights
and held by approximately 50 stockholders of record. This Prospectus and
Solicitation Statement, together with the accompanying Consent Form, also is
being sent to persons and entities (including the current registered
stockholders of FFL) who are expected to be registered stockholders of Holdings
as of the date of effectiveness of the FFL Merger, which has been fixed as the
record date for determining the stockholders entitled to consent to the
Reincorporation Merger. Holdings expects that, upon completion of the FFL
Merger, and after giving effect to an anticipated stock split which has been
approved by the Board of Directors of Holdings, there will be outstanding
22,991,126 shares of Holdings Common Stock entitled to voting rights and held by
approximately 110 stockholders of record.
The Consents solicited by this Prospectus and Solicitation Statement
contemplate that each holder of outstanding FFL Common Stock and each holder of
outstanding warrants to purchase common stock of Holdings will approve the
Stockholders Agreement Proposal. Accordingly, in addition to being sent to all
record stockholders of FFL, this Prospectus and Solicitation Statement, together
with the accompanying Consent Form, is being sent to all registered holders of
Holdings warrants as of May 15, 1995, which has been fixed as the record date
for determining the holders entitled to consent to the Stockholders Agreement
Proposal.
Holdings and New Holdings jointly have filed a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with the Securities and Exchange Commission
covering 22,356,042 shares of Holdings Common Stock which may be issued in
connection with the FFL Merger and 23,318,682 shares of New Holdings Common
Stock which may be issued in connection with the Reincorporation Merger. This
Prospectus and Solicitation Statement constitutes the Solicitation Statement of
FFL and Holdings being used to solicit Consents to the Proposed Mergers and the
Stockholders Agreement Proposal and the Prospectus of Holdings and New Holdings
filed as part of the Registration Statement. See "Available Information."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND SOLICITATION STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND SOLICITATION STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROSPECTUS AND SOLICITATION STATEMENT, OR THE
SOLICITATION OF A CONSENT, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER, OR SOLICITATION OF AN OFFER, OR CONSENT SOLICITATION.
NEITHER DELIVERY OF THIS PROSPECTUS AND SOLICITATION STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES BEING OFFERED PURSUANT TO THIS PROSPECTUS AND
SOLICITATION STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE
OF THIS PROSPECTUS AND SOLICITATION STATEMENT.
------------------------------
THE HOLDINGS COMMON STOCK TO BE ISSUED IN THE FFL MERGER AND THE NEW HOLDINGS
COMMON STOCK TO BE ISSUED IN THE REINCORPORATION MERGER HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS AND SOLICITATION
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus and Solicitation Statement is May 19, 1995
ii
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AVAILABLE INFORMATION
Holdings and New Holdings have filed a Registration Statement (the
"Registration Statement") on Form S-4 with the Securities and Exchange
Commission (the "Commission") under the Securities Act, with respect to the
Holdings Common Stock to be issued in connection with the FFL Merger and the New
Holdings Common Stock to be issued in connection with the Reincorporation
Merger. Each of Holdings, Food 4 Less and RGC is subject to the reporting and
other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder, and in accordance therewith files reports and other information with
the Commission. Such reports and other information filed by Holdings, Food 4
Less or RGC with the Commission can be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following regional offices of the
Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60601. Copies of such
materials can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
New Holdings intends to furnish to each of its stockholders, upon their
request, annual reports containing audited financial statements and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year. Any such request should be directed to Jan Charles Gray,
Esq., Senior Vice President, General Counsel and Secretary of Ralphs Grocery
Company at 1100 West Artesia Boulevard, Compton, California 90220, telephone
number (310) 884-4000.
This Prospectus and Solicitation Statement summarizes the contents and
terms of documents not included herewith. These documents are available upon
request from, as applicable, Holdings and Food 4 Less at 777 South Harbor Blvd.,
La Habra, California 90631, telephone number (714) 738-2000, Attn: Linda
McLoughlin Figel, Investor Relations; or RGC at 1100 West Artesia Blvd.,
Compton, California 90220, telephone number (310) 884-4000, Attn: Jan Charles
Gray, Esq., Senior Vice President, General Counsel and Secretary. In order to
ensure timely delivery of the documents, any request for such documents should
be made at least five business days prior to the Expiration Date.
Neither FFL nor Holdings is subject to Regulations 14A or 14C under the
Exchange Act governing the solicitation of proxies and distribution of
information statements, and therefore this Prospectus and Solicitation Statement
does not contain all of the information which would be required if it had been
prepared in accordance with the requirements of such Regulations.
iii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION................................................................. iii
SUMMARY............................................................................... 1
RISK FACTORS.......................................................................... 24
THE MERGER AND THE FINANCING.......................................................... 28
PRO FORMA CAPITALIZATION.............................................................. 32
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 34
SELECTED HISTORICAL FINANCIAL DATA OF RALPHS.......................................... 43
SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS........................................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 47
BUSINESS.............................................................................. 62
MANAGEMENT............................................................................ 77
EXECUTIVE COMPENSATION................................................................ 79
PRINCIPAL STOCKHOLDERS................................................................ 85
DESCRIPTION OF CAPITAL STOCK.......................................................... 86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 89
THE SOLICITATION...................................................................... 93
THE PROPOSED MERGERS.................................................................. 97
THE STOCKHOLDERS AGREEMENT PROPOSAL................................................... 103
THE EXCHANGE OFFERS AND THE PUBLIC OFFERINGS.......................................... 109
DESCRIPTION OF THE NEW CREDIT FACILITY................................................ 116
DESCRIPTION OF OTHER INDEBTEDNESS..................................................... 118
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 122
LEGAL MATTERS......................................................................... 124
EXPERTS............................................................................... 124
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
ANNEX A: THE 1995 STOCKHOLDERS AGREEMENT.............................................. A-1
ANNEX B: THE 1995 REGISTRATION RIGHTS AGREEMENT....................................... B-1
</TABLE>
iv
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto appearing elsewhere in this
Prospectus and Solicitation Statement. Unless the context otherwise requires,
(i) the terms "Food 4 Less" and "Ralphs," as used herein, refer to Food 4 Less
and RSI and their consolidated subsidiaries, respectively, prior to the
consummation of the Merger, (ii) the term "Holdings," as used herein, refers to
Holdings and its consolidated subsidiaries (including Food 4 Less) prior to the
consummation of the Reincorporation Merger, (iii) the term "FFL," as used
herein, refers to FFL and its consolidated subsidiaries prior to the
consummation of the FFL Merger, and (iv) the term "New Holdings," as used
herein, refers to New Holdings (which will be the successor to Holdings
following the consummation of the Reincorporation Merger) and its consolidated
subsidiaries. The "Company" refers to Ralphs Grocery Company as the surviving
and renamed subsidiary corporation of New Holdings following the consummation of
the Merger and includes, unless the context otherwise requires, all of its
consolidated subsidiaries. As used herein, "Southern California" means Los
Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego counties.
Except as otherwise stated, references in this Prospectus and Solicitation
Statement to numbers of stores prior to the consummation of the Merger are as of
October 1, 1994. References to the "pro forma" number of stores to be operated
by the Company following the consummation of the Merger are based on October 1,
1994 totals, but give effect to certain anticipated store conversions,
divestitures and closings.
Holdings was incorporated in California on December 8, 1992, under the
direction of its parent corporation, Food 4 Less, Inc. Holdings does not have
any business operations of its own and its assets consist solely of all of the
outstanding capital stock of Food 4 Less. Following the Merger, the FFL Merger
and the Reincorporation Merger, New Holdings, as successor by merger to
Holdings, will own all of the outstanding stock of the Company.
New Holdings was incorporated in Delaware on December 19, 1994, under the
direction of Holdings, its parent corporation. Prior to the consummation of the
Reincorporation Merger, New Holdings will have neither any business operations
nor any material assets of its own.
THE COMPANY
The combination of Ralphs Grocery Company and Food 4 Less Supermarkets,
Inc. will create the largest food retailer in Southern California. Pro forma for
the Merger, the Company will operate approximately 332 Southern California
stores with an estimated 26% market share among the area's supermarkets. The
Company will operate the second largest conventional supermarket chain in the
region under the "Ralphs" name and the largest warehouse supermarket chain under
the "Food 4 Less" name. In addition, the Company will operate approximately 24
conventional format stores and 39 warehouse format stores in Northern California
and the Midwest. Management believes that by the end of the fourth full year of
combined operations, approximately $90 million in net annual cost savings will
be achieved as a result of the Merger. Pro forma for the Merger, Holdings would
have had sales of approximately $5.1 billion and $2.8 billion, operating income
of approximately $183 million and $90 million and EBITDA (as defined) of
approximately $343 million and $189 million for the 52 weeks ended June 25, 1994
and the 28 weeks ended January 7, 1995, respectively. Management believes the
Merger will enhance the growth and profitability of Ralphs and Food 4 Less by
providing the Company with the following benefits:
- - TWO LEADING COMPLEMENTARY FORMATS. The Company will operate its conventional
supermarkets in Southern California under the "Ralphs" name and all of its
price impact warehouse format stores in Southern California under the "Food 4
Less" name. Pro forma for the Merger and certain planned store conversions,
the Company will operate 264 Ralphs conventional format stores and 68 Food 4
Less warehouse format stores in the region. The Ralphs stores will continue to
emphasize a broad selection of merchandise, high quality fresh produce, meat
and seafood and service departments, including bakery and delicatessen
departments in most stores. The Company's conventional stores will also
benefit from Ralphs' strong private label program and its strengths in
merchandising, store operations and systems. Passing on format-related
efficiencies, the price impact warehouse format stores will continue to offer
consumers the
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lowest overall prices while providing product selections comparable to
conventional supermarkets. Management believes the Food 4 Less warehouse
format has demonstrated its appeal to a wide range of demographic groups in
Southern California and offers a significant opportunity for future growth.
The Company plans to open nine new Food 4 Less warehouse stores and 21 new
Ralphs stores over the next two years.
- - SUBSTANTIAL COST SAVINGS OPPORTUNITIES. Management believes that approximately
$90 million of net annual cost savings (as compared to such costs for the pro
forma combined fiscal year ended June 25, 1994) will be achieved by the end of
the fourth full year of combined operations. It is also anticipated that
approximately $117 million in Merger-related capital expenditures and $50
million of other non-recurring costs will be required to complete store
conversions, integrate operations and expand warehouse facilities over the
same period. Although a portion of the anticipated cost savings is premised
upon the completion of such capital expenditures, management believes that
over 70% of the cost savings could be achieved without making any
Merger-related capital expenditures.
The following anticipated savings are based on estimates and assumptions
made by the Company that are inherently uncertain, though considered reasonable
by the Company, and are subject to significant business, economic and
competitive uncertainties and contingencies, all of which are difficult to
predict and many of which are beyond the control of management. There can be no
assurance that such savings will be achieved. The sum of the components of the
estimated annual cost savings exceeds $90 million; however, management's
estimate of $90 million in net annual cost savings gives effect to an offsetting
adjustment to reflect its expectation that a portion of the savings will be
reinvested in the Company's operations. See "Risk Factors -- Ability to Achieve
Anticipated Cost Savings."
-- REDUCED ADVERTISING EXPENSES. Consolidating the conventional format stores
in Southern California under the "Ralphs" name will eliminate most of the
separate advertising associated with Food 4 Less' existing Alpha Beta, Boys
and Viva formats. Since Ralphs' current advertising program covers the
Southern California region, the Company will be able to advertise for all
of its Southern California stores under the existing Ralphs program.
Management estimates that there will be annual advertising cost savings of
approximately $28 million as compared to such costs for the pro forma
combined fiscal year ended June 25, 1994. Because of reductions in certain
advertising expenses that Food 4 Less has already begun to implement and
certain refinements in the post-Merger advertising plan, actual cost
savings related to advertising expenses are presently expected to be $19
million in the first full year of combined operations following the Merger
as compared to the current annualized costs.
-- REDUCED STORE OPERATIONS EXPENSE. Management expects to reduce store
operations costs as a result of both reduced labor and benefit costs and
reduced non-labor expenses. Store-level labor savings will be achieved when
Ralphs' labor scheduling, computerized record keeping and other advanced
store systems are applied to the Food 4 Less store base. In addition,
management believes that the adoption of Ralphs' store systems in non-labor
areas, such as energy management, safety programs and pooled supply
purchasing, will produce further annual cost savings. Management estimates
that annual store operations cost savings of approximately $21 million will
be achieved by the fourth full year of combined operations after certain
required capital expenditures are made.
-- INCREASED VOLUME PURCHASING EFFICIENCIES. The combined volume requirements
and leading market position of the Company should generally allow the
Company to obtain improved terms from vendors, including suppliers of
products carried on an exclusive or promoted basis, and to convert some
less-than-truckload shipping quantities to full truckload quantities.
Management estimates that annual purchasing cost savings of approximately
$19 million will be achieved by the second full year of combined
operations.
-- WAREHOUSING AND DISTRIBUTION EFFICIENCIES. Consolidating the Company's
warehousing and distribution operations into Ralphs' two primary facilities
located in Compton, California and in the Atwater district of Los Angeles
and Food 4 Less' primary facility located in La Habra, California will
result in lower outside storage, transportation and labor costs. In
addition, occupancy costs will be reduced as a result of the closure of
certain existing facilities. Management estimates that annual warehousing
and distribution
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cost savings of approximately $16 million will be achieved by the third
full year of combined operations after certain capital expenditures on
existing facilities are completed.
-- CONSOLIDATED MANUFACTURING. Ralphs and Food 4 Less operate manufacturing
facilities that produce similar products or have excess capacity.
Management believes that consolidating meat, bakery, dairy, and other
manufacturing and processing operations, and discontinuing external
purchases of certain goods that can be manufactured internally, will
achieve annual cost savings of approximately $10 million by the second full
year of combined operations.
-- CONSOLIDATED ADMINISTRATIVE FUNCTIONS. The Company expects to achieve
savings from the elimination of redundant administrative staff, the
consolidation of management information systems and a decreased reliance on
certain outside services and consultants. Management estimates that annual
savings of approximately $15 million associated with consolidating
administrative functions will be achieved by the second full year of
combined operations.
- - TECHNOLOGICALLY ADVANCED WAREHOUSING AND DISTRIBUTION. The Company will
utilize Ralphs' technologically advanced warehousing and distribution
systems, which include a 17 million cubic foot high-rise automated storage
and retrieval system warehouse (the "ASRS") for non-perishable items and a
5.4 million cubic foot perishable service center (the "PSC") designed for
processing, storing and distributing all perishable items. These facilities
will provide the Company with substantial operating benefits, including: (i)
enhanced turnover to further improve the freshness and quality of in-store
products, (ii) added opportunities in forward buying programs and (iii) an
increased percentage of inventory supplied by the Company's own warehousing
and distribution system. Management believes the utilization of these
facilities and Food 4 Less' La Habra warehouse will enable the Company to
meet the combined inventory requirements of all stores with fewer employees
and lower operating and occupancy-related expenses.
- - STORE LOCATIONS. As a result of Ralphs' 122-year history and Alpha Beta
Company's ("Alpha Beta") 91-year history in Southern California, the Company
will have valuable and well established store locations, many of which are in
densely populated metropolitan areas.
- - RECENTLY REMODELED AND NEW STORE BASE. The Company will have a modern,
technologically advanced store base. During the five years ended June 25,
1994, on a combined basis, Ralphs and Food 4 Less opened 74 new stores and
remodeled 211 stores. Approximately 84% of the Company's stores have been
opened or remodeled during the last five years.
- - EXPERIENCED MANAGEMENT TEAM. The executive officers of the Company have
extensive experience in the supermarket industry. The strength of Ralphs
management expertise is evidenced by Ralphs' reputation for quality and
service, technologically advanced systems, strong store operations and high
historical EBITDA margins. The Food 4 Less management team will provide
valuable experience in operating warehouse supermarkets and in effectively
integrating companies into a combined operation. Following the acquisition of
Alpha Beta in 1991, Food 4 Less management successfully integrated Alpha Beta
with its existing Southern California operations and (within three years)
achieved annual cost savings in excess of $40 million (compared to a
pre-acquisition estimate of approximately $33 million).
THE YUCAIPA COMPANIES
Food 4 Less was organized in 1989 by its sponsor, The Yucaipa Companies
("Yucaipa"), a private investment group which specializes in the supermarket
industry. Yucaipa has a successful track record in acquiring, integrating and
improving the cash flow of supermarket companies. Since 1986, Yucaipa and its
affiliated companies have completed eleven acquisition transactions, including
five acquisitions by Food 4 Less and its subsidiaries. Following completion of
the Merger, Yucaipa and its affiliates will control the Board of Directors of
New Holdings and the Company.
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THE MERGER AND THE FINANCING
On September 14, 1994, Food 4 Less, Inc. ("FFL"), Food 4 Less Supermarkets,
Inc. ("Food 4 Less") and Food 4 Less Holdings, Inc. ("Holdings"), entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") with Ralphs
Supermarkets, Inc. ("RSI") and its stockholders. Pursuant to the terms of the
Merger Agreement, Food 4 Less will be merged with and into RSI (the "RSI
Merger"). Immediately following the RSI Merger, RGC, which is currently a
wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger,"
and together with the RSI Merger, the "Merger"), and RSI will change its name to
Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). Prior to the
Merger, FFL will merge with and into Holdings, which will be the surviving
corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings
will change its jurisdiction of incorporation by merging into a newly-formed,
wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the
"Reincorporation Merger"). As a result of the Merger, the FFL Merger and the
Reincorporation Merger, the Company will become a wholly-owned subsidiary of New
Holdings. See "-- Corporate Structure." Conditions to the consummation of the
RSI Merger include the receipt of regulatory approvals and other necessary
consents and the completion of financing. The purchase price for RSI is
approximately $1.5 billion, including the assumption of debt. The consideration
payable to the stockholders of RSI consists of $375 million in cash, $131.5
million principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures
due 2007 (the "Seller Debentures") and $18.5 million initial accreted value of
13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures") to
be issued by New Holdings. New Holdings will use $100 million of the cash
received from the issuance of new preferred stock (the "New Equity Investment"),
together with the Seller Debentures and such New Discount Debentures, to acquire
approximately 48% of the capital stock of RSI immediately prior to consummation
of the RSI Merger. New Holdings will then contribute the $250 million of
purchased shares of RSI stock to Food 4 Less, and pursuant to the RSI Merger the
remaining shares of RSI stock will be acquired for $275 million in cash.
As currently contemplated, the Merger will be financed through the
following transactions (collectively, the "Financing"):
- Borrowings of up to $750 million aggregate principal amount pursuant to
the New Term Loans (as defined) under a senior bank facility (the "New
Credit Facility") to be provided by a syndicate of banks in a senior
financing (the "Bank Financing") led by Bankers Trust Company ("Bankers
Trust"). The New Credit Facility will also provide for a $325 million
revolving credit facility (the "New Revolving Facility"), $16.4 million
of which is anticipated to be drawn at closing.
- The issuance of up to $295 million principal amount of new Senior Notes
due 2004 (the "New F4L Senior Notes") pursuant to a public offering (the
"Senior Note Public Offering") registered under the Securities Act.
- The issuance of up to $200 million principal amount of new Senior
Subordinated Notes due 2005 (the "New RGC Notes") pursuant to a public
offering (the "Subordinated Note Public Offering," and together with the
Senior Note Public Offering, the "Public Offerings") registered under
the Securities Act.
- The issuance of preferred stock in a private placement by New Holdings
to a group of investors (the "New Equity Investors") led by Apollo
Advisors, L.P. and Apollo Advisors II, L.P. (on behalf of one or more
managed entities) or their respective affiliates and designees
("Apollo") and including affiliates of BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston") and
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and other
institutional investors, yielding cash proceeds of $140 million pursuant
to the New Equity Investment. Concurrently with the New Equity
Investment, the New Equity Investors will purchase outstanding shares of
New Holdings capital stock from a stockholder of New Holdings for a
purchase price of $57.8 million. See "Description of Capital
Stock -- New Equity Investment."
- The offers by Food 4 Less to exchange (a) up to $175 million aggregate
principal amount of its 10.45% Senior Notes due 2000 (the "Old F4L
Senior Notes") for up to $175 million aggregate
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<PAGE> 9
principal amount of additional New F4L Senior Notes (which will be part
of the same issue as the New F4L Senior Notes offered pursuant to the
Senior Note Public Offering) plus $5.00 in cash per $1,000 principal
amount exchanged and (b) up to $145 million aggregate principal amount
of its 13.75% Senior Subordinated Notes due 2001 (the "Old F4L Senior
Subordinated Notes," and together with the Old F4L Senior Notes, the
"Old F4L Notes") for up to $145 million aggregate principal amount of
new 13.75% Senior Subordinated Notes due 2005 (the "New F4L Senior
Subordinated Notes," and together with the New F4L Senior Notes, the
"New F4L Notes") plus $20.00 in cash per $1,000 principal amount
exchanged, together with the solicitation of consents from the holders
of the Old F4L Notes to certain amendments to the indentures
(collectively, the "Old F4L Indentures") under which the Old F4L Notes
were issued (such transactions being referred to herein collectively as
the "F4L Exchange Offers"). It is a condition to the F4L Exchange Offers
that at least 80% of the outstanding principal amount of the Old F4L
Notes are exchanged pursuant to the F4L Exchange Offers.
- The offers by Food 4 Less to (a) exchange up to $450 million aggregate
principal amount of the 9% Senior Subordinated Notes due 2003 of RGC
(the "Old RGC 9% Notes") and the 10 1/4% Senior Subordinated Notes due
2002 of RGC (the "Old RGC 10 1/4% Notes," and together with the Old RGC
9% Notes, the "Old RGC Notes") for up to $450 million aggregate
principal amount of additional New RGC Notes (which will be part of the
same issue as the New RGC Notes offered pursuant to the Subordinated
Note Public Offering) plus $20.00 in cash per $1,000 principal amount of
Old RGC Notes exchanged and (b) purchase Old RGC Notes for $1,010.00 in
cash per $1,000 principal amount of Old RGC Notes accepted for purchase,
together with the solicitation of consents from the holders of the Old
RGC Notes to certain amendments to the indentures (collectively, the
"Old RGC Indentures") under which the Old RGC Notes were issued (such
transactions being referred to herein as the "RGC Offers," and together
with the F4L Exchange Offers, the "Exchange Offers"). It is a condition
to the RGC Offers that at least a majority of the outstanding principal
amount of the Old RGC Notes are exchanged for New RGC Notes pursuant to
the RGC Offers (the "RGC Minimum Exchange").
- The purchase by New Holdings of approximately 48% of the outstanding
common stock of RSI for an aggregate consideration of $250 million,
consisting of $100 million of the cash proceeds from the New Equity
Investment, $131.5 million principal amount of the Seller Debentures and
$18.5 million initial accreted value of the New Discount Debentures,
followed by the contribution of such common stock of RSI to Food 4 Less.
Pursuant to the RSI Merger, the remaining shares of RSI stock will be
acquired for $275 million in cash.
- The placement by New Holdings (the "New Discount Debenture Placement")
of $100 million initial accreted value of New Discount Debentures to a
partnership including Yucaipa, the selling stockholders of Ralphs, an
affiliate of George Soros, Apollo, and an affiliate of each of BT
Securities, CS First Boston and DLJ. The $100 million initial accreted
value of New Discount Debentures includes (a) $18.5 million that will be
issued to the RSI stockholders, (b) $15 million, $5 million and $2.5
million that will be issued to Yucaipa, BT Securities and Apollo,
respectively, in satisfaction of fees otherwise payable by the Company
and New Holdings in connection with the Merger and the Financing and (c)
$59 million that will be issued for cash to the partnership described
above. The $41 million initial accreted value of New Discount Debentures
to be issued to the RSI stockholders, Apollo, BT Securities and Yucaipa
will be contributed to such partnership by the recipients thereof.
- The assumption by the Company, pursuant to the Merger, of approximately
$166.8 million of other indebtedness of RGC and Food 4 Less.
- The offer by Holdings to holders of its 15.25% Senior Discount Notes due
2004 (the "Discount Notes") to purchase such Discount Notes for $785.00
in cash, plus accrued cash interest thereon at a rate of 15.25% per
annum from and after March 15, 1995 until the Closing Date (as defined)
for every $1,000 principal amount (at maturity) of Discount Notes
(which, as of May 1, 1995 had an accreted value of $680.26 per $1,000)
accepted for purchase, together with the solicitation of consents
5
<PAGE> 10
from the holders of the Discount Notes to certain amendments to the
indenture (the "Discount Note Indenture") under which the Discount Notes
were issued (such transactions being referred to herein collectively as
the "Holdings Offer to Purchase"). The Public Offerings, the F4L
Exchange Offers, the RGC Offers, the New Discount Debenture Placement
and the Holdings Offer to Purchase are sometimes hereinafter referred to
as the "Other Debt Financing Transactions."
Standard & Poor's Ratings Group ("Standard & Poor's") has publicly
announced that, upon consummation of the Merger, it intends to assign a new
rating to the Old RGC Notes. Such new rating assignment, if implemented, would
constitute a Rating Decline (as defined) under the Old RGC Indentures. The
consummation of the Merger (which is conditioned on, among other things,
successful consummation of the Other Debt Financing Transactions, the New Equity
Investment and the Bank Financing) and the resulting change in composition of
the Board of Directors of RGC, together with the anticipated Rating Decline
would constitute a Change of Control Triggering Event (as defined) under the Old
RGC Indentures. Although Food 4 Less does not anticipate that there will be a
significant amount of Old RGC Notes outstanding following consummation of the
RGC Offers, upon such a Change of Control Triggering Event, the Company would be
obligated to make a change of control purchase offer following the consummation
of the Merger for all outstanding Old RGC Notes at 101% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase (the "Change
of Control Offer"). The Merger will not constitute a change of control under the
Old F4L Indentures or the Discount Note Indenture and no change of control
purchase offer will be made with respect to the Old F4L Notes or the Discount
Notes.
6
<PAGE> 11
The following table illustrates the sources and uses of funds to consummate
the Merger, assuming the transaction occurs as of May 30, 1995. This
presentation assumes that $225.5 million principal amount of Old RGC Notes is
tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1%
of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million
principal amount of Old RGC Notes is tendered into the RGC Offers for cash
(representing 49.9% of the outstanding aggregate principal amount of Old RGC
Notes), $256 million principal amount of Old F4L Notes is tendered into the F4L
Exchange Offers (representing 80% of the outstanding aggregate principal amount
of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount
Notes is tendered into the Holdings Offer to Purchase (representing 100% of the
outstanding aggregate principal amount (at maturity) of Discount Notes). This
presentation assumes the use of the maximum amount of cash proceeds that could
be necessary to consummate the Merger (if holders representing more than 49.9%
of the outstanding principal amount of Old RGC Notes tender into the RGC Offers
in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum
Exchange is exceeded), the non-cash sources and cash uses would be
correspondingly adjusted). Although management believes such assumptions are
reasonable under the circumstances, actual sources and uses may differ from
those set forth below depending upon the outcome of the Holdings Offer to
Purchase, the F4L Exchange Offers and the RGC Offers.
For additional information regarding the Financing, see "The Merger and the
Financing."
SOURCES AND USES
(in millions)
<TABLE>
<CAPTION>
CASH SOURCES CASH USES
- --------------------------------------------- ---------------------------------------------
<S> <C> <C> <C>
New Term Loans(a)............... $ 750.0 Purchase RSI Common Stock(j)...... $ 375.9
New Revolving Facility(b)....... 16.4 Purchase Old RGC Notes(k)......... 226.8
New F4L Senior Notes(c)......... 295.0 Purchase Discount Notes........... 83.9
New RGC Notes(d)................ 200.0 Repay Ralphs 1992 Credit
New Equity Investment(e)........ 140.0 Agreement....................... 255.1
New Discount Debentures(f)...... 59.0 Repay F4L Credit Agreement........ 161.5
Pay Accrued Interest(l)........... 29.3
EAR Related Payments(m)........... 22.8
Repay Mortgage Indebtedness(n).... 191.5
Purchase New Holdings Common
Stock(o)........................ 3.7
Fees and Expenses(p).............. 109.9
--------- ---------
Total Cash Sources........... $ 1,460.4 Total Cash Uses................... $ 1,460.4
========= =========
NON-CASH SOURCES NON-CASH USES
- --------------------------------------------- ---------------------------------------------
New F4L Senior Notes(g)......... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0
Assumed Old F4L Senior Notes.... 35.0 Assumed Old F4L Senior Notes...... 35.0
New F4L Senior Subordinated Old F4L Senior Subordinated Notes
Notes........................ 116.0 Exchanged....................... 116.0
Assumed Old F4L Senior Assumed Old F4L Senior
Subordinated Notes........... 29.0 Subordinated Notes.............. 29.0
New RGC Notes(h)................ 225.5 Old RGC Notes Exchanged........... 225.5
New Discount Debentures(f)...... 41.0 Fees and Expenses(p).............. 22.5
Assumed Capital Leases and Other Assumed Capital Leases and Other
Debt......................... 166.8 Debt............................ 166.8
Seller Debentures(i)............ 131.5 Purchase RSI Common Stock(i)...... 150.0
--------- ---------
Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8
========= =========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company up to a maximum aggregate amount of $1,075 million of financing
under the New Credit Facility. It is anticipated that the New Credit
Facility will be syndicated to a number of financial institutions for whom
Bankers Trust will act as agent. The New Credit Facility will provide for
(i) term loans in the aggregate amount of up to $750 million, comprised of
a $375 million tranche with a six year term (the "Tranche A Loan"), a $125
million tranche with a seven year term (the "Tranche B Loan"), a $125
million tranche with an eight year term (the "Tranche C Loan"), and a $125
million tranche with a nine year term (the "Tranche D Loan," and, together
with the Tranche A Loan, Tranche B Loan and Tranche C Loan, the "New Term
Loans"); and (ii) a $325 million revolving credit facility (the "New
Revolving Facility"). The New Term Loans and the New Revolving Facility are
referred to collectively as the "New Credit Facility." The Tranche A Loan
may not be fully funded at the Closing Date. The New Credit Facility will
provide that the portion of the Tranche A Loan not funded at the Closing
Date will be available for a period of 91 days following the Closing Date
to fund the Change of Control Offer. See "Description of the New Credit
Facility."
7
<PAGE> 12
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The letters of credit will be
used to cover workers' compensation contingencies and for other purposes
permitted under the New Revolving Facility. The Company anticipates that
letters of credit for approximately $92.6 million will be issued under the
New Revolving Facility at closing, in replacement of existing letters of
credit, primarily to satisfy the State of California's requirements
relating to workers compensation self-insurance.
(c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public
Offering. If Food 4 Less receives tenders in excess of the RGC Minimum
Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of
New F4L Senior Notes being offered pursuant to the Senior Note Public
Offering.
(d) Represents New RGC Notes issued pursuant to the Subordinated Note Public
Offering. If Food 4 Less receives tenders in excess of the RGC Minimum
Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of
New RGC Notes being offered pursuant to the Subordinated Note Public
Offering. It is not anticipated that the amount of New RGC Notes offered
pursuant to the Subordinated Note Public Offering will be reduced below
$100 million principal amount.
(e) Does not include the $10 million equity contribution by Ralphs management.
See note (m) below. Concurrently with the New Equity Investment, certain
existing stockholders of New Holdings (formerly stockholders of FFL),
including affiliates of George Soros, will sell outstanding shares of New
Holdings stock to CLH Supermarket Corp. ("CLH"), a corporation owned by
certain Yucaipa partners, which in turn will sell such shares to the New
Equity Investors for an aggregate purchase price of $57.8 million (which
represents the same price per share as will be paid in the New Equity
Investment). In connection with the New Equity Investment, the New Equity
Investors will contribute the common stock so acquired to New Holdings in
consideration for newly-issued preferred shares. See "Description of
Capital Stock -- New Equity Investment."
(f) Represents $100 million initial accreted value of New Discount Debentures,
$59 million of which will be issued for cash, $18.5 million of which will
be issued to the RSI stockholders as Merger consideration and $15 million,
$5 million and $2.5 million of which will be issued to Yucaipa, BT
Securities and Apollo, respectively, in satisfaction of fees otherwise
payable by the Company and New Holdings in connection with the Merger and
the Financing.
(g) Represents New F4L Senior Notes issued pursuant to the F4L Exchange Offers,
which will be part of the same issue as the New F4L Senior Notes issued
pursuant to the Senior Note Public Offering.
(h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be
part of the same issue as the New RGC Notes issued pursuant to the
Subordinated Note Public Offering.
(i) In connection with the RSI Merger, New Holdings will issue $131.5 million
principal amount of the Seller Debentures as part of the purchase price for
the RSI common stock, up to $10 million of which may be put to Yucaipa on
the closing date of the Merger at a purchase price equal to their principal
amount pursuant to the Put Agreement (as defined). In addition, Yucaipa
will be reimbursed by the Company for (i) any losses incurred upon the
resale of the $10 million principal amount of Seller Debentures which may
be put to it pursuant to the Put Agreement and (ii) its expenses in
connection with the Merger and the related transactions. See "The Merger
and the Financing" and "Description of Other Indebtedness -- The Seller
Debentures."
(j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9
million to be paid in cash to holders of RSI management stock options. See
"Executive Compensation -- New Management Stock Option Plan and Management
Investment."
(k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the
RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding
following consummation of the RGC Offers, a portion of the Tranche A Loan
not fully funded at the Closing Date will be available to fund the purchase
of Old RGC Notes pursuant to the Change of Control Offer. See "The Exchange
Offers and the Public Offerings."
(l) Represents accrued interest payable on all debt securities assumed to be
tendered pursuant to the F4L Exchange Offers and the RGC Offers.
(m) Represents payments to or for the benefit of Ralphs management with respect
to outstanding equity appreciation rights (the "EARs" or "Equity
Appreciation Rights") in connection with the Merger. Ralphs management will
receive New Holdings stock options in exchange for the cancellation of the
remaining EAR liability of $10 million. See "Executive
Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships
and Related Transactions -- Food 4 Less and Holdings."
(n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in
the principal amount of $174.1 million, plus the estimated amount of the
prepayment fees payable with respect thereto.
(o) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of
$5 million to be paid to BT Securities and commitment fees of $5 million to
be paid to Apollo, upon closing of the Merger. Of such amounts, $15 million
of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT
Securities' $5 million fee will be paid through the issuance of New
Discount Debentures in lieu of cash. Such New Discount Debentures will be
contributed by them to the partnership that will acquire all of the New
Discount Debentures. Yucaipa anticipates that it in turn will pay a cash
fee of approximately $3.5 million to Soros Fund Management in consideration
for advisory services which Soros Fund Management has rendered since 1991.
See "Certain Relationships and Related Transactions -- Food 4 Less and
Holdings."
8
<PAGE> 13
CORPORATE STRUCTURE
The following tables illustrate (i) the corporate structures of FFL,
Holdings, Food 4 Less and Ralphs immediately prior to the RSI Merger, the RGC
Merger, the FFL Merger and the Reincorporation Merger and (ii) the corporate
structure of New Holdings and the Company and the anticipated outstanding
indebtedness of New Holdings and the Company, immediately after such mergers.
Prior to the RSI Merger, FFL will merge with and into Holdings, and Holdings
(which will be the surviving corporation) will reincorporate in Delaware as New
Holdings. Pursuant to the terms of the Merger Agreement, Food 4 Less will merge
with and into RSI and RSI will be the surviving corporation in the RSI Merger.
Immediately following the RSI Merger, RGC will merge with and into RSI and RSI
will be the surviving corporation in the RGC Merger and will change its name to
Ralphs Grocery Company.
BEFORE MERGER
[See Edgar Appendix]
9
<PAGE> 14
AFTER MERGER, FFL MERGER AND REINCORPORATION MERGER
[See Edgar Appendix]
10
<PAGE> 15
THE SOLICITATION
Purpose of the Solicitation... The Solicitation is being undertaken (i) at the
direction of the FFL Board of Directors for
purposes of obtaining Consents from the holders
of FFL Common Stock to approve the FFL Merger,
pursuant to which FFL will merge with and into
Holdings, with Holdings being the surviving
corporation, and each outstanding share of FFL
Common Stock will be converted into the right
to receive 2.082 shares of Holdings Common
Stock; and (ii) at the direction of the
Holdings Board of Directors for purposes of
obtaining Consents from the holders of Holdings
Common Stock and FFL Common Stock to approve
the Reincorporation Merger, pursuant to which
Holdings will change its jurisdiction of
incorporation from California to Delaware by
merging into New Holdings, which is a
newly-formed wholly-owned subsidiary of
Holdings, incorporated in Delaware, and
pursuant to which each outstanding share of
Holdings Common Stock will be converted into
the right to receive one share of New Holdings
Common Stock. The Reincorporation Merger will
take place immediately following the FFL
Merger.
An additional purpose of the Solicitation is to
obtain Consents to a proposal (the
"Stockholders Agreement Proposal") to amend or
terminate certain existing agreements to which
FFL stockholders are parties and to which
Holdings warrantholders are parties, and to
have FFL stockholders and Holdings
warrantholders become party to (a) the 1995
Stockholders Agreement which will be entered
into by New Holdings and the New Equity
Investors, and (b) in the case of FFL
stockholders, the 1995 Registration Rights
Agreement. The 1995 Stockholders Agreement and
1995 Registration Rights Agreement will replace
the FFL Holdings Corporation Stock Purchase and
Shareholders' Agreement dated as of May 23,
1987 (the "1987 Stockholders Agreement"), the
Food 4 Less, Inc. Stockholders Agreement and
related Registration Rights Agreement, each
dated as of June 17, 1991 (the "1991
Stockholders Agreement" and "1991 Registration
Rights Agreement," respectively), and the Food
4 Less Holdings, Inc. Warrantholders Agreement
dated as of December 31, 1992 (the
"Warrantholders Agreement," and together with
the 1987 Stockholders Agreement, the 1991
Stockholders Agreement and the 1991
Registration Rights Agreement, the "Existing
Stockholders Agreements").
The FFL Merger and the Reincorporation Merger
(collectively, the "Proposed Mergers") and the
Stockholders Agreement Proposal are being
undertaken at the request of the New Equity
Investors, who will purchase a minimum of $140
million of preferred stock of New Holdings as
part of the Financing for the RSI Merger. The
Proposed Mergers will simplify the holding
company structure of the combined entities by
consolidating all of the existing stockholders
of FFL and Holdings, as well as the new
preferred stockholders, at the same corporate
level. This streamlining of the corporate
structure will serve to facilitate the
acquisition of RSI. In addition, approval of
the Stockholders Agreement Proposal will
eliminate conflicting contractual obligations
of New
11
<PAGE> 16
Holdings and provide significant benefits to
existing stockholders and warrantholders.
The Proposed Mergers.......... Pursuant to the FFL Merger, FFL will be merged
with and into its subsidiary, Holdings, and
Holdings will be the surviving corporation.
Upon effectiveness of the FFL Merger, (a) each
outstanding share of FFL Common Stock will be
converted into the right to receive 2.082
shares of Holdings Common Stock (the "FFL
Merger Ratio"), rounded to the nearest whole
share, (b) each outstanding share of Holdings
Common Stock held by FFL will be cancelled and
(c) each other outstanding share of Holdings
Common Stock and each outstanding Holdings
common stock purchase warrant will remain
outstanding and will be unaffected by the FFL
Merger. Upon consummation of the FFL Merger,
FFL's stockholders will receive, in the
aggregate, a number of shares of Holdings
Common Stock equal to the number of shares of
Holdings Common Stock owned by FFL immediately
prior thereto (after giving effect to an
anticipated stock split with respect to
Holdings Common Stock). Such shares will be
received pro rata by the FFL stockholders in
proportion to their respective ownership
interests.
Pursuant to the Reincorporation Merger,
Holdings will be merged with and into its
wholly-owned Delaware subsidiary, New Holdings,
and New Holdings will be the surviving
corporation. The Reincorporation Merger is
expected to become effective immediately
following effectiveness of the FFL Merger. The
principal effect of the Reincorporation Merger
will be to change the jurisdiction of
incorporation of Holdings from California to
Delaware. Upon effectiveness of the
Reincorporation Merger, (a) each outstanding
share of Holdings Common Stock will be
converted into the right to receive one share
of New Holdings Common Stock, (b) each
outstanding warrant to purchase Holdings Common
Stock will become a warrant to purchase an
equivalent amount of New Holdings Common Stock
and (c) each share of New Holdings Common Stock
outstanding immediately prior to effectiveness
of the Reincorporation Merger will be
cancelled.
Termination of Existing
Stockholders Agreements....... By consenting to the Stockholders Agreement
Proposal, each FFL stockholder and each
Holdings warrantholder will be deemed to
consent to the termination of its rights and
obligations (except as described below) under
any Existing Stockholders Agreement to which it
is subject. Except for certain limited
covenants contained therein, the 1987
Stockholders Agreement (but not the 1991
Stockholders Agreement, the 1991 Registration
Rights Agreement or the Warrantholders
Agreement) will terminate by its terms in
connection with the FFL Merger. IN ADDITION,
CONSENT TO THE STOCKHOLDERS AGREEMENT PROPOSAL
BY HOLDERS SUBJECT TO THE 1991 STOCKHOLDERS
AGREEMENT, THE 1991 REGISTRATION RIGHTS
AGREEMENT OR THE WARRANTHOLDERS AGREEMENT WILL
CONSTITUTE CONSENT TO THE AMENDMENT OF EACH OF
THOSE AGREEMENTS TO ELIMINATE ALL CONTRACTUAL
OBLIGATIONS OF NEW HOLDINGS AND ITS
STOCKHOLDERS OR WAR-
12
<PAGE> 17
RANTHOLDERS THEREUNDER (OTHER THAN CERTAIN
OBLIGATIONS OF SUCH HOLDERS TO PARTICIPATE IN A
SALE OF NEW HOLDINGS). Accordingly, any FFL
stockholder formerly subject to the 1987
Stockholders Agreement, and (if the
Stockholders Agreement Proposal is approved by
the holders of the requisite shares and
warrants required for amendment under each of
the 1991 Stockholders Agreement and the
Warrantholders Agreement) any FFL stockholder
subject to the 1991 Stockholders Agreement and
any Holdings warrantholder will have no
substantial rights under any stockholders
agreement unless such holder consents to the
Stockholders Agreement Proposal.
Holdings warrantholders should note that the
Registration Rights Agreement dated December
31, 1992, by and among Holdings and the
original purchasers of the Holdings warrants,
will continue in effect for the benefit of
current warrantholders following the Closing
Date of the RSI Merger, and will not be amended
by the Stockholders Agreement Proposal. In
addition, the current management stockholders
of Holdings should note that their Management
Stockholders Agreements will continue in effect
following the Closing Date of the RSI Merger
and the New Equity Investment, subject to any
amendments that may be agreed upon by them.
Accordingly, the Stockholders Agreement
Proposal does not provide for Holdings
warrantholders to become parties to the 1995
Registration Rights Agreement, or for the
current stockholders of Holdings to become
parties to the 1995 Stockholders Agreement or
the 1995 Registration Rights Agreement.
Finally, all FFL stockholders and Holdings
warrantholders should note that under the
Existing Stockholders Agreements they have
certain "preemptive rights" to purchase shares
of New Holdings preferred stock being offered
in the New Equity Investment. Because the New
Equity Investment is being effected as a
private placement, New Holdings has determined
that it cannot legally extend the right to
participate in the New Equity Investment to
such holders. Notwithstanding the amendment or
termination of the Existing Stockholders
Agreements as described above, New Holdings
will extend to all of such holders to whom it
is legally permitted to do so, at the earliest
time it is permitted to do so, the right to
purchase shares of New Holdings preferred stock
at the same price paid by the New Equity
Investors, and in the amounts and upon the
other terms applicable under the "preemptive
right" provisions of the Existing Stockholders
Agreements.
The 1995 Stockholders
Agreement
and 1995 Registration Rights
Agreement................... The 1995 Stockholders Agreement will provide
significant rights and benefits to the FFL
stockholders and Holdings warrantholders (who
will become stockholders and warrantholders,
respectively, of New Holdings following the FFL
Merger and Reincorporation Merger)
(collectively, the "Investors"). The terms of
the 1995 Stockholders Agreement include,
without limitation: (a) certain "tag-along"
rights allowing Investors the opportunity
(subject to certain exceptions) to participate
in sales by Yucaipa and its
13
<PAGE> 18
affiliates (the "Controlling Stockholders") of
a pecuniary interest in any New Holdings equity
securities, (b) certain "drag-along" rights of
the Controlling Stockholders to require
Investors to include their equity securities of
New Holdings (subject to certain exceptions) in
a cash sale of all outstanding New Holdings
equity, (c) certain obligations of New Holdings
to provide financial and other information to
Investors, (d) certain "preemptive rights" of
the Investors to participate (subject to
certain exceptions) in issuances of capital
stock of New Holdings, (e) an obligation of the
Investors to vote their New Holdings shares to
elect persons nominated by Yucaipa and the New
Equity Investors as the Boards of Directors of
New Holdings and RGC, (f) prohibitions on the
taking of certain actions by New Holdings or
its subsidiaries without the approval of the
members of the Board of Directors who have been
nominated by the New Equity Investors, and (g)
prohibitions on public disclosures by New
Holdings (subject to certain exceptions)
regarding the Investors. In addition, the 1995
Registration Rights Agreement will provide to
FFL stockholders certain "piggyback" rights to
have their New Holdings shares included in
registration statements, relating to New
Holdings equity securities, proposed to be
filed under the Securities Act by New Holdings.
The foregoing summary is not complete, and for
more information, see "The Stockholders
Agreement Proposal -- Terms of the 1995
Stockholders Agreement" and "-- Terms of the
1995 Registration Rights Agreement," and the
forms of 1995 Stockholders Agreement and 1995
Registration Rights Agreement included as
Annexes A and B to this Prospectus and
Solicitation Statement.
Recommendation of the Board of
Directors of FFL; Possible
Conflicts of Interest....... The members of the Boards of Directors of FFL,
Holdings and New Holdings, as applicable, have
unanimously approved the terms of the Proposed
Mergers and the Stockholders Agreement
Proposal. THE BOARDS OF DIRECTORS OF FFL AND
HOLDINGS RECOMMEND THAT THEIR STOCKHOLDERS AND
WARRANTHOLDERS APPROVE THE PROPOSED MERGERS AND
THE STOCKHOLDERS AGREEMENT PROPOSAL (AS
APPLICABLE), WHICH WILL PROVIDE SEVERAL
IMPORTANT BENEFITS TO SUCH STOCKHOLDERS. The
benefits of the Proposed Mergers include: (1)
simplification of the holding company structure
of Food 4 Less and the consolidation of all of
the existing stockholders of FFL and Holdings,
as well as the new preferred stockholders, at
the same corporate level; (2) facilitation of
the RSI Merger, which the Boards of Directors
believe will provide the Company, New Holdings
and New Holdings' stockholders with enhanced
potential for long-term growth; and (3)
retention by the surviving corporation, New
Holdings, of the same state of incorporation as
the current parent corporation (FFL), and as
the principal operating subsidiaries of New
Holdings following the RSI Merger. The benefits
of the Stockholders Agreement Proposal include:
(1) the elimination of multiple, conflicting
contractual obligations of New Holdings (as the
successor by operation of merger to FFL and
Holdings) under the Existing Stockholders
Agreements, (2) the replacement of the
14
<PAGE> 19
Existing Stockholders Agreements with the 1995
Stockholders Agreement and the 1995
Registration Rights Agreement, which will
provide significant rights and benefits to the
New Equity Investors as well as to the existing
FFL stockholders and Holdings warrantholders,
and (3) the satisfaction of a material
condition precedent to completion of the
Financing for the RSI Merger. The Boards of
Directors have also considered identifiable
negative factors in their deliberations
concerning the RSI Merger and the Proposed
Mergers, including the costs of completing the
RSI Merger, the high degree of Company leverage
following the RSI Merger, and other factors
described under "Risk Factors."
For a description of possible conflicts of
interest of FFL, Holdings and New Holdings
directors in approving the Proposed Mergers and
the Stockholders Agreement Proposal, see "The
Solicitation -- Possible Conflicts of Interest
of Certain Officers and Directors."
Consents Required............. Consents to the Proposed Mergers are being
solicited hereby from the holders of FFL Common
Stock and Holdings Common Stock, respectively,
in lieu of any meeting of such holders. This
Prospectus and Solicitation Statement and the
Consent forms (the "Consent Forms") are being
sent to all persons who are holders of record
of FFL Common Stock as of May 15, 1995 (the
"FFL Record Date") and to all persons
(including the FFL stockholders) who are
expected to be holders of record of Holdings
Common Stock as of the date of effectiveness of
the FFL Merger (the "Holdings Record Date." In
addition, Consents to the Stockholders
Agreement Proposal are being solicited hereby
from the holders of FFL Common Stock and the
holders of Holdings warrants. Accordingly, in
addition to being sent to all record
stockholders of FFL and Holdings, this
Prospectus and Solicitation Statement and
Consent Forms are being sent to all persons who
are holders of record of Holdings warrants as
of May 15, 1995 (the "Warrant Record Date," and
together with the FFL Record Date and the
Holdings Record Date, the "Record Date").
In order to consummate the FFL Merger, FFL must
receive from the holders of at least a majority
of the outstanding shares of FFL Common Stock,
as of the FFL Record Date, a properly completed
and executed Consent approving the FFL Merger.
In order to consummate the Reincorporation
Merger, Holdings must receive from the holders
of at least a majority of the outstanding
shares of Holdings Common Stock, as of the
Holdings Record Date, a properly completed and
executed Consent approving the Reincorporation
Merger. Although FFL is not a party to the
Reincorporation Merger, Consents to the
Reincorporation Merger are being solicited
hereby from the holders of FFL Common Stock
because upon consummation of the FFL Merger,
FFL's stockholders will become the holders of
more than 90% of the outstanding Holdings
Common Stock. The Board of Directors of
Holdings has fixed the date of effectiveness of
the FFL Merger as the Holdings Record Date so
that FFL stockholders may have the opportunity
to
15
<PAGE> 20
consent or to withhold their consent to the
Reincorporation Merger.
FFL and Holdings expect to receive Consents
sufficient to approve the Proposed Mergers
inasmuch as affiliates of Yucaipa (the
Company's investment sponsor) and Apollo (which
is leading the New Equity Investment) together
own or control a majority of the outstanding
shares of FFL Common Stock and, as of the
Holdings Record Date, are expected to own a
majority of the outstanding shares of Holdings
Common Stock.
Approval of the Stockholders Agreement Proposal
(including the termination of each of the
Existing Stockholders Agreements and their
replacement by the 1995 Stockholders Agreement)
by requisite majorities of certain stockholder
groups is a condition to completion of the
Financing for the RSI Merger. The 1995
Stockholders Agreement will be binding on, and
inure to the benefit of, only those FFL
stockholders and Holdings warrantholders who
deliver Consents to the Stockholders Agreement
Proposal hereunder.
Procedures for Delivering
Consents...................... In responding to the Solicitation, holders of
shares of FFL Common Stock, Holdings Common
Stock or Holdings warrants should complete,
sign and date the Consent Form (or a facsimile
thereof) in accordance with the instructions
set forth therein and forward or hand deliver
the same to FFL at the address set forth below.
To be valid, a properly completed, signed and
dated Consent Form must be received by FFL on
or prior to the Expiration Date and must not be
revoked on or prior to the Expiration Date.
Executed Consent Forms as well as all inquiries
or correspondence relating to the Solicitation
should be directed to:
Food 4 Less, Inc.
c/o 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, CA 90067
Attention: Mark A. Resnik, Esq.
Telephone: (310) 789-7200
Telecopy: (310) 789-7201
IT IS NOT NECESSARY IN CONNECTION WITH THE
SOLICITATION FOR ANY HOLDER OF FFL COMMON
STOCK, HOLDINGS COMMON STOCK OR HOLDINGS
WARRANTS TO TENDER OR DELIVER CERTIFICATES
EVIDENCING HIS OR HER SHARES OF FFL COMMON
STOCK, HOLDINGS COMMON STOCK OR HOLDINGS
WARRANTS. UPON EFFECTIVENESS OF THE PROPOSED
MERGERS, HOLDERS OF FFL COMMON STOCK AND
HOLDINGS COMMON STOCK WILL BE ASKED TO SUBMIT
THEIR FFL SHARE CERTIFICATES AND/OR HOLDINGS
SHARE CERTIFICATES TO NEW HOLDINGS SO THAT SUCH
HOLDERS MAY BE ISSUED CERTIFICATES REPRESENTING
THE SHARES OF NEW HOLD-
16
<PAGE> 21
INGS COMMON STOCK INTO WHICH THEIR FFL SHARES
OR HOLDINGS SHARES (AS APPLICABLE) HAVE BEEN
CONVERTED. HOLDINGS WARRANTS WILL NOT BE
REISSUED FOLLOWING THE PROPOSED MERGERS BUT
INSTEAD WILL REPRESENT, FOLLOWING THE PROPOSED
MERGERS, WARRANTS TO PURCHASE AN EQUIVALENT
NUMBER OF SHARES OF NEW HOLDINGS COMMON STOCK.
Expiration Date............... The Solicitation with respect to the FFL Merger
and the Stockholders Agreement Proposal will
expire at 5:00 p.m. Los Angeles time on June 2,
1995, and the Solicitation with respect to the
Reincorporation Merger will expire at 5:00 p.m.
Los Angeles time on the date of effectiveness
of the FFL Merger, unless FFL, Holdings or New
Holdings, as the case may be, in its sole
discretion extends the Solicitation, in which
case the term "Expiration Date" shall mean the
latest time and date to which the Solicitation
is extended.
Holders Entitled to Deliver
Consents; Revocation of
Consents.................... ONLY REGISTERED HOLDERS OF SHARES OF FFL COMMON
STOCK, HOLDINGS COMMON STOCK OR HOLDINGS
WARRANTS (OR THEIR LEGAL REPRESENTATIVES OR
ATTORNEYS-IN-FACT) MAY DELIVER A CONSENT. ANY
BENEFICIAL OWNER OF FFL COMMON STOCK, HOLDINGS
COMMON STOCK OR HOLDINGS WARRANTS WHO IS NOT
THE REGISTERED HOLDER OF SUCH FFL COMMON STOCK,
HOLDINGS COMMON STOCK OR HOLDINGS WARRANTS MUST
ARRANGE WITH THE REGISTERED HOLDER TO EXECUTE
AND DELIVER THE CONSENT ON HIS OR HER BEHALF.
Consents may be revoked at any time on or prior
to the Expiration Date. Only a holder of FFL
Common Stock, Holdings Common Stock or Holdings
warrants as of the applicable Record Date (or
his or her duly designated proxies) is entitled
to revoke a Consent previously given regardless
of whether such holder continues to hold such
FFL Common Stock, Holdings Common Stock or
Holdings warrants after the applicable Record
Date. The delivery of a Consent will not affect
a holder's right to sell or transfer FFL Common
Stock, Holdings Common Stock or Holdings
warrants.
Conditions to the Proposed
Mergers....................... The consummation of the Proposed Mergers is not
expressly subject to any particular conditions.
However, neither of the Proposed Mergers will
be consummated unless both are consummated. In
addition, even if the requisite Consents are
obtained by FFL and Holdings with respect to
each Proposed Merger, their consummation is
subject to the continuing discretion of the
Boards of Directors of FFL and Holdings to
modify the terms of or to abandon such mergers
prior to their consummation. Any modification
of the terms of either Proposed Merger will be
submitted to FFL and Holdings stockholders for
their approval to the extent required by the
Delaware General Corporation Law (the "Delaware
GCL") or the California General Corporation Law
(the "California GCL"). However, the Proposed
Mergers may be abandoned at any time after the
date hereof, if such mergers have not
previously been consummated, by the Boards of
Directors of
17
<PAGE> 22
FFL and Holdings without further action by the
stockholders of either corporation.
Conditions to the Stockholders
Agreement Proposal.......... Adoption of the Stockholders Agreement Proposal
is conditioned upon consummation of the RSI
Merger. In addition, New Holdings reserves the
right not to make any particular FFL
stockholder or Holdings warrantholder a party
to the 1995 Stockholders Agreement unless
requisite Consents have been obtained to amend
the Existing Stockholders Agreement to which
such holder currently is subject. Even if the
requisite Consents are obtained by New Holdings
to amend or terminate the Existing Stockholders
Agreements, as described above, their amendment
or termination, as well as the adoption of the
1995 Stockholders Agreement and the 1995
Registration Rights Agreement, is subject to
the continuing discretion of the Boards of
Directors of FFL, Holdings, and New Holdings to
abandon such actions.
Certain Federal Income Tax
Consequences................ In general, holders of FFL Common Stock should
not recognize gain or loss upon the conversion
of their FFL Common Stock solely into Holdings
Common Stock pursuant to the FFL Merger or upon
the conversion of their Holdings Common Stock
solely into New Holdings Common Stock pursuant
to the Reincorporation Merger. In addition,
holders of Holdings Common Stock in general
should not recognize gain or loss upon the
conversion of their Holdings Common Stock
solely into New Holdings Common Stock pursuant
to the Reincorporation Merger. See "Certain
Federal Income Tax Consequences."
Dissenters' Rights............ The holders of FFL Common Stock are not
entitled to statutory dissenters' rights under
the Delaware GCL or the California GCL with
respect to either the FFL Merger or the
Reincorporation Merger. The holders of Holdings
Common Stock are not entitled to statutory
dissenters' rights under the California GCL
with respect to the Reincorporation Merger. The
holders of Holdings Common Stock (other than
FFL) are entitled to dissenters' rights under
the California GCL with respect to the FFL
Merger, as described herein. See "The Proposed
Mergers -- Dissenters' Rights."
18
<PAGE> 23
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined
financial data for the 52 weeks ended June 25, 1994 and for the 28 weeks ended
January 7, 1995, after giving effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related assumptions), as
if such transactions had occurred on June 27, 1993 with respect to the pro forma
operating and other data, and as of January 7, 1995, with respect to the pro
forma balance sheet data. Such pro forma information combines the results of
operations of Holdings for the 52 weeks ended June 25, 1994 and the results of
operations and balance sheet data as of and for the 28 weeks ended January 7,
1995, with the results of operations of Ralphs for the 52 weeks ended July 17,
1994 and the results of operations and balance sheet data as of and for the 28
weeks ended January 29, 1995, respectively. See "The Merger and the Financing."
Prior to consummation of the Merger, FFL will merge with and into Holdings, and
Holdings (which will be the surviving corporation) will reincorporate in
Delaware as New Holdings. FFL is a holding company and the assets of FFL consist
solely of its investment in the capital stock of Holdings. For purposes of the
pro forma financial presentation set forth below, the minority ownership
interest in Holdings that existed prior to the FFL Merger has been classified
with the majority ownership interest in Holdings as a result of its elimination
in the FFL Merger. The merger of FFL into Holdings has no effect on Holdings.
The pro forma financial data set forth below is not necessarily indicative of
the results that actually would have been achieved had such transactions been
consummated as of the dates indicated, or that may be achieved in the future.
The following pro forma financial data should be read in conjunction with the
"Unaudited Pro Forma Combined Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Holdings and Ralphs and related
notes thereto, included elsewhere in this Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
52 WEEKS ENDED 28 WEEKS ENDED
JUNE 25, 1994 JANUARY 7, 1995
---------------------- ------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA:
Sales.................................................... $5,053.5 $2,767.6
Gross profit............................................. 1,048.2 553.0
Selling, general and administrative expenses............. 833.1 442.1
Interest expense:
Cash.................................................. 224.3 122.5
Non-cash.............................................. 47.8 27.4
Amortization of debt issuance costs................... 13.4 6.9
-------- --------
Total interest expense................................... 285.5 156.8
Net loss(a).............................................. (119.5) (67.3)
Net loss per common share(b)............................. $ (5.22) $ (2.94)
Ratio of earnings to fixed charges(c).................... -- --
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................................................................. $ 18.4
Total assets..................................................................... 3,096.2
Total debt....................................................................... 2,228.8
Stockholders' equity............................................................. 52.5
OTHER DATA:
Depreciation and amortization............................ $ 150.8 $ 76.4
Capital expenditures(d).................................. 123.2 78.1
Stores open at end of period(e).......................... -- 395
EBITDA (as defined)(a)(f)(g)............................. $ 342.5 $ 189.3
EBITDA margin(h)......................................... 6.8% 6.8%
</TABLE>
- ---------------
(a) The summary unaudited pro forma combined financial data and the results of
operations and EBITDA (as defined) for the 52 weeks ended June 25, 1994 and
the 28 weeks ended January 7, 1995 do not include certain one-time
non-recurring costs related to (i) severance payments under certain
employment contracts with Food 4 Less management totaling $1.4 million that
are subject to change of control provisions and the achievement of earnings
and sales targets, (ii) costs related to the integration of the Company's
operations, which are estimated to be $50.0 million over a three-year
period, (iii) $1.8 million in costs related to the cancellation of an
employment agreement, and (iv) other costs related to warehouse closures,
which costs are not presently determinable.
19
<PAGE> 24
(b) Net loss per common share has been computed after giving effect to the
16.586-for-1 stock split to be effected immediately prior to the FFL Merger
and the redemption of the shares of the stockholders who have exercised
statutory dissenters' rights.
(c) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, cumulative effect of
change in accounting principles, extraordinary items and fixed charges
before capitalized interest. "Fixed charges" consist of interest expense
(including amortization of self-insurance reserves discount), capitalized
interest, amortization of deferred debt issuance costs and one-third of
rental expense (the portion deemed representative of the interest factor).
Holdings' pro forma earnings were insufficient to cover pro forma fixed
charges by approximately $119.5 million and $67.3 million for the 52 weeks
ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively.
However, such pro forma earnings included non-cash charges of $221.6
million and $119.4 million, respectively, primarily consisting of
depreciation and amortization.
(d) Does not include Merger-related capital expenditures of $55.0 million and
$37.5 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended
January 7, 1995, respectively. It is estimated that the gross capital
expenditures to be made by the Company in the first fiscal year following
the closing will be approximately $153 million (or $106 million net of
expected capital leases), of which approximately $98 million relate to
ongoing expenditures for new stores, equipment and maintenance and
approximately $55 million relate to store conversions and other
Merger-related and non-recurring items.
(e) The pro forma number of stores is based on October 1, 1994 totals, but
gives effect to the closing or divestiture of 32 stores (29 Food 4 Less
conventional supermarkets or warehouse stores and 3 Ralphs stores) in
connection with the Merger and the closure of 2 additional Food 4 Less
conventional stores open at October 1, 1994 which were subsequently closed.
The pro forma financial information presented herein has been based upon
the actual number of stores open as of the beginning of each period
presented, adjusted for the closing or divestiture of the 32 stores which
have yet to be consummated and does not include any pro forma adjustment
attributable to the 2 stores closed subsequent to October 1, 1994.
(f) "EBITDA," as defined and presented historically by RGC, represents net
earnings before interest expense, income tax expense (benefit),
depreciation and amortization expense, provision for Equity Appreciation
Rights, provision for tax indemnification payments to Federated Department
Stores, Inc. ("Federated"), provision for postretirement benefits, the LIFO
charge, extraordinary item relating to debt refinancing, provision for
legal settlement, provision for restructuring, provision for earthquake
losses, a one-time charge for Teamsters Union sick pay benefits, transition
expense and gains and losses on disposal of assets. EBITDA is a widely
accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Holdings' operating performance or as a
measure of liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(g) Pro forma EBITDA does not give any effect to $90 million of anticipated net
annual cost savings (as compared to such costs for the pro forma combined
fiscal year ended June 25, 1994) which management believes are achievable by
the end of the fourth full year of combined operations. It is anticipated
that approximately $117 million in Merger-related capital expenditures and
$50 million of other non-recurring costs will be required to complete store
conversions, integrate operations and expand warehouse facilities over the
same period. Although a portion of the anticipated cost savings is premised
upon the completion of such capital expenditures, management believes that
over 70% of the cost savings could be achieved without making any
Merger-related capital expenditures. As shown below, the sum of the
components of the estimated annual cost savings exceeds $90 million;
however, management's estimate of $90 million in net annual cost savings
gives effect to an offsetting adjustment to reflect its expectation that a
portion of the savings will be reinvested in the Company's operations. These
anticipated savings are based on estimates and assumptions made by the
Company that are inherently uncertain, though considered reasonable by the
Company, and are subject to significant business, economic and competitive
uncertainties and contingencies, all of which are difficult to predict and
many of which are beyond the control of management. As a result, there can
be no assurance that such savings will be achieved. See "Business -- The
Merger" and "Risk Factors -- Ability to Achieve Anticipated Cost Savings."
The components of the estimated cost savings are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Pro forma EBITDA for the 52 weeks ended June 25, 1994........................ $342.5
Estimated net annual cost savings:
Reduced advertising expenses............................................... 28.0
Reduced store operations expense........................................... 21.0
Increased volume purchasing efficiencies................................... 19.0
Warehousing and distribution efficiencies.................................. 16.0
Consolidated manufacturing................................................. 10.0
Consolidated administrative functions...................................... 15.0
Less: Annual reinvestment of cost savings.................................. (19.0)
------
Total estimated net annual cost savings...................................... $ 90.0
------
Sum of EBITDA (as defined) and full amount of estimated annual cost savings
to be realized over four years............................................. $432.5
======
</TABLE>
Because of reductions in certain advertising expenses that Food 4 Less has
already begun to implement and certain refinements in the post-Merger
advertising plan, actual cost savings related to advertising expenses are
expected to be approximately $19 million in the first full year following
the Merger as compared to the current annualized costs.
(h) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
20
<PAGE> 25
SUMMARY HISTORICAL FINANCIAL DATA OF RALPHS
The following table sets forth summary historical financial data of RGC (as
the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991 and
the 52 weeks ended February 2, 1992, and summary historical financial data of
RSI as of and for the 52 weeks ended January 31, 1993, January 30, 1994 and
January 29, 1995, which have been derived from the financial statements of RSI
and RGC audited by KPMG Peat Marwick LLP, independent certified public
accountants. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of RSI and RGC and related notes thereto
included elsewhere in this Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29,
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.................................................... $2,799.1 $2,889.2 $2,843.8 $2,730.2 $2,724.6
Gross profit............................................. 573.7 614.0 626.6 636.5 623.6
Selling, general and administrative expenses(a).......... 438.0 459.2 470.0 471.0 467.0
Interest expense(b)...................................... 128.5 130.2 125.6 108.8 112.7
Net earnings (loss)(c)................................... (51.4) (41.2) (76.1) 138.4(i) 32.1
Ratio of earnings to fixed charges(d).................... --(d) --(d) 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit)........................ $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5)
Total assets............................................. 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9
Total debt(e)............................................ 986.1 941.9 1,029.8 998.9 1,018.5
Redeemable stock......................................... 3.0 3.0 -- -- --
Stockholders' equity (deficit)........................... (16.0) (57.2) (133.3) 5.1 27.2
OTHER DATA:
Depreciation and amortization(f)......................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0
Capital expenditures..................................... 87.6 50.4 102.7 62.2 64.0
Stores open at end of period............................. 150 158 159 165 173
EBITDA (as defined)(g)................................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2
EBITDA margin(h)......................................... 7.4% 7.8% 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $2.2
million, $2.6 million, $3.3 million, $3.4 million, and $2.6 million for the
53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992,
January 31, 1993, January 30, 1994 and January 29, 1995, respectively.
(b) Interest expense includes non-cash charges related to the amortization of
deferred debt issuance costs of $4.1 million for the 53 weeks ended February
3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million
for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended
January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995,
respectively.
(c) Net earnings (loss) includes expenses relating to provisions for Equity
Appreciation Rights and for tax indemnification payments to Federated,
extraordinary item relating to debt refinancing, loss on disposal of assets,
provisions for postretirement and pension benefits and provision for
earthquake losses. Net earnings (loss) includes a pre-tax provision for self
insurance, which is classified in cost of sales, selling, general and
administrative expenses and interest expense, of $29.2 million, $31.2
million, $36.9 million, $36.3 million, and $20.0 million, for the 53 weeks
ended February 3, 1991, the 52 weeks ended February 2, 1992, the 52 weeks
ended January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks
ended January 29, 1995, respectively. Included in the 52 weeks ended January
30, 1994 and the 52 weeks ended January 29, 1995 are reduced employer
contributions of $11.8 million and $12.7 million, respectively, related to
union health and welfare benefit plans.
(d) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of earnings before income taxes, cumulative effect of change in
accounting principles, extraordinary item and fixed charges before
capitalized interest. "Fixed charges" consist of interest expense (including
amortization of self-insurance reserves discount), capitalized interest,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Earnings were
insufficient to cover fixed charges for the 53 weeks ended February 3, 1991
and the 52 weeks ended February 2, 1992 by approximately $25.5 million and
$27.7 million, respectively.
(e) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
(f) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2,
1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation
and amortization includes amortization of the excess of cost over net
assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0
million and $11.0 million, respectively.
(g) "EBITDA," as defined and presented historically by RGC, represents earnings
before interest expense, income tax expense (benefit), depreciation and
amortization expense, provisions for Equity Appreciation Rights, provision
for tax indemnification payments to Federated, provision for postretirement
benefits, the LIFO charge, extraordinary item relating to debt refinancing,
provision for legal settlement, provision for restructuring, provision for
earthquake losses, a one-time charge for Teamsters Union sick pay benefits,
transition expense and gains and losses on disposal of assets. EBITDA is a
widely accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Ralphs' operating performance or as a measure
of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(h) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
(i) Includes recognition of $109.1 million of deferred income tax benefit and
$1.1 million current income tax expense for Fiscal 1993 (see Note 11 of
Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.).
21
<PAGE> 26
SUMMARY HISTORICAL FINANCIAL DATA OF HOLDINGS
The following table sets forth summary historical financial data of
Holdings and its predecessor, Food 4 Less. Because Holdings acquired the capital
stock of Food 4 Less in a reorganization, which occurred December 31, 1992, the
financial data presented below for periods ending prior to such date represent
data of Food 4 Less. Operating data of Holdings for the 52 weeks ended June 26,
1993 reflects the operating results of Food 4 Less only until December 31, 1992,
and reflects the consolidated operating results of Holdings for the remainder of
the period. The historical financial data of Food 4 Less presented below as of
and for the 52 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991 and
the 52 weeks ended June 27, 1992, and the historical financial data of Holdings
presented below as of and for the 52 weeks ended June 26, 1993 and the 52 weeks
ended June 25, 1994 have been derived from the financial statements of Holdings
and Food 4 Less audited by Arthur Andersen LLP, independent public accountants.
The summary historical financial data of Holdings presented below as of and for
the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from
unaudited interim financial statements of Holdings which, in the opinion of
management, reflect all material adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such data. The
following information should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements of Holdings and related notes thereto included elsewhere in
this Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
FOOD 4 LESS HOLDINGS
------------------------------ ---------------------------------------------
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 28 WEEKS 28 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1990 1991(A) 1992 1993 1994(B) 1994 1995
-------- -------- -------- -------- -------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.......................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,416.2 $1,404.7
Gross profit................................... 204.8 265.7 520.8 484.2 469.3 262.2 237.5
Selling, general, administrative and other
expenses..................................... 157.8 213.1 469.7 434.9 388.8 221.5 199.2
Interest expense(c)............................ 50.8 50.1 70.2 73.6 77.0 41.5 43.2
Net loss(d).................................... (10.1) (9.6) (33.8) (31.2) (11.5) (5.7) (14.3)
Net loss applicable to common share(e)......... (.72) (.70) (1.46) (1.35) (.50) (.25) (.62)
Ratio of earnings to fixed charges(f).......... --(f) --(f) --(f) --(f) --(f) --(f) --(f)
BALANCE SHEET DATA (end of period)(g):
Working capital surplus (deficit).............. $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8)
Total assets................................... 574.7 980.0 998.5 957.8 980.1 969.6 984.6
Total debt(h).................................. 360.7 558.9 525.3 588.3 576.9 576.2 615.9
Redeemable stock............................... 5.1 -- -- -- -- -- --
Stockholder's equity (deficit)................. 20.6 84.6 50.8 22.6 10.0 16.2 (4.1)
OTHER DATA:
Depreciation and amortization(i)............... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8
Capital expenditures........................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0
Stores open at end of period................... 115 259 249 248 258 249 266
EBITDA (as defined)(j)......................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4
EBITDA margin(k)............................... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 29, 1991 include the results of
Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha
Beta's sales for the two weeks ended June 29, 1991 were $59.2 million.
(b) Operating data for the 52 weeks ended June 25, 1994 include the results of
the Food Barn stores, which were not material, from March 29, 1994, the date
of the Food Barn acquisition.
(c) Interest expense includes non-cash charges related to the amortization of
deferred financing costs of $4.1 million for the 53 weeks ended June 30,
1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for
the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June
26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million
for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks
ended January 7, 1995.
(d) Net loss includes a pre-tax provision for self insurance, which is
classified in cost of sales, selling, general and administrative expenses,
and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9
million, $25.7 million, $24.8 million, and $14.9 million for the 53 weeks
ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended,
June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25,
1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7,
1995, respectively. Included in the 52 weeks ended June 25, 1994, the 28
weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995 are
reduced employer contributions of $8.1 million, $2.8 million and $13.7
million, respectively, related to union health and welfare benefit plans.
(e) Net loss applicable to common share has been computed after giving effect to
the 16.586-for-1 stock split to be effected immediately prior to the FFL
Merger.
22
<PAGE> 27
(f) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of loss before provision for income taxes and
extraordinary charges plus fixed charges. "Fixed charges" consist of
interest on all indebtedness, amortization of deferred debt financing costs
and one-third of rental expense (the portion deemed representative of the
interest factor). Earnings were insufficient to cover fixed charges for the
53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27,
1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8,
1994 and January 7, 1995, by approximately $9.1 million, $3.4 million,
$25.6 million, $29.8 million, $8.8 million, $5.0 million and $13.8 million,
respectively. However, such earnings included non-cash charges of $29.9
million for the 53 weeks ended June 30, 1990, $37.0 million for the 52
weeks ended June 29, 1991, $61.2 million for the 52 weeks ended June 27,
1992, $66.4 million for the 52 weeks ended June 26, 1993, $71.3 million for
the 52 weeks ended June 25, 1994, $38.0 million for the 28 weeks ended
January 8, 1994 and $44.6 million for the 28 weeks ended January 7, 1995,
primarily consisting of depreciation, amortization and accretion of
interest.
(g) Balance sheet data as of June 30, 1990 include the effect of the
acquisition of Breco Holding Company (the "BHC Acquisition"), as well as
the acquisitions of Bell Markets, Inc. and certain assets of ABC Market
Corp. Balance sheet data as of June 29, 1991, June 27, 1992, June 26, 1993
and January 8, 1994 reflect the Alpha Beta acquisition and the financings
and refinancings associated therewith. Balance sheet data as of June 25,
1994 and January 7, 1995 reflect the acquisition of the Food Barn stores.
(h) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(i) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991,
June 27, 1992, June 26, 1993 and June 25, 1994, and for the 28 weeks ended
January 8, 1994 and January 7, 1995, depreciation and amortization includes
amortization of excess of cost over net assets acquired of $5.3 million,
$5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and
$4.2 million, respectively.
(j) "EBITDA," as defined and presented historically by Holdings, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for income taxes, provision for earthquake losses
and a one-time charge for Teamsters Union sick pay benefits. EBITDA is a
widely accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Holdings' operating performance or as a
measure of liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(k) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
23
<PAGE> 28
RISK FACTORS
Before deciding whether to Consent to the Proposed Mergers, each holder of
FFL Common Stock and Holdings Common Stock should carefully consider the
following factors, in addition to the other matters described in this Prospectus
and Solicitation Statement.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Merger and the Financing, New Holdings
will be highly leveraged. At January 7, 1995, pro forma for the Merger, the FFL
Merger, the Reincorporation Merger and the Financing (and certain related
assumptions), New Holdings' total indebtedness (including current maturities)
and stockholder's equity would have been $2,228.8 million and $52.5 million,
respectively, and the Company would have had an additional $169.4 million
available to be borrowed under the New Revolving Facility. In addition, as of
January 7, 1995, after giving effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related assumptions),
scheduled payments under operating leases of the Company and its subsidiaries
for the twelve months following the Merger would have been $125.0 million. On
the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 28 weeks
ended January 7, 1995, New Holdings' earnings before fixed charges would have
been inadequate to cover fixed charges by $119.5 million and $67.3 million,
respectively. However, such earnings include non-cash charges of $221.6 million
and $119.4 million, respectively, primarily consisting of depreciation and
amortization. New Holdings will be required to make semi-annual cash payments of
interest on the New Discount Debentures and the Seller Debentures commencing
five years from their date of issuance in the amount of $61.0 million per annum.
In addition, New Holdings will be required to commence semi-annual cash payments
of interest on any Discount Notes that remain outstanding following the Merger
commencing June 15, 1998. New Holdings' ability to make scheduled payments of
the principal of, or interest on, or to refinance its Indebtedness and to make
scheduled payments under its operating leases depends on its future performance,
which to a certain extent is subject to economic, financial, competitive and
other factors beyond its control.
The pro forma financial information presented in this Prospectus and
Solicitation Statement is based on, among other things, the assumption that the
interest rate borne by the New F4L Senior Notes and the New RGC Notes will be
11% and 11.50%, respectively. In the event that the interest rates on the New
F4L Senior Notes and the New RGC Notes are higher than the respective assumed
interest rates, the Company's interest expense and deficiency of earnings to
fixed charges would increase over the amounts reflected in such pro forma
financial information. For a description of the effects on the pro forma
financial information of varying acceptance levels in the RGC Offers and the F4L
Exchange Offers and of varying interest rates, see Note (l) to the Notes to
Unaudited Pro Forma Combined Statement of Operations.
Based upon the current level of operations and anticipated cost savings,
Holdings believes that the Company's cash flow from operations, together with
borrowings under the New Revolving Facility and its other sources of liquidity
(including leases), will be adequate to meet its anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments over the next several years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that anticipated
cost savings can be fully achieved. If the Company is unable to generate
sufficient cash flow from operations in the future to service its debt and make
necessary capital expenditures, or if its future earnings growth is insufficient
to amortize all required principal payments out of internally generated funds,
the Company may be required to refinance all or a portion of its existing debt,
sell assets or obtain additional financing. There can be no assurance that any
such refinancing or asset sales would be possible or that any additional
financing could be obtained, particularly in view of the Company's high level of
debt following the Merger and the fact that substantially all of its assets will
be pledged to secure the borrowings under the New Credit Facility and other
secured obligations.
New Holdings' high level of debt will have several important effects on its
future operations, including the following: (a) New Holdings will have
significant cash requirements to service debt, reducing funds available
24
<PAGE> 29
for operations and future business opportunities of the Company and increasing
the Company's vulnerability to adverse general economic and industry conditions;
(b) the financial covenants and other restrictions contained in the New Credit
Facility and other agreements relating to the indebtedness of New Holdings and
the Company will require the Company to meet certain financial tests and will
restrict its ability to borrow additional funds, to dispose of assets or to pay
cash dividends; and (c) because of New Holdings' debt service requirements,
funds available for working capital, capital expenditures, acquisitions and
general corporate purposes, may be limited. New Holdings' leveraged position may
increase the Company's vulnerability to competitive pressures. The Company's
continued growth depends, in part, on its ability to continue its expansion and
store conversion efforts, and, therefore, its inability to finance capital
expenditures through borrowed funds could have a material adverse effect on the
Company's future operations. Moreover, any default under the documents governing
the indebtedness of New Holdings could have a significant adverse effect on the
market value of the New Holdings Common Stock.
CONTROL OF THE COMPANY
Pro forma for the Merger, the FFL Merger, the Reincorporation Merger and
certain related events, affiliates of Yucaipa and Apollo will have beneficial
ownership of approximately 41.8% and 33.9%, respectively, of the outstanding
capital stock of New Holdings. Pursuant to a new stockholders' agreement (the
"1995 Stockholders Agreement") which will be entered into by the New Equity
Investors and certain current FFL stockholders and Holdings warrantholders upon
completion of the Merger, New Holdings and the Company will have boards
consisting of nine and ten members, respectively, and (i) Yucaipa will have the
right to elect six directors to the board of New Holdings and seven directors to
the board of the Company, (ii) Apollo will have the right to elect two directors
to the board of each of New Holdings and the Company, and (iii) the other New
Equity Investors will have the right to elect one director to the board of each
of New Holdings and the Company. Under the 1995 Stockholders Agreement, unless
and until New Holdings has effected an initial public offering of its equity
securities meeting certain criteria, New Holdings and its subsidiaries,
including the Company, may not take certain actions without the approval of the
New Holdings directors which the New Equity Investors are entitled to elect,
including but not limited to certain mergers, sale transactions, transactions
with affiliates, issuances of capital stock and payments of dividends on or
repurchases of capital stock. As a result of the ownership structure of New
Holdings and the contractual rights described above, the voting and management
control of New Holdings is highly concentrated. Yucaipa, acting with the consent
of the directors elected by the New Equity Investors, has the ability to direct
the actions of New Holdings with respect to matters such as the payment of
dividends, material acquisitions and dispositions and other extraordinary
corporate transactions. Yucaipa will be a party to a consulting agreement with
the Company, pursuant to which Yucaipa will render certain management and
advisory services to the Company, and will receive fees for such services.
Yucaipa will also receive certain fees in connection with the consummation of
the Merger, including an advisory fee of $19 million, of which $15 million will
be paid through the issuance of New Discount Debentures. In addition, as a
result of the Merger, certain officers and former officers of Ralphs will redeem
the EARs for $17.8 million in cash and a deferred payment of up to $5 million
and will cancel certain options to purchase common stock of RSI for $880,000. An
additional $10 million of the EARs, however, will be reinvested in New Holdings
by such officers and former officers. Yucaipa also will be reimbursed for (i)
any losses incurred upon the resale of the $10 million principal amount of
Seller Debentures which may be put to it pursuant to the Put Agreement and (ii)
its expenses in connection with the Merger and the related transactions. In
addition, on the Closing Date the Company and EJDC will enter into a Consulting
Agreement, pursuant to which EJDC will act as a consultant to the Company with
respect to certain real estate and general commercial matters for a period of
five years from the Closing Date in exchange for the payment of a one-time
consulting fee of $9 million, of which $4 million will be used to purchase
interests in the partnership that will purchase the New Discount Debentures. See
"Certain Relationships and Related Transactions," "Principal Stockholders" and
"Description of Capital Stock."
LIQUIDATION PREFERENCE OF NEW EQUITY INVESTMENT
The Series A Preferred Stock and the Series B Preferred Stock of New
Holdings to be purchased by the New Equity Investors initially will have an
aggregate liquidation preference of $197,832,440, which initially
25
<PAGE> 30
will accrete daily at the rate of 7% per annum, compounded quarterly, until the
later of the fifth anniversary of the date of issuance or the date the Company
first reports EBITDA (as defined) of at least $500 million for any twelve-month
period. Thereafter, the liquidation preference will remain constant. The
accretion rate of the liquidation preference will increase (a) by 2% per annum
if the Company fails to report EBITDA of at least $400 million for the four
fiscal quarters ending closest to the third anniversary of the date of issuance
(or for the rolling four-quarter period ending on any of the three subsequent
quarter-ends), (b) by 2% per annum if the Company fails to report EBITDA of at
least $425 million for the four fiscal quarters ending closest to the fourth
anniversary of the date of issuance (or for the rolling four-quarter period
ending on any of the three subsequent quarter-ends) and (c) by 2% per annum if
the Company fails to report EBITDA of at least $450 million for the four fiscal
quarters ending closest to the fifth anniversary of the date of issuance, in
each case, such increase to take effect on the first day after the last day of
the fiscal quarter with respect to which such failure occurred; provided that
the accretion rate of the liquidation preference will not at any time exceed 13%
per annum. The accretion of the liquidation preference will result in a
proportional increase in the number of shares of common stock issuable upon
conversion of the Series A Preferred Stock and the Series B Preferred Stock. The
accretion of the liquidation preference also will increase the amount of
distributions available to the New Equity Investors on a preferred basis over
existing common stockholders in the event that New Holdings is liquidated or
dissolved. In addition, the initial aggregate liquidation preference of the
Series A Preferred Stock and the Series B Preferred Stock may increase from the
amounts set forth above depending on whether New Holdings determines to increase
the number of shares it may sell pursuant to the New Equity Investment, and
depending on whether certain existing equity holders of FFL and Holdings
exercise preemptive rights to participate in the New Equity Investment. See
"Description of Capital Stock -- New Holdings" and "-- New Equity Investment."
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $90 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended June 25, 1994) can be achieved over a four year
period as a result of integrating the operations of Ralphs and Food 4 Less. See
"Business -- The Merger." The cost savings estimates have been prepared solely
by members of the management of each company. The estimates necessarily make
numerous assumptions as to future sales levels and other operating results, the
availability of funds for capital expenditures as well as general industry and
business conditions and other matters, many of which are beyond the control of
the Company. Several of the cost savings estimates are premised on the
assumption that certain levels of efficiency presently maintained by either Food
4 Less or Ralphs can be achieved by the combined Company following the Merger.
Other estimates are based on a management consensus as to what levels of
purchasing and similar efficiencies should be achievable by an entity the size
of the Company. Certain of the estimates relating to the consolidation of
warehousing and distribution facilities assume the completion of certain capital
expenditures to expand the capacity of the continuing facilities. It is
anticipated that $117 million in Merger-related capital expenditures and $50
million of other non-recurring costs will be required to complete store
conversions, integrate operations and expand warehouse facilities over the four
year period following the Merger, without which the estimated cost savings may
not be fully achievable. Management expects that the non-recurring integration
costs will effectively offset any cost savings in the first year following the
Merger. Because the assumptions underlying the cost savings estimates are
numerous and detailed, management believes that it would be impractical to
specify all such assumptions in this Prospectus and Solicitation Statement.
However, management also believes that all such assumptions are reasonable in
light of existing business conditions and prospects. Investors are cautioned
that the actual cost savings realized by the Company may vary considerably from
the estimates contained herein and that undue reliance should not be placed upon
such estimates. There also can be no assurance that unforeseen costs and
expenses or other factors will not offset the projected cost savings in whole or
in part.
REGIONAL ECONOMIC CONDITIONS
Following the consummation of the Merger, a substantial percentage of the
Company's business (representing approximately 90% of pro forma sales) will be
conducted in Southern California. Southern
26
<PAGE> 31
California began to experience a significant economic downturn in 1991 and has
only recently begun a mild recovery. The economy in Southern California has been
affected by substantial job losses in the defense and aerospace industries and
other adverse economic trends. These adverse regional economic conditions have
resulted in declining sales levels at Ralphs and Holdings in recent periods. For
the 52 weeks ended June 25, 1994, and the 52 weeks ended January 29, 1995,
Holdings and Ralphs experienced 6.9% and 3.7% declines, respectively, in
comparable store sales as compared with the comparable period in the prior year,
primarily reflecting the weak economy in Southern California, lower levels of
price inflation in certain food product categories, and increased competitive
store openings in Southern California. For the 28 weeks ended January 7, 1995
and the 28 weeks ended January 29, 1995, Holdings and Ralphs experienced 4.5%
and 3.4% declines, respectively, in comparable store sales. However, both
Holdings' and Ralphs' comparable store sales declines have begun to moderate in
recent months. Although data indicate a mild recovery in the Southern California
economy and management believes that overall sales trends in Southern California
should improve along with the economy, there can be no assurance that
improvement will occur or that substantial future declines in same store sales
will not occur. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors in each of its operating divisions
include national and regional supermarket chains, independent and specialty
grocers, drug and convenience stores, and the newer "alternative format" food
stores, including warehouse club stores, deep discount drug stores and "super
centers." Supermarket chains generally compete on the basis of location, quality
of products, service, price, product variety and store condition. The Company
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate in light of existing conditions. Some
of the Company's competitors have greater financial resources than the Company
and could use these resources to take steps which could adversely affect the
Company's competitive position. See "Business -- Competition."
ILLIQUID INVESTMENT
New Holdings Common Stock (like FFL Common Stock and Holdings Common Stock)
is expected to be an illiquid investment. New Holdings Common Stock will not be
listed for trading on any exchange, and no firm is expected to make a market in
New Holdings Common Stock. Moreover, a significant portion of the outstanding
shares of New Holdings Common Stock is expected to be subject to the terms of
the 1995 Stockholders Agreement or other agreements which restrict the transfer
of shares and impose material obligations, including with respect to voting of
shares, which bind transferees. As a consequence, there can be no assurance as
to the ability of a holder of New Holdings Common Stock to sell his shares or
the price at which he may be able to sell his shares.
NET LOSSES
Holdings has reported a net loss of $11.5 million for the 52 weeks ended
June 25, 1994, $31.2 million for the 52 weeks ended June 26, 1993, $33.8 million
for the 52 weeks ended June 27, 1992, $9.6 million for the 52 weeks ended June
29, 1991 and $10.1 million for the 53 weeks ended June 30, 1990. On a pro forma
basis for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7,
1995, after giving effect to the Merger, the FFL Merger and the Financing (and
certain related assumptions), New Holdings would have reported a net loss of
approximately $119.5 million and $67.3 million, respectively. There can be no
assurance that Holdings will not continue to report net losses in the future.
27
<PAGE> 32
THE MERGER AND THE FINANCING
On September 14, 1994, Food 4 Less, Holdings and FFL entered into the
Merger Agreement with RSI and the stockholders of RSI. Pursuant to the terms of
the Merger Agreement, Food 4 Less will, subject to certain conditions being
satisfied or waived, be merged with and into RSI pursuant to the RSI Merger.
Immediately following the RSI Merger, RGC, which is currently a wholly-owned
subsidiary of RSI, will merge with and into RSI pursuant to the RGC Merger, and
RSI will change its name to Ralphs Grocery Company. Prior to the Merger, FFL
will merge with and into Holdings, which will be the surviving corporation in
the FFL Merger. Immediately following the FFL Merger, Holdings will change its
jurisdiction of incorporation by merging into a newly-formed, wholly-owned
subsidiary, New Holdings, incorporated in Delaware, pursuant to the
Reincorporation Merger. As a result of the Merger, the FFL Merger and the
Reincorporation Merger, the Company will become a wholly-owned subsidiary of New
Holdings. As a result of the Reincorporation Merger, any Discount Notes that
remain outstanding following the Merger will be the obligations of New Holdings.
Conditions to the consummation of the RSI Merger include the receipt of
regulatory approvals and other necessary consents and the completion of
financing. The purchase price for RSI is approximately $1.5 billion, including
the assumption of debt. The consideration payable to the stockholders of RSI
consists of $375 million in cash, $131.5 million principal amount of the Seller
Debentures and $18.5 million initial accreted value of the New Discount
Debentures to be issued by New Holdings. New Holdings will use $100 million of
the cash received from the New Equity Investment, together with the Seller
Debentures and such New Discount Debentures, to acquire approximately 48% of the
capital stock of RSI immediately prior to consummation of the RSI Merger. New
Holdings will then contribute the $250 million of purchased shares of RSI stock
to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock
will be acquired for $275 million in cash. Pursuant to an agreement (the "Put
Agreement") entered into in connection with the execution of the Merger
Agreement, the Edward J. DeBartolo Corporation, an Ohio corporation ("EJDC"),
which currently owns approximately 60.3% of the outstanding common stock of RSI,
will have the right to put to Yucaipa, which controls Food 4 Less, on the
closing date of the Merger (the "Closing Date"), up to $10 million aggregate
principal amount of Seller Debentures acquired by EJDC in connection with the
Merger, at a purchase price equal to their principal amount. Yucaipa will be
reimbursed for (i) any losses incurred upon the resale of the $10 million
principal amount of Seller Debentures which may be put to it pursuant to the Put
Agreement and (ii) its expenses in connection with the Merger and the related
transactions. In addition, on the Closing Date the Company and EJDC will enter
into a Consulting Agreement, pursuant to which EJDC will act as a consultant to
the Company with respect to certain real estate and general commercial matters
for a period of five years from the Closing Date in exchange for the payment of
a consulting fee of $9 million, of which $4 million will be used to purchase
interests in the partnership that will purchase the New Discount Debentures. See
"Certain Relationships and Related Transactions -- Food 4 Less and Holdings."
The Merger Agreement, as amended, provides that Food 4 Less will pay the
stockholders of RSI interest on the aggregate purchase price of $525 million at
a rate equal to the prime rate plus 1% from and after March 16, 1995 through the
Closing Date. The Merger Agreement may be terminated by the parties if the
Merger has not been consummated on or prior to June 6, 1995.
As currently contemplated, the Merger will be financed through the
following transactions:
- Borrowings of up to $750 million aggregate principal amount pursuant to
the New Term Loans under the New Credit Facility to be provided by a
syndicate of banks led by Bankers Trust. The New Credit Facility will
also provide for the $325 million New Revolving Facility, $16.4 million
of which is anticipated to be drawn at closing.
- The issuance of up to $295 million of New F4L Senior Notes pursuant to
the Senior Note Public Offering.
- The issuance of up to $200 million of New RGC Notes pursuant to the
Subordinated Note Public Offering.
- The issuance of preferred stock in a private placement by New Holdings
to a group of investors led by Apollo and including affiliates of BT
Securities, CS First Boston and DLJ and other institutional investors,
yielding cash proceeds of $140 million pursuant to the New Equity
Investment. Concurrently with the New Equity Investment, the New Equity
Investors will purchase outstanding shares of
28
<PAGE> 33
New Holdings capital stock from a stockholder of New Holdings for a
purchase price of $57.8 million. See "Description of Capital
Stock -- New Equity Investment."
- The exchange by Food 4 Less pursuant to the F4L Exchange Offers of (a)
up to $175 million aggregate principal amount of the Old F4L Senior
Notes for up to $175 million aggregate principal amount of New F4L
Senior Notes plus $5.00 in cash per $1,000 principal amount exchanged
and (b) up to $145 million aggregate principal amount of the Old F4L
Senior Subordinated Notes for up to $145 million aggregate principal
amount of the New F4L Senior Subordinated Notes plus $20.00 in cash per
$1,000 principal amount exchanged, together with the solicitation of
consents from the holders of the Old F4L Notes to certain amendments to
the Old F4L Indentures. It is a condition to the F4L Exchange Offers
that at least 80% of the outstanding principal amount of Old F4L Notes
are exchanged pursuant to the F4L Exchange Offers.
- The RGC Offers by Food 4 Less to (i) exchange up to $450 million
aggregate principal amount of the Old RGC Notes for up to $450 million
aggregate principal amount of New RGC Notes plus $20.00 in cash per
$1,000 principal amount of Old RGC Notes exchanged and (ii) purchase Old
RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC
Notes accepted for purchase, together with the solicitation of consents
from holders of Old RGC Notes to certain amendments to the Old RGC
Indentures. The RGC Minimum Exchange condition to the RGC Offers
provides that at least a majority of the outstanding principal amount of
the Old RGC Notes are exchanged for New RGC Notes pursuant to the RGC
Offers.
- The purchase by New Holdings of approximately 48% of the outstanding
common stock of RSI for an aggregate consideration of $250 million,
consisting of $100 million of the cash proceeds from the New Equity
Investment, $131.5 million principal amount of the Seller Debentures and
$18.5 million initial accreted value of the New Discount Debentures,
followed by the contribution of such common stock of RSI to Food 4 Less.
Pursuant to the RSI Merger the remaining shares of RSI stock will be
acquired for $275 million in cash.
- The placement by New Holdings of $100 million initial accreted value of
New Discount Debentures to a partnership including Yucaipa, the selling
stockholders of Ralphs, an affiliate of George Soros, Apollo, and an
affiliate of each of BT Securities, CS First Boston and DLJ. The $100
million initial accreted value of New Discount Debentures includes (a)
$18.5 million that will be issued to the RSI stockholders, (b) $15
million, $5 million and $2.5 million that will be issued to Yucaipa, BT
Securities and Apollo, respectively, in satisfaction of fees otherwise
payable by the Company and New Holdings in connection with the Merger
and the Financing and (c) $59 million that will be issued for cash to
the partnership described above. The $41 million initial accreted value
of New Discount Debentures to be issued to the RSI stockholders, Apollo,
BT Securities and Yucaipa will be contributed to such partnership by the
recipients thereof.
- The assumption by the Company, pursuant to the RGC Merger, of
approximately $166.8 million of other indebtedness of RGC and Food 4
Less.
- The purchase by Holdings pursuant to the Holdings Offer to Purchase of
Discount Notes for $785.00 in cash, plus accrued cash interest thereon
at a rate of 15.25% per annum from and after March 15, 1995 until the
Closing Date for every $1,000 principal amount (at maturity) of Discount
Notes (which, as of May 1, 1995 had an accreted value of $680.26 per
$1,000) accepted for purchase, together with the solicitation of
consents from the holders of the Discount Notes to certain amendments to
the Discount Note Indenture.
29
<PAGE> 34
The following table illustrates the sources and uses of funds to consummate
the Merger, assuming the transaction occurs as of May 30, 1995. This
presentation assumes that $225.5 million principal amount of Old RGC Notes is
tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1%
of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million
principal amount of Old RGC Notes is tendered into the RGC Offers for cash
(representing 49.9% of the outstanding aggregate principal amount of Old RGC
Notes), $256 million principal amount of Old F4L Notes is tendered into the F4L
Exchange Offers (representing 80% of the outstanding aggregate principal amount
of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount
Notes is tendered into the Holdings Offer to Purchase (representing 100% of the
outstanding aggregate principal amount (at maturity) of Discount Notes). This
presentation assumes the use of the maximum amount of cash proceeds that could
be necessary to consummate the Merger (if holders representing more than 49.9%
of the outstanding principal amount of Old RGC Notes tender into the RGC Offers
in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum
Exchange is exceeded), the non-cash sources and cash uses would be
correspondingly adjusted). Although management believes such assumptions are
reasonable under the circumstances, actual sources and uses may differ from
those set forth below depending upon the outcome of the Holdings Offer to
Purchase, the F4L Exchange Offers and the RGC Offers.
SOURCES AND USES
(in millions)
<TABLE>
<S> <C> <C> <C>
CASH SOURCES CASH USES
- --------------------------------------------- ---------------------------------------------
New Term Loans(a)................. $ 750.0 Purchase RSI Common Stock(j)...... $ 375.9
New Revolving Facility(b)......... 16.4 Purchase Old RGC Notes(k)......... 226.8
New F4L Senior Notes(c)........... 295.0 Purchase Discount Notes........... 83.9
Repay Ralphs 1992 Credit
New RGC Notes(d).................. 200.0 Agreement......................... 255.1
New Equity Investment(e).......... 140.0 Repay F4L Credit Agreement........ 161.5
New Discount Debentures(f)........ 59.0 Pay Accrued Interest(l)........... 29.3
EAR Related Payments(m)........... 22.8
Repay Mortgage Indebtedness(n).... 191.5
Purchase New Holdings Common
Stock(o)........................ 3.7
Fees and Expenses(p).............. 109.9
--------- ---------
Total Cash Sources........... $ 1,460.4 Total Cash Uses................... $ 1,460.4
========= =========
NON-CASH SOURCES NON-CASH USES
- --------------------------------------------- ---------------------------------------------
New F4L Senior Notes(g)........... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0
Assumed Old F4L Senior Notes...... 35.0 Assumed Old F4L Senior Notes...... 35.0
New F4L Senior Subordinated Old F4L Senior Subordinated Notes
Notes........................... 116.0 Exchanged......................... 116.0
Assumed Old F4L Senior Assumed Old F4L Senior
Subordinated Notes.............. 29.0 Subordinated Notes................ 29.0
New RGC Notes(h).................. 225.5 Old RGC Notes Exchanged........... 225.5
New Discount Debentures(f)........ 41.0 Fees and Expenses(p).............. 22.5
Assumed Capital Leases and Other Assumed Capital Leases and Other
Debt............................ 166.8 Debt.............................. 166.8
Seller Debentures(i).............. 131.5 Purchase RSI Common Stock(i)...... 150.0
--------- ---------
Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8
========= =========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company up to a maximum aggregate amount of $1,075 million of financing
under the New Credit Facility. It is anticipated that the New Credit
Facility will be syndicated to a number of financial institutions for whom
Bankers Trust will act as agent. The New Credit Facility will provide for
(i) the New Term Loans in the aggregate amount of up to $750 million,
comprised of the $375 million Tranche A Loan, the $125 million Tranche B
Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan
and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not
be fully funded at the Closing Date. The New Credit Facility will provide
that the portion of the Tranche A Loan not funded at the Closing Date will
be available for a period of 91 days following the Closing Date to fund the
Change of Control Offer. See "Description of the New Credit Facility."
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The
30
<PAGE> 35
letters of credit will be used to cover workers' compensation contingencies
and for other purposes permitted under the New Revolving Facility. The
Company anticipates that letters of credit for approximately $92.6 million
will be issued under the New Revolving Facility at closing, in replacement
of existing letters of credit, primarily to satisfy the State of
California's requirements relating to workers compensation self-insurance.
(c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public
Offering. If Food 4 Less receives tenders in excess of the RGC Minimum
Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of
New F4L Senior Notes being offered pursuant to the Senior Note Public
Offering.
(d) Represents New RGC Notes issued pursuant to the Subordinated Note Public
Offering. If Food 4 Less receives tenders in excess of the RGC Minimum
Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of
New RGC Notes being offered pursuant to the Subordinated Note Public
Offering. It is not anticipated that the amount of New RGC Notes offered
pursuant to the Subordinated Note Public Offering will be reduced below $100
million principal amount.
(e) Does not include the $10 million equity contribution by Ralphs management.
See note (m) below. Concurrently with the New Equity Investment, certain
existing stockholders of New Holdings (formerly stockholders of FFL),
including affiliates of George Soros, will sell outstanding shares of New
Holdings stock to CLH, which in turn will sell such shares to the New Equity
Investors for an aggregate purchase price of $57.8 million (which represents
the same price per share as will be paid in the New Equity Investment). In
connection with the New Equity Investment, the New Equity Investors will
contribute the common stock so acquired to New Holdings in consideration for
newly-issued preferred shares. See "Description of Capital Stock -- New
Equity Investment."
(f) Represents $100 million initial accreted value of New Discount Debentures,
$59 million of which will be issued for cash, $18.5 million of which will be
issued to the RSI stockholders as Merger consideration and $15 million, $5
million and $2.5 million of which will be issued to Yucaipa, BT Securities
and Apollo, respectively, in satisfaction of fees otherwise payable by the
Company and New Holdings in connection with the Merger and the Financing.
(g) Represents New F4L Senior Notes issued pursuant to the F4L Exchange Offers,
which will be part of the same issue as the New F4L Senior Notes issued
pursuant to the Senior Note Public Offering.
(h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be
part of the same issue as the New RGC Notes issued pursuant to the
Subordinated Note Public Offering.
(i) In connection with the RSI Merger, New Holdings will issue $131.5 million
principal amount of the Seller Debentures as part of the purchase price for
the RSI common stock, up to $10 million of which may be put to Yucaipa on
the Closing Date at a purchase price equal to their principal amount
pursuant to the Put Agreement. In addition, Yucaipa will be reimbursed by
the Company for (i) any losses incurred upon the resale of the $10 million
principal amount of Seller Debentures which may be put to it pursuant to the
Put Agreement and (ii) its expenses in connection with the Merger and the
related transactions. See "Certain Relationships and Related
Transactions -- Food 4 Less."
(j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9
million to be paid in cash to holders of RSI management stock options. See
"Executive Compensation -- New Management Stock Option Plan and Management
Investment."
(k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the
RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding
following consummation of the RGC Offers, a portion of the proceeds of the
Tranche A Loan not fully funded at the Closing Date will be available to
fund the purchase of Old RGC Notes pursuant to the Change of Control Offer.
(l) Represents accrued interest payable on all debt securities assumed to be
tendered pursuant to the F4L Exchange Offers and the RGC Offers.
(m) Represents payments to or for the benefit of Ralphs management with respect
to outstanding EARs in connection with the Merger. Ralphs management will
receive New Holdings stock options in exchange for the cancellation of the
remaining EAR liability of $10 million. See "Executive
Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships
and Related Transactions -- Food 4 Less and Holdings."
(n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in
the principal amount of $174.1 million, plus the estimated amount of the
prepayment fees payable with respect thereto.
(o) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of
$5 million to be paid to BT Securities and commitment fees of $5 million to
be paid to Apollo upon the closing of the Merger. Of such amounts, $15
million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee
and BT Securities' $5 million fee will be paid through the issuance of New
Discount Debentures in lieu of cash. Such New Discount Debentures will be
contributed by them to the partnership that will acquire all of the New
Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee
of approximately $3.5 million to Soros Fund Management in consideration for
advisory services which Soros Fund Management has rendered since 1991. See
"Certain Relationships and Related Transactions -- Food 4 Less and
Holdings."
For additional information, see "Description of the New Credit Facility," "The
Exchange Offers and the Public Offerings" and "Description of Other
Indebtedness."
31
<PAGE> 36
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma combined capitalization of New
Holdings as of January 7, 1995, adjusted to give effect to the Merger, the FFL
Merger, the Reincorporation Merger and the Financing (and certain related
assumptions) and the application of the proceeds therefrom. This presentation
assumes that $225.5 million principal amount of Old RGC Notes is tendered into
the RGC Offers in exchange for New RGC Notes, $224.5 million principal amount of
Old RGC Notes is tendered into the RGC Offers for cash, $256 million principal
amount of Old F4L Notes is tendered into the F4L Exchange Offers and $103.6
million principal amount (at maturity) of Discount Notes is tendered into the
Holdings Offer to Purchase. This presentation also assumes that any Old RGC
Notes not tendered into the RGC Offers are repurchased after the Closing Date
pursuant to the Change of Control Offer. The table should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements and the historical
consolidated financial statements of Ralphs and Holdings and related notes
thereto included elsewhere in this Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION
--------------
(IN MILLIONS)
<S> <C>
Cash............................................................................ $ 50.9
=========
Short-term and current portion of long-term debt:
New Term Loans................................................................ $ 3.8
Other indebtedness............................................................ 23.0
---------
Total short-term and current portion of long-term debt................ $ 26.8
=========
Long-term debt:
New Term Loans(a)............................................................. $ 746.2
New Revolving Facility(b)..................................................... 54.5
Other indebtedness............................................................ 129.3
New F4L Senior Notes(c)....................................................... 435.0
Old F4L Senior Notes.......................................................... 35.0
New RGC Notes(d).............................................................. 425.5
New F4L Senior Subordinated Notes............................................. 116.0
Old F4L Senior Subordinated Notes............................................. 29.0
New Discount Debentures (initial accreted value).............................. 100.0
Seller Debentures............................................................. 131.5
---------
Total long-term debt.................................................. 2,202.0
---------
Stockholders' equity(e):
Series A Preferred Stock(f)................................................... 161.8
Series B Preferred Stock(f)................................................... 31.0
Common stock, $.01 par value.................................................. 0.0
Additional paid-in capital.................................................... 59.9
Notes receivable(g)........................................................... (0.7)
Retained deficit.............................................................. (193.6)
Treasury stock................................................................ (5.9)
---------
Total stockholders' equity................................................. 52.5
---------
Total capitalization.................................................. $ 2,254.5
=========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company up to a maximum aggregate amount of $1,075 million of financing
under the New Credit Facility. It is anticipated that the New Credit
Facility will be syndicated to a number of financial institutions for whom
Bankers Trust will act as agent. The New Credit Facility will provide for
(i) the New Term Loans in the aggregate amount of up to $750 million,
comprised of the $375 million Tranche A Loan, the $125 million Tranche B
Loan, the $125 million Tranche C Loan and the $125 million Tranche D Loan
and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not
be fully funded at the Closing Date. The New Credit Facility will provide
that the portion of the Tranche A Loan not funded at the Closing Date will
be available for a period of 91 days following the Closing Date to fund the
Change of Control Offer. See "Description of the New Credit Facility."
32
<PAGE> 37
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The letters of credit will be
used to cover workers' compensation contingencies and for other purposes
permitted under the New Revolving Facility. The Company anticipates that
letters of credit for approximately $92.6 million will be issued under the
New Revolving Facility at closing, in replacement of existing letters of
credit, primarily to satisfy the State of California's requirements relating
to workers' compensation self-insurance.
(c) Includes New F4L Senior Notes issued pursuant to both the Senior Note Public
Offering and the F4L Exchange Offers.
(d) Includes New RGC Notes issued pursuant to both the Subordinated Note Public
Offering and the RGC Offers. In accordance with the terms of the Old RGC
Indentures, holders of Old RGC Notes not exchanged for New RGC Notes or
purchased pursuant to the RGC Offers will be entitled to have such Old RGC
Notes repurchased by the Company pursuant to the Change of Control Offer
which will occur up to 91 days following the closing of the Merger. A
portion of the Tranche A Loan not fully funded at the Closing Date will be
available to fund the purchase of Old RGC Notes pursuant to the Change of
Control Offer.
(e) Prior to consummation of the Merger, FFL will merge with and into Holdings
pursuant to the FFL Merger. FFL is a holding company and the assets of FFL
consist solely of its investment in the capital stock of Holdings.
Immediately following the FFL Merger, Holdings will change its jurisdiction
of incorporation by merging into its wholly-owned subsidiary, New Holdings,
incorporated in Delaware, pursuant to the Reincorporation Merger. For
purposes of the pro forma financial presentation set forth above, the
minority ownership interest in Holdings that existed prior to the FFL Merger
has been classified with the majority ownership interest in Holdings as a
result of its elimination in the FFL Merger.
(f) Reflects the issuance of the Series A Preferred Stock (liquidation
preference $166.8 million) and Series B Preferred Stock (liquidation
preference $31.0 million) in the New Equity Investment for cash net of, in
the case of the Series A Preferred Stock, $5 million in related commitment
fees (of which $2.5 million is being satisfied through the issuance of New
Discount Debentures).
(g) Represents notes receivable from shareholders of Holdings with respect to
the purchase of Holdings' common stock. See "Executive Compensation -- Food
4 Less Stock Plan."
33
<PAGE> 38
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of New
Holdings for the 52 weeks ended June 25, 1994 and as of and for the 28 weeks
ended January 7, 1995, give effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related assumptions set
forth below) and the application of the proceeds therefrom as if such
transactions occurred on June 27, 1993, with respect to the pro forma operating
and other data, and as of January 7, 1995, with respect to the pro forma balance
sheet data. Such pro forma information combines the results of operations of
Holdings for the 52 weeks ended June 25, 1994 and the results of operations and
balance sheet data as of and for the 28 weeks ended January 7, 1995, with the
results of operations of Ralphs for the 52 weeks ended July 17, 1994 and the
results of operations and balance sheet data as of and for the 28 weeks ended
January 29, 1995, respectively. For information regarding the Merger, the FFL
Merger, the Reincorporation Merger and the Financing, see "The Merger and the
Financing."
Prior to consummation of the Merger, FFL will merge with and into Holdings
pursuant to the FFL Merger. The Merger of FFL into Holdings has no effect on
Holdings. FFL is a holding company and the assets of FFL consist solely of its
investment in the capital stock of Holdings. Immediately following the FFL
Merger, Holdings will change its jurisdiction of incorporation by merging into a
newly-formed, wholly-owned subsidiary, New Holdings, incorporated in Delaware,
pursuant to the Reincorporation Merger. For purposes of the pro forma financial
presentation set forth below, the minority ownership interest in Holdings that
existed prior to the FFL Merger has been classified with the majority ownership
interest in Holdings as a result of its elimination in the FFL Merger. The pro
forma adjustments are based upon the following assumptions: (i) $225.5 million
principal amount of Old RGC Notes are tendered into the RGC Offers in exchange
for New RGC Notes, (ii) $224.5 million principal amount of Old RGC Notes are
tendered into the RGC Offers for cash, (iii) $256 million principal amount of
Old F4L Notes are tendered into the F4L Exchange Offers, and (iv) $103.6 million
principal amount (at maturity) of Discount Notes are tendered into the Holdings
Offer to Purchase. This presentation also assumes that $200 million principal
amount of New RGC Notes are issued pursuant to the Subordinated Note Public
Offering and that $295 million principal amount of New F4L Senior Notes are
issued pursuant to the Senior Note Public Offering. In addition, the unaudited
pro forma combined financial statements have been prepared based upon the
assumption that upon consummation of the Merger, the Company will divest or
close 32 stores.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management believes are reasonable. The Merger
will be accounted for by New Holdings as a purchase of Ralphs by New Holdings
and Ralphs' assets and liabilities will be recorded at their estimated fair
market values at the date of the Merger. The adjustments included in the
unaudited pro forma combined financial statements represent New Holdings'
preliminary determination of these adjustments based upon available information.
There can be no assurance that the actual adjustments will not differ
significantly from the pro forma adjustments reflected in the pro forma
financial information.
The unaudited pro forma combined financial statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transactions had been consummated as of the
indicated dates. The unaudited pro forma combined financial statements should be
read in conjunction with the historical consolidated financial statements of
Holdings and Ralphs, together with the related notes thereto, included elsewhere
in this Prospectus and Solicitation Statement.
34
<PAGE> 39
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
--------------------------
RALPHS HOLDINGS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (AUDITED)
JULY 17, JUNE 25, PRO FORMA PRO FORMA
1994 1994 ADJUSTMENTS COMBINED
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales........................................... $ 2,709.7 $2,585.2 $(241.4)(a) $ 5,053.5
Cost of sales................................... 2,076.3 2,115.9 (194.7)(a) 4,005.3
4.2(b)
2.8(c)
0.8(d)
--------- -------- ------- ---------
Gross profit............................... 633.4 469.3 (54.5) 1,048.2
Selling, general and administrative
expenses(m)................................... 469.1 388.8 (36.4)(a) 833.1
8.1(b)
1.4(d)
1.6(e)
0.5(f)
Amortization of excess cost over net assets
acquired...................................... 11.0 7.7 10.7(g) 29.4
Provision for restructuring..................... 2.4 0.0 -- 2.4
--------- -------- ------- ---------
Operating income........................... 150.9 72.8 (40.4) 183.3
Other expenses:
Interest expense -- cash(l)................... 93.2 57.0 74.1(h) 224.3
Interest expense -- non-cash(l)............... 9.4 14.6 23.8(h) 47.8
Amortization of debt issuance costs(l)........ 6.4 5.5 1.5(h) 13.4
Loss on disposal of assets.................... 1.8 -- -- 1.8
Provision for earthquake loss................. 11.0 4.5 -- 15.5
--------- -------- ------- ---------
Earnings (loss) before income tax
provision(n)............................. 29.1 (8.8) (139.8) (119.5)
Income tax expense (benefit).................... (108.0) 2.7 105.3(i) --
--------- -------- ------- ---------
Net earnings (loss)(j)..................... $ 137.1 $ (11.5) $(245.1) $ (119.5)
========= ======== ======= =========
Net loss per common share(o)............... n/a $ (.50) $ (5.22)
======== =========
Ratio of earnings to fixed charges(k)(l)... 1.2x -- --
========= ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
35
<PAGE> 40
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
28 WEEKS ENDED
---------------------------
RALPHS HOLDINGS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (UNAUDITED)
JANUARY 29, JANUARY 7, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales.......................................... $1,483.6 $1,404.7 $(120.7)(a) $2,767.6
Cost of sales.................................. 1,144.5 1,167.2 (99.3)(a) 2,214.6
2.3 (b)
(0.8)(c)
0.7 (d)
-------- -------- ------- --------
Gross profit.............................. 339.1 237.5 (23.6) 553.0
Selling, general and administrative
expenses(m).................................. 254.7 199.2 (18.7)(a) 442.1
4.4 (b)
1.3 (d)
0.9 (e)
0.3 (f)
Amortization of excess cost over net assets
acquired..................................... 5.9 4.2 5.8 (g) 15.9
Provision for restructuring.................... 0.0 5.1 -- 5.1
-------- -------- ------- --------
Operating income.......................... 78.5 29.0 (17.6) 89.9
Other expenses:
Interest expense -- cash(l).................. 53.2 31.6 37.7 (h) 122.5
Interest expense -- non-cash(l).............. 4.9 8.5 14.0 (h) 27.4
Amortization of debt issuance costs(l)....... 3.2 3.1 0.6 (h) 6.9
Loss (gain) on disposal of assets............ 0.8 (0.4) -- 0.4
-------- -------- ------- --------
Earnings (loss) before income tax
provision(n)............................ 16.4 (13.8) (69.9) (67.3)
Income tax expense (benefit)................... 0.0 0.5 (0.5)(i) 0.0
-------- -------- ------- --------
Net earnings (loss)(j).................... $ 16.4 $ (14.3) $ (69.4) $ (67.3)
======== ======== ======= ========
Net loss per common share(o).............. n/a $ (.62) $ (2.94)
======== ========
Ratio of earnings to fixed
charges(k)(l)........................... 1.2x -- --
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
36
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
(a) Reflects the anticipated closing or divestiture of 32 stores. Does not give
effect to the closure of 2 Food 4 Less stores open at October 1, 1994 which
were subsequently closed. Food 4 Less has determined that there is no
impairment of existing goodwill related to the store closures based on its
projection of future undiscounted cash flows.
(b) Represents the additional depreciation expense associated with the purchase
price allocation to property, plant and equipment of $160.0 million based
on the current estimate of fair market value. Property, plant and equipment
is being depreciated over an average useful life of 13 years. Depreciation
expense has been allocated among cost of sales and selling, general and
administrative expenses.
(c) Reflects the elimination of Ralphs historical LIFO provision.
(d) Reflects depreciation expense associated with approximately $36.8 million
of additional fixed assets required for the conversion of 23 Ralphs stores
to the Food 4 Less warehouse format and 122 Alpha Beta, Boys and Viva
stores to the Ralphs format.
(e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks
ended June 25, 1994 and $1.1 million for the 28 weeks ended January 7,
1995) and the elimination of an annual guarantee fee ($0.4 million for the
52 weeks ended June 25, 1994 and $0.2 million for the 28 weeks ended
January 7, 1995) paid by Ralphs to EJDC.
(f) Reflects increased compensation resulting from new employment agreements
with certain of the current executive officers of Ralphs.
(g) Reflects the amortization of the excess of cost over net assets acquired in
the Merger ($21.7 million for the 52 weeks ended June 25, 1994 and $11.7
million for the 28 weeks ended January 7, 1995) and elimination of Ralphs'
historical amortization ($11.0 million for the 52 weeks ended June 25, 1994
and $5.9 million for the 28 weeks ended January 7, 1995). Amortization has
been calculated on the straight line basis over a period of 40 years.
(h) The following table presents a reconciliation of pro forma interest
expense and amortization of deferred financing costs:
<TABLE>
<CAPTION>
28 WEEKS
52 WEEKS ENDED
ENDED JANUARY 7,
JUNE 25, 1994 1995
------------- ----------
<S> <C> <C>
Historical interest expense -- cash........................................... $ 150.2 $ 84.8
------- -------
Plus: Interest on borrowings under:
New Credit Facility....................................................... 79.8 42.9
New F4L Senior Notes...................................................... 33.2 17.9
New RGC Notes............................................................. 48.9 26.4
Other bank fees........................................................... 3.5 1.9
Other debt................................................................ 2.0 1.8
Less: Interest on borrowings under:
Old bank term loans:
Ralphs.................................................................. (21.3) (13.7)
Food 4 Less............................................................. (11.5) (6.9)
Old RGC Notes............................................................. (43.9) (23.6)
Other debt................................................................ (16.6) (9.0)
------- -------
Pro forma adjustment........................................................ 74.1 37.7
------- -------
Pro forma interest expense -- cash............................................ $ 224.3 $ 122.5
======= =======
Historical interest expense -- non-cash....................................... $ 24.0 $ 13.4
Plus:
Interest on Seller Debentures............................................. 18.5 11.1
Accretion of New Discount Debentures...................................... 14.1 8.4
Less:
Accretion of Discount Notes............................................... (8.8) (5.5)
------- -------
Pro forma interest expense -- non-cash........................................ $ 47.8 $ 27.4
======= =======
Historical amortization of debt issuance costs................................ $ 11.9 $ 6.3
Plus:
Financing and exchange/consent fees....................................... 9.0 4.8
Other fees and expenses................................................... 3.9 2.1
Less:
Historical financing costs:
Ralphs.................................................................... (6.1) (3.2)
Food 4 Less............................................................... (5.3) (3.1)
------- -------
Pro forma adjustment........................................................ 1.5 0.6
------- -------
Pro forma amortization of debt issuance costs................................. $ 13.4 $ 6.9
======= =======
</TABLE>
(i) Represents the elimination of the historical income tax benefit of Ralphs
($108.0 million for the 52 weeks ended June 25, 1994) and Holdings income
tax expense ($2.7 million for the 52 weeks ended June 25, 1994 and $0.5
million for the 28 weeks ended January 7, 1995) given expected pro forma
losses. Holdings' ability to recognize income tax benefits may be limited
in accordance with Financial Accounting Standard No. 109 "Accounting for
Income Taxes." As such, no income tax benefit has been reflected in these
pro forma financial statements. See "Certain Federal Income Tax
Considerations."
(j) The unaudited pro forma results of operations for the 52 weeks ended June
25, 1994 and the 28 weeks ended January 7, 1995 do not include one-time
non-recurring costs related to (i) severance payments under certain
employment contracts with Food 4 Less management totalling $1.4 million
that are subject to change of control provisions and the achievement of
earnings and sales targets,
37
<PAGE> 42
(ii) costs related to the integration of the Company's operations which are
estimated to be $50.0 million over a three-year period, (iii) $1.8 million
in costs related to the cancellation of an employment agreement, or (iv)
other costs related to warehouse closures, which costs are not presently
determinable.
(k) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of earnings before income taxes, cumulative effect of change in
accounting principles, extraordinary item and fixed charges before
capitalized interest. "Fixed charges" consist of interest expense (including
amortization of self-insurance reserves discount), capitalized interest,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Holdings' pro
forma earnings were inadequate to cover pro forma fixed charges for the 52
weeks ended June 25, 1994 and for the 28 weeks ended January 7, 1995 by
approximately $119.5 million and $67.3 million, respectively. However, such
pro forma earnings included non-cash charges of $221.6 million for the 52
weeks ended June 25, 1994 and $119.4 million for the 28 weeks ended January
7, 1995, primarily consisting of depreciation and amortization.
(l) Supplemental Pro Forma Adjustments:
The table below shows the variations that would occur in the pro forma
cash and non-cash interest expense, the amortization of debt issuance costs
and the amount of the deficiency of earnings to fixed charges at different
participation levels of Old RGC Notes tendered in exchange for New RGC
Notes in the RGC Offers (50.1%, 55.1%, 60.1% and 65.1%) and of Old F4L
Notes tendered into the F4L Exchange Offers (80%, 85%, 90% and 95%). The
table also indicates the changes in the foregoing items (at each
participation level) that would result from each 25 basis point increase in
the interest rate on the New F4L Senior Notes over the assumed rate of 11%
and each 25 basis point increase in the interest rate on the New RGC Notes
over the assumed rate of 11.50%.
<TABLE>
<CAPTION>
52 WEEK PERIOD 28 WEEK PERIOD
----------------------------------------- -----------------------------------------
PARTICIPATION LEVEL(1) PARTICIPATION LEVEL(1)
----------------------------------------- -----------------------------------------
50.1/80% 55.1/85% 60.1/90% 65.1/95% 50.1/80% 55.1/85% 60.1/90% 65.1/95%
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense -- cash........... $224.3 $224.9 $225.4 $226.0 $122.5 $122.8 $123.1 $123.4
Interest expense -- non-cash....... 47.8 47.8 47.8 47.8 27.4 27.4 27.4 27.4
Amortization of debt issuance
costs............................ 13.4 13.5 13.6 13.7 6.9 7.0 7.0 7.1
Deficiency of earnings to fixed
charges(2)....................... 119.5 120.2 120.8 121.5 67.3 67.7 68.0 68.4
EFFECT OF EACH 25 BASIS POINT INCREASE IN THE
INTEREST RATE ON THE NEW F4L SENIOR NOTES
AND NEW RGC NOTES
Additional interest
expense -- cash.................. $ 2.2 $ 2.2 $ 2.3 $ 2.4 $ 1.2 $ 1.2 $ 1.2 $ 1.3
Additional interest
expense -- non-cash.............. -- -- -- -- -- -- -- --
Additional amortization of debt
issuance costs................... -- -- -- -- -- -- -- --
Additional deficiency of earnings
to fixed charges(2).............. 2.2 2.2 2.3 2.4 1.2 1.2 1.2 1.3
</TABLE>
----------------------
(1) If Food 4 Less receives tenders in excess of the RGC Minimum
Exchange in the RGC Offers, Food 4 Less may elect to decrease
the amount of New RGC Notes being offered pursuant to the
Subordinated Note Public Offering and/or decrease the amount
of New F4L Senior Notes being offered pursuant to the Senior
Note Public Offering.
(2) "Earnings" consist of earnings before income taxes, cumulative
effect of change in accounting principles, extraordinary item
and fixed charges before capitalized interest. "Fixed charges"
consist of interest expense (including amortization of
self-insurance reserves discount), capitalized interest,
amortization of deferred debt issuance costs and one-third of
rental expense (the portion deemed representative of the
interest factor).
(m) Pro forma combined selling, general and administrative expenses for the 52
weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 include
reduced employer contributions of $25.8 million and $20.5 million,
respectively, related to union health and welfare benefit plans.
(n) The pro forma combined loss before income tax provision for the 52 weeks
ended June 25, 1994 and the 28 weeks ended January 7, 1995 includes
reduction in self insurance reserves of $26.4 million and $21.5 million,
respectively.
(o) Net loss per common share has been computed after giving effect to the
16.586-for-1 stock split to be effected immediately prior to the FFL Merger
and the redemption of the shares of stockholders who have exercised
statutory dissenters' rights.
(p) "EBITDA," as defined and presented historically by RGC, represents net
earnings before interest expense, income tax expense (benefit), depreciation
and amortization expense, post-retirement benefits, the LIFO charge,
provision for restructuring, provision for earthquake losses, a one-time
charge for Teamsters Union sick pay benefits, transition expense and gains
and losses on disposal of assets. EBITDA is a widely accepted financial
indicator of a company's ability to service debt. However, EBITDA should not
be construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of the
Holdings' operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
38
<PAGE> 43
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED 28 WEEKS ENDED
JUNE 25, 1994 JANUARY 7, 1995
-------------- --------------
<S> <C> <C>
Historical EBITDA:
Ralphs EBITDA............................................................ $228.1 $126.0
EBITDA margin(1)....................................................... 8.4% 8.5%
Food 4 Less EBITDA....................................................... $130.5 $ 69.4
EBITDA margin.......................................................... 5.0% 4.9%
Less: Pro Forma Adjustments(2)............................................. $(16.1) $ (6.1)
------ ------
Pro Forma EBITDA........................................................... $342.5 $189.3
====== ======
Pro Forma EBITDA margin.................................................. 6.8% 6.8%
====== ======
</TABLE>
(1) EBITDA margin represents EBITDA (as defined) as a percentage
of sales.
(2) Reflects primarily EBITDA (as defined) associated with closed
or divested stores and the adjustments referred to in notes
(e) and (f) above.
39
<PAGE> 44
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RALPHS HOLDINGS
(HISTORICAL) (HISTORICAL)
(AUDITED) (UNAUDITED) PRO FORMA
JANUARY 29, 1995 JANUARY 7, 1995 ADJUSTMENTS PRO FORMA
---------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 35.1 $ 15.8 $ 0.0(a) $ 50.9
Accounts receivable.......................... 43.6 26.8 -- 70.4
Inventories.................................. 221.4 223.2 39.9(b) 484.5
Prepaid expense and other current assets..... 19.8 17.6 -- 37.4
-------- ------- ------- --------
Total current assets.................. 319.9 283.4 39.9 643.2
Investments.................................... 0.0 12.4 12.4
Property, plant and equipment.................. 624.7 370.2 160.0(c) 1,130.1
(22.8)(d)
(2.0)(e)
Excess of cost over net assets acquired, net... 365.4 263.7 501.4(f) 1,130.5
Beneficial lease rights........................ 49.2 0.0 -- 49.2
Deferred debt issuance costs, net.............. 23.0 25.5 88.4(g) 94.1
(42.8)(h)
Deferred income taxes.......................... 112.5 0.0 (112.5)(i) 0.0
Other assets................................... 15.2 29.4 (12.9)(d) 36.7
5.0(j)
-------- ------- ------- --------
Total assets.......................... $1,509.9 $ 984.6 $ 601.7 $3,096.2
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 84.0 $ 25.9 $ (83.1)(k) $ 26.8
Short-term debt.............................. 51.5 0.0 (51.5)(l) 0.0
Accounts payable............................. 176.6 165.0 -- 341.6
Accrued expenses............................. 99.8 108.8 (14.8)(m) 200.3
4.7(d)
1.8(n)
Current portion of self-insurance reserves... 27.5 28.6 -- 56.1
-------- ------- ------- --------
Total current liabilities............. 439.4 328.3 (142.9) 624.8
Long-term debt................................. 883.0 590.0 729.0(o) 2,202.0
Self-insurance reserves........................ 44.9 50.7 -- 95.6
Deferred income taxes.......................... 0.0 14.7 -- 14.7
Lease valuation reserve........................ 29.0 0.0 -- 29.0
Other non-current liabilities.................. 86.4 5.0 (27.8)(p) 77.6
11.0(q)
3.0(e)
-------- ------- ------- --------
Total liabilities..................... 1,482.7 988.7 572.3 3,043.7
-------- ------- ------- --------
Stockholders' equity:
Series A Preferred Stock, liquidation
preference $166.8 million.................. -- -- 104.0(r) 161.8
57.8(s)
Series B Preferred Stock, liquidation
preference $31.0 million................... -- -- 31.0(r) 31.0
Common Stock................................. 0.3 0.0 (0.3)(t) 0.0
Additional paid-in capital................... 175.2 105.5 10.0(p) 59.9
(175.2)(t)
(57.8)(s)
2.2(u)
Notes receivable from shareholders........... 0.0 (0.7) -- (0.7)
Retained deficit............................. (148.3) (108.9) (22.6)(v) (193.6)
148.3(t)
(40.4)(d)
(1.8)(n)
(19.9)(w)
Treasury stock............................... -- -- (2.2)(u) (5.9)
(3.7)(x)
-------- ------- ------- --------
Total stockholders' equity(y)......... 27.2 (4.1) 29.4 52.5
-------- ------- ------- --------
Total liabilities and stockholders'
equity.............................. $1,509.9 $ 984.6 $ 601.7 $3,096.2
======== ======= ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
40
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects gross proceeds received from (i) the New Term Loans, (ii) the New
Revolving Facility, (iii) the New Equity Investment, (iv) the Public
Offerings and (v) the New Discount Debenture Placement used to retire
certain debt and liabilities and to pay financing costs and other related
fees as set forth in the following table:
<TABLE>
<S> <C>
New Term Loans............................................................................ $ 750.0
New Revolving Facility.................................................................... 54.5
New F4L Senior Notes...................................................................... 295.0
New RGC Notes............................................................................. 200.0
New Equity Investment..................................................................... 140.0
New Discount Debentures................................................................... 59.0
Purchase Discount Notes................................................................... (83.9)
Purchase RSI Common Stock................................................................. (375.9)
Repay Ralphs 1992 Credit Agreement........................................................ (297.4)
Repay F4L Credit Agreement................................................................ (174.4)
Purchase Old RGC Notes.................................................................... (226.8)
Pay EAR liability......................................................................... (17.8)
Loan to affiliate......................................................................... (5.0)
Repay other Ralphs debt................................................................... (188.9)
Purchase New Holdings Common Stock........................................................ (3.7)
Accrued Interest.......................................................................... (14.8)
Fees and Expenses......................................................................... (109.9)
-------
Pro forma adjustment.............................................................. $ 0.0
=======
</TABLE>
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million)
and the write-up of merchandise inventory ($22.5 million); both to reflect
current estimated selling prices less costs of disposal and a reasonable
profit allowance for the selling effort of the acquiring company.
(c) Reflects the estimated write-up to fair value of Ralphs property, plant and
equipment as of the date of the Merger.
(d) Reflects estimated restructuring charge associated with closing 29 Food 4
Less conventional supermarkets or warehouse stores and converting 5 Food 4
Less conventional supermarkets to warehouse stores. Pursuant to the
settlement agreement with the State of California, 24 Food 4 Less stores (as
well as 3 Ralphs stores) must be closed by December 31, 1995. See
"Business -- California Settlement Agreement." Although not required by such
settlement agreement, an additional 5 under-performing stores selected by
the Company also are scheduled to be closed by December 31, 1995. The
restructuring charge consists of write-downs of property, plant and
equipment ($22.8 million), write-off of the Alpha Beta trademark ($8.6
million), write-off of other assets ($4.3 million), lease termination
expenses ($3.1 million) and miscellaneous expense accruals ($1.6 million).
The expected cash payments to be made in connection with the restructuring
charge total $7.1 million. It is expected that such cash payments will be
made by December 31, 1995. The estimated restructuring charge will be
recorded as an expense once the Merger is completed. No additional expenses
are expected to be incurred in future periods in connection with these
closings. Food 4 Less has determined that there is no impairment of existing
goodwill related to the store closures based on its projections of future
undiscounted cash flows.
(e) Reflects the anticipated closing of 3 Ralphs stores.
(f) Reflects the excess of costs over the fair value of the net assets of Ralphs
acquired in connection with the Merger ($866.8 million) and the elimination
of Ralphs historical excess of costs over the fair value of the net assets
acquired ($365.4 million). The purchase price and preliminary calculation of
the excess of cost over the net book value of assets acquired is as follows:
<TABLE>
<S> <C>
Purchase price:
Purchase of outstanding common equity.................................................. $ 525.9
Fees and expenses...................................................................... 55.8
--------
Total purchase price................................................................... $ 581.7
--------
Purchase price is financed by:
Seller Debentures...................................................................... $ 131.5
New Discount Debentures................................................................ 18.5
New Equity Investment.................................................................. 140.0
New borrowings......................................................................... 291.7
--------
$ 581.7
========
</TABLE>
Preliminary calculation of purchase price allocated to assets and
liabilities
based on management's estimate of fair values as of January 29, 1995:
<TABLE>
<S> <C>
Cash................................................................................... $ 35.1
Receivables............................................................................ 43.6
Inventories............................................................................ 261.3
Other current assets................................................................... 19.8
Property, fixtures and equipment....................................................... 782.7
Beneficial lease rights................................................................ 49.2
Goodwill............................................................................... 866.8
Other assets........................................................................... 18.0
Current liabilities.................................................................... (424.8)
Obligations under capital leases....................................................... (89.1)
Long-term debt......................................................................... (806.6)
Other non-current liabilities.......................................................... (174.3)
--------
$ 581.7
========
</TABLE>
41
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C> <C>
Pro forma book value of historical assets acquired:
Historical net book value at January 29, 1995...................................... $ 27.2
Less book value of historical assets with no value at the acquisition date:
Historical deferred tax asset............................................. 112.5
Historical goodwill....................................................... 365.4
Historical deferred debt costs............................................ 20.2 (498.1)
----- --------
Negative pro forma book value of net assets acquired............................. 470.9
Purchase price..................................................................... 581.7
--------
Excess of purchase price to be allocated........................................... $1,052.6
========
Excess allocated to:
Inventories........................................................................ $ 39.9
Property, fixtures and equipment................................................... 160.0
Goodwill........................................................................... 866.8
Other non-current liabilities...................................................... (14.1)
--------
$1,052.6
========
</TABLE>
(g) Reflects the debt issuance costs associated with the New Credit Facility,
($33.4 million), the RGC Offers ($2.2 million), the F4L Exchange Offers
($2.6 million), the Senior Note Public Offering ($8.9 million) and the
Subordinated Note Public Offering ($6.0 million), the cash exchange payments
associated with the RGC Offers ($4.5 million) and the F4L Exchange Offers
($3.0 million) and other financing costs ($27.8 million). These amounts have
been capitalized as deferred financing costs.
(h) Reflects the elimination of deferred debt issuance costs associated with the
Ralphs 1992 Credit Agreement (as defined) ($6.3 million), the F4L Credit
Agreement (as defined) ($9.2 million), the Old RGC Notes ($10.4 million) and
the Old F4L Notes ($13.4 million) and other indebtedness of RGC and Food 4
Less ($3.5 million) to be repaid in connection with the Merger.
(i) Reflects the elimination of Ralphs deferred tax asset associated with
changes in the financial reporting basis of assets. The combined Company may
be required to record a valuation allowance on all or some deferred tax
assets in compliance with Financial Accounting Standard No. 109 "Accounting
for Income Taxes." This determination may be based, in part, on historical
or expected earnings. For purposes of these pro forma financial statements
it has been assumed that all deferred net tax assets have been fully
reserved.
(j) Represents a loan to a corporation owned by Yucaipa affiliates. The
corporation will invest the loan proceeds in a partnership that will
purchase New Discount Debentures. All proceeds received by the Company from
the repayment of the loan will be paid to former holders of Ralphs EARs in
satisfaction of the deferred EAR liability. See "Certain Relationships and
Related Transactions -- Food 4 Less and Holdings."
(k) Reflects the repayment and cancellation of the current maturities of Ralphs
1992 Credit Agreement ($65.0 million), the F4L Credit Agreement ($19.8
million), certain other Ralphs debt ($2.1 million) and the recording of the
current maturities of the New Credit Facility ($3.8 million).
(l) Reflects the repayment of Ralphs' old revolving credit facility.
(m) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement
($1.5 million), the F4L Credit Agreement ($1.7 million), the Old RGC Notes
($5.5 million), the Old F4L Notes ($4.5 million) and other indebtedness of
RGC and Food 4 Less ($1.6 million) to be repaid in connection with the
Merger.
(n) Represents the liability to an executive under his employment contract due
to a change of control provision.
(o) Reflects the repayment and cancellation of the Ralphs 1992 Credit Agreement
and the F4L Credit Agreement and the repayment of certain other Ralphs debt,
and records borrowings under the New Credit Facility and issuance of the New
Discount Debentures and the Seller Debentures as set forth in the table
below:
<TABLE>
<S> <C>
New Term Loans............................................................................ $ 746.2
New Revolving Facility.................................................................... 54.5
New F4L Senior Notes...................................................................... 295.0
New RGC Notes............................................................................. 200.0
New Discount Debentures................................................................... 100.0
Seller Debentures......................................................................... 131.5
Purchase Discount Notes (book value)...................................................... (64.5)
Repay Ralphs 1992 Credit Agreement........................................................ (180.0)
Repay F4L Credit Agreement................................................................ (154.6)
Purchase Old RGC Notes.................................................................... (224.5)
Repay other Ralphs debt................................................................... (174.6)
-------
Net pro forma adjustment.......................................................... $ 729.0
=======
</TABLE>
(p) Reflects payments with respect to a portion of the Ralphs EAR liability
($17.8 million) and the issuance of New Holdings stock options in
consideration of the cancellation of the remaining Ralphs EAR liability
($10.0 million). See "Executive Compensation -- Equity Appreciation Rights
Plan." No future compensation expense will be recorded as the cancellation
of certain EAR liabilities ($10.0 million) in consideration for the issuance
of New Holdings stock options is deemed to reflect fair value.
(q) Reflects a reserve for Ralphs unfunded defined benefit pension plan,
determined as the difference between the projected benefit obligation of the
plan as compared to the fair value of plan assets, less amounts previously
accrued.
(r) Reflects the issuance of the Series A and Series B Preferred Stock for cash,
net of (in the case of the Series A Preferred Stock) $5.0 million in related
commitment fees. The proceeds will be used to acquire RSI stock, to
repurchase Discount Notes and to repay indebtedness of the Company.
(s) Represents the cancellation of 5,783,244 shares of common stock (after
giving effect to a 2.082-for-one stock split) in connection with the
issuance of Preferred Stock in the New Equity Investment.
(t) Reflects the elimination of Ralphs historical equity.
(u) Represents the reclassification of treasury stock held by Holdings.
(v) Represents the write-off of the historical deferred debt issuance costs of
Holdings related to its refinanced debt.
(w) Represents the premium over the book value of the Discount Notes as of
January 7, 1995 and related fees.
(x) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(y) The unaudited pro forma combined balance sheet as of January 7, 1995 does
not include certain one-time non-recurring costs related to (i) severance
payments under certain employment contracts with Food 4 Less management
totaling $1.4 million that are subject to change of control provisions and
the achievement of earnings and sales targets, (ii) costs related to the
integration of the Company's operations which are estimated to be $50.0
million (includes an estimated $12.0 million related to termination and
severance costs) over a three-year period, (iii) other costs related to
warehouse closures, which costs are not presently determinable or (iv) any
contingent liability to reimburse Yucaipa in the event it incurs a loss on
the resale of $10 million of the Seller Debentures.
42
<PAGE> 47
SELECTED HISTORICAL FINANCIAL DATA OF RALPHS
The following table presents selected historical financial data of RGC (as
the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991, and
the 52 weeks ended February 2, 1992, and summary historical financial data of
RSI for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, which have been derived from the financial statements of RSI and RGC
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
following information should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of RSI and RGC and related notes thereto included elsewhere in this
Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29,
1991 1992 1993 1994 1995
------------ ------------ ----------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales................................................ $2,799.1 $2,889.2 $ 2,843.8 $ 2,730.2 $2,724.6
Cost of sales........................................ 2,225.4 2,275.2 2,217.2 2,093.7 2,101.0
-------- -------- --------- --------- --------
Gross profit......................................... 573.7 614.0 626.6 636.5 623.6
Selling, general and administrative expenses(a)...... 438.0 459.2 470.0 471.0 467.0
Provision for equity appreciation rights............. 15.3 18.3 -- -- --
Amortization of excess of cost over net assets
acquired........................................... 11.0 11.0 11.0 11.0 11.0
Provisions for restructuring and tax indemnification
payments(b)........................................ -- 10.0 7.1 2.4 --
-------- -------- --------- --------- --------
Operating income..................................... 109.4 115.5 138.5 152.1 145.6
Interest expense(c)................................ 128.5 130.2 125.6 108.8 112.7
Loss on disposal of assets and provisions for legal
settlement and earthquake losses(d).............. 6.4 13.0 10.1 12.9 0.8
Income tax expense (benefit)......................... 12.8 13.5 8.3 (108.0)(e) --
Cumulative effect of change in accounting for
postretirement benefits other than pensions........ (13.1) -- -- -- --
Extraordinary item-debt refinancing, net of tax
benefits........................................... -- -- (70.6) -- --
-------- -------- --------- --------- --------
Net earnings (loss)(f)............................... $ (51.4) $ (41.2) $ (76.1) $ 138.4 $ 32.1
======== ======== ========= ========= ========
Ratio of earnings to fixed charges(g)................ --(g) --(g) 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit).................... $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5)
Total assets......................................... 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9
Total debt(h)........................................ 986.1 941.9 1,029.8 998.9 1,018.5
Redeemable stock..................................... 3.0 3.0 -- -- --
Stockholders' equity (deficit)....................... (16.0) (57.2) (133.3) 5.1 27.2
OTHER DATA:
Depreciation and amortization(i)..................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0
Capital expenditures................................. 87.6 50.4 102.7 62.2 64.0
Stores open at end of period......................... 150 158 159 165 173
EBITDA (as defined)(j)............................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2
EBITDA margin(k)..................................... 7.4% 7.8% 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $2.2
million, $2.6 million, $3.3 million, $3.4 million and $2.6 million for the
53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992,
January 31, 1993, January 30, 1994 and January 29, 1995, respectively.
(b) Provisions for restructuring are charges for expenses relating to closing of
Ralphs central bakery operation. The charge reflected the complete
write-down of the bakery building, machinery and equipment, leaseholds,
related inventory and supplies, and providing severance pay to terminated
employees. These charges were $7.1 million and $2.4 million for the 52 weeks
ended January 31, 1993 and the 52 weeks ended January 30, 1994,
respectively. Provision for tax indemnification payments to Federated were
$10.0 million for the 52 weeks ended February 2, 1992.
(c) Interest expense includes non-cash charges related to the amortization of
deferred debt issuance costs of $4.1 million for the 53 weeks ended February
3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million
for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended
January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995,
respectively.
(d) Loss on disposal of assets was $6.4 million, $13.0 million, $2.6 million,
$1.9 million and $0.8 million for the 53 weeks ended February 3, 1991, the
52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and
January 29, 1995, respectively. The 52 weeks ended February 2, 1992 includes
approximately $12.2 million representing a reserve against losses related to
the closing of three stores. Provision for legal settlement was $7.5 million
for the 52 weeks ended January 31, 1993. Provision for earthquake losses was
$11.0 million for the 52 weeks ended January 30, 1994. This represents
reserve for losses, net of anticipated insurance recoveries, resulting from
the January 17, 1994 Southern California earthquake.
43
<PAGE> 48
(e) Includes recognition of $109.1 million of deferred income tax benefit and
$1.1 million current income tax expense for Fiscal 1993 (see Note 11 of
Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.).
(f) Net earnings (loss) includes a pre-tax provision for self insurance, which
is classified in cost of sales, selling, general and administrative expenses
and interest expense, of $29.2 million, $31.2 million, $36.9 million, $36.3
million, and $20.0 million, for the 53 weeks ended February 3, 1991, the 52
weeks ended February 2, 1992, the 52 weeks ended January 31, 1993, the 52
weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995,
respectively. Included in the 52 weeks ended January 30, 1994 and the 52
weeks ended January 29, 1995 are reduced employer contributions of $11.8
million and $12.7 million, respectively, related to union health and welfare
benefit plans.
(g) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of earnings before income taxes, cumulative effect of change in
accounting principles, extraordinary items and fixed charges before
capitalized interest. "Fixed charges" consist of interest expense (including
amortization of self-insurance reserves discount), capitalized interest,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Earnings were
insufficient to cover fixed charges for the 53 weeks ended February 3, 1991
and the 52 weeks ended February 2, 1992 by $25.5 million and $27.7 million,
respectively.
(h) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
(i) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2,
1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation
and amortization includes amortization of the excess of cost over net assets
acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and
$11.0 million, respectively.
(j) "EBITDA," as defined and presented historically by RGC, represents earnings
before interest expense, income tax expense (benefit), depreciation and
amortization expense, provisions for Equity Appreciation Rights, provision
for tax indemnification payments to Federated, provision for postretirement
benefits, the LIFO charge, extraordinary item relating to debt refinancing,
provision for legal settlement, provision for restructuring, provision for
earthquake losses, a one-time charge for Teamsters Union sick pay benefits,
transition expense and gains and losses on disposal of assets. EBITDA is a
widely accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Ralphs' operating performance or as a measure
of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(k) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
44
<PAGE> 49
SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS
The following table presents selected historical financial data of Holdings
and its predecessor, Food 4 Less. Because Holdings acquired the capital stock of
Food 4 Less in a reorganization, which occurred December 31, 1992, the financial
data presented below for periods ending prior to such date represent data of
Food 4 Less. Operating data of Holdings for the 52 weeks ended June 26, 1993
reflects the operating results of Food 4 Less only until December 31, 1992 and
reflects the consolidated operating results of Holdings for the remainder of the
period. The historical financial data of Food 4 Less presented below as of and
for the 52 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991 and the
52 weeks ended June 27, 1992, and the historical financial data of Holdings
presented below as of and for the 52 weeks ended June 26, 1993 and the 52 weeks
ended June 25, 1994 have been derived from the financial statements of Holdings
and Food 4 Less audited by Arthur Andersen LLP, independent public accountants.
The summary historical financial data of Holdings presented below as of and for
the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from
unaudited interim financial statements of Holdings which, in the opinion of
management, reflect all material adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such data. The
following information should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements of Holdings and related notes thereto included
elsewhere in this Prospectus and Solicitation Statement.
<TABLE>
<CAPTION>
FOOD 4 LESS HOLDINGS
-------------------------------- ----------------------------------------------
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 28 WEEKS 28 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1990 1991(A) 1992 1993 1994(B) 1994 1995
-------- -------- -------- -------- -------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales..................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,416.2 $1,404.7
Cost of sales............................. 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,154.0 1,167.2
-------- -------- -------- -------- -------- -------- --------
Gross profit.............................. 204.8 265.7 520.8 484.2 469.3 262.2 237.5
Selling, general, administrative and other
expenses................................ 157.8 213.1 469.7 434.9 388.8 221.5 199.2
Amortization of excess cost over net
assets acquired......................... 5.3 5.3 7.8 7.6 7.7 4.1 4.2
Restructuring charge...................... -- -- -- -- -- -- 5.1(d)
-------- -------- -------- -------- -------- -------- --------
Operating income.......................... 41.7 47.3 43.3 41.7 72.8 36.6 29.0
Interest expense(c)....................... 50.8 50.1 70.2 73.6 77.0 41.5 43.2
Loss (gain) on disposal of assets......... -- 0.6 (1.3) (2.1) -- 0.1 (0.4)
Provision for earthquake losses........... -- -- -- -- 4.5 -- --
Provision for income taxes................ 1.0 2.5 3.4 1.4 2.7 0.7 0.5
Extraordinary charge...................... -- 3.7 (f) 4.8 (g) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss(e)............................... $ (10.1) $ (9.6) $ (33.8) $ (31.2) $ (11.5) $ (5.7) $ (14.3)
======== ======== ======== ======== ======== ======== ========
Net loss applicable to common share (h)... $ (.72) $ (.70) $ (1.46) $ (1.35) $ (.50) $ (.25) $ (.62)
Ratio of earnings to fixed charges(i)..... -- (i) -- (i) -- (i) -- (i) -- (i) -- (i) -- (i)
BALANCE SHEET DATA (end of period)(j):
Working capital surplus (deficit)......... $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8)
Total assets.............................. 574.7 980.0 998.5 957.8 980.1 969.6 984.6
Total debt(k)............................. 360.7 558.9 525.3 588.3 576.9 576.2 615.9
Redeemable stock.......................... 5.1 -- -- -- -- -- --
Stockholder's equity (deficit)............ 20.6 84.6 50.8 22.6 10.0 16.2 (4.1)
OTHER DATA:
Depreciation and amortization(l).......... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8
Capital expenditures...................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0
Stores open at end of period.............. 115 259 249 248 258 249 266
EBITDA (as defined)(m).................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4
EBITDA margin(n).......................... 5.3 % 5.0 % 3.5 % 3.9 % 5.0 % 4.9% 4.9%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 29, 1991 include the results of
Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha
Beta's sales for the two weeks ended June 29, 1991 were $59.2 million.
(b) Operating data for the 52 weeks ended June 25, 1994 include the results of
the Food Barn stores, which were not material, from March 29, 1994, the date
of the acquisition of the Food Barn stores.
45
<PAGE> 50
(c) Interest expense includes non-cash charges related to the amortization of
deferred financing costs of $4.1 million for the 53 weeks ended June 30,
1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for
the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June
26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million
for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks
ended January 7, 1995.
(d) Represents the recording of a restructuring charge for the write-off of
property and equipment in connection with the conversion of 11 conventional
format supermarkets to warehouse format stores.
(e) Net loss includes a pre-tax provision for self insurance, which is
classified in cost of sales, selling general and administrative expenses and
interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9
million, and $25.7 million, $24.8 million, and $14.9 million for the 53
weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks
ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended
June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended
January 7, 1995, respectively. Included in the 52 weeks ended June 25, 1994,
the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995
are reduced employer contributions of $8.1 million, $2.8 million and $13.7
million, respectively, related to union health and welfare benefit plans.
(f) Represents an extraordinary charge of $3.7 million (net of related income
tax benefit of $2.5 million) relating to the refinancing of certain
indebtedness in connection with the Alpha Beta acquisition and the write-off
of related debt issuance costs.
(g) Represents an extraordinary net charge of $4.8 million reflecting the
write-off of $6.7 million (net of related income tax benefit of $2.5
million) of deferred debt issuance costs as a result of the early redemption
of a portion of Food 4 Less' term loan facility under the F4L Credit
Agreement, partially offset by a $1.9 million extraordinary gain (net of a
related income tax expense of $0.7 million) on the replacement of partially
depreciated assets following the civil unrest in Los Angeles.
(h) Net loss applicable to common share has been computed after giving effect to
the 16.586-for-1 stock split to be effected immediately prior to the FFL
Merger.
(i) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of loss before provision for income taxes and extraordinary charges,
plus fixed charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Earnings were
insufficient to cover fixed charges for the 53 weeks ended June 30, 1990,
the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25,
1994 and the 28 weeks ended January 8, 1994 and January 7, 1995 by
approximately $9.1 million, $3.4 million, $25.6 million, $29.8 million, $8.8
million, $5.0 million and $13.8 million, respectively. However, such
earnings included non-cash charges of $29.9 million for the 53 weeks ended
June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2
million for the 52 weeks ended June 27, 1992 and $66.4 million for the 52
weeks ended June 26, 1993, $71.3 million for the 52 weeks ended June 25,
1994, $38.0 million for the 28 weeks ended January 8, 1994 and $44.6 million
for the 28 weeks ended January 7, 1995, primarily consisting of
depreciation, amortization and accretion of interest.
(j) Balance sheet data as of June 30, 1990 include the effect of the BHC
Acquisition, as well as the acquisitions of Bell Markets, Inc. and certain
assets of ABC Market Corp. Balance sheet data as of June 29, 1991, June 27,
1992, June 26, 1993 and January 8, 1994 reflect the Alpha Beta acquisition
and the financings and refinancings associated therewith. Balance sheet data
as of June 25, 1994 and January 7, 1995 reflect the acquisition of the Food
Barn stores.
(k) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(l) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June
27, 1992, June 26, 1993 and June 25, 1994, and the 28 weeks ended January 8,
1994 and January 7, 1995, depreciation and amortization includes
amortization of excess of cost over net assets acquired of $5.3 million,
$5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and
$4.2 million, respectively.
(m) "EBITDA," as defined and presented historically by Holdings, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for incomes taxes, provision for earthquake losses
and the one-time adjustment to the Teamsters Union sick pay accrual. EBITDA
is a widely accepted financial indicator of a company's ability to service
debt. However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Holdings' operating performance or as a
measure of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(n) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
46
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Prior to consummation of the Merger, FFL will merge with and into Holdings
pursuant to the FFL Merger. FFL is a holding company and the assets of FFL
consist solely of its investment in the capital stock of Holdings. FFL does not
conduct any operations of its own. Holdings owns 100% of the stock of Food 4
Less and does not conduct any business operations of its own. Immediately
following the FFL Merger, Holdings will change its jurisdiction of incorporation
by merging into a newly-formed, wholly-owned subsidiary, New Holdings,
incorporated in Delaware, pursuant to the Reincorporation Merger. The following
discussion addresses an overview of the combination of Ralphs and Food 4 Less,
the historical results of operations of Ralphs and Holdings and the liquidity
and capital resources of Ralphs and Holdings on both a historical and a pro
forma combined basis.
OVERVIEW
The combination of Ralphs and Food 4 Less will create the largest
supermarket operator in Southern California with an estimated 264 conventional
format Ralphs stores and an estimated 68 price-impact Food 4 Less warehouse
format stores. The Company will operate an additional 63 stores in Northern
California and certain areas of the Midwest. Management believes that the
Company's dual format strategy will appeal to a broad range of Southern
California consumers and enable the Company to significantly enhance its overall
competitive position. In addition, the Company expects to achieve cost savings
and incremental profitability through the integration of advertising,
administration, purchasing, distribution, manufacturing and other operations.
Due to its increased size, dual format strategy and integration related costs,
the Company believes that its future operating results may not be directly
comparable to the historical operating results of either Ralphs or Holdings.
Certain factors which are expected to affect the future operating results of the
Company (or their comparability to prior periods) are discussed below.
Regional Economic Conditions. In recent periods Ralphs and Food 4 Less have
each been affected by the adverse economic conditions that have existed in
Southern California since approximately 1991. These conditions were exacerbated
by the substantial layoffs in the defense and aerospace industries and by the
civil unrest in Los Angeles in April, 1992. In addition, management estimates
that approximately eight million square feet of supermarket selling space has
been added in Southern California over the past five years. As a result of these
factors and general deflationary pressures in certain food product categories,
Ralphs and Food 4 Less have each experienced declining comparable store sales in
recent periods. Over the last three fiscal years, Food 4 Less' and Ralphs' total
sales declined by 11.3% and 4.2%, respectively. However, both Food 4 Less' and
Ralphs' comparable store sales declines have begun to moderate in recent months.
Despite these sales trends, however, each company has improved its profitability
over the same period as discussed in greater detail below. Although data
indicate a mild recovery in the Southern California economy and management
believes that overall sales trends in Southern California should improve along
with the economy, there can be no assurance that such improvements will occur.
Management believes that its dual format strategy and anticipated cost savings
will leave it well positioned to take advantage of improvements in the regional
economy and growing population and to compete effectively in the Southern
California marketplace. See "Risk Factors -- Regional Economic Conditions."
Integration Costs and Restructuring Charges. The two principal components
of the Company's integration strategy will be (i) the conversion of up to 122 of
Food 4 Less' conventional stores (primarily Alpha Beta stores) to the Ralphs
name and format and the conversion of 16 other (Boys and Viva) Food 4 Less
conventional stores (11 of which were recently completed) and 23 Ralphs stores
to the Food 4 Less price impact warehouse format; and (ii) the achievement of
substantial cost savings through the consolidation of warehousing, manufacturing
and distribution operations and the elimination of certain other duplicative
overhead costs. Management has estimated that approximately $90 million of net
annual cost savings (as compared to such costs for the pro forma combined fiscal
year ended June 25, 1994) are achievable by the end of the fourth year of
combined operations. Although a portion of the anticipated cost savings is
premised upon the completion of certain capital expenditures, management
believes that over 70% of the cost savings could be achieved without making any
Merger-related capital expenditures. See "Business -- The Merger" and
47
<PAGE> 52
"Risk Factors -- Ability to Achieve Anticipated Cost Savings." Management
believes that approximately $117 million in Merger-related capital expenditures
and $50 million of other non-recurring costs will be required to complete store
conversions, integrate operations and expand warehouse facilities over this
four-year period. Management expects that the non-recurring integration costs
will effectively offset any cost savings in the first year following the Merger.
See "-- Liquidity and Capital Resources." In addition, management anticipates
that certain non-recurring costs associated with the integration of operations
will be recorded as a restructuring charge. The charge will cover costs
associated with the writedown of property and equipment and related reserves
associated with the conversion of certain Food 4 Less conventional supermarkets
to warehouse stores and the closure of certain Food 4 Less conventional stores
as well as the write-off of the Alpha Beta trademark. This restructuring charge
has been estimated, for purposes of the pro forma financial information included
elsewhere herein, at approximately $45.5 million. On December 14, 1994, Food 4
Less and Ralphs entered into a Settlement Agreement (the "Settlement Agreement")
with the State of California. See "Business -- California Settlement Agreement."
Under the Settlement Agreement, the Company must divest a total of 27 stores (24
Food 4 Less conventional supermarkets or warehouse stores and 3 Ralphs stores).
In addition, although not required pursuant to the Settlement Agreement, an
additional 5 under-performing stores selected by the Company are scheduled to be
closed following the Merger. It is anticipated that such closures and store
conversions will be substantially completed by December 31, 1995. The estimated
restructuring charge aggregating $45.5 million for the 24 Food 4 Less stores to
be divested under the Settlement Agreement, the planned closures (5 Food 4 Less
stores) and the conversion of 16 Food 4 Less conventional stores to warehouse
format stores reflects (i) the writedown of property, plant and equipment ($27.9
million), (ii) the write-off of the Alpha Beta trademark ($8.6 million), (iii)
the write-off of other assets ($4.3 million), (iv) lease termination expense
($3.1 million) and (v) miscellaneous expense accruals ($1.6 million). The
expected cash payments to be made in connection with the restructuring charge
will total $7.1 million. It is expected that such cash payments will be made by
December 31, 1995. As a result of the completion of 11 of the 16 planned Food 4
Less conventional store conversions during the second quarter of the current
fiscal year, Food 4 Less has recorded a restructuring charge of $5.1 million in
its results of operations for the 28 weeks ended January 7, 1995. Food 4 Less
has determined that there is no impairment of existing goodwill related to the
store closures based on its projections of future undiscounted cash flows. The
remaining estimated restructuring charge will be recorded as an expense once the
Merger is completed. The divestiture of the 3 Ralphs stores pursuant to the
Settlement Agreement will be reflected in the allocation of the purchase price
and therefore will not give rise to any restructuring charge.
Store Mix. Approximately 28% of the Company's total anticipated number of
stores following the Merger are expected to be warehouse format stores. Because
these stores offer prices that are generally 5-12% below those in Food 4 Less'
conventional stores, they produce lower gross profit margins than an average
conventional supermarket. As a result, the Holdings' consolidated gross margin
following the Merger is expected to decline from the levels historically
reported by Ralphs. In addition, if the percentage of warehouse stores in the
overall store mix increases following the Merger, as expected, the Holdings'
consolidated gross margins should also be expected to decline slightly over
time. Because of the reduced SG&A (as defined) costs associated with the
warehouse format stores, management believes that overall profitability of the
warehouse stores is comparable to that of conventional stores.
Purchase Accounting. The Merger will be accounted for as a purchase of
Ralphs by Holdings. As a result, the assets and liabilities of Ralphs will be
recorded at their estimated fair market values on the date the Merger is
consummated. The purchase price in excess of the fair market value of Ralphs'
assets will be recorded as goodwill and amortized over a forty-year period. The
purchase price allocation reflected in the pro forma statements is based on
management's preliminary estimates. The actual purchase accounting adjustments
will be determined following the Merger and may vary from the amounts reflected
in the Unaudited Pro Forma Financial Data included elsewhere herein.
Fiscal Year and Restatement of Holdings Financial Statements. Food 4 Less
and Holdings each have filed a Form 8-K with the Commission to announce that
they will adopt Ralphs' fiscal year end for financial reporting purposes.
Ralphs' fiscal year ends on the Sunday closest to January 31. In connection with
the preparation of this Prospectus and Solicitation Statement, Holdings elected
to restate its historical financial statements to conform to Ralphs'
classification of certain expenses. The changes primarily involved the
48
<PAGE> 53
reclassification of certain labor, occupancy and utility costs associated with
product deliveries as cost of goods sold, which were previously classified as
selling, general, administrative and other expense, net. In addition,
depreciation expense, which had been reported separately by Holdings with the
amortization of goodwill, was classified as cost of goods sold or selling,
general, administrative and other expense, net, as appropriate. The amounts
aggregated $236.2 million, $224.5 million, $219.5 million and $114.3 million
(unaudited) for the fiscal years ended June 27, 1992, June 26, 1993, June 25,
1994 and the 28 weeks ended January 8, 1994. Holdings has also classified a
portion of its self-insurance costs as interest expense that was previously
recorded in selling, general, administrative and other expense, net. These
self-insurance amounts were reclassified to more completely segregate the
interest component of self-insurance costs arising from discounting long-term
obligations. The amounts reclassified aggregated $5.0 million, $5.9 million,
$5.8 million and $3.3 million (unaudited) for the fiscal years ended June 27,
1992, June 26, 1993, June 25, 1994 and the 28 weeks ended January 8, 1994. All
historical financial information for Holdings and Food 4 Less included in this
Prospectus and Solicitation Statement reflects these reclassifications. See Note
13 of Notes to Holdings Consolidated Financial Statements.
RESULTS OF OPERATIONS OF RALPHS
The following table sets forth the historical operating results of Ralphs
for the 52 weeks ended January 31, 1993 ("Fiscal 1992"), January 30, 1994
("Fiscal 1993") and January 29, 1995 ("Fiscal 1994"):
<TABLE>
<CAPTION>
52 WEEKS ENDED
--------------------------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
---------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Sales............................................... $2,843.8 100.0% $2,730.2 100.0% $2,724.6 100.0%
Cost of sales....................................... 2,217.2 78.0 2,093.7 76.7 2,101.0 77.1
Selling, general and administrative expenses........ 470.0 16.5 471.0 17.2 467.0 17.2
Operating income(a)................................. 138.5 4.9 152.1 5.6 145.6 5.3
Net interest expense................................ 125.6 4.4 108.8 4.0 112.7 4.1
Provision for earthquake losses(b).................. -- -- 11.0 0.4 -- --
Income tax expense (benefit)........................ 8.3 0.3 (108.0) (4.0) -- --
Extraordinary item.................................. 70.6 2.5 -- -- -- --
Net earnings (loss)................................. (76.1) (2.7) 138.4 5.1 32.1 1.2
</TABLE>
- ---------------
(a) Operating income reflects charges of $7.1 million in Fiscal 1992 and $2.4
million in Fiscal 1993, for expenses relating to closing of central bakery
operation. The charges reflected the complete write-down of the bakery
building, machinery and equipment, leaseholds, related inventory and
supplies, and providing severance pay to terminated employees.
(b) Represents reserve for losses, net of expected insurance recoveries,
resulting from the January 17, 1994 Southern California earthquake.
COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 29,
1995 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994.
Sales
For the fifty-two weeks ended January 29, 1995 ("Fiscal 1994"), sales were
$2,724.6 million, a decrease of $5.6 million or 0.2% from the fifty-two weeks
ended January 30, 1994 ("Fiscal 1993"). During Fiscal 1994, Ralphs opened ten
new stores (four in Los Angeles County, three in Orange County, one in San Diego
County and two in Riverside County), closed two stores (in conjunction with new
stores opening in the same areas), and completed five store remodels. Comparable
store sales decreased 3.7%, which included an increase of 0.3% for replacement
store sales, from $2,707.9 million in Fiscal 1993 to $2,606.4 million in Fiscal
1994. Ralphs sales continued to be adversely affected by the continuing softness
of the economy in Southern California, continuing competitive new store and
remodeling activity and recent pricing and promotional changes by competitors.
Ralphs continued to take steps to mitigate the impact of the weak retailing
environment in its markets, which included continuing its own new store and
remodeling program and initiating the Ralphs Savings Plan in February 1994, a
new marketing campaign specifically designed to enhance customer value. See
"Business -- Advertising and Promotion."
49
<PAGE> 54
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 closed on the morning of
January 17th. Thirty-four stores reopened within one day and an additional 17
stores reopened within three days. Three stores in the San Fernando Valley area
of Los Angeles suffered major structural damage. 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
expected insurance recoveries, is expected to be approximately $11.0 million and
Ralphs 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 increased $7.3 million or 0.3% from $2,093.7 million in
Fiscal 1993 to $2,101.0 million in Fiscal 1994. As a percentage of sales, cost
of sales increased to 77.1% in Fiscal 1994 from 76.7% in Fiscal 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 was included in cost of sales and $0.4 million 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, pass-throughs of increased operating costs and increases in relative
margins where allowed by competitive conditions.
Warehousing and distribution cost savings were primarily attributable to
Ralphs' ASRS and PSC facilities along with the ongoing implementation of new
computer control programs and labor standards that improved distribution
productivity. 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.
Over the last several years, Ralphs has been implementing modifications in
its workers compensation and general liability insurance programs. Ralphs
believes that these modifications have resulted in a significant reduction in
self-insurance costs for Fiscal 1994. Based on a review of the results of these
modifications by Ralphs and its actuaries, adjustments to the accruals for
self-insurance costs were made during Fiscal 1994 resulting in a reduction of
approximately $18.9 million. Of the total $18.9 million reduction in
self-insurance costs, $7.5 million is included in cost of sales and $11.4
million is included in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased $4.0
million or 0.8% from $471.0 million in Fiscal 1993 to $467.0 million in Fiscal
1994. As a percentage of sales, SG&A was 17.2% in Fiscal 1993 and 17.2% in
Fiscal 1994. The decrease in SG&A was primarily due to a reduction in
contributions to the United Food and Commercial Workers Union ("UFCW") health
care benefit plans, due to an excess reserve in these plans, a reduction in
self-insurance costs, as discussed above, and the results of cost savings
programs instituted by Ralphs. Ralphs is continuing its expense reduction
program. The decrease in SG&A was partially offset by several factors including
increases in union wage rates, a one-time charge for Teamsters Union sick pay
benefits, as discussed above, transition expense relating to the Merger ($1.4
million) 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
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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 received a pro rata share of 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, $12.7 million, was recognized in
Fiscal 1994. 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 Fiscal 1994 decreased 4.3% to $145.6 million from
$152.1 million in Fiscal 1993. Operating margin, defined as operating income as
a percentage of sales, was 5.3% in Fiscal 1994 compared to 5.6% in Fiscal 1993.
EBITDA, defined as net earnings before interest expense, income tax expense
(benefit), depreciation and amortization expense, provision for postretirement
benefits, provision for LIFO expense, gain or loss on disposal of assets,
transition expense and a one-time charge for Teamsters Union sick pay benefits,
was 8.4% of sales or $230.2 million in Fiscal 1994 and 8.4% of sales or $230.2
million in Fiscal 1993.
Net Interest Expense
Net interest expense for Fiscal 1994 was $112.7 million versus $108.8
million for Fiscal 1993. Net interest expense increased primarily as a result of
increases in interest rates. Included as interest expense during Fiscal 1994 was
$97.4 million, representing interest expense on existing debt obligations,
capitalized leases and a swap agreement. Comparable interest expense for Fiscal
1993 was $92.8 million. Also included in net interest expense for Fiscal 1994
was $15.3 million representing certain other charges related to amortization of
debt issuance costs, self-insurance discounts, lease valuation reserves and
other miscellaneous charges (categorized by Ralphs as non-cash interest expense)
as compared to $16.0 million for Fiscal 1993. Investment income, which is
immaterial, has been offset against interest expense. The continuation of higher
interest rates subsequent to the end of Fiscal 1994 has continued to increase
interest expense and adversely affect Ralphs' net income.
Net Earnings
For Fiscal 1994, Ralphs reported net earnings of $32.1 million compared to
net earnings of $138.4 million for Fiscal 1993. The decrease in net earnings is
primarily the result of decreased operating income, higher interest expense due
to increased interest rates, the recognition of $109.1 million of deferred
income tax benefit in Fiscal 1993 partially offset by $11.0 million recorded for
earthquake losses in Fiscal 1993.
Other
In February 1994, the Board of Directors of Ralphs authorized a dividend of
$10.0 million to be paid to RSI, and the Board of Directors of RSI authorized
distribution of this dividend to its shareholders subject to certain restrictive
covenants in the instruments governing certain of Ralphs' indebtedness that
impose limitations on the declaration or payment of dividends. Ralphs' credit
agreement, entered into in 1992 (the "1992 Credit Agreement"), was amended to
allow for the payment of the dividend to RSI for distribution to RSI's
shareholders. The fee for the amendment was approximately $500,000, which was
included in interest expense for the period. The dividend was distributed to the
shareholders of RSI in the second quarter of Fiscal 1994.
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<PAGE> 56
COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30,
1994 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 31, 1993.
Sales
Sales in Fiscal 1993 were $2,730.2 million, a decrease of $113.6 million or
4.0% compared to Fiscal 1992. During Fiscal 1993, Ralphs opened eight new
stores, four in Los Angeles County, two in Orange County and two in Riverside
County, and remodeled six stores. Two of the eight new stores replaced the two
stores closed during the fiscal year. Comparable store sales decreased 5.8%,
which included an increase of 0.6% for the replacement stores, from $2,823.4
million to $2,659.3 million in Fiscal 1993. Ralphs' sales continued to be
adversely affected by the significant recession in Southern California,
continuing competitive new store and remodelling activity and pricing and
promotional changes by competitors.
Cost of Sales
Cost of sales decreased $123.5 million or 5.6% from $2,217.2 million in
Fiscal 1992 to $2,093.7 million in Fiscal 1993. As a percentage of sales, cost
of sales declined to 76.7% in Fiscal 1993 from 78.0% in Fiscal 1992. The
decrease in cost of sales as a percentage of sales was the result of savings in
warehousing and distribution costs, the pass-through of increased operating
costs and increases in relative margins where allowed by competitive conditions.
Selling, General and Administrative Expenses
SG&A increased $1.0 million or 0.2% from $470.0 million in Fiscal 1992 to
$471.0 million in Fiscal 1993. As a percentage of sales, SG&A increased from
16.5% in Fiscal 1992 to 17.2% in Fiscal 1993. The increase in SG&A as a
percentage of sales was the result of several factors including the soft sales
environment. Increases in expense were partially offset by cost savings programs
instituted by Ralphs.
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 UFCW 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. The change in health and welfare plan expenses
resulted from the $11.8 million credit associated with the collective bargaining
agreement as well as a reduction in the current year plan expense due to the
overfunded status of the plan. 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. Partially offsetting the reductions of health and
welfare maintenance payments was a $6.0 million contract ratification bonus paid
by Ralphs at the conclusion of contract negotiations with the UFCW in Fiscal
1993. The $6.0 million contract ratification payment was an item separate from
either of these plans.
Operating Income
Operating income in Fiscal 1993 increased to $152.1 million from $138.5
million in Fiscal 1992, a 9.8% increase. Operating margin increased in Fiscal
1993 to 5.6% from 4.9% in Fiscal 1992. This increase was primarily the result of
the aforementioned improvements in Ralphs' cost of sales percentage. EBITDA,
defined as net earnings before interest expense, income tax expense (benefit),
depreciation and amortization expenses, postretirement benefits, the LIFO
charge, extraordinary item relating to debt refinancing, provision for legal
settlement, provision for restructuring, provision for earthquake losses and
loss on disposal of assets, improved to $230.2 million or 8.4% of sales in
Fiscal 1993 from $227.3 million or 8.0% of sales in Fiscal 1992.
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<PAGE> 57
Net Interest Expense
Net interest expense for Fiscal 1993 was $108.8 million, compared to $125.6
million for Fiscal 1992. The reduction in net interest expense was attributable
to the refinancing and defeasance of Ralphs 14% Senior Subordinated Debentures
due 2000 (the "14% Debentures") with the proceeds from the issuance of the Old
RGC 9% Notes as the final step in a recapitalization plan initiated on July 30,
1992. Cash interest expense during Fiscal 1993 was $92.8 million compared to
$105.5 million in Fiscal 1992. Also included in interest expense for Fiscal 1993
was $16.0 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 $20.1 million for Fiscal 1992. Investment income, which is
immaterial, has been offset against interest expense.
Earthquake Losses
Several Ralphs stores suffered earthquake damage from the January 17, 1994
earthquake in Southern California and 54 stores were completely shutdown on the
morning of January 17th. 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 expected insurance recoveries, is expected to be
approximately $11.0 million and Ralphs 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.
Income Taxes
In Fiscal 1993, Ralphs recorded the incremental impact of The Omnibus
Budget Reconciliation Act of 1993 on net deductible temporary differences and
Ralphs increased its deferred income tax assets by a net amount of $109.1
million. Income tax expense (benefit) for Fiscal 1993 includes recognition of
$109.1 million of deferred income tax benefit and $1.1 million current income
tax expense for Fiscal 1993. See Note 11 of Notes to Ralphs Consolidated
Financial Statements.
Net Earnings
In Fiscal 1993, Ralphs reported net earnings of $138.4 million compared to
a net loss of $76.1 million for Fiscal 1992. This increase in net earnings was
primarily the result of Ralphs' recognition of $109.1 million of deferred income
tax benefit for Fiscal 1993 and the following items recorded in Fiscal 1992: (1)
an extraordinary charge, net of tax benefit, of $70.6 million relating to
Ralphs' recapitalization plan, (2) a provision of $7.1 million made for expenses
related to the closure of the central bakery operation (an additional charge of
$2.4 million was recorded in Fiscal 1993) and (3) a provision of $7.5 million
made for the maximum loss under a judgment rendered against Ralphs.
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RESULTS OF OPERATIONS OF HOLDINGS
The following table sets forth the historical operating results of Holdings
for the 52 weeks ended June 27, 1992 ("Fiscal 1992"), June 26, 1993 ("Fiscal
1993") and June 25, 1994 ("Fiscal 1994"), and for the 28 weeks ended January 8,
1994 and January 7, 1995:
<TABLE>
<CAPTION>
52 WEEKS ENDED 28 WEEKS ENDED
---------------------------------------------------------- -----------------------------------------
JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1992 1993 1994 1994 1995
---------------- ---------------- ---------------- ------------------ ------------------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.................. $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,416.2 100.0% $1,404.7 100.0%
Gross profit........... 520.8 17.9 484.2 17.7 469.3 18.1 262.2 18.5 237.5 16.9
Selling, general,
administrative and
other, net........... 469.7 16.1 434.9 15.9 388.8 15.0 221.5 15.6 199.2 14.2
Amortization of excess
costs over net assets
acquired............. 7.8 0.3 7.6 0.3 7.7 0.3 4.1 0.3 4.2 0.3
Restructuring charge... -- -- -- -- -- -- -- -- 5.1 0.4
Operating income....... 43.3 1.5 41.7 1.5 72.8 2.8 36.6 2.6 29.0 2.0
Interest expense....... 70.2 2.4 73.6 2.6 77.0 2.9 41.5 2.9 43.2 3.0
Loss (gain) on disposal
of assets............ (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.4) --
Provision for
earthquake losses.... -- -- -- -- 4.5 0.2 -- -- -- --
Provision for income
taxes................ 3.4 0.1 1.4 0.1 2.7 0.1 0.7 0.1 0.5 --
Loss before
extraordinary
charge............... (29.0) (1.0) (31.2) (1.1) (11.5) (0.4) (5.7) (0.4) (14.3) (1.0)
Extraordinary
charges.............. 4.8 0.2 -- -- -- -- -- -- -- --
Net loss............... (33.8) (1.2) (31.2) (1.1) (11.5) (0.4) (5.7) (0.4) (14.3) (1.0)
</TABLE>
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 7,
1995 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 8, 1994
Sales
Sales decreased $11.5 million, or 0.8%, from $1,416.2 million in the 28
weeks ended January 8, 1994, to $1,404.7 million in the 28 weeks ended January
7, 1995, primarily as a result of a 4.5% decline in comparable store sales,
partially offset by sales from new and acquired stores opened since January 8,
1994. Management believes that the decline in comparable store sales is
attributable to the weak economy in Southern California and, to a lesser extent,
in Food 4 Less' other operating areas, and competitive store openings and
remodels in Southern California.
Gross Profit
Gross profit decreased as a percentage of sales from 18.5% in the 28 weeks
ended January 8, 1994, to 16.9% in the 28 weeks ended January 7, 1995. The
decrease in gross profit margin resulted primarily from pricing and promotional
activities related to Food 4 Less' "Total Value Pricing" program and an increase
in the number of warehouse format stores (which have lower gross margins
resulting from prices that are generally 5-12% below the prices in Food 4 Less'
conventional stores) from 48 at January 8, 1994, to 87 at January 7, 1995. The
decrease in the gross profit margin was partially offset by improvements in
product procurement.
Selling, General, Administrative and Other, Net
Selling, general, administrative and other expenses, net ("SG&A") were
$221.5 million and $199.2 million for the 28 weeks ended January 8, 1994 and
January 7, 1995, respectively. SG&A decreased as a percentage of sales from
15.6% to 14.2% for the same period. Food 4 Less experienced a reduction of
workers' compensation and general liability self-insurance costs of $9.7 million
due to continued improvement in the cost and frequency of claims. The improved
experience was due primarily to cost control programs implemented by Food 4
Less, including awards for stores with the best loss experience, specific
achievable
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<PAGE> 59
goals for each store, and increased monitoring of third-party administrators. In
addition, Food 4 Less maintained tight control of administrative expenses and
store level expenses, including advertising, payroll (due primarily to increased
productivity), advertising and other controllable store expenses. Because Food 4
Less' warehouse stores have lower SG&A than conventional stores, the increase in
the number of warehouse stores, from 48 at January 8, 1994, to 87 at January 7,
1995, also contributed to decreased SG&A.
Food 4 Less participates in multi-employer health and welfare plans for its
store employees who are members of the UFCW. As part of the renewal of the
Southern California UFCW contract in October 1993, employers contributing to
UFCW health and welfare plans are to receive a pro rata share of the excess
reserves in the plans through a reduction of current employer contributions.
Food 4 Less' share of the excess reserves was $24.2 million, of which Holdings
recognized $8.1 million in Fiscal 1994 and $13.7 million in the 28 weeks ended
January 7, 1995. The remainder of the excess reserves will be recognized as the
credits are taken in the future.
On August 28, 1994, the Teamsters and Food 4 Less ratified a new contract
which, among other things, provided for the vesting of sick pay benefits
resulting in a one-time charge of $2.1 million.
Restructuring Charge
Food 4 Less has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 28 weeks ended January 7, 1995, Food 4 Less
recorded a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
Interest Expense
Interest expense (including amortization of deferred financing costs) was
$41.5 million and $43.2 million for the 28 weeks ended January 8, 1994 and
January 7, 1995, respectively. The increase in interest expense was due
primarily to higher interest rates on the term loan portion (the "Term Loan") of
Food 4 Less' credit agreement dated as of June 17, 1991, as amended, (the "F4L
Credit Agreement"), and on the revolving credit portion of the F4L Credit
Agreement (the "Revolving Credit Facility"), combined with increased
indebtedness under the Discount Notes and the Revolving Credit Facility. The
increase was partially offset by the reduction of indebtedness under the Term
Loan as a result of amortization payments. Food 4 Less increased its borrowing
under the F4L Credit Agreement as a result of higher capital expenditures
subsequent to the end of its first quarter.
Net Loss
Primarily as a result of the factors discussed above, Holdings' net loss
increased from $5.7 million in the 28 weeks ended January 8, 1994, to $14.3
million in the 28 weeks ended January 7, 1995.
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 25,
1994 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26, 1993.
Sales
Sales decreased $156.8 million or 5.7% from $2,742.0 million in Fiscal 1993
to $2,585.2 million in Fiscal 1994. The decrease in sales resulted primarily
from a 6.9% decline in comparable store sales. The decline in comparable store
sales primarily reflects (i) the continuing softness of the economy in Southern
California, (ii) lower levels of price inflation in certain key food product
categories, and (iii) competitive factors, including new stores, remodeling and
recent pricing and promotional activity. This decrease in sales was partially
offset by sales from 13 stores opened or acquired during Fiscal 1994.
Gross Profit
Gross profit increased as a percent of sales from 17.7% in Fiscal 1993 to
18.1% in Fiscal 1994. The increase in gross profit margin was attributable to
improvements in product procurement and an increase in
55
<PAGE> 60
vendors' participation in Food 4 Less' promotional costs. These improvements
were partially offset by an increase in the number of warehouse format stores
(which have lower gross margins resulting from prices that are generally 5-12%
below the prices in Food 4 Less' conventional stores) from 45 at June 26, 1993
to 66 at June 25, 1994, and the effect of the fixed cost component of gross
profit as compared to a lower sales base.
Selling, General, Administrative and Other, Net
SG&A was $434.9 million and $388.8 million in Fiscal 1993 and Fiscal 1994,
respectively. SG&A decreased as a percent of sales from 15.9% to 15.0% for the
same periods. Food 4 Less experienced a reduction of self-insurance costs of
$18.2 million due to continued improvement in the cost and frequency of claims.
The improved experience was due primarily to cost control programs implemented
by Food 4 Less, including awards for stores with the best loss experience,
specific achievable goals for each store, and increased monitoring of
third-party administrators, and, to a lesser extent, a lower sales base which
reduced Food 4 Less' exposure. In addition, Food 4 Less maintained tight control
of administrative expenses and store level expenses, including payroll (due
primarily to increased productivity), advertising, and other controllable store
expenses. Because Food 4 Less' warehouse stores have lower SG&A than
conventional stores, the increase in the number of warehouse stores, from 45 at
June 26, 1993 to 66 at June 25, 1994, also contributed to decreased SG&A as a
percentage of sales. The reduction in SG&A as a percentage of sales was
partially offset by the effect of the fixed cost component of SG&A as compared
to a lower sales base.
Food 4 Less participates in multi-employer health and welfare plans for its
store employees who are members of the UFCW. As part of the renewal of the
Southern California UFCW contract in October 1993, employers contributing to
UFCW health and welfare plans are to receive a pro rata share of the excess
reserves in the plans through a reduction of current employer contributions.
Food 4 Less' share of the excess reserves was $24.2 million, of which Holdings
recognized $8.1 million in Fiscal 1994 and the remainder of which will be
recognized as the credits are taken in the future. Offsetting the reduction in
employer contributions was a $5.5 million contract ratification bonus and
contractual wage increases.
Interest Expense
Interest expense (including amortization of deferred financing costs)
increased $3.4 million from $73.6 million to $77.0 million for Fiscal 1993 and
Fiscal 1994, respectively. The increase in interest expense is due to additional
indebtedness related to the Discount Notes, partially offset by reduced
borrowings under the F4L Credit Agreement.
Provision for Earthquake Losses
On January 17, 1994, Southern California was struck by a major earthquake
which resulted in the temporary closing of 31 of Food 4 Less' stores. The
closures were caused primarily by loss of electricity, water, inventory, or
structural damage. All but one of the closed stores reopened within a week of
the earthquake. The final closed store reopened on March 24, 1994. Food 4 Less
is insured against earthquake losses (including business interruption), subject
to certain deductibles. The pre-tax financial impact, net of expected insurance
recovery, was approximately $4.5 million.
Net Loss
Primarily as a result of the factors discussed above, Holdings' net loss
decreased from $31.2 million in Fiscal 1993 to $11.5 million in Fiscal 1994.
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26,
1993 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 27, 1992.
Sales
Sales decreased $171.5 million or 5.9% from $2,913.5 million in Fiscal 1992
to $2,742.0 million in Fiscal 1993, primarily as a result of a 5.1% decline in
comparable store sales and a net reduction in Food 4 Less' total
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<PAGE> 61
store count of one store at June 26, 1993 compared to June 27, 1992. Management
believes that the decline in comparable store sales was attributable to (i) the
weak economy in Southern California, and, to a lesser extent, in Food 4 Less'
other operating areas, (ii) lower levels of price inflation in certain key food
categories, and (iii) increased competitive store openings in Southern
California.
Gross Profit
Gross profit decreased as a percent of sales from 17.9% in Fiscal 1992 to
17.7% in Fiscal 1993 primarily as a result of an increase in the number of Food
4 Less warehouse stores (which have lower gross margins resulting from prices
that are generally 5-12% below the prices in Food 4 Less' conventional stores),
from 34 stores in Fiscal 1992 to 45 stores in Fiscal 1993, and as a result of
the fixed cost component of gross profit being compared to a lower sales base,
partially offset by increases in relative margins allowed by competitive
conditions, improvements in the procurement function, and cost savings and
operating efficiencies associated with Food 4 Less' warehousing and
manufacturing facilities.
Selling, General, Administrative and Other, Net
SG&A was $469.7 million and $434.9 million in Fiscal 1992 and Fiscal 1993,
respectively. SG&A decreased as a percent of sales from 16.1% to 15.9% for the
same periods as a result of tight control of direct store expenses, primarily
payroll costs, the impact in Fiscal 1992 of the $12.8 million non-cash
self-insurance reserve adjustment partially offset by market-wide contractual
increases in union wages, current year increases in workers' compensation costs
primarily associated with the new law which took effect in 1990, and the fixed
cost component of SG&A being compared to a lower sales base.
Interest Expense
Interest expense (including amortization of deferred financing costs)
increased $3.4 million from $70.2 million to $73.6 million for the 52 weeks
ended June 27, 1992 and June 26, 1993, respectively. The increase to interest
expense is due to additional indebtedness related to the Discount Notes,
partially offset by lower interest expense due to the reduction of indebtedness
as a result of amortization payments combined with decreasing interest rates on
the Term Loan.
Loss Before Extraordinary Charge
Primarily as a result of the factors discussed above, Holdings' loss before
extraordinary charge increased from $29.0 million in Fiscal 1992 to $31.2
million in Fiscal 1993. Holdings recorded a net extraordinary charge of $4.8
million in Fiscal 1992, reflecting the write-off of certain deferred financing
costs which were partially offset by a gain on the replacement of partially
depreciated assets following the civil unrest in Los Angeles.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the consummation of the Reincorporation Merger, New Holdings will
have neither any business operations nor any material assets of its own. In
addition, Holdings does not conduct any business operations of its own and has
no income or assets other than its investment in Food 4 Less' common and
preferred stock. No cash interest is payable on any Discount Notes that remain
outstanding following the Merger until June 15, 1998 and on the Seller
Debentures and the New Discount Debentures until the fifth anniversary of their
issue date. New Holdings intends to service the cash interest payments on the
Seller Debentures, on the New Discount Debentures and on any Discount Notes that
remain outstanding following the consummation of the Merger through dividends it
receives from the Company following the Merger. Such dividends and other
payments will be restricted under the terms of the debt agreements of the
Company. See "Risk Factors -- Holding Company Structure."
In order to consummate the Merger, Holdings and Food 4 Less expect to
utilize total new financing proceeds in the amount of approximately $1.5
billion. Pursuant to the New Equity Investment, New Holdings (as the successor
to Holdings) will issue capital stock for total cash proceeds of approximately
$140 million (excluding a $5 million commitment fee of which $2.5 million will
be paid in cash and $2.5 million will be
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<PAGE> 62
satisfied through the issuance of New Discount Debentures). In addition, Food 4
Less will enter into the New Credit Facility pursuant to which it will have
available up to $750 million of New Term Loans, all of which is anticipated to
be drawn at the Closing Date (assuming all Old RGC Notes are tendered into the
RGC Offers), and will have available a $325 million New Revolving Facility, of
which $16.4 million is anticipated to be drawn at the Closing Date. Food 4 Less
will also issue up to $295 million principal amount of New F4L Senior Notes
pursuant to the Senior Note Public Offering and will issue up to $200 million
principal amount of New RGC Notes pursuant to the Subordinated Note Public
Offering. The proceeds from the New Credit Facility and the Public Offerings,
together with the $140 million cash proceeds of the New Equity Investment, $59
million cash proceeds of the New Discount Debenture Placement, $41 million in
initial accreted value of additional New Discount Debentures issued other than
for cash and $131.5 million principal amount of the Seller Debentures, will
provide the sources of financing required to consummate the Merger and to repay
existing bank debt of approximately $161.5 million at Food 4 Less and $255.1
million at Ralphs, to repay existing mortgage debt of $174.1 million (excluding
prepayment fees) at Ralphs and to pay $83.9 million in consideration for the
Discount Notes (excluding related fees). Proceeds from the New Credit Facility
and the Public Offerings will also be used to pay the cash portions of the RGC
Offers and the F4L Exchange Offers, as well as the Change of Control Offer, if
any, and accrued interest on all exchanged debt securities in the amount of
$29.3 million (as of May 30, 1995), to pay $17.8 million to the holders of
Ralphs Equity Appreciation Rights and to loan $5 million to an affiliate for the
benefit of such holders, to pay up to $109.9 million of fees and expenses of the
Merger and the Financing and to pay $3.7 million to purchase shares of New
Holdings Common Stock. The Company will also assume certain existing
indebtedness of Food 4 Less and Ralphs. Pursuant to the RGC Offers, Food 4 Less
will seek the exchange of at least a majority of the Old RGC Notes for New RGC
Notes and pursuant to the F4L Exchange Offers, Food 4 Less will seek the
exchange of at least 80% of the Old F4L Notes for New F4L Notes. The primary
purpose of the F4L Exchange Offers and the RGC Offers is to refinance Food 4
Less' and RGC's existing public debt securities with longer term public debt
securities, to obtain all necessary consents to consummate the Merger and to
eliminate substantially all of the restrictive covenants contained in the Old
F4L Indentures and the Old RGC Indentures.
After the Merger the Company's principal sources of liquidity are expected
to be cash flow from operations, amounts available under the New Revolving
Facility and capital and operating leases. It is anticipated that the Company's
principal uses of liquidity will be to provide working capital, finance capital
expenditures, including the costs associated with the integration of Food 4 Less
and Ralphs, and to meet debt service requirements.
The New Revolving Facility will be a $325 million line of credit which will
be available for working capital requirements and general corporate purposes. Up
to $150 million of the New Revolving Facility may be used to support standby
letters of credit. The letters of credit will be used to cover workers'
compensation contingencies and for other purposes permitted under the New Credit
Facility. The Company anticipates that letters of credit for approximately $92.6
million will be drawn under the New Revolving Facility at closing, in
replacement of existing letters of credit, primarily to satisfy the State of
California's requirements relating to workers compensation self-insurance. The
New Revolving Facility will be non-amortizing and will have a six-year term. The
Company will be required to reduce loans outstanding under the New Revolving
Facility to $75 million for a period of not less than 30 consecutive days during
each consecutive 12-month period. Assuming that the Merger closes on May 30,
1995, giving effect to currently anticipated borrowings and letter of credit
issuances, the Company's remaining borrowing availability under the New
Revolving Facility would have been approximately $216.0 million. Pursuant to the
New Credit Facility, the New Term Loans will be issued in four tranches: (i)
Tranche A, in the amount of $375 million, will have a six-year term; (ii)
Tranche B, in the amount of $125 million, will have a seven-year term; (iii)
Tranche C, in the amount of $125 million, will have an eight-year term; and,
(iv) Tranche D, in the amount of $125 million, will have a nine-year term. The
Tranche A Loan may not be fully funded at the Closing Date. The New Credit
Facility will provide that the portion of the Tranche A Loan not funded at the
Closing Date will be available for a period of 91 days following the Closing
Date to fund the Change of Control Offer. The New Term Loans will require
quarterly amortization payments aggregating $3.8 million in the first year,
$48.8 million in the second year and increasing thereafter. The New Credit
Facility will be guaranteed by New Holdings and each of the
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<PAGE> 63
Company's subsidiaries and secured by liens on substantially all of the
unencumbered assets of the Company and its subsidiaries and by a pledge of New
Holdings' stock in the Company. The New Credit Facility will contain financial
covenants which are expected to require, among other things, the maintenance of
specified levels of cash flow and stockholder's equity. See "Description of the
New Credit Facility."
Standard & Poor's has publicly announced that, upon consummation of the
Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating
assignment, if implemented, would constitute a Rating Decline under the Old RGC
Indentures. The consummation of the Merger (which is conditioned on, among other
things, successful consummation of the Other Debt Financing Transactions, the
New Equity Investment and the Bank Financing) and the resulting change in
composition of the Board of Directors of RGC, together with the anticipated
Rating Decline, would constitute a Change of Control Triggering Event under the
Old RGC Indentures. Although Food 4 Less does not anticipate that there will be
a significant amount of Old RGC Notes outstanding following consummation of the
RGC Offers, upon such a Change of Control Triggering Event the Company would be
obligated to make the Change of Control Offer following the consummation of the
Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof
plus accrued and unpaid interest to the date of repurchase. The portion of the
Tranche A Loan not fully funded at the Closing Date will be available to fund
the purchase of Old RGC Notes tendered pursuant to the Change of Control Offer.
Management anticipates that significant capital expenditures will be
required following the Merger in connection with the integration of Ralphs and
Food 4 Less. In order to implement the Company's store format strategy, up to
122 conventional stores currently operated by Food 4 Less will be converted to
the Ralphs format and 16 conventional stores (primarily Boys and Viva) have been
or will be converted and 23 Ralphs stores will be converted to the Food 4 Less
warehouse format. An additional 18 Ralphs and Food 4 Less warehouse stores are
scheduled to be opened during calendar 1995. It is estimated that the gross
capital expenditures to be made by the Company in the first fiscal year
following the closing will be approximately $153 million (or $106 million net of
expected capital leases), of which approximately $98 million relate to ongoing
expenditures for new stores, equipment and maintenance and approximately $55
million relate to store conversions and other Merger-related and non-recurring
items. An additional $33 million of Merger-related and non-recurring capital
expenditure items (or $22 million net of expected capital leases) are
anticipated to be incurred in the second year following the consummation of the
Merger. Management expects that these expenditures will be financed primarily
through cash flow from operations and capital leases.
Ralphs cash flow from operating activities was $55.4 million for the 52
weeks ended January 29, 1995 and $104.0 million for Fiscal 1993. Holdings
generated approximately $87.8 million of cash from operating activities during
the 52-week period ended June 25, 1994 and used approximately $18.0 million of
cash for its operating activities during the 28 weeks ended January 7, 1995 (as
compared to generating $30.5 million of cash during the 28 weeks ended January
8, 1994). The decrease in cash from operating activities is due primarily to
changes in operating assets and liabilities. Holdings anticipates that one of
the principal uses of cash in its operating activities will be inventory
purchases. However, supermarket operators typically require small amounts of
working capital since inventory is generally sold prior to the time that
payments to suppliers are due. This reduces the need for short-term borrowings
and allows cash from operations to be used for non-current purposes such as
financing capital expenditures and other investing activities. Consistent with
this pattern, Ralphs and Holdings had working capital deficits of $119.5 million
and $44.8 million at January 29, 1995 and January 7, 1995, respectively.
Ralphs cash used in investing activities was $45.5 million during Fiscal
1993 and $50.8 million during the 52 weeks ended January 29, 1995. These amounts
reflected 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. For the 52 weeks ended June 25,
1994, Holdings' cash used in investing activities was $55.8 million. Investing
activities consisted primarily of capital expenditures by Food 4 Less of $57.5
million, partially offset by $9.3 million of sale/leaseback transactions, and
$11.1 million of costs in connection with the acquisition of ten former "Food
Barn" stores. For the 28 weeks ended January 7, 1995, Holdings' cash used in
investing activities was $32.8 million. Investing activities consisted primarily
of capital expenditures by Food 4 Less of
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$39.0 million, partially offset by $6.5 million of sale/leaseback transactions.
The capital expenditures, net of the proceeds from sale/leaseback transactions,
were financed primarily with cash provided by financing activities. The capital
expenditures included the costs associated with the conversion of 11
conventional format stores to the Food 4 Less warehouse format. See
"Business -- The Merger -- Two Leading Complementary Formats." In January 1995,
Food 4 Less entered into an amendment to the F4L Credit Agreement to, among
other things, allow for the accelerating of the capital expenditures and other
costs associated with the conversion of stores to the warehouse format.
Ralphs cash used in financing activities was approximately $24.6 million
for the 52 weeks ended January 29, 1995. Reduction of capital lease obligations
of $12.2 million and the payment of a $10.0 million dividend reduced cash flow.
Food 4 Less' cash provided by financing activities was $33.6 million for the 28
weeks ended January 7, 1995, which consisted primarily of $48.7 million of
borrowings outstanding on its revolving credit facility at January 7, 1995
partially offset by a $11.3 million repayment of its term loan. At January 7,
1995, $48.6 million of standby letters of credit had been issued under Food 4
Less' existing letter of credit facility.
Ralphs and FFL have significant net operating loss carryforwards for
regular federal income tax purposes. As a result of the Merger and the New
Equity Investment, New Holdings' ability to utilize such loss carryforwards in
future periods will be limited to approximately $15.6 million per year with
respect to FFL net operating loss carryforwards and approximately $15.0 million
per year with respect to Ralphs' net operating loss carryforwards. Holdings does
not expect the Merger to materially adversely affect any other tax assets of the
Company or New Holdings. New Holdings will be a party to a tax sharing agreement
with the Company and its subsidiaries. Pursuant to the tax sharing agreement,
the Company will make payments to New Holdings in the amount it would be
required to pay if its consolidated liability was calculated on a separate
company basis. Conversely, if the Company generates losses or credits which
reduce the consolidated tax liability of New Holdings, New Holdings will credit
to the Company the amount of such reduction in the consolidated tax liability.
See "Certain Relationships and Related Transactions." The Company will continue
to be a party to an indemnification agreement with Federated and certain other
parties. See Note 1 of Notes to Consolidated Financial Statements of Ralphs
Supermarkets, Inc. Pursuant to the terms of such agreement, Ralphs will make
annual tax payments of $1.0 million in 1995 and 1996 and a final tax payment of
$5.0 million in 1997.
Following the Merger, the Company will be a wholly-owned subsidiary of New
Holdings. In addition, following the Merger, New Holdings will have $100 million
initial accreted value of the New Discount Debentures and $131.5 million
principal amount of the Seller Debentures outstanding. New Holdings is a holding
company which will have no assets other than the capital stock of the Company.
New Holdings will be required to commence semi-annual cash payments of interest
on (i) the New Discount Debentures and the Seller Debentures commencing five
years from their date of issuance in the amount of $61.0 million per annum and
(ii) any Discount Notes that remain outstanding following the Merger commencing
June 15, 1998. Subject to the limitations contained in its debt instruments, the
Company intends to make dividend payments to New Holdings in amounts which are
sufficient to permit New Holdings to service its cash interest requirements. The
Company may pay other dividends to New Holdings in connection with certain
employee stock repurchases and for routine administrative expenses. See "Risk
Factors -- Holding Company Structure."
Following the consummation of the Merger and the Financing, New Holdings
will be highly leveraged. Based upon current levels of operations and
anticipated cost savings and future growth, Holdings believes that its cash flow
from operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), will be adequate
to meet its anticipated requirements for working capital, capital expenditures,
integration costs and interest 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 costs savings and growth can be achieved. See
"Risk Factors -- Leverage and Debt Service."
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Interest Rate Protection Agreements
Ralphs and Food 4 Less currently are parties to certain interest rate
protection agreements required under the terms of their existing bank
indebtedness. In connection with the New Credit Facility, these interest rate
protection agreements will be replaced by a new agreement which will be
finalized prior to the closing of the Merger. The Company will be exposed to
credit loss in the event of nonperformance by the counterparty to the interest
rate protection agreement. However, the Company does not anticipate
nonperformance by such counterparty.
The following details the impact of Ralphs' hedging activity on its
weighted average interest rate for each of the last three fiscal years of
Ralphs:
<TABLE>
<CAPTION>
WITH WITHOUT
HEDGE HEDGE
-------- --------
<S> <C> <C>
1992............................................ 10.52% 10.22%
1993............................................ 8.96% 8.96%
1994............................................ 9.37% 9.18%
</TABLE>
Due to increasing interest rates under its existing credit facility,
Ralphs' interest expense has increased during recent periods and may continue to
increase, reducing Ralphs' net income during such periods.
The following details the impact of Food 4 Less' hedging activity on its
weighted average interest rate for each of the last three fiscal years of Food 4
Less:
<TABLE>
<CAPTION>
WITH WITHOUT
HEDGE HEDGE
-------- --------
<S> <C> <C>
1992............................................ 10.28% 10.25%
1993............................................ 10.07% 10.03%
1994............................................ 10.10% 10.09%
</TABLE>
Effects of Inflation
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including inflation, availability and
price of merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, Ralphs and Food 4 Less
have generally been able to maintain margins by adjusting their retail prices,
but competitive conditions may from time to time render the Company unable to do
so while maintaining its market share.
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BUSINESS
THE MERGER
The combination of Ralphs Grocery Company and Food 4 Less Supermarkets,
Inc. will create the largest food retailer in Southern California. Pro forma for
the Merger, the Company will operate approximately 332 Southern California
stores with an estimated 26% market share among the area's supermarkets. The
Company will operate 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. In addition, the Company will operate
approximately 24 conventional format stores and 39 warehouse format stores in
Northern California and the Midwest. On a pro forma basis giving effect to the
Merger, Holdings would have had sales of approximately $5.1 billion and $2.8
billion, operating income of approximately $183 million and $90 million and
EBITDA (as defined) of approximately $343 million and $189 million, for the 52
weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively.
TWO LEADING COMPLEMENTARY FORMATS
In Southern California the Company plans to convert up to 122 conventional
stores currently operated by Food 4 Less to the "Ralphs" name and format and 39
Ralphs and Food 4 Less conventional stores to the "Food 4 Less" name and
warehouse format. As a result, and pro forma for the Merger, Ralphs will be the
region's second largest conventional format supermarket chain, with 264 stores
and Food 4 Less will be the region's largest warehouse format supermarket chain
with 68 stores. The Ralphs stores will continue to emphasize a broad selection
of merchandise, high quality fresh produce, meat and seafood and service
departments, including bakery and delicatessen departments in most stores. The
Company's conventional stores will also benefit from Ralphs' strong private
label program and its strengths in merchandising, store operations and systems.
Passing on format-related efficiencies, the Company's price impact warehouse
format stores will continue to offer consumers the lowest overall prices while
still providing product selections comparable to conventional supermarkets.
Management believes the Food 4 Less warehouse format has demonstrated its appeal
to a wide range of demographic groups in Southern California and offers a
significant opportunity for future growth. The Company plans to open nine new
Food 4 Less warehouse stores and 21 new Ralphs stores over the next two years.
Management believes the consolidation of its formats will improve the
Company's ability to adapt its stores' merchandising strategy to the local
markets in which they operate while achieving cost savings and other
efficiencies. These conversions will be effected in three phases which the
Company believes will be completed within the first 18 months of combined
operation.
Phase 1. Food 4 Less has converted 11 of its conventional format stores
operated under the names "Viva" and "Boys" into Food 4 Less warehouse format
supermarkets. Such conversions took up to eight weeks to complete and generally
required the store to be closed for up to two weeks. These Phase 1 conversions,
which were planned independently, were completed prior to the end of Food 4
Less' second quarter at a cost of approximately $1 million per store.
Phase 2. Following the Merger, the Company plans to begin converting up to
122 conventional format stores currently operated by Food 4 Less under the names
"Viva," "Alpha Beta" and "Boys" into Ralphs conventional format stores. It is
anticipated that these conversions will be completed at the rate of
approximately 10 stores per week. Management expects that the Company will be
able to substantially complete each conversion without closing the store.
Management believes that these Phase 2 conversions will be completed within the
first 12-16 weeks of the Company's combined operation at a cost of approximately
$75,000 per store.
Phase 3. Following the Merger, the Company also plans to convert 23
conventional Ralphs format stores and five Food 4 Less conventional format
stores into Food 4 Less warehouse format stores. Management expects that each
such conversion will take up to eight weeks and may require the store to be
closed for up to two to eight weeks during such period. Management believes that
these Phase 3 conversions will be completed within the first 18 months of the
Company's combined operation at a cost of approximately $1 million per store.
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The following table summarizes the store formats to be operated by the
Company in Southern California both before and after giving effect to the
conversion program:
<TABLE>
<CAPTION>
PRO FORMA NUMBER OF
ACTUAL STORES(1)
---------- -------------------------
OCTOBER 1, PRIOR TO FOLLOWING
STORE FORMATS 1994 CONVERSION CONVERSION
------------- ---------- ---------- ----------
<S> <C> <C> <C>
Ralphs Conventional............................... 168 165 264
Food 4 Less Warehouse............................. 30 29 68
Alpha Beta Conventional........................... 129 105 0
Viva Conventional................................. 15 13 0
Boys Conventional................................. 24 20 0
--- --- ---
Total........................................... 366 332 332
</TABLE>
- ---------------
(1) Pro forma store numbers give effect to the anticipated Merger-related
divestiture or closing of 32 stores open at October 1, 1994 and the closure
of two additional Food 4 Less conventional stores.
Ralphs Conventional Format. Following completion of the store conversions
described above, and pro forma for the Merger, the Company will operate 264
Ralphs stores in Southern California. Management believes these conversions will
enhance Ralphs' market position and competitive advantages. Converted stores
will benefit from Ralphs strengths in merchandising, store operations, systems
and technology. Although all Ralphs stores use the Ralphs name and are operated
under a single format, each store is merchandised to appeal to the local
community it serves. Ralphs' substantial supermarket product selection is a
significant aspect of its marketing efforts: Ralphs stocks between 20,000 and
30,000 merchandise items in its stores, including approximately 2,800 private
label products, representing 17.3% of sales (excluding meat, service
delicatessen and produce items) during Fiscal 1993. Ralphs stores offer
name-brand grocery products; quality and freshness in its produce, meat,
seafood, delicatessen and bakery products; and broad selection in all
departments. Most existing Ralphs stores offer service delicatessen departments,
on-premises bakery facilities and seafood departments. Ralphs emphasizes store
ambiance and cleanliness, fast and friendly service, the convenience of debit
and credit card payment (including in-store branch banks) and 24-hour operations
in most stores.
Food 4 Less' 168 conventional supermarkets, currently operated under the
names "Alpha Beta," "Boys" and "Viva," are located throughout densely populated
areas of Los Angeles and surrounding counties, including both suburban and urban
neighborhoods. Food 4 Less' merchandising strategy for conventional stores has
been tailored to the community each store services, but has emphasized customer
service, quality of merchandise, and a large variety of product offerings in
modern store environments. Of Food 4 Less' 168 conventional supermarkets, up to
122 are intended to be converted to the "Ralphs" name and format, 16 will be
converted to the "Food 4 Less" warehouse format and the remainder are expected
to be closed or sold.
Food 4 Less Warehouse Format. Following completion of the store conversions
described above, and pro forma for the Merger, the Company will operate 68 Food
4 Less warehouse stores in Southern California. The conversions will
substantially accelerate the growth of the Food 4 Less format and will enhance
the Company's position as the largest operator of warehouse supermarkets in
Southern California. In addition to the conversions, the Company plans to
continue its rapid growth of the Food 4 Less format by opening nine new
warehouse format stores over the next two years, including five stores in San
Diego, a new market for Food 4 Less. Management believes the expansion of
warehouse format stores will create efficiencies in warehousing, distribution,
and administrative functions.
Food 4 Less' warehouse format stores target the price-conscious segment of
the market, encompassing a wide range of demographic groups in both urban and
suburban areas. Food 4 Less attempts to offer the lowest overall prices in its
marketing areas by passing savings on to the consumer while providing the
product selection associated with a conventional format. Savings are achieved
through labor efficiencies and lower overhead and advertising costs associated
with the warehouse format. In-store operations are designed to allow customers
to perform certain labor-intensive services usually offered in conventional
supermarkets. For example, merchandise is presented on warehouse style racks in
full cartons, reducing labor intensive
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unpacking, and customers bag their own groceries. Labor costs are also reduced
since the stores generally do not have service departments such as
delicatessens, bakeries and fresh seafood departments, although they do offer a
complete line of fresh meat, fish, produce and baked goods. Additionally, labor
rates are generally lower than in conventional supermarkets.
The Food 4 Less format generally consists of large facilities constructed
with high ceilings to accommodate warehouse racking with overhead pallet
storage. Wide aisles accommodate forklifts and, compared to conventional
supermarkets, a higher percentage of total store space is devoted to retail
selling because the top of the warehouse-style grocery racks on sales floors are
used to store inventory. This reduces the need for large backroom storage. The
Food 4 Less warehouse format supermarkets have brightly painted walls and
inexpensive signage in lieu of more expensive graphics. In addition, a "Wall of
Values" located at the entrance of each store presents the customer with a
selection of specially priced merchandise.
SUBSTANTIAL COST SAVINGS OPPORTUNITIES
Management believes that approximately $90 million of net annual cost
savings (as compared to such costs for the pro forma combined fiscal year ended
June 25, 1994) will be achieved by the end of the fourth full year of combined
operations. It is also anticipated that approximately $117 million in
Merger-related capital expenditures and $50 million of other non-recurring costs
will be required to complete store conversions, integrate operations and expand
warehouse facilities over the same period. Although a portion of the anticipated
cost savings is premised upon the completion of such capital expenditures,
management believes that over 70% of the cost savings could be achieved without
making any Merger-related capital expenditures. The following anticipated
savings are based on estimates and assumptions made by the Company that are
inherently uncertain, though considered reasonable by the Company, and are
subject to significant business, economic and competitive uncertainties and
contingencies, all of which are difficult to predict and many of which are
beyond the control of management. There can be no assurance that such savings
will be achieved. The sum of the components of the estimated cost savings
exceeds $90 million; however, management's estimate of $90 million in net annual
cost savings gives effect to an offsetting adjustment to reflect its expectation
that a portion of the savings will be reinvested in the Company's operations.
See "Risk Factors -- Ability to Achieve Anticipated Cost Savings."
Reduced Advertising Expenses. As a result of the consolidation of
conventional format stores in Southern California under the "Ralphs" name, the
Company will eliminate most of the separate advertising associated with Food 4
Less' existing Alpha Beta, Boys and Viva formats. Because Ralphs' current
advertising program now covers the Southern California region, the Company will
be able to expand the number of Ralphs stores without significantly increasing
advertising costs. Management estimates that there will be annual advertising
cost savings of approximately $28 million as compared to such costs for the pro
forma combined fiscal year ended June 25, 1994. Because of reductions in certain
advertising and promotional expenses on its conventional format stores that Food
4 Less has already begun to implement and certain refinements in the post-Merger
advertising plan, actual cost savings related to advertising expenses are
presently expected to be $19 million in the first full year of combined
operations following the Merger as compared to the current annualized costs.
Reduced Store Operations Expense. Management expects to reduce store
operations costs as a result of both reduced labor and benefit costs and reduced
non-labor expenses. Projected labor and benefit cost savings are based primarily
on Ralphs' labor scheduling system, which has reduced Ralphs' labor costs
relative to those of Food 4 Less. Other labor savings will result from the
reduction of certain high-cost labor as a result of changed manufacturing,
warehouse and distribution practices, and productivity enhancements resulting
from the installation of Ralphs store level systems.
Non-labor expense reductions are based primarily on the installation of
Ralphs' computerized energy management equipment in Food 4 Less stores which
will require significant capital expenditures. The expense savings associated
with the use of this equipment is based on Ralphs' historical experience. Other
significant non-labor expense reductions are projected to come from improved
safety programs, increased cardboard baling revenues, changes to guard and
shoplift agent programs and a reduction in supply and packaging costs.
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Total labor and non-labor operational savings estimated at approximately $21
million annually are anticipated to be achieved by the fourth full year of
combined operation.
Increased Volume Purchasing Efficiencies. Management has identified
approximately $19 million of cost savings it believes can be achieved as a
result of purchasing efficiencies. These efficiencies consist primarily of (i)
savings from increased discounts and allowances as a result of the combined
volume of the two companies; (ii) an improvement in the terms of vendor
contracts for products carried in the Company's stores on an exclusive or
promoted basis; and (iii) savings from the conversion of some
less-than-truckload shipping quantities to full truckload quantities. These
savings are anticipated to be achieved by the second full year of combined
operation.
Warehousing and Distribution Efficiencies. The consolidation of the
Company's warehousing and distribution facilities into Ralphs' two primary
facilities located in Compton, California and the Atwater district of Los
Angeles and Food 4 Less' primary facility located in La Habra, California will
result in lower outside storage, transportation and labor costs. The Company
plans facility additions at one Ralphs facility to accommodate the additional
volume as a result of such consolidation. Management anticipates improvements in
the areas of automation, inventory management and handling, delivering,
scheduling and route optimization and worker safety. In addition, the Company
plans to close three existing facilities, which will result in lower occupancy
expenses. Management believes that annual savings of approximately $16 million
associated with warehousing and distribution will be achieved, before giving
effect to capital expenditures in connection with facilities expansions and
facility closing costs. Such savings are expected to be achieved by the third
full year of combined operations.
Consolidated Manufacturing. Ralphs and Food 4 Less operate manufacturing
facilities that produce similar products or have excess capacity. Through the
consolidation of meat, bakery, dairy and other manufacturing and processing
operations, and the discontinuance of external purchases of certain goods that
can be manufactured internally, management believes that annual cost savings of
approximately $10 million can be achieved. In each instance, management has
identified the facilities best suited to the needs of the combined company and
has estimated the expense savings associated with each consolidation. The
combined company will utilize a 316,000 square foot bakery and a 25,722 square
foot milk processing plant, located at Food 4 Less' La Habra facility, and a
28,000 square foot milk processing plant, a 9,000 square foot ice cream
processing plant, and a 23,000 square foot delicatessen kitchen located at
Ralphs' Compton facility. Previously, Ralphs purchased bakery products
externally and Food 4 Less purchased ice cream and delicatessen items
externally. Management also plans to utilize Ralphs' third party meat
processors, which have historically provided Ralphs with a full line of
prefabricated and retail cuts of beef, to produce meat for Food 4 Less stores.
Management anticipates that manufacturing expense savings will be achieved by
the second full year of combined operation.
Consolidated Administrative Functions. The Company expects to achieve
savings from the elimination of redundant administrative staff, the
consolidation of management information systems and a decreased reliance on
certain outside services and consultants. To reduce headcount, the Company plans
to target several functions for consolidation, including accounting, marketing,
management information systems, administration and human resources. The Company
plans to eliminate a data processing center, which is anticipated to result in
savings in the areas of equipment, software, headcount and outside programmer
fees. The Company also plans to eliminate the use of third party administrators
to handle workers compensation and general liability claims. Management
estimates that annual savings of approximately $15 million associated with
consolidating administrative functions will be achieved by the second full year
of combined operation.
EXPERIENCED MANAGEMENT TEAM
The executive officers of the Company have extensive experience in the
supermarket industry. The strength of Ralphs management expertise is evidenced
by Ralphs' reputation for quality and service, its technologically advanced
systems, strong store operations and high historical EBITDA margins. The Food 4
Less management team will provide valuable experience in operating warehouse
supermarkets and in effectively integrating companies into a combined operation.
Following the acquisition of Alpha Beta in 1991,
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<PAGE> 70
Food 4 Less management successfully integrated Alpha Beta with its existing
Southern California operations and (within three years) achieved annual cost
savings in excess of $40 million (compared to a pre-acquisition estimate of
approximately $33 million). See "Management."
WAREHOUSING AND DISTRIBUTION
The combined Company will utilize Ralphs' technologically advanced
warehousing and distribution systems, which include a 17 million cubic foot
high-rise automated storage and retrieval system warehouse (the "ASRS") for
non-perishable items and a 5.4 million cubic foot perishable service center (the
"PSC") designed for processing, storing and distributing all perishable items.
These facilities and the Food 4 Less La Habra warehouse will provide the Company
with substantial operating benefits, including: (i) enhanced turnover to further
improve the freshness and quality of in-store products, (ii) additional
opportunities in forward buying programs and (iii) an increase in the percentage
of inventory supplied by the Company's own warehousing and distribution system.
Management believes the consolidation of these operations will enable the
Company to meet the combined inventory requirements of all stores with fewer
employees and lower operating and occupancy-related expenses.
In November 1987, Ralphs opened the 17 million cubic foot highrise ASRS
warehouse for non-perishable items in the Atwater district of Los Angeles, at a
cost of approximately $50 million. This facility significantly increased
capacity and improved the efficiency of Ralphs' warehouse operations. The
automated warehouse has a ground floor area of 170,000 square feet and capacity
of approximately 50,000 pallets. Guided by computer software, ten-story high
cranes move pallets from the receiving dock to programmed locations in the ASRS
warehouse while recording the location and time of storage. Goods are retrieved
and delivered by the cranes to conveyors leading to an adjacent "picking"
warehouse where individual store orders are filled and shipped. The Company
plans to utilize existing unused capacity to accommodate additional volume
resulting from the consolidation. The ASRS facility can hold substantially more
inventory and requires fewer employees to operate than 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." The Company plans to close two
existing Ralphs warehouse facilities in Los Angeles and Carson, California and
one Food 4 Less facility in Los Angeles, California.
In mid-1992, Ralphs opened the 5.4 million cubic foot PSC facility in
Compton, California, designed to process and store all perishable products. This
facility cost approximately $35 million and has provided Ralphs with the ability
to deliver perishable products to its stores on a daily basis, thereby improving
the freshness and quality of these products. The facility contains an energy
efficient refrigeration system and a computer system designed to document the
location and anticipated delivery time of all inventory. The PSC 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 also plans to expand the PSC facility to
accommodate additional volume resulting from the consolidation.
Most Ralphs stores and Food 4 Less Southern California stores are located
within approximately a one-hour drive from Ralphs' distribution and warehousing
facilities. This geographical concentration, combined with Ralphs' efficient
order system, shortens the lead time between the placement of a merchandise
order and its receipt.
Food 4 Less currently operates a centralized manufacturing, warehouse and
office facility in La Habra, California which it leases from Alpha Beta's former
parent corporation. The La Habra facility measures 1,378,083 total square feet
over 75 acres and, in addition to serving warehousing, distribution and office
functions, houses manufacturing operations which include a bakery and creamery.
The La Habra facility is operated pursuant to a long-term lease which expires in
2001. The La Habra facility is expected to be used as an additional distribution
and warehouse facility.
Food 4 Less is party to a joint venture with a subsidiary of Certified
Grocers of California, Ltd. which operates a general merchandise warehouse in
Fresno, California. Management is evaluating the role of such warehouse in the
operation of the combined Company.
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<PAGE> 71
MANUFACTURING
Ralphs' manufacturing operations produce a variety of dairy and other
products, including fluid milk, ice cream, yogurt and bottled waters and juices
as well as packaged ice, cheese and salad preparations. Ralphs contracts with
meat processors to provide a full line of prefabricated and retail cuts of beef.
Ralphs ceased its bakery operations during the second quarter of Fiscal 1993 at
its 102,000 square foot facility in Los Angeles. Food 4 Less' La Habra facility
includes a full-line bakery as well as a creamery and certain other
manufacturing operations.
The following table sets forth information concerning the principal
manufacturing and processing facilities expected to be owned and operated by the
Company:
<TABLE>
<CAPTION>
FACILITY SQUARE FEET LOCATION
-------- ----------- ----------
<S> <C> <C>
Milk processing................................ 28,000 Compton
Ice cream processing........................... 9,000 Compton
Delicatessen kitchen........................... 23,000 Compton
Bakery......................................... 316,000 La Habra
Milk processing................................ 25,722 La Habra
</TABLE>
Management believes that Ralphs' manufacturing facilities and the La Habra
bakery can accommodate the volume requirements of the Company, after planned
expenditures of approximately $3.0 million over the next year.
PRIVATE LABEL PROGRAM
Through its private label program, Ralphs offers approximately 2,800 items
under the "Ralphs," "Private Selection," "Perfect Choice" and "Plain Wrap" brand
names. These products provide quality comparable to that of national brands at
prices 20-30% lower. Gross margins on private label goods are generally higher
than on national brands. Management believes its private label program is one of
the most successful programs in the supermarket industry, representing 17.3% of
sales (excluding meats, service delicatessen and produce items) during the
twelve months ended July 17, 1994. This figure has grown in the past few years,
and management intends to continue the growth of its private label program in
the future.
Food 4 Less has entered into several private label licensing arrangements
which allow it to exclusively utilize recognized brand names in connection with
certain goods it manufactures or purchases from others, including "Carnation"
and "Sunnyside Farms" (dairy products) and "Van de Kamps" (baked goods). In
addition, Food 4 Less has entered into an agreement to distribute private label
dry grocery and frozen products under the "Sunny Select" and "Grocers Pride"
labels and has established its own private label, "Equality," for health and
beauty aid products. Food 4 Less actively promoted its private label products
during fiscal 1994, and management believes that the additional variety,
superior quality and promotional program resulted in an overall increase in
private label sales and corresponding gross margins. It is expected that the
Company will continue the Carnation, Van de Kamps and certain of its other
licensing agreements following the Merger.
EXPANSION AND DEVELOPMENT
As a result of Ralphs' 122-year history and Alpha Beta's 91-year history in
Southern California, the Company will have valuable and well established store
locations, many of which are in densely populated metropolitan areas.
Additionally, the Company will have a technologically advanced store base.
During the five years ended June 25, 1994, on a combined basis, Ralphs and Food
4 Less opened 74 new stores and remodeled 211 stores. Approximately 84% of the
Company's stores have been opened or remodeled in the last five years.
The Company plans to expand the Southern California Division by acquiring
existing stores and constructing new ones. The Company intends to continue to
focus its new store construction and store conversion efforts during calendar
1995 and future years primarily within existing marketing areas. Such efforts
will encompass both of the Company's store formats, namely Food 4 Less and
Ralphs. To this end, the
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<PAGE> 72
Company plans to continue its store expansion program in Southern California by
opening 17 new stores during calendar 1995 (including three Food 4 Less stores
which will be located in San Diego, a new market for Food 4 Less), and
additional stores in subsequent years. During the second quarter of its current
fiscal year, Food 4 Less converted 11 of its conventional format stores to
warehouse format stores and, following the Merger, the Company plans to convert
approximately five additional conventional stores currently managed by Food 4
Less and approximately 23 stores currently managed by RGC to the "Food 4 Less"
name and warehouse format, as Food 4 Less stores have proven to have a strong
appeal to value-conscious consumers across a wide range of demographic groups.
See "-- The Merger -- Two Leading Complementary Formats." Remodeling activity in
Southern California will be focused on the conventional format stores, including
13 planned major remodels of such stores during calendar 1995. The Company's
expansion, remodel and conversion efforts have required, and will continue to
require, the funding of significant capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
During the last five fiscal years, Ralphs has opened 46 new stores and
remodeled 54 stores at a cost of approximately $277.2 million. A majority of
these new and remodeled stores offer expanded produce and European-style seafood
departments, service delicatessens, fresh bakeries and a broad selection of
general merchandise. With enhanced decor reflecting contemporary interior
design, these stores are designed to provide a quality shopping experience. At
the end of Fiscal 1994, 100 of Ralphs' 173 total stores were newly built or
remodeled within the past five fiscal years. While Ralphs has sold or closed 15
stores during the last five fiscal years, the number of Ralphs' stores has
increased from 142 stores at January 28, 1990 to 173 stores at January 29, 1995.
During the last five fiscal years, in Southern California Food 4 Less has
acquired or opened 172 stores (which includes 142 stores acquired in connection
with the acquisition of Alpha Beta) and remodeled 113 stores. Since its
acquisition of Alpha Beta in 1991, Food 4 Less has undertaken an extensive
program of store remodels, conversions and additions, which have resulted in a
substantially improved store base. During Fiscal 1994, Food 4 Less spent
approximately $50.7 million on capital improvements in Southern California.
Additionally, since the Alpha Beta acquisition, Food 4 Less has converted 22
Southern California stores from conventional formats to the warehouse format. As
Food 4 Less has remodeled existing stores, opened new larger stores and closed
smaller, marginally performing stores, there has been a net reduction in store
count, from 209 stores to 196 stores from the year ended June 29, 1991 ("Fiscal
1991") to the end of Fiscal 1994, but an increase in average store size. The
average square feet per store has increased from 28,700 at the end of Fiscal
1991 to 30,500 at the end of Fiscal 1994. During the last five fiscal years, 29
stores have been closed or sold (including five stores which closed as a result
of the April 1992 civil unrest in Los Angeles).
The Company will select most new store sites from developers' proposals
after such proposals have been researched and analyzed by the Company's
personnel. Each site will be monitored for population shifts, zoning changes,
traffic patterns, and nearby new construction and competitors' stores in an
effort to determine sales potential. The Company will actively participate with
developers in order to attain the Company's objectives for the site, including
adequate parking and complementary co-tenant mix. Remodeling involves enhancing
a store's decor through fixture replacement, upgrading of service departments
and improvements to lighting systems. In order to minimize the disruptive effect
on sales, most stores will be kept open during the remodeling period. The
primary objectives of remodeling will be to improve the attractiveness of
stores, increase sales of higher margin product categories and to increase
selling area where feasible.
Remodelings and openings, among other things, are subject to the
availability of developers' financing, agreements with developers and landlords,
local zoning regulations, construction schedules and other factors, including
costs, often beyond the Company's control. Accordingly, there can be no
assurance that the schedule will be met. Further, the Company expects increasing
competition for new store sites, and it is possible that this competition might
adversely affect the timing of its new store opening program.
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<PAGE> 73
ADVERTISING AND PROMOTION
Ralphs' marketing strategy is to provide a combination of wide product
selection, quality and freshness of perishable products, competitive prices and
double coupons supporting Ralphs' advertising theme "Everything You Need. Every
Time You Shop." In February 1994, Ralphs launched the Ralphs Savings Plan, a new
marketing campaign 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 second
quarter of 1994, Ralphs began more aggressively promoting perishables through
weekly ad features and lower prices. In addition, Ralphs increased the number of
storewide GLPs. Further, a mailer program was intensified to highlight the
perishable pricing and increased GLPs.
Ralphs stores promote sales through the use of product coupons, consisting
of manufacturers' coupons and Ralphs' own promotional coupons. Ralphs offers a
double coupon program in all stores with Ralphs matching the price reduction
offered by the manufacturer. Ralphs also generates store traffic through weekly
advertised specials, special sales promotions such as discounts on recreational
activities, seasonal and holiday promotions, increased private label selection,
club pack items and exclusive product offerings. Current advertising by Ralphs
has substantially the same market coverage as Food 4 Less and it is expected
that following the Merger duplicative advertising can be eliminated.
The Food 4 Less warehouse stores utilize print and radio advertising which
emphasizes Food 4 Less' low-price leadership, rather than promoting special
prices on individual items. The Food 4 Less warehouse stores also utilize weekly
advertising circulars, customized to local communities, which highlight the
merchandise offered in each store.
INFORMATION SYSTEMS AND TECHNOLOGY
Ralphs' management utilizes technology and industrial engineering methods
to enhance operating efficiency. Every checkout lane in every Ralphs store has a
point of sale terminal. Information from these terminals is utilized to allocate
shelf space, select merchandise based on the buying patterns of each store,
reduce out-of-stocks and increase efficiency at the checkstand and in the
warehouses. Industrial engineering methods are used to schedule labor thereby
improving productivity at the store level and in warehousing and distribution
operations.
Ralphs was the first supermarket chain in the western United States to
adopt scanning in all of its stores and has upgraded this equipment through the
purchase of IBM 4680 point-of-sale computers. All Ralphs stores use laser
scanning equipment, operating through an integrated computer system, to scan the
Universal Product Code, which provides prices and descriptions for most
products.
Ralphs has a Uniform Communications Standard purchase order system that
electronically links Ralphs to major suppliers via computer. This system has
enabled the automated processing of purchase orders which management believes
reduces the lead time required for product purchases. In Fiscal 1994, Ralphs
completed installation of an industry standard, direct store delivery receiving
system for goods delivered directly by vendors. This system allows the receipt
of each order to be recorded electronically, thereby confirming product retail
price and purchase authorization. This system has reduced the incidence of
billing errors and unauthorized deliveries.
Industrial engineering standards have been established for all major work
functions in Ralphs stores, ranging from stocking to checkout. Performance of
each major department in each store is measured weekly against these standards.
Similar measurements are made in Ralphs' distribution, warehouse and
manufacturing operations. Ralphs believes that its application of qualitative
methods to the operation of the business has
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<PAGE> 74
given it a competitive advantage and has better enabled management to run its
business efficiently and to control costs.
The Company plans to convert the Food 4 Less management information systems
to the Ralphs management information systems. Ralphs stores that will be
converted to the Food 4 Less format will continue to use the Ralphs programs.
NORTHERN CALIFORNIA AND MIDWESTERN DIVISIONS
The Northern California Division of Food 4 Less operates 19 conventional
supermarkets in the greater San Francisco Bay Area under the names "Cala" and
"Bell," and six warehouse format stores under the "Foods Co." name. Management
believes that the Northern California Division has excellent store locations in
the city of San Francisco that are very difficult to replicate. The Midwestern
Division of Food 4 Less operates 38 stores, of which 33, including ten former
"Food Barn" stores which Food 4 Less acquired in March 1994, are warehouse
format stores operated under the "Food 4 Less" name, and five of which are
conventional supermarkets operated under the "Falley's" name. Of these 38
stores, 34 are located in Kansas and four are located in Missouri. Management
believes the Food 4 Less warehouse format stores are the low-price leaders in
each of the markets in which they compete. The Northern California Division's
conventional store strategy is to attract customers through its convenient
locations, broad product line and emphasis on quality and service and its
advertising and promotion strategy highlights the reduced price specials offered
in its stores. In contrast, the Company's warehouse format stores, operated
under the Food 4 Less name in the Midwestern Division and the Foods Co. name in
the Northern California Division, emphasize lowest overall prices rather than
promoting special prices on individual items. The Northern California Division's
conventional stores range in size from approximately 8,900 square feet to 32,800
square feet, and average approximately 19,400 square feet. The Northern
California Division's warehouse stores range in size from approximately 30,000
square feet to 59,600 square feet, and average approximately 37,900 square feet.
The Midwestern Division's warehouse format stores range in size from
approximately 8,800 square feet to 60,200 square feet and average approximately
37,300 square feet.
The Northern California Division purchases merchandise from a number of
suppliers; however, approximately 40% of its purchases are made through
Certified Grocers of California, Ltd. ("Certified"), a food distribution
cooperative, pursuant to supply contracts. The Northern California Division
does not operate its own warehouse facilities, relying instead on direct
delivery to its stores by Certified and other vendors. Food 4 Less' Southern
California warehouse facilities supply a portion of the merchandise sold in the
Northern California Division stores, and it is expected that, following
completion of the Merger, the Company's Southern California warehouses will
continue to do so.
The Midwestern Division's primary supplier is Associated Wholesale Grocers
("AWG"), a member-owned wholesale grocery cooperative based in Kansas City. The
Midwestern Division does not operate a central warehouse, but purchases
approximately 73% of the merchandise sold in its stores from AWG. Management
believes that, as AWG's largest single customer, the Midwestern Division has
significant buying power, allowing it to provide a broader product line more
economically than it could if it maintained its own full-line warehouse. The
Midwestern Division produces approximately 50% of all case-ready fresh meat
items sold in its stores at its central meat plant located in Topeka, Kansas.
In fiscal 1990, the Northern California Division initiated a remodeling
program to upgrade its stores and to increase profitability. Food 4 Less
remodeled 15 stores during the past five fiscal years, and opened five new
stores during the past four fiscal years. During fiscal 1994, Food 4 Less opened
one new warehouse store, converted three existing stores to the warehouse format
and remodeled one conventional format store. The Company has closed 4 stores
during the past five fiscal years and increased its number of stores from 22 at
the end of the fiscal year ended June 30, 1990 to 24 at the end of the fiscal
year ended June 25, 1994. The average square feet per store has increased from
20,000 at the end of fiscal 1990 to 23,300 at the end of fiscal 1994. The
Company plans to open one additional warehouse format store and remodel two
conventional format stores during fiscal 1995. Management plans to further
expand the Northern California Division in the future by acquiring existing
stores and constructing new stores, including warehouse stores. The Northern
California
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Division Food 4 Less warehouse stores were renamed "Foods Co." in fiscal 1994
following the sale by Food 4 Less of exclusive rights to use the "Food 4 Less"
name in Northern California to Fleming Companies, Inc. See "-- Licensing
Operations."
The Company intends to focus its Midwestern Division expansion primarily on
its Food 4 Less operations. While Food 4 Less expects to construct new stores,
it may also expand operations by purchasing existing Food 4 Less stores from
unaffiliated licensees, or by acquiring existing supermarkets and converting
them to the Food 4 Less warehouse format. The acquisition in March 1994 of ten
warehouse stores formerly operated as "Food Barn" stores increased the
Midwestern Division's Food 4 Less warehouse store count from 23 at June 26, 1993
to 33 at June 25, 1994. During the last five fiscal years, the Midwestern
Division has opened 3 new stores, acquired 13 stores, closed one store and
remodeled 10 stores.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors in each of its operating divisions
include national and regional supermarket chains, independent and specialty
grocers, drug and convenience stores, and the newer "alternative format" food
stores, including warehouse club stores, deep discount drug stores and "super
centers." Supermarket chains generally compete on the basis of location, quality
of products, service, price, product variety and store condition. The Company
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate in light of existing conditions. Some
of the Company's competitors have greater financial resources than the Company
and could use these resources to take steps which could adversely affect the
Company's competitive position.
The Southern California stores compete with several large national and
regional chains, principally Albertsons, Hughes, Lucky, Smith's, Stater Bros.,
and Vons, and with smaller independent supermarkets and grocery stores as well
as warehouse clubs and other "alternative format" food stores. The Northern
California Division competes with large national and regional chains,
principally Lucky and Safeway, and with independent supermarket and grocery
store operators and other retailers, including "alternative format" stores. The
Midwestern Division's supermarkets compete with several national and regional
supermarket chains, principally Albertsons and Dillons, as well as independent
and "alternative format" stores such as Hypermarket USA. Food 4 Less positions
its Food 4 Less warehouse format supermarkets as the overall low-price leader in
each marketing area in which they operate. In addition, management believes that
Ralphs is a leading competitor in many of its marketing areas, based on its
strong customer franchise, desirable store locations, technology and efficient
distribution systems.
EMPLOYEES
RALPHS
At January 29, 1995, Ralphs had 6,213 full-time and 8,940 part-time
employees as follows:
<TABLE>
<CAPTION>
EMPLOYEE TYPE UNION NON-UNION TOTAL
--------------------------------------------- ------ --------- ------
<S> <C> <C> <C>
Hourly....................................... 13,854 245 14,099
Salaried..................................... -- 1,054 1,054
------ ----- ------
Total employees.................... 13,854 1,299 15,153
</TABLE>
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Of Ralphs' 15,153 total employees at January 29, 1995, 13,854 were covered
by union contracts principally with the UFCW. The table below sets forth
information regarding Ralphs' union contracts which cover more than 100
employees.
<TABLE>
<CAPTION>
UNION NUMBER OF EMPLOYEES COVERED DATE OF EXPIRATION
- ---------------------------------- -------------------------------- -------------------
<S> <C> <C>
UFCW 10,723 clerks and meatcutters October 6, 1996
International Brotherhood of 1,675 drivers and warehousemen September 13, 1998
Teamsters
Hotel Employees and Restaurant
Employees 977 September 10, 1995
Hospital and Service Employees 328 Los Angeles January 19, 1997
67 San Diego April 20, 1997
</TABLE>
FOOD 4 LESS
At June 25, 1994, Food 4 Less had a total of 5,728 full-time and 8,959
part-time employees as follows:
<TABLE>
<CAPTION>
EMPLOYEE TYPE UNION NON-UNION TOTAL
----------------------------------------------- ------ --------- ------
<S> <C> <C> <C>
Hourly......................................... 11,882 1,907 13,789
Salaried....................................... -- 898 898
------ ----- ------
Total employees...................... 11,882 2,805 14,687
</TABLE>
Of Food 4 Less' 14,687 total employees at June 25, 1994, 11,882 were
covered by union contracts, principally with UFCW. The table below sets forth
information regarding Food 4 Less' union contracts which cover more than 100
employees.
<TABLE>
<CAPTION>
NUMBER OF DATE OF
UNION EMPLOYEES COVERED EXPIRATION
- ---------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
UFCW.......................................... 7,908 Southern California October 6, 1996
clerks and meatcutters
Hospital and Service Employees................ 299 Southern California January 19, 1997
store porters
International Brotherhood of Teamsters........ 886 Southern California September 13, 1998
produce drivers
and warehousemen
UFCW.......................................... 971 Northern California February 28, 1995(a)
clerks and meatcutters
UFCW.......................................... 1,532 Southern California February 25, 1996
clerks and meatcutters
Bakery and Confectionery Workers.............. 192 Southern California July 8, 1995
bakers
</TABLE>
- ---------------
(a) Certain of such employees are covered by a contract expiring on June 2,
1996. The contract which expired on February 28, 1995 and an additional
contract which expired on March 4, 1995 have been provisionally extended for
a five-month period and currently are being renegotiated.
Pursuant to their collective bargaining agreements, both Ralphs and Food 4
Less contribute to various union-sponsored, multi-employer pension plans.
The terms of most collective bargaining agreements that cover employees of
conventional stores operated by Food 4 Less are substantially identical to the
terms of the corresponding collective bargaining agreements of Ralphs. The terms
of each company's collective bargaining agreements generally will remain in
effect following the Merger, although it is expected that, as a result of
current negotiations, Ralphs' collective bargaining agreements will apply to all
Company stores converted to the Ralphs name and format, and the collective
bargaining agreements that cover employees of Food 4 Less warehouse format
stores will apply to all Company stores converted to the Food 4 Less name and
warehouse format.
Management believes that both Ralphs and Food 4 Less have good relations
with their employees.
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LICENSING OPERATIONS
Food 4 Less owns the "Food 4 Less" trademark and service mark and licenses
the "Food 4 Less" name for use by others. In Fiscal 1994, earnings from
licensing operations were approximately $270,000. An exclusive license with the
right to sublicense the "Food 4 Less" name in all areas of the United States
except Arkansas, Iowa, Illinois, Minnesota, Nebraska, North Dakota, South
Dakota, Wisconsin, the upper peninsula of Michigan, certain portions of Kansas,
Missouri, and Tennessee has been granted to Fleming Companies, Inc. ("Fleming"),
a major food wholesaler and retailer. In August of 1993, Food 4 Less amended
(the "Amendment") its licensing agreement with Fleming to give Fleming exclusive
use of the Food 4 Less name in Northern California and Food 4 Less exclusive use
in Southern California. Fleming paid Food 4 Less a fee of $1.9 million for the
Amendment. With the exception of Northern California, and subject to the
Amendment and certain proximity restrictions, Food 4 Less retains the right to
open and operate its own "Food 4 Less" warehouse supermarkets throughout the
United States. As of June 25, 1994, there were 158 Food 4 Less warehouse
supermarkets in 20 states, including the 61 stores owned or leased and operated
by Food 4 Less. Of the remaining 97 stores, Fleming operates three under
license, 67 are operated under sublicenses from Fleming and 27 are operated by
other licensees.
PROPERTIES
At October 1, 1994, Ralphs and Food 4 Less operated a total of 429 stores,
as set forth in the table below:
<TABLE>
<CAPTION>
NUMBER OF
SUPERMARKETS
-------------- TOTAL SELLING
OWNED LEASED SQUARE FEET SQUARE FEET
----- ------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Southern California..................... 49 317(a) 12,929 9,174
Northern California..................... -- 25 610 424
Midwestern.............................. 2(b) 36 1,357 1,025
-- --- ------ ------
Total......................... 51 378(c) 14,896 10,623
== === ====== ======
</TABLE>
- ---------------
(a) Includes 17 stores located on real property subject to a ground lease.
(b) Includes one store that is partially owned and partially leased.
(c) The average remaining term (including renewal options) of Ralphs' and Food 4
Less' supermarket leases is 27 years.
The number of Ralphs and Food 4 Less stores by size classification as of October
1, 1994 is as follows:
<TABLE>
<CAPTION>
AVERAGE GROSS SQUARE FEET AVERAGE SELLING SQUARE FEET NUMBER OF STORES
TOTAL SQUARE --------------------------- --------------------------- -----------------------------------
FEET RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS TOTAL
- ---------------- ----------- ----------- ----------- ----------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
8,800 - 15,599 -- 13,175 -- 9,478 -- 8 8
15,600 - 25,000 21,867 21,740 16,709 14,880 3 92 95
25,001 - 30,000 27,926 26,966 19,725 18,633 15 37 52
30,001 - 35,000 32,993 32,574 24,204 23,247 31 51 82
35,001 - 40,000 37,254 36,804 27,053 26,272 32 27 59
40,001 - 45,000 43,264 42,329 31,422 30,038 59 12 71
45,001 - 50,000 46,356 48,037 33,185 34,572 15 11 26
50,001 - 84,280 68,400 55,056 48,466 37,814 13 23 36
</TABLE>
At October 1, 1994, the Company also operated 20 distribution, warehouse
and administrative facilities and five manufacturing and processing facilities,
14 of which are owned and 11 of which are leased. Certain of the facilities are
expected to be sold, closed or subleased following completion of the Merger. See
"-- Warehousing and Distribution."
Ralphs' distribution and warehouse facilities include the 17 million cubic
foot ASRS warehouse for nonperishable items that Ralphs opened in November 1987
and the 5.4 million cubic foot PSC facility for the processing and storage of
perishable products opened in mid-1992. Food 4 Less operates two warehouse
facilities: The largest of such facilities is Food 4 Less' central office,
manufacturing and warehouse complex in La Habra, California, which occupies
approximately 1.4 million total square feet over 75 acres. Food 4 Less has
entered into a lease of the La Habra property which expires in 2001 (and which
may be extended for up to 15 years at the election of Food 4 Less), with
American Food and Drug, Inc. ("AFDI"), a subsidiary of
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American Stores Company, and has an option to purchase such property. Rent on
the La Habra property was $6.3 million in Fiscal 1994. Four of Food 4 Less'
supermarkets are also leased from AFDI. In addition to the La Habra facility,
Food 4 Less leases a 321,000 square foot warehouse in Los Angeles. This
warehouse, which was formerly owned by Food 4 Less, was the subject of a sale
leaseback arrangement entered into by Food 4 Less in August 1990. For
information regarding the Company's plan to consolidate its warehouse facilities
following completion of the Merger, see "-- The Merger -- Substantial Cost
Savings Opportunities -- Warehousing and Distribution Efficiencies."
LEGAL PROCEEDINGS
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against RGC and Food 4 Less and other
major supermarket chains located in Southern California, alleging that they
conspired to refrain from competing in the retail market for fluid milk and to
fix the retail price of fluid milk above competitive prices. Specifically, class
actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C.
Pfeifle on December 7, December 14, and December 23, 1992, respectively. The
Court has yet to certify any of these classes. A demurrer to the complaints was
denied. Notwithstanding that it believes there is no merit to these cases, RGC
had reached an agreement in principle to settle them. However, no settlement
agreement has been signed. Food 4 Less is continuing to actively defend these
suits and Ralphs has elected to defer any further settlement discussions until
after the consummation of the Merger. The Company does not believe that the
resolution of these cases will have a material adverse effect on its future
financial condition. Any settlement would be subject to court approval.
On March 25, 1991, George A. Koteen Associates, Inc. ("Koteen Associates")
commenced an action in San Diego Superior Court alleging that RGC breached an
alleged utility rate consulting agreement. In December 1992, a jury returned a
verdict of approximately $4.9 million in favor of Koteen Associates and in March
1993, attorney's fees and certain other costs were awarded to the plaintiff. RGC
has appealed the judgment and fully reserved in Fiscal 1992 against an adverse
ruling by the appellate courts.
In April 1994, RGC 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 RGC 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 RGC 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 RGC is vigorously defending this suit.
Management believes, based on 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.
In addition, Food 4 Less and Ralphs are defendants in a number of other
cases currently in litigation or potential claims encountered in the normal
course of business which are being vigorously defended. In the opinion of
management, the resolutions of these matters will not have a material effect on
Food 4 Less' or Ralphs' financial position or results of operations.
CALIFORNIA SETTLEMENT AGREEMENT
On December 14, 1994, Food 4 Less and Ralphs entered into a Settlement
Agreement (the "Settlement Agreement") with the State of California to settle
potential antitrust and unfair competition claims the State of California
asserted against Ralphs and Food 4 Less relating to the effects of the Merger on
supermarket competition in Southern California (the "State Claims"). Without
admitting any liability in connection with the State Claims, Food 4 Less and
Ralphs agreed in the Settlement Agreement to divest 27 specific stores in
Southern California. Under the Settlement Agreement, the Company must divest 14
stores by June 30, 1995, and the balance of 13 stores by December 31, 1995. The
Company also agreed not to acquire new stores from
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<PAGE> 79
third parties in the six Southern California areas specified in the Settlement
Agreement for five years following the date of the Settlement Agreement. If the
Company fails to divest the required stores by the two dates set forth in the
Settlement Agreement, the Company has agreed not to object to the appointment of
a trustee to effect the required sales. The Settlement Agreement also requires
the Company to pay the reasonable fees and costs of the attorneys and experts of
the State of California associated with its review.
GOVERNMENT REGULATION
Ralphs and Food 4 Less are subject to regulation by a variety of
governmental agencies, including, but not limited to, the California Department
of Alcoholic Beverage Control, the California Department of Agriculture, the
U.S. Food and Drug Administration, the U.S. Department of Agriculture and state
and local health departments. In addition, the Merger is subject to the review
of the Federal Trade Commission and the requirements and waiting period imposed
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The
waiting period under the HSR Act has expired and on February 2, 1995, the
Federal Trade Commission advised Food 4 Less and Ralphs that it had closed its
investigation of the Merger.
ENVIRONMENTAL MATTERS
In January 1991, the California Regional Water Quality Control Board for
the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a
subsurface characterization of Ralphs' Atwater property. This request was part
of an ongoing effort by the Regional Board, in connection with the U.S.
Environmental Protection Agency (the "EPA"), to identify contributors to
groundwater contamination in the San Fernando Valley. Significant parts of the
San Fernando Valley, including the area where Ralphs' Atwater property is
located, have been designated federal Superfund sites requiring response actions
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, because of regional groundwater contamination. On June 18,
1991, the EPA made its own request for information concerning the Atwater
property. Since that time, the Regional Board has requested further
investigations by Ralphs. Ralphs has conducted the requested investigations and
has reported the results to the Regional Board. Approximately 25 companies have
entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate
and design a remediation system for contaminated groundwater beneath an area
which includes the Atwater property. Ralphs is not a party to that Consent
Order, but is cooperating with requests of the subject companies to allow
installation of monitoring or recovery wells on Ralphs' property. On or about
May 2, 1995 the EPA mailed a General Notice Letter to 14 parties, including
Ralphs as owner and operator of the Atwater property, naming them as additional
potentially responsible parties ("PRPs"). As such, Ralphs and the other PRPs may
be requested to perform or pay for remediation or oversight costs in connection
with the Superfund site. Ralphs is evaluating the implications of this letter to
determine an appropriate response. Based upon available information, management
does not believe this matter will have a material adverse effect on the
Company's financial condition or results of operations.
Ralphs has removed underground storage tanks and remediated soil
contamination at the Atwater property. In some instances the removals and the
contamination were associated with grocery business operations; in others they
were associated with prior property users. Although the possibility of other
contamination from prior operations or adjacent properties exists at the Atwater
property, management does not believe that the costs of remediating such
contamination will be material to the Company.
Apart from the Atwater property, Ralphs and Food 4 Less have recently had
environmental assessments performed on a significant portion of Ralphs'
facilities and Food 4 Less' facilities, including warehouse and distribution
facilities. Management believes that any responsive actions required at the
examined properties as a result of such assessments will not have a material
adverse effect on its financial condition or results of operations.
Ralphs has incurred approximately $4.5 million in non-recurring capital
expenditures for conversion of refrigerants during 1994. Food 4 Less may incur
some additional capital expenditures for such conversion. Other than these
expenditures, neither Ralphs nor Food 4 Less has incurred material capital
expenditures for
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<PAGE> 80
environmental controls during the previous three years, nor does management
anticipate incurring such expenditures during the current fiscal year or the
succeeding fiscal year.
At the time that Food 4 Less acquired Alpha Beta in 1991, it learned that
certain underground storage tanks located on the site of the La Habra facility
may have released hydrocarbons. In connection with the acquisition of Alpha Beta
the seller (who is also the lessor of the La Habra facility) agreed to retain
responsibility, subject to certain limitations, for remediation of the release.
Ralphs and Food 4 Less are subject to a variety of environmental laws,
rules, regulations and investigative or enforcement activities, as are other
companies in the same or similar business. The Company believes it is in
substantial compliance with such laws, rules and regulations. These laws, rules,
regulations and agency activities change from time to time, and such changes may
affect the ongoing business and operations of the Company.
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<PAGE> 81
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the persons
who are expected to serve as the executive officers and directors of the Company
and New Holdings, as successor to Holdings, following the consummation of the
Merger, the FFL Merger and the Reincorporation Merger.
<TABLE>
<CAPTION>
YEARS OF SUPERMARKET
INDUSTRY SERVICE
----------------------------
NAME AGE POSITION MANAGERIAL POSITIONS TOTAL
- ------------------------- --- ----------------------------------- -------------------- -----
<S> <C> <C> <C> <C>
Ronald W. Burkle 42 Director and Chairman of the Board 19 24
of New Holdings and the Company
Byron E. Allumbaugh 63 Director and Chief Executive 36 36
Officer of New Holdings and the
Company
George G. Golleher 47 Director and Vice Chairman of New 21 21
Holdings and the Company
Alfred A. Marasca 53 Director of the Company and 30 38
President and Chief Operating
Officer of New Holdings and the
Company
Joe S. Burkle 71 Director and Executive Vice 44 48
President of New Holdings and the
Company
Greg Mays 48 Executive Vice President of New 21 21
Holdings and the Company
Terry Peets 50 Executive Vice President of New 18 18
Holdings and the Company
Jan Charles Gray 47 Senior Vice President, General 20 31
Counsel and Secretary of New
Holdings and the Company
Alan J. Reed 48 Senior Vice President and Chief 22 22
Financial Officer of New Holdings
and the Company
Patrick L. Graham 45 Director of New Holdings and the -- --
Company
Mark A. Resnik 47 Director of New Holdings and the -- --
Company
</TABLE>
Ronald W. Burkle has been a Director and the Chairman of the Board and
Chief Executive Officer of Food 4 Less since its inception in 1989. Mr. Burkle
co-founded Yucaipa in 1986 and has served as Director, Chairman of the Board,
President and Chief Executive Officer of FFL since 1987 and of Holdings since
1992. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of
Jurgensen's, a Southern California gourmet food retailer. Before joining
Jurgensen's, Mr. Burkle was a private investor in Southern California. Mr.
Burkle is the son of Joe S. Burkle.
Byron E. Allumbaugh has been Chairman of the Board and Chief Executive
Officer of Ralphs since 1976 and a Director since 1988. He also is a Director of
the H.F. Ahmanson Company, El Paso Natural Gas Company and Ultramar, Inc.
George G. Golleher has been a Director of Food 4 Less since its inception
in 1989 and has been the President and Chief Operating Officer of Food 4 Less
since January 1990. From 1986 through 1989 Mr. Golleher served as Senior Vice
President, Finance and Administration, of The Boys Markets, Inc. Prior to
joining The Boys Markets, Inc. in 1984, Mr. Golleher served as Vice President
and Chief Financial Officer of Mayfair Markets, Inc. from 1983 to 1984.
Alfred A. Marasca has been President, Chief Operating Officer and a
Director of Ralphs since February 1994 and he was President from February 1993
to February 1994, Executive Vice President, Retail from 1991 until 1993 and
Executive Vice President, Marketing from 1985 to 1991.
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<PAGE> 82
Joe S. Burkle has been a Director and Executive Vice President of Food 4
Less since its inception in 1989 and has been Chief Executive Officer of
Falley's, Inc. since 1987. Mr. Burkle began his career in the supermarket
industry in 1946, and served as President and Chief Executive Officer of Stater
Bros. Markets, a Southern California supermarket chain. Prior to 1987, Mr.
Burkle was a private investor in Southern California. Mr. Burkle is the father
of Ronald W. Burkle.
Greg Mays has been Executive Vice President -- Finance and Administration,
and Chief Financial Officer of Food 4 Less and of Holdings since December 1992.
From 1989 until 1991, Mr. Mays was Chief Financial Officer of Almac's, Inc. and,
from 1991 to December 1992, President and Chief Financial Officer of Almac's.
From April 1988 to June 1989, Mr. Mays was Chief Financial Officer of Food 4
Less of Modesto, Inc. and Cala Foods, Inc.
Terry Peets has been Executive Vice President of Ralphs since February
1994. He was Senior Vice President, Marketing from 1991 to February 1994, Senior
Vice President, Merchandising from 1990 to 1991, Group Vice President,
Merchandising from 1988 to 1990 and Group Vice President, Store Operations from
1987 to 1988.
Jan Charles Gray has been Senior Vice President, General Counsel and
Secretary of Ralphs since 1988. He was Senior Vice President and General Counsel
from 1985 to 1988 and Vice President and General Counsel from 1978 to 1985.
Alan J. Reed has been Senior Vice President and Chief Financial Officer of
Ralphs since 1988. He was Senior Vice President, Finance from 1985 to 1988 and
Vice President, Finance from 1983 to 1985.
Patrick L. Graham joined Yucaipa as a general partner in January 1993.
Prior to that time he was a Managing Director in the corporate finance
department of Libra Investments, Inc. from 1992 to 1993 and PaineWebber Inc.
from 1990 to 1992. From 1982 to 1990, he was a Managing Director of the
corporate finance department of Drexel Burnham Lambert Incorporated and an
Associate Director in the corporate finance department of Bear Stearns & Co.,
Inc.
Mark A. Resnik has been a Director and the Vice President and Secretary of
Food 4 Less since its inception in 1989, co-founded Yucaipa in 1986 and has been
a Director, Vice President and Secretary of FFL since 1987. From 1986 until
1988, Mr. Resnik served as a Director, Vice President and Secretary for
Jurgensen's. From 1983 through 1986, Mr. Resnik served as a Director, Vice
President and General Counsel of Stater Bros. Markets.
In addition to the directors named above, two members will be nominated to
the Board of Directors of each of the Company and New Holdings by Apollo, and
one member will be nominated to the Board of Directors of each of the Company
and New Holdings by the other New Equity Investors, pursuant to the terms of the
1995 Stockholders Agreement. See "Description of Capital Stock -- 1995
Stockholders Agreement."
All directors of the Company and New Holdings will hold office until the
election and qualification of their successors. Executive officers of each of
the Company and New Holdings will be chosen by its Board of Directors and will
serve at its discretion. It is anticipated that neither the Company nor New
Holdings will pay any fees or remuneration to its directors for service on the
board or any board committee, but that the Company and New Holdings will
reimburse directors for their ordinary out-of-pocket expenses incurred in
connection with attending meetings of the Board of Directors.
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<PAGE> 83
EXECUTIVE COMPENSATION
EMPLOYMENT AGREEMENTS
Concurrently with the consummation of the Merger, the Company will enter
into employment agreements with certain of the current executive officers of
Ralphs and Food 4 Less. It is expected that Byron E. Allumbaugh, George G.
Golleher, Alfred A. Marasca, as well as other executive officers of the Company,
including Messrs. Mays, Peets, Gray and Reed, will enter into three-year
employment contracts with the Company and that the existing employment
contracts, if any, of such officers will be cancelled.
New Allumbaugh Agreement. The employment agreement between the Company and
Byron Allumbaugh, 63, is expected to provide for a salary of $1 million for the
first year and $1.25 million for the second year. If Mr. Allumbaugh continues as
the Chief Executive Officer during the third year following the Merger, he would
be entitled to a salary of $2 million and if he is employed in another capacity
then he would be entitled to a salary of $1.25 million for the third year. Mr.
Allumbaugh will be entitled to a bonus equal to his salary in each year if
certain prescribed earnings targets (the "Earnings Targets") for the year are
reached. If the Company completes an initial public offering of capital stock
during the first two years of Mr. Allumbaugh's employment, Mr. Allumbaugh will
remain Chief Executive Officer for one year after the public offering. If the
public offering is anticipated to occur during the third year of Mr.
Allumbaugh's employment agreement, Mr. Allumbaugh will resign as Chief Executive
Officer six months prior to the intended date of the public offering but will
continue to be employed at the lesser compensation level provided in his
employment agreement until its termination.
New Golleher Agreement. Food 4 Less is currently a party to a five-year
employment agreement with George G. Golleher providing for annual base
compensation of $350,000, plus employee benefits and an incentive bonus
calculated in accordance with a formula based on Food 4 Less' earnings. Under
the employment agreement, Mr. Golleher may terminate his employment agreement in
the event of a change of control of Food 4 Less, in which case he is entitled to
receive all of the salary and benefits provided under the agreement for the
remaining term thereof, notwithstanding the termination of his employment. In
connection with the consummation of the Merger, the Food 4 Less board of
directors has authorized the payment of a special bonus to George Golleher in a
lump sum amount equal to the base salary due him under the remaining term of his
employment agreement. As a condition of the payment of such bonus, Mr.
Golleher's existing employment agreement will be cancelled, and he will enter
into a new agreement containing terms to be mutually agreed upon between Food 4
Less and Mr. Golleher. The new employment agreement is expected to provide for
an annual salary of $500,000 plus a bonus equal to his salary in each year if
the Earnings Targets are reached. Certain existing contractual rights of Mr.
Golleher, including the right to be elected to the Company's board of directors
and the right to require the Company to repurchase certain of his shares of New
Holdings stock upon his death, disability or termination without cause, will
continue in effect pursuant to the new employment agreement.
New Marasca Agreement. The employment agreement between the Company and
Alfred Marasca is expected to provide for a salary of $500,000 per annum and an
annual bonus equal to his salary if the Earnings Targets for the year are
reached.
General Provisions of the New Employment Agreements. The new employment
agreements are expected to provide generally that the Company may terminate the
agreement for cause or upon the failure of the employee to render services to
the Company for a continuous period to be agreed upon by the Company and the
employee because of the employee's disability. In addition, the employee's
services may be suspended upon notice by the Company and in such event the
employee will continue to be compensated by the Company during the remainder of
the term of the agreement subject to certain offsets if the employee becomes
engaged in another business.
Existing Food 4 Less Employment Agreements. Food 4 Less entered into
employment agreements with 24 officers providing for their employment for a
one-year term commencing on the date of a change of control of Food 4 Less.
These agreements provide for the payment of an incentive bonus calculated in
accordance with Food 4 Less policies, and certain of the agreements provide for
the payment of a special bonus payable upon a change of control (provided
certain financial performance targets have been met). These agreements
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<PAGE> 84
will become effective upon the consummation of the Merger. Greg Mays, who will
be an Executive Vice President of the Company, will be entitled to receive a
base salary of not less than $250,000 and a special bonus of $150,000 (provided
certain financial performance targets have been met). It is anticipated that
some, but not all, of these employment agreements will be replaced by new
employment agreements with the Company.
Joe Burkle Consulting Agreement. Food 4 Less has a consulting agreement
with Joe S. Burkle providing for compensation of $3,000 per week, pursuant to
which Mr. Burkle provides the management and consulting services of an executive
vice president. The agreement has a five-year term, which is automatically
renewed on January 1 of each year for a five-year term unless sixty days' notice
is given by either party; provided that if Food 4 Less terminates Mr. Burkle's
services for reasons other than for good cause, the payments due under the
agreement continue for the balance of the term. It is expected that the Company
will assume Mr. Burkle's consulting agreement upon the consummation of the
Merger.
EQUITY APPRECIATION RIGHTS PLAN
RGC has 1,500,000 EARs outstanding that were granted under the RGC 1988
Equity Appreciation Rights Plan, as amended (the "EAR Plan"). The outstanding
EARs are held by 36 officers and former officers of Ralphs, including Byron
Allumbaugh, Alfred Marasca, Alan Reed, Terry Peets and Jan Charles Gray. All
outstanding EARs are vested in full and not subject to forfeiture by the
holders, except in the event a holder's employment is terminated for cause
within the meaning of the EAR Plan. The outstanding EARs represent the right to
receive, in the aggregate, 15% of the increase of the appraised value of RGC's
equity at the time of exercise over a base value of $120 million. Concurrently
with the consummation of the Merger, the outstanding EARs will be redeemed for
$17.8 million in cash and a deferred payment of up to $5.0 million. An
additional $10 million of EAR payments that would otherwise be payable upon
consummation of the Merger will be cancelled in exchange for the issuance of the
Reinvestment Options (as defined). No future compensation expense will be
recorded as the cancellation of certain EAR liabilities ($10.0 million) in
consideration for the Reinvestment Options is deemed by management to reflect
fair and equal value. See "-- New Management Stock Option Plan and Management
Investment," "Description of Capital Stock -- New Equity Investment" and
"Certain Relationships and Related Transactions -- Food 4 Less and Holdings."
The price to redeem the EARs is based on a $517 million valuation (the maximum
valuation possible under the EAR Plan) of RGC's equity.
NEW MANAGEMENT STOCK OPTION PLAN AND MANAGEMENT INVESTMENT
Upon the consummation of the Merger, certain members of Ralphs' management
and Food 4 Less' management will be entitled to receive options to purchase
common stock of New Holdings (the "New Options"). The New Options will have a
term of ten years and the exercise price with respect to each New Option will be
$10 per share, which is equal to the price paid by the New Equity Investors for
the New Equity Investment. The New Options will represent 7.5% of the total
equity of New Holdings, and will be allocated as follows: New Options
representing 1.5%, 0.5% and 0.5% of the total equity of New Holdings will be
granted to Byron Allumbaugh, George Golleher and Alfred Marasca, respectively
(the "Tier One Options"). The Tier One Options will be fully vested upon
issuance and will be immediately exercisable. New Options for an additional 2.5%
of the total equity of New Holdings will be granted to certain other management
employees of the Company (the "Tier Two Options"). Fifty percent (50%) of the
Tier Two Options granted to each holder will vest immediately upon issuance and
10% will vest each year thereafter. In addition, New Options representing an
aggregate of 2.5% of the total equity of New Holdings will be issued to holders
of EARs in exchange for the cancellation of $10 million of the EAR payments
which would otherwise be payable upon consummation of the Merger (the
"Reinvestment Options"). The value of the EAR payments cancelled will be
credited against the exercise price for each Reinvestment Option. The
Reinvestment Options will be fully vested upon issuance and will be immediately
exercisable.
Certain of Ralphs' officers, including Messrs. Allumbaugh, Marasca, Reed,
Peets and Gray, currently hold options to purchase common stock of RSI. These
options will be cancelled for cash payments aggregating $880,000 in connection
with the Merger.
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<PAGE> 85
Each holder of New Options (collectively, the "Management Shareholders")
will also execute a management shareholder agreement with New Holdings
(collectively, the "Management Shareholder Agreements"). The Management
Shareholder Agreements generally will provide New Holdings with a right of first
refusal in the event of proposed sales of New Holdings stock acquired by the
Management Shareholders upon the exercise of New Options and an option,
exercisable following any termination for cause of a Management Shareholder's
employment or if the Management Shareholder commences employment with a
competitor, to repurchase at Fair Market Value (as defined in the Management
Shareholder Agreements) any New Holdings stock acquired by such Management
Shareholder upon the exercise of New Options. Each Management Shareholder
Agreement will contain certain rights of the Management Shareholders to
participate in sales by Yucaipa of New Holdings stock and certain obligations of
the Management Shareholders to sell their New Holdings stock in the case of a
sale for cash of all of the outstanding New Holdings stock. Finally, the
Management Shareholders will be required to vote their New Holdings stock to
elect to the New Holdings Board of Directors the directors nominated by Yucaipa,
Apollo and the other New Equity Investors under New Holdings' 1995 Stockholders
Agreement. See "Description of Capital Stock -- 1995 Stockholders Agreement."
The Management Shareholders Agreements, and all rights and obligations of the
Management Shareholders thereunder described above, will terminate upon an
initial public offering of New Holdings common stock meeting certain criteria.
SUMMARY COMPENSATION TABLE -- RALPHS
The following Summary Compensation Table sets forth information concerning
the compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of Ralphs who are expected to serve as executive
officers of the Company, whose total annual salary and bonus exceeded $100,000
for the year ended January 29, 1995.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL ----------------------- UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#) COMPENSATION($)(2)
- ------------------------ ---- -------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Byron E. Allumbaugh, 1994 650,000 0 N/A 25,580
Chairman and 1993 645,000 387,000 N/A 20,075
Chief Executive
Officer 1992 620,000 372,000 587,753 21,897
Alfred A. Marasca, 1994 400,000 0 N/A 10,580
President and 1993 340,000 204,000 N/A 7,187
Chief Operating
Officer 1992 296,260 148,125 308,812 8,206
Alan J. Reed, 1994 225,000 0 N/A 6,248
Senior Vice President, 1993 222,500 111,250 N/A 8,879
Finance and 1992 211,250 105,625 154,406 6,125
Chief Financial
Officer
Terry Peets, 1994 215,000 0 N/A 7,562
Executive Vice
President 1993 192,500 96,250 N/A 6,127
1992 182,500 91,250 154,406 6,027
Jan Charles Gray, 1994 213,750 0 N/A 9,047
Senior Vice President, 1993 207,500 103,750 N/A 9,084
General Counsel and 1992 196,250 98,125 154,406 6,605
Secretary
</TABLE>
- ---------------
(1) Bonuses for services performed in Fiscal Year 1994 were paid in Fiscal Year
1995. Bonus amounts for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray
were $390,000, $240,000, $112,500, $107,500 and $106,875 respectively.
(2) Represents (i) insurance premiums and the dollar value of the remainder of
premiums paid under the Senior Executive Supplemental Benefit Plan, and (ii)
Ralphs' contributions under the Ralphs Thrift Incentive Plan. The respective
amount paid for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray are as
follows: (A) Insurance premiums: $18,500, $6,600, $4,025, $5,460 and $4,500;
(B) dollar value of the remainder of premiums: $5,232, $2,701, $0, $0 and
$2,699; (C) incentive plan contributions: $1,848, $1,278, $2,223, $2,102 and
$1,848.
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<PAGE> 86
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR
VALUES -- RALPHS
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)
ACQUIRED --------------------- --------------------
ON EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#)(1) REALIZED($) UNEXERCISABLE(2) UNEXERCISABLE(3)(4)
- ------------------------------- ----------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Byron E. Allumbaugh............ 70,000 1,961,646 352,652/ 0/
375,101 3,923,290
Alfred A. Marasca.............. 13,500 378,317 108,084/ 0/
259,228 1,639,375
Alan J. Reed................... 10,500 294,247 54,042/ 0/
145,864 1,275,069
Terry Peets.................... 7,500 210,176 54,042/ 0/
132,864 910,764
Jan Charles Gray............... 0 0 54,042/ 0/
132,864 1,120,940
</TABLE>
- ---------------
(1) Represents EARs exercised under the EAR Plan.
(2) Each number represents the aggregate number of options and EARs outstanding,
as currently exercisable/unexercisable. Options and EARs were granted under
different plans, not in tandem. All EARs are free standing.
(3) Represents value of EARs, based on a value of $28.0235 per EAR at the time
of exercise. Outstanding options are not currently in-the-money, based on
current estimates of the fair market value of the Common Stock.
(4) A portion of the EARs will be redeemed in connection with the Merger and the
remaining EARs will be cancelled in exchange for the issuance of the
Reinvestment Options by New Holdings, based upon their maximum possible
valuation of $39.70 per EAR (or $517 for the total equity of RGC). For
purposes of such redemptions and cancellations, the value of outstanding
EARs held by Messrs. Allumbaugh, Marasca, Reed, Peets and Gray is expected
to equal approximately $8.0 million, $2.7 million, $2.1 million, $1.5
million and $1.7 million, respectively.
RALPHS' RETIREMENT PLANS
Retirement Plan. The Ralphs Grocery Company Retirement Plan (the
"Retirement Plan") is a defined benefit pension plan for salaried and hourly
nonunion employees with at least one year of credited service (1,000 hours).
Ralphs makes annual contributions to the Retirement Plan in such amounts as are
actuarially required to fund the benefits payable to participants in accordance
with the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Supplemental Executive Retirement Plan. To allow Ralphs' retirement program
to provide benefits based upon a participant's total compensation and without
regard to other ERISA or tax code pension plan limitations, eligible executive
employees of Ralphs participate in the Ralphs Grocery Company Supplemental
Executive Retirement Plan and, after December 31, 1993, the Ralphs Grocery
Company Retirement Supplement Plan (collectively, the "Supplemental Plan"). The
Supplemental Plan also modifies the benefit formula under the Retirement Plan in
other respects. Benefits provided under the Supplemental Plan were improved
effective April 9, 1994.
The following table sets forth the combined estimated annual benefits
payable in the form of a (single) life annuity under both the Retirement Plan
and the Supplemental Plan (unreduced by the cash surrender value of any life
insurance policies) to a participant in both plans who is retiring at a normal
retirement date of January 1, 1995 for the specified final average salaries and
years of credited service.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
------------------------------------------------------------
FINAL AVERAGE SALARY 15 20 25 30 35
- -------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 19,484 $ 25,978 $ 32,473 $ 38,967 $ 45,462
200,000 41,984 55,978 69,973 83,967 97,962
300,000 90,000 120,000 150,000 180,000 180,000
400,000 120,000 160,000 200,000 240,000 240,000
600,000 180,000 240,000 300,000 360,000 360,000
800,000 240,000 320,000 400,000 480,000 480,000
1,000,000 300,000 400,000 500,000 600,000 600,000
1,200,000 360,000 480,000 600,000 720,000 720,000
</TABLE>
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<PAGE> 87
Messrs. Allumbaugh, Marasca, Reed, Peets and Gray have completed 36, 38,
22, 18 and 31 years of credited service, respectively. Compensation covered by
the Supplemental Plan includes both salary and bonus. The calculation of
retirement benefits generally is based on average compensation for the highest
three years of the ten years preceding retirement. The benefits earned by a
participant under the Supplemental Plan are reduced by any benefits which the
participant has earned under the Retirement Plan and may be offset under certain
circumstances by the cash surrender value of life insurance policies maintained
by Ralphs pursuant to the split dollar life insurance agreements entered into by
Ralphs and the executive. Benefits are not subject to any deduction for social
security offset.
It is currently anticipated, although there can be no assurance, that
Ralphs and Food 4 Less salaried employees will participate in the Retirement
Plan and other existing Ralphs benefit plans following the Merger. These plans
are currently being evaluated to determine the feasibility of such
participation.
SUMMARY COMPENSATION TABLE -- FOOD 4 LESS
Holdings has no operations of its own and Holdings' executive officers do
not receive any additional remuneration for serving as executive officers of
Holdings. The following Summary Compensation Table sets forth information
concerning the compensation of the Chief Executive Officer and the other three
most highly compensated executive officers of Food 4 Less who are expected to
serve as executive officers of the Company, whose total annual salary and bonus
exceeded $100,000 for services rendered in all capacities to Food 4 Less and its
subsidiaries for Fiscal 1994.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(4)($)
- -------------------------------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Ronald W. Burkle, Chairman and.............. 1994 -- -- --
Chief Executive Officer(1) 1993 -- -- --
1992 -- -- --
George G. Golleher,......................... 1994 500,000 500,000 3,937
President 1993 500,000 500,000 --
1992 500,000 235,000 5,300
Greg Mays, Executive Vice-President......... 1994 250,000 150,000 --
Finance/Administration and 1993 108,000 75,000 --
Chief Financial Officer(2) 1992 -- -- --
Joe Burkle,................................. 1994 196,000 50,000 --
Executive Vice President(3) 1993 156,000 -- --
1992 156,000 -- --
</TABLE>
- ---------------
(1) Ronald W. Burkle and Mark A. Resnik, Vice President and Secretary of Food 4
Less, provide services to Food 4 Less pursuant to a management agreement
between Yucaipa and Food 4 Less. See "Certain Relationships and Related
Transactions." Pursuant to this management agreement, Food 4 Less paid
Yucaipa and an affiliate of Yucaipa $2.4 million in the fiscal year ended
June 25, 1994 for the services of Messrs. Ronald Burkle and Resnik and other
Yucaipa personnel. Such payments to Yucaipa and its affiliate are not
reflected in the table set forth above.
(2) During Fiscal 1993, Greg Mays became Executive Vice
President-Finance/Administration and Chief Financial Officer.
(3) Mr. Joe Burkle provides services to Food 4 Less pursuant to a consulting
agreement. See " -- Employment Agreements."
(4) The amounts shown in this column represent annual payments by Food 4 Less to
the Employee Profit Sharing and Retirement Program of Food 4 Less for the
benefit of Mr. Golleher.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION -- FOOD 4 LESS
Food 4 Less does not have a board committee performing the functions of a
compensation committee. Ronald W. Burkle, Chief Executive Officer of Food 4
Less, and George G. Golleher, President of Food 4 Less, made decisions with
regard to Food 4 Less' executive officer compensation for Fiscal 1994.
FOOD 4 LESS STOCK PLAN
As of June 25, 1994, certain employees of Food 4 Less (the "Management
Stockholders") collectively owned approximately 4.5% of Holdings' outstanding
common stock which they acquired under the management stock plan of Food 4 Less.
Pursuant to this plan, the Board of Directors of Holdings from time to time has
offered common stock of Holdings for sale to selected employees at a price and
for consideration (which may include a promissory note) determined at the
discretion of the Board. Management Stockholders who have purchased shares are
party to a Management Stockholders Agreement (the "Stockholders Agreement")
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<PAGE> 88
with Holdings, a Stockholder Voting Agreement and Proxy (the "Voting
Agreement"), and such other documents as Holdings may require. The Stockholders
Agreement prohibits the transfer of any of the Management Stockholder's common
stock for a period of four years from the date of its original issuance
(although such date may, in the case of certain Management Stockholders who were
shareholders of BHC, relate back to the date that shares were issued to them by
BHC) other than transfers to certain family members and heirs or pursuant to a
registration statement. The Management Stockholder's shares may be purchased by
Holdings if, (a) prior to the fourth anniversary of their issuance, the
Management Stockholder's employment terminates for any reason, or (b) after such
fourth anniversary, the Management Stockholder wishes to sell his/her common
stock to a third party. In the event of the death or permanent disability of the
Management Stockholder, each Management Stockholder has an irrevocable option
for one year to require Holdings to purchase all (or a portion) of his common
stock in the manner and on the terms set forth in the Stockholders Agreement;
provided, however, that the Management Stockholder may exercise such option in
the event of death or disability only to the extent that Holdings or Food 4 Less
has insurance, under which Holdings or Food 4 Less is the named beneficiary,
with respect to such event. Additionally, if shareholders holding at least fifty
percent (50%) of the issued and outstanding common stock of Holdings agree to
sell to a third party more than eighty percent (80%) of the shares of common
stock then held by them, then upon the demand of such selling stockholders, each
Management Stockholder must sell to such third party the same percentage of his
common stock as is proposed to be sold by the selling stockholders. The
Stockholders Agreement terminates on the tenth anniversary of the Merger.
Under the Voting Agreement, Ronald W. Burkle, George G. Golleher and
Yucaipa Capital Advisors, Inc. have sole voting control over the shares of
common stock owned by the other Management Stockholders until the tenth
anniversary of the Merger (unless extended by such Management Stockholders).
As of January 7, 1995, there was outstanding $0.7 million principal amount
of notes receivable from certain Management Stockholders, representing loans for
the purchase of Holdings' common stock. The notes are due over various periods,
bear interest at the bank "prime" lending rate, and are secured by such common
stock.
Pursuant to the Reincorporation Merger, New Holdings will succeed to the
rights and obligations of Holdings under the Food 4 Less stock plan. It is
expected that following the Merger, equity issuances to management will cease to
be made under the Food 4 Less stock plan and instead will be made under the New
Holdings option plan. See "-- New Management Stock Option Plan and Management
Investment."
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<PAGE> 89
PRINCIPAL STOCKHOLDERS
The information in the following table gives effect to (i) the Merger and
the Financing and (ii) the FFL Merger and the Reincorporation Merger. The
information in the following table assumes that the outstanding stock options of
RSI have been cancelled, that certain new stock options of New Holdings have
been granted to management and that certain warrants to purchase New Holdings
Common Stock have been issued to institutional investors who currently hold
warrants to purchase Common Stock of Holdings. Based on such assumption and
giving effect to the foregoing events, the following table sets forth the
ownership of common stock and Series A Preferred Stock and Series B Preferred
Stock of New Holdings by each person who to the knowledge of Food 4 Less will
own 5% or more of New Holdings' outstanding voting stock, by each person who
will be a director or named executive officer of the Company, and by all
executive officers and directors of the Company as a group. Share amounts and
percentage ownership information set forth for the Series A Preferred Stock and
Series B Preferred Stock are subject to change pending finalization of the
Financing.
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON PREFERRED PREFERRED
STOCK(1)(2) STOCK(1) STOCK(1)
------------------ ----------------- ----------------- PERCENTAGE PERCENTAGE
NUMBER NUMBER NUMBER OF TOTAL OF ALL
OF OF OF VOTING OUTSTANDING
BENEFICIAL OWNER(3) SHARES % SHARES % SHARES % POWER STOCK
- --------------------------- ---------- ----- ---------- ---- --------- ---- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yucaipa and affiliates:
The Yucaipa
Companies(4)(5)........ 17,567,622 62.3% -- -- -- -- 39.1% 36.6%
Ronald W. Burkle(4)(6)... 2,046,392 10.1% -- -- -- -- 5.5% 5.1%
George G.
Golleher(2)(6)......... 462,525 2.3% -- -- -- -- 1.3% 1.2%
10000 Santa Monica
Boulevard, Los Angeles,
California 90067
---------- ----- ---------- -----------
Total................ 20,076,539 71.2% -- -- -- -- 44.7% 41.8%
Byron E.
Allumbaugh(2)(7)......... 600,000 3.0% -- -- -- -- 1.6% 1.5%
Alfred A. Marasca(2)(7).... 200,000 1.0% -- -- -- -- 0.5% 0.5%
Greg Mays(8)............... -- -- -- -- -- -- -- --
Alan J. Reed(7)............ -- -- -- -- -- -- -- --
Terry Peets(7)............. -- -- -- -- -- -- -- --
Jan Charles Gray(7)........ -- -- -- -- -- -- -- --
Apollo Advisors, L.P.
Apollo Advisors II, L.P.(9)
2 Manhattanville Road
Purchase, NY 10577....... 1,285,165 6.4% 12,283,244 73.6% -- -- 36.8% 33.9%
BT Investment Partners,
Inc.(10)
130 Liberty Street
New York, NY 10006....... 509,812 2.5% 900,000 5.4% 3,100,000 100% 3.8% 11.3%
Other New Equity Investors
as a group(11)........... 40,172 0.2% 3,500,000 21.0% -- -- 9.5% 8.8%
All directors and executive
officers as a group (15
persons)(2)(4)(5)(6)..... 20,876,539 74.0% -- -- -- -- 46.5% 43.5%
</TABLE>
- ---------------
(1) Gives effect to (i) a stock split to be effected with respect to the
outstanding common stock of Holdings prior to the Merger, (ii) the
conversion (in connection with the FFL Merger) of the outstanding common
stock of FFL into newly-issued common stock of Holdings in an amount which
will preserve the proportionate ownership interests of FFL's stockholders,
and of the equity holders of Holdings, in the combined Company, (iii) the
conversion (in connection with the Reincorporation Merger) of the
outstanding common stock, and warrants to acquire common stock, of Holdings
into New Holdings common stock and warrants, (iv) the issuance by New
Holdings of 16,683,244 shares of Series A Preferred Stock and 3,100,000
shares of Series B Preferred Stock in connection with the New Equity
Investment and the concurrent exchange of outstanding shares of common
stock acquired by the New Equity Investors from an existing stockholder,
and (v) the assumed exercise of the outstanding warrants to acquire New
Holdings common stock issued to the former Holdings warrantholders in
connection with the Reincorporation Merger.
(2) Gives effect to the exercise of Tier One Options to be issued to Byron E.
Allumbaugh, George G. Golleher and Alfred A. Marasca under a new management
stock option plan to be adopted prior to completion of the Merger, covering
600,000, 200,000 and 200,000 shares, respectively. Does not give effect to
the exercise of (a) Tier Two Options to purchase up to 1,000,000 shares of
New Holdings common stock to be issued at the discretion of the Board of
Directors to certain management employees of the Company, under such stock
option plan, concurrently with or following completion of the Merger or (b)
Reinvestment Options to purchase up to 1,000,000 shares of New Holdings
common stock to be issued to holders of EARs in exchange for the
cancellation of $10 million
85
<PAGE> 90
of the EAR payments which would otherwise be payable upon consummation of
the Merger. See "Executive Compensation -- New Management Stock Option Plan
and Management Investment."
(3) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all shares of Common Stock or Series
A Preferred Stock or Series B Preferred Stock owned by such beneficial
owner.
(4) Represents shares owned by The Yucaipa Companies, F4L Equity Partners,
L.P., FFL Partners, Yucaipa Capital Fund and Yucaipa/F4L Partners. These
entities are affiliated partnerships which are controlled, directly or
indirectly, by Ronald W. Burkle. Following completion of the Merger, the
foregoing entities will be parties to a stockholders agreement with other
New Holdings investors which will give to Yucaipa the right to elect a
majority of the directors of New Holdings. See "Description of Capital
Stock -- 1995 Stockholders Agreement."
(5) Share amount and percentages shown for Yucaipa include a warrant to
purchase 8,000,000 shares of New Holdings Common Stock to be issued to
Yucaipa concurrently with the completion of the Merger and the Financing.
Such warrant will become exercisable only upon the occurrence of an initial
public offering or certain sale transactions involving New Holdings. See
"Description of Capital Stock -- Yucaipa Warrant."
(6) Certain management stockholders who own in the aggregate 852,326 shares of
Common Stock (pro forma for the events and assumptions described above)
have entered into a Stockholder Voting Agreement and Proxy pursuant to
which Ronald W. Burkle, George G. Golleher and Yucaipa Capital Advisors,
Inc. have sole voting control over the shares currently owned by such
management stockholders until December 31, 2002 (unless extended by such
stockholders). See "Executive Compensation -- Food 4 Less Stock Plan." The
852,326 shares have been included, solely for purposes of the above table,
in the share amounts shown for Mr. Burkle but not for Mr. Golleher. Neither
Messrs. Burkle and Golleher nor Yucaipa Capital Advisors, Inc. have the
power to dispose of, or any other form of investment power with respect to,
such shares. Messrs. Burkle and Golleher have sole voting and investment
power with respect to 1,194,066 and 462,525 shares of Common Stock they
respectively own (including, in the case of Mr. Golleher, 200,000 shares
issuable upon the exercise of Tier One Options).
(7) Does not include Reinvestment Options to purchase 228,428 shares, 100,000
shares, 60,000 shares, 60,000 shares and 174,940 shares of New Holdings
Common Stock to be issued to Messrs. Allumbaugh, Marasca, Reed, Peets and
Gray, respectively, in exchange for the cancellation of the EAR payments
which would otherwise be payable upon consummation of the Merger.
(8) Mr. Mays owns 8,890 of the 852,326 shares of Common Stock which are subject
to the Stockholder Voting Agreement and Proxy described in note (6) above.
(9) Represents shares owned by one or more entities managed by or affiliated
with Apollo Advisors, L.P. or Apollo Advisors II, L.P., together with
certain affiliates or designees of Apollo.
(10) Represents shares owned by BT Investment Partners, Inc. ("BTIP"), Bankers
Trust New York Corporation and BT Securities Corporation. Bankers Trust New
York Corporation and BT Securities Corporation are affiliated with BTIP.
BTIP expressly disclaims beneficial ownership of all shares owned by
Bankers Trust New York Corporation and BT Securities Corporation.
(11) Includes certain institutional investors, other than Apollo and BTIP, which
will purchase Series A Preferred Stock of New Holdings in connection with
the Financing. Pursuant to the 1995 Stockholders Agreement, certain
corporate actions by New Holdings and its subsidiaries will require the
consent of the directors whom the New Equity Investors, including Apollo
and BTIP, are entitled to elect to the New Holdings Board of Directors. See
"Description of Capital Stock -- 1995 Stockholders Agreement." Such
investors do not affirm the existence of a "group" within the meaning of
Rule 13d-5 under the Exchange Act, and expressly disclaim beneficial
ownership of all New Holdings shares except for those shares held of record
by each such investor or its nominees.
DESCRIPTION OF CAPITAL STOCK
Following is a description of the capital stock of the Company and New
Holdings to be authorized and outstanding upon completion of the Merger, the FFL
Merger and the Reincorporation Merger, including the terms of the New Equity
Investment to be made in New Holdings in connection with the closing of the
Merger.
THE COMPANY
Upon completion of the Merger, the authorized capital stock of the Company
will consist of 1,600,000 shares of Common Stock, $.01 par value per share, of
which 1,513,938 shares will be outstanding. All of such outstanding shares will
be owned by New Holdings. There will be no public trading market for the Common
Stock of the Company. The indentures that will govern outstanding debt
securities of the Company will contain certain restrictions on the payment of
cash dividends with respect to the Company's Common Stock. In addition, it is
expected that the New Credit Facility will also restrict such payments. Subject
to the limitations contained in the New Credit Facility and such indentures,
holders of Common Stock of the Company will be entitled to dividends when and as
declared by the Board of Directors from funds legally available therefor, and
upon liquidation, will be entitled to share ratably in any distribution to
holders of Common Stock. All holders of Common Stock will be entitled to one
vote per share on any matter coming before the stockholders for a vote.
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<PAGE> 91
NEW HOLDINGS
Following completion of the Merger, the FFL Merger, the Reincorporation
Merger and the New Equity Investment, (i) the authorized capital stock of New
Holdings will consist of 60,000,000 shares of Common Stock, $.01 par value,
25,000,000 shares of Non-Voting Common Stock, $.01 par value, 25,000,000 shares
of Series A Preferred Stock, $.01 par value, and 25,000,000 shares of Series B
Preferred Stock, $.01 par value, (ii) 17,207,882 shares of Common Stock,
16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B
Preferred Stock will be outstanding and held by approximately 100 holders of
record, (iii) 2,008,874 shares of Common Stock will be reserved for issuance
upon the exercise of outstanding warrants held by institutional investors, and
(iv) 3,000,000 shares of Common Stock will be reserved for issuance upon the
exercise of the New Options. See "Executive Compensation -- New Management Stock
Option Plan and Management Investment." An additional 8,000,000 shares of Common
Stock will be reserved for issuance upon the exercise of a warrant to be issued
to Yucaipa upon closing of the Merger. See "-- Yucaipa Warrant" below.
There is no public trading market for the capital stock of New Holdings,
nor will any such market exist following completion of the Merger. New Holdings
does not expect in the foreseeable future to pay any dividends on its capital
stock. Holders of Common Stock of New Holdings are entitled to dividends when
and as declared by the Board of Directors of New Holdings from funds legally
available therefor, and upon liquidation, are entitled to share ratably in any
distribution to holders of common stock. All holders of New Holdings Common
Stock are entitled to one vote per share on any matter coming before the
stockholders for a vote.
The Series A Preferred Stock initially will have an aggregate liquidation
preference of $166,832,440, or $10 per share, which will accrete as described
below. The holders of the Series A Preferred Stock will vote (on an as-converted
basis) together with the Common Stock as a single class on all matters submitted
for stockholder vote. Each share of Series A Preferred Stock initially will be
convertible at the option of the holder thereof into a number of shares of New
Holdings Common Stock equal to the liquidation preference of such share of
Series A Preferred Stock divided by $10. Upon consummation of an initial public
offering of New Holdings equity securities which meets certain criteria, the
shares of Series A Preferred Stock will automatically convert into shares of
Common Stock of New Holdings at the same rate as applicable to an optional
conversion.
The Series B Preferred Stock initially will have an aggregate liquidation
preference of $31,000,000, or $10 per share, which will accrete as described
below. The holders of Series B Preferred Stock generally will not be entitled to
vote on any matters, except as required by the Delaware General Corporation Law.
Upon the occurrence of a change of control, each share of Series B Preferred
Stock initially will be convertible at the option of the holder thereof into a
number of shares of New Holdings Common Stock or Non-Voting Common Stock equal
to the liquidation preference of such share of Series B Preferred Stock divided
by $10. Upon consummation of an initial public offering of New Holdings equity
securities which meets certain criteria, shares of Series B Preferred Stock will
automatically convert into shares of Non-Voting Common Stock of New Holdings at
the same rate as applicable to an optional conversion.
The liquidation preference of the Series A Preferred Stock and the Series B
Preferred Stock initially will accrete daily at the rate of 7% per annum,
compounded quarterly, until the later of the fifth anniversary of the date of
issuance or the date the Company first reports EBITDA (as defined) of at least
$500 million for any twelve-month period. Thereafter, the liquidation preference
will remain constant. The accretion rate of the liquidation preference will
increase (a) by 2% per annum if the Company fails to report EBITDA of at least
$400 million for the four fiscal quarters ending closest to the third
anniversary of the date of issuance (or for the rolling four-quarter period
ending on any of the three subsequent quarter-ends), (b) by 2% per annum if the
Company fails to report EBITDA of at least $425 million for the four fiscal
quarters ending closest to the fourth anniversary of the date of issuance (or
for the rolling four-quarter period ending on any of the three subsequent
quarter-ends) and (c) by 2% per annum if the Company fails to report EBITDA of
at least $450 million for the four fiscal quarters ending closest to the fifth
anniversary of the date of issuance, in each case, such increase to take effect
on the first day after the last day of the fiscal quarter with respect to which
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<PAGE> 92
such failure occurred; provided that the accretion rate of the liquidation
preference will not at any time exceed 13% per annum. The accretion of the
liquidation preference will result in a proportional increase in the number of
shares of common stock issuable upon conversion of the Series A Preferred Stock
and the Series B Preferred Stock. In addition, the initial aggregate liquidation
preference of the Series A Preferred Stock and the Series B Preferred Stock may
increase from the amounts set forth above depending on whether New Holdings
determines to increase the number of shares it may sell pursuant to the New
Equity Investment, and depending on whether certain existing equity holders of
FFL and Holdings exercise preemptive rights to participate in the New Equity
Investment.
Shares of Series A Preferred Stock or Series B Preferred Stock may be
converted (subject to certain conditions) at the option of the holder into
shares of the other series. The holders of Series A Preferred Stock and Series B
Preferred Stock have no rights to any fixed dividends in respect thereof.
Subject to certain exceptions, New Holdings will be prohibited from declaring
dividends with respect to, or redeem, purchase or otherwise acquire, shares of
its capital stock without the consent of holders of a majority of the Series A
Preferred Stock. If dividends are declared on the Series A Preferred Stock or
the Series B Preferred Stock which are payable in voting securities of New
Holdings, New Holdings will make available to each holder of Series A Preferred
Stock and Series B Preferred Stock, at such holder's request, dividends
consisting of non-voting securities of New Holdings which are otherwise
identical to the voting securities and which are convertible into or
exchangeable for such voting securities upon a change of control.
NEW EQUITY INVESTMENT
Concurrently with the closing of the Merger, certain existing stockholders
of New Holdings, including affiliates of George Soros, will sell 5,783,244
outstanding shares of common stock of New Holdings to CLH, which in turn will
sell such shares to the New Equity Investors for an aggregate purchase price of
$57.8 million. New Holdings will then issue 16,683,244 shares of Series A
Preferred Stock and 3,100,000 shares of Series B Preferred Stock in a private
placement to the New Equity Investors, led by Apollo and including affiliates of
BT Securities, CS First Boston and DLJ for an aggregate consideration of $140
million plus the contribution to New Holdings of the shares of common stock
purchased from CLH in the secondary sale transaction. The shares of Series A
Preferred Stock and Series B Preferred Stock acquired by the New Equity
Investors will represent approximately 42% in the aggregate of the fully diluted
common equity of New Holdings (assuming exercise of the Yucaipa warrant). See
"Principal Stockholders."
The $140 million cash proceeds from the issuance of Series A Preferred
Stock and Series B Preferred Stock will be applied by New Holdings as set forth
under "The Merger and the Financing."
Food 4 Less has accepted a commitment letter (the "Equity Commitment") from
Apollo pursuant to which Apollo has agreed (subject to certain conditions) to
purchase up to $140 million of the Series A Preferred Stock to be offered by New
Holdings as part of the New Equity Investment. In consideration of its equity
commitment, upon the closing of the Merger Apollo will receive from New Holdings
a fee of $5 million, of which $2.5 million will be satisfied through the
issuance to Apollo of New Discount Debentures and $2.5 million will be paid to
Apollo in cash. See "Certain Relationships and Related Transactions -- Food 4
Less and Holdings." The Company anticipates that the remainder of the Series A
Preferred Stock and Series B Preferred Stock so offered will be purchased by
affiliates of lenders and other financial institutions which have provided
financing to the Company, including BTIP, which is an affiliate of Bankers
Trust, by affiliates of CS First Boston and DLJ and by certain other investors.
The amounts of New Holdings stock expected to be held by Apollo, affiliates of
Bankers Trust and all other holders of 5% or more of New Holdings' outstanding
stock following completion of the Merger and the Financing are set forth above
under "Principal Stockholders."
1995 STOCKHOLDERS AGREEMENT
Under the terms of the 1995 Stockholders Agreement (which is expected to be
entered into by New Holdings, Yucaipa and its affiliates, the New Equity
Investors and other stockholders), the New Equity Investors holding Series A
Preferred Stock will be entitled to nominate three directors to the Board of
Directors of each of New Holdings and the Company (the "Series A Directors"), of
which two directors will
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<PAGE> 93
be nominees of Apollo and one director will be a nominee of the other New Equity
Investors holding Series A Preferred Stock. The 1995 Stockholders Agreement will
give to Yucaipa the right to nominate six directors of New Holdings and seven
directors of the Company, and the boards of New Holdings and the Company will
consist of a total of nine and ten directors, respectively. The numbers of
directors which may be nominated by the foregoing stockholders will be reduced
if such stockholders cease to own certain specified percentages of their initial
holdings. Unless and until New Holdings has effected an initial public offering
of its equity securities meeting certain criteria, New Holdings and its
subsidiaries may not take certain actions without the approval of the Series A
Directors, including but not limited to certain mergers, sale transactions,
transactions with affiliates, issuances of capital stock and payments of
dividends on or repurchases of capital stock. In addition, under the 1995
Registration Rights Agreement the New Equity Investors will have certain
"demand" and "piggyback" registration rights with respect to their Series A
Preferred Stock and Series B Preferred Stock, as well as the right under the
1995 Stockholders Agreement to participate, on a pro rata basis, in sales by
Yucaipa of the New Holdings stock it holds. In certain circumstances, Yucaipa
will have the right to compel the participation of the New Equity Investors and
other stockholders in sales of all the outstanding shares of New Holdings stock.
YUCAIPA WARRANT
Upon closing of the Merger, New Holdings has agreed to issue to Yucaipa a
warrant to purchase up to 8,000,000 shares of New Holdings Common Stock. The
initial exercise price of such warrant will be set such that the warrant will
have no value unless and until the value of the shares representing New
Holdings' equity on the Closing Date appreciates to $1.220 billion. Such warrant
will be exercisable on a cashless basis at the election of Yucaipa in the event
New Holdings completes an initial public offering of equity securities meeting
certain criteria, or in connection with certain sale transactions involving New
Holdings, in either case effected on or prior to the fifth anniversary of the
Closing Date. The expiration date of such warrant, and the deadline for such
triggering transactions, may be extended from the fifth to the seventh
anniversary of the Closing Date if New Holdings meets certain financial
performance goals prior to such fifth anniversary. The cashless exercise
provisions of such warrant allow the holder to exercise it without the payment
of cash consideration, provided that New Holdings will withhold from the shares
otherwise issuable upon such exercise a number of shares having a fair market
value as of the exercise date equal to the exercise price.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RALPHS
In connection with the acquisition of a majority of RSI's common stock in
February 1992, EJDC agreed to guarantee RGC's obligations as a self-insurer of
worker's compensation liabilities in the State of California (the "EJDC
Guaranty"). In consideration of the EJDC Guaranty, RGC unconditionally agreed to
reimburse EJDC for any payments made under the EJDC Guaranty and for the cost of
insurance up to $200,000 to cover liabilities incurred pursuant to the EJDC
Guaranty. Further, RGC agreed to pay EJDC a guarantee fee of $33,500 for each
month the EJDC Guaranty was in effect ($402,000 was paid in Fiscal 1994).
Concurrently with the completion of the Merger, the EJDC Guaranty will be
terminated, and RGC will cease to pay any guarantee fee to EJDC or to reimburse
it for the cost of insurance. However, RGC will continue to be obligated to
reimburse EJDC for any payments which EJDC could in the future be required to
make under the EJDC Guaranty in respect of prior claims. Moreover, FFL has
undertaken for the benefit of EJDC to maintain, until the fifth anniversary of
the closing of the Merger, bank letters of credit, insurance or other security
for the workers' compensation claims for which EJDC could have liability under
the EJDC Guaranty.
In connection with the bankruptcy reorganization of Federated and its
affiliates, Federated agreed to pay certain potential tax liabilities relating
to RGC as a member of the affiliated group of companies comprising Federated and
its subsidiaries. In consideration thereof, RSI and RGC agreed to pay Federated
a total of $10 million, payable $1 million on each of February 3, 1992, 1993,
1994, 1995 and 1996 and $5 million on February 3, 1997. The five $1 million
installments are to be paid by RGC and the $5 million payment is the joint
obligation of RSI and RGC. In the event Federated is required to pay certain tax
liabilities, RSI and RGC have agreed to reimburse Federated up to an additional
$10 million, subject to certain adjustments. This
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additional obligation, if any, is the joint and several obligation of RSI and
RGC. Pursuant to the terms of the Merger Agreement, the $5 million payment and
the potential $10 million payment will be paid in cash. See Note 1 of Notes to
Ralphs Consolidated Financial Statements.
In addition, EJDC and the other current holders of Common Stock of RSI are
parties to an agreement providing for various aspects of corporate governance
(the "Ralphs Registration Rights and Governance Agreement") relating to Ralphs.
Pursuant to the Ralphs Registration Rights and Governance Agreement, RGC is
obligated to provide RSI, by dividend, pursuant to a services agreement or
otherwise, with funds sufficient to enable RSI to perform its duties as the
holding company of RGC's stock and to perform its obligations set forth in the
Ralphs Registration Rights and Governance Agreement. The Ralphs Registration
Rights and Governance Agreement will be cancelled concurrently with the closing
of the Merger.
FOOD 4 LESS AND HOLDINGS
Yucaipa provides certain management and financial services to Food 4 Less
and its subsidiaries pursuant to a consulting agreement. The services of Ronald
Burkle, Mark Resnik and Patrick Graham, acting in their capacities as directors
and officers, and the services of other Yucaipa personnel are provided to Food 4
Less pursuant to this agreement. All of such individuals are partners of
Yucaipa. Yucaipa's consulting agreement provides for annual management fees
currently equal to $2 million plus an additional amount based on Food 4 Less'
performance. Upon completion of the Merger, the consulting agreement will be
amended to provide for an annual management fee payable by the Company to
Yucaipa in the amount of $4 million, with no additional amounts payable based on
performance. In addition, the Company may retain Yucaipa in an advisory capacity
in connection with certain acquisitions or sale transactions, in which case the
Company will pay Yucaipa an advisory fee. The agreement has a five-year term,
which will be automatically renewed on each anniversary of the Merger for a
five-year term unless ninety days' notice is given by either party. The
agreement may be terminated at any time by the Company, provided that Yucaipa
will be entitled to full monthly payments under the agreement for the remaining
term thereof, unless the Company terminates for cause pursuant to the terms of
the agreement. Yucaipa may terminate the agreement if the Company fails to make
a payment due thereunder, or if there occurs a change of control (as defined in
the agreement) of the Company, and upon any such termination Yucaipa will be
entitled to full payments for the remainder of the five-year period commencing
on the closing of the Merger. Pursuant to the agreement, Food 4 Less paid
Yucaipa a total of $2.4 million, $3.8 million and $2 million in management and
advisory fees for the fiscal years ended June 25, 1994, June 26, 1993 and June
27, 1992 respectively.
The Yucaipa consulting agreement also provides that upon closing of the
Merger, Yucaipa will be entitled to receive an advisory fee from the Company in
the amount of $19 million, plus reimbursement of expenses in connection with the
Merger and the related transactions. New Holdings will issue $15 million initial
accreted value of New Discount Debentures to Yucaipa in satisfaction of a
portion of such fee and the Company will pay the remaining $4 million of such
fee in cash. Upon closing of the Merger, Yucaipa anticipates that it in turn
will pay a cash fee of approximately $3.5 million to Soros Fund Management in
consideration for advisory services which Soros Fund Management has rendered
since 1991. The Company has no responsibility for such payment by Yucaipa.
Additionally, upon closing of the Merger, Yucaipa will receive a warrant to
purchase 8,000,000 shares of New Holdings common stock exercisable upon the
conditions described under "Description of Capital Stock -- The Yucaipa
Warrant." In consideration for its commitment to purchase Series A
Preferred Stock of New Holdings, Apollo will receive a fee of $5 million from
New Holdings upon the closing of the Merger. New Holdings will issue $2.5
million initial accreted value of New Discount Debentures to Apollo in
satisfaction of a portion of such fee, and New Holdings will pay the remaining
$2.5 million of such fee in cash. See "Description of Capital Stock -- New
Equity Investment."
In connection with the execution of the Merger Agreement, Yucaipa entered
into the Put Agreement with EJDC, pursuant to which EJDC will be entitled to put
up to $10 million aggregate principal amount of Seller Debentures to Yucaipa on
the Closing Date. The Yucaipa consulting agreement will provide that the Company
will reimburse Yucaipa for any loss and expenses incurred by Yucaipa upon the
resale of such Seller Debentures to any unaffiliated third party. Yucaipa has
advised the Company that it intends to resell the Seller
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Debentures on the Closing Date or as soon thereafter as practicable. The
agreement will also require Yucaipa to contribute any profit realized upon the
resale of such Seller Debentures within such period to the capital of the
Company.
Pursuant to the New Discount Debenture Placement, New Holdings has
committed to issue $100 million initial accreted value of New Discount
Debentures, which will be acquired by a partnership comprised of FFL Investors
L.L.C. (an affiliate of George Soros), Yucaipa RGC L.L.C. (an affiliate of
Yucaipa whose members include Ronald Burkle, Mark Resnik and Patrick Graham)
("Yucaipa LLC"), RGC Investment Co. (a corporation controlled by certain Yucaipa
partners) ("RGCIC"), BTIP, an affiliate of CS First Boston, an affiliate of DLJ,
Apollo, EJDC and the other selling stockholders of RSI. New Discount Debentures
having an initial accreted value of $59 million will be issued directly to the
partnership by New Holdings for cash consideration contributed to the
partnership by (i) FFL Investors L.L.C., which will invest $40 million in cash
proceeds received from Soros' affiliate as a result of the secondary sale of New
Holdings common stock, (ii) BTIP, which will invest $5 million in cash, (iii) an
affiliate of CS First Boston, which will invest $2.5 million in cash, (iv) an
affiliate of DLJ, which will invest $2.5 million in cash, (v) EJDC, which will
invest $4 million of its consulting fee payable by the Company upon closing of
the Merger and (vi) RGCIC, which will invest $5 million in cash borrowed from
the Company. New Holdings will issue additional New Discount Debentures having
an initial accreted value of (a) $15 million to Yucaipa LLC in satisfaction of
advisory fees otherwise payable to Yucaipa by the Company in connection with the
Merger and the Financing, (b) $5 million to BT Securities in satisfaction of
other fees payable to BT Securities by the Company in connection with the
Financing, (c) $2.5 million to Apollo in satisfaction of a portion of the
commitment fees otherwise payable to Apollo by New Holdings in connection with
the New Equity Investment and (d) $18.5 million to RSI stockholders as Merger
consideration, all of which New Discount Debentures shall be contributed to the
partnership, whereupon the partnership will hold all $100 million initial
accreted value of New Discount Debentures issued by New Holdings.
New Holdings will grant to the partnership certain registration rights with
respect to the New Discount Debentures. Pursuant to such registration rights
agreement, New Holdings will file with the Commission a shelf registration
statement which will permit resales of the New Discount Debentures by the
partnership commencing 60 days following closing of the Merger. New Holdings
will be obligated to use its best efforts to cause such shelf registration
statement to remain effective for up to three years. If New Holdings fails to
comply with its obligations to keep such shelf registration statement effective,
New Holdings will be obligated to pay certain liquidated damages. New Holdings
and its subsidiaries will agree not to effect any public distribution of
securities similar to the New Discount Debentures until the New Discount
Debentures are resold by the partnership (or until the third anniversary of the
Closing Date, if later). New Holdings believes that the partnership actively
would seek to dispose of its entire interest in the New Discount Debentures
promptly upon expiration of the 60 day holdback period following closing of the
Merger. New Holdings will agree to use its best efforts to assist the
partnership in such disposition, and to pay all expenses, including underwriting
discounts and brokers' or dealers' commissions and mark-ups (subject to certain
limitations), incident thereto.
The $5 million cash investment to be made in the partnership by RGCIC, as
described above, will be borrowed from the Company by RGCIC, and such borrowings
will bear interest at the applicable Federal rate (as defined under the Internal
Revenue Code). RGCIC will be obligated to repay such borrowings with any
distributions received from the partnership in connection with resales of the
New Discount Debentures. Such repayments will be applied first to the principal
balance of the borrowings and then to accrued interest. To the extent that such
distributions are not sufficient to repay such borrowings, any remaining
indebtedness of RGCIC (including all accrued interest) will be forgiven by the
Company and the Company's obligation to pay the Ralphs deferred EAR liability
will be correspondingly forgiven. Upon receipt of any principal amounts repaid
under such borrowings, the Company will be obligated to pay such amounts over to
former holders of RGC's EARs redeemed upon closing of the Merger. The aggregate
consideration payable to redeem the EARs includes, in addition to the foregoing
deferred cash payment of up to $5 million, $17.8 million in cash payable at
closing and $10 million in Reinvestment Options. See "Executive
Compensation -- Equity Appreciation Rights Plan."
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FFL files a consolidated federal income tax return, under which the federal
income tax liability of FFL and its subsidiaries (which since December 31, 1992
includes Holdings) is determined on a consolidated basis. FFL has entered into a
federal income tax sharing agreement with Food 4 Less and certain of its
subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides
that in any year in which Food 4 Less is included in any consolidated tax
liability of FFL and has taxable income, Food 4 Less will pay to FFL the amount
of the tax liability that Food 4 Less would have had on such due date if it had
been filing a separate return. Conversely, if Food 4 Less generates losses or
credits which actually reduce the consolidated tax liability of FFL and its
other subsidiaries, FFL will credit to Food 4 Less the amount of such reduction
in the consolidated tax liability. In the event any state and local income taxes
are determinable on a combined or consolidated basis, the Tax Sharing Agreement
provides for a similar allocation between FFL and Food 4 Less of such state and
local taxes. By operation of the FFL Merger and the Reincorporation Merger, New
Holdings will succeed to the rights and obligations of FFL under the Tax Sharing
Agreement.
Management believes that the terms of the transactions described above are
or were fair to Food 4 Less and are or were on terms at least as favorable to
Food 4 Less as those which could be obtained from unaffiliated parties (assuming
that such transactions could be effected with such parties).
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THE SOLICITATION
BACKGROUND AND PURPOSE OF THE SOLICITATION
The Solicitation is being undertaken (i) at the direction of the FFL Board
of Directors for purposes of obtaining Consents from the holders of FFL Common
Stock to approve the FFL Merger, pursuant to which FFL will merge with and into
Holdings, with Holdings being the surviving corporation, and each outstanding
share of FFL Common Stock will be converted into the right to receive 2.082
shares of Holdings Common Stock; and (ii) at the direction of the Holdings Board
of Directors for purposes of obtaining Consents from the holders of Holdings
Common Stock and FFL Common Stock to approve the Reincorporation Merger,
pursuant to which Holdings will change its jurisdiction of incorporation from
California to Delaware by merging into New Holdings, which is a newly-formed
wholly-owned subsidiary of Holdings, incorporated in Delaware, and pursuant to
which each outstanding share of Holdings Common Stock will be converted into the
right to receive one share of New Holdings Common Stock. The Reincorporation
Merger will take place immediately following the FFL Merger.
An additional purpose of the Solicitation is to obtain Consents to a
proposal (the "Stockholders Agreement Proposal") to amend or terminate certain
existing agreements to which FFL stockholders are parties and to which Holdings
warrantholders are parties, and to have FFL stockholders and Holdings
warrantholders become party to (a) the 1995 Stockholders Agreement which will be
entered into by New Holdings and the New Equity Investors, and (b) in the case
of FFL stockholders, the 1995 Registration Rights Agreement. The 1995
Stockholders Agreement and 1995 Registration Rights Agreement will replace the
FFL Holdings Corporation Stock Purchase and Shareholders' Agreement dated as of
May 23, 1987 (the "1987 Stockholders Agreement"), the Food 4 Less, Inc.
Stockholders Agreement and related Registration Rights Agreement, each dated as
of June 17, 1991 (the "1991 Stockholders Agreement" and "1991 Registration
Rights Agreement," respectively), and the Food 4 Less Holdings, Inc.
Warrantholders Agreement dated as of December 31, 1992 (the "Warrantholders
Agreement," and together with the 1987 Stockholders Agreement, the 1991
Stockholders Agreement and the 1991 Registration Rights Agreement, the "Existing
Stockholders Agreements").
The FFL Merger and the Reincorporation Merger (collectively, the "Proposed
Mergers") and the Stockholders Agreement Proposal are being undertaken at the
request of the New Equity Investors, who will purchase a minimum of $140 million
of preferred stock of New Holdings as part of the Financing for the RSI Merger.
The Proposed Mergers will simplify the holding company structure of the combined
entities by consolidating all of the existing stockholders of FFL and Holdings,
as well as the new preferred stockholders, at the same corporate level. This
streamlining of the corporate structure will serve to facilitate the acquisition
of RSI. In addition, approval of the Stockholders Agreement Proposal will
eliminate conflicting contractual obligations of New Holdings and provide
significant benefits to existing stockholders and warrantholders.
Although the Proposed Mergers are being undertaken in part to facilitate
the Financing for the RSI Merger, the completion of the RSI Merger is not a
condition to the effectiveness of either of the Proposed Mergers, which are
expected to be effected prior to the completion of the RSI Merger. Because the
Proposed Mergers will benefit FFL, Holdings, and their respective stockholders
by consolidating and simplifying the holding company structure of Food 4 Less,
the Boards of Directors of FFL and Holdings may elect to complete such mergers
following the receipt of requisite Consents whether or not the RSI Merger is
consummated. Alternatively, the Boards may choose to abandon such mergers if the
RSI Merger does not appear likely to be consummated within a reasonable period
of time. See "The Proposed Mergers -- Conditions." However, the 1995
Stockholders Agreement and 1995 Registration Rights Agreement will be executed,
and the Existing Stockholders Agreements will be terminated, only if the RSI
Merger actually is consummated.
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RECOMMENDATION OF THE BOARDS OF DIRECTORS OF FFL AND HOLDINGS
The Boards of Directors of FFL and Holdings have identified several
benefits of the Proposed Mergers. Such benefits include: (1) simplification of
the holding company structure of Food 4 Less and the consolidation of all of the
existing stockholders of FFL and Holdings, as well as the new preferred
stockholders, at the same corporate level; (2) facilitation of the RSI Merger,
which the Boards of Directors believe will provide the Company, New Holdings and
New Holdings' stockholders with enhanced potential for long-term growth; and (3)
retention by the surviving corporation, New Holdings, of the same state of
incorporation as the current parent corporation (FFL), and as the principal
operating subsidiaries of New Holdings following the RSI Merger. The Boards of
Directors have also considered identifiable negative factors in their
deliberations concerning the RSI Merger and the Proposed Mergers, including the
costs of completing the RSI Merger, the high degree of Company leverage
following the RSI Merger, and other factors described under "Risk Factors."
In addition, the Board of Directors of New Holdings has identified several
benefits of the Stockholders Agreement Proposal. Such benefits include: (1) the
elimination of multiple, conflicting contractual obligations of New Holdings (as
the successor by operation of merger to FFL and Holdings) under the Existing
Stockholders Agreements, (2) the replacement of the Existing Stockholders
Agreements with the 1995 Stockholders Agreement and the 1995 Registration Rights
Agreement, which will provide significant rights and benefits to the New Equity
Investors as well as to the existing FFL stockholders and Holdings
warrantholders, and (3) the satisfaction of a material condition precedent to
completion of the Financing for the RSI Merger.
After consideration of all of these factors, the members of the Board of
Directors of FFL have unanimously approved the terms of the FFL Merger, the
members of the Board of Directors of Holdings have unanimously approved the
terms of the Reincorporation Merger, and the members of the Board of Directors
of New Holdings have unanimously approved the terms of the Stockholders
Agreement Proposal. The Boards of Directors of FFL, Holdings and New Holdings
recommend that their stockholders approve the Proposed Mergers and the
Stockholders Agreement Proposal, as applicable. For a description of possible
conflicts of interest of FFL, Holdings and New Holdings directors in approving
the Proposed Mergers and the Stockholders Agreement Proposal, see "-- Possible
Conflicts of Interest of Certain Officers and Directors" below.
POSSIBLE CONFLICTS OF INTEREST OF CERTAIN OFFICERS AND DIRECTORS
In recommending that stockholders of FFL approve the FFL Merger, that
stockholders of Holdings approve the Reincorporation Merger, and that FFL
stockholders and Holdings warrantholders approve the Stockholders Agreement
Proposal, the Boards of Directors of FFL, Holdings and New Holdings have
carefully considered the interests of all FFL and Holdings stockholders. Upon
such consideration, such Boards of Directors have concluded that the Proposed
Mergers and the Stockholders Agreement Proposal are necessary to facilitate the
completion of the RSI Merger, which the Boards have determined to be in the best
interests of FFL, Holdings, New Holdings and their respective stockholders.
However, the members of the Boards of Directors of FFL, Holdings and New
Holdings have substantial personal interests in the completion of the RSI Merger
and related transactions.
In particular, all of the members of the Boards of Directors of FFL,
Holdings and New Holdings are partners or affiliates of Yucaipa. As described
above, upon closing of the Merger Yucaipa will receive an advisory fee of $19
million, of which $15 million will be paid through the issuance of New Discount
Debentures. Following the Merger, Yucaipa will render management and advisory
services to the Company in consideration of fees equal to $4 million per annum,
plus additional fees for certain investment banking services which Yucaipa may
render from time to time to the Company. See "Certain Relationships and Related
Transactions -- Food 4 Less and Holdings." Upon closing of the Merger, Yucaipa
will also be granted a warrant to purchase 8,000,000 shares of New Holdings
common stock (although the per share exercise price of such warrant initially
will be more than three times the per share price to be paid by the New Equity
Investors for the New Holdings stock they will purchase). See "Description of
Capital Stock -- Yucaipa
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Warrant." Moreover, the 1995 Stockholders Agreement will give to Yucaipa the
right to elect six of the nine directors of New Holdings and seven of the ten
directors of the Company. See "Description of Capital Stock -- 1995 Stockholders
Agreement."
Additionally, upon closing of the Merger, George G. Golleher, who is a
director and executive officer of FFL, Holdings, New Holdings and Food 4 Less,
will receive employee stock options to purchase 200,000 shares of New Holdings
Common Stock, will become party to a new employment agreement with Food 4 Less,
and will receive a special bonus approved by the Food 4 Less Board of Directors
in connection with the termination of his existing employment agreement. See
"Executive Compensation -- Employment Agreements -- New Golleher Agreement."
CONSENTS REQUIRED
General. Under Section 228 of the Delaware General Corporation Law (the
"Delaware GCL") and Section 603 of the California General Corporation Law (the
"California GCL"), stockholder approvals required for actions such as the
Proposed Mergers may be taken without a stockholder meeting if written consents
to such action are signed by the holders of a majority of the outstanding
shares, and if prompt notice of such action is given to the stockholders who
have not executed consents. In accordance with such statutes, Consents to the
Proposed Mergers are being solicited hereby from the holders of FFL Common Stock
and Holdings Common Stock, respectively, in lieu of any meeting of such holders.
This Prospectus and Solicitation Statement and Consent Forms are being sent to
all persons who are holders of record of FFL Common Stock as of May 15, 1995
(the "FFL Record Date") and to all persons (including the FFL stockholders) who
are expected to be holders of record of Holdings Common Stock as of the date of
effectiveness of the FFL Merger (the "Holdings Record Date"). In addition,
Consents to the Stockholders Agreement Proposal are being solicited hereby from
the holders of FFL Common Stock and the holders of Holdings warrants.
Accordingly, in addition to being sent to all record stockholders of FFL and
Holdings, this Prospectus and Solicitation Statement and Consent Forms are being
sent to all persons who are holders of record of Holdings warrants as of May 15,
1995 (the "Warrant Record Date," and together with the FFL Record Date and the
Holdings Record Date, the "Record Date").
The FFL Merger. In order to consummate the FFL Merger, FFL must receive
from the holders of a majority of the outstanding shares of FFL Common Stock, as
of the FFL Record Date, a properly completed and executed Consent approving the
FFL Merger. As of the FFL Record Date, there were outstanding 10,634,357 shares
of FFL Common Stock entitled to voting rights. Such shares were held by
approximately 50 stockholders of record. If, upon the Expiration Date, FFL has
received consents approving the FFL Merger from the holders of a majority of the
outstanding shares of FFL Common Stock, FFL may effect the FFL Merger. FFL
expects to receive such consents inasmuch as affiliates of Yucaipa (the
Company's investment sponsor) and Apollo (which is leading the New Equity
Investment) together own or control a majority of the outstanding FFL shares.
The Reincorporation Merger. In order to consummate the Reincorporation
Merger, Holdings must receive from the holders of a majority of the outstanding
shares of Holdings Common Stock, as of the Holdings Record Date, a properly
completed and executed Consent approving the Reincorporation Merger. Although
FFL is not a party to the Reincorporation Merger, Consents to the
Reincorporation Merger are being solicited hereby from the holders of FFL Common
Stock because upon consummation of the FFL Merger, FFL's stockholders will
become the holders of more than 90% of the outstanding Holdings Common Stock.
Although FFL currently is the majority stockholder of Holdings and therefore has
the ability unilaterally to approve the Reincorporation Merger, the Board of
Directors of Holdings has fixed the date of effectiveness of the FFL Merger as
the Holdings Record Date so that FFL stockholders may have the opportunity to
consent or to withhold their consent to the Reincorporation Merger. Holdings
expects that, upon completion of the FFL Merger, and after giving effect to an
anticipated 16.586-for-1 stock split which has been approved by the Board of
Directors of Holdings, there will be outstanding 22,991,126 shares of Holdings
Common Stock entitled to voting rights. Such shares are expected to be held by
approximately 110 stockholders of record, including 11,876,539 shares owned or
controlled by Yucaipa and its affiliates and
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1,285,165 shares owned by Apollo and its affiliates. Holdings' outstanding
common stock purchase warrants will have no right to vote or to consent with
respect to the Reincorporation Merger.
The Stockholders Agreement Proposal. Approval of the Stockholders Agreement
Proposal by requisite majorities of certain stockholder groups is a condition to
completion of the Financing for the RSI Merger. In particular, the terms of the
New Equity Investment require that the Existing Stockholders Agreements be
terminated and be replaced by the 1995 Stockholders Agreement. The 1995
Stockholders Agreement will be binding on, and inure to the benefit of, only
those FFL stockholders and Holdings warrantholders who deliver Consents to the
Stockholders Agreement Proposal hereunder. Except for certain limited covenants
contained therein, the 1987 Stockholders Agreement (but not the 1991
Stockholders Agreement, the 1991 Registration Rights Agreement or the
Warrantholders Agreement) will terminate by its terms in connection with the FFL
Merger. Thus, any FFL stockholder formerly subject to the 1987 Stockholders
Agreement will have no substantial rights under any stockholders agreement
unless such stockholder consents to the Stockholders Agreement Proposal. In
addition, consent to the Stockholders Agreement Proposal by holders subject to
the 1991 Stockholders Agreement, the 1991 Registration Rights Agreement or the
Warrantholders Agreement will constitute consent to the amendment of each of
those agreements to eliminate all contractual obligations of New Holdings and
its stockholders or warrantholders thereunder (other than certain obligations of
such holders to participate in a sale of New Holdings). The amendment of the
1991 Stockholders Agreement and the 1991 Registration Rights Agreement requires
the consent of the holders of a majority of the FFL shares held in each of
certain defined groups of stockholders thereunder, and the amendment of the
Warrantholders Agreement requires the consent of holders of a majority of the
Holdings warrants. Accordingly, if the Stockholders Agreement Proposal is
approved by the majorities required for amendment under each of the 1991
Stockholders Agreement and the Warrantholders Agreement, any FFL stockholder
subject to the 1991 Stockholders Agreement and any Holdings warrantholder will
have no rights under any stockholders agreement unless such holder consents to
the Stockholders Agreement Proposal.
PROCEDURES FOR DELIVERING CONSENTS
In responding to the Solicitation, holders of shares of FFL Common Stock,
Holdings Common Stock or Holdings warrants should complete, sign and date the
Consent Form (or a facsimile thereof) in accordance with the instructions set
forth therein and forward or hand deliver the same to FFL at the address set
forth below. To be valid, a properly completed, signed and dated Consent Form
must be received by FFL on or prior to the Expiration Date and must not be
revoked on or prior to the Expiration Date.
The term "Expiration Date," with respect to the FFL Merger and the
Stockholders Agreement Proposal, means 5:00 p.m. Los Angeles time on June 2,
1995, and, with respect to the Reincorporation Merger, means 5:00 p.m. Los
Angeles time on the date of effectiveness of the FFL Merger, unless FFL,
Holdings or New Holdings, as the case may be, in its sole discretion extends the
Solicitation, in which case the term "Expiration Date" shall mean the latest
time and date to which the Solicitation is extended.
Executed Consent Forms as well as all inquiries or correspondence relating
to the Solicitation should be directed to:
Food 4 Less, Inc.
c/o 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, CA 90067
Attention: Mark A. Resnik, Esq.
Telephone: (310) 789-7200
Telecopy: (310) 789-7201
IT IS NOT NECESSARY IN CONNECTION WITH THE SOLICITATION FOR ANY HOLDER OF
FFL COMMON STOCK, HOLDINGS COMMON STOCK OR HOLDINGS WARRANTS TO TENDER OR
DELIVER CERTIFICATES EVIDENCING HIS OR HER SHARES OF FFL COMMON STOCK, HOLDINGS
COMMON STOCK OR HOLDINGS WARRANTS. UPON EFFECTIVENESS OF THE PROPOSED MERGERS,
HOLDERS OF FFL COMMON STOCK AND HOLDINGS COM-
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MON STOCK WILL BE ASKED TO SUBMIT THEIR FFL SHARE CERTIFICATES AND/OR HOLDINGS
SHARE CERTIFICATES TO NEW HOLDINGS SO THAT SUCH HOLDERS MAY BE ISSUED
CERTIFICATES REPRESENTING THE SHARES OF NEW HOLDINGS COMMON STOCK INTO WHICH
THEIR FFL SHARES OR HOLDINGS SHARES (AS APPLICABLE) HAVE BEEN CONVERTED.
HOLDINGS WARRANTS WILL NOT BE REISSUED FOLLOWING THE PROPOSED MERGERS BUT
INSTEAD WILL REPRESENT, FOLLOWING THE PROPOSED MERGERS, WARRANTS TO PURCHASE AN
EQUIVALENT NUMBER OF SHARES OF NEW HOLDINGS COMMON STOCK.
Only registered holders of shares of FFL Common Stock, Holdings Common
Stock or Holdings warrants (or their legal representatives or attorneys-in-fact)
may deliver a Consent. Any beneficial owner of FFL Common Stock, Holdings Common
Stock or Holdings warrants who is not the registered holder of such FFL Common
Stock, Holdings Common Stock or Holdings warrants must arrange with the
registered holder to execute and deliver the Consent on his or her behalf.
The Consent Form must be executed by the registered holder(s) in exactly
the same manner as the name(s) appear(s) on the share certificates representing
the FFL Common Stock or Holdings Common Stock or on the certificates
representing the Holdings warrants. If the shares of FFL Common Stock or
Holdings Common Stock, or Holdings warrants, to which the Consent Form relates
are held of record by two or more joint holders, all such holders must sign the
Consent Form. If the signature is by a trustee, executor, administrator,
guardian, attorney-in-fact or other person acting in a fiduciary or
representative capacity, such person should indicate so when signing the
Consent.
Consents may be revoked at any time on or prior to the Expiration Date. All
properly completed and executed Consent Forms received by FFL will be counted,
notwithstanding any transfer of FFL Common Stock, Holdings Common Stock or
Holdings warrants, to which such Consents relate, unless FFL receives a properly
completed and duly executed notice of revocation or a changed Consent Form
bearing a date later than the date of the prior Consent Form at any time on or
prior to the Expiration Date. Only a holder of FFL Common Stock, Holdings Common
Stock or Holdings warrants as of the applicable Record Date (or his or her duly
designated proxies) is entitled to revoke a Consent previously given regardless
of whether such holder continues to hold such FFL Common Stock, Holdings Common
Stock or Holdings warrants after the applicable Record Date. The delivery of a
Consent will not affect a holder's right to sell or transfer FFL Common Stock,
Holdings Common Stock or Holdings warrants.
All Consent Forms that are properly completed, signed, dated and delivered
to FFL at the address set forth above will be given effect in accordance with
the specifications thereon. If no specification is made thereon, the holder of
FFL Common Stock, Holdings Common Stock or Holdings warrants will be deemed to
have consented to the Proposed Mergers and the Stockholders Agreement Proposal.
Failure to deliver a Consent will be treated as a nonapproval of the Proposed
Mergers and the Stockholders Agreement Proposal.
Food 4 Less will bear the expense of preparing and mailing this Prospectus
and Solicitation Statement and the accompanying Consent Forms, including legal,
accounting and other expenses. In addition to solicitation by use of the mails,
Consents may be solicited by directors, officers and employees of Food 4 Less
and its affiliates in person or by telephone, telecopy or other means of
communication. Such directors, officers and employees will not be additionally
compensated for their services in connection with the Solicitation.
THE PROPOSED MERGERS
TERMS OF THE PROPOSED MERGERS
General. Each of the Proposed Mergers is expected to be effected as a
so-called "short-form" merger under Section 253 of the Delaware GCL and Section
1110 of the California GCL. Such statutes provide certain streamlined procedures
with respect to the merger of a parent corporation into a subsidiary, if the
parent holds 90 percent or more of the outstanding shares of each class of stock
of the subsidiary, including among other things provisions allowing the merging
corporations to dispense with a vote of stockholders of the subsidiary
corporation with respect to the merger. However, as described above under "The
Solicitation --
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Consents Required," the FFL Merger and the Reincorporation Merger will require
approval by a majority of the outstanding shares of the parent corporation in
each such merger (i.e. by FFL stockholders in the FFL Merger and by Holdings
stockholders in the Reincorporation Merger). Stockholders of the parent
corporation do not have statutory dissenters' rights under the Delaware GCL or
the California GCL in either of the Proposed Mergers. See "-- Dissenters'
Rights."
The FFL Merger. Pursuant to the FFL Merger, FFL will be merged with and
into its subsidiary, Holdings, and Holdings will be the surviving corporation.
No date of effectiveness for the FFL Merger has been scheduled by the FFL Board
of Directors, and the consummation and timing thereof is subject to the
discretion of the FFL Board of Directors based on the factors discussed below
under "-- Conditions." Upon effectiveness of the FFL Merger, (a) each
outstanding share of FFL Common Stock will be converted into the right to
receive 2.082 shares of Holdings Common Stock (the "FFL Merger Ratio"), rounded
to the nearest whole share, (b) each outstanding share of Holdings Common Stock
held by FFL will be cancelled, and (c) each other outstanding share of Holdings
Common Stock and each outstanding Holdings common stock purchase warrant will
remain outstanding and will be unaffected by the FFL Merger.
The FFL Merger Ratio has been fixed by the Boards of Directors of FFL and
Holdings by dividing (a) the number of shares of FFL Common Stock currently
outstanding (other than certain shares owned by Food 4 Less) into (b) the number
of shares of Holdings Common Stock held by FFL (after giving effect to an
anticipated stock split with respect to Holdings Common Stock). As a result,
upon consummation of the FFL Merger, FFL's stockholders will receive, in the
aggregate, a number of shares of Holdings Common Stock equal to the number of
shares of Holdings Common Stock owned by FFL immediately prior thereto (after
giving effect to such Holdings stock split). Such shares will be received pro
rata by the FFL stockholders in proportion to their respective ownership
interests.
The Reincorporation Merger. Pursuant to the Reincorporation Merger,
Holdings will be merged with and into its wholly-owned Delaware subsidiary, New
Holdings, and New Holdings will be the surviving corporation. The
Reincorporation Merger is expected to become effective immediately following
effectiveness of the FFL Merger, subject to the factors discussed below under
"-- Conditions." The principal effect of the Reincorporation Merger will be to
change the jurisdiction of incorporation of Holdings from California to
Delaware, with the attendant consequences discussed herein under "-- Certain
Effects of the Proposed Mergers on the Rights of Stockholders." The
Reincorporation Merger will not alter the proportionate ownership interests of
Holdings' stockholders and warrantholders in the reincorporated surviving
corporation. Upon effectiveness of the Reincorporation Merger, (a) each
outstanding share of Holdings Common Stock will be converted into the right to
receive one share of New Holdings Common Stock, (b) each outstanding warrant to
purchase Holdings Common Stock will become a warrant to purchase an equivalent
amount of New Holdings Common Stock and (c) each share of New Holdings Common
Stock outstanding immediately prior to effectiveness of the Reincorporation
Merger will be cancelled.
The Surviving Corporation. Upon completion of the Proposed Mergers, the
separate existence of FFL and Holdings will cease, and New Holdings will be the
surviving corporation. New Holdings will have the same legal name as Holdings
(i.e. Food 4 Less Holdings, Inc.), but will be a Delaware corporation instead of
a California corporation. As the surviving corporation in such mergers, New
Holdings will succeed by operation of law to all property, rights and interests,
as well as all debts, liabilities and duties, of FFL and Holdings. Following the
Proposed Mergers, certain shares of New Holdings Common Stock held by Food 4
Less (which will be a wholly-owned subsidiary of New Holdings) will be
cancelled, and shares of Series A and Series B Preferred Stock of New Holdings
will be issued to the New Equity Investors. After giving effect to the Proposed
Mergers and the New Equity Investment, the authorized and outstanding capital
stock of New Holdings will be as described herein under "Description of Capital
Stock -- New Holdings."
CONDITIONS
The consummation of the Proposed Mergers is not expressly subject to any
particular conditions. However, neither of the Proposed Mergers will be
consummated unless both are consummated. In addition, even if the requisite
Consents are obtained by FFL and Holdings with respect to each Proposed Merger,
their
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consummation is subject to the continuing discretion of the Boards of Directors
of FFL and Holdings to modify the terms of or to abandon such mergers prior to
their consummation. Any modification of the terms of either Proposed Merger will
be submitted to FFL and Holdings stockholders for their approval to the extent
required by the Delaware GCL or the California GCL. However, the Proposed
Mergers may be abandoned at any time after the date hereof, if such mergers have
not previously been consummated, by the Boards of Directors of FFL and Holdings
without further action by the stockholders of either corporation. In particular,
because the Proposed Mergers are being undertaken in part to facilitate the
closing of the RSI Merger and the related Financing, there is a substantial
likelihood that FFL and Holdings may choose not to consummate the Proposed
Mergers if the RSI Merger is not consummated or does not appear likely to be
consummated within a reasonable period of time (to be determined in the
discretion of the Board of Directors) following the receipt of requisite
Consents hereunder. In this connection, it should be noted that the RSI Merger
is subject to numerous conditions, including the receipt of regulatory approvals
and other necessary consents and the completion of financing. See "The Merger
and the Financing." Alternatively, FFL and Holdings may elect to consummate the
Proposed Mergers following receipt of requisite Consents even if the RSI Merger
does not appear likely to be consummated within a reasonable period of time. See
"The Solicitation -- Background and Purpose of the Solicitation."
CERTAIN EFFECTS OF THE PROPOSED MERGERS ON THE RIGHTS OF STOCKHOLDERS
General. Upon consummation of the Proposed Mergers, the stockholders of FFL
will become stockholders of New Holdings, and their rights as stockholders will
be governed by the New Holdings Certificate of Incorporation (the "New Holdings
Certificate") and Bylaws. The New Holdings Certificate and Bylaws do not differ
in material respects from the FFL Certificate of Incorporation (the "FFL
Certificate") and Bylaws, except that the New Holdings Certificate authorizes
the issuance of shares of preferred stock at the discretion of New Holdings'
Board of Directors, while the FFL Certificate authorizes the issuance of common
stock only. However, the New Holdings Certificate and Bylaws do differ in
certain material respects from the Holdings Articles of Incorporation (the
"Holdings Articles") and Bylaws. Moreover, the rights of New Holdings
stockholders will be governed by the Delaware GCL, while the rights of Holdings
stockholders are governed by the California GCL. The Delaware GCL and California
GCL differ in many respects, and consequently it is not practical to summarize
all of such differences. It should be noted that certain aspects of the Delaware
GCL have been publicly criticized because they do not afford minority
shareholders the same substantive rights and protections as are available under
the California GCL. However, it should also be noted that because FFL is a
Delaware corporation, the law governing the rights of FFL stockholders will be
the same as the law governing their rights as New Holdings stockholders
following the consummation of the Proposed Mergers.
The following is a summary of significant differences between the Holdings
Articles, Bylaws and applicable provisions of the California GCL, on the one
hand, and the New Holdings Certificate, Bylaws and applicable provisions of the
Delaware GCL, on the other. This discussion is not intended to be complete and
is qualified in its entirety by reference to the New Holdings Certificate and
New Holdings Bylaws. Copies of the FFL Certificate and FFL Bylaws, the Holdings
Articles and Holdings Bylaws and the New Holdings Certificate and New Holdings
Bylaws are available for inspection at the principal executive offices of
Holdings and copies will be sent to holders of shares of FFL Common Stock upon
request. See "Available Information."
Directors; Classified Board; Cumulative Voting. Under the New Holdings
Bylaws, the Board of Directors of New Holdings consists of nine directors. The
Delaware GCL permits, but does not require, the adoption of a classified Board
of Directors with staggered terms, with each class having a term of office
longer than one year but not longer than three years. The New Holdings
Certificate does not provide for such a classified Board of Directors.
The Holdings Bylaws currently provide for a Board of Directors consisting
of four directors, each of whom is elected for a one-year term. Under the
California GCL, corporations whose outstanding shares are listed on the New York
Stock Exchange or the American Stock Exchange, and certain corporations whose
outstanding shares are authorized for quotation on NASDAQ, are permitted to have
a classified board.
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Cumulative voting, which enhances the ability of minority stockholders to
elect directors, is not available under the Delaware GCL unless otherwise
provided in a corporation's certificate of incorporation. Under cumulative
voting, each stockholder is entitled to the number of votes equal to the number
of shares owned by the stockholder multiplied by the number of directors to be
elected. All such votes may be cast for a single nominee or distributed among
several nominees. In the absence of cumulative voting, the holders of a majority
of the shares present or represented at a meeting to elect directors may elect
all directors, and no director could be elected without the support of a
majority of the shareholders. The New Holdings Certificate does not provide for
cumulative voting. Under the California GCL, any shareholder may cumulate votes,
provided certain procedures are followed. The Holdings Bylaws provide for
cumulative voting and set forth the required procedures.
Removal of Directors; Filling Vacancies on the Board of Directors. Under
the Delaware GCL, directors generally may be removed, with or without cause, by
the holders of a majority of voting shares. Under the California GCL, a director
may be removed for cause by the directors or a court, upon suit by holders of at
least 10% of the outstanding shares. A director also may be removed without
cause, under the California GCL, by the holders of a majority of voting shares,
unless the number of shares voting against removal would be sufficient to elect
such director if voted cumulatively.
Under the New Holdings Bylaws, any vacancies on the Board of Directors may
be filled by a majority of the directors then in office whether or not less than
a quorum, or by a sole remaining director. In addition, the New Holdings Bylaws
provide that a director elected to fill a vacancy on the Board of Directors will
serve for the unexpired portion of the term of the director whose place has been
filled. Under the Delaware GCL, however, if at the time of filling any vacancy
or newly created directorship, the directors then in office constitute less than
a majority of the entire Board of Directors (as constituted immediately prior to
any increase in their number), the Delaware Chancery Court may, under certain
circumstances, order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
Under the California GCL, a vacancy created by removal of a director may be
filled by the Board of Directors only if so authorized by a corporation's
articles of incorporation or by a bylaw approved by the corporation's
shareholders. Under the Holdings Bylaws, a vacancy created by the removal of a
director may be filled only by the approval of a majority of shares represented
and voting at a duly held meeting at which a quorum is present, or by the
written consent of all outstanding shares entitled to vote. Vacancies on the
Holdings Board of Directors arising other than from the removal of a director
may be filled by a majority of directors then in office, whether or not less
than a quorum, by a sole remaining director, or by a majority of voting shares
(whether represented and voting at a duly held meeting or acting by written
consent). The California GCL provides that if, after the filling of any vacancy
by the directors, the directors then in office who have been elected by the
shareholders shall constitute less than a majority of the directors then in
office, (i) any holder or holders of 5% or more of the outstanding voting shares
may call a special meeting of shareholders, or (ii) the California Superior
Court of the proper county shall, upon application of such shareholder or
shareholders, summarily order a special meeting of shareholders, to be held to
elect the entire Board of Directors.
Stockholder Action by Written Consent; Special Meetings. Unless otherwise
provided in the certificate of incorporation, stockholders of a Delaware
corporation may take action without a meeting, without prior notice and without
a vote, upon the written consent of stockholders having not less than the
minimum number of votes that would be necessary to authorize the proposed action
at a meeting at which all shares entitled to vote were present and voted. The
New Holdings Bylaws permit stockholder action without a meeting by written
consent. The New Holdings Bylaws provide that special meetings of stockholders
may be called by the President, or by the President or the Secretary at the
request in writing of a majority of the Board of Directors, or at the request in
writing of the stockholders owning a majority of the outstanding voting shares.
The Holdings Bylaws permit shareholder action by written consent. Except in
the case of shareholder action by written consent to fill certain vacancies, as
described above, under the California GCL directors may not be elected by
written consent except by unanimous written consent of all shareholders entitled
to vote for
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the election of directors. The Holdings Bylaws provide that special meetings of
the shareholders may be called by the Board of Directors, the Chairman of the
Board, the President or by one or more shareholders holding shares entitled to
cast not less than 10% of the votes at the meeting.
Limitation on Directors' Liability. The New Holdings Certificate contains
certain provisions limiting the personal liability of directors. The Holdings
Articles also contain certain provisions limiting the personal liability of
directors, although in general, the Delaware GCL permits a corporation to
indemnify its directors and officers under a broader range of circumstances than
does the California GCL.
Authorized Capital Stock. The Holdings Articles authorize the issuance of
up to 1,600,000 shares of Holdings Common Stock, of which, at May 15, 1995,
1,392,820 shares of Holdings Common Stock were issued, and 121,118 shares of
Holdings Common Stock were reserved for issuance upon exercise of outstanding
warrants. The New Holdings Certificate authorizes the issuance of up to
60,000,000 shares of Common Stock, 25,000,000 shares of Non-Voting Common Stock,
25,000,000 shares of Series A Preferred Stock and 25,000,000 shares of Series B
Preferred Stock. Upon completion of the RSI Merger, it is expected that
17,207,882 shares of New Holdings Common Stock will be outstanding, 13,008,874
shares of New Holdings Common Stock will be reserved for issuance upon the
exercise of options and warrants, 19,783,244 shares of New Holdings Common Stock
will be reserved for issuance upon the conversion of outstanding Series A and
Series B Preferred Stock, 16,683,244 shares of Series A Preferred Stock will be
outstanding and 3,100,000 shares of Series B Preferred Stock will be
outstanding. (The foregoing share amounts are subject to change pending
finalization of the financing for the RSI Merger.) Authorized but unissued
shares of New Holdings Common Stock and New Holdings Preferred Stock are
available for issuance at the discretion of the Board of Directors of New
Holdings without stockholder approval. Such shares could be issued in the future
by the Board of Directors in ways that would make more difficult a change in
control of New Holdings, such as through a private sale, diluting the stock
ownership of the person seeking to gain control of New Holdings. Any such action
could have the effect of deterring an offer for outstanding New Holdings Common
Stock which might otherwise enable the holders thereof to earn a premium over
the then current market price of such securities.
Dissenters' Rights. Under both the California GCL and Delaware GCL, a
dissenting shareholder of a corporation participating in certain transactions
may, under varying circumstances, receive cash in the amount of the fair market
value of his shares (as determined by agreement of the parties or by a court),
in lieu of the consideration he would otherwise receive in any such transaction.
The Delaware GCL generally requires such dissenters' rights of appraisal with
respect to mergers and consolidations, but not a sale of assets, unless the
corporation's certificate of incorporation provides otherwise. The Delaware GCL
contains certain exclusions from dissenters' rights requirements, including a
merger or consolidation by a corporation, the shares of which are either listed
on a national securities exchange or held by more than 2,000 stockholders, if
the stockholders receive shares of the surviving corporation or of such a listed
or widely-held corporation. In contrast, the California GCL in general affords
dissenters' rights in a share-for-share exchange reorganization, a sale-of
assets reorganization, or a merger. The exclusions from dissenters' rights in
mergers under the California GCL are somewhat different from those under the
Delaware GCL. For example, in the case of a corporation whose shares are listed
on a national securities exchange, dissenters' rights would nevertheless be
available in certain transactions for any shares with respect to which there are
certain restrictions on transfer, and for any class with respect to which the
holders of 5% or more of such class claims dissenters' rights. Also, under the
California GCL, shareholders of a corporation involved in a reorganization are
not entitled to dissenters' rights if the corporation, or its shareholders
immediately before the reorganization, or both, own (immediately after the
reorganization) certain equity securities possessing more than five-sixths of
the voting power of the surviving or acquiring corporation or a parent party.
Loans to Directors, Officers and Employees. Under the Delaware GCL, a
corporation may make loans or guarantee the obligations of its officers or other
employees and those of its subsidiaries when such action, in the judgment of the
directors, may reasonably be expected to benefit the corporation. Under the
California GCL, shareholders of a corporation with at least 100 shareholders may
approve a bylaw providing that a disinterested majority of the Board may approve
loans and guarantees to officers without shareholder approval
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if the Board determines that such loans may reasonably be expected to benefit
the corporation. There is no such bylaw in the Holdings Bylaws.
Dividends and Repurchases of Shares; Par Value, Capital and Surplus. The
California GCL dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like, while such concepts are
retained under the Delaware GCL. A Delaware corporation may make repurchases or
redemptions that do not impair capital, and may pay dividends out of any surplus
account (generally the stockholders' equity of the corporation less the par
value of the capital stock outstanding) or, if there exists no surplus, out of
net profits of the current and preceding fiscal year (after provision for
outstanding preferred stock). To determine the surplus, assets and liabilities
may be revalued at their current fair market value, which may create greater
surplus from which to pay dividends than would the book valuation of assets and
liabilities.
With certain limited exceptions, distributions to shareholders of a
California corporation (including redemptions, repurchases and dividends, other
than stock dividends) are generally limited either to the amount of the
corporation's retained earnings or to an amount which would leave the
corporation with (i) tangible assets of at least one and one quarter times its
liabilities (other than certain deferred liabilities) and (ii) current assets at
least equal to its current liabilities. In addition, the California GCL provides
that a corporation may not make any distribution that would render the
corporation unable to meet its liabilities, nor may such a distribution be made
if, as a result, the excess of the corporation's assets over its liabilities
would be less than the liquidation preference of all shares having a preference
on liquidation over the class or series to which the distribution is made. The
California GCL does not permit the revaluation of assets from book value to
their current fair market value.
DISSENTERS' RIGHTS
The holders of FFL Common Stock are not entitled to statutory dissenters'
rights under the Delaware GCL or the California GCL with respect to either the
FFL Merger or the Reincorporation Merger. The holders of Holdings Common Stock
are not entitled to statutory dissenters' rights under the California GCL with
respect to the Reincorporation Merger. The holders of Holdings Common Stock
(other than FFL) are entitled to dissenters' rights under the California GCL
with respect to the FFL Merger, although such holders have no right under the
California GCL to vote or consent with respect to the FFL Merger. By so
dissenting, Holdings stockholders become entitled, upon compliance with the
procedures set forth in Chapter 13 of the California GCL, to receive payment in
cash for the "fair market value" of their shares of Holdings Common Stock. This
value would be determined as of the day before the announcement of the FFL
Merger, excluding any appreciation or depreciation as a consequence of the FFL
Merger.
Holdings stockholders who seek to exercise their dissenters' rights with
respect to the FFL Merger are advised to follow the statutory procedures
precisely. The following summary does not purport to be a complete statement of
law relating to dissenters' rights, and is qualified in its entirety by Chapter
13 of the California GCL. Chapter 13 of the California GCL should be reviewed
carefully by Holdings stockholders who wish to exercise dissenters' rights or to
preserve their right to do so, since failure to comply with the statutory
procedures set forth below will result in a termination or waiver of such
rights.
FFL STOCKHOLDERS HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE PROPOSED
MERGERS, AND THE PROCEDURES DESCRIBED BELOW ARE NOT APPLICABLE TO FFL
STOCKHOLDERS.
Holdings stockholders who wish to exercise dissenters' rights with respect
to the FFL Merger must make a written demand upon Holdings that Holdings
purchase for cash their dissenting shares. Such stockholders may demand that
Holdings purchase all or part of the shares which they hold of record. The
written demand must contain: (i) the number of the shares held of record, (ii)
the number of those shares that are dissenting shares, and (iii) the claimed
"fair market value" of the shares, as discussed below. This written demand
constitutes an offer by the stockholder to sell the dissenting shares at the
stated price, and was required to have been received by Holdings on or prior to
February 17, 1995 (30 days from the date such stockholders were given notice of
their dissenters' rights). Demands were to be delivered or mailed to Food 4 Less
Holdings,
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Inc., c/o The Yucaipa Companies, 10000 Santa Monica Boulevard, Fifth Floor, Los
Angeles, California 90067, Attn: Mark A. Resnik, Esq. Stock certificate(s)
representing the dissenting shares also were required to have been submitted on
or prior to February 17, 1995 for endorsement with the statement that the shares
represented are dissenting shares. If the stockholder's shares are pledged to
Holdings and the stock certificate is already in the possession of Holdings, the
requirement to deliver the certificate was deemed satisfied.
Under the California GCL, the failure to undertake the steps summarized
above operates as a waiver of dissenters' rights.
Holdings has determined that the "fair market value" of the Holdings Common
Stock, for purposes of any exercise of dissenters' rights, shall be deemed $139
per share (prior to adjustment for Holdings' anticipated stock split).
Accordingly, Holdings has offered to purchase, pursuant to Section 1301(a) of
the California GCL, for $139 per share any Holdings stockholder's shares that
are or become "dissenting shares" as defined in Section 1300(b) of the
California GCL, unless those shares lose their status as dissenting shares under
Section 1309.
After the stockholder makes a timely demand and submits his or her stock
certificates for endorsement, if the stockholder accepts the price stated above
or if the price of the shares is otherwise agreed upon, the stockholder will be
entitled to the agreed price, with interest thereon at the legal rate from the
date of such agreement. Payment for the shares would then be made within thirty
days after their price has been agreed upon, or within thirty days after any
statutory or contractual conditions to the FFL Merger were satisfied, whichever
is later. Upon payment of the agreed price with interest, the stockholder would
cease to have any interest in Holdings.
If the stockholder has otherwise timely complied with required statutory
procedures but has not accepted the price stated above or if Holdings and the
stockholder have not otherwise agreed as to the fair market value of those
shares, then such stockholder may, within six months of the date of this letter,
file a suit in the county court as specified in Chapter 13 of the California GCL
and in accordance with other laws of the State of California asking for a
determination of whether the shares are dissenting shares or as to the fair
market value of the shares, or such stockholder may intervene in any other
action raising the same issues. Two or more dissenting stockholders may join as
plaintiffs or may be joined as defendants in any such suit, and two or more
suits may be consolidated and determined in a single proceeding by the court. If
the stockholder fails to file suit (or otherwise become a party to such a suit)
within such six-month period, such stockholder's shares lose their status as
dissenting shares.
At the trial of the action, if the status of a stockholder's shares as
dissenting shares is disputed, a court shall first determine that issue. If the
fair market value of the shares is disputed, the court shall determine the fair
market value of the shares and enter a judgement accordingly. A dissenting
stockholder is entitled to the fair market value of the shares as set forth in
such a judgment, with interest thereon at the legal rate from the date of such
judgment, upon the endorsement and delivery to Holdings of the certificates
representing the shares. The costs of the action may be assessed and apportioned
as the court considers fair, but if the value determined by the court exceeds
the price offered by Holdings, Holdings shall pay the cost. If the value
determined by the court is more than 25% greater than the price offered by
Holdings, the court may in its discretion also require that Holdings pay
additional expenses, including the stockholder's attorneys' fees, fees of expert
witnesses and additional interest.
THE STOCKHOLDERS AGREEMENT PROPOSAL
Pursuant to the Stockholders Agreement Proposal, New Holdings is soliciting
Consents from all holders of FFL common stock and warrants to purchase Holdings
common stock (who will become stockholders and warrantholders, respectively, of
New Holdings as a result of the Proposed Mergers) to become party as "Investors"
to the 1995 Stockholders Agreement and (in the case of FFL stockholders) the
1995 Registration Rights Agreement. The 1995 Stockholders Agreement and the 1995
Registration Rights Agreement will be substantially in the forms attached as
Annexes A and B to this Prospectus and Solicitation Statement, with such changes
therein, as may be approved by New Holdings, Yucaipa and the New Equity
Investors, that do not adversely affect the rights or duties of the Investors.
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TERMINATION OF EXISTING STOCKHOLDERS AGREEMENTS
By consenting to the Stockholders Agreement Proposal, each FFL stockholder
and each Holdings warrantholder will be deemed to consent to the termination of
its rights and obligations (except as described below) under any Existing
Stockholders Agreement to which it is subject, including the 1987 Stockholders
Agreement, the 1991 Stockholders Agreement, the 1991 Registration Rights
Agreement and the Warrantholders Agreement. Except for certain limited covenants
contained therein, the 1987 Stockholders Agreement (but not the 1991
Stockholders Agreement, the 1991 Registration Rights Agreement or the
Warrantholders Agreement) will terminate by its terms in connection with the FFL
Merger. In addition, consent to the Stockholders Agreement Proposal by holders
subject to the 1991 Stockholders Agreement, the 1991 Registration Rights
Agreement or the Warrantholders Agreement will constitute consent to the
amendment of each of those agreements to eliminate all contractual obligations
of New Holdings and its stockholders or warrantholders thereunder (other than
certain obligations of such holders to participate in a sale of New Holdings
meeting certain requirements). The amendment of the 1991 Stockholders Agreement
and the 1991 Registration Rights Agreement requires the consent of the holders
of a majority of the FFL shares held in each of certain defined groups of
stockholders thereunder, and the amendment of the Warrantholders Agreement
requires the consent of a majority of the Holdings warrantholders. Accordingly,
if the Stockholders Agreement Proposal is approved by the majorities required
for amendment under each of the 1991 Stockholders Agreement, the 1991
Registration Rights Agreement and the Warrantholders Agreement, the rights and
obligations (other than the obligation to participate in certain sale
transactions including New Holdings) of all stockholders and warrantholders
subject to such agreements will terminate, whether or not all such investors
have delivered Consents hereunder.
To the extent that the Existing Stockholders Agreements have been amended
or terminated as described above, no FFL stockholder or Holdings warrantholder
will have substantial protections afforded by any stockholders agreement or (in
the case of FFL stockholders) registration rights agreement unless such holder
has delivered a Consent to the Stockholders Agreement Proposal, and thereby has
become subject to the 1995 Stockholders Agreement and (in the case of FFL
stockholders) the 1995 Registration Rights Agreement.
Holdings warrantholders should note that the Registration Rights Agreement
dated December 31, 1992, by and among Holdings and the original purchasers of
the warrants, will continue in effect for the benefit of current warrantholders
following the Closing Date of the RSI Merger and New Equity Investment, and will
not be amended by the Stockholders Agreement Proposal. In addition, the current
management stockholders of Holdings should note that their Management
Stockholders Agreements will continue in effect following the Closing Date of
the RSI Merger and New Equity Investment, subject to any amendments that may be
agreed upon by them. Accordingly, the Stockholders Agreement Proposal does not
provide for Holdings warrantholders to become parties to the 1995 Registration
Rights Agreement or for the current stockholders of Holdings to become parties
to the 1995 Stockholders Agreement or the 1995 Registration Rights Agreement.
Finally, all FFL stockholders and Holdings warrantholders should note that
under the Existing Stockholders Agreements they have certain "preemptive rights"
to purchase shares of New Holdings preferred stock being offered in the New
Equity Investment. Because the New Equity Investment is being effected as a
private placement, New Holdings has determined that it cannot legally extend the
right to participate in the New Equity Investment to such holders.
Notwithstanding the amendment or termination of the Existing Stockholders
Agreements as described above, New Holdings will extend to all of such holders
to whom it is legally permitted to do so, at the earliest time it is permitted
to do so, the right to purchase shares of New Holdings preferred stock at the
same price paid by the New Equity Investors, and in the amounts and upon the
other terms applicable under the "preemptive right" provisions of the Existing
Stockholders Agreements.
TERMS OF THE 1995 STOCKHOLDERS AGREEMENT
The 1995 Stockholders Agreement will be entered into by New Holdings,
Yucaipa and its affiliates (the "Controlling Stockholders"), the New Equity
Investors (referred to herein as the "Purchasers") and other stockholders and
warrantholders of New Holdings (the "Other Investors," and together with the
Purchasers,
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the "Investors"), and will become effective upon closing of the RSI Merger. New
Holdings believes that the 1995 Stockholders Agreement will provide significant
rights and benefits to such stockholders and warrantholders, as summarized
below. The following summary of the 1995 Stockholders Agreement does not purport
to be complete, and is qualified in its entirety by reference to all of the
terms of the 1995 Stockholders Agreement, including the definitions of certain
terms therein, which are contained in Annex A to this Prospectus and
Solicitation Statement.
Tag-Along Rights. Any Controlling Stockholder who proposes to sell or
transfer a pecuniary interest in any New Holdings common stock, Series A
Preferred Stock, Series B Preferred Stock or warrants (collectively, "Shares")
shall afford to the Investors the opportunity to participate in such sale or
transfer, at the same price and upon identical terms and conditions as
applicable to the Controlling Stockholder, except that no Investor will be
required to make representations and warranties in connection with such sale or
transfer other than certain specified representations relating to authorization
for the transfer and ownership of transferred Shares. The number of Shares which
may be included by each participating Investor in such a sale (the "Transfer
Allotment") will equal the product of (a) the total number of Shares proposed to
be transferred in such sale multiplied by (b) a fraction, the numerator of which
is the total number of Shares owned by such participating Investor and the
denominator of which is the total number of Shares owned by the Controlling
Stockholders, the Investors, and all other stockholders of New Holdings having
"tag-along" or other contractual rights to participate in the proposed sale. In
the event of an under-subscription for all Investors' Transfer Allotments, the
unsubscribed-for Transfer Allotments will be reapportioned among the
participating Investors. Certain sales or transfers by the Controlling
Stockholders are exempt from the foregoing requirements, including without
limitation transfers pursuant to the "drag-along" rights described in the next
paragraph, transfers pursuant to a Public Offering or Rule 144 Open Market
Transaction (as defined), or transfers by certain Controlling Stockholders
following the first anniversary of the Closing Date not to exceed 7.5% of the
number of Shares beneficially owned by the Controlling Stockholders on the
Closing Date. Transfers by the Controlling Stockholders to certain Permitted
Transferees (as defined) are also exempt from the foregoing requirements,
subject to certain limitations on such transfers requiring Ronald W. Burkle to
maintain a pecuniary interest in specified percentages of the Shares.
Drag-Along Rights. The Controlling Stockholders will have the right to
require each of the Investors to sell all of its Shares in any cash sale of all
of the outstanding Shares (a "Compelled Sale"), at the same price and upon
identical terms and conditions as applicable to the Controlling Stockholders,
except that no Investor will be required to make representations and warranties
in connection with such sale other than certain specified representations
relating to authorization for the transfer and ownership of transferred Shares.
If the aggregate consideration to be paid for all outstanding Shares in a
Compelled Sale implies an Enterprise Value (as defined) of less than 6.5 times
EBITDA (as defined) of New Holdings for the latest four fiscal quarters, then
(a) certain of the Purchasers may demand an appraisal, (b) if such an appraisal
is requested and any Purchaser declines to participate in the Compelled Sale, no
Investor will be required to sell shares in the Compelled Sale unless the per
share price to be paid in the Compelled Sale equals or exceeds the appraised
value of the Shares, and (c) Apollo (as the largest New Equity Investor) will
have certain rights to elect to assume the purchase obligations in such
Compelled Sale and thereby to acquire all outstanding Shares.
Offering Memorandum and Other Information. New Holdings will make available
information reasonably requested by the Investors to facilitate the transfer or
sale of 5% or more of the outstanding Shares to a third party. In the case of
any such transfer or sale of 5% or more of the outstanding Shares which is
exempt from registration under the Securities Act, New Holdings will provide
reasonable access to its management to facilitate such transfer, and will
prepare an offering memorandum relating to the Shares if it is not then filing
periodic reports under the Exchange Act.
Restrictions on Transfer. No party to the 1995 Stockholders Agreement may
sell or transfer Shares unless the proposed transferee has agreed to become
bound by the terms of the 1995 Stockholders Agreement in the same manner as the
transferor, except in the case of transfers to New Holdings or certain bona fide
public distributions. Prior to an Initial Public Offering (as defined) and
subject to certain exceptions, New Holdings may not issue Shares unless the
person acquiring such newly-issued Shares agrees to be bound as an Other
Investor under the 1995 Stockholders Agreement.
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Certain Covenants. The 1995 Stockholders Agreement prohibits Yucaipa and
its affiliates from entering into any business opportunity primarily related to
the supermarket business within New Holdings' geographic markets (other than
limited investments in shares of any public company) without the approval of
certain Purchasers. New Holdings and its subsidiaries may pay Yucaipa and its
affiliates management fees and fees for investment banking or financial advisory
services (and reimbursement of related expenses) only in accordance with the
provisions of the Consulting Agreement to be entered into by New Holdings and
RGC as of the Closing Date, or any similar agreement approved by the Board of
Directors of New Holdings and a majority of the New Nominees (as defined below).
For a description of the terms of the Consulting Agreement, see "Certain
Relationships and Related Transactions -- Food 4 Less and Holdings."
New Holdings will deliver to each Investor copies of unaudited quarterly
financial statements and audited annual financial statements, together with
management's discussion and analysis, and (subject to confidentiality and other
limitations) will provide to any Purchaser or any single Investor owning more
than 10% of the outstanding Shares reasonable access to the properties, books
and records of New Holdings and its subsidiaries.
In addition, New Holdings will offer to all Investors preemptive rights to
participate in issuances of capital stock or options, warrants or other
securities exercisable or exchangeable for or convertible into capital stock,
subject to certain exceptions relating to, among other things, issuance to
employees, pursuant to a public offering or for consideration other than cash or
indebtedness. Such preemptive rights, to the extent applicable, will allow the
Investors to participate pro rata in such issuance so that each such Investor
will have the same percentage of equity ownership of New Holdings following such
issuance as before such issuance.
Voting Agreement. The 1995 Stockholders Agreement will require all
Investors to vote their Shares to elect to the New Holdings and RGC Boards of
Directors the persons nominated by certain parties. In particular, the New
Holdings Board of Directors will consist of nine members, six of which may be
nominated by Yucaipa (the "Yucaipa Nominees"), two of which may be nominated by
Apollo (the "Apollo Nominees"), and one of which may be nominated by the
Purchasers other than Apollo (the "Other Purchasers") who own New Holdings
common stock or Series A Preferred Stock (the "Other Purchasers Nominee," and
together with the Apollo Nominees, the "New Nominees"). The RGC Board of
Directors will consist of ten members, seven of which may be Yucaipa Nominees,
two of which may be Apollo Nominees, and one of which may be the Other
Purchasers Nominee. The numbers of directors which may be nominated to each
board by Yucaipa will be reduced by three if Ronald W. Burkle ceases to
beneficially own at least 33 1/3% of the Shares beneficially owned by the
Controlling Stockholders on the Closing Date, and will terminate if Ronald W.
Burkle ceases to beneficially own at least 25% of the Shares beneficially owned
by the Controlling Stockholders on the Closing Date. Subject to certain rights
of Apollo to assign its board seats to a transferee of its Shares, the numbers
of directors which may be nominated to each board by Apollo will be reduced by
one if Apollo ceases to beneficially own at least 33 1/3% of the Shares
beneficially owned by it on the Closing Date and will terminate if Apollo ceases
to beneficially own at least 25% of the Shares beneficially owned by it on the
Closing Date. The right of the Other Purchasers to nominate the Other Purchasers
Nominee to each board will terminate if the Other Purchasers cease to
beneficially own at least 33 1/3% of the Shares beneficially owned by the Other
Purchasers on the Closing Date.
The New Holdings and RGC by-laws will authorize the establishment of an
Executive Committee and an Audit Committee of each company's board. The Audit
Committee of each board will consist of at least one Apollo Nominee (or if none,
the Other Purchasers Nominee) and at least one other director.
Each Other Investor will agree under the 1995 Stockholders Agreement to
appoint one representative to vote all Shares owned by it or its officers,
directors, partners, controlling persons or other affiliates.
Action by the Board of Directors. Prior to the consummation of a Qualified
IPO (generally defined as an initial public offering meeting certain minimum
thresholds as to price and amount of stock publicly distributed), New Holdings
and RGC will not, and will cause their respective subsidiaries not to, take any
of the following actions (subject to certain exceptions) without the affirmative
vote of a majority of the members of the Board of Directors and the affirmative
vote of a majority of the New Nominees: (a) mergers or consolidations involving
New Holdings or its subsidiaries, (b) a sale of substantially all of the assets
of New
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Holdings or its subsidiaries or of a geographic division, (c) an acquisition of
assets not in the ordinary course of business and having a purchase price
(including assumed debt) in excess of $50 million, (d) the adoption or amendment
of an employee benefit plan providing for the issuance of capital stock, or
rights, options or warrants to acquire capital stock, (e) an issuance or sale of
capital stock, or rights, options or warrants to acquire capital stock (other
than pursuant to a Qualified IPO or under an employee benefit plan), (f)
dividends or distributions on or repurchases or redemptions of capital stock
(other than pro rata dividends paid from current earnings or, subject to certain
limitations, repurchases of shares held by employees), (g) dissolution,
liquidation, or bankruptcy filings, (h) the replacement of independent
accountants, (i) the payment of compensation to board members other than in
accordance with the Consulting Agreement, or (j) increases or decreases in the
number of authorized directors or the creation of board committees.
In addition, prior to the consummation of a Qualified IPO, New Holdings and
RGC will not, and will cause their respective subsidiaries not to, take any of
the following actions without the affirmative vote of a majority of the members
of the Board of Directors and the unanimous approval of the New Nominees: (a)
entry into an unrelated line of business, (b) amendment of charter documents,
other than to accommodate a Qualified IPO, or (c) certain transactions with
affiliates, other than Permitted Affiliate Transactions (as defined). Prior to
the consummation of a Qualified IPO, board actions with respect to certain
transactions between New Holdings or its subsidiaries and any Purchaser, to the
extent outside the ordinary course of business and having terms less favorable
to New Holdings than those obtainable from an unrelated third party, will
require the affirmative vote of a majority of the directors who are
disinterested with respect to such transaction.
Board Visitation Rights. New Holdings will (a) provide notice of each
meeting of its or RGC's board to each Purchaser owning at least 250,000 Shares
and each Investor owning more than 10% of the outstanding Shares, (b) provide
each such person a copy of all materials provided to the board in connection
with such meeting, and (c) permit a single representative of each such person to
attend such board meeting, subject to exclusions necessary to preserve
attorney-client privileged information.
Amendment and Termination. The 1995 Stockholders Agreement may not be
amended in any manner adverse to an Investor without the consent of a majority
of the Shares held by the Investors (so long as the Investors, in the aggregate,
beneficially own at least 25% of the Shares beneficially owned by them on the
Closing Date). In addition, all amendments of the 1995 Stockholders Agreement
require the approval of Yucaipa and the holders of a majority of the Shares held
by the Purchasers (including at least two unrelated Purchasers), and certain
amendments that adversely affect Apollo or the Other Purchasers require the
approval of Apollo or a majority of the Shares held by the other Purchasers, as
applicable. The 1995 Stockholders Agreement will terminate (a) by mutual
agreement of all parties, (b) as to any party, at such time as it ceases to own
any Shares, (c) at such time as less than 10% of the Shares continue to be
subject to the provisions of the 1995 Stockholders Agreement, or (d) on the
tenth anniversary of the Closing Date. If the 1995 Stockholders Agreement has
not otherwise terminated prior to the eighth anniversary of the Closing Date,
the Investors and the Controlling Stockholders will undertake to renew the
provisions relating to the voting of Shares for a successive ten-year period, or
such shorter period as the agreement is in effect.
Public Disclosures Regarding Investors. New Holdings will not make any
public announcement or disclosure relating or referring to any Investor or its
affiliates without the consent of the Investor (which consent may not
unreasonably be withheld), except to the extent such disclosure is required by
law or by stock exchange regulation.
TERMS OF THE 1995 REGISTRATION RIGHTS AGREEMENT
The 1995 Registration Rights Agreement will be entered into by New
Holdings, the New Equity Investors and other holders of FFL common stock (who
will become stockholders of New Holdings by operation of the FFL Merger and
Reincorporation Merger) who deliver Consents to the Stockholders Agreement
Proposal (the "Investors").
The 1995 Registration Rights Agreement will give Apollo the right to make
two demands for registration of New Holdings shares under the Securities Act,
and will give to other New Equity Investors the right to
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make two additional demands for registration of New Holdings shares under the
Securities Act, in each case at any time after the earlier of (i) the second
anniversary of the Closing Date of the RSI Merger or (ii) the consummation of a
Qualified IPO (as defined). If the demanding holders so elect, the offering of
New Holdings shares pursuant to such registration statement will be in the form
of an underwritten offering.
If at any time New Holdings files a registration statement under the
Securities Act with respect to an offering of equity securities for its own
account or for the account of any holders of any class of its equity securities
(with certain exceptions), including any demand registration as described above,
New Holdings will be obligated to extend "piggyback" rights to the Investors to
have their New Holdings shares included in such registration statement. The
number of shares which may be included in such registration by "piggybacking"
Investors is subject to reduction in the event that the offering is underwritten
and the managing underwriters advise that such reduction is necessary. In such
event, New Holdings will have first priority to include shares if such offering
is a primary offering by New Holdings. If such offering is pursuant to a demand
registration filed on behalf of another holder or holders of New Holdings
shares, such other holder or holders will have first priority to include shares,
the piggybacking Investors will have second priority (pro rata in proportion to
the numbers of shares they requested to register), and New Holdings will have
third priority.
New Holdings will be obligated to pay expenses in connection with demand or
piggyback registrations, including registration fees, "blue sky" filing fees,
printing expenses, accounting fees and fees of one firm of counsel chosen by the
demanding holders, but not including underwriting discounts or commissions. New
Holdings will be obligated to enter into customary underwriting agreements in
connection with a demand registration and to take certain other actions in
connection with a demand or piggyback registration, including providing due
diligence access, providing customary opinions of counsel and accountants'
"comfort" letters, and making required "blue sky" filings.
Under the 1995 Registration Rights Agreement, Investors will agree not to
make any public sale of their shares during the 14 days prior to, and during the
90-day period beginning on, the effective date of any registration statement
filed by New Holdings with respect to an underwritten public offering of equity
securities, if so requested by the managing underwriter. New Holdings will agree
to a similar holdback period with respect to sales by it of its equity
securities during the pendency of a demand registration.
Investors who are party to the 1987 Stockholders Agreement or the 1991
Registration Rights Agreement should note that the demand registration rights of
FFL stockholders under such agreements are no longer exercisable in that their
exercise requires the participation of Yucaipa, Apollo or other FFL stockholders
who have agreed to become party to the 1995 Stockholders Agreement. Accordingly,
such demand registration rights will be terminated by the Stockholders Agreement
Proposal. Holdings warrantholders should note that the Registration Rights
Agreement dated December 31, 1992, by and among Holdings and the original
purchasers of the Holdings warrants, will continue in effect for the benefit of
current warrantholders following the Closing Date of the RSI Merger and the New
Equity Investment, and will not be amended by the Stockholders Agreement
Proposal.
The foregoing summary of the 1995 Registration Rights Agreement does not
purport to be complete, and is qualified in its entirety by reference to all of
the terms of the 1995 Registration Rights Agreement which are contained in Annex
B to this Prospectus and Solicitation Statement.
CONDITIONS
Adoption of the Stockholders Agreement Proposal is conditioned upon
consummation of the RSI Merger. In addition, New Holdings reserves the right not
to make any particular FFL stockholder or Holdings warrantholder a party to the
1995 Stockholders Agreement unless requisite Consents have been obtained to
amend the Existing Stockholders Agreement to which such holder currently is
subject, as described above under "-- Termination of Existing Stockholders
Agreements." Even if the requisite Consents are obtained by New Holdings to
amend or terminate the Existing Stockholders Agreements, as described above,
their amendment or termination, as well as the adoption of the 1995 Stockholders
Agreement, is subject to the
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continuing discretion of the Boards of Directors of FFL, Holdings, and New
Holdings to abandon such actions.
THE EXCHANGE OFFERS AND THE PUBLIC OFFERINGS
THE RGC OFFERS
In connection with the Merger, Food 4 Less is offering to holders of the
Old RGC Notes (i) to exchange such Old RGC Notes for New RGC Notes and $20.00 in
cash for each $1,000 principal amount tendered for exchange or (ii) to tender
for purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of
Old RGC Notes accepted for purchase, in each case plus accrued and unpaid
interest to the date of exchange or purchase. The consummation of the RGC Offers
will occur simultaneously with the consummation of the Public Offerings, the F4L
Exchange Offers and the Holdings Offer to Purchase.
The obligation of Food 4 Less to accept for exchange or purchase any
validly tendered Old RGC Note is conditioned upon, among other things, the
satisfaction or waiver of certain conditions, including (i) satisfaction of a
minimum tender amount (i.e., at least a majority of the aggregate principal
amount of the outstanding Old RGC Notes being validly tendered for exchange for
New RGC Notes and not withdrawn pursuant to the RGC Offers prior to the date of
expiration); (ii) the receipt of the requisite consents to certain amendments to
the indentures under which the Old RGC Notes were issued (i.e., consents from
Old RGC Noteholders representing at least a majority in aggregate principal
amount of each issue of Old RGC Notes held by persons other than RGC and its
affiliates) on or prior to the date of expiration; (iii) the satisfaction or
waiver, in Food 4 Less' sole discretion, of all conditions precedent to the
Merger; (iv) the prior or contemporaneous consummation of the Holdings Offer to
Purchase, the F4L Exchange Offers, the Public Offerings and the New Discount
Debenture Placement; and (v) the prior or contemporaneous consummation of the
Bank Financing and the New Equity Investment.
The terms of the Old RGC Indentures are substantially identical.
Noteholders participating in the RGC Offers will be required to consent to
certain proposed amendments to the Old RGC Indentures. Such proposed amendments
will modify certain terms of such indentures to permit the Merger and will
eliminate substantially all the restrictive covenants in the Old RGC Indentures.
The Old RGC Notes. The Old RGC 10 1/4% Notes were originally issued in
July 1992, are currently outstanding in an aggregate principal amount of $300
million and will mature on July 15, 2002. The Old RGC 9% Notes were originally
issued in March 1993, are currently outstanding in an aggregate principal amount
of $150 million and will mature on April 1, 2003. Interest on the Old RGC
10 1/4% Notes accrues at a rate of 10 1/4% per annum and is payable
semi-annually on each January 15 and July 15. Interest on the Old RGC 9% Notes
accrues at a rate of 9% per annum and is payable semi-annually on each April 1
and October 1.
The Old RGC 10 1/4% Notes are subject to redemption at any time on or after
July 15, 1997, at the option of RGC, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple
of $1,000 at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning July 15 of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
1997...................................................... 105.0%
1998...................................................... 102.5%
1999 and thereafter....................................... 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the redemption date (subject to
the right of holders of record on relevant record dates to receive interest due
on an interest payment date).
The Old RGC 9% Notes are subject to redemption at any time on or after
April 1, 2000, at the option of RGC, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple
of $1,000 at 100% of the principal amount thereof plus accrued interest to the
redemption
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date (subject to the right of holders of record on relevant record dates to
receive interest due on an interest payment date.)
Standard & Poor's has publicly announced that, upon consummation of the
Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating
assignment, if implemented, would constitute a Rating Decline under the Old RGC
Indentures. The consummation of the Merger (which is conditioned upon, among
other things, successful consummation of the Other Debt Financing Transactions,
the New Equity Investment and the Bank Financing) and the resulting change in
composition of the Board of Directors of RGC, together with the anticipated
Rating Decline would constitute a Change of Control Triggering Event under the
Old RGC Indentures. Although Food 4 Less does not anticipate that there will be
a significant amount of Old RGC Notes outstanding following consummation of the
RGC Offers, upon such a Change of Control Triggering Event the Company would be
obligated to make the Change of Control Offer following the Merger for all
outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase.
The Old RGC Indentures contain certain covenants, including, but not
limited to, covenants with respect to the following matters: (i) limitation on
incurrence of additional indebtedness; (ii) limitation on dividends and other
restricted payments; (iii) limitation on transactions with affiliates; (iv)
limitation on liens securing subordinated indebtedness; (v) limitation on other
senior subordinated indebtedness; (vi) limitation on preferred stock of
subsidiaries; (vii) limitation on dividend and other payment restrictions
affecting subsidiaries; and (viii) limitation on mergers and sales of assets.
Under the Old RGC Indentures, certain events constitute an event of default
including: (i) the failure to make any principal and interest payment on the Old
RGC Notes when due; (ii) the failure to comply with any other agreement
contained in the Old RGC Indentures or the Old RGC Notes; (iii) a default under
certain indebtedness; (iv) certain final judgments or orders for payments of
money; and (v) certain events occurring under bankruptcy laws.
Upon the consummation of the RGC Offers, supplemental indentures to each of
the Old RGC Indentures will become effective, reflecting the proposed amendments
to the Old RGC Indentures. Such supplemental indentures will eliminate
substantially all of the restrictive covenants in the Old RGC Indentures,
including covenants with respect to limitation on indebtedness, limitation on
restricted payments, limitation on transactions with affiliates, limitation on
liens securing subordinated indebtedness, restrictions on preferred stock of
subsidiaries and limitation on dividends and other payment restrictions
affecting subsidiaries. In addition, such supplemental indentures will modify
the covenants which limit the ability of RGC to consolidate or merge with, or
sell all or substantially all of its assets, to any other person or entity
unless certain conditions are satisfied, by eliminating the subsections thereof
which require that immediately after giving effect to such transaction on a pro
forma basis RGC or the surviving entity, as the case may be, has a Consolidated
Interest Coverage Ratio (as defined in the Old RGC Indentures) for its four most
recently completed fiscal quarters of at least 1.8 to 1.0.
The New RGC Notes. The New RGC Notes will be issued upon consummation of
the RGC Offers to tendering holders of Old RGC Notes who tender Old RGC Notes in
exchange for New RGC Notes and will be part of the same issue as the New RGC
Notes offered pursuant to the Subordinated Note Public Offering.
The New RGC Notes will bear interest at a fixed rate per annum equal to the
greater of (a) 11% and (b) the RGC Applicable Treasury Rate (as hereinafter
defined) plus 400 basis points (4.00 percentage points); provided, however, that
in no event will the New RGC Notes bear interest at a rate per annum that is
less than the interest rate on the New RGC Notes offered pursuant to the
Subordinated Note Public Offering. The "RGC Applicable Treasury Rate" means the
yield to maturity at the time of computation of United States Treasury
securities with a constant maturity (as compiled by and published in the most
recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the
average life to stated maturity of the New RGC Notes; provided, that if the
average life to stated maturity of the New RGC Notes is not equal to the
constant maturity of the United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of the year) from the
weekly average yields of the United States Treasury securities for which such
yields are given. Interest will be payable on the New RGC Notes on each June 1
and December 1, beginning December 1,
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1995. The New RGC Notes will mature on June 1, 2005. On or after June 1, 2000,
the New RGC Notes may be redeemed in whole at any time or in part from time to
time, at the option of the Company, at a redemption price equal to the
applicable percentage of the principal amount thereof set forth below, plus
accrued and unpaid interest to the redemption date, if redeemed during the 12
months commencing on June 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
2000...................................................... 104.125 %
2001...................................................... 102.750 %
2002...................................................... 101.375 %
2003 and thereafter....................................... 100.000 %
</TABLE>
In the event that the interest rate on the New RGC Notes is greater than 11%,
the above redemption prices will be correspondingly adjusted.
In addition, on or prior to June 1, 1998 the Company may, at its option,
use the net cash proceeds from one or more Public Equity Offerings to redeem up
to an aggregate of 35% of the principal amount of the New RGC Notes originally
issued, at a redemption price equal to 111% of the principal amount thereof if
redeemed during the 12 months commencing on June 1, 1995, 109.625% of the
principal amount thereof if redeemed during the 12 months commencing on June 1,
1996 and 108.25% of the principal amount thereof if redeemed during the 12
months commencing on June 1, 1997, in each case plus accrued and unpaid
interest, if any, to the redemption date. In the event that the interest rate on
the New RGC Notes is greater than 11%, the above redemption prices will be
correspondingly adjusted.
The New RGC Note Indenture (as defined) provides that if a Change of
Control (as defined therein) occurs, each holder will have the right to require
the Company to repurchase such holder's New RGC Notes pursuant to a Change of
Control Offer (as defined therein) at 101% of the principal amount thereof plus
accrued interest, if any, to the date of repurchase.
The indenture governing the New RGC Notes (the "New RGC Note Indenture")
contains certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitation on dividends and other
restricted payments; (ii) limitation on incurrences of additional indebtedness;
(iii) limitation on liens; (iv) limitation on asset sales; (v) limitation on
dividend and other payment restrictions affecting subsidiaries; (vi) limitation
on transactions with affiliates; (vii) limitation on preferred stock of
subsidiaries; (viii) limitation on mergers and certain other transactions; (ix)
limitation on other senior subordinated indebtedness; and (x) limitation on
guarantees of certain indebtedness.
The aggregate principal amount of Old RGC Notes and New RGC Notes, whether
issued in the RGC Offers or pursuant to the Subordinated Note Public Offering,
will be limited to $650 million at any one time outstanding.
THE F4L EXCHANGE OFFERS
In connection with the Merger, Food 4 Less is offering to holders of its
Old F4L Senior Subordinated Notes and its Old F4L Senior Notes the opportunity
to (i) exchange such Old F4L Senior Subordinated Notes for New F4L Senior
Subordinated Notes, plus $20.00 in cash for each $1,000 principal amount
exchanged and (ii) exchange such Old F4L Senior Notes for New F4L Senior Notes,
plus $5.00 in cash for each $1,000 principal amount exchanged, in each case plus
accrued and unpaid interest to the date of exchange. The consummation of the F4L
Exchange Offers will occur simultaneously with the consummation of the Public
Offerings, the RGC Offers and the Holdings Offer to Purchase.
The obligation of Food 4 Less to accept for exchange any validly tendered
Old F4L Note is conditioned upon, among other things, the satisfaction or waiver
of certain conditions, including (i) satisfaction of a minimum tender amount
(i.e., at least 80% of the aggregate principal amount of the outstanding Old F4L
Notes being validly tendered and not withdrawn pursuant to the F4L Exchange
Offers prior to the date of expiration); (ii) the receipt of the requisite
consents to certain amendments to the indentures governing the
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<PAGE> 116
Old F4L Notes (i.e., consents from Old F4L Noteholders representing at least a
majority in aggregate principal amount of each issue of Old F4L Notes held by
persons other than Food 4 Less and its affiliates) on or prior to the date of
expiration; (iii) the satisfaction or waiver, in Food 4 Less' sole discretion,
of all conditions precedent to the Merger; (iv) the prior or contemporaneous
consummation of the Other Debt Financing Transactions; and (v) the prior or
contemporaneous consummation of the Bank Financing and the New Equity
Investment.
Noteholders participating in the F4L Exchange Offers will be required to
consent to certain amendments to the indentures governing the Old F4L Notes.
Such proposed amendments will modify certain terms of such indentures to permit
the Merger and will eliminate substantially all of the restrictive covenants in
the Old F4L Indentures.
The Old F4L Senior Subordinated Notes. The Old F4L Senior Subordinated
Notes were issued in June 1991, are limited in aggregate principal amount to
$145 million and will mature on June 15, 2001. The Old F4L Senior Subordinated
Notes are unsecured general obligations of Food 4 Less, are subordinated to the
prior payment when due of all Senior Indebtedness (as defined in the indenture
(the "Old F4L Senior Subordinated Note Indenture") governing the Old F4L Senior
Subordinated Notes) and are guaranteed on a senior subordinated basis by Food 4
Less' wholly-owned subsidiaries.
The Old F4L Senior Subordinated Notes bear interest at a rate equal to
13.75% per annum and interest is payable semi-annually on June 15 and December
15 of each year. On or after June 15, 1996, the Old F4L Senior Subordinated
Notes may be redeemed in whole or from time to time in part, at the option of
Food 4 Less, at a redemption price equal to the applicable percentage of the
principal amount thereof set forth below, together with accrued interest to the
redemption date, if redeemed during the 12 months commencing on June 15 in the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------ ----------
<S> <C>
1996...................................... 106.111%
1997...................................... 104.583%
1998...................................... 103.056%
1999...................................... 101.528%
</TABLE>
and thereafter at 100% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date.
In the event of a Change of Control (as defined in the Old F4L Senior
Subordinated Note Indenture), the Old F4L Senior Subordinated Notes may be
redeemed on or after June 15, 1994 and prior to June 15, 1996, at the option of
Food 4 Less, at a redemption price equal to the applicable percentage of the
principal amount thereof set forth below, plus accrued and unpaid interest to
the redemption date, if redeemed during the 12 months commencing on June 15 in
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------ ----------
<S> <C>
1994...................................... 109.167%
1995...................................... 107.639%
</TABLE>
Food 4 Less is required to make a mandatory sinking fund payment on June
15, 2000, sufficient to retire 50% of the Old F4L Senior Subordinated Notes, at
a redemption price equal to 100% of the principal amount thereof, together with
accrued interest to the redemption date. Food 4 Less may, at its option, receive
credit against such sinking fund payment for 100% of the principal amount of any
Old F4L Senior Subordinated Notes previously acquired by Food 4 Less in the open
market and surrendered to the trustee under the Old F4L Senior Subordinated Note
Indenture for cancellation or redeemed at the option of Food 4 Less and which
were not previously used as a credit against any other required payment pursuant
to the Old F4L Senior Subordinated Note Indenture. Food 4 Less intends to credit
exchanges of Old F4L Senior Subordinated Notes accepted pursuant to the F4L
Exchange Offers against its sinking fund obligations.
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<PAGE> 117
The Old F4L Senior Subordinated Notes are subject to certain covenants as
provided in the Old F4L Senior Subordinated Note Indenture. These covenants
impose certain limitations on the ability of Food 4 Less to, among other things,
incur indebtedness, pay dividends or make certain other restricted payments,
enter into certain transactions with affiliates, merge or consolidate with any
other person, or sell, lease, transfer or otherwise dispose of substantially all
of the properties or assets of Food 4 Less. In addition, upon the occurrence of
a Change of Control, each holder has the right to require the repurchase of such
holder's Old F4L Senior Subordinated Notes at a purchase price equal to 101% of
the principal amount thereof plus accrued interest, if any, to the date of
purchase. The Old F4L Senior Subordinated Note Indenture also requires Food 4
Less to offer to repurchase a specified portion of the Old F4L Senior
Subordinated Notes if its net worth does not equal or exceed a specified minimum
net worth at the end of any two consecutive fiscal quarters.
Under the Old F4L Senior Subordinated Note Indenture, certain events
constitute an event of default, including (i) the failure to make any principal
and interest payment on the Old F4L Senior Subordinated Notes when due; (ii) the
failure to comply with any other agreement contained in the Old F4L Senior
Subordinated Note Indenture or the Old F4L Senior Subordinated Notes; (iii) a
default under certain indebtedness; (iv) certain final judgments or orders for
payments of money; and (v) certain events occurring under bankruptcy laws.
Upon the consummation of the F4L Exchange Offers, a supplemental indenture
to the Old F4L Senior Subordinated Note Indenture will become effective,
reflecting the proposed amendments to the Old F4L Senior Subordinated Note
Indenture. Such supplemental indenture will eliminate substantially all of the
restrictive covenants in the Old F4L Senior Subordinated Note Indenture,
including covenants with respect to maintenance of net worth, the limitation on
restricted payments, limitation on incurrences of additional indebtedness,
limitation on liens, limitation on disposition of assets, limitation on payment
restrictions affecting subsidiaries, limitation on transactions with affiliates,
limitation on change of control and the covenant requiring additional subsidiary
guarantees under certain circumstances. In addition, such supplemental indenture
will modify the covenant which limits the ability of Food 4 Less to consolidate
or merge with, or sell all or substantially all of its assets to, any other
person or entity unless certain conditions are satisfied by eliminating the
subsections thereof which require that immediately after giving effect to such
transaction and the incurrence of any indebtedness in connection therewith, Food
4 Less or the surviving entity, as the case may be, has a Net Worth (as defined)
or Operating Coverage Ratio (as defined) that meets the standards set forth
therein.
The New F4L Senior Subordinated Notes. The New F4L Senior Subordinated
Notes will be issued upon consummation of the F4L Exchange Offers to tendering
holders of Old F4L Senior Subordinated Notes.
The New F4L Senior Subordinated Notes will bear interest at a rate of
13.75% per annum and interest will be payable on each June 1 and December 1,
beginning December 1, 1995. The New F4L Senior Subordinated Notes will mature on
June 1, 2005. On or after June 15, 1996, the New F4L Senior Subordinated Notes
may be redeemed in whole at any time or in part from time to time, at the option
of the Company, at a redemption price equal to the applicable percentage of the
principal amount thereof set below, plus accrued and unpaid interest to the
redemption date, if redeemed during the 12 months commencing on June 15 of the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------ ----------
<S> <C>
1996...................................... 106.111%
1997...................................... 104.583%
1998...................................... 103.056%
1999...................................... 101.528%
</TABLE>
and thereafter at 100% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date.
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<PAGE> 118
Upon a Change of Control (as defined), each holder of the New F4L Senior
Subordinated Notes has the right to require the Company to repurchase such
holder's New F4L Senior Subordinated Notes at a price equal to 101% of their
principal amount, plus accrued interest, if any, to the date of repurchase.
The aggregate principal amount of Old F4L Senior Subordinated Notes and New
F4L Senior Subordinated Notes will be limited to $145 million at any one time
outstanding.
The Old F4L Senior Notes. The Old F4L Senior Notes were issued in April
1992, are limited in aggregate principal amount to $175 million and will mature
on April 15, 2000. The Old F4L Senior Notes are unsecured general obligations of
Food 4 Less and are guaranteed on a senior basis by Food 4 Less' wholly-owned
subsidiaries.
The Old F4L Senior Notes bear interest at a rate equal to 10.45% per annum
and interest is payable semi-annually on April 15 and October 15 of each year.
The Old F4L Senior Notes are redeemable, at the option of Food 4 Less, in whole
at any time or in part from time to time, on and after April 15, 1996 at the
following redemption prices (expressed as percentages of the principal amount)
if redeemed during the twelve-month period commencing on April 15 of the year
set forth below, plus, in each case, accrued and unpaid interest to the date of
redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
----------------------------------------- ----------
<S> <C>
1996...................................... 104.48%
1997...................................... 102.99%
1998...................................... 101.49%
1999 and thereafter....................... 100.00%
</TABLE>
In the event of a Change of Control (as defined in the indenture (the "Old
F4L Senior Note Indenture") governing the Old F4L Senior Notes), each holder has
the right to require the repurchase of such holder's Old F4L Senior Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase.
Food 4 Less is required to make a mandatory sinking fund payment of $87.5
million on April 15, 1999, sufficient to retire 50% of the Old F4L Senior Notes
originally issued, at a redemption price equal to 100% of the principal amount
thereof, together with accrued interest to the date of redemption. Food 4 Less
may, at its option, receive credit against such sinking fund payment for 100% of
the principal amount of any Old F4L Senior Note previously acquired by Food 4
Less and surrendered to the trustee under the Old F4L Senior Note Indenture for
cancellation or redeemed at the option of Food 4 Less and which, in each case,
were not previously used for or as a credit against any other required payment
pursuant to the Old F4L Senior Note Indenture. Food 4 Less intends to credit
exchanges of Old F4L Senior Notes accepted pursuant to the F4L Exchange Offers
against its sinking fund obligations.
The Old F4L Senior Notes are subject to certain covenants as provided in
the Old F4L Senior Note Indenture. These covenants impose certain limitations on
the ability of Food 4 Less to, among other things, incur indebtedness, pay
dividends or make certain other restricted payments, enter into certain
transactions with affiliates, incur liens, guarantee indebtedness or merge or
consolidate with any other person, or sell, lease, transfer or otherwise dispose
of substantially all of the properties or assets of Food 4 Less. The Old F4L
Senior Note Indenture also requires Food 4 Less to offer to repurchase a
specified portion of the Old F4L Senior Notes if its net worth does not equal or
exceed a specified minimum net worth at the end of any two consecutive fiscal
quarters.
Under the Old F4L Senior Note Indenture, certain events constitute an event
of default. These events are as follows: (i) the failure to make any principal
and interest payment on the Old F4L Senior Notes when due; (ii) the failure to
comply with any other agreement contained in the Old F4L Senior Note Indenture
or the Old F4L Senior Notes; (iii) a default under certain indebtedness; (iv)
certain final judgments or orders for payments of money; and (v) certain events
occurring under bankruptcy laws.
Upon consummation of the F4L Exchange Offers, a supplemental indenture to
the Old F4L Senior Note Indenture will become effective, reflecting the proposed
amendments to the Old F4L Senior Note Indenture.
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<PAGE> 119
Such supplemental indenture will eliminate substantially all of the restrictive
covenants in the Old F4L Senior Note Indenture, including covenants with respect
to the maintenance of net worth, the limitation on change of control, the
limitation on restricted payments, the limitation on incurrences of additional
indebtedness, the limitation on liens, the limitation on disposition of assets,
the limitation on payment restrictions affecting subsidiaries and the limitation
on transactions with affiliates and the covenant requiring additional subsidiary
guarantees under certain circumstances. In addition, the supplemental indenture
will modify the covenant which limits the ability of Food 4 Less to consolidate
or merge with, or sell all or substantially all of its assets to, any other
person or entity unless certain conditions are satisfied, to eliminate the
subsections thereof which require that immediately after giving effect to such
transaction and the incurrence of any indebtedness in connection therewith, Food
4 Less or the surviving entity, as the case may be, has a Net Worth (as defined)
or Operating Coverage Ratio (as defined) that meets the standards set forth
therein.
The New F4L Senior Notes. The New F4L Senior Notes that will be issued upon
consummation of the F4L Exchange Offers to tendering holders of Old F4L Senior
Notes will be part of the same issue as the New F4L Senior Notes issued pursuant
to the Senior Note Public Offering.
The New F4L Senior Notes will bear interest at a fixed rate per annum equal
to the greater of (a) 10.45% and (b) the F4L Applicable Treasury Rate (as
defined) plus 350 basis points (3.50 percentage points), provided, however, that
in any event the New F4L Senior Notes will bear interest at a rate per annum no
less than the rate on the New F4L Senior Notes offered in the Senior Note Public
Offering. The "F4L Applicable Treasury Rate" means the yield to maturity at the
time of computation of United States Treasury securities with a constant
maturity (as compiled by, and published in, the most recent Federal Reserve
Statistical Release H.15 (519)) most nearly equal to the average life to stated
maturity of the New F4L Senior Notes; provided, that if the average life to
stated maturity of the New F4L Senior Notes is not equal to the constant
maturity of the United States Treasury security for which a weekly average yield
is given, the F4L Applicable Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of the year) from the
weekly average yields of the United States Treasury securities for which such
yields are given. Interest will be payable on the New F4L Senior Notes on each
June 1 and December 1, beginning December 1, 1995. The New F4L Senior Notes will
mature on June 1, 2004. On or after June 1, 2000, the New F4L Senior Notes may
be redeemed in whole at any time or in part from time to time, at the option of
the Company, at a redemption price equal to the applicable percentage of the
principal amount thereof set forth below, plus accrued and unpaid interest to
the redemption date, if redeemed during the 12 months commencing on June 1 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
----------------------------------------- ----------
<S> <C>
2000..................................... 103.9188%
2001..................................... 102.6125%
2002..................................... 101.3063%
2003 and thereafter...................... 100.0000%
</TABLE>
In the event that the interest rate on the New F4L Senior Notes is greater than
10.45%, the above redemption prices will be correspondingly adjusted.
In addition, on or prior to June 1, 1998, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the New F4L Senior Notes
originally issued, at a redemption price equal to 110.45% of the principal
amount thereof if redeemed during the 12 months commencing on June 1, 1995,
109.1438% of the principal amount thereof if redeemed during the 12 months
commencing on June 1, 1996 and 107.8375% of the principal amount thereof if
redeemed during the 12 months commencing on June 1, 1997, in each case plus
accrued and unpaid interest, if any, to the redemption date. In the event that
the interest rate on the New F4L Senior Notes is greater than 10.45%, the above
redemption prices will be correspondingly adjusted. In order to effect the
foregoing redemption with the proceeds of a Public Equity Offering, the Company
shall send the redemption notice not later than 60 days after the consummation
of such Public Equity Offering.
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<PAGE> 120
Upon a Change of Control (as defined), each holder of the New F4L Senior
Notes has the right to require the Company to repurchase such holder's New F4L
Senior Notes at a price equal to 101% of their principal amount, plus accrued
interest, if any, to the date of repurchase.
The aggregate principal amount of Old F4L Senior Notes and New F4L Senior
Notes, whether issued in the F4L Exchange Offers or pursuant to the Senior Note
Public Offering, will be limited to $470 million at any one time outstanding.
THE PUBLIC OFFERINGS
Concurrently with the Holdings Offer to Purchase, the F4L Exchange Offers
and the RGC Offers, Food 4 Less is (i) offering up to $295 million principal
amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and
(ii) offering up to $200 million principal amount of New RGC Notes pursuant to
the Subordinated Note Public Offering. The New F4L Senior Notes offered for
exchange pursuant to the Senior Note Public Offering will be part of the same
issue as the New F4L Senior Notes issued pursuant to the F4L Exchange Offers and
the New RGC Notes offered pursuant to the Subordinated Note Public Offering will
be part of the same issue as the New RGC Notes offered for exchange pursuant to
the RGC Offers. Food 4 Less does not expect to commence the Public Offerings
until such time as the RGC Minimum Exchange has been satisfied and the Requisite
Consents have been received. The consummation of the Public Offerings, the
Holdings Offer to Purchase, the F4L Exchange Offers and the RGC Offers will
occur simultaneously. It is a condition to the consummation of the Public
Offerings that the Holdings Offer to Purchase, the F4L Exchange Offers and the
RGC Offers be successfully consummated. See "The Merger and the
Financing -- Sources and Uses."
DESCRIPTION OF THE NEW CREDIT FACILITY
In connection with the Merger, Food 4 Less will enter into the New Credit
Facility with a syndicate of financial institutions for whom Bankers Trust will
act as agent. All of Food 4 Less' obligations under the New Credit Facility will
be assumed by the Company immediately following the Merger. Food 4 Less has
accepted a commitment letter (the "Commitment Letter") from Bankers Trust
pursuant to which Bankers Trust has agreed, subject to certain conditions, to
provide the Company up to a maximum aggregate amount of $1,075 million of
financing under the New Credit Facility. The following is a summary of the
anticipated material terms and conditions of the New Credit Facility. This
summary does not purport to be a complete description of the New Credit Facility
and is subject to the detailed provisions of the loan agreement (the "Loan
Agreement") and various related documents to be entered into in connection with
the New Credit Facility. A draft copy of the Loan Agreement will be available
upon request from Food 4 Less.
GENERAL
The New Credit Facility will provide for (i) term loans in the aggregate
amount of $750 million, comprised of the $375 million Tranche A Loan, the $125
million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million
Tranche D Loan; and (ii) the $325 million New Revolving Facility under which
working capital loans may be made and commercial or standby letters of credit in
the maximum aggregate amount of up to $150 million may be issued, under which
approximately $92.6 million of letters of credit are expected to be issued upon
the closing of the Merger. The Tranche A Loan may not be fully funded at the
Closing Date. The New Credit Facility will provide that the portion of the
Tranche A Loan not funded at the Closing Date in an amount not to exceed $225
million will be available for a period of 91 days following the Closing Date to
finance the Change of Control Offer. In addition, if the total principal amount
of the Old RGC Notes exchanged for New RGC Notes exceeds $225 million the
Commitment Letter requires that there be a reduction, in an amount equal to such
excess, in one or any combination of (i) the principal amount of proceeds from
the Senior Note Public Offering, (ii) the principal amount of proceeds from the
Subordinated Note Public Offering or (iii) the principal amount available under
the Tranche A Loan.
Proceeds of the New Term Loans and loans under the Revolving Credit
Facility on the Closing Date, together with proceeds from the New Discount
Debenture Placement, the New Equity Investment and the
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<PAGE> 121
Public Offerings, will be used to fund the cash requirements for the acquisition
of RSI, refinance existing bank indebtedness of Ralphs and Food 4 Less, purchase
the Discount Notes, Old RGC 9% Notes and Old RGC 10 1/4% Notes, repay a portion
of other indebtedness, pay holders of the Ralphs EARs and pay various fees,
expenses and other costs associated with the Merger and the Financing. The New
Revolving Facility will be available to provide for the working capital
requirements and general corporate purposes of the Company and to issue
commercial and standby letters of credit to support workers' compensation
contingencies and for other corporate purposes.
INTEREST RATE; FEES
Borrowings under (i) the New Revolving Facility and the Tranche A Loan will
bear interest at a rate equal to the Base Rate (as defined in the Loan
Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as
defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loan
will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted
Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loan will bear
interest at the Base Rate plus 2.50% per annum or the reserve adjusted
Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loan will bear
interest at the Base Rate plus 2.75% per annum or the reserve adjusted
Euro-Dollar Rate plus 4.00% per annum, in each case as selected by the Company.
Applicable interest rates on Tranche A Loan and the New Revolving Facility and
the fees payable under the New Revolving Facility on letters of credit, will be
reduced by up to 0.50% per annum after the New Term Loans have been reduced by
amounts to be agreed upon by the Company and Bankers Trust and if the Company
meets certain financial tests. Up to $30 million of the New Revolving Facility
will be available as a swingline facility and loans outstanding under the
swingline facility shall bear interest at the Base Rate plus 1.00% per annum
(subject to adjustment as described in the preceding sentence). After the
occurrence of a default under the New Credit Facility, interest will accrue at
the rate equal to the rate on loans bearing interest at the rate determined by
reference to the Base Rate plus an additional 2.00% per annum. The Company will
pay the issuing bank a fee of 0.25% on each standby letter of credit and each
commercial letter of credit and will pay the lenders under the New Credit
Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving
Credit Facility (the "Eurodollar Margin") for standby letters of credit and a
fee equal to the Eurodollar Margin minus 1% for commercial letters of credit.
Each of these fees will be calculated based on the amount available to be drawn
under a letter of credit. In addition, the Company will pay a commitment fee of
0.50% per annum on the undrawn amount of the Tranche A Loans from the closing of
the Merger until the drawing or termination thereof and on the unused portions
of the New Revolving Facility and for purposes of calculating this fee, loans
under the swingline facility shall not be deemed to be outstanding. The New
Credit Facility will require the Company to enter into hedging agreements to
limit its exposure to increases in interest rates for a period of not less than
two years. The New Credit Facility may be prepaid in whole or in part without
premium or penalty.
AMORTIZATION; PREPAYMENTS
The Tranche A Loan will mature six years after the closing of the Merger
and will be subject to amortization, commencing in the fifteenth month after the
closing of the Merger on a quarterly basis in aggregate annual amounts of $45
million in the second year, $75 million in the third year, $80 million in the
fourth year, $85 million in the fifth year, and $90 million in the sixth year.
The Tranche B Loan will mature seven years after the closing of the Merger and
will be subject to amortization on a quarterly basis in aggregate annual amounts
of $1.25 million for the first six years and $117.5 million in the seventh year.
The Tranche C Loan will mature eight years after the closing of the Merger and
will be subject to amortization on a quarterly basis in aggregate annual amounts
of $1.25 million for the first seven years and $116.25 million in the eighth
year. The Tranche D Loan will mature nine years after the closing of the Merger
and will be subject to amortization on a quarterly basis in aggregate annual
amounts of $1.25 million for the first eight years and $115 million in the ninth
year. The New Revolving Facility will mature on the same date as the Tranche A
Loan. The Company will be required to reduce loans outstanding under the New
Revolving Facility to $75 million for a period of not less than 30 consecutive
days during each consecutive 12-month period. The Company will be required to
make certain prepayments, subject to certain exceptions, on the New Credit
Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan
Agreement) and with the
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<PAGE> 122
proceeds from certain asset sales, issuances of debt and equity securities and
any pension plan reversion. Such prepayments will be allocated pro rata between
the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans
and to scheduled amortization payments of the Tranche A Loans, the Tranche B
Loans, Tranche C Loans, and the Tranche D Loans pro rata. Mandatory prepayments
on the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will be used
to make an offer to repay such loans and to the extent not accepted 50% of such
amount will be applied to reduce Tranche A Loans on a pro rata basis and the
remaining 50% may be retained by the Company.
GUARANTEES AND COLLATERAL
New Holdings and all active subsidiaries of the Company (including the
Subsidiary Guarantors) will guarantee the Company's obligations under the New
Credit Facility. The Company's obligations and the guarantees of its
subsidiaries will be secured by substantially all personal property of the
Company and its subsidiaries, including a pledge of the stock of all
subsidiaries of the Company (with the exception of the stock of Bell Markets,
Inc., which has been pledged to secure notes payable to the former owners
thereof, so long and only so long as such stock is subject to the liens of such
former owners). New Holdings' guarantee will be secured by a pledge of the stock
of the Company. The Company's obligations will also be secured by first priority
liens on certain unencumbered real property fee interests of the Company and its
subsidiaries and the Company and its subsidiaries will use their reasonable
economic efforts to provide the lenders with a first priority lien on certain
unencumbered leasehold interests of the Company and its subsidiaries.
COVENANTS
The obligation of the lenders under the New Credit Facility to advance
funds is subject to the satisfaction of certain conditions customary in
agreements of this type. In addition, the Company will be subject to certain
customary affirmative and negative covenants contained in the New Credit
Facility, including, without limitation, covenants that restrict, subject to
specified exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) a merger or acquisition, (iii) asset sales, (iv) the granting
of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in
transactions with affiliates, or (vii) cash capital expenditures. In addition,
the New Credit Facility will require that the Company maintain certain specified
financial covenants, including a minimum fixed charge coverage, a minimum
EBITDA, a maximum ratio of total debt to EBITDA and a minimum net worth.
EVENTS OF DEFAULT
The New Credit Facility also provides for customary events of default. The
occurrence of any of such events of default could result in acceleration of the
Company's obligations under the New Credit Facility and foreclosure on the
collateral securing such obligations, which could have material adverse results
to holders of the Seller Debentures.
DESCRIPTION OF OTHER INDEBTEDNESS
THE NEW DISCOUNT DEBENTURES
The New Discount Debentures will be issued in the New Discount Debenture
Placement upon consummation of the Merger. The New Discount Debentures will be
issued in an aggregate principal amount of $193,295,080 at maturity and will
mature on July 1, 2005. The New Discount Debentures will be senior unsecured
obligations of New Holdings and will be senior in right of payment to all
subordinated indebtedness of New Holdings, including the Seller Debentures.
Until June 1, 2000, no interest will accrue on the New Discount Debentures, but
the Accreted Value (as defined in the indenture governing the New Discount
Debentures (the "New Debenture Indenture")) will accrete at a rate of 13 5/8%
(representing the amortization of the original issue discount) from the date of
original issuance until June 1, 2000, on a semi-annual bond equivalent basis
using a 360 day year comprised of twelve 30-day months, such that the Accreted
Value shall be equal to the full principal amount of the New Discount Debentures
on June 1, 2000. The initial Accreted Value per $1,000 principal amount of New
Discount Debentures will be $517.33 (representing the original
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<PAGE> 123
purchase price). Beginning on June 1, 2000, cash interest on the New Discount
Debentures will accrue at a rate of 13 5/8% per annum and will be payable
semi-annually in arrears on each June 1 and December 1 of each year, commencing
December 1, 2000, to the holders of record on the immediately preceding May 15
and November 15.
On or after June 1, 2000, the New Discount Debentures may be redeemed, at
the option of New Holdings, in whole at any time or in part from time to time,
at a redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest, to the redemption
date, if redeemed during the twelve-month period commencing on June 1 in the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------------ ----------------
<S> <C>
2000...................................... 106.8125%
2001...................................... 105.1094%
2002...................................... 103.4063%
2003...................................... 101.7031%
2004 and thereafter....................... 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use
the net proceeds of an Initial Public Offering (as defined in the New Debenture
Indenture) of New Holdings or the Company (or of FFL under certain
circumstances) to redeem up to 35% of the New Discount Debentures at a
redemption price equal to 110% of the Accreted Value thereof on the date of
redemption.
In the event of a Change of Control (as defined in the New Debenture
Indenture), each holder has the right to require the repurchase of such holder's
New Discount Debentures at a purchase price equal to 101% of the Accreted Value
thereof on the Change of Control Payment Date (as defined in the New Debenture
Indenture) (if such date is prior to June 1, 2000) or 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the Change of
Control Payment Date (if such date is on or after June 1, 2000).
The New Debenture Indenture will contain covenants that, among other
things, limit the ability of New Holdings to enter into certain mergers or
consolidations or incur certain liens or of New Holdings or its subsidiaries to
incur additional indebtedness, pay dividends or make certain other Restricted
Payments (as defined in the New Debenture Indenture), or engage in certain
transactions with affiliates. Under certain circumstances, New Holdings will be
required to make an offer to purchase New Discount Debentures at a price equal
to 100% of the Accreted Value thereof on the date of purchase, if such date is
prior to June 1, 2000, or 100% of the principal amount thereof, plus accrued
interest to the date of purchase, if such date is on or after June 1, 2000, with
the proceeds of certain Asset Sales (as defined in the New Debenture Indenture).
The New Debenture Indenture will contain certain customary events of defaults,
which will include the failure to pay interest and principal, the failure to
comply with certain covenants in the New Discount Debentures or the New
Debenture Indenture, a default under certain indebtedness, the imposition of
certain final judgments or warrants of attachment and certain events occurring
under bankruptcy laws.
Pursuant to the terms of a registration rights agreement to be entered into
by New Holdings, New Holdings will be obligated to file a shelf registration
statement with the Commission with respect to the New Discount Debentures, to
have such shelf registration statement declared effective prior to or at the
closing of the Merger, to use its best efforts to cause such shelf registration
statement to remain effective for up to three years, and to pay the expenses
related thereto, including underwriting discounts and brokers' or dealers'
commissions and mark-ups (subject to certain limitations). If New Holdings fails
to comply with its obligations to keep such shelf registration statement
effective, New Holdings will be obligated to pay certain liquidated damages.
Under the registration rights agreement, the holder of the New Discount
Debentures will be entitled to commence resales of the New Discount Debentures
60 days following closing of the Merger. New Holdings and its subsidiaries will
agree not to effect any public distribution of securities similar to the New
Discount Debentures until the New Discount Debentures are resold by the
partnership (or until the third anniversary of the Closing Date, if later). New
Holdings believes that the holder of the New Discount
119
<PAGE> 124
Debentures actively would seek to dispose of its entire interest in the New
Discount Debentures promptly upon expiration of the 60 day holdback period
following closing of the Merger.
THE SELLER DEBENTURES
The Seller Debentures will be issued to the stockholders of RSI upon
consummation of the Merger. The Seller Debentures will be issued in an aggregate
principal amount of $131.5 million and will mature on June 1, 2007. The Seller
Debentures will be general unsecured obligations of New Holdings and will be
subordinated to the prior payment when due of all Senior Indebtedness (as
defined in the indenture governing the Seller Debentures (the "Debenture
Indenture")), including the New Discount Debentures and any Discount Notes that
remain outstanding following consummation of the Merger. The Seller Debentures
will bear interest at a rate equal to 13 5/8% per annum. Interest will accrue on
the Seller Debentures beginning from the date of issuance or from the most
recent date to which interest has been paid and will be payable semi-annually in
arrears on each interest payment date. New Holdings will have the option, in its
sole discretion, to issue additional securities ("Secondary Securities") in lieu
of a cash payment of any or all of the interest due for the period prior to the
interest payment date five years after the date of issuance of the Seller
Debentures.
On or after June 1, 2000, the Seller Debentures may be redeemed, at the
option of New Holdings, in whole at any time or in part from time to time, at a
redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest, if any, to the
redemption date, if redeemed during the twelve-month period commencing on June 1
in the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
----------------------------------------- ----------
<S> <C>
2000..................................... 106.8125%
2001..................................... 105.1094%
2002..................................... 103.4063%
2003..................................... 101.7031%
2004 and thereafter...................... 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use
the net proceeds of an Initial Public Offering (as defined in the Debenture
Indenture) of New Holdings or Food 4 Less to redeem up to 35% of the Seller
Debentures at a redemption price equal to 110% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of redemption.
In the event of a Change of Control (as defined in the Debenture
Indenture), each holder has the right to require the repurchase of such holder's
Seller Debentures at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase.
The Debenture Indenture will contain certain covenants that, among other
things, limit the ability of New Holdings to enter into certain mergers or
consolidations or incur certain liens or of New Holdings or its subsidiaries to
incur additional indebtedness, pay dividends or make certain other Restricted
Payments (as defined in the Debenture Indenture), or engage in certain
transactions with affiliates. Under certain circumstances, New Holdings will be
required to make an offer to purchase Seller Debentures at a price equal to 100%
of the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date with the proceeds of certain Asset Sales (as defined
in the Debenture Indenture). The Debenture Indenture will contain certain
customary events of default, which will include the failure to pay interest and
principal, the failure to comply with certain covenants in the Seller Debentures
or the Debenture Indenture, a default under certain indebtedness, the imposition
of certain final judgments or warrants of attachment and certain events
occurring under bankruptcy laws.
Pursuant to the terms of the Merger Agreement and a registration rights
agreement to be executed concurrently with the closing of the Merger, New
Holdings is obligated to file a shelf registration statement with the Commission
with respect to the Seller Debentures, use its best efforts to cause such shelf
registration statement to become effective and remain effective for up to three
years, and pay the expenses related thereto. The effectiveness of such shelf
registration statement is a condition to the consummation of the Merger. If
120
<PAGE> 125
New Holdings fails to comply with its obligations to keep such shelf
registration statement effective, New Holdings will be obligated to pay certain
liquidated damages.
THE DISCOUNT NOTES
Concurrently with the RGC Offers and the F4L Exchange Offers, Holdings is
(A) offering to holders of the Discount Notes to purchase such Discount Notes
for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per
annum from and after March 15, 1995 until the Closing Date for every $1,000
principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had
an accreted value of $680.26 per $1,000) accepted for purchase and (B)
soliciting consents from holders of the Discount Notes to certain amendments to
the Discount Note Indenture.
The obligation of Holdings to accept for exchange any validly tendered
Discount Note is conditioned upon, among other things, the satisfaction or
waiver of certain conditions, including (i) the receipt of the requisite
consents to certain amendments to the Discount Note Indenture (i.e., consents
from Discount Noteholders representing at least a majority in aggregate
principal amount of Discount Notes held by persons other than Holdings and its
affiliates) on or prior to the date of expiration, (ii) the satisfaction or
waiver, in Holdings' sole discretion, of all conditions precedent to the RSI
Merger, (iii) the prior or contemporaneous successful completion of this
Offering, the F4L Exchange Offers, the RGC Offers and the New Discount Debenture
Placement, and (iv) the prior or contemporaneous consummation of the Bank
Financing and the New Equity Investment.
The Discount Notes were issued in December 1992, are limited in aggregate
principal amount (at maturity) to $103.6 million and will mature on December 15,
2004. The Discount Notes are unsecured general obligations of Holdings (and will
become obligations of New Holdings by operation of the Reincorporation Merger).
Cash interest does not accrue on the Discount Notes prior to December 15, 1997.
Thereafter, cash interest on the Discount Notes will accrue at the rate of
15.25% per annum, and will be payable in cash semiannually in arrears on each
June 15 and December 15, commencing on June 15, 1998.
The Discount Notes were issued at a substantial discount from their
principal amount and the purchase discount accretes at a rate of 15.25% per
annum compounded semi-annually on each June 15 and December 15 through (but
excluding) December 15, 1997.
The Discount Notes are redeemable, at the option of Holdings, in whole at
any time or in part from time to time, on or after December 15, 1997 at the
following redemption prices (expressed as percentages of the accreted value) if
redeemed during the twelve-month period commencing on December 15 of the year
set forth below, plus, in each case, accrued and unpaid interest to the date of
redemption:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------- ----------------
<S> <C>
1997................................. 107.630%
1998................................. 106.100%
1999................................. 104.575%
2000................................. 103.050%
2001................................. 101.525%
2002 and thereafter.................. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to December 15, 1997, Holdings may use
the net proceeds of an Initial Public Offering (as defined in the Discount Note
Indenture) of Holdings or Food 4 Less to redeem up to 25% of the Discount Notes
at redemption prices equal to the sum of (i) the applicable percentage of the
accreted value plus (ii) the Proportionate Share (as defined in the Discount
Note Indenture) of the Discount
121
<PAGE> 126
Notes, if any to the date of redemption if redeemed during the twelve-month
period beginning December 15 of the year set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------- ----------------
<S> <C>
1992................................. 120.000%
1993................................. 117.525%
1994................................. 115.050%
1995................................. 112.575%
1996................................. 110.100%
</TABLE>
In the event of a Change of Control (as defined in the Discount Note
Indenture), each holder has the right to require the repurchase of such holder's
Discount Notes at a purchase price equal to 101% of the accreted value, plus
either, (i) if the date of the purchase is prior to December 15, 1997, the
Proportionate Share, if any, with respect to the Discount Notes to the date of
purchase and (ii) if the date of the purchase is on or after December 15, 1997,
the aggregate principal amount thereof plus accrued interest, if any, to the
date of purchase.
Holdings will make a mandatory sinking fund payment on December 15, 2003,
sufficient to retire 50% of the Discount Notes, at a redemption price equal to
100% of the principal amount thereof, together with accrued interest to the
redemption date. Holdings may, at its option, receive credit against such
sinking fund payment for 100% of the principal amount of any Discount Notes
previously acquired or redeemed by Holdings and surrendered to the trustee under
the Discount Note Indenture for cancellation and which were not previously used
as a credit against any other required payment pursuant to the Discount Note
Indenture. New Holdings intends to credit Discount Notes purchased pursuant to
the Holdings Offer to Purchase against its sinking fund obligations.
The Discount Note Indenture contains certain covenants that, among other
things, limit the ability of Holdings to enter into certain mergers or
consolidations or incur certain liens or of Holdings or its subsidiaries to
incur additional indebtedness, pay dividends or make certain other Restricted
Payments (as defined in the Debenture Indenture), or engage in certain
transactions with affiliates. Under certain circumstances, Holdings will be
required to make an offer to purchase Discount Notes at a price equal to 100% of
the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the purchase date, with the proceeds of certain Asset Sales (as defined
in the Debenture Indenture). The Discount Note Indenture contains certain
customary events of default, including the failure to pay interest and
principal, the failure to comply with certain covenants in the Discount Notes or
the Discount Note Indenture, a default under certain indebtedness, the
imposition of certain final judgments or warrants of attachment and certain
events occurring under bankruptcy laws. In connection with the Holdings Offer to
Purchase, Holdings is soliciting consents to delete all of the restrictive
covenants from the Discount Note Indenture.
Following the Reincorporation Merger, New Holdings and the trustee under
the Discount Note Indenture will execute a supplemental indenture assuming the
obligations of Holdings thereunder. New Holdings and the trustee under the
Discount Note Indenture will then execute a second supplemental indenture
implementing such proposed amendments to the Discount Note Indenture after
certification to such trustee that Holdings has received consents from at least
a majority in aggregate principal amount of such notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Latham & Watkins, counsel to FFL and Holdings, has advised FFL and Holdings
that the following discussion expresses their opinion as to the material federal
income tax consequences expected to result from the Proposed Mergers to holders
of FFL Common Stock and Holdings Common Stock who are citizens or residents of
the United States. Such opinion is based on current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations,
judicial authority and current administrative rulings and pronouncements of the
Internal Revenue Service (the "Service"). There can be no assurance that the
Service will not take a contrary view, and no ruling from the Service has been
or will be sought.
122
<PAGE> 127
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders.
The tax treatment of a holder of FFL Common Stock or Holdings Common Stock
may vary depending upon such holder's particular situation. Certain holders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, persons who are not citizens or
residents of the United States and holders who acquired their shares of FFL
Common Stock or Holdings Common Stock pursuant to the exercise of employee stock
options or otherwise as compensation) may be subject to special rules not
discussed below. EACH HOLDER OF FFL COMMON STOCK OR HOLDINGS COMMON STOCK SHOULD
CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
PROPOSED MERGERS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
TAX CONSEQUENCES TO HOLDERS OF FFL COMMON STOCK AND HOLDINGS COMMON STOCK
The FFL Merger. Under present federal income tax law:
(i) The FFL Merger should constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Code;
(ii) No gain or loss should be recognized by holders of FFL Common Stock
upon the conversion of their FFL Common Stock solely into Holdings Common Stock
pursuant to the FFL Merger;
(iii) The tax basis of the Holdings Common Stock into which the shares of
FFL Common Stock are converted pursuant to the FFL Merger should be the same as
the tax basis of such FFL Common Stock exchanged therefor; and
(iv) The holding period of the Holdings Common Stock into which the shares
of FFL Common Stock are converted pursuant to the FFL Merger should include the
holding period of such FFL Common Stock, provided such shares were capital
assets of the holders.
The Reincorporation Merger. Under present federal income tax law:
(i) The Reincorporation Merger should constitute a reorganization for
federal income tax purposes within the meaning of Section 368(a) of the Code;
(ii) No gain or loss should be recognized by holders of Holdings Common
Stock upon the conversion of their Holdings Common Stock solely into New
Holdings Common Stock pursuant to the Reincorporation Merger;
(iii) No gain or loss should be recognized by holders of FFL Common Stock
who previously converted their FFL Common Stock into Holdings Common Stock
pursuant to the FFL Merger upon the conversion of their Holdings Common Stock
solely into New Holdings Common Stock pursuant to the Reincorporation Merger;
(iv) The tax basis of the New Holdings Common Stock into which shares of
Holdings Common Stock are converted pursuant to the Reincorporation Merger
should be the same as the tax basis of such Holdings Common Stock exchanged
therefor; and
(v) The holding period of the New Holdings Common Stock into which shares
of Holdings Common Stock are converted pursuant to the Reincorporation Merger
should include the holding period of such Holdings Common Stock (determined as
described above under "The Proposed Mergers -- Terms of the Proposed
Mergers -- The FFL Merger"), provided such shares were capital assets of the
holders.
TAX CONSEQUENCES TO FFL, HOLDINGS AND NEW HOLDINGS
The Proposed Mergers. FFL, Holdings and New Holdings should recognize no
income, gain or loss for federal income tax purposes as a result of the Proposed
Mergers.
123
<PAGE> 128
Net Operating Loss Carryforwards. Under Section 382 of the Code, if a
corporation with net operating losses (a "loss corporation") undergoes an
"ownership change," the use of such net operating losses will be limited
annually to the product of the long-term tax-exempt rate (published monthly by
the Service) and the value of the loss corporation's outstanding stock
immediately before the ownership change (excluding certain capital
contributions) (the "Section 382 Limitation"). In general, an "ownership change"
occurs if the percentage of the value of the loss corporation's stock owned by
one or more direct or indirect "five percent shareholders" has increased by more
than 50 percentage points over the lowest percentage of that value owned by such
five percent shareholder or shareholders at any time during the applicable
"testing period" (generally the shorter of (i) the three-year period preceding
the testing date or (ii) the period of time since the most recent ownership
change of the corporation).
Both FFL and RSI have significant net operating loss carryforwards for
regular federal income tax purposes. The New Equity Investment and the RSI
Merger will trigger ownership changes for both the FFL and RSI affiliated groups
for purposes of Section 382 of the Code. As a result, the use of the FFL and RSI
pre-ownership change net operating loss carryforwards will be limited annually
by the Section 382 Limitation. The annual Section 382 Limitation that will be
applicable to the FFL net operating loss carryforwards is estimated to be
approximately $15.6 million, and the annual Section 382 Limitation that will be
applicable to the RSI net operating loss carryforwards is estimated to be
approximately $15 million.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF FFL COMMON STOCK OR
HOLDINGS COMMON STOCK IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME
TAX SITUATION. EACH HOLDER OF FFL COMMON STOCK OR HOLDINGS COMMON STOCK SHOULD
CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH
HOLDER FROM THE PROPOSED MERGERS, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the shares of Holdings Common Stock and the shares of New
Holdings Common Stock to be issued in connection with the FFL Merger and the
Reincorporation Merger, respectively, and the tax consequences of the Proposed
Mergers, will be passed upon for Holdings and New Holdings by Latham & Watkins,
Los Angeles, California.
EXPERTS
The consolidated balance sheets of Ralphs Supermarkets, Inc. as of January
30, 1994 and January 29, 1995 and the related consolidated statements of
operations, cash flows and stockholders' equity for the year ended January 31,
1993, the year ended January 30, 1994 and the year ended January 29, 1995, have
been included in this Prospectus and Solicitation Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheets of Food 4 Less Holdings, Inc., a California
corporation, and subsidiaries as of June 26, 1993 and June 25, 1994 and the
related consolidated statements of operations, cash flows and shareholders'
equity of Food 4 Less Holdings, Inc. for the 52 weeks ended June 27, 1992, the
52 weeks ended June 26, 1993 and the 52 weeks ended June 25, 1994, and the
related financial statement schedules and the balance sheet of Food 4 Less
Holdings, Inc., a Delaware corporation, as of January 4, 1995 included in this
Prospectus and Solicitation Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
124
<PAGE> 129
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY):
Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-2
Consolidated balance sheets at January 30, 1994 and January 29, 1995 ................. F-3
Consolidated statements of operations for the years ended January 31, 1993, January
30, 1994 and January 29, 1995....................................................... F-4
Consolidated statements of cash flows for the years ended January 31, 1993, January
30, 1994 and January 29, 1995....................................................... F-5
Consolidated statements of stockholders' equity for the years ended January 31, 1993,
January 30, 1994 and January 29, 1995............................................... F-6
Notes to consolidated financial statements............................................ F-7
FOOD 4 LESS HOLDINGS, INC. (A CALIFORNIA CORPORATION):
Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-28
Consolidated balance sheets as of June 26, 1993, June 25, 1994 and January 7, 1995
(unaudited)......................................................................... F-29
Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and
January 7, 1995 (unaudited)......................................................... F-31
Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and
January 7, 1995 (unaudited)......................................................... F-32
Consolidated statements of shareholders' equity for the 52 weeks ended June 27, 1992,
June 26, 1993 and June 25, 1994 and the 28 weeks ended January 7, 1995
(unaudited)......................................................................... F-34
Notes to consolidated financial statements............................................ F-35
FOOD 4 LESS HOLDINGS, INC. (A DELAWARE CORPORATION):
Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-50
Balance sheet as of January 4, 1995................................................... F-51
Notes to the balance sheet............................................................ F-52
</TABLE>
F-1
<PAGE> 130
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ralphs Supermarkets, Inc.:
We have audited the consolidated balance sheets of Ralphs Supermarkets,
Inc. and subsidiary as of January 30, 1994 and January 29, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended January 31, 1993, the year ended January 30, 1994 and the year
ended January 29, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ralphs
Supermarkets, Inc. and subsidiary as of January 30, 1994 and January 29, 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 29, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 9, 1995
F-2
<PAGE> 131
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 30,
1994 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 55,080 $ 35,125
Accounts receivable............................................... 30,420 43,597
Inventories....................................................... 202,354 221,388
Prepaid expenses and other current assets......................... 18,111 19,793
---------- ----------
Total current assets...................................... 305,965 319,903
Property, plant and equipment, net................................ 601,897 624,724
Excess of cost over net assets acquired, net...................... 376,414 365,418
Beneficial lease rights, net...................................... 55,553 49,164
Deferred debt issuance costs, net................................. 26,583 23,011
Deferred income taxes............................................. 109,125 112,491
Other assets...................................................... 8,113 15,203
---------- ----------
Total assets.............................................. $1,483,650 $1,509,914
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.............................. $ 70,975 $ 83,989
Short-term debt................................................... -- 51,500
Bank overdrafts................................................... 37,716 45,669
Accounts payable.................................................. 138,554 130,889
Accrued expenses.................................................. 101,543 99,804
Current portion of self-insurance reserves........................ 30,138 27,552
---------- ----------
Total current liabilities................................. 378,926 439,403
Long-term debt.................................................... 927,909 883,020
Self-insurance reserves........................................... 49,872 44,954
Lease valuation reserve........................................... 32,575 28,957
Other non-current liabilities..................................... 89,299 86,393
---------- ----------
Total liabilities......................................... 1,478,581 1,482,727
---------- ----------
Stockholders' equity:
Common stock, $.01 par value per share Authorized 50,000,000
shares; issued and outstanding, 25,587,280 shares at January
30, 1994 and January 29, 1995.................................. 256 256
Additional paid-in capital........................................ 175,292 175,292
Accumulated deficit............................................... (170,479) (148,361)
---------- ----------
Total stockholders' equity................................ 5,069 27,187
---------- ----------
Commitments and contingencies (See Notes 2 and 8)
Total liabilities and stockholders' equity (deficit)...... $1,483,650 $1,509,914
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 132
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, 1993 JANUARY 30, 1994 JANUARY 29, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Sales............................ $2,843,816 100.0% $2,730,157 100.0% $2,724,604 100.0%
Cost of sales.................... 2,217,197 78.0 2,093,727 76.7 2,101,033 77.1
---------- ----- ---------- ----- ---------- -----
Gross profit................... 626,619 22.0 636,430 23.3 623,571 22.9
Selling, general and
administrative expenses..... 470,012 16.5 471,000 17.2 467,022 17.2
Amortization of excess cost
over net assets acquired.... 10,997 0.4 10,996 0.4 10,996 0.4
Provision for restructuring.... 7,100 0.2 2,374 0.1 -- --
---------- ----- ---------- ----- ---------- -----
Operating income............... 138,510 4.9 152,060 5.6 145,553 5.3
Other expenses:
Interest expense, net.......... 125,611 4.4 108,755 4.0 112,651 4.1
Loss on disposal of assets..... 2,607 0.1 1,940 0.1 784 0.0
Provision for legal
settlement.................. 7,500 0.3 -- -- -- --
Provision for earthquake
losses...................... -- -- 11,048 0.4 -- --
---------- ----- ---------- ----- ---------- -----
Earnings before income taxes and
extraordinary item............. 2,792 0.1 30,317 1.1 32,118 1.2
Income tax expense (benefit)..... 8,346 0.3 (108,049) (4.0) -- --
---------- ----- ---------- ----- ---------- -----
Earnings (loss) before
extraordinary item............. (5,554) (0.2) 138,366 5.1 32,118 1.2
Extraordinary item-debt
refinancing, net of tax benefit
$4,173......................... (70,538) (2.5) -- -- -- --
---------- ----- ---------- ----- ---------- -----
Net earnings (loss).............. $ (76,092) (2.7)% $ 138,366 5.1% $ 32,118 1.2%
========== ===== ========== ===== ========== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 133
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................. $ (76,092) $ 138,366 $ 32,118
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 76,873 74,452 76,043
Amortization of discounts and deferred debt
issuance costs................................. 20,978 9,768 9,032
LIFO charge (credit)............................. 1,115 (2,054) 2,085
Loss on sale of assets........................... 6,841 4,314 784
Provision for post-retirement benefits........... 3,275 3,370 2,555
Provision for legal settlement................... 7,500 -- --
Other changes in assets and liabilities:
Accounts receivable................................. 6,376 326 (13,177)
Inventories at replacement cost..................... (13,682) 6,724 (21,120)
Prepaid expenses and other current assets........... 3,703 (1,658) (1,682)
Other assets........................................ (616) 4,449 (7,287)
Interest payable.................................... (13,393) (4,822) (2,419)
Accounts payable and accrued liabilities............ 23,054 (1,622) (1,047)
Income taxes payable................................ (527) (1,480) (2,906)
Deferred tax asset.................................. -- (109,125) (3,366)
Business interruption credit........................ -- (581) --
Earthquake losses................................... -- (11,048) --
Self insurance reserves............................. 8,456 7,031 (7,503)
Other liabilities................................... (170) (12,407) (6,692)
--------- --------- --------
Cash provided by operating activities............... 53,691 104,003 55,418
--------- --------- --------
Cash flows from investing activities:
Capital expenditures................................ (102,697) (62,181) (64,018)
Proceeds from sale of property, plant and
equipment........................................ 219 16,700 13,257
--------- --------- --------
Cash used in investing activities................... (102,478) (45,481) (50,761)
--------- --------- --------
Cash flows from financing activities:
Net borrowings under lines of credit................ 2,100 (31,100) 51,500
Redemption of preferred stock....................... (3,000) -- --
Capitalized financing and acquisition costs......... (22,426) (5,108) (2,496)
Increase (decrease) in bank overdrafts.............. (8,865) 655 7,952
Proceeds from issuance of long-term debt............ 668,269 150,000 --
Dividends paid...................................... -- -- (10,000)
Principal payments on long-term debt................ (577,902) (164,081) (71,568)
--------- --------- --------
Cash provided by (used in) financing activities..... 58,176 (49,634) (24,612)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 9,389 8,888 (19,955)
Cash and cash equivalents at beginning of period...... 36,803 46,192 55,080
--------- --------- --------
Cash and cash equivalents at end of period............ $ 46,192 $ 55,080 $ 35,125
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 134
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RALPHS RALPHS
SUPERMARKETS, INC. GROCERY COMPANY
-------------------- -------------------- ADDITIONAL
OUTSTANDING COMMON OUTSTANDING COMMON PAID-IN- ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL DEFICIT TOTAL
----------- ------ ----------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 2,
1992...................... -- $ -- 100 -- $ 175,548 $(232,753) $ (57,205)
Capitalization of Ralphs
Supermarkets, Inc. .... 25,587,280 256 (100) -- (256) -- --
Net Loss.................. -- -- -- -- -- (76,092) (76,092)
BALANCES AT JANUARY 31,
1993...................... 25,587,280 256 -- -- 175,292 (308,845) (133,297)
Net earnings.............. -- -- -- -- -- 138,366 138,366
---------- ---- ---- ---- --------- --------- ---------
BALANCES AT JANUARY 30,
1994...................... 25,587,280 256 -- -- 175,292 (170,479) 5,069
Net Earnings.............. -- -- -- -- -- 32,118 32,118
Dividends Paid............ -- -- -- -- -- (10,000) (10,000)
---------- ---- ---- ---- --------- --------- ---------
BALANCES AT JANUARY 29,
1995...................... 25,587,280 $256 -- $ -- $ 175,292 $(148,361) $ 27,187
========== ==== ==== ==== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 135
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
At February 2, 1992, Ralphs Grocery Company was an indirect wholly owned
subsidiary of Federated Stores, Inc. ("Federated"). Two wholly owned
subsidiaries of Federated, Federated Holdings III, Inc. ("Holdings III") and
Allied Stores Corporation ("Allied") directly owned the common stock of Ralphs
Grocery Company approximately 84% and 16% respectively. In January 1990 Holdings
III and Allied, and certain other subsidiaries of Federated, each filed
petitions for relief under Chapter 11, Title 11 of the United States Code
("Chapter 11"). In March 1990, Federated filed a petition for relief under
Chapter 11. Pursuant to the plans of reorganization for Federated and certain of
its subsidiaries, Ralphs Supermarkets, Inc. was formed to hold the outstanding
shares of common stock of Ralphs Grocery Company. On February 3, 1992, Holdings
III and Allied contributed their shares of Ralphs Grocery Company to Ralphs
Supermarkets, Inc. in exchange for the issuance by Ralphs Supermarkets, Inc. of
Ralphs Supermarkets, Inc. shares in the same proportion in Ralphs Grocery
Company shares were owned ("Internal Reorganization"). For financial reporting
purposes, this transaction was recorded at predecessor cost. For Federal tax
purposes, a new basis was established at Ralphs Supermarket, Inc. as more fully
described in Note 11.
Under the plans of reorganization for Federated, Holdings III and certain
other subsidiaries of Federated (the "FSI Plan"), all Ralphs Supermarkets, Inc.
shares of common stock held by Holdings III were to be distributed to certain
creditors of Federated and Holdings III, including The Edward J. DeBartolo
Corporation ("EJDC"), Bank of Montreal ("BMO"), Banque Paribas ("BP") and Camdev
Properties Inc. ("Camdev"), and Federated. The FSI Plan was confirmed by the
Bankruptcy Court in January 1992 and was consummated on February 3, 1992. Under
the plan of reorganization of Allied and certain affiliates including Federated
Department Stores, Inc. (the "Allied-Federated Plan"), a portion of Allied's
Holding Company shares were to be distributed to BMO and BP. The
Allied-Federated Plan was confirmed by the Bankruptcy Court in January 1992 and
was consummated shortly after the FSI Plan.
Thus, following consummation of both the FSI Plan and the Allied-Federated
Plan and the transfer on July 19, 1993 of the shares of common stock in Ralphs
Supermarkets, Inc. held by Federated Stores, Inc. to Camdev, the approximate
ownership of Ralphs Supermarkets, Inc. is as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENT
OWNERSHIP OF RALPHS
SUPERMARKETS, INC.
COMMON STOCK
AS OF JULY 19, 1993
-------------------
<S> <C>
EJDC................................................ 60.4%
BMO................................................. 10.1%
BP.................................................. 10.1%
Camdev.............................................. 12.8%
Federated Department Stores, Inc. (as successor by
merger to Allied)................................. 6.6%
</TABLE>
Pursuant to certain agreements entered into contemporaneously with the
effectiveness of the FSI Plan and the Allied-Federated Plan, certain income tax
liabilities of Ralphs Grocery Company, Federated, Allied, Federated Department
Stores, Inc. and other affiliates have been settled with the Internal Revenue
Service. In addition, Ralphs Grocery Company and certain affiliates including
Federated Department Stores, Inc., Allied and Federated (the "Affiliated Group")
entered into an agreement (the "Tax Indemnity Agreement") pursuant to which
Federated Department Stores, Inc. agreed to pay certain tax liabilities, if any,
relating to Ralphs Grocery Company being a member of the Affiliated Group. The
Tax Indemnity Agreement provides a formula to determine the amount of additional
tax liabilities through February 3, 1992 that Ralphs Grocery
F-7
<PAGE> 136
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company would be obligated to pay the Affiliated Group. However, such additional
liability, if any, is limited to $10 million subject to certain adjustments.
Under the Tax Indemnity agreement, both Ralphs Supermarkets, Inc. and
Ralphs Grocery Company have agreed to pay Federated Department Stores, Inc. $1
million annually for each of five years starting on February 3, 1992, and an
additional $5 million on February 3, 1997. These total payments of $10 million
have been recorded in the consolidated financial statements at February 2, 1992.
The five $1 million installments are to be paid by Ralphs Grocery Company and
the $5 million is the joint obligation of both Ralphs Supermarkets, Inc. and
Ralphs Grocery Company. Also, in the event Federated Department Stores, Inc. is
required to pay certain tax liabilities on behalf of Ralphs Grocery Company,
both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to
reimburse Federated Department Stores, Inc. up to an additional $10 million,
subject to certain adjustments. This additional obligation is the joint and
several obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company.
The $5 million payment and the potential $10 million payment may be paid, at the
option of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company, in cash or
newly issued Ralphs Supermarkets, Inc. Common Stock.
In connection with the consummation of the FSI Plan and the
Allied-Federated Plan, Ralphs Grocery Company and certain parties entered into
an agreement (the "Comprehensive Settlement Agreement") pursuant to which the
parties thereto, among other things, agreed to deliver releases to the various
parties to the Comprehensive Settlement Agreement as well as certain additional
parties. Under the Comprehensive Settlement Agreement, Ralphs Grocery Company
received general releases from Allied, Federated, Federated Department Stores,
Inc. and certain other affiliates which released it from any and all claims
which could have been asserted by the parties thereto prior to the effective
dates of FSI Plan and the Allied-Federated Plan other than for claims arising
under the Comprehensive Settlement Agreement, the FSI Plan, the Allied-Federated
Plan and the Tax Indemnity Agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
These consolidated financial statements present the statements of financial
position of Ralphs Supermarkets, Inc. and subsidiary as of January 31, 1993,
January 30, 1994 and January 29, 1995 and the results of their operations and
their cash flows for the three years then ended. Ralphs Grocery Company is
deemed to be the predecessor entity of Ralphs Supermarkets, Inc. For purposes of
these consolidated financial statements Ralphs Supermarkets, Inc. and Ralphs
Grocery Company will be collectively referred to as "Ralphs".
(b) Reporting Period
Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal
year-ends are as follows:
January 31, 1993 (Fiscal 1992)
January 30, 1994 (Fiscal 1993)
January 29, 1995 (Fiscal 1994)
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, Ralphs considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
F-8
<PAGE> 137
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Inventories
Inventories are stated at the lower cost or market. Cost is determined
primarily using the last-in, first-out (LIFO) method. The replacement cost of
inventories exceeded the LIFO inventory cost by $15.5 million and $17.6 million
at January 30, 1994 and January 29, 1995, respectively.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property and equipment
held under capital leases are stated at the present value of the minimum lease
payments at the inception of the lease.
Depreciation of plant and equipment is calculated using the straight-line
method over the estimated useful lives of assets. Plant and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset. Useful lives range from 10 to 40 years for buildings and improvements and
3 to 20 years for fixtures and equipment.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. Interest
cost capitalized during fiscal 1992, 1993 and 1994 was $1.074 million, $.740
million and $.324 million, respectively.
(f) Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized over the terms of the applicable debt agreements using the
effective interest method.
(g) Pre-opening Costs
Pre-opening costs of new stores are deferred and expensed at the time the
store opens. If a new store is ultimately not opened, the costs are expensed
directly to selling, general and administrative expense at the time it is
determined that the store will not be opened.
(h) Self Insurance Reserves
Ralphs is self-insured for a portion of workers' compensation, general
liability and automobile accident claims. Ralphs establishes reserve provisions
based on an independent actuary's review of claims filed and an estimate of
claims incurred but not yet filed.
(i) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired, resulting from the May 3, 1988
acquisition of Ralphs is being amortized using the straight-line method over 40
years. Ralphs assesses the recoverability of this intangible asset by
determining whether the amortization of the asset balance over its remaining
life can be recovered through projected undiscounted operating income (including
interest, depreciation and all amortization expense except amortization of
excess of cost over net assets acquired) over the remaining amortization period
of the excess of cost over net assets acquired. The amount of excess of cost
over net assets acquired impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting Ralphs' average cost
of funds. Accumulated amortization aggregated $63.4 million and $74.4 million at
January 30, 1994 and January 29, 1995, respectively.
F-9
<PAGE> 138
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Acquired Leases
Beneficial lease rights and lease valuation reserves are recorded as the
net present value of the differences between contractual rents under existing
lease agreements and fair value of entering such lease agreements as of the May
3, 1988 acquisition of Ralphs. All beneficial lease rights and lease valuation
reserves arose solely as a result of the May 3, 1988 acquisition. Adjustments to
the carrying value of these assets would typically occur only through additional
business combinations or in the event of early lease termination. Beneficial
lease rights are amortized using the straight-line method over the terms of the
leases. Lease valuation reserves are amortized using the interest method over
the terms of the leases.
(k) Discounts and Promotional Allowances
Promotional allowances and vendor discounts are recorded as a reduction of
cost of sales in the accompanying statements of operations. Allowance proceeds
received in advance are deferred and recognized over the period earned.
(l) Income Taxes
Through February 2, 1992, Ralphs operated under a tax-sharing agreement
with Federated and was included in the consolidated Federal tax returns of
Federated. Through January 28, 1990, Ralphs was included in the combined state
tax returns of Federated; however, Ralphs filed separate state tax returns
subsequent to January 28, 1990. Under the tax-sharing agreement, tax-sharing
payments were made to Federated based on the amount that Ralphs would be liable
for had Ralphs filed separate tax returns, taking into account applicable
carryback and carryforward provision of the tax laws.
Subsequent to February 2, 1992, Ralphs is responsible for filing tax
returns with the Internal Revenue Service and state taxing authorities. Prior to
February 3, 1992 Ralphs paid alternative minimum tax to Federated under its tax
sharing agreement. As a result of the Internal Reorganization, Ralphs will not
be entitled to offset its future Federal regular tax liability with the payments
made to Federated.
Effective for the fiscal year ended February 2, 1992, Ralphs adopted
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." At the date of adoption such change had no impact on the
consolidated financial results.
(m) Reclassification
Certain amounts in the accompanying financial statements have been
reclassified to conform to the current year's presentation.
(n) Consolidation Policy
The consolidated financial statements include the accounts of Ralphs
Supermarkets, Inc., and its wholly owned subsidiary, Ralphs Grocery Company, and
its wholly owned subsidiary, collectively referred to as the Company. All
material intercompany balances and transactions are eliminated in consolidation.
(o) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
(i) Cash and short-term investments
The carrying amount approximates fair value because of the short
maturity of those instruments.
F-10
<PAGE> 139
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) Long-term debt
The fair value of Ralphs' long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the
current rates offered to Ralphs for debt of the same remaining
maturities.
(iii) Interest Rate Swap Agreements
The fair value of interest rate swap agreements is the estimated
amount that Ralphs would receive or pay to terminate the swap
agreements at the reporting date, taking into account current
interest rates and the current credit-worthiness of the swap
counterparties.
(p) Advertising
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was $17.5 million, $16.4 million
and $18.2 million in fiscal 1992, 1993 and 1994, respectively.
(q) Transaction Costs
In connection with the proposed merger, Ralphs has capitalized in other
assets approximately $2.3 million of transaction costs, principally attorney and
accounting fees. Upon completion of the merger these amounts will be
reclassified to excess of cost of net assets acquired and amortized accordingly.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land................................................. $ 159,904 $ 161,725
Buildings and improvements........................... 191,179 199,133
Leasehold improvements............................... 161,341 170,430
Fixtures and equipment............................... 354,626 372,077
Capital leases....................................... 86,964 124,861
---------- ----------
954,014 1,028,226
Less: Accumulated depreciation....................... (312,746) (354,539)
Less: Accumulated capital lease amortization......... (39,371) (48,963)
---------- ----------
Property, plant and equipment, net................... $ 601,897 $ 624,724
========== ==========
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued wages, vacation and sick leave............... $ 34,763 $ 43,766
Taxes other than income tax.......................... 11,084 10,055
Interest............................................. 11,090 8,670
Other................................................ 44,606 37,313
--------- ---------
$ 101,543 $ 99,804
========= =========
</TABLE>
F-11
<PAGE> 140
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
First mortgage notes payable in monthly
installments, commencing June 1, 1994 of $1.6
million including interest at an effective rate
of 9.651%; interest only payable monthly prior to
June 1, 1994. Final payment due June 1, 1999.
Secured by land and buildings with a net book
value of $188.8 million.......................... $178,013 $176,634
Notes payable in varying monthly installments
including interest ranging from 11.5% to 18.96%.
Final payment due through November 30, 1996.
Secured by equipment with a net book value of
$28.5 million.................................... 9,721 6,291
Capitalized lease obligations at interest rates
ranging from 7.25% to 14% maturing at various
dates through 2019 (note 6)...................... 61,150 89,084
Note payable to bank............................... 300,000 245,000
Initial Notes and Exchange Notes, 9% due 2003...... 150,000 150,000
Senior Subordinated Debentures, 10 1/4%, due
2002............................................. 300,000 300,000
-------- --------
Total long-term debt............................... 998,884 967,009
Less current maturities............................ (70,975) (83,989)
-------- --------
Long-term debt..................................... $927,909 $883,020
======== ========
</TABLE>
During the third quarter of 1992, the Company implemented a
recapitalization plan (the "Recapitalization Plan") which was completed during
the first quarter of 1993 by the Company's offering of $150.0 million aggregate
principal amount of its 9% Senior Subordinated notes due 2003 (the "Initial
Notes") in private placement under the Securities Act of 1933, as amended (the
"Securities Act"). The proceeds of the Initial Notes were used to (i) purchase
for cancellation of $60.0 million aggregate principal amount of the Company's
14% Senior Subordinated Debentures due 2000 (the "14% Subordinated Debentures")
from a noteholder who had made an unsolicited offer to sell such 14%
Subordinated Debentures, (ii) defease the remaining $38.1 million aggregate
principal amount of the 14% Subordinated Debentures, (iii) prepay $36.1 million
of borrowings under the Company's $350.0 million 1992 term loan facility entered
into as part of the Recapitalization Plan and (iv) pay fees and expenses
associated with such transactions and for other purposes. As part of a
registration rights agreement entered into with the initial purchasers of the
Initial Notes, the Company agreed to offer to exchange up to $150.0 million
aggregate principal amount of the Exchange Notes for all of the outstanding
Initial Notes (the "Exchange Offer"). The terms of the Exchange Notes are
substantially identical (including principal amount, interest rate and maturity)
in all respects to the terms of the Initial Notes except that the Exchange Notes
are freely transferable by the holders thereof (with certain exceptions) and are
not subject to any covenant upon the Company regarding registration under the
Securities Act. On June 24, 1993, the Company completed the Exchange Offer
exchanging $149.7 million aggregate principal amount of Exchange Notes for
Initial Notes ($.3 million of Initial Notes remain outstanding).
The note payable to bank and working capital line, under the 1992 Credit
Agreement, are secured by first priority liens on Ralphs' inventory and
receivables, servicemarks and registered trademarks, equipment (other than
equipment located at facilities subject to existing liens in favor of equipment
financiers) and after-acquired real property interests and all existing real
property interests (other than those that are subject to prior encumbrances) and
bears interest at the rates, as selected by Ralphs as follows: (i) 1 3/4% over
the prime
F-12
<PAGE> 141
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate, or (ii) 2 3/4% over the Eurodollar Rate. Interest calculated pursuant to
(i) above is payable quarterly, otherwise interest is payable quarterly or at
the selected borrowings option maturity. During the 52 weeks ended January 29,
1995, interest rates under these borrowings ranged from 5.9375% to 10.25%.
Ralphs is required to pay an annual administrative fee of $300,000 pursuant to
the 1992 Credit Agreement as well as a commitment fee of 0.5% on the average
daily amounts available for borrowing under the $120.0 million working capital
credit line.
The 1992 Credit Agreement, which includes a $350.0 million term loan and
$120.0 million working capital credit line, also supports up to $60.0 million of
letters of credit which reduce the available borrowings on the credit line. The
1992 Credit Agreement is subject to quarterly principal payment requirements,
which commenced on March 31, 1993, with payment in full on June 30, 1998. As of
January 29, 1995, $52.4 million of letters of credit and $51.5 million in
borrowings were outstanding, with $16.1 million available under the working
capital credit line.
In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate
cap agreement with an effective date of November 6, 1992 and a three-year
maturity. The interest rate cap agreement hedges the interest rate in excess of
6.5% LIBOR on $105.0 million principal amount against increases in short-term
rates. This agreement satisfies interest rate protection requirements under the
1992 Credit Agreement. In addition to the interest rate cap agreement, 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. This interest rate swap agreement has a three-year
term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement. However,
Ralphs does not anticipate nonperformance by the counterpart.
The following details the impact of the hedging activity on the weighted
average interest rate for each of the last three fiscal years.
<TABLE>
<CAPTION>
WITH HEDGE WITHOUT HEDGE
---------- -------------
<S> <C> <C>
1992........................................ 10.52% 10.22%
1993........................................ 8.96% 8.96%
1994........................................ 9.37% 9.18%
</TABLE>
The Initial Notes and Exchange Notes are unsecured obligations of Ralphs
subordinated in right of payment to amounts due on the aforementioned senior
debt. Interest at 9% is payable each April 1 and October 1 through April 1,
2003, when the notes mature.
The 10 1/4% Senior Subordinated Debentures are unsecured obligations of
Ralphs subordinated in right of payment to amounts due on the senior debt.
Interest at 10 1/4% is payable each January 15 and July 15 through July 15,
2002, when the debentures mature.
The aforementioned debt agreements contain various restrictive covenants
pertaining to net worth levels, limitations on additional indebtedness and
capital expenditures, financial ratios and dividends. The 1992 Credit Agreement
requires Ralphs to reduce its working capital credit line to zero for 30
consecutive days annually. The current annual period extends from July 1 to June
30. The Company has not yet complied with this annual covenant. The Company
intends to either satisfy this covenant by June 30, 1995 or seek to obtain the
necessary waiver from its lenders, if such event of non-compliance ultimately
occurs but there is no assurance that such waiver will be granted, or, if
granted, will be on terms acceptable to the Company. At January 29, 1995, Ralphs
is in compliance with all its 1992 Credit Agreement restrictive covenants. The
Company currently anticipates that it may be out of compliance with certain
other maintenance covenants at the end of the second quarter of 1995. The
Company intends to seek the necessary waivers from its lenders should these
events of non-compliance ultimately occur, but there is no assurance that such
waivers will be granted, or, if granted, will be on terms acceptable to the
Company.
F-13
<PAGE> 142
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities on long-term debt for each of the five years
subsequent to fiscal 1994 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
------------
<S> <C>
1995...................................................... $ 83,989
1996...................................................... 86,792
1997...................................................... 84,771
1998...................................................... 53,605
1999...................................................... 175,400
2000 and thereafter....................................... 482,452
--------
$967,009
========
</TABLE>
The estimated fair value of each class of financial instruments (where
practical), all held for non-trading purposes, is as follows in (000s):
<TABLE>
<S> <C>
Long-term debt............................................ $953,883
Interest rate swap agreement.............................. $ 1,252
Interest rate cap agreement............................... $ (366)
</TABLE>
(6) LEASES
Ralphs has leases for retail store facilities, warehouses and manufacturing
plants for periods up to 30 years. Generally, the lease agreements include
renewal options for five years each. Under most leases, Ralphs is responsible
for property taxes, insurance, maintenance and expense related to the lease
property. Certain store leases require excess rentals based on a percentage of
sales at that location. Certain equipment is leased by Ralphs under agreements
ranging from 3 to 15 years. The agreements usually do not include renewal option
provisions.
Minimum rental payments due under capital leases and operating leases
subsequent to fiscal 1994 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1995............................................... $ 21,640 $ 61,324 $ 82,964
1996............................................... 19,093 60,847 79,940
1997............................................... 18,288 58,182 76,470
1998............................................... 15,901 53,321 69,222
1999............................................... 11,784 52,839 64,623
2000 and thereafter................................ 53,959 373,021 426,980
-------- -------- --------
Total minimum lease payments....................... $140,665 $659,534 $800,199
======== ========
Less amounts representing interest................. (51,581)
--------
Present value of net minimum lease payments........ 89,084
Less current portion of lease obligations.......... (13,151)
--------
Long-term capital lease obligations................ $ 75,933
========
</TABLE>
F-14
<PAGE> 143
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense is summarized as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Capital Leases
Contingent rental............................. $ 2,443 $ 2,241 $ 2,256
Rentals from subleases........................ (2,144) (2,048) (1,734)
Operating Leases
Minimum rentals............................... 49,001 54,965 55,906
Contingent rentals............................ 5,058 3,645 3,763
Rentals from subleases........................ (1,123) (1,150) (1,791)
------- ------- -------
$53,235 $57,653 $58,400
======= ======= =======
</TABLE>
(7) SELF-INSURANCE
Ralphs is a qualified self-insurer in the State of California for worker's
compensation and for automobile liability. For fiscal 1992, 1993 and 1994 self
insurance loss provisions amounted to (in thousands) $25,950, $30,323 and
$14,003, respectively. Ralphs discounts self-insurance liabilities using an 8%
discount rate for all years presented. Management believes that this rate
approximates the time value of money over the anticipated payout period
(approximately 8 years) for essentially risk free investments.
Based on a review of modifications in its workers compensation and general
liability insurance programs, Ralphs adjusted its self-insurance costs during
Fiscal 1994, resulting in a reduction in the loss provision in Fiscal 1994 of
approximately $18.9 million.
Ralphs' historical self-insurance liability for the previous two fiscal
years is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY JANUARY
30, 29,
1994 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Self-insurance liability..................................... $ 97,864 $ 87,830
Less: Discount............................................... (17,854) (15,324)
-------- --------
Net self-insurance liability................................. $ 80,010 $ 72,506
======== ========
</TABLE>
The Company expects that cash payments for claims over the next five years
will aggregate approximately $28 million in fiscal year 1995, $19 million in
fiscal year 1996, $13 million in fiscal year 1997, $8 million in fiscal year
1998 and $7 million in fiscal year 1999.
(8) COMMITMENTS AND CONTINGENCIES
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against Ralphs and other major
supermarket chains located in Southern California, alleging that they conspired
to refrain from competing in the retail market for fluid milk and to fix the
retail price of fluid milk above competitive prices. Specifically, class actions
were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle
on December 7, December 14, and December 23, 1992, respectively. The Court has
yet to certify any of these classes. A demurrer to the complaints was denied.
Notwithstanding that it believes there is no merit to these cases, Ralphs had
reached an agreement in principle to settle them.
F-15
<PAGE> 144
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
However, no settlement agreement has been signed. The Company does not believe
that the resolution of these cases will have a material adverse effect on its
future financial condition. Any settlement would be subject to court approval.
On March 25, 1991, George A. Koteen Associates, In. ("Koteen Associates")
commenced an action in San Diego Superior Court alleging that Ralphs breached an
alleged utility rate consulting agreement. In December 1992, a jury returned a
verdict of approximately $4.9 million in favor of Koteen Associates and in March
1993, attorney's fees and certain other costs were awarded to the plaintiff.
Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an
adverse ruling by the appellate courts.
In April 1994, Ralphs 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 Ralphs 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 Ralphs 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 Ralphs is vigorously defending
this suit. Management believes, based on 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.
In addition, Ralphs is a defendant in a number of other cases currently in
litigation or potential claims encountered in the normal course of business
which are being vigorously defended. In the opinion of management, the
resolutions of these matters will not have a material effect on Ralphs'
financial position or results of operations.
Environmental Matters
In January 1991, the California Regional Water Quality Control Board for
the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a
subsurface characterization of Ralphs' Atwater property. This request was part
of an ongoing effort by the Regional Board, in connection with the U.S.
Environmental Protection Agency (the "EPA"), to identify contributors to
groundwater contamination in the San Fernando Valley. Significant parts of the
San Fernando Valley, including the area where Ralphs' Atwater property is
located, have been designated federal Superfund sites requiring response actions
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, because of regional groundwater contamination. On June 18,
1991, the EPA made its own request for information concerning the Atwater
property. Since that time, the Regional Board has requested further
investigation by Ralphs. Ralphs has conducted the requested investigations and
has reported the results to the Regional Board. Approximately 25 companies have
entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate
and design a remediation system for contaminated groundwater beneath an area
which includes the Atwater property. Ralphs is not a party to the Consent Order,
but is cooperating with requests of the subject companies to allow installation
of monitoring or recovery wells on Ralphs' property. Based upon available
information, management does not believe this matter will have a material
adverse effect on the Company's financial condition or results of operations.
Ralphs has removed underground storage tanks and remediated soil
contamination at the Atwater property. In some instances the removals and the
contamination were associated with grocery business operations, in others they
were associated with prior property users. Although the possibility of other
F-16
<PAGE> 145
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contamination from prior operations or adjacent properties exists at the Atwater
property, management does not believe that the costs of remediating such
contamination will be material to the Company.
Apart from the Atwater property, the Company has recently had environmental
assessments performed on a significant portion of its facilities, including
warehouse and distribution facilities. The Company believes that any responsive
actions required at the examined properties as a result of such assessments will
not have a material adverse effect on its financial condition or results of
operations.
Ralphs has incurred approximately $4.5 million in non-recurring capital
expenditures for conversion of refrigerants during 1994. Other than these
expenditures, Ralphs has not incurred material capital expenditures for
environmental controls during the previous three years, nor does management
anticipate incurring such expenditures during the current fiscal year or the
succeeding fiscal year.
Ralphs is subject to a variety of environmental laws, rules, regulations
and investigative or enforcement activities, as are other companies in the same
or similar business. The Company believes it is in substantial compliance with
such laws, rules and regulations. These laws, rules, regulations and agency
activities change from time to time, and such changes may affect the ongoing
business and operations of the Company.
(9) REDEEMABLE PREFERRED STOCK
Ralphs' non-voting preferred stock consisted of 10,000,000 shares of
authorized $.01 par value preferred stock. At February 3, 1991 and February 2,
1992, 170,000 shares of Class A Preferred Stock and 130,000 shares of Class B
Preferred Stock were issued and outstanding. All of the outstanding shares of
preferred stock were redeemed by Ralphs during February 1992 at their initial
issuance price of $3.0 million.
(10) EQUITY APPRECIATION RIGHTS PLANS
Effective August 26, 1988, Ralphs adopted an Equity Appreciation Plan
("1988 Plan"), whereby certain officers received equity rights representing, in
aggregate, the right to receive 15% of the increase in the appraised value (as
defined in the 1988 Plan) of the Ralphs' equity over an initial value of $120.0
million. The 1988 Plan was amended in January 1992 by agreement among Ralphs and
the Equity Rights holders ("Amended Plan"). Ralphs accrued for the increase in
equity appreciation rights over the contractually defined vesting period (fully
accrued in fiscal 1991), based upon the maximum allowable contractual amount
which approximated ending appraised value.
Under the Amended Plan, all outstanding Equity Rights vested in full are no
longer subject to forfeiture by the holders, except in the event a holder's
employment is terminated for cause within the meaning of the Amended Plan. The
appraised value of Ralphs' equity is to be determined as of May 1 each year by
an investment banking company engaged for this purpose utilizing the methodology
specified in the Amended Plan (which is unchanged from that specified in the
1988 Plan); however, under the Amended Plan the appraised value of Ralphs'
equity for purposes of the plan may not be less than $400.0 million nor exceed
$517.0 million. The amount of equity rights redeemable at any given time is
defined in each holders' separate agreement. On exercise of an equity right, the
holder will be entitled to receive a pro rata percentage of any such increase in
appraised value. In addition, the Amended Plan provides for the possible
additional further payment to the holder of each exercised Equity Right of an
amount equal to the "Deferred Value" of such Equity Right as defined in the
Amended Plan. Ralphs did not incur any expense under the Equity Appreciation
Rights Plan in fiscal 1992, fiscal 1993 and fiscal 1994.
F-17
<PAGE> 146
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of Equity Rights redeemable for each of the four years
subsequent to fiscal 1994 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1995............................................ $ 6,669
1996............................................ 12,389
1997............................................ 3,636
1998............................................ 10,150
-------
$32,844
=======
</TABLE>
(11) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal...................................... $4,173 $ (2,424) $ 713
State........................................ -- 3,500 2,653
------ --------- -------
$4,173 $ 1,076 $ 3,366
------ --------- -------
Deferred
Federal...................................... $ -- $(109,125) $(3,366)
State........................................ -- -- --
------ --------- -------
$ -- $(109,125) $(3,366)
------ --------- -------
Total income tax expense (benefit)........... $4,173 $(108,049) $ --
====== ========= =======
</TABLE>
Income tax expense (benefit) has been classified in the accompanying
statements of operations as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------- --------- ---------
<S> <C> <C> <C>
Earnings before extraordinary items........ $ 8,346 $(108,049) $ --
Extraordinary item......................... (4,173) -- --
------- --------- ---------
Net tax expense (benefit).................. $ 4,173 $(108,049) $ --
======= ========= =========
</TABLE>
F-18
<PAGE> 147
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between income tax expense and income taxes computed using
the top marginal U.S. Federal income tax rate of 34% for Fiscal 1992 and of 35%
for fiscal 1993 and fiscal 1994 applied to earnings (loss) before income taxes
(including, in Fiscal 1992, the extraordinary loss of $74.8 million) were as
follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount of expected expense (benefit) computed
using the statutory Federal rate.............. $(24,450) $ 10,611 $ 11,241
Utilization of financial operating loss....... -- (10,611) (11,241)
Amortization of excess cost over net assets
acquired................................... 3,356 -- --
State income taxes, net of Federal income tax
benefit.................................... -- 3,500 2,653
Accounting limitation (recognition) of
deferred tax benefit....................... 20,041 (109,125) (3,366)
Alternative minimum tax....................... 4,173 625 --
Other, net.................................... 1,053 (3,049) 713
-------- --------- ---------
Total income tax expense (benefit).... $ 4,173 $(108,049) $ --
======== ========= =========
</TABLE>
Ralphs' deferred tax assets, recorded under SFAS 109, were comprised of the
following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deductible intangible assets............................... $ 56,000 $ 43,000
Net operating loss carryforward and tax credit............. 40,125 55,000
Self insurance accrual..................................... 43,000 25,000
Software basis difference and amortization................. -- --
Fees collected in advance.................................. -- 2,600
Property, plant and equipment basis difference and
depreciation............................................. 21,000 16,000
Equity appreciation rights................................. 16,000 11,000
Favorable lease basis differences.......................... 16,000 16,000
State deferred taxes....................................... 17,000 19,000
Other...................................................... 40,000 51,103
--------- ---------
249,125 238,703
Less valuation allowance................................. (140,000) (126,212)
--------- ---------
Total............................................ $ 109,125 $ 112,491
========= =========
</TABLE>
On October 15, 1992, Ralphs filed an election with the Internal Revenue
Service under Section 338(h)(10). Under this Section, Ralphs is required to
restate, for Federal tax purposes, its assets and liabilities to fair market
value as of February 3, 1992. The effect of this transaction is to record a new
Federal tax basis to reflect a change of control for Federal tax purposes
resulting from the Internal Reorganization. No change of control for financial
reporting purposes was affected.
In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act")
was enacted. The Act increased the Federal income tax rate from 34 to 35 percent
for filers whose taxable income exceeded $10.0 million. In the current year, the
effect of the Federal income tax rate change was to increase the net
F-19
<PAGE> 148
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax assets. In addition, the Act also provided for the deductibility of
certain intangibles, including costs in excess gross assets acquired.
The Act has significantly impacted the aggregate deferred tax asset
position of Ralphs at January 29, 1995. Ralphs elected to retroactively apply
certain provisions of the Act related to the February 3, 1992 change of control
for Federal tax purposes. As such, approximately $610.7 million in excess of
cost over net assets acquired became fully deductible for Federal tax purposes.
This amount is deductible over 15 years. This excess in the tax basis over the
financial statement basis of excess of cost over net assets acquired aggregated
$123.0 million at January 29, 1995.
During the year ended January 30, 1994, Ralphs recorded the incremental
impact of the Act on deductible temporary differences and increased its deferred
income tax assets by a net amount of $109.1 million. The decision to reduce the
valuation allowance was based upon several factors. Specific among them, was the
Company's completion of its restructuring plan which effectively reduced
estimated interest expense by approximately $9.0 as compared to the year ended
January 31, 1993. In addition, the January 31, 1993 operating results were
negatively effected by several charges including provisions for restructuring,
legal settlements and a loss on retirement of debt all aggregating approximately
$90 million on a pre-tax basis.
Although there can be no assurance as to future taxable income, the Company
believes that, based upon the above mentioned events, as well as the Company's
expectation of future taxable income, it is more likely than not that the
recorded deferred tax asset will be realized. In order to realize the net
deferred tax asset currently recorded, Ralphs will need to generate sufficient
future taxable income, assuming current tax rates, of approximately $320.0
million.
At January 29, 1995, the Company has Federal net operating loss (NOL)
carryforwards of approximately $162.0 million and Federal and state Alternative
Minimum Tax Credit carryforwards of approximately $2.1 million which can be used
to offset Federal taxable income and regular taxes payable, respectively. The
NOL carryforwards begin expiring in 2008.
During the past three fiscal years, the Company has generated Federal
taxable losses of approximately $162.0 million versus financial pre-tax earnings
of approximately $65.2 million for the same periods. These differences result
principally from excess tax versus financial amortization on certain intangible
assets (excess of cost over net assets acquired), as well as several other
originating temporary differences.
(12) EMPLOYEE BENEFIT PLANS
Ralphs has a defined benefit pension plan covering substantially all
employees not already covered by collective bargaining agreements with at least
one year of credit service (defined at 1,000 hours). Ralphs' policy is to fund
pension costs at or above the minimum annual requirement.
On February 23, 1990, the Company adopted a Supplemental Executive
Retirement Plan covering certain key officers of Ralphs. The Company has
purchased split dollar life insurance policies for participants under this plan.
Under certain circumstances, the cash surrender value of certain split dollar
life insurance policies will offset Ralphs obligations under the Supplemental
Executive Retirement Plan.
During the second quarter of 1994, the Company approved and adopted a new
non-qualified retirement plan, the Ralphs Grocery Company Retirement
Supplemental 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 1993 Omnibus Budget Reconciliation Act.
F-20
<PAGE> 149
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 29, 1995, the Company recorded a $4.0 million additional minimum
liability in offsetting intangible asset to reflect the changes in the new and
amended plans.
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 following actuarially determined components were included in the net
pension expense:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................................... $ 2,076 $ 2,228 $ 2,901
Interest cost on projected benefit obligation..... 2,471 2,838 3,821
Actual return on assets........................... (2,794) (2,695) (1,447)
Net amortization and deferral..................... 237 (46) (1,100)
------- ------- -------
Net pension expense............................. $ 1,990 $ 2,325 $ 4,175
======= ======= =======
</TABLE>
The funded status of Ralphs' pension plan, (based on December 31, 1993 and
1994 asset values), is as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets Exceed Accumulated Benefits:
Actuarial present value of benefit obligations:
Vested benefit obligation................................... $29,659 $31,621
Accumulated benefit obligation.............................. 29,950 31,856
Projected benefit obligation................................ 42,690 45,246
Plan assets at fair value................................... 32,968 38,179
------- -------
Projected benefit obligation in excess of Plan Assets......... (9,722) (7,067)
Unrecognized net gain......................................... 4,567 3,611
Unrecognized prior service cost............................... (1,778) (1,659)
Unrecognized net asset........................................ -- --
------- -------
Accrued pension cost........................................ $(6,933) $(5,115)
======= =======
Accumulated Benefits Exceed Assets:
Actuarial present value of benefit obligations:
Vested benefit obligation................................... 2,982
Accumulated benefit obligation.............................. 2,982
Projected benefit obligation................................ 7,102
Plan assets at fair value................................... --
-------
Projected benefit obligation in excess of plan assets......... (7,102)
Unrecognized net gain......................................... (229)
Unrecognized prior service cost............................... 8,354
Adjustment required to recognized minimum liability........... (4,005)
-------
Accrued pension cost........................................ $(2,982)
=======
</TABLE>
The accrued pension cost for accumulated benefits that exceeded assets at
January 30, 1994 was immaterial to the consolidated financial statements.
F-21
<PAGE> 150
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Service costs for fiscal 1992 and 1993 were calculated using a discount
rate of 8.5% and a rate of increase in future compensation levels of 6%. The
1994 discount rate and the rate of increase in future compensation levels were
reduced to 7.75% and 5.0%, respectively, to reflect the decline in interest
rates in 1994. The discount rate will be increased to 8.25% in 1995 in order to
reflect the increase in the current long-term interest rate. A long-term rate of
return on assets of 9% was used for fiscal 1992, 1993 and 1994.
The pension plan assets consist primarily of common stocks, bonds, debt
securities, and a money market fund. Plan benefits are based primarily on years
of service and on average compensation during the last years of employment.
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
received a prorata share of 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, $12.7 million, was recognized in Fiscal 1994.
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.
The expense related to these plans is summarized as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Multi-employer pension plans.............. $ 7,973 $17,687 $ 8,897
======= ======= =======
Multi-employer health and welfare......... $71,183 $45,235 $66,351
======= ======= =======
</TABLE>
Ralphs maintains the Ralphs Grocery Company Savings Plan Plus--Prime and
the Ralphs Grocery Savings Plan Plus -- Basic (collectively referred to as the
"401(k) Plan") covering substantially all employees who are not covered by
collective bargaining agreements and who have at least one year of credited
service (defined at 1,000 hours). The 401(k) Plan provided for both pre-tax and
after-tax contributions by participating employees. With certain limitations,
participants may elect to contribute from 1% to 12% of their annual compensation
on a pre-tax basis to the Plan. Ralphs has committed to match a minimum of 20%
of an employee's contribution to the 401(k) Plan that do not exceed 5% of the
employee's compensation. Expenses under the 401(k) Plan for fiscal 1992, 1993
and 1994 were $407,961, $431,774 and $446,826, respectively.
Ralphs has an executive incentive compensation plan which covers
approximately 39 key employees. Benefits to participants are earned based on a
percentage of base compensation upon attainment of a targeted formula of
earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was $2.5
million, $2.6 million and $2.4 million, respectively. Ralphs has also adopted an
incentive plan for certain members of management. Benefits to participants are
earned based on a percentage of base compensation upon attainment of a targeted
formula of earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was
$2.8 million, $3.0 million and $3.1 million, respectively.
The aforementioned incentive plans may be cancelled by the Board of
Directors at any time.
F-22
<PAGE> 151
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ralphs sponsors a postretirement medical benefit plan (Postretirement
Medical Plan) covering substantially all employees who are not members of a
collective bargaining agreement and who retire under certain age and service
requirements.
The Postretirement Medical Plan is a traditional type medical plan
providing outpatient, inpatient and various other covered services. Such
benefits are funded from Ralphs' general assets. The calendar year deductible is
$1,270 per individual, indexed to the Medical Consumer Price Index.
The net periodic cost of the Postretirement Medical Plan includes the
following components:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................. $ 1,908 $ 1,767 $ 1,396
Interest cost............................. 1,367 1,603 1,387
Return on plan assets..................... -- -- --
Net amortization and deferral............. -- -- (228)
------- ------- -------
Net postretirement benefit cost......... $ 3,275 $ 3,370 $ 2,555
</TABLE>
The funded status of the postretirement benefit plan is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.............................................. $ 1,237 $ 1,303
Fully eligible plan participants...................... 357 1,499
Other active plan participants........................ 16,062 10,289
Plan assets at fair value............................. -- --
--------- ---------
Funded status......................................... (17,656) (13,091)
Plan assets in excess of projected obligations........ -- --
Unrecognized gain (loss).............................. 6,302 13,676
Unrecognized prior service cost....................... -- (358)
--------- ---------
Accrued postretirement benefit obligation............. $ (23,958) $ (26,409)
========= =========
</TABLE>
Service cost was calculated using a medical cost trend of 10.5% for fiscal
1992. Service cost was calculated using a medical cost trend of 10.5% and a
decreasing medical cost trend rate of 14%-8% for 1993 and 1994 respectively. The
discount rate for 1993 was 8.5% and was reduced to 7.75% in 1994 to reflect the
decline in interest rates in 1994. In 1995, the discount rate will increase to
8.25% in order to reflect the increase in the current long-term interest rate.
The long-term rate of return of plan assets is not applicable as the plan is not
funded.
The effect of a one-percent increase in the medical cost trend would
increase the fiscal 1994 service and interest cost to 18%. The accumulated
postretirement benefit obligation at January 29, 1995 would also increase by
27%.
F-23
<PAGE> 152
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) QUARTERLY RESULTS (UNAUDITED)
Quarterly results for fiscal 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
GROSS OPERATING INCOME NET
SALES PROFIT INCOME TAXES EARNINGS
------- ------ --------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FY 1993 Quarters
12 weeks ended 04/25/93......................... $ 632.4 $142.4 $ 31.4 $ 1.0 $ 3.9
12 weeks ended 07/18/93......................... 629.0 145.2 36.8 (1.0) 12.9
12 weeks ended 10/10/93......................... 612.8 141.5 31.7 -- 7.0
16 weeks ended 01/30/94......................... 856.0 207.4 52.2 (108.0) 114.6
-------- ------ ------- ------- ------
Total................................... $2,730.2 $636.5 $ 152.1 $(108.0) $138.4
======== ====== ======= ======= ======
FY 1994 Quarters
12 weeks ended 04/24/94......................... $ 616.0 $141.7 $ 34.1 $ -- $ 8.4
12 weeks ended 07/17/94......................... 625.0 142.9 32.9 -- 7.2
12 weeks ended 10/09/94......................... 615.4 138.8 30.8 -- 4.3
16 weeks ended 01/29/95......................... 868.2 200.2 47.8 -- 12.2
-------- ------ ------- ------- ------
Total................................... $2,724.6 $623.6 $ 145.6 $ -- $ 32.1
======== ====== ======= ======= ======
</TABLE>
(14) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized................... $118,391 $93,738 $99,067
Income taxes paid........................................... $ 7,169 $ 2,423 $ 6,270
Capital lease assets and obligations assumed................ $ -- $15,395 $41,131
</TABLE>
(15) STOCK OPTION PLAN
On February 3, 1992, 3,162,235 options for Common Stock of the Company were
granted under the Ralphs Non-qualified Stock Option Plan. All options were
vested, but not exercisable, on the date of the grant. Options granted to
certain officers become exercisable at the rate of 20% on each September 30 of
calendar years 1992 through 1996. Options granted to other officers become
exercisable as to 10% of the grant on each of September 30, 1992 and 1993, 15%
on each of September 30, 1994 through September 30, 1997, and 20% on September
20, 1998.
F-24
<PAGE> 153
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Ralphs Non-qualified Stock Option Plan.
<TABLE>
<CAPTION>
NUMBER OF PRICE
OPTIONS RANGE
--------- ------
<S> <C> <C>
Options Outstanding at January 30, 1994:
Beginning of year............................................. 3,162,235 $20.21
Granted....................................................... -- --
Exercised..................................................... -- --
Cancelled..................................................... -- --
Expired....................................................... -- --
End of year................................................ 3,162,235 $20.21
--------- ------
Exercisable at end of year...................................... 811,760 --
--------- ------
Available for grant at end of year.............................. -- --
--------- ------
Options Outstanding at January 29, 1995:
Beginning of year............................................. 3,162,235 $20.21
Granted....................................................... -- --
Exercised..................................................... -- --
Cancelled..................................................... -- --
Expired....................................................... -- --
End of year................................................ 3,162,235 $20.21
--------- ------
Exercisable at end of year...................................... 1,330,924 --
--------- ------
Available for grant at end of year.............................. -- --
--------- ------
</TABLE>
The option price for outstanding options at January 29, 1995 assumes a
grant date fair market value of Common Stock of the Company equal to $20.21 per
share, which represents the high end of a range of estimated values of the
Common Stock of the Company on February 3, 1992, the date of the grant.
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate that value is
discussed in Note 2.
The estimated fair value of each class of financial instruments (where
practical), all held for non-trading purposes, is as follows in (000s):
<TABLE>
<CAPTION>
JANUARY 30, 1994 JANUARY 29, 1995
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long term debt................................ $998,884 $1,014,634 $967,009 $ 953,883
Interest rate swap agreements................. n/a 1,153 n/a 1,252
Interest rate cap agreements.................. n/a (19) n/a (366)
</TABLE>
In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate
cap agreement with an effective date of November 6, 1992 and a three year
maturity. The interest rate cap agreement hedges the interest rate in excess of
6.5% LIBOR on $105.0 million principal amount against increases in short-term
rates. This
F-25
<PAGE> 154
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement satisfies interest rate protection requirements under the 1992 Credit
Agreement. In addition to the interest rate cap agreement, Ralphs entered into
an interest rate swap agreement on $150.0 million national 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. This interest rate swap agreement has a three-year term expiring
November 6, 1995. Ralphs is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement. However,
Ralphs does not anticipate nonperformance by the counterpart.
The following details the impact of the hedging activity on the weighted
average rate for each of the last three fiscal years.
<TABLE>
<CAPTION>
WITH HEDGE WITHOUT HEDGE
---------- -------------
<S> <C> <C>
1992........................................................ 10.52% 10.22%
1993........................................................ 8.96% 8.96%
1994........................................................ 9.37% 9.18%
</TABLE>
(17) THE MERGER (UNAUDITED)
On September 14, 1994, Food 4 Less Supermarkets, Inc. ("Food 4 Less"), Food
4 Less Holdings, Inc. ("Holdings"), and the parent company of Holdings, Food 4
Less, Inc. ("FFL"), entered into a definitive Agreement and Plan of Merger (as
amended from time to time, the "Merger Agreement") with Ralphs Supermarkets,
Inc. (the "Holding Company") and its stockholders. Pursuant to the terms of the
Merger Agreement, Food 4 Less will be merged with and into Holding Company (the
"RSI Merger") and Holding Company will continue as the surviving corporation.
Food 4 Less is a multiple format supermarket operator that operates in three
geographic areas: Southern California, Northern California and certain areas of
the Midwest.
Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), which
is currently a wholly-owned subsidiary of Holding Company, will merge with and
into Holding Company (the "RGC Merger," and together with the RSI Merger, the
"Merger"), and Holding Company will change its name to Ralphs Grocery Company
(the "New Company"). Prior to the Merger, FFL will merge with and into Holdings,
which will be the surviving corporation (the "FFL Merger"). Immediately
following the FFL Merger, Holdings will change its jurisdiction of incorporation
by merging with a newly-formed, wholly-owned subsidiary ("New Holdings"),
incorporated in Delaware (the "Reincorporation Merger"). As a result of the
Merger, the FFL Merger and the Reincorporation Merger, the New Company will
become a wholly-owned subsidiary of New Holdings. Agreement has been reached
with each of the California Attorney General and the Federal Trade Commission
for approval of the Merger. Food 4 Less and Ralphs have agreed in a settlement
agreement with the Attorney General to divest 27 specific stores in Southern
California. Under the agreement, the Company must divest 14 stores by June 30,
1995, and the balance of 13 stores by December 31, 1995.
In order to consummate the Merger, Food 4 Less has made an Offer to
Exchange and Offer to Purchase and Solicit Consents with respect to the holders
of the 9% Senior Subordinated Notes (the "Old RGC 9% Notes") due April 1, 2003
of Ralphs and the 10 1/4% Senior Subordinated Notes due July 15, 2002 of RGC
(the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old
RGC Notes") (i) to exchange (as so amended and restated, the "Exchange Offers")
such Old RGC Notes for New Senior Subordinated Notes due 2005 (the "New Notes")
plus a cash payment of $20.00 in cash for each $1,000 principal amount of Old
RGC Notes tendered for exchange or (ii) to purchase (the "Cash Offers," and
together with the Exchange Offers, the "Offers") Old RGC Notes for $1,010 in
cash per $1,000 principal amount of Old RGC Notes accepted for purchase, in each
case, plus accrued and unpaid interest to the date of exchange or purchase. The
Offers are subject to the terms and conditions set forth in an Amended and
F-26
<PAGE> 155
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restated Prospectus and Solicitation Statement, filed by Food 4 Less with the
Securities and Exchange Commission and which is subject to further change (the
"Prospectus"), including: (1) satisfaction of a minimum tender amount (i.e., at
least a majority of the aggregate principal amount of the outstanding Old RGC
Notes being validly tendered for exchange for New Notes and not withdrawn
pursuant to the Offers prior to the date of expiration); (2) the receipt of the
requisite consents to certain amendments to the indentures (the "Indentures")
under which the Old RGC Notes were issued (i.e., consents from holders of Old
RGC Notes representing at least a majority in aggregate principal amount of each
issue of Old RGC Notes held by persons other than Ralphs and its affiliates) on
or prior to the date of expiration; (3) the satisfaction or waiver, in Food 4
Less' sole discretion, of all conditions precedent to the Merger; (4) the prior
or contemporaneous consummation of other exchange offers, consent solicitations
and public offerings contemplated by the Prospectus; and (5) the prior or
contemporaneous consummation of the bank financing and the equity investment
described in the Prospectus. As a result of the RSI Merger and the RGC Merger,
the New Notes and any outstanding Old RGC Notes not tendered in the Offers will
be the obligations of the New Company.
Conditions to the consummation of the RSI Merger include the receipt of
necessary consents and the completion of financing of the transaction. The
purchase price for Holding Company is approximately $1.5 billion, including the
assumption or repayment of debt. The consideration payable to the stockholders
of Holding Company consists of $375 million in cash, $131.5 million principal
amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 to be
issued to the selling shareholders of Holding Company (the "Seller Debentures")
by New Holdings and $18.5 million initial accreted value of 13 5/8% Senior
Discount Debentures due 2005 (the "New Discount Debentures"). New Holdings will
use $100 million of the cash received from a new equity investment (the "New
Equity Investment"), together with the Seller Debentures and the New Discount
Debentures, to acquire approximately 48% of the capital stock of Holding Company
immediately prior to consummation of the RSI Merger. New Holdings will then
contribute the $250 million of purchased shares of Holding Company stock to Food
4 Less, and pursuant to the RSI Merger the remaining shares of Holding Company
stock will be acquired for $275 million in cash.
Standard & Poor's has publicly announced that, upon consummation of the
Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating
assignment, if implemented, would constitute a Rating Decline pursuant to the
Indentures. The consummation of the Merger and the resulting change in
composition of the Board of Directors of RGC, together with the anticipated
Rating Decline, would constitute a Change of Control Triggering Event under the
Indentures. Although RGC does not anticipate that there will be a significant
amount of Old RGC Notes outstanding following consummation of the Exchange
Offers, upon such a Change of Control Triggering Event, the New Company would be
obligated to make the Change of Control Offer following the Merger for all
outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase.
Due to the increased size, dual format strategy and integration related
costs, after giving effect to or in connection with the Merger, RGC believes
that its future operating results will not be directly comparable to the
historical operating results of RGC. Upon consummation of the Merger, the
operations and activities of RGC 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 New Company. The
amount of the restructuring charge is not 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 RGC and the New Company.
Following the consummation of the Merger, the New Company will be highly
leveraged.
F-27
<PAGE> 156
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Food 4 Less Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Food 4 Less
Holdings, Inc. (a California corporation) and subsidiaries (the Company) as of
June 26, 1993 and June 25, 1994, and the related consolidated statements of
operations, shareholders' equity and cash flows for the 52 weeks ended June 27,
1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Food 4 Less
Holdings, Inc. and subsidiaries as of June 26, 1993 and June 25, 1994, and the
results of their operations and their cash flows for the 52 weeks ended June 27,
1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 29, 1994 (except with respect
to the matter discussed in
Note 13, as to which the date is
October 14, 1994, and with respect to
the matter discussed in Note 14, as to
which the date is April 13, 1995)
F-28
<PAGE> 157
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 7,
1993 1994 1995
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 25,089 $ 32,996 $ 15,750
Trade receivables, less allowances of $1,919, $1,386 and
$1,264 at June 26, 1993, June 25, 1994 and January 7,
1995, respectively.................................... 22,048 25,039 25,992
Notes and other receivables.............................. 1,278 1,312 777
Inventories.............................................. 191,467 212,892 223,261
Patronage receivables from suppliers..................... 2,680 2,875 5,093
Prepaid expenses and other............................... 6,011 6,323 12,542
-------- -------- --------
Total current assets............................. 248,573 281,437 283,415
INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER
COOPERATIVES:
A.W.G.................................................... 6,693 6,718 6,718
Certified and Other...................................... 6,657 5,984 5,694
PROPERTY AND EQUIPMENT:
Land..................................................... 23,912 23,488 23,488
Buildings................................................ 12,827 12,827 24,148
Leasehold improvements................................... 81,049 97,673 106,484
Store equipment and fixtures............................. 129,178 148,249 153,538
Transportation equipment................................. 31,758 32,259 32,363
Construction in progress................................. 757 12,641 14,459
Leased property under capital leases..................... 77,553 78,222 78,222
Leasehold interests...................................... 93,863 93,464 93,226
-------- -------- --------
450,897 498,823 525,928
Less: Accumulated depreciation and amortization.......... 96,948 134,089 155,758
-------- -------- --------
Net property and equipment............................ 353,949 364,734 370,170
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $11,611, $17,083 and $20,166 at June 26, 1993, June
25, 1994 and January 7, 1995, respectively............ 33,778 28,536 25,529
Goodwill, less accumulated amortization of $26,254,
$33,945 and $38,113 at June 26, 1993, June 25, 1994
and January 7, 1995, respectively..................... 280,895 267,884 263,658
Other, net............................................... 27,295 24,787 29,438
-------- -------- --------
$957,840 $980,080 $984,622
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-29
<PAGE> 158
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 7,
1993 1994 1995
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................ $140,468 $180,708 $ 164,981
Accrued payroll and related liabilities................. 40,319 42,805 39,976
Accrued interest........................................ 5,293 5,474 7,454
Other accrued liabilities............................... 40,467 53,910 60,619
Income taxes payable.................................... 2,053 2,000 689
Current portion of self-insurance liabilities........... 23,552 29,492 28,616
Current portion of long-term debt....................... 12,778 18,314 22,290
Current portion of obligations under capital leases..... 2,865 3,616 3,634
-------- -------- ---------
Total current liabilities....................... 267,795 336,319 328,259
LONG-TERM DEBT............................................ 335,576 310,944 342,396
OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 38,071
SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000
SENIOR HOLDINGS DISCOUNT NOTES............................ 50,230 58,997 64,541
DEFERRED INCOME TAXES..................................... 22,429 14,740 14,740
SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 55,701
COMMITMENTS AND CONTINGENCIES............................. -- -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 1,600,000 shares
authorized and 1,385,265, 1,381,782 and 1,384,309
shares issued at June 26, 1993, June 25, 1994 and
January 7, 1995, respectively........................ 14 14 14
Additional paid-in capital.............................. 106,452 105,182 105,460
Notes receivable from shareholders...................... (714) (586) (702)
Retained deficit........................................ (83,119) (94,586) (108,858)
-------- -------- ---------
Total shareholders' equity (deficit)............ 22,633 10,024 (4,086)
-------- -------- ---------
$957,840 $980,080 $ 984,622
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-30
<PAGE> 159
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1992 1993 1994 1994 1995
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES...................................... $2,913,493 $2,742,027 $2,585,160 $1,416,213 $1,404,665
COST OF SALES (including purchases from
related parties of $277,812, $204,028,
$175,929, $106,060 and $99,367 for the 52
weeks ended June 27, 1992, June 26, 1993,
and June 25, 1994, and for the 28 weeks
ended January 8, 1994 and January 7,
1995, respectively)...................... 2,392,655 2,257,835 2,115,842 1,153,989 1,167,205
---------- ---------- ---------- ---------- ----------
GROSS PROFIT............................... 520,838 484,192 469,318 262,224 237,460
SELLING, GENERAL, ADMINISTRATIVE AND OTHER,
NET...................................... 469,751 434,908 388,836 221,464 199,161
AMORTIZATION OF EXCESS COSTS OVER NET
ASSETS ACQUIRED.......................... 7,795 7,571 7,691 4,132 4,168
RESTRUCTURING CHARGE....................... -- -- -- -- 5,134
---------- ---------- ---------- ---------- ----------
OPERATING INCOME........................... 43,292 41,713 72,791 36,628 28,997
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs........... 63,907 68,713 71,545 38,635 40,145
Amortization of deferred financing
costs................................. 6,304 4,901 5,472 2,948 3,083
---------- ---------- ---------- ---------- ----------
70,211 73,614 77,017 41,583 43,228
LOSS (GAIN) ON DISPOSAL OF ASSETS.......... (1,364) (2,083) 37 87 (459)
PROVISION FOR EARTHQUAKE LOSSES............ -- -- 4,504 -- --
---------- ---------- ---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY CHARGES.................... (25,555) (29,818) (8,767) (5,042) (13,772)
PROVISION FOR INCOME TAXES................. 3,441 1,427 2,700 700 500
---------- ---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGES.......... (28,996) (31,245) (11,467) (5,742) (14,272)
EXTRAORDINARY CHARGES:
Loss on extinguishment of debt, net of
income tax benefit of $2,484.......... 6,716 -- -- -- --
Gain on partially depreciated assets
replaced by insurance companies, net
of income tax expense of $702......... (1,898) -- -- -- --
---------- ---------- ---------- ---------- ----------
NET LOSS................................... $ (33,814) $ (31,245) $ (11,467) $ (5,742) $ (14,272)
========== ========== ========== ========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges........ $ (20.74) $ (22.43) $ (8.29) $ (4.15) $ (10.32)
Extraordinary charges.................... (3.45) -- -- -- --
---------- ---------- ---------- ----------- ----------
Net loss................................. $ (24.19) $ (22.43) $ (8.29) $ (4.15) $ (10.32)
========== ========== ========== ========== ==========
Average Number of Common Shares
Outstanding........................... 1,397,939 1,393,289 1,382,710 1,383,127 1,383,170
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE> 160
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1992 1993 1994 1994 1995
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Cash received from customers........... $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 1,416,213 $ 1,404,665
Cash paid to suppliers and employees... (2,752,442) (2,711,779) (2,441,353) (1,361,103) (1,389,667)
Interest paid.......................... (56,234) (58,807) (56,762) (29,178) (32,621)
Income taxes (paid) refunded........... (4,665) 2,971 (247) 1,652 (1,811)
Interest received...................... 1,266 993 903 486 836
Other, net............................. 4,734 8,093 121 2,388 583
----------- ----------- ----------- ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................. 106,152 (16,502) 87,822 30,458 (18,015)
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment........................... 17,395 15,685 11,953 12,307 7,120
Payment for purchase of property and
equipment........................... (60,263) (53,467) (57,471) (20,404) (39,049)
Proceeds (payment) for sale (purchase)
of other assets..................... (4,754) (18) 813 -- --
Business acquisition costs, net of cash
acquired............................ (27,563) -- (11,050) -- --
Receivable received from seller of
business acquired................... 12,259 -- -- -- --
Other, net............................. -- -- -- 61 (907)
----------- ----------- ----------- ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES.... (62,926) (37,800) (55,755) (8,036) (32,836)
CASH PROVIDED (USED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
debt................................ 177,500 26,557 28 28 --
Net increase (decrease) in revolving
loan................................ (23,900) 4,900 (4,900) (4,900) 48,700
Payments of long-term debt............. (184,389) (14,319) (14,224) (10,395) (13,272)
Proceeds from the issuance of preferred
stock............................... -- 46,348 -- -- --
Proceeds from issuance of common stock,
net................................. 341 3,652 -- -- --
Purchase of treasury stock, net........ (313) (545) (1,192) (726) 92
Payments of capital lease obligation... (2,814) (2,840) (3,693) (1,565) (1,909)
Deferred financing costs and other..... (6,656) (8,839) (179) (161) (6)
----------- ----------- ----------- ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES............................. (40,231) 54,914 (24,160) (17,719) 33,605
----------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 2,995 612 7,907 4,703 (17,246)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD................. 21,482 24,477 25,089 25,089 32,996
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD....................... $ 24,477 $ 25,089 $ 32,996 $ 29,792 $ 15,750
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-32
<PAGE> 161
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7,
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss................................ $(33,814) $(31,245) $(11,467) $(5,742) $ (14,272)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization........ 61,181 62,541 62,555 33,320 33,878
Accretion of Holdings Discount
Notes.............................. -- 3,882 8,767 4,721 5,544
Extraordinary charge................. 4,818 -- -- -- --
Restructuring charge................. -- -- -- -- 5,134
Loss (gain) on sale of assets........ (1,364) (4,613) 65 87 (459)
Equity loss on investments in
supplier cooperative............... 472 207 -- --
Change in assets and liabilities, net
of effects from acquisition of
businesses:
Accounts and notes receivable...... (7,688) 17,145 (3,220) (9,568) (2,725)
Inventories........................ 202 17,697 (17,125) (16,106) (10,369)
Prepaid expenses and other......... (2,834) (6,163) (5,717) (5,659) (9,097)
Accounts payable and accrued
liabilities..................... 71,369 (83,286) 55,301 23,752 (20,228)
Self-insurance liabilities......... 15,034 2,935 (3,790) 3,301 (4,110)
Deferred income taxes.............. 2,033 4,004 2,506 1,714 --
Income taxes payable............... (3,257) 394 (53) 638 (1,311)
-------- -------- -------- ------- ---------
Total adjustments.................... 139,966 14,743 99,289 36,200 (3,743)
-------- -------- -------- ------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES.............................. $106,152 $(16,502) $ 87,822 $30,458 $ (18,015)
======== ======== ======== ======= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of property and equipment
through issuance of capital lease
obligation........................... -- -- $ 2,575 -- --
======== ======== ======== ======= =========
Reduction of goodwill and deferred
income taxes......................... -- -- $ 9,896 -- --
======== ======== ======== ======= =========
Acquisition of businesses:
Fair value of assets acquired........ -- -- $ 11,241 -- --
Net cash paid in acquisition......... -- -- (11,050) -- --
-------- -------- -------- ------- ---------
Liabilities assumed.................. -- -- $ 191 -- --
======== ======== ======== ======= =========
Final purchase price allocation for the
Alpha Beta Acquisition:
Property and equipment valuation
adjustment......................... $ 44,231 -- -- -- --
======== ======== ======== ======= =========
Additional acquisition liabilities... $ 14,305 -- -- -- --
======== ======== ======== ======= =========
Deferred tax benefit................. $ 12,800 -- -- -- --
======== ======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-33
<PAGE> 162
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ --------------- TOTAL
NUMBER NUMBER SHARE- ADD'L SHARE-
OF OF HOLDERS' PAID-IN RETAINED HOLDERS'
SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) EQUITY
--------- ------ ------ ------ --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 29, 1991........... 1,396,878 $ 14 (1,250) $ (125) $(930) $103,658 $ (18,060) $ 84,557
Net loss.......................... -- -- -- -- -- -- (33,814) (33,814)
Issuance of Common Stock.......... 1,636 -- -- -- (190) 341 -- 151
Purchase of Treasury Stock........ -- -- (3,947) (463) 131 -- -- (332)
Sale of Treasury Stock............ -- -- 1,560 159 (50) -- -- 109
Payments of Shareholders' Notes... -- -- -- -- 100 -- -- 100
--------- ---- ------ ------ ----- -------- --------- --------
BALANCES AT JUNE 27, 1992........... 1,398,514 14 (3,637) (429) (939) 103,999 (51,874) 50,771
Net loss.......................... -- -- -- -- -- -- (31,245) (31,245)
Issuance of Common Stock
Warrants....................... -- -- -- -- -- 3,652 -- 3,652
Purchase of Treasury Stock........ -- -- (9,612) (770) 225 -- -- (545)
Elimination of Treasury Stock..... (13,249) -- 13,249 1,199 -- (1,199) -- --
--------- ---- ------ ------ ----- -------- --------- --------
BALANCES AT JUNE 26, 1993........... 1,385,265 14 -- -- (714) 106,452 (83,119) 22,633
Net loss.......................... -- -- -- -- -- -- (11,467) (11,467)
Purchase of Common Stock.......... (3,483) -- -- -- 78 (1,270) -- (1,192)
Payments of Shareholders' Notes... -- -- -- -- 50 -- -- 50
--------- ---- ------ ------ ----- -------- --------- --------
BALANCES AT JUNE 25, 1994........... 1,381,782 14 -- -- (586) 105,182 (94,586) 10,024
Payment of Shareholders' Notes
(unaudited).................... -- -- -- -- 70 -- -- 70
Issuance of Common Stock
(unaudited).................... 3,644 -- -- -- (191) 340 -- 149
Purchase of Common Stock
(unaudited).................... (1,117) -- -- -- 5 (62) -- (57)
Net loss (unaudited).............. -- -- -- -- -- -- (14,272) (14,272)
--------- ---- ------ ------ ----- -------- --------- --------
BALANCES AT JANUARY 7, 1995
(unaudited)....................... 1,384,309 $ 14 -- $ -- $(702) $105,460 $(108,858) $ (4,086)
========= ==== ====== ====== ===== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE> 163
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND ACQUISITIONS
Food 4 Less Holdings, Inc. ("Holdings" or together with its subsidiaries,
the "Company"), a majority-owned subsidiary of Food 4 Less, Inc. ("FFL"), was
formed on December 8, 1992 for the purpose of issuing Senior Discount Notes (the
"Holdings Discount Notes") in a principal amount sufficient to yield gross
proceeds of approximately $50.0 million, together with Common Stock Purchase
Warrants (the "Warrants") in a private placement offering. FFL is a holding
company with no operations or activities and its only asset is its investment in
Holdings. In conjunction with the offering of the Holdings Discount Notes and
Warrants, the stockholders of Food 4 Less Supermarkets, Inc. (together with its
subsidiaries, "Supermarkets") exchanged their common stock in Supermarkets for
common stock in Holdings, and Supermarkets became a 100%-owned subsidiary of
Holdings. Supermarkets is a multiple format supermarket operator that tailors
its retail strategy to the particular needs of the individual communities it
serves. It operates in three geographic areas: Southern California, Northern
California and certain areas of the Midwest. Supermarkets has three first-tier
subsidiaries: Cala Co. ("Cala"), Falley's, Inc. ("Falley's") and Food 4 Less of
Southern California, Inc. ("F4L-SoCal"), formerly known as Breco Holding
Company, Inc. ("BHC"). Cala Foods, Inc. ("Cala Foods") and Bell Markets, Inc.
("Bell") are subsidiaries of Cala, and Alpha Beta Company ("Alpha Beta") is a
subsidiary of F4L-SoCal.
(a) Acquisitions
On March 29, 1994, the Company purchased certain operating assets formerly
owned by Food Barn Stores, Inc. (the "Food Barn Stores") from Associated
Wholesale Grocers, Inc. ("AWG") (the "Food Barn Acquisition") for $11,241,000
(including acquisition costs of $180,000). The financial statements reflect the
preliminary allocation of the purchase price as the purchase price allocation
has not been finalized. The effect of the acquisition was not material to the
Company's financial position and results of operations. Falley's has agreed to
purchase merchandise (as defined) for the Food Barn Stores from AWG through
March 24, 2001. Falley's has pledged its patronage dividends and notes
receivable from AWG as security under this supply agreement.
On June 17, 1991, Supermarkets acquired all of the common stock of Alpha
Beta for $270,513,000 (including acquisition costs of $41,477,000) in a
transaction accounted for as a purchase.
In January 1990, Supermarkets purchased certain operating assets of ABC
Market Corp. ("ABC") for $14,675,000, plus approximately $1,000,000 in fees and
expenses.
On June 30, 1989, Supermarkets acquired Bell for approximately $13,700,000,
which includes $8,000,000 of notes and the assumption of Bell's long-term debt.
The transaction was accounted for as a purchase. Certified Grocers of
California, Ltd. ("Certified") has guaranteed up to $4,000,000 of notes issued
by the Company to the seller in connection with the purchase and the performance
of a lease.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Holdings is a nonoperating holding company formed for the purpose of
issuing the Holdings Discount Notes and the Warrants.
The Company is engaged primarily in the operation of retail supermarkets.
(b) Basis of Presentation
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. The results of operations of Alpha Beta, F4L-SoCal
F-35
<PAGE> 164
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(BHC), Bell, ABC and the Food Barn Stores have been excluded from the
consolidated financial statements prior to their respective acquisition dates.
The excess of the purchase price over the fair value of the net assets acquired
is classified as goodwill. All intercompany transactions have been eliminated in
consolidation.
Interim Financial Statements. The consolidated balance sheet of the Company
as of January 7, 1995 and the consolidated statements of operations and cash
flows for the interim periods ended January 7, 1995 and January 8, 1994 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 Company's financial statements and notes thereto
included herein. Results of operations for interim periods are not necessarily
indicative of the results for a full fiscal year.
(c) Fiscal Years
The Company's fiscal year is the 52 or 53-week period which ends on the
last Saturday in June. Fiscal years 1994, 1993, and 1992 include 52 weeks.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
(e) Inventories
Inventories, which consist of grocery products, are stated at the lower of
cost or market. Cost has been principally determined using the last-in,
first-out ("LIFO") method. If inventories had been valued using the first-in,
first-out ("FIFO") method, inventories would have been higher by $13,103,000,
$13,802,000 and $16,202,000 (unaudited) at June 26, 1993, June 25, 1994 and
January 7, 1995, respectively, and gross profit and operating income would have
been greater by $3,554,000, $4,441,000, $699,000, $2,200,000 (unaudited) and
$2,400,000 (unaudited) for the 52 weeks ended June 27, 1992, the 52 weeks ended
June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8,
1994, and the 28 weeks ended January 7, 1995, respectively.
(f) Pre-opening Costs
The costs associated with opening new stores are deferred and amortized
over one year following the opening of each new store.
(g) Closed Store Reserves
When a store is closed, the Company provides a reserve for the net book
value of any store assets, net of salvage value, and the net present value of
the remaining lease obligation, net of sublease income. For the 52 weeks ended
June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25,
1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995,
utilization of this reserve was $4.0 million, $2.4 million, $1.1 million, $0.5
million (unaudited) and $0.5 million (unaudited), respectively.
(h) Investments in Supplier Cooperatives
The investment in Certified is accounted for on the cost method. There are
certain restrictions on the sale of this investment.
F-36
<PAGE> 165
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Investment in Food 4 Less of Modesto, Inc.
During the 52 weeks ended June 26, 1993, the Company sold its 20%
investment in Food 4 Less of Modesto, Inc. ("Modesto") for gross proceeds of
$4.5 million, which included a $1.5 million note receivable, resulting in a gain
of $2.5 million. The Company previously accounted for this investment using the
cost method.
(j) Property and Equipment
Property and equipment are stated at cost and are depreciated principally
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C> <C>
Buildings and improvements.................. 5-40 years
Equipment and fixtures...................... 3-10 years
Property under capital leases and leasehold
interests................................. 3-45 years (lease term)
</TABLE>
(k) Deferred Financing Costs
Costs incurred in connection with the issuance of debt are amortized over
the term of the related debt using the effective interest method.
(l) Goodwill and Covenants Not to Compete
The excess of the purchase price over the fair value of the net assets of
businesses acquired is amortized on a straight-line basis over 40 years
beginning at the date of acquisition. Covenants not to compete, which are
included in Other Assets, are amortized on a straight-line basis over the term
of the covenant.
Current and undiscounted future operating cash flows are compared to
current and undiscounted future goodwill amortization to determine if an
impairment of goodwill has occurred and is continuing. As of June 25, 1994, no
impairment exists.
(m) Income Taxes
On June 27, 1993, the Company prospectively adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts.
Under SFAS 109, the Company recognizes to a greater degree the future tax
benefits of expenses which have been recognized in the financial statements.
The implementation of SFAS No. 109 did not have a material effect on the
accompanying consolidated financial statements.
(n) Notes Receivable from Shareholders
Notes receivable from shareholders represent loans to employees of the
Company for purchases of the Company's stock. The notes are due over various
periods, bear interest at the prime rate, and are secured by each shareholder's
shares of common stock.
F-37
<PAGE> 166
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(o) Self-Insurance
Certain of the Company's subsidiaries are self-insured for a portion of
workers' compensation, general liability and automobile accident claims. The
Company establishes reserves based on an independent actuary's review of claims
filed and an estimate of claims incurred but not yet filed.
(p) Discounts and Promotional Allowances
Promotional allowances and vendor discounts are recorded as a reduction of
cost of sales in the accompanying consolidated statements of operations.
Allowance proceeds received in advance are deferred and recognized over the
period earned.
(q) Provision for Earthquake Losses
On January 17, 1994, Southern California was struck by a major earthquake
which resulted in the temporary closing of 31 of the Company's stores. The
closures were caused primarily by loss of electricity, water, inventory, or
structural damage. All but one of the closed stores reopened within a week of
the earthquake. The final closed store reopened on March 24, 1994. The Company
is insured against earthquake losses (including business interruption), subject
to certain deductibles. The pre-tax financial impact, net of insurance claims,
was approximately $4.5 million. At June 25, 1994, the Company had received all
expected insurance proceeds related to this claim.
(r) Extraordinary Items
For the 52 weeks ended June 27, 1992, the Company classified the write-off
of deferred financing costs associated with the early extinguishment of debt as
an extraordinary item. For the 52 weeks ended June 27, 1992, the Company also
classified the difference between the net book value and replacement cost of
property and equipment destroyed during the April 1992 civil unrest in Los
Angeles and replaced by insurance companies as an extraordinary item. Proceeds
received from insurance companies for business interruption related to the civil
unrest are included as a component of selling, general, administrative and other
expenses.
(s) Loss Per Common Share
Loss per common share is computed based on the weighted average number of
shares outstanding during the applicable period. Fully diluted loss per share
has been omitted as it is anti-dilutive for all periods presented.
(t) Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the June 25, 1994 presentation.
F-38
<PAGE> 167
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25,
1993 1994
------------ ------------
<S> <C> <C>
Bank Term Loan, principal due quarterly through January
1999, with interest payable monthly in arrears........ $148,478,000 $137,064,000
10.45 percent Senior Notes principal due 2000 with
interest payable semi-annually in arrears............. 175,000,000 175,000,000
15.25 percent Senior Holdings Discount Notes due 2004;
after December 15, 1997, interest payable
semi-annually in arrears.............................. 50,230,000 58,997,000
Revolving Loan.......................................... 4,900,000 --
10.625 percent first real estate mortgage due 1998,
$12,000 of principal plus interest payable monthly
secured by land and building with a net book value of
$2,122,000............................................ 1,558,000 1,521,000
9.2 to 9.25 percent notes payable, collateralized by
equipment, due September 1994, $67,000 of principal
plus interest payable monthly, plus balloon payment of
$992,000.............................................. 1,772,000 1,103,000
10.8 percent notes payable, collateralized by equipment,
due September 1995, $72,000 of principal plus interest
payable monthly, plus balloon payment of $1,004,000... 2,447,000 1,819,000
10.0 percent secured promissory note, collateralized by
the stock of Bell, due 1996, interest payable
quarterly through June 1996........................... 8,000,000 8,000,000
10.08 percent notes payable, collateralized by
equipment, due November 1996, $34,000 of principal
plus interest payable monthly, plus balloon payment of
$493,000.............................................. 1,515,000 1,242,000
10.15 percent notes payable, collateralized by
equipment, due December 1996, $45,000 of principal and
interest payable monthly, plus balloon payment of
$640,000.............................................. 1,994,000 1,675,000
10.0 percent real estate mortgage due 2000, $8,000 of
principal and interest payable monthly................ 474,000 419,000
Other long-term debt.................................... 2,216,000 1,415,000
------------ ------------
398,584,000 388,255,000
Less -- current portion................................. 12,778,000 18,314,000
------------ ------------
$385,806,000 $369,941,000
============ ============
</TABLE>
In June 1991, Supermarkets and certain of its subsidiaries entered into a
Credit Agreement (the "Credit Agreement") with certain banks, comprised of a
$315,000,000 Term Loan (the "Bank Term Loan") facility, a $70,000,000 Revolving
Loan (the "Revolving Loan") facility and a $55,000,000 standby letter of credit
facility (the "Letter of Credit Facility"). At June 25, 1994, $137,064,000 was
outstanding under the Bank Term Loan, there were no borrowings outstanding under
the Revolving Loan and $48,131,000 of standby letters of credit had been issued
on behalf of the Company. A commitment fee of 1/2 of 1 percent is charged on the
average daily unused portion of the Revolving Loan and the Letter of Credit
Facility; such commitment fees are due quarterly in arrears. Interest on
borrowings under the Bank Term Loan is at the bank's Base Rate (as defined) plus
1.25 percent or the Eurodollar Rate (as defined) plus 2.5 percent. At June 25,
1994, the weighted average interest rate on the Bank Term Loan was 6.5 percent.
In accordance with certain requirements of the Credit Agreement, the Company
purchased an interest rate cap for a principal amount of approximately $91.4
million on the three-month Libor rate at 5.5% which expires on January 3, 1995.
Quarterly principal installments on the Bank Term Loan continue to December
1998, with $15,580,000
F-39
<PAGE> 168
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable in fiscal year 1995, $21,245,000 payable in fiscal year 1996,
$22,661,000 payable in fiscal 1997, $40,489,000 payable in fiscal 1998, and
$37,089,000 payable in fiscal 1999. Interest on borrowings under the Revolving
Loan is at the bank's Base Rate (as defined) plus 1.25 percent. At June 25,
1994, the interest rate on the Revolving Loan was 8.5 percent. To the extent
borrowings under the Revolving Loan are not paid earlier, they are due in June
1996. The common stock of F4L-SoCal, Falley's, Cala and certain of their direct
and indirect subsidiaries has been pledged as security under the Credit
Agreement.
In April 1992, Supermarkets and its wholly-owned subsidiaries issued
$175,000,000 of 10.45 percent Senior Notes (the "Senior Notes"). These notes are
due in two equal sinking fund payments on April 15, 1999 and 2000. They are
general unsecured obligations of the Company and rank senior in right of payment
to all subordinated indebtedness (as defined). The Senior Notes rank pari passu
in right of payment with all borrowings and other obligations of the Company
under its bank Credit Agreement; however, the obligations under the Credit
Agreement are secured by substantially all the assets of the Company and its
subsidiaries. The Senior Notes may be redeemed beginning in 1996 at 104.5
percent, declining ratably to 100 percent in 1999. The proceeds received, net of
issuance costs, were used to pay down borrowings under the Bank Term Loan.
Deferred financing costs related to the portion of the Bank Term Loan that was
retired of $6.7 million, net of related tax benefit of $2.5 million, are
classified as an extraordinary item in the Company's consolidated statement of
operations for the 52 weeks ended June 27, 1992.
Scheduled maturities of principal of Long-Term Debt at June 25, 1994 are as
follows:
<TABLE>
<S> <C>
1995................................................... $ 18,314,000
1996................................................... 23,384,000
1997................................................... 32,322,000
1998................................................... 40,701,000
1999................................................... 124,823,000
Later years............................................ 148,711,000
------------
$388,255,000
============
</TABLE>
Supermarkets issued $145,000,000 principal amount of Senior Subordinated
Notes (the "Subordinated Notes") in connection with the acquisition of Alpha
Beta as described in Note 1. The Subordinated Notes bear interest, payable
semi-annually on June 15 and December 15, at an annual rate of 13.75 percent.
The Subordinated Notes are subordinated to all Senior Indebtedness (as defined)
of the Company, and may be redeemed beginning in 1996 at a redemption price of
106 percent. The redemption price declines ratably to 100 percent in 2000.
On December 31, 1992, Holdings issued $103.6 million aggregate principal
amount of Holdings Discount Notes and 121,118 Warrants for gross proceeds of
$50.0 million. The expenses related to the issuance of the Discount Notes and
the Warrants were paid by Supermarkets. The Holdings Discount Notes are due in
two equal sinking fund payments on December 15, 2003 and 2004. They are general
unsecured obligations of Holdings and will rank senior in right of payment to
all future subordinated indebtedness of Holdings and pari passu in right of
payment to all future senior indebtedness of Holdings. As a debt obligation of
Holdings, the Holdings Discount Notes are structurally subordinate to all
existing and future liabilities and obligations (whether or not borrowed for
money) of Supermarkets. The first cash interest payment is due June 15, 1998.
The debt agreements, among other things, require Supermarkets to maintain
minimum levels of net worth (as defined), to maintain minimum levels of earnings
(as defined), to maintain a hedge agreement to provide interest rate protection,
and to comply with certain ratios related to interest expense (as defined),
fixed charges (as defined), working capital and indebtedness. In addition, the
debt agreements limit, among other things, additional borrowings, dividends on,
and redemption of, capital stock, capital expenditures, incurrence of lease
obligations, and the acquisition and disposition of assets. At June 26, 1993 and
June 25, 1994, the
F-40
<PAGE> 169
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company was in compliance with the financial covenants of its debt agreements.
At June 25, 1994, dividends and certain other payments are restricted based on
terms in the debt agreements.
(4) LEASES
The Company's operations are conducted primarily in leased properties.
Substantially all leases contain renewal options. Rental expense under operating
leases was as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rents................................. $46,706,000 $44,504,000 $49,788,000
Rents based on sales.......................... 7,656,000 5,917,000 3,806,000
</TABLE>
Following is a summary of future minimum lease payments under operating
leases at June 25, 1994:
<TABLE>
<S> <C>
1995................................................... $ 52,542,000
1996................................................... 48,966,000
1997................................................... 45,325,000
1998................................................... 38,925,000
1999................................................... 34,423,000
Later years............................................ 269,332,000
------------
$489,513,000
============
</TABLE>
The Company has entered into lease agreements for new supermarket sites
which were not in operation at June 25, 1994. Future minimum lease payments
under such operating leases generally begin when such supermarkets open and at
June 25, 1994 are: 1995 -- $5,990,000; 1996 -- $11,772,000; 1997 -- $11,825,000;
1998 -- $11,810,000; 1999 -- $11,819,000; later years -- $218,480,000.
Certain leases qualify as capital leases under the criteria established in
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and
are classified on the consolidated balance sheets as leased property under
capital leases. Future minimum lease payments for the property under capital
leases at June 25, 1994 are as follows:
<TABLE>
<S> <C>
1995.................................................... $ 7,948,000
1996.................................................... 7,521,000
1997.................................................... 6,995,000
1998.................................................... 6,374,000
1999.................................................... 6,071,000
Later years............................................. 44,108,000
-----------
Total minimum lease payments.................. 79,017,000
Less: amounts representing interest..................... 35,403,000
-----------
Present value of minimum lease payments................. 43,614,000
Less: current portion................................... 3,616,000
-----------
$39,998,000
===========
</TABLE>
Accumulated depreciation related to capital leases was $20,356,000 and
$24,041,000 at June 26, 1993 and June 25, 1994, respectively.
F-41
<PAGE> 170
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is leasing a distribution facility and four store locations
from the previous owner of Alpha Beta. The agreement contains a purchase option
for the land, buildings and improvements and equipment at a price that equals or
exceeds the estimated fair market value throughout the term of the lease.
(5) INVESTMENT IN A.W.G.
The investment in Associated Wholesale Grocers ("A.W.G.") consists
principally of the cooperative's six percent interest-bearing seven and
eight-year patronage certificates received in payment of certain rebates.
Following is a summary of future maturities based upon current redemption terms:
<TABLE>
<S> <C>
1995..................................................... $ --
1996..................................................... --
1997..................................................... 795,000
1998..................................................... 1,420,000
1999..................................................... 1,520,000
Later years.............................................. 2,983,000
----------
$6,718,000
==========
</TABLE>
(6) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $2,507,000 $ -- $ 3,251,000
State and other............................. 934,000 82,000 712,000
---------- ---------- -----------
3,441,000 82,000 3,963,000
---------- ---------- -----------
Deferred:
Federal..................................... -- 1,345,000 78,000
State and other............................. -- -- (1,341,000)
---------- ---------- -----------
-- 1,345,000 (1,263,000)
---------- ---------- -----------
$3,441,000 $1,427,000 $ 2,700,000
========== ========== ===========
</TABLE>
F-42
<PAGE> 171
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision (benefit) for income taxes to amounts
computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35%
for fiscal 1994 is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
------------ ------------ -----------
<S> <C> <C> <C>
Federal income taxes at statutory rate on loss
before provision for income taxes and
extraordinary charges........................... $ (8,689,000) $(10,138,000) $(3,068,000)
State and other taxes, net of federal tax
benefit......................................... 934,000 82,000 (1,000)
Alternative minimum tax........................... 2,507,000 -- --
Effect of permanent differences resulting from:
Amortization of goodwill........................ 2,706,000 2,850,000 2,820,000
Original issue discount......................... -- 208,000 526,000
Accounting limitation of deferred tax benefit..... 5,983,000 8,425,000 2,423,000
------------ ------------ -----------
$ 3,441,000 $ 1,427,000 $ 2,700,000
============ ============ ===========
</TABLE>
The provision (benefit) for deferred taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
------------ ------------ -----------
<S> <C> <C> <C>
Depreciation...................................... $ 6,282,000 $ 7,756,000 $ 2,536,000
Difference between book and tax basis of assets
sold............................................ 2,514,000 3,198,000 (4,223,000)
Deferred revenues and allowances.................. (7,028,000) 40,000 (2,349,000)
Original issue discount........................... -- (1,308,000) (2,981,000)
Pre-opening costs................................. 1,072,000 (512,000) 174,000
Accounts receivable reserves...................... -- (270,000) 249,000
Unicap............................................ (124,000) (5,000) (536,000)
Capital lease obligation.......................... (2,010,000) (1,385,000) 2,792,000
Self-insurance reserves........................... (13,558,000) (4,082,000) (535,000)
Inventory shrink reserve.......................... (528,000) 777,000 (869,000)
LIFO.............................................. 7,104,000 (554,000) (1,010,000)
Closed store reserve.............................. 964,000 1,092,000 440,000
Accrued expense................................... -- -- (582,000)
Accrued payroll and related liabilities........... (2,656,000) 193,000 1,721,000
Damaged inventory reimbursement................... 1,195,000 -- --
Acquisition costs................................. 4,974,000 2,626,000 1,397,000
Sales tax reserves................................ -- (715,000) (418,000)
Deferred rent subsidy............................. -- (483,000) (624,000)
Net operating loss usage.......................... -- -- 5,782,000
Tax credits benefited............................. -- (1,392,000) (4,477,000)
Accounting limitation (recognition) of deferred
tax benefit..................................... 1,588,000 (3,283,000) 1,896,000
Other, net........................................ 211,000 (348,000) 354,000
------------ ------------ -----------
$ -- $ 1,345,000 $(1,263,000)
============ ============ ===========
</TABLE>
F-43
<PAGE> 172
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25,
1993 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued payroll and related liabilities............... $ 4,064,000 $ 2,448,000
Other accrued liabilities............................. 14,796,000 18,271,000
Property and equipment................................ 9,674,000 2,997,000
Self-insurance liabilities............................ 30,907,000 27,744,000
Loss carryforwards.................................... 27,863,000 20,675,000
Tax credit carryforwards.............................. 1,392,000 5,869,000
Other................................................. 1,223,000 580,000
------------ ------------
Gross deferred tax assets.......................... 89,919,000 78,584,000
Valuation allowance................................... (46,316,000) (35,467,000)
------------ ------------
Net deferred tax assets............................ $ 43,603,000 $ 43,117,000
------------ ------------
Deferred tax liabilities:
Inventories........................................... $(20,243,000) $(16,738,000)
Property and equipment................................ (38,298,000) (30,516,000)
Obligations under capital leases...................... (5,802,000) (8,733,000)
Other................................................. (1,689,000) (1,870,000)
------------ ------------
Gross deferred tax liability....................... (66,032,000) (57,857,000)
------------ ------------
Net deferred tax liability......................... $(22,429,000) $(14,740,000)
============ ============
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its
gross deferred tax assets at June 25, 1994 due primarily to financial and tax
losses in recent years. Under SFAS 109, this valuation allowance will be
adjusted in future periods as appropriate. However, the timing and extent of
such future adjustments to the allowance cannot be determined at this time.
At June 25, 1994, approximately $8,864,000 of the valuation allowance for
deferred tax assets will reduce goodwill when the allowance is no longer
required.
At June 25, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of $59,071,000, which expire in 2007 through 2008.
The Company has federal and state Alternative Minimum Tax ("AMT") credit
carryforwards of approximately $4,090,000 which are available to reduce future
regular taxes in excess of AMT. Currently, there is no expiration date for these
credits.
FFL files a consolidated federal income tax return, under which the federal
income tax liability of FFL and its subsidiaries (which since June 23, 1989
include the Company) is determined on a consolidated basis. FFL has entered into
a federal income tax sharing agreement with the Company and certain of its
subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides
that in any year in which the Company is included in any consolidated tax
liability of FFL and has taxable income, the Company will pay to FFL the amount
of the tax liability that the Company would have had on such due date if it had
been filing a separate return. Conversely, if the Company generates losses or
credits which actually reduce the consolidated tax liability of FFL and its
other subsidiaries, FFL will credit to the Company the amount of such reduction
in the consolidated tax liability. These credits are passed between FFL and the
Company in the form of cash payments. In the event any state and local income
taxes are determinable on a combined or consolidated basis, the Tax Sharing
Agreement provides for a similar allocation between FFL and the Company of such
state and local taxes.
F-44
<PAGE> 173
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company currently has an Internal Revenue Service examination in
process covering its 1990 and 1991 fiscal years. The Internal Revenue Service
has not yet made any additional tax assessments related to these years.
(7) RELATED PARTY TRANSACTIONS
Supermarkets has a five-year consulting agreement with an affiliated
company effective June 17, 1991 for management, financing, acquisition and other
services. The agreement is automatically renewed on January 1 of each year for
the five-year term unless ninety (90) days' notice is given by either party. The
contract provides for annual management fees equal to $2 million plus an
additional amount based on Supermarkets' performance and advisory fees for
acquisition and financing transactions.
Fees paid or accrued associated with management services were $2,270,000
during the 52 weeks ended June 25, 1994, $2,000,000 during the 52 weeks ended
June 26, 1993, and $2,000,000 during the 52 weeks ended June 27, 1992. Advisory
fees paid or accrued were $170,000 during the 52 weeks ended June 25, 1994,
$1,795,000 for the 52 weeks ended June 26, 1993, and $116,000 for the 52 weeks
ended June 27, 1992. Advisory fees paid or accrued for financing transactions
are capitalized and amortized over the term of the related financing. In
connection with the acquisitions of Alpha Beta, ABC and the Food Barn Stores,
the Company capitalized fees of $8,000,000, $500,000 and $92,000, respectively,
which were paid to this affiliated company for acquisition services.
(8) COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to former stockholders of certain
predecessors of F4L-SoCal for any prorated gains which may be realized within
ten years of the acquisition of the respective companies resulting from the sale
of the Certified stock. Such gains are only payable if Certified is purchased or
dissolved, or if the Company sells the shares to Certified within the period
noted above.
Supermarkets is a partner in a supplier partnership, in which it is
contingently liable for the partnership's long-term debt. Supermarkets' portion
of such debt is approximately $1,650,000.
The Company has entered into lease agreements with the developers of
several new sites in which the Company has agreed to provide construction
financing. At June 25, 1994, the Company had capitalized construction costs of
$10,435,000 on total commitments of $19,250,000.
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against the Company and other major
supermarket chains located in Southern California, alleging that they conspired
to refrain from competing in and to fix the price of fluid milk above
competitive prices. Specifically, class actions were commenced by Diane Barela
and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and
December 23, 1992, respectively. To date, the Court has yet to certify any of
these classes, while a demurrer to the complaints was denied. The Company will
vigorously defend itself in these class action suits.
In addition, the Company or its subsidiaries are defendants in a number of
other cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion of
management, the resolutions of these matters will not have a material effect on
the Company's financial position or results of operations.
The Company self-insures its workers compensation and general liability.
For the 52 weeks ended June 25, 1994, the 52 weeks ended June 26, 1993, and the
52 weeks ended June 27, 1992, self-insurance loss provisions were $19,880,000,
$38,040,000 and $46,140,000, respectively. The Company discounts its self-
insurance liability using a 7% discount rate for all years presented. Management
believes that this rate
F-45
<PAGE> 174
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximates the time value of money over the anticipated payout period
(approximately 10 years) for essentially risk free investments.
The Company's historical self-insurance liability for the three most recent
fiscal years is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
------------ ------------ -----------
<S> <C> <C> <C>
Self-insurance liability.............. $ 95,605,000 $100,773,000 $90,898,000
Less: Discount........................ (13,046,000) (15,279,000) (9,194,000)
------------ ------------ -----------
Net self-insurance liability.......... $ 82,559,000 $ 85,494,000 $81,704,000
============ ============ ===========
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $16 million, $20 million, $18 million, $12 million and $7 million
for its fiscal years ended in June 1995, 1996, 1997, 1998 and 1999.
(9) EMPLOYEE BENEFIT PLANS
The Company implemented SOP No. 93-6, Employer Accounting for Employee
Stock Ownership Plans, effective June 26, 1994. The implementation of SOP No.
93-6 did not have a material effect on the accompanying unaudited consolidated
financial statements.
The Company and its subsidiaries sponsor several defined contribution
benefit plans. The full-time employees of Falley's who are not members of a
collective bargaining agreement are covered under a 401(k) plan under which the
Company matches certain employee contributions with cash or FFL stock (the
"Falley's ESOP"). As part of the original stock sale agreement between FFL and
the Falley's ESOP, which has been amended from time to time, a partnership which
owns stock of FFL has assumed the obligation to purchase any FFL shares as to
which terminated plan participants exercise a put option under the terms of
Falley's ESOP. The Company is not required to make cash payments to redeem the
shares. As part of that agreement, the Company may elect, after providing a
right of first refusal to the partnership, to purchase FFL shares put under the
provisions of the plan. However, the partnership's obligation to purchase such
FFL shares is unconditional, and any repurchase of shares by the Company is at
the Company's sole election. During the year ended June 25, 1994, the Company
elected to purchase $1.0 million of FFL shares as to which terminated plan
participants had exercised their put option. FFL shares purchased by the Company
are classified as additional paid-in-capital. As of April 30, 1994, the fair
value of the shares allocated which are subject to a repurchase obligation by
the partnership referred to above was approximately $15,170,000.
The Company also sponsors two ESOPs for employees of the Company who are
members of certain collective bargaining agreements (the "Union ESOPs"). The
Union ESOPs provide for annual contributions based on hours worked at a rate
specified by the terms of the collective bargaining agreements. The Company
contributions are made in the form of Holdings stock or cash for the purchase of
Holdings stock and are to be allocated to participants based on hours worked.
During the 28 weeks ended January 7, 1995, the Company recorded a charge against
operations of approximately $230,000 (unaudited) for benefits under the Union
ESOPs. There were no shares issued to the Union ESOPs at January 7, 1995.
All other full-time employees of the Company who are not members of a
collective bargaining agreement are covered under a separate 401(k) plan (the
"Management Plan"). The Management Plan provides for annual contributions which
are determined at the discretion of the Company. The Company contributions are
allocated to participants based on employee compensation and matching of certain
employee contributions. A portion of the Company contribution allocated based on
compensation is made in the form of stock or cash for the purchase of stock.
F-46
<PAGE> 175
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total charges against operations related to all employee benefit plans
sponsored by the Company and its subsidiaries were $337,000, $284,000 and
$699,000 for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993,
and the 52 weeks ended June 25, 1994, respectively. No contributions were made
with stock and no stock was acquired by any plans in fiscal 1992, fiscal 1993 or
fiscal 1994.
The Company contributes to multi-employer pension plans administered by
various trustees. Contributions to these plans are based upon negotiated wage
contracts. These plans may be deemed to be defined benefit plans. Information
related to accumulated plan benefits and plan net assets as they may be
allocated to the Company at June 25, 1994 is not available. The Company
contributed $78.6 million, $69.4 million and $57.2 million to these plans for
the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994,
respectively. Management is not aware of any plans to terminate such plans.
The United Food and Commercial Workers health and welfare plans were
overfunded and those employers who contributed to the plans are to receive a pro
rata share of the excess reserves in these plans through a reduction of current
contributions. The Company's share of the excess reserve was $24.2 million, of
which $8.1 million was recognized in the 52 weeks ended June 25, 1994, with the
remainder to be recognized in future periods as the credits are taken.
Offsetting the reduction in employer contributions was a $5.5 million union
contract ratification bonus and contractual wage increases.
(10) COMMON STOCK WARRANTS
Concurrent with the purchase of the Holdings Discount Notes, the
Noteholders purchased 121,118 Warrants for $30.16 per Warrant. Each Warrant is
exercisable on or after December 15, 1997 or earlier, upon the occurrence of
certain events and allows the holder to acquire one share of common stock at
$.01 per share.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
(a) Cash and Cash Equivalents
The carrying amount approximates fair value as a result of the short
maturity of these instruments. (b) Short-Term Notes and Other Receivables
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
(c) Investments In and Notes Receivable From Supplier Cooperatives
The Company maintains a non-current deposit with Certified in the form of
Class B shares of Certified. Certified is not obligated in any fiscal year to
redeem more than a prescribed number of the Class B shares issued. Therefore, it
is not practicable to estimate the fair value of this investment.
The Company maintains a non-current note receivable from A.W.G. There are
no quoted market prices for this investment and a reasonable estimate could not
be made without incurring excessive costs. Additional information pertinent to
the value of this investment is provided in Note 5.
(d) Long-Term Debt
The fair value of the $175.0 million Senior Notes, the $145.0 million
Subordinated Notes, the $103.6 million Holdings Discount Notes and the Bank Term
Loan is based on quoted market prices. Market quotes for the fair value of the
remainder of the Company's debt are not available, and a reasonable estimate
F-47
<PAGE> 176
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the fair value could not be made without incurring excessive costs.
Additional information pertinent to the value of the unquoted debt is provided
in Note 3.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 25, 1994
-----------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................... $ 32,996,000 $ 32,996,000
Short-term notes and other receivables.................. 4,187,000 4,187,000
Investments in and notes receivable from supplier
cooperatives.......................................... 12,702,000 --
Long-term debt for which it is:
- Practicable to estimate fair values................. 516,061,000 547,112,000
- Not practicable..................................... 17,194,000 --
</TABLE>
(12) OTHER INCOME, NET
The components of other income items included in SG&A are as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25,
1992 1993 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest income.................................... $1,266,000 $ 993,000 $ 903,000
Licensing fees..................................... 493,000 246,000 270,000
Other income (expense)............................. 769,000 3,710,000 (177,000)
---------- ---------- ---------
$2,528,000 $4,949,000 $ 996,000
========== ========== =========
</TABLE>
(13) RESTATEMENT
The Company has restated the statements of operations for its fiscal years
ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended
January 8, 1994 to classify certain buying, occupancy and labor costs associated
with making its products available for sale as cost of sales. These amounts were
previously classified as selling, general, administrative and other net, and
depreciation and amortization of property and equipment and totalled
$236,152,000, $224,469,000, $219,548,000 and $114,334,000 (unaudited) for the
fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28
weeks ended January 8, 1994, respectively. The Company has also classified a
portion of its self-insurance costs as interest expense that was previously
recorded in selling, general, administrative and other, net. These amounts were
$4,960,000, $5,865,000, $5,836,000 and $3,275,000 (unaudited) for the fiscal
years 1992, 1993 and 1994 and the 28 weeks ended January 8, 1994, respectively.
Depreciation and amortization costs not classified in cost of sales are included
in selling, general, administrative and other, net. The change in classification
did not affect the net loss, loss before provision for income taxes and
extraordinary charges or loss per common share.
(14) SUBSEQUENT EVENT (UNAUDITED)
On September 14, 1994, the Company, Supermarkets, and FFL entered into a
definitive Agreement and Plan of Merger (the "Merger") with Ralphs Supermarkets,
Inc. ("Ralphs") and the stockholders of Ralphs. Pursuant to the terms of the
Merger Agreement, Supermarkets will, subject to certain terms and conditions
being satisfied or waived, be merged into Ralphs and Ralphs will become a
wholly-owned subsidiary of the Company. 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 transaction. The
purchase price for Ralphs is approximately $1.5 billion, including the
assumption of debt.
F-48
<PAGE> 177
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price, payable to the stockholders of Ralphs, will
consist of $375 million in cash, $131.5 million initial principal amount of
13 5/8% Senior Subordinated Pay-in Kind Debentures due 2007 ("Seller
Debentures") and $18.5 million of initial accreted value of 13 5/8% Senior
Discount Debentures due 2005 ("New Discount Debentures"). In addition,
Supermarkets will enter into an agreement with a stockholder of Ralphs pursuant
to which such stockholder will act as a consultant to Supermarkets with respect
to certain real estate and general commercial matters for a period of five years
from the closing of the Ralphs Merger in exchange for the payment of a
consulting fee.
The financing required to complete the Merger will include the issuance of
significant additional equity by FFL, the issuance of new debt securities by the
Company and Supermarkets and the incurrence of additional bank financing by
Supermarkets. The equity issuance would be made to a group of investors led by
Apollo Advisors, L.P. ("Apollo"), which will purchase $140 million in FFL stock.
Apollo will receive a $5 million fee for its commitment to make an equity
investment. The issuance of new debt securities would be in the form of senior
notes of Supermarkets of up to $295 million and senior subordinated notes of
Supermarkets of up to $200 million. The bank financing would be made pursuant to
a commitment by Bankers Trust Company to provide up to $1,075 million in such
financing. In connection with the receipt of new financing, the Company and
Supermarkets will also be required to complete certain exchange offers, consent
solicitations and or other transactions with the holders of their currently
outstanding debt securities. The Company will issue an additional $81.5 million
of initial accreted value of New Discount Debentures for $59.0 million in cash
and $22.5 million in lieu of cash for fees associated with the Merger. The
Company will redeem the Discount Notes, with a book value of $64.5 million at
January 7, 1995, for $83.9 million in cash.
As of January 29, 1995, Ralphs had outstanding indebtedness of
approximately $1,018.5 million. Ralphs had sales of $2,724.6 million, operating
income of $145.6 million and earnings before income taxes of $32.1 million for
its most recent fiscal year ended January 29, 1995.
Upon consummation of the Merger, the operations and activities of
Supermarkets will be significantly impacted due to conversions of the
Supermarkets' existing Southern California conventional stores to either Ralphs
or Food 4 Less warehouse stores as well as the consolidation of various
operating functions and departments. The Merger will result in restructuring
charges that are currently estimated to be approximately $45 million, of which
approximately $5.1 million was recorded in the Company's results of operations
for the 28 weeks ended January 7, 1995. The remaining estimated restructuring
charges will be recorded as an expense once the Merger is completed.
(15) RESTRUCTURING CHARGE (UNAUDITED)
The Company has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 28 weeks ended January 7, 1995, the Company
recorded a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
F-49
<PAGE> 178
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholder of Food 4 Less Holdings, Inc.:
We have audited the accompanying balance sheet of Food 4 Less Holdings,
Inc. (a Delaware corporation) (the Company) as of January 4, 1995. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Food 4 Less Holdings, Inc. as of
January 4, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 4, 1995 (except with
respect to the matter
discussed in Note 2, as
to which the date is
April 13, 1995)
F-50
<PAGE> 179
FOOD 4 LESS HOLDINGS, INC.
BALANCE SHEET
JANUARY 4, 1995
<TABLE>
<S> <C>
Cash................................................................................ $1,000
======
SHAREHOLDER'S EQUITY:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none outstanding... $ --
Common stock, $.01 par value, 60,000,000 shares authorized, 1,000 shares
outstanding.................................................................... 10
Additional paid-in capital........................................................ 990
------
Total shareholder's equity................................................ $1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
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<PAGE> 180
FOOD 4 LESS HOLDINGS, INC.
NOTES TO THE BALANCE SHEET
(1) ORGANIZATION
Food 4 Less Holdings, Inc., a Delaware corporation (the Company), is a
wholly-owned subsidiary of Food 4 Less Holdings, Inc., a California corporation
(Holdings). The Company was incorporated in December 1994 for the purpose of
reincorporating Holdings into a Delaware corporation. The Company and Holdings
have no operations or activities. Holdings is a holding company whose sole asset
is its ownership in Food 4 Less Supermarkets, Inc. (Food 4 Less). Holdings is
majority owned by Food 4 Less, Inc. (FFL) which is also a holding company whose
sole asset is its ownership of Holdings stock.
On December 31, 1992, Holdings issued $103.6 million aggregate principal
amount of Holdings Discount Notes and 121,118 Warrants for gross proceeds of
$50.0 million. The proceeds were contributed to Food 4 Less in exchange for Food
4 Less preferred stock. The Holdings Discount Notes are due in two equal sinking
fund payments on December 15, 2003 and 2004. They are general unsecured
obligations of Holdings. As a debt obligation of Holdings, the Holdings Discount
Notes are structurally subordinate to all existing and future liabilities and
obligations (whether or not borrowed for money) of Food 4 Less. The first cash
interest payment is due June 15, 1998.
(2) ACQUISITION OF RALPHS SUPERMARKETS, INC.
On September 14, 1994 Food 4 Less entered into a definitive Agreement and
Plan of Merger (the Merger Agreement) with Ralphs Supermarkets Inc. (RSI) and
its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less
will, subject to certain conditions being waived or satisfied, be merged with
and into RSI (the "RSI Merger"). Immediately following the RSI Merger, Ralphs
Grocery Company ("RGC"), which is currently a wholly-owned subsidiary of RSI,
will merge with and into RSI (the "RGC Merger," and together with the RSI
Merger, the "Merger"), and RSI will change its name to Ralphs Grocery Company
(Ralphs). Prior to the Merger, FFL will merge with and into Holdings, which will
be the surviving corporation (the "FFL Merger"). Immediately following the FFL
Merger, Holdings will change its jurisdiction of incorporation by merging into
the Company (the "Reincorporation Merger"). As a result of the Merger, the FFL
Merger and the Reincorporation Merger, Ralphs will become a wholly-owned
subsidiary of the Company. As a result of the Reincorporation Merger, the
Holdings Discount Notes will become the obligations of the Company. Conditions
to the consummation of the RSI Merger include the receipt of regulatory
approvals and other necessary consents and the completion of financing.
The purchase price for RSI is approximately $1.5 billion, including the
assumption of debt. The consideration payable to the stockholders of RSI
consists of $375 million in cash, $131.5 million principal amount of 13 5/8%
Senior Subordinated Pay-in Kind Debentures due 2007 (Seller Debentures) and
$18.5 million of initial accreted value 13 5/8% Senior Discount Debentures (New
Discount Debentures) due 2005 to be issued by the Company. In connection with
the Merger, the Company will issue preferred stock to new equity investors for
gross proceeds of $140 million in cash, for which they will pay a $5 million
fee. One hundred million dollars of the cash proceeds received from the new
equity investors, together with the $131.5 million principal amount of the
Seller Debentures and $18.5 million of the New Discount Debentures will be used
to acquire approximately 48% of the capital stock of RSI immediately prior to
consummation of the RSI Merger. The Company will issue an additional $81.5
million of initial accreted value of New Discount Debentures for $59.0 million
in cash and $22.5 million in lieu of cash for fees associated with the Merger.
One hundred three million six hundred thousand dollars of the Holdings 15.25%
Discount Notes with a book value of $64.5 million at January 7, 1995 will be
redeemed by New Holdings for $83.9 million. The Company will then contribute the
$250 million of purchased shares of RSI stock, together with the remaining net
cash proceeds received from the new equity investors and the issuance of New
Discount Debentures, to Food 4 Less, and pursuant to the RSI Merger the
remaining shares of RSI stock will be acquired for $275 million in cash by Food
4 Less.
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ANNEX A
STOCKHOLDERS AGREEMENT
OF FOOD 4 LESS HOLDINGS, INC.
STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of June , 1995, by and
among (i) each of the purchasers listed on the signature pages attached hereto
(together with their Permitted Transferees (defined below), the "Purchasers"),
(ii) each of the investors listed on the signature pages or consent forms
attached hereto, (iii) The Yucaipa Companies, a California general partnership,
FFL Partners, a California general partnership, Yucaipa Capital Fund, L.P., a
California limited partnership, F4L Equity Partners, L.P., a California limited
partnership, Yucaipa/F4L Partners, a California general partnership, and Ronald
W. Burkle (collectively, the "Yucaipa Affiliates"), (iv) Food 4 Less Holdings,
Inc., a Delaware corporation (the "Company"), (v) Ralphs Grocery Company, a
Delaware corporation and wholly owned subsidiary of the Company ("RGC"), and
(vi) each other Person (defined below) who becomes a party to this Agreement in
accordance with the terms hereof.
W I T N E S S E T H:
WHEREAS, this Agreement shall become effective (the "Effective Date") on the
date of, and simultaneously with, the closings under the Stock Purchase and
Exchange Agreement, dated as of June , 1995, among the Company, Yucaipa
(defined below) and the Purchasers (the "Stock Purchase Agreement");
WHEREAS, certain of the parties hereto are parties to that certain FFL
Holdings Corporation Stock Purchase and Shareholders' Agreement, dated as of May
23, 1987 (the "1987 Stockholders Agreement"), that certain Stockholders
Agreement, dated as of June 17, 1991 (the "1991 Stockholders Agreement"), that
certain Registration Rights Agreement, dated as of June 17, 1991 (the "1991
Registration Rights Agreement") and/or that certain Warrantholders' Agreement of
Food 4 Less Holdings, Inc., a California corporation, dated as of December 31,
1992 (the "Warrantholders Agreement");
WHEREAS, on the Effective Date, (i) the authorized capital stock of the
Company will consist of 60,000,000 shares of voting common stock, $.01 par value
(the "Voting Stock"), 25,000,000 shares of non-voting common stock, $.01 par
value (the "Non-Voting Stock" and together with the Voting Stock, the "Common
Stock"), 25,000,000 shares of Series A Preferred Stock, $.01 par value (the
"Series A Preferred Stock"), and 25,000,000 shares of Series B Preferred Stock,
$.01 par value (the "Series B Preferred Stock"), and (ii) the issued and
outstanding capital stock of the Company will consist of 17,207,882 shares of
Common Stock, 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares
of Series B Preferred Stock, with 2,008,874 shares of Common Stock reserved for
issuance upon the exercise of certain warrants (the "Warrants"), 3,000,000
shares of Common Stock reserved for issuance upon the exercise of certain
management stock options, and 8,000,000 shares of Common Stock reserved for
issuance upon the exercise of the Yucaipa Warrant (defined below);
WHEREAS, on the Effective Date (i) each Yucaipa Affiliate shall beneficially
own the number of shares of Common Stock set forth under its name on the
signature pages attached hereto, and the Yucaipa Affiliates shall collectively
beneficially own 10,761,688 shares of Common Stock, (ii) each Purchaser shall
beneficially own the number and kind of Shares (defined below) set forth under
its name on the signature pages attached hereto, and (iii) each Other Investor
shall beneficially own the number and kind of Shares set forth under its name on
the signature page or consent form attached hereto; and
WHEREAS, the parties hereto desire to restrict the sale, assignment,
transfer, encumbrance or other disposition of the Shares, including both issued
and outstanding Shares as well as Shares that may be issued or otherwise
acquired hereafter, to provide for certain rights and obligations in respect to
the Shares and the Company as hereinafter provided, and to terminate
substantially all rights and obligations of the parties under the Existing
Stockholders Agreements (defined below).
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. As used in this Agreement, the following terms
have the following meanings:
"Additional Shares" shall have the meaning set forth in Section 2.6(c).
"Affiliate," as applied to any specified Person, shall mean any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person and, in the case of a Person
who is an individual, shall include (i) members of such specified Person's
immediate family (as defined in Instruction 2 of Item 404(a) of Regulation S-K
under the Securities Act) and (ii) trusts, the trustee and all beneficiaries of
which are such specified Person or members of such Person's immediate family as
determined in accordance with the foregoing clause (i). Notwithstanding the
foregoing, the Purchasers and their respective Affiliates shall not be deemed
Affiliates of the Company.
"Affiliate Transaction" shall mean (i) any sale, lease, transfer or other
disposition by the Company or its Subsidiaries of any of their respective
properties or assets to, (ii) any purchase of property or assets by the Company
or its Subsidiaries from, (iii) any
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Investment by the Company or its Subsidiaries in, (iv) any agreement by
the Company or its Subsidiaries with or for the benefit of, or (v) any other
transaction between the Company or its Subsidiaries and, an Affiliate of the
Company or of any Subsidiary of the Company.
"Apollo" shall mean, collectively, the Purchaser identified as such on
the signature page attached hereto and any of its Permitted Transferees to which
Apollo has Transferred Shares.
"Apollo Nominees" shall have the meaning set forth in Section 5.1(a).
"Appraisal Notice" shall have the meaning set forth in Section 2.7(c).
"Appraisal Request" shall mean a written request for an appraisal
pursuant to Section 2.7(i) sent to Yucaipa, Apollo and the Other Purchasers on
or prior to the fifth business day following delivery of the Compelled Sale
Notice by (i) Apollo, or (ii) Other Purchasers holding at least 65% of the
Shares then held by the Other Purchasers, which request shall identify five
proposed Appraisers that are independent from the Company, the stockholders of
the Company or any of their respective Affiliates; provided that the right to
deliver an Appraisal Request shall terminate (i) with respect to Apollo, on the
first date on which Apollo owns fewer than 40% of the Shares held by Apollo on
the Effective Date, and (ii) with respect to the Other Purchasers, on the first
date on which the Other Purchasers own fewer than 40% of the Shares held by the
Other Purchasers on the Effective Date.
"Appraised Value" shall mean, with respect to any Compelled Sale, the per
Share value of the Company immediately prior to such Compelled Sale (without
giving effect thereto or to the rights of Apollo contained in Section 2.7(c)(ii)
hereof), as determined in good faith by the Appraiser.
"Appraiser" shall mean a nationally recognized investment bank, appraisal
firm or other Person with experience in valuing businesses chosen pursuant to
Section 2.7(i).
"Audit Request" shall have the meaning set forth in Section 4.7.
"Beneficial owner" of a security shall mean any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship, or
otherwise has (i) the power to vote, or to direct the voting of, such security
and (ii) the power to dispose, or to direct the disposition of, such security.
Ownership of the Yucaipa Warrant shall not constitute beneficial ownership of
the Shares issuable upon the exercise thereof.
"Board of Directors" shall mean the Board of Directors of the Company.
"Business Day" shall mean each day other than Saturdays, Sundays and days
when commercial banks are authorized to be closed for business in New York, New
York.
"Business Opportunity" shall have the meaning set forth in Section 3.2.
"Certificates of Designation" shall mean the Certificates of Designation
of Series A Preferred Stock and Series B Preferred Stock, respectively, in the
forms attached as exhibits to the Stock Purchase Agreement.
"Charter Documents" shall mean the Restated Certificate of Incorporation
and By-Laws of the Company, attached hereto as Exhibits A and B, respectively.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall have the meaning set forth in the recitals.
"Company" shall have the meaning set forth in the preamble.
"Compelled Sale" shall have the meaning set forth in Section 2.7(a).
"Compelled Sale Acceptance" shall have the meaning set forth in Section
2.7(c).
"Compelled Sale Agreement" shall have the meaning set forth in Section
2.7(a).
"Compelled Sale Closing" shall have the meaning set forth in Section
2.7(e).
"Compelled Sale Date" shall have the meaning set forth in Section 2.7(b).
"Compelled Sale Notice" shall have the meaning set forth in Section
2.7(b).
"Compelled Sale Termination Date" shall have the meaning set forth in
Section 2.7(b).
"Consulting Agreement" shall mean that certain Consulting Agreement,
dated as of the date hereof, by and among RGC, the Company and Yucaipa, attached
hereto as Exhibit D.
"control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Controlling Stockholders" shall mean the Yucaipa Affiliates and any of
their Permitted Transferees to which any Yucaipa Affiliate or any other
Controlling Stockholder has Transferred Shares.
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"Credit Agreement" shall mean the Credit Agreement, dated as of the date
hereof, among the Company, Supermarkets, and its Subsidiaries and the lenders,
arrangers and administrative agents named therein.
"Customary Trading Activities" shall mean market-making, broker-dealer,
investment banking, capital markets or investment management activities
undertaken in the ordinary course of business.
"Disallowed Reserve" shall have the meaning set forth in Section 4.7.
"Disqualified Indebtedness" shall have the meaning set forth in Section
2.7(g).
"Earthquake Reserve" shall have the meaning set forth in Section 4.7.
"EBITDA" shall mean with respect to any person for any period, (a) the
net income (or loss) of such person and its subsidiaries on a consolidated basis
for such period, determined in accordance with GAAP, excluding (to the extent
included therein), without duplication, (i) all net extraordinary gains (or
losses), (ii) total interest expense (including that portion attributable to
capital leases in accordance with GAAP) of such person and its subsidiaries on a
consolidated basis with respect to outstanding indebtedness of such person and
its subsidiaries, including without limitation, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing and net costs under interest rate swap, cap, collar or
similar agreements, (iii) provisions for taxes based on income, (iv) total
depreciation expense, (v) total amortization expense, (vi) LIFO provision, (vii)
reserves for non-cash restructuring charges ("Restructuring Reserve"), (viii)
tax indemnification payments to Federated Department Stores, Inc., (ix)
provision for earthquake losses or other natural disasters, (x) gain (or loss)
on disposal of assets, (xi) the cumulative effect of any accounting changes, and
(xii) other non-cash, non-operating items reducing net income and other
non-cash, non-operating items increasing net income, minus (b) cash expenditures
charged against, or adjustments resulting in a decrease of, the Restructuring
Reserve or the Disallowed Reserve, all of the foregoing as determined on a
consolidated basis for such person and its subsidiaries in accordance with GAAP;
provided, that EBITDA of the Company for any period shall be calculated to give
pro forma effect to all acquisitions and divestitures during such period as if
such acquisitions and divestitures had occurred on the first day of such period,
such calculations to be made in accordance with GAAP and Rule 11-02 of
Regulation S-X of the Commission.
"Effective Date" shall have the meaning set forth in the recitals.
"Employee Plans" shall mean any employee or similar plans set forth in
Schedule 3.9 to the Stock Purchase Agreement or approved in accordance with
Section 5.2(e) hereof.
"Enterprise Value" with respect to any proposed Compelled Sale, shall
mean (without duplication) the sum of (a) the aggregate value of the fully
diluted common equity of the Company, based on the price per Share proposed to
be paid in such Compelled Sale, net of the exercise, exchange or conversion
price, if any, with respect to any security exercisable or exchangeable for or
convertible into Common Stock of the Company, plus (b) the aggregate principal
amount of all Indebtedness of the Company and its consolidated Subsidiaries and
the aggregate liquidation preference of all preferred stock of the Company
(other than the Shares or other convertible preferred stock included in clause
(a) above), in each case as reflected on the Company's most recent consolidated
balance sheet that was (or was required to be) provided pursuant to Section 4.4
hereof on or prior to the date of the Compelled Sale Notice, less (c) all cash
and cash equivalents of the Company and its consolidated Subsidiaries as
reflected on such balance sheet.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"Existing Stockholders Agreements" shall mean the 1987 Stockholders
Agreement, the 1991 Stockholders Agreement, the 1991 Registration Rights
Agreement and the Warrantholders Agreement.
"GAAP" shall mean generally accepted accounting principles, consistently
applied.
"Holdings Indenture" shall mean the Indenture, dated as of June , 1995,
relating to the 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 of
the Company, by and among the Company and the Trustee named therein, as in
effect on the date hereof.
"Holdings Merger" shall mean (i) the merger of Food 4 Less, Inc., a
Delaware corporation, with and into Food 4 Less Holdings, Inc., a California
corporation, and (ii) the merger of Food 4 Less Holdings, Inc., a California
corporation, with and into the Company, in each case as consummated on or prior
to the Effective Date.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indebtedness" shall mean with respect to any person, without
duplication, all liabilities of such person (a) for borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such person or
only to a portion thereof), (b) evidenced by bonds, notes, debentures or similar
instruments or representing the balance deferred and unpaid of the purchase
price of any property (other than any such balance that represents an account
payable or any other monetary obligation to a trade creditor (whether or not an
Affiliate)), or (c) for the payment of money relating to a Capitalized Lease
Obligation (as defined in the Holdings Indenture).
"Initial Public Offering" shall mean the initial primary Public Offering
of common stock by the Company (other than pursuant to a registration statement
on Form S-8 or otherwise relating to equity securities issuable exclusively
under any employee benefit plan of the Company).
"Investors" shall mean each of the parties to this Agreement (other than
the Company and Controlling Stockholders), together with such party's Permitted
Transferees, including (without limitation) any Person who shall become a party
to or agree to be bound by the terms of this Agreement after the date hereof.
For purposes of determining the number of Shares held by any Investor, such
Investor shall be deemed to hold all Shares held by such Investor's Permitted
Transferees.
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"MD&A" shall mean a management's discussion and analysis of the Company's
financial condition and results of operation comparable to the discussion that
is required to be included in periodic reports filed under the Exchange Act.
"New Nominees" shall have the meaning set forth in Section 5.1(a).
"Non-Voting Stock" shall have the meaning set forth in the recitals.
"Notices" shall have the meaning set forth in Section 7.6.
"Offering Notice" shall have the meaning set forth in Section 4.6(b).
"Other Investors" shall mean the Investors other than the Purchasers.
"Other Purchasers" shall mean the Purchasers other than Apollo.
"Other Purchasers Nominee" shall have the meaning set forth in Section
5.1(a).
"Pecuniary interest" in any security shall mean the opportunity, directly
or indirectly, to profit or share in any profit derived from a transaction in
such security, and shall include securities owned by an individual's spouse or
issue or any trust solely for the benefit of such individual, spouse or issue.
"Permitted Affiliate Transaction" shall mean:
(a) any transaction enumerated in (1) Section 5.11(b) of the Indenture,
dated as of June , 1995, relating to the Senior Subordinated Notes due
2005 of RGC, by and among RGC, the Subsidiary Guarantors and the Trustee
named therein, as in effect on the date hereof, or (2) Section 4.11(b) of
the Holdings Indenture, other than (with respect to either Indenture named
in (1) or (2)), subsections (b)(i), (ii), (v), (vi) and (vii) thereof,
(b) payment of amounts or provision of benefits required to be paid or
provided to participants in any Employee Plans, as provided in the documents
related thereto,
(c) transactions pursuant to leases between the Company and partnerships
of which Ronald W. Burkle is general partner, relating to three warehouse
format stores located in Victorville, Corona and Rialto, California,
respectively, as in effect on the Effective Date, and
(d) transactions pursuant to any provision of this Agreement, the
Registration Rights Agreement, the Stock Purchase Agreement, the Consulting
Agreement, or the Yucaipa Warrant, including, but not limited to, the
Holdings Merger.
"Permitted Exchange" shall mean the New York Stock Exchange, the American
Stock Exchange or the Nasdaq Stock Market National Market.
"Permitted Transferee" shall mean:
(a) in the case of any Purchaser (i) any officer, director or partner
of, or Person controlling, such Purchaser or any other Purchaser, or (ii)
any other Person that is (x) an Affiliate of the general partner(s),
investment manager(s) or investment advisor(s) of such Purchaser on the date
hereof, (y) an Affiliate of such Purchaser or a Permitted Transferee of such
Purchaser or (z) an investment fund, investment account or investment entity
whose investment manager, investment advisor or general partner thereof is
such Purchaser or a Permitted Transferee of such Purchaser, in each case in
a bona fide distribution or other transaction not intended to avoid the
provisions of this Agreement;
(b) in the case of any Controlling Stockholder, (i) any Person that is
controlled by Ronald W. Burkle, (ii) upon a bona fide liquidation of, or a
bona fide withdrawal from, such Controlling Stockholder, in each case, not
intended to avoid the provisions of this Agreement, the shareholders,
partners or principals, as the case may be, of such Controlling Stockholder,
(iii) upon a bona fide reduction (not intended to avoid the provisions of
this Agreement) in such Controlling Stockholder's interest in another
Controlling Stockholder (a "Specified Person"), and a corresponding increase
in a Yucaipa Individual's interest in such Specified Person, such Yucaipa
Individual; provided, that immediately after such Transfer, Ronald W. Burkle
continues to control such Specified Person, or (iv) if such Controlling
Stockholder is an individual, (x) any spouse or issue of such individual, or
any trust solely for the benefit of such individual, spouse or issue, and
(y) upon such individual's death, any Person to whom Shares are transferred
in accordance with the laws of descent and/or testamentary distribution; and
(c) in the case of any Other Investor, (i) any Subsidiary of such Other
Investor, (ii) any Person of which such Other Investor is a Subsidiary,
(iii) any Subsidiary of a Person described in the foregoing clause (ii), or
(iv) if such Other Investor is an individual, (x) any spouse or issue of
such Other Investor or any trust for the benefit of such individual, spouse
or issue, and (y) upon such Other Investor's death, any Person to whom
Shares are transferred in accordance with the laws of descent and/or
testamentary distribution.
"Person" shall mean an individual or a corporation, partnership, trust,
or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Preferred Preemptive Purchase" shall mean the purchase, within one year
following the Effective Date, of Series A Preferred Stock or Series B Preferred
Stock by any Person who holds Shares as of the Effective Date pursuant to the
exercise of preemptive rights
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granted to such Person under the Existing Stockholder Agreements with
respect to the transactions contemplated by the Stock Purchase Agreement;
provided that prior to or concurrently with such purchase, such Person has
become a party to, or agreed to be bound as an Other Investor by the terms of,
this Agreement.
"Proposed Purchaser" shall mean a Person or group of Persons to which any
Controlling Stockholder proposes to Transfer Shares in accordance with Section
2.6.
"Public Offering" shall mean any bona fide underwritten public
distribution of equity securities of the Company pursuant to an effective
registration statement under the Securities Act.
"Purchaser Transaction" shall mean (a) any sale, lease, transfer or other
disposition by the Company or its Subsidiaries of any of their respective
properties or assets to, (b) any purchase of property or assets by the Company
or its Subsidiaries from, (c) any investment by the Company or its Subsidiaries
in, (d) any agreement by the Company or its Subsidiaries with, or (e) any other
transaction between the Company or its Subsidiaries and, a Purchaser or its
Affiliates, in each case occurring after the Effective Date; provided, however,
that the term "Purchaser Transaction" shall not include (i) any Permitted
Affiliate Transaction, (ii) any transaction on terms no less favorable to the
Company on the whole than those obtainable from an unrelated third party, or
(iii) any transaction effected within the ordinary course of business of the
Company or such Subsidiary.
"Purchasers" shall have the meaning set forth in the preamble.
"Qualified IPO" shall mean:
(a) an Initial Public Offering in which (i) the shares of Common Stock
distributed either (A) constitute at least 20% of the fully diluted Shares
outstanding or (B) have a market value of at least $150 million, in either
case immediately after such offering, (ii) immediately after such offering
the Common Stock of the Company is listed for trading on a Permitted
Exchange and (iii) the price at which such Common Stock is sold to the
public implies an aggregate value of the Shares outstanding immediately
after the closings under the Stock Purchase Agreement (the "Initial Equity
Account") greater than the Trigger Amount on the date on which such offering
is consummated; provided, that if (1) an Initial Public Offering meets the
requirements of clauses (a)(i) and (ii) hereof but not those of this clause
(iii) on the date of the consummation thereof and (2) thereafter, for any
period of 45 consecutive trading days, the last reported sale price of the
Common Stock on each such day implies an aggregate value of the Initial
Equity Account greater than the Trigger Amount on the last day of such
period, then (except for purposes of Section 5.2(f) hereof) a Qualified IPO
will be deemed to occur on the last day of such period, or
(b) a merger of the Company pursuant to a registration statement on Form
S-4 that results in the holders of all of the Shares (other than any holders
who exercise statutory dissenters rights) receiving registered equity
securities in exchange therefor; but only if (i) the average weekly trading
volume of the class of shares issued to holders of the Shares pursuant to
such merger (the "Merger Shares") for the 12 consecutive week period
immediately preceding the public announcement of such merger is at least
0.75% of the outstanding Merger Shares on the last day of such period, (ii)
the value of the Initial Equity Account implied by such transaction is
greater than the Trigger Amount on the date of such merger, and (iii) both
immediately before and after the consummation of such merger the Merger
Shares are listed on a Permitted Exchange.
"Registration Rights Agreement" shall mean that certain Registration
Rights Agreement, dated as of the date hereof, by and among the Company, the
Purchasers and the other parties thereto.
"Regulatory Problem" shall have the meaning set forth in Section 4.5.
"Remaining Holders" shall have the meaning set forth in Section 2.7(a).
"Reserve Notice" shall have the meaning set forth in Section 4.7.
"Reviewer" shall have the meaning set forth in Section 4.7.
"RGC" shall have the meaning set forth in the preamble.
"RGC Board" shall mean the Board of Directors of RGC.
"ROFO Acceptance" shall have the meaning set forth in Section 5.2(g).
"ROFO Closing Date" shall have the meaning set forth in Section 5.2(g).
"ROFO Notice" shall have the meaning set forth in Section 5.2(g).
"ROFO Shares" shall have the meaning set forth in Section 5.2(g).
"RPHC" shall mean any Person, if an interest in such Person is treated as
a "United States real property interest" within the meaning of section 897 of
the Internal Revenue Code of 1986, as amended.
"Rule 144 Open Market Transaction" shall mean any bona fide public sale
of Shares in an open market transaction under Rule 144 of the Securities Act (or
any successor rule) if such sale is in compliance with the requirements of
paragraphs (c), (d), (e), (f) and (g) of such Rule (notwithstanding the
provisions of paragraph (k) of such Rule).
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
"Series A Preferred Stock" shall have the meaning set forth in the
recitals.
"Series B Preferred Stock" shall have the meaning set forth in the
recitals.
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"Shares" shall mean, collectively, the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock, and the Warrants. Whenever this
Agreement refers to a number or percentage of Shares, such number or percentage
shall be calculated as if each of the Shares had been exchanged or converted
into shares of Common Stock immediately prior to such calculation regardless of
the existence of any restrictions on such exchange or conversion.
"Stock Purchase Agreement" shall have the meaning set forth in the
recitals.
"Subsidiary" shall mean, with respect to any Person, (a) a corporation a
majority of whose capital stock with voting power, under ordinary circumstances,
to elect directors is at the time, directly or indirectly, owned by such Person,
by a Subsidiary of such Person, or by such Person and one or more Subsidiaries
of such Person, (b) a partnership in which such Person or a Subsidiary of such
Person is, at the date of determination, a general partner of such partnership,
or (c) any other Person (other than a corporation) in which such Person, a
Subsidiary of such Person or such Person and one or more Subsidiaries of such
Person, directly or indirectly, at the date of determination thereof, has (i) at
least a majority ownership interest or (ii) the power to elect or direct the
election of the directors or other governing body of such Person.
"Tag-Along Notice" shall have the meaning set forth in Section 2.6(c).
"Tag-Along Sale" shall mean a bona fide Transfer of a Controlling
Stockholder's pecuniary interest in any Shares (except in accordance with
Section 2.7), including (without limitation) (a) by means of such Controlling
Stockholder's Transfer of an interest in any Person owning such Shares or (b) a
Transfer of a pecuniary interest in any Shares by such Controlling Stockholder's
spouse or issue, or by any trust solely for the benefit of such Controlling
Stockholder's spouse or issue.
"Tag-Along Stockholder" shall have the meaning set forth in Section
2.6(a).
"Third Party" shall mean any prospective purchaser of Shares (that is not
an Affiliate or Permitted Transferee of the transferor or of any Yucaipa
Affiliate) in an arm's length purchase from such transferor.
"Transfer" shall mean (i) when used as a noun: any direct or indirect
transfer, sale, assignment, pledge, hypothecation, encumbrance or other
disposition and (ii) when used as a verb: to directly or indirectly transfer,
sell, assign, pledge, hypothecate, encumber, or otherwise dispose of.
"Transferee" shall mean any Person to whom Shares have been Transferred
in compliance with the terms of this Agreement.
"Transfer Allotment" of any Tag-Along Stockholder with respect to any
Tag-Along Sale shall mean the product of (i) the total number of Shares proposed
to be Transferred in such Tag-Along Sale multiplied by (ii) a fraction, the
numerator of which is the total number of Shares owned by such Tag-Along
Stockholder as of the close of business on the second day immediately preceding
the mailing date of the Transfer Notice and the denominator of which is the
total number of Shares then owned by the Controlling Stockholders, the
Investors, and all other stockholders of the Company having tag-along or other
contractual rights to participate in the proposed Transfer.
"Transfer Date" shall have the meaning set forth in Section 2.6(b).
"Transfer Notice" shall have the meaning set forth in Section 2.6(b).
"Trigger Amount" shall mean, on any date, the lesser of (a) $1.95 billion
or (b) the sum of (i) $650 million plus (ii) if such date is after the second
anniversary of the Effective Date, the value accreted on such amount (on a daily
basis) from such second anniversary to such date, at a rate of 25% per annum,
compounded annually.
"Voting Stock" shall have the meaning set forth in the recitals.
"Warrant" shall have the meaning set forth in the recitals.
"Warrant Registration Rights Agreement" shall mean the Registration
Rights Agreement, dated as of December 31, 1992, by and among Food 4 Less
Holdings, Inc. and the purchasers of the Warrants.
"Yucaipa" shall mean The Yucaipa Companies, a California general
partnership, until a successor controlled by Ronald W. Burkle replaces such
Person, and thereafter means such successor; provided that the rights set forth
in Section 5.1 of this Agreement as belonging to Yucaipa initially shall be
exercisable personally by Ronald W. Burkle, and neither The Yucaipa Companies
nor any other Yucaipa Affiliate shall have any right or interest in the exercise
of such rights; provided further that Ronald W. Burkle may assign such rights to
any successor controlled by him, and for purposes of Section 5.1, "Yucaipa"
thereafter shall mean such successor so long as it remains controlled by Ronald
W. Burkle.
"Yucaipa Affiliate" shall have the meaning set forth in the preamble.
"Yucaipa Individual" shall mean (a) a full-time employee of a Yucaipa
Affiliate or the Company or (b) a partner of a Yucaipa Affiliate who devotes
substantially all of his business efforts to such Yucaipa Affiliate.
"Yucaipa Nominees" shall have the meaning set forth in Section 5.1(a).
"Yucaipa Warrant" shall mean the warrant to purchase 8,000,000 shares of
Common Stock issued by the Company to Yucaipa on the Effective Date.
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ARTICLE II
RESTRICTIONS ON TRANSFERS
SECTION 2.1 Transfers in Accordance with this Agreement. Any attempt to
Transfer, or purported Transfer of, any Shares in violation of the terms of this
Agreement shall be null and void and neither the Company nor any transfer agent
shall register upon its books any such Transfer. A copy of this Agreement shall
be filed with the Secretary of the Company and kept with the records of the
Company.
SECTION 2.2 Agreement to be Bound. (a) No party hereto shall Transfer any
Shares (other than Transfers to the Company or Transfers constituting a bona
fide public distribution pursuant to (i) the registration rights included in the
Registration Rights Agreement, (ii) any shelf registration pursuant to Rule 415
under the Securities Act or any Public Offering or (iii) Rule 144 Open Market
Transactions) unless (x) the certificates representing such Shares issued to the
Transferee bear the legend provided in Section 2.3, if required by such Section,
and (y) the Transferee (if not already a party hereto) has executed and
delivered to each other party hereto, as a condition precedent to such Transfer,
an instrument or instruments, reasonably satisfactory to the Company, confirming
that the Transferee agrees to be bound by the terms of this Agreement in the
same manner as such Transferee's transferor, except as otherwise specifically
provided in this Agreement.
(b) At any time prior to the earlier of an Initial Public Offering or a
Qualified IPO, the Company shall cause each Person (other than any Person
already a party to this Agreement) acquiring newly issued Shares (other than
acquisitions of Shares (i) pursuant to Employee Plans or (ii) in exchange for
consideration consisting only of property, assets or services (other than cash)
pursuant to a transaction approved in writing by a majority of the New
Nominees), including any Person who acquires Shares pursuant to the Preferred
Preemptive Purchase, to execute and deliver to each other party hereto a written
agreement, reasonably satisfactory to the parties hereto, confirming that such
Person agrees to be bound as an Other Investor under this Agreement (or to be
bound under another agreement by provisions substantially identical to those
contained herein) and to cause any certificates representing Shares issued to
such Person to bear the legend provided in Section 2.3 (or a substantially
similar legend).
SECTION 2.3 Legend. Each Investor and Controlling Stockholder hereby agrees
that each outstanding certificate representing Shares issued to any of them, or
any certificate issued in exchange for or upon conversion of any similarly
legended certificate, shall, unless sold in a transaction exempted from the
operation of Section 2.2(a) above, bear a legend reading substantially as
follows (except for certificates representing Shares issued in the Holdings
Merger pursuant to a Registration Statement on Form S-4, which certificate shall
bear only the legend set forth in the second paragraph below):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS, AND
MAY BE OFFERED AND SOLD ONLY IF SO REGISTERED OR AN EXEMPTION FROM REGISTRATION
IS AVAILABLE. THE HOLDER OF THESE SHARES MAY BE REQUIRED TO DELIVER TO THE
COMPANY, IF THE COMPANY SO REQUESTS, AN OPINION OF COUNSEL (REASONABLY
SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY) TO THE EFFECT THAT AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (OR QUALIFICATION UNDER
STATE SECURITIES LAWS) IS AVAILABLE WITH RESPECT TO ANY TRANSFER OF THESE SHARES
THAT HAS NOT BEEN SO REGISTERED (OR QUALIFIED).
THE SHARES REPRESENTED BY THIS CERTIFICATE ALSO ARE SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER AND OBLIGATIONS, TO WHICH ANY TRANSFEREE AGREES BY HIS
ACCEPTANCE HEREOF, AS SET FORTH IN THE STOCKHOLDERS AGREEMENT, DATED AS OF JUNE
, 1995, COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY. NO TRANSFER OF SUCH
SHARES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE
OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT AND BY AN AGREEMENT OF THE
TRANSFEREE TO BE BOUND BY THE RESTRICTIONS SET FORTH IN THE STOCKHOLDERS
AGREEMENT.
Notwithstanding the foregoing, each Investor and Controlling Stockholder
hereby agrees that each outstanding Warrant shall, unless sold in a transaction
exempted from the operation of Section 2.2(a) above, bear substantially the
legend set forth in the Warrantholders Agreement (notwithstanding the
termination of such agreement), provided that any reference in such legend to
the Warrantholders Agreement shall be amended, upon any reissuance of a Warrant
in connection with a Transfer thereof, to refer to this Agreement.
SECTION 2.4 [Intentionally Left Blank].
SECTION 2.5 Transfer of Pecuniary Interests. Prior to a Transfer of a
pecuniary interest in any Shares by Ronald W. Burkle or any Controlling
Stockholder controlled by Ronald W. Burkle to a Permitted Transferee (including,
without limitation, by means of a Transfer of an interest in any Person owning
Shares) Ronald W. Burkle shall provide each of the Purchasers with a written
notice specifying the number of Shares in which a pecuniary interest is being
Transferred.
Without the prior written consent of (a) the holders of a majority of the
Shares held by the Purchasers and (b) at least two unrelated Purchasers, neither
Ronald W. Burkle nor any Controlling Stockholder controlled by Ronald W. Burkle
shall Transfer a pecuniary interest in any Shares to a Permitted Transferee
(including, without limitation, by means of a Transfer of an interest in any
Person owning Shares), if immediately after giving effect to such Transfer
Ronald W. Burkle would have a pecuniary interest in a number of Shares less than
(i) 85% of the number of Shares in which Ronald W. Burkle has a pecuniary
interest on the date hereof minus (ii) any Shares as to
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which Ronald W. Burkle has a pecuniary interest on the date hereof that are
Transferred in a Tag-Along Sale exempt from the provisions of Section 2.6
pursuant to Section 2.6(e)(v).
The provisions of this Section 2.5 shall not apply to any Transfer to (x)
any spouse or issue of Ronald W. Burkle, or any trust solely for the benefit of
Ronald W. Burkle or any such spouse or issue, and (y) upon Ronald W. Burkle's
death, any Person to whom Shares are transferred in accordance with the laws of
descent and/or testamentary distribution.
SECTION 2.6 Tag-Along Rights. (a) Each Controlling Stockholder who
proposes to effect a Tag-Along Sale shall afford each of the Investors (each, a
"Tag-Along Stockholder") the opportunity to participate therein in accordance
with this Section 2.6.
Each Controlling Stockholder represents to the Investors that it has not
entered into any agreement providing for any rights inconsistent with the rights
provided to the Investors in this Section 2.6 and that it has not otherwise
directly or indirectly granted any such rights, other than pursuant to the
Existing Stockholders Agreements. No Controlling Stockholder shall enter into
any agreement providing for, or otherwise directly or indirectly grant, any
tag-along or other contractual rights (other than customary registration rights)
to participate, directly or indirectly, in any Tag-Along Sale (other than with
respect to (i) Shares issued under the Employee Plans representing no more than
11% of the Shares outstanding immediately following the Effective Date or (ii)
Shares issued pursuant to the Preferred Preemptive Purchase) without the prior
unanimous written approval of the New Nominees.
(b) With respect to each Tag-Along Sale, each Tag-Along Stockholder shall
have the right to Transfer, at the same price and upon identical terms and
conditions as such proposed Transfer (except as set forth below), the number of
Shares owned by such Tag-Along Stockholder equal to such Tag-Along Stockholder's
Transfer Allotment; provided, however, that (i) a Tag-Along Stockholder may
Transfer Shares of a different kind than those transferred by a Controlling
Stockholder pursuant to a Tag-Along Sale; and (ii) in the event of a Tag-Along
Sale pursuant to a Transfer by a Controlling Stockholder of an interest in a
Person that directly or indirectly owns Shares, the price and other terms and
conditions of such Tag-Along Sale applicable to each Tag-Along Stockholder and
the Shares to be sold by such Tag-Along Stockholder, shall as closely
approximate those of the proposed Transfer as is reasonably practicable.
At the time any Tag-Along Sale is proposed, the Controlling Stockholders
shall give written notice to each Tag-Along Stockholder of its right to sell
Shares hereunder (the "Transfer Notice"), which notice shall identify the
Proposed Purchaser and state the number of Shares proposed to be Transferred,
the proposed offering price (including the form and terms of any non-cash
consideration to be received in connection therewith), the proposed date of any
such Transfer (the "Transfer Date") and any other material terms and conditions
of the proposed Transfer. The Transfer Notice shall also contain a complete and
correct copy of any offer to, or agreement with, the Controlling Stockholders by
the Proposed Purchaser to purchase such Shares. The Controlling Stockholders
shall use their best efforts to deliver the Transfer Notice at least 30 days
prior to the Transfer Date and in no event shall the Controlling Stockholders
provide such Transfer Notice later than 21 days prior to the Transfer Date.
(c) Each Tag-Along Stockholder that wishes to participate in the Tag-Along
Sale shall provide written notice (or oral notice confirmed in writing) (the
"Tag-Along Notice") to the Controlling Stockholders no less than 7 days prior to
the Transfer Date. The Tag-Along Notice shall set forth the number and kind of
Shares that such Tag-Along Stockholder elects to include in the Transfer, which
shall not exceed such Tag-Along Stockholder's Transfer Allotment; provided that
the failure of a Tag-Along Stockholder to correctly specify a number or kind of
Shares not exceeding its Transfer Allotment shall not affect the rights such
Tag-Along Stockholder may otherwise have under this Section 2.6. The Tag-Along
Notice shall also specify the aggregate number and kind of additional Shares
owned of record by such Tag-Along Stockholder as of the close of business on the
second day immediately preceding the date on which the Tag-Along Notice is given
by such Tag-Along Stockholder, if any, which such Tag-Along Stockholder desires
also to include in the Transfer ("Additional Shares") in the event there is any
under-subscription for the entire amount of all Tag-Along Stockholders' Transfer
Allotments. In the event there is an under-subscription by the Tag-Along
Stockholders for any portion of the aggregate Tag-Along Stockholders' Transfer
Allotments, the Controlling Stockholders shall apportion the unsubscribed
Tag-Along Stockholders' Transfer Allotments to Tag-Along Stockholders whose
Tag-Along Notices specified an amount of Additional Shares, which apportionment
shall be on a pro rata basis among such Tag-Along Stockholders in accordance
with the number of Additional Shares specified by all such Tag-Along
Stockholders in their Tag-Along Notices. The Tag-Along Notices given by the
Tag-Along Stockholders shall constitute their binding agreements to sell such
Shares on the terms and conditions applicable to the Transfer.
If a Tag-Along Notice is not received by the Controlling Stockholders from a
Tag-Along Stockholder prior to the 7-day period specified above, the Controlling
Stockholders shall have the right to sell or otherwise Transfer the number of
Shares specified in the Transfer Notice to the Proposed Purchaser specified in
the Transfer Notice without any participation by such Tag-Along Stockholder
(subject to the right of other Tag-Along Stockholders to sell Additional Shares
in the event of an under-subscription by Tag-Along Stockholders, as described
above), but only on terms and conditions with respect to the consideration paid
by the Proposed Purchaser no more favorable (and other material terms and
conditions which a reasonable investor would consider significant to the
decision to include Shares in the Transfer no more favorable in any material
respect) to the Controlling Stockholders than as stated in the Transfer Notice
to the Tag-Along Stockholders, and only if such Transfer occurs on a date within
45 business days of the Transfer Date.
(d) No Tag-Along Stockholder shall be required to make any representations
and warranties to any Person in connection with such Tag-Along Sale except as to
(i) good title and the absence of liens with respect to such Tag-Along
Stockholder's Shares, (ii) the corporate or other existence of such Tag-Along
Stockholder and (iii) the authority for and the validity and binding effect of,
and the absence of any conflicts under the charter documents and material
agreements of such Tag-Along Stockholder as to, any agreements entered into by
such Tag-Along Stockholder in connection with such Transfer. No Tag-Along
Stockholder shall be required to provide any indemnities in connection with such
Tag-Along Sale except for a breach of such representations and warranties.
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(e) The provisions of this Section 2.6 shall not apply to any Transfers (i)
by a Controlling Stockholder to a Permitted Transferee of such Controlling
Stockholder (provided that such Permitted Transferee has agreed to be bound by
this Agreement as contemplated by Section 2.2 hereof), (ii) pursuant to a Public
Offering, (iii) pursuant to a Rule 144 Open Market Transaction of which each of
the New Nominees has been provided at least 2 business days' prior written
notice, or (iv) on or after the one year anniversary of the Effective Date, by
Ronald W. Burkle or Controlling Stockholders controlled by Ronald W. Burkle;
provided, that the aggregate number of Shares transferred pursuant to this
clause (iv) by all such Persons does not exceed 807,127 (7.5% of the number of
Shares beneficially owned by the Yucaipa Affiliates on the date hereof).
SECTION 2.7 Rights to Compel Sale. (a) If at any time the Controlling
Stockholders shall enter into a written agreement with a Third Party to acquire
solely for cash all, but not less than all, of the issued and outstanding Shares
in a bona fide transaction (a "Compelled Sale Agreement"), the Controlling
Stockholders shall have the right, subject to the terms and conditions set forth
below, to require each of the Investors (the "Remaining Holders") to sell all,
but not less than all, of the Shares held by each such Remaining Holder (a
"Compelled Sale"). Subject to the terms and conditions set forth below, the
Remaining Holders shall (and hereby agree to) sell such Shares on the same terms
and conditions and for the same per Share consideration as the Controlling
Stockholders sell their Shares.
As soon as is reasonably practicable after the commencement of material
discussions regarding a proposed sale of the Company (whether through a merger,
sale of stock or assets or otherwise), business combination, or similar
transaction, the Controlling Stockholders shall provide each of the New Nominees
with notice thereof, which shall include reasonable details with respect
thereto. The Controlling Stockholders shall provide each of the New Nominees
with prompt notice of all material developments in such discussions.
(b) Within two Business Days following execution of any Compelled Sale
Agreement, the Controlling Stockholders shall provide each Remaining Holder with
written notice thereof (the "Compelled Sale Notice"). The Compelled Sale Notice
shall attach a copy of the Compelled Sale Agreement and shall set forth: (i) the
name and address of the Third Party; (ii) the amount of consideration to be paid
per Share and the terms and conditions of payment offered by the Third Party;
and (iii) all other material terms of such Compelled Sale, including the
proposed date of the Compelled Sale (the "Compelled Sale Date"), which shall be
not less than 20 days following the delivery of the Compelled Sale Notice, and
the outside termination date of the Compelled Sale Agreement (the "Compelled
Sale Termination Date"), which shall be not more than 150 days following the
delivery of the Compelled Sale Notice.
(c) The provisions of this Section 2.7(c) shall only apply if the aggregate
consideration to be paid for all outstanding Shares in such Compelled Sale
implies an Enterprise Value on the date of delivery of the Compelled Sale Notice
of less than the product of (x) 6.5 times (y) EBITDA of the Company for the
latest four fiscal quarters of the Company for which information was (or was
required to be) provided to Investors pursuant to Section 4.4 hereof (or, if
such Compelled Sale Notice is given prior to the date on which the Company has
provided a full year of financial statements pursuant to Section 4.4 hereof, the
annualized EBITDA of the Company based on all periods beginning on or after the
Effective Date for which information was (or was required to be) so provided).
(i) Upon delivery of an Appraisal Request, Yucaipa and Apollo, if the
Other Purchasers delivered the Appraisal Request or Yucaipa and the Other
Purchasers, if Apollo delivered the Appraisal Request, shall choose an
Appraiser from the list of proposed Appraisers contained in the Appraisal
Request, and notify the party delivering such Appraisal Request of such
choice on or prior to the fifth business day following delivery of the
Appraisal Request. The party or parties making such Appraisal Request shall
retain such Appraiser and cause the Appraiser to calculate an Appraised
Value as promptly as practicable (but in any event prior to the 20th
business day following selection of the Appraiser) and to provide written
notice thereof to the Controlling Stockholders and the Purchasers (the
"Appraisal Notice").
If the per Share consideration to be paid in such Compelled Sale is less
than the Appraised Value, then (A) the Controlling Stockholders shall pay
all fees and expenses of the Appraiser arising in connection with the
calculation of the Appraised Value and (B) each Purchaser may elect whether
or not to sell its Shares in such Compelled Sale, provided, that if any
Purchaser elects not to sell its Shares in such Compelled Sale, no Investor
shall be required to sell its Shares in the Compelled Sale. Otherwise, the
party or parties delivering the Appraisal Request pursuant to the preceding
paragraph shall pay all fees and expenses of the Appraiser arising in
connection with the calculation of the Appraised Value and the Investors
shall be required to sell their Shares in the Compelled Sale subject to the
terms and conditions of this Section 2.7.
(ii) If (A)(1) an Appraisal Request is not delivered on or prior to the
fifth business day following delivery of the Compelled Sale Notice, (2) the
per Share consideration to be paid in such Compelled Sale is not less than
the Appraised Value or (3) the per Share consideration to be paid in such
Compelled Sale is less than the Appraised Value, but each Purchaser elects
to sell its Shares in such Compelled Sale and (B) Apollo delivers to Yucaipa
a written notice (a "Compelled Sale Acceptance") within 15 days following
the delivery of the Compelled Sale Notice (or, if an Appraisal Request was
delivered, within 15 days following delivery of the Appraisal Notice), which
Compelled Sale Acceptance sets forth the binding commitment of Apollo (or
its designee) to purchase all of the issued and outstanding Shares at the
price per Share and on all of the other terms and subject to all of the
conditions set forth in the Compelled Sale Agreement and the other terms and
conditions set forth herein (including, without limitation, the condition
that Apollo (or its designee) obtains financing, within the time periods set
forth below, on terms and conditions satisfactory to Apollo (or such
designee)), then the Controlling Stockholders and such Remaining Holders
shall, and the Controlling Stockholders shall cause the other participating
stockholders to, sell, and Apollo (or its designee) shall purchase, such
Shares on the terms and subject to the conditions set forth therein as if
Apollo (or its designee) is (and for purposes of this Section 2.7 will be
deemed to be) the Third Party, and the Compelled Sale Date is (and for
purposes of this Section 2.7 will be deemed to be) the later
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of (1) 60 days following the delivery of the Compelled Sale Notice or the
Appraisal Notice, as the case may be, (2) if on the date of the Compelled
Sale Notice, the Company and its Subsidiaries have, in the aggregate,
greater than $500 million of outstanding Disqualified Indebtedness, 90 days
following the delivery of the Compelled Sale Notice or the Appraisal Notice,
as the case may be, and (3) the Compelled Sale Date specified in the
Compelled Sale Notice; provided, that (A) the right of Apollo (or its
designee) to purchase Shares pursuant to this Section 2.7(c) shall terminate
if (x) it has not satisfied or waived its financing contingencies on or
prior to the date all financing contingencies contained in the Compelled
Sale Agreement were required to be so satisfied or waived (or, if later, on
or prior to the date set forth in clause (1) or (2) above, as applicable) or
(y) such purchase has not been consummated on or prior to the Compelled Sale
Termination Date (or, if later, the date set forth in clause (1) or (2)
above, as applicable) and (B) subject to its ability to obtain financing on
satisfactory terms and conditions within the time periods set forth above,
the obligation of Apollo (or its designee) to purchase Shares shall
terminate only in accordance with the terms of the Compelled Sale Agreement
(or similar agreement by which Apollo (or such designee) has become bound).
If the per Share consideration to be paid in such Compelled Sale is less
than the Appraised Value and any Purchaser elects not to sell its Shares in
such Compelled Sale, Apollo (or its designee) shall nevertheless have the
right (but not the obligation) to purchase all of the Shares owned by the
Controlling Stockholders in the manner otherwise contemplated by this
Section 2.7.
(d) Notwithstanding anything contained in this Agreement to the contrary, in
connection with a Transfer (which otherwise complies with the terms of this
Agreement) of at least 66 2/3% of the Shares held by Apollo on the Effective
Date to a single Transferee (whether by a single transaction or a series of
transactions) Apollo may, by written notice to the Company, assign all of its
rights under this Section 2.7 to such Transferee including, without limitation,
the right to purchase all of the issued and outstanding Shares under this
Section 2.7(c).
(e) Subject to the satisfaction or waiver of the terms and conditions of the
Compelled Sale Agreement (other than any condition relating to the delivery of
Shares by the Remaining Holders), the Compelled Sale shall occur at a closing
(the "Compelled Sale Closing") on the Compelled Sale Date during normal business
hours at a time and place reasonably designated by the Controlling Stockholders
and the Third Party; provided, that if the Compelled Sale Closing has not
occurred on or prior to the Compelled Sale Termination Date, the Remaining
Holders will be released from their obligations under this Section 2.7, unless
and until the Controlling Stockholders deliver a new Compelled Sale Notice in
compliance with this Section 2.7.
(f) If any Person fails to deliver certificates representing its Shares as
required by this Section 2.7 and the Compelled Sale in question is consummated,
then such Person (i) shall not be entitled to the consideration it is to receive
under this Section 2.7 until it cures such failure (provided, that after curing
such failure it shall be so entitled to such consideration without interest),
(ii) shall for all purposes be deemed no longer to be a stockholder of the
Company and have no voting rights with respect to such Shares, (iii) shall not
be entitled to any dividends or other distributions with respect to the Shares
held by it, (iv) shall have no other rights or privileges granted to
stockholders under this or any other agreement and (v) in the event of
liquidation of the Company, shall have rights subordinate to the rights of any
equity holder with respect to any consideration it would have received if it had
complied with this Section 2.7, if any, until it cures such failure (provided,
that after curing such failure it shall be so entitled to such consideration
without interest). If any party so fails to deliver such certificates as so
required it shall execute, acknowledge and deliver all such further agreements
and take all such further actions as may be necessary or desirable to give
effect to the provisions of this Section 2.7(f).
(g) No Remaining Holder shall be required to make any representations and
warranties to any Person in connection with such Transfer except as to (i) good
title and the absence of liens with respect to such Remaining Holder's Shares,
(ii) the corporate or other existence of such Remaining Holder and (iii) the
authority for and the validity and binding effect of, and the absence of any
conflicts under the charter documents and material agreements of such Remaining
Holder as to, any agreements entered into by such Remaining Holder in connection
with such Transfer. The Remaining Holders shall not be required to provide any
indemnities in connection with such Transfer except for a breach of such
representations and warranties.
(h) The Company shall, and shall cause its Subsidiaries to, use their
respective best efforts to ensure that the terms of all Indebtedness and
preferred stock created, incurred, assumed or guaranteed by the Company or any
of its Subsidiaries after the Effective Date (and all agreements and instruments
relating thereto) do not (directly or indirectly) prohibit, or provide for a
default, right to accelerate, acceleration, put, mandatory redemption,
repurchase or repayment, or similar event, directly or indirectly, due to, upon,
in anticipation of, or following, Apollo's exercise of its rights pursuant to
this Section 2.7 or any other transaction pursuant to which Apollo obtains or
may obtain control of the Company. Any Indebtedness or preferred stock
containing any of such terms is referred to herein as "Disqualified
Indebtedness."
SECTION 2.8 Offering Memorandum. The Company shall cooperate with the
Investors and make available on a timely basis such information as the Investors
may reasonably request (to the extent that such information can be provided
without unreasonable expense or disruption of the Company's affairs) to
facilitate (i) the Transfer of 5% or more of the issued and outstanding Shares
to a Third Party or (ii) in the case of Apollo, the financing of a Compelled
Sale, including, in the case of (A) any Transfer of 5% or more of the issued and
outstanding Shares not registered pursuant to the Securities Act or (B) in the
case of Apollo, the financing of a Compelled Sale, (x) at any time the Company
is not filing periodic reports under the Exchange Act, prompt preparation of an
offering memorandum relating to the Shares, the financing (if applicable) and
the Company and its Subsidiaries that contains such information as is required
by the Securities Act and other applicable laws to be provided to "accredited
investors," and such other information reasonably requested by the Investors,
and (y) making available to any proposed purchaser of such Shares or proposed
source of financing reasonable access to management of the Company and its
Subsidiaries.
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The Company shall provide customary representations and warranties to the
selling Investors and any purchaser of such Shares or source of financing, as
the case may be, to the effect that the information contained in any such
offering memorandum that has been provided by the Company does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, and shall indemnify each of the Investors,
the purchaser or source of financing, as the case may be, and their respective
representatives and agents from and against any loss, claim, damage, liability
or expense incurred by any of them as a result of any breach of such
representation and warranty.
SECTION 2.9 Deliveries at Closing; Method of Payment of Purchase
Price. Each Tag-Along Stockholder, Controlling Stockholder and Remaining Holder,
as applicable, shall deliver to the Proposed Purchaser, Apollo or the Third
Party, as applicable, against delivery of the purchase price for the Shares
being sold by it, (i) certificates appropriately endorsed and representing the
Shares being sold, free and clear of any lien, claim or encumbrance, and (ii)
such other documents, including, without limitation, executed stock powers and
evidence of ownership and authority, as the purchasers may reasonably request.
The purchase price shall be paid by wire transfer of immediately available funds
to the bank account designated by each Tag-Along Stockholder, Controlling
Stockholder and Remaining Holder, or by certified check if the amount payable to
the recipient thereof is less than $1,000,000.
ARTICLE III
SCOPE OF BUSINESS OF THE COMPANY
SECTION 3.1 Scope of Business. As of the Effective Date, after giving
effect to the transactions contemplated by the Stock Purchase Agreement,
including, without limitation, the Acquisition (as defined therein) and the
Holdings Merger, the Company legally and beneficially will own 100% of the
outstanding shares of capital stock of RGC. RGC and its Subsidiaries are engaged
primarily in the operation of conventional retail supermarkets, warehouse format
supermarkets and grocery warehouse facilities located principally in California,
Kansas and Missouri.
SECTION 3.2 Business Opportunities. None of Yucaipa, its partners nor any
Person controlled by any of them (other than the Company or its Subsidiaries)
shall, directly or indirectly, enter into, or agree or commit to enter into, any
material investment in or otherwise exploit any business opportunity primarily
related to the operation of conventional retail supermarkets, warehouse format
supermarkets and grocery warehouse facilities within the State of California or
in any other market in which the Company or any of its Subsidiaries does
business (other than an investment in the shares of any public company
representing less than 5% of such company's fully diluted common equity) (a
"Business Opportunity") except with the approval of Apollo and the holders of a
majority of the Shares held by the Other Purchasers.
ARTICLE IV
ADDITIONAL RIGHTS AND OBLIGATIONS OF
INVESTORS AND THE COMPANY
SECTION 4.1 Management Fees. Neither the Company nor any of its
Subsidiaries shall pay to Yucaipa or any of its Affiliates compensation for
providing services to the Company and its Subsidiaries (or reimbursement of
expenses in connection therewith) other than pursuant to (a) the Consulting
Agreement, (b) customary compensation and expense reimbursement arrangements
between the Company or its subsidiaries and George G. Golleher, or (c) any
similar agreement or arrangement approved by the Board of Directors and a
majority of the New Nominees.
SECTION 4.2 Investment Banking Services. Neither the Company nor any of its
Subsidiaries may retain or employ Yucaipa or any of its Affiliates as a
financial advisor or investment banker other than solely in accordance with the
terms of the Consulting Agreement or any similar agreement or arrangement
approved by the Board of Directors and a majority of the New Nominees.
SECTION 4.3 Access to Information; Confidentiality. Upon the request of any
single Investor owning more than 10% of the outstanding Shares or of any
Purchaser, the Company shall afford such Person and its accountants, counsel and
other representatives reasonable access to all of the properties, books,
contracts, commitments and records (including, but not limited to, tax returns)
of the Company and its Subsidiaries that are reasonably requested. Such Person
will, and will cause its agents to, conduct any such investigations on
reasonable advance notice, during normal business hours, with reasonable numbers
of persons and in such a manner as not to interfere unreasonably with the normal
operations of the Company and its Subsidiaries.
Except as otherwise required by applicable law, neither the Company nor any
of its Subsidiaries shall be required to provide access to or to disclose
information where such access or disclosure would violate or prejudice the
rights of any customer or other Person, would jeopardize the attorney-client
privilege of the Person in possession or control of such information, or would
contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or
binding agreement entered into prior to the date hereof. The parties hereto will
make appropriate substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
The Investors shall, and shall use their best efforts to cause their
representatives to, keep confidential all such information to the same extent
such information is treated as confidential by the Company, and shall not
directly or indirectly use such information for any competitive or other
commercial purpose. The obligation to keep such information confidential shall
not apply to (i) any information that (x) was already in the Investors'
possession prior to the disclosure thereof by the Company (other than through
disclosure by any other Person known by such Investor to be subject to a duty of
confidentiality), (y) was then generally known to the public, or (z) was
disclosed
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to the Investors by a third party not known by such Investor to be bound by an
obligation of confidentiality or (ii) disclosures made as required by law or
legal process or to any person exercising regulatory authority over such
Investor or its Affiliates. If in the absence of a protective order or the
receipt of a waiver hereunder the Investors are nonetheless, in the opinion of
their counsel, compelled to disclose information concerning the Company to any
tribunal or governmental body or agency or else stand liable for contempt or
suffer other censure or penalty, the Investors may disclose such information to
such tribunal or governmental body or agency without liability hereunder.
SECTION 4.4 Furnishing of Information. (a) The Company shall deliver to
each Investor, as long as such Investor shall own any Shares:
(i) as promptly as practical, but in no event later than 60 days after
the close of each of its first three quarterly accounting periods during any
fiscal year of the Company, the consolidated balance sheet of the Company as
at the end of such quarterly period, and the related consolidated statements
of operations, stockholders' equity and cash flows for such quarterly
period, and for the elapsed portion of the fiscal year ended with the last
day of such quarterly period, and in each case setting forth comparative
figures for the related periods in the prior fiscal year (if such
comparative figures are available without unreasonable expense), all of
which shall be certified by the chief financial officer of the Company, to
have been prepared in accordance with generally accepted accounting
principles, subject to year-end audit adjustments, together with an MD&A;
(ii) as promptly as practical, but in no event later than 105 days after
the close of each fiscal year of the Company, the consolidated balance sheet
of the Company as of the end of such fiscal year and the related
consolidated statements of operations, stockholders' equity and cash flows
for such fiscal year, in each case setting forth comparative figures for the
preceding fiscal year, and certified by independent certified public
accountants of recognized national standing, together with an MD&A; and
(iii) all reports, if any, filed by the Company or any Subsidiary of the
Company with the Commission under the Exchange Act, as promptly as
practical, but in no event later than 15 days after filing any such reports
with the Commission.
(b) The provisions of Sections 4.4(a)(i) and (ii) above shall be deemed to
have been satisfied if the Company delivers the reports timely filed by the
Company with the Commission on Form 10-Q or 10-K, as applicable, for such
periods promptly, but in no event later than 15 days after filing any such Form
with the Commission.
(c) The Company shall deliver to Apollo and each Other Purchaser holding not
less than 500,000 Shares a copy of all notices, statements and information sent
to the Agent or the Lenders pursuant to Section 6.1 of the Credit Agreement, but
in no event later than 15 days after each such delivery to the Agent or Lenders,
as the case may be.
SECTION 4.5 Regulatory Problems, etc. (a) Each Investor that has a
potential Regulatory Problem shall notify the Company of the existence thereof
and of the percentage amount of the Company's equity securities that would cause
it to have such Regulatory Problem. A Person shall be deemed to have a
"Regulatory Problem" when such Person and its Affiliates would own, control or
have the power over a greater number or percentage of securities of any kind
issued by the Company or any other Person than are permitted under any
requirement of any governmental authority.
(b) Before the Company or any of its Subsidiaries redeems, purchases or
otherwise acquires, directly or indirectly, or converts or takes any action with
respect to the voting rights of, any shares of any of its capital stock or any
securities convertible into or exchangeable for any shares of any class of its
capital stock, the Company shall give prompt written notice of such pending
action to any Investor that would, according to the terms of any such prior
notice, have a Regulatory Problem as a result of such action.
(c) Before the Company or any of its Subsidiaries directly or indirectly
takes any action that would result in the Company being treated as a RPHC, the
Company shall give prompt written notice to each Purchaser that has advised the
Company it desires to receive such Notice.
(d) Upon the written request of any Investor so notified pursuant to clause
(b) or (c), above, made within 10 days after its receipt thereof, the Company
shall (or shall cause its Subsidiaries to) defer taking such action for such
period (not to extend beyond 45 days after such Investor's receipt of the
Company's original notice) as such Investor requests.
SECTION 4.6 Preemptive Rights. (a) If the Company shall issue any (i)
shares of capital stock, (ii) rights, options or warrants directly or indirectly
to purchase shares of its capital stock or (iii) securities convertible directly
or indirectly into such capital stock (other than any bona fide such issuance
(A) to employees who are not Controlling Stockholders, (B) pursuant to the
exercise or exchange of rights, options, warrants or convertible securities that
are outstanding on the Effective Date or issued thereafter in accordance with
the terms of this Agreement, (C) pursuant to the Holdings Merger, (D) pursuant
to a Public Offering, (E) for consideration other than cash and/or indebtedness
or (F) pursuant to the Preferred Preemptive Purchase), then Ronald W. Burkle,
George G. Golleher and each Investor shall be entitled to participate in such
issuance on the same terms and conditions, on a pro rata basis in respect of
such Person's Shares, so that following such issuance, each such Person, if it
has elected to acquire the new securities to be issued, will have (or in the
case of the issuance of options, warrants, rights or convertible securities,
have the right to acquire) the same percentage of the equity ownership of the
Company as such Person had by reason of its ownership of Shares immediately
prior to such issuance.
(b) The Company shall provide a written notice (the "Offering Notice") of
any such issuance to the Investors, and the Investors may elect to purchase
securities in any such issuance by giving a notice to the Company within 20 days
following the date of the Offering Notice. The closing of any purchase by the
Investors shall be made no later than 60 days following the date of the Offering
Notice or such other date as the Company and the Investors may mutually agree.
If, subsequent to the date of the Offering Notice, the Company alters
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the price or other significant terms and conditions of the offering that a
reasonable investor would consider material to the decision to purchase such
securities, or the Company has not sold such securities within 60 days after the
date of the Offering Notice, the Company shall provide another Offering Notice
to the Investors with respect to any subsequent issuance and will otherwise
comply with the provisions of this Section 4.6 to the extent applicable to such
issuance.
(c) Notwithstanding anything contained in this Section 4.6 to the contrary,
if the Company issues any shares of capital stock that have voting rights, or
any rights, options or warrants directly or indirectly to purchase shares of
such voting capital stock, or securities directly or indirectly convertible into
shares of such voting capital stock, then at any Investor's request, in lieu of
the shares, rights, options, warrants or convertible securities that such
Investor otherwise has the right to purchase pursuant to this Section 4.6, the
Company shall issue to such Investor other shares of its capital stock (or, as
the case may be, equivalent rights, options or warrants to purchase other shares
of its capital stock, or equivalent securities convertible into other shares of
its capital stock) that have no voting rights or limited voting rights, are
convertible into such voting stock on the same terms as Series B Preferred Stock
is convertible into Common Stock or Series A Preferred Stock, and are otherwise
identical to such voting stock (and, as the case may be, to the rights, options,
warrants or convertible securities relating to such voting stock) in all
respects.
(d) The rights set forth in this Section 4.6 shall terminate upon the
consummation of a Qualified IPO.
SECTION 4.7 Earthquake Losses. If the Company shall determine that
recording a reserve for non-cash charges in connection with earthquake losses or
other natural disasters ("Earthquake Reserve") is appropriate, within ten (10)
business days of making such determination, it shall provide each Investor with
written notice thereof (the "Reserve Notice"). The Reserve Notice shall set
forth the amount of such Earthquake Reserve and a reasonable itemization of the
assumptions and estimates comprising the basis for such Earthquake Reserve. If
holders of a majority of the Shares held by the Investors on such date deliver
to Yucaipa a written notice (an "Audit Request") within twenty (20) business
days following delivery of the Reserve Notice that such Investors believe, in
good faith, that such Earthquake Reserve is, or the assumptions or estimates
relating thereto are, unreasonable or not determined in accordance with GAAP,
then the Investors delivering such Audit Request shall retain an independent,
nationally recognized accounting firm, reasonably acceptable to the Company (the
"Reviewer"), and cause the Reviewer to analyze such Earthquake Reserve and the
assumptions and estimates relating thereto as promptly as practicable (but in
any event prior to the twentieth (20th) business day following delivery of the
Audit Request).
If the Reviewer determines that all or any portion of the Earthquake Reserve
is unreasonable or not determined in accordance with GAAP (and the Company does
not correspondingly adjust the Earthquake Reserve), such amount shall be
referred to herein as the "Disallowed Reserve" and the Controlling Stockholders
shall pay all fees and expenses of the Reviewer arising in connection with the
analysis of such Earthquake Reserve. Otherwise, the party or parties delivering
the Audit Request pursuant to the preceding paragraph shall pay all fees and
expenses of the Reviewer arising in connection with the analysis of the
Earthquake Reserve.
ARTICLE V
CORPORATE GOVERNANCE AND VOTING
SECTION 5.1 Boards of Directors of the Company and RGC. (a) The Board of
Directors and the RGC Board shall be composed of nine and ten members,
respectively (or such lesser number of members as actually shall have been
designated by the parties hereto in accordance with the provisions of this
Section 5.1). Yucaipa shall be entitled, but not required, to designate six
members to the Board of Directors and seven members to the RGC Board
(collectively, the "Yucaipa Nominees"). Apollo (or any representative thereof
designated by Apollo) shall be entitled, but not required, to designate two
members to each of the Board of Directors and the RGC Board (collectively, the
"Apollo Nominees"). The holders of a majority of the Shares (other than
Warrants, or shares of Series B Preferred Stock or Non-Voting Stock) held by the
Other Purchasers (or any representative thereof designated by the holders of a
majority of the Shares (other than Warrants or shares of Series B Preferred
Stock or Non-Voting Stock) held by the Other Purchasers) shall be entitled, but
not required, to designate one member to each of the Board of Directors and the
RGC Board (collectively, the "Other Purchasers Nominees" and, together with the
Apollo Nominees, the "New Nominees").
(b) The Controlling Stockholders shall take appropriate actions to cause the
appointment of the New Nominees to become effective upon the Effective Date. The
Investors and the Controlling Stockholders shall vote all of the Shares (other
than Warrants or shares of Series B Preferred Stock or Non-Voting Stock) owned
or held of record by them at all regular and special meetings of the
stockholders of the Company called or held for the purpose of filling positions
on the Board of Directors, and in each written consent executed in lieu of such
a meeting of stockholders, and each party hereto shall take all actions
otherwise necessary, to ensure (to the extent within the parties' collective
control) the election to the Board of Directors and the RGC Board of the Yucaipa
Nominees, the Apollo Nominees and the Other Purchasers Nominees.
(c) The Company, RGC, the Controlling Stockholders and the Investors shall
use their respective best efforts to call, or cause the appropriate officers and
directors of the Company or RGC, as applicable, to call, a special meeting of
stockholders of the Company or RGC, as applicable, and to vote all of the Shares
(other than Warrants or shares of Series B Preferred Stock or Non-Voting Stock)
or shares of RGC, as applicable, owned or held of record by them for, or to take
all actions by written consent in lieu of any such meeting necessary to cause,
the removal (with or without cause) of (A) any Yucaipa Nominee if Yucaipa
requests such director's removal in writing for any reason, (B) any Apollo
Nominee if Apollo requests such director's removal in writing for any reason,
and (C) the Other Purchasers Nominee if the holders of a majority of the Shares
(other than Warrants or shares of Series B Preferred Stock or Non-Voting Stock)
held by the Other Purchasers request such director's removal in writing for any
reason. Yucaipa, Apollo, and the holders of a
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majority of the Shares (other than Warrants or shares of Series B Preferred
Stock or Non-Voting Stock) held by the Other Purchasers, respectively, shall
have the right to designate a new nominee in the event any Yucaipa Nominee,
Apollo Nominee or Other Purchasers Nominee, respectively, shall be so removed
under this Section 5.1(c) or shall vacate his directorship for any reason.
Except as provided in this Section 5.1(c), each party hereto agrees that, at
any time that it is then entitled to vote for the election or removal of
directors, it will not vote in favor of the removal of any Yucaipa Nominee,
Apollo Nominee or Other Purchasers Nominee unless (i) such removal shall be at
the request of the party who nominated such director pursuant to the provisions
of Section 5.1(a) or (ii) the right of the party who nominated such director to
do so has terminated in accordance with clause (f) below.
(d) The Company shall not, and shall not permit any of its Subsidiaries to,
without the consent of holders of a majority of the Shares (other than Warrants
or shares of Series B Preferred Stock or Non-Voting Stock) held by Yucaipa,
Apollo, or the Other Purchasers, as the case may be, take any action that under
the Charter Documents or this Agreement requires the approval of one or more
Yucaipa Nominees, Apollo Nominees or Other Purchasers Nominee, as the case may
be, if any of the Yucaipa Nominees, Apollo Nominees or Other Purchasers Nominee,
as the case may be, approving such action are Persons whose removal from the
Board of Directors has been requested at or prior to the time of such action by
the party who nominated such director pursuant to Section 5.1(a). Each party
hereto shall use reasonable efforts to prevent any action from being taken by
the Board of Directors or the RGC Board, as the case may be, during the pendency
of any vacancy due to death, resignation or removal of a director, unless the
Person entitled to have a person nominated by it elected to fill such vacancy
shall have failed, for a period of 10 days after notice of such vacancy, to
nominate a replacement; provided that the provisions of this Section 5.1(d)
shall not apply in circumstances in which action must be taken by the Board of
Directors or the RGC Board, as the case may be, to protect the best interests of
the Company or the RGC, as the case may be.
(e) The initial Yucaipa Nominees shall be Ronald W. Burkle, Byron E.
Allumbaugh, George G. Golleher, Joe S. Burkle, Patrick L. Graham and Mark A.
Resnik and with respect to the RGC Board only, Alfred A. Marasca. The initial
Apollo Nominees shall be designated by Apollo on or prior to the Effective Date.
The initial Other Purchasers Nominee shall be designated by the Other Purchasers
on or prior to the Effective Date.
(f) (i) The right of Yucaipa to designate members to the Board of Directors
and to the RGC Board under this Section 5.1 shall (A) be decreased by three
(with respect to each Board) if Ronald W. Burkle ceases to beneficially own at
least 3,587,230 Shares (33 1/3% of the Shares beneficially owned by the Yucaipa
Affiliates on the Effective Date) and (B) shall terminate if Ronald W. Burkle
ceases to beneficially own at least 2,690,422 Shares (25% of the Shares
beneficially owned by the Yucaipa Affiliates on the Effective Date); provided,
that if the termination of Yucaipa's rights pursuant to this Section 5.1(f) is
due to the death of Ronald W. Burkle, such termination will not become effective
until 60 days after the date thereof.
(ii) The right of Apollo to designate members to the Board of Directors and
to the RGC Board under this Section 5.1 shall (A) be decreased by one (with
respect to each Board) if Apollo ceases to beneficially own at least 4,522,803
Shares (33 1/3% of the Shares beneficially owned by Apollo on the Effective
Date) and (B) shall terminate if Apollo ceases to beneficially own at least
3,392,102 Shares (25% of the Shares beneficially owned by Apollo on the
Effective Date).
(iii) The right of the Other Purchasers to designate a member to the Board
of Directors and to the RGC Board under this Section 5.1 shall terminate if such
Persons cease to beneficially own at least 2,500,000 Shares (33 1/3% of the
Shares beneficially owned by the Other Purchasers on the Effective Date).
(g) (i) Notwithstanding anything in this Agreement to the contrary, in
connection with a Transfer of at least 66 2/3% of the Shares held by Apollo on
the Effective Date to a single Transferee (other than any of the Yucaipa
Affiliates) whether by a single transaction or a series of transactions, Apollo
may, by written notice to the Company, assign all of its rights under this
Section 5.1 to such Transferee and, without limiting the foregoing, such
Transferee's rights to designate directors under this Section 5.1 shall not be
reduced until such Transferee and its Permitted Transferees collectively cease
to beneficially own at least 33 1/3% or 25%, as the case may be, of the number
of Shares beneficially owned by Apollo on the Effective Date; provided, that
such directors shall not be deemed New Nominees unless Apollo has provided
Yucaipa the opportunity to purchase such Shares pursuant to clause (ii) below
and such Shares are transferred to a Transferee other than any of the Yucaipa
Affiliates.
(ii) Apollo may (but shall not be required to) provide Yucaipa with written
notice of its desire to effect a proposed Transfer of at least 66 2/3% of the
Shares beneficially owned by Apollo on the Effective Date (the "ROFO Notice"),
which notice shall set forth: (1) the proposed price to be paid per Share; (2)
the minimum number of Shares proposed to be Transferred (the "ROFO Shares"); and
(3) the names of up to five proposed Transferees. If Apollo delivers a ROFO
Notice and Yucaipa delivers to Apollo, within 15 days following the delivery
thereof, a written acceptance setting forth the binding commitment (subject to
the receipt of all required governmental approvals and financing on terms and
conditions satisfactory to Yucaipa) of Yucaipa to purchase all (but not less
than all) of the ROFO Shares at the price per Share set forth in the ROFO Notice
(a "ROFO Acceptance"), then Apollo shall sell, and Yucaipa shall purchase, all
the ROFO Shares on a date no later than 90 days after delivery of the ROFO
Notice (the "ROFO Closing Date"). If Yucaipa timely elects not to purchase the
ROFO Shares, fails to deliver a ROFO Acceptance within 15 days following
delivery of the ROFO Notice, or fails to purchase the ROFO Shares on or prior to
the ROFO Closing Date (which failure shall not relieve Yucaipa of its binding
commitment, subject to the receipt of all required governmental approvals and
financing on terms and conditions satisfactory to Yucaipa, to purchase such
Shares), then in connection with a Transfer by Apollo of a number of Shares not
less than the number of ROFO Shares to any one of the Transferees specified in
the ROFO Notice for a price per Share not less than that specified in the ROFO
Notice, Apollo may assign its rights to designate directors in accordance with
the terms of clause (i) above, and thereafter directors designated by such
Transferee under Section 5.1 shall be deemed New Nominees; provided that, if
Yucaipa has timely elected not to purchase the ROFO Shares or
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failed to deliver a ROFO Acceptance within 15 days following delivery of the
ROFO Notice, such Transfer is consummated on or before the later of (i) the 90th
day following delivery of the ROFO Notice and (ii) if Apollo and such Transferee
have entered into a binding agreement with respect to such Transfer on or prior
to such 90th day, the date on which all regulatory approvals with respect to
such Transfer have been obtained.
(h) (i) The By-Laws of each of the Company and RGC shall authorize the
establishment of an Executive Committee of the Board of Directors and the RGC
Board, and may authorize the establishment of other committees of the Board of
Directors or the RGC Board, as the case may be, comprised in any case of such
persons as a majority of the Board of Directors or the RGC Board, as the case
may be, shall approve, and having authority, subject to applicable law, to take
all actions that (A) are ancillary to or arise in the normal course of the
businesses of the Company or RGC, as the case may be, or (B) implement and are
consistent with resolutions of the Board of Directors or the RGC Board as the
case may be, provided, however, that such Executive Committee or other committee
shall not be authorized to take any action which, if proposed to be taken by the
full Board of Directors or RGC Board, as the case may be, would require the
affirmative vote of a majority (or all) of the New Nominees. Any other
delegations of authority to the Executive Committee or any other committee of
the Board of Directors or RGC Board, as the case may be, shall require the prior
written approval of a majority of the New Nominees.
(ii) The By-Laws of the Company and RGC shall authorize the establishment of
an Audit Committee of the Board of Directors and the RGC Board, respectively.
Yucaipa shall cause the Yucaipa Nominees to approve the formation of such an
Audit Committee which shall be comprised of at least one of the Apollo Nominees,
if any (or if none, the Other Purchasers Nominee, if any), and at least one
other director designated by the Board of Directors or the RGC Board, as the
case may be. Each Audit Committee's duties shall include, but not be limited to,
reviewing both the audit and other work of the Company's independent accountants
or RGC's independent accountants, as the case may be, recommending to the Board
of Directors or the RGC Board, as the case may be, the independent accountants
to be retained and reviewing generally the maintenance and safekeeping of the
records and documents of the Company or RGC, as the case may be.
(iii) Each committee of the Board of Directors or the RGC Board, as the case
may be, to which authority has been delegated, shall keep complete and accurate
minutes and records of all actions taken by such committee, prepare such minutes
and records in a timely fashion and promptly distribute such minutes and records
to each member of the Board of Directors or the RGC Board, as the case may be.
SECTION 5.2 Action by the Board of Directors. All decisions of the Board of
Directors shall require the affirmative vote of a majority of the directors of
the Company then in office, or a majority of the members of an Executive
Committee of the Board of Directors, to the extent such decisions may be
lawfully delegated to an Executive Committee pursuant to Section 5.1(h). The
Company shall cause the RGC Board not to take any action unless such action is
approved by the affirmative vote of a majority of the directors of RGC then in
office, including a number of directors who are also directors of the Company
that would be sufficient to approve such action if it were taken by the Board of
Directors.
Prior to the consummation of a Qualified IPO, neither the Company nor RGC
shall, and the Company and RGC shall cause each of their respective Subsidiaries
not to, take (or agree to take) any action regarding the following matters
without the affirmative vote of a majority of the directors then in office and
the affirmative vote of a majority (or, in the case of clauses (c), (h) and (k)
below, the unanimous approval) of the New Nominees, if any, that are members of
the Board of Directors:
(a) any merger or consolidation of the Company or its successors or any
Subsidiary or its successors, other than (i) the Holdings Merger, (ii) any
merger between the Company and any direct or indirect wholly owned
Subsidiary, or between direct or indirect wholly owned Subsidiaries, or
(iii) any merger subject to the drag along rights set forth in Section 2.7
hereof;
(b) any Transfer of all or substantially all of the assets of the
Company and its Subsidiaries, taken as a whole, or of a geographic division
of the Company (but excluding any pledge, hypothecation or encumbrance of
such assets to provide security for any bona fide debt);
(c) any entry into a line of business that is unrelated to the
supermarket business (whether by stock or asset purchase or otherwise) by
the Company or a Subsidiary;
(d) any acquisition of assets other than in the ordinary course of
business, pursuant to a single transaction or series of related
transactions, if the purchase price therefor (including any debt assumed in
connection therewith) exceeds $50 million;
(e) any adoption or material amendment of an employee or similar plan
under which capital stock, or rights, options or warrants to acquire capital
stock, of the Company or a Subsidiary may be issued;
(f) any issuance or sale of capital stock or rights, options or
warrants to acquire capital stock of the Company or any Subsidiary (other
than (1) issuances by the Company pursuant to a Qualified IPO with a per
share offering price equal to or greater than the exercise price of the
Yucaipa Warrant immediately following such sale, (2) the issuance of capital
stock of the Company or rights, options or warrants to acquire capital stock
of the Company under Employee Plans, (3) any such issuance or sale by a
Subsidiary to the Company or a wholly owned Subsidiary of the Company, (4)
the issuance of any Shares upon the exercise or conversion of any option,
warrant or other convertible security (including the Series A Preferred
Stock and Series B Preferred Stock, the Warrants, the Yucaipa Warrant, and
management stock options) outstanding on the Effective Date or issued
thereafter in accordance with the terms of this Agreement or (5) any such
issuance pursuant to the Preferred Preemptive Purchase);
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(g) declaration or payment of any dividend on, distributions with
respect to, or repurchase or redemption of capital stock (other than (1) pro
rata dividends on the Shares (other than the Warrants) paid from current
earnings, (2) payments of dividends on or repurchases of shares of wholly
owned Subsidiaries' capital stock or (3) repurchases of Shares held by bona
fide, full-time employees of the Company or its Subsidiaries (other than
Ronald W. Burkle or any other partner of Yucaipa) in connection with the
death, disability or termination of such employees in accordance with the
terms of any Employee Plan, provided that the aggregate amount of all such
repurchases shall not exceed $10,000,000 per fiscal year plus, commencing as
of the second full fiscal year of the Company after the date hereof, any
unused portion of such $10,000,000 amount from the prior fiscal year up to a
maximum amount of $20,000,000 in any fiscal year);
(h) any amendment of the charter documents of the Company or any
Subsidiary, except as necessary to accommodate a Qualified IPO;
(i) any dissolution, liquidation or bankruptcy filing of the Company or
any Subsidiary;
(j) any replacement of independent accountants;
(k) any Affiliate Transaction other than a Permitted Affiliate
Transaction;
(l) any action that would result in the Company being treated as a
RPHC;
(m) any increase or reduction in the number of authorized members of the
Board of Directors or the RGC Board or any creation of or appointment of
members to a committee of the Board of Directors or the RGC Board, or any
direct or indirect payment to, or on behalf of, any member of such board, as
compensation for serving thereon or as a member of any committee thereof
(other than (i) reimbursement of expenses in accordance with the expense
reimbursement policy of the Company from time to time in effect or (ii)
payments pursuant to the Consulting Agreement).
Prior to the consummation of a Qualified IPO, all decisions of the Board of
Directors with respect to a Purchaser Transaction shall require the affirmative
vote of a majority of directors of the Company then in office who are
disinterested with respect to such transaction (or of a majority of the members
of an Executive Committee of the Board of Directors who are disinterested with
respect to such transaction, to the extent such decisions may be lawfully
delegated to an Executive Committee pursuant to Section 5.1(h)).
SECTION 5.3 Charter Documents. (a) Exhibits A and B set forth copies of
the Charter Documents, each in the form in which it is to be in effect on the
Effective Date, except that the Company's Restated Certificate of Incorporation
shall also include, in addition to the terms of Exhibit A hereto, the
Certificates of Designation, which shall have been filed with the Secretary of
State of Delaware as part of the Company's Restated Certificate of Incorporation
on or prior to the Effective Date.
(b) The Company covenants that it will act, and each Controlling Stockholder
and Investor agrees to use its best efforts to cause the Company to act, in
accordance with its Charter Documents and Certificates of Designation in all
material respects. Each Controlling Stockholder and Investor shall vote all the
Shares (other than Warrants or shares of Series B Preferred Stock or Non-Voting
Stock) owned or held of record by it at any regular or special meeting of
stockholders of the Company or in any written consent executed in lieu of such a
meeting of stockholders, and shall take all action necessary, to ensure (to the
extent within the parties' collective control) that (i) the Charter Documents
and Certificates of Designation of the Company do not, at any time, conflict
with the provisions of this Agreement, and (ii) unless an amendment is approved
by the Board of Directors and, if required under Section 5.2(h), each of the New
Nominees, the Charter Documents of the Company continue to be in effect in the
form attached hereto as Exhibits A and B and the Certificates of Designation
continue to be in effect in the forms attached as exhibits to the Stock Purchase
Agreement.
SECTION 5.4 Appointment of Representative. Until the termination of this
Agreement, each Other Investor shall and shall cause its Permitted Transferees
(jointly with the transferor, if it retains any Shares) to appoint one proxy to
vote all Shares owned by such Other Investor and its Permitted Transferees. If
requested by the Company, Apollo, the Yucaipa Affiliates, and the Controlling
Stockholders shall each designate one Person (which designated Person may be
changed from time to time by notice to the Company) to make, on their respective
behalf, any and all elections and designations and to give and receive any and
all notices required or permitted hereunder.
SECTION 5.5 Board Visitation Rights. The Company shall (a) provide notice
of each meeting of the Board of Directors and of the RGC Board concurrently
with, and in the same manner as, the notice of such meeting provided to the
members of such board (but not less than one Business Day prior to such meeting)
to (i) each Purchaser, as long as such Purchaser shall beneficially own at least
250,000 Shares, and (ii) each Investor owning more than 10% of the outstanding
Shares, (b) provide each such Person a copy of all materials and written
information provided to members of each such board and any committee thereof in
connection with any such meeting concurrently with the distribution thereof to
such members, and (c) permit a single representative of each such Person to
attend and observe each such board meeting (in person or telephonically);
provided, that (x) the Company may redact or withhold all or any portion of such
materials and/or (y) exclude any such representative from all or any portion of
any such meeting if the members of such board or committee reasonably determine
in good faith that such redaction, withholding or exclusion is required in order
to preserve the attorney client privilege with respect to any matter before the
Board of Directors or the RGC Board, as the case may be.
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ARTICLE VI
TERMINATION
SECTION 6.1 Termination. Except as otherwise provided herein with respect
to certain specific provisions, this Agreement shall terminate upon the earlier
to occur of:
(i) the mutual agreement of the parties hereto,
(ii) with respect to any party hereto other than the Company, such
party (or its Permitted Transferees) ceasing to own any Shares,
(iii) such time as less than 10% of the Shares continue to be subject to
the provisions of this Agreement or
(iv) on the tenth anniversary of the Effective Date.
If this Agreement has not otherwise terminated prior to the eighth
anniversary of the date hereof, the Investors and the Controlling Stockholders
shall undertake to renew provisions of this Agreement relating to the voting of
Shares for a successive ten-year period, or such shorter period as this
Agreement is in effect. Notwithstanding the foregoing, Section 4.3 shall survive
to the later of the tenth anniversary of the Effective Date or the termination
of this Agreement.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 No Inconsistent Agreements. Each party hereto hereby consents
to the termination of each Existing Stockholders Agreement to which it is a
party and of any other prior written or oral agreement or understanding
restricting, conditioning or limiting the ability of any party to transfer or
vote Shares and of any registration rights agreements entered into pursuant to
or in connection therewith, other than (i) the Registration Rights Agreement,
the Warrant Registration Rights Agreement and that certain Management
Stockholder Voting Agreement and Proxy, originally dated as of December 31, 1992
and (ii) the obligations of such holders under Section 2.7 of the 1991
Stockholders Agreement and Section 8 of the Warrantholders Agreement. To the
extent that less than all of the parties bound by the 1991 Stockholders
Agreement, the 1991 Registration Rights Agreement and the Warrantholders
Agreement have become parties to this Agreement (or otherwise have consented to
the termination of such agreements), each party hereto who is or was bound by
the 1991 Stockholders Agreement, the 1991 Registration Rights Agreement or the
Warrantholders Agreement hereby agrees to the amendment of the 1991 Stockholders
Agreement, the 1991 Registration Rights Agreement and the Warrantholders
Agreement to eliminate all contractual obligations of the Company and its
stockholders or warrantholders under each of such agreements (other than the
obligations of such holders under Section 2.7 of the 1991 Stockholders Agreement
and Section 8 of the Warrantholders Agreement). The Company acknowledges that
such amendments will (to the extent satisfying the requirements for amendment of
each such agreement) be binding upon it and all other parties to each of the
1991 Stockholders Agreement, the 1991 Registration Rights Agreement and the
Warrantholders Agreement.
Each of the Company and the Controlling Stockholders represents and agrees
that, as of the Effective Date, there is no (and from and after the Effective
Date they will not, and will cause their respective Subsidiaries and Affiliates
not to, enter into any) agreement with respect to any securities of the Company
or any of its Subsidiaries (and from and after the Effective Date neither the
Company nor any Controlling Stockholder shall take, or permit any of their
Subsidiaries or Affiliates to take, any action) that is inconsistent in any
material respect with the rights granted to the Investors in this Agreement.
Without limiting the foregoing, the Company represents that, (a) except for
(i) this Agreement, (ii) the Warrant Registration Rights Agreement, (iii) the
Stock Purchase Agreement, dated July 22, 1988, by and among FFL Partners, Food 4
Less, Inc., Falley's, Inc., and U.S. Trust Company of California, N.A., as
trustee of the Falley's Inc. Employee Stock Ownership Plan and Trust, as
amended, (iv) the Food 4 Less Holdings, Inc. Management Equity Program initially
adopted as of December 31, 1992 (and assumed by the Company), including those
certain Management Stockholders Agreements and Stockholder Voting Agreement and
Proxy entered into from time to time thereunder, (v) the Company's 1995 Stock
Option Plan and those certain Management Stockholders Agreements entered into
thereunder, and (iv) the Existing Stockholders Agreements, there are no other
existing agreements relating to the voting or registration of any equity
securities of the Company or any of its Subsidiaries and (b) except for (i) the
agreements specified in clause (a), above, (ii) the Employment Agreement, dated
the Effective Date, by and between the Company and George G. Golleher, (iii) the
Food 4 Less Supermarkets, Inc. Teamsters Employee Stock Ownership Plan and
related trust agreement, (iv) the Food 4 Less Supermarkets, Inc. UFCW Employee
Stock Ownership Plan and related trust agreement, (v) the Revised Employee
Profit Sharing and Retirement Program of Food 4 Less, Inc. and related trust
agreement, and (vi) the Falley's Inc. Employee Stock Ownership Plan and Trust,
as amended, and related trust agreement, there are no other existing agreements
between the Company and any other holder of Shares relating to the transfer of
any equity securities of the Company or any of its Subsidiaries.
SECTION 7.2 No Other Affiliate Stockholders. Each Yucaipa Affiliate
represents to the Investors that, as of the Effective Date, except for
10,761,688 shares of Common Stock owned collectively by the Yucaipa Affiliates,
2,263 Shares owned by Darren W. Karst and 262,525 Shares owned by George
Golleher, individually, treasury Shares owned by the Company and its
Subsidiaries and the Yucaipa Warrant, no Yucaipa Affiliate or Affiliate of any
Yucaipa Affiliate is the beneficial or record owner of (or has any pecuniary
interest in) any Shares or any rights, options or warrants to purchase Shares or
securities convertible into Shares.
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SECTION 7.3 Recapitalization, Exchanges, etc. If any capital stock or
other securities are issued in respect of, in exchange for, or in substitution
of, any Shares by reason of any reorganization, recapitalization,
reclassification, merger, consolidation, spin-off, partial or complete
liquidation, stock dividend, split-up, sale of assets, distribution to
stockholders or combination of the Shares or any other change in capital
structure of the Company, appropriate adjustments shall be made with respect to
the relevant provisions of this Agreement so as to fairly and equitably
preserve, as far as practicable, the original rights and obligations of the
parties hereto under this Agreement and the terms "Common Stock," "Series A
Preferred Stock," "Series B Preferred Stock," "Warrants" and "Shares," each as
used herein, shall be deemed to include shares of such capital stock or other
securities, as appropriate. Without limiting the foregoing, whenever a
particular number of Shares is specified herein, such number shall be adjusted
to reflect stock dividends, stock-splits, combinations or other
reclassifications of stock or any similar transactions.
SECTION 7.4 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, and their respective
successors and permitted assigns; provided that (i) neither this Agreement nor
any rights or obligations hereunder may be transferred or assigned by the
Company (except by operation of law in any merger); (ii) neither this Agreement
nor any rights or obligations hereunder may be transferred or assigned by the
Controlling Stockholders or any Investor except to any Person to whom it has
Transferred Shares in compliance with this Agreement and who has become bound by
this Agreement pursuant to Section 2.2 hereof; and (iii) the rights of the
parties under Article V hereof may not be assigned to any Person except as
explicitly provided therein. If any party hereto shall acquire additional
Shares, such Shares shall, except as otherwise expressly provided herein, be
held subject to (and entitled to all the benefits of) all of the terms of this
Agreement.
SECTION 7.5 No Waivers; Amendments. (a) No failure or delay by any party
in exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
(b) This Agreement may not be amended or modified, nor may any provision
hereof be waived, other than by a written instrument signed by (x) Yucaipa, (y)
the holders of a majority of the Shares held by the Purchasers and (z) at least
two unrelated Purchasers; provided, however, that
(i) so long as Apollo beneficially owns at least 25% of the Shares
beneficially owned by Apollo on the Effective Date, without the consent of
Apollo, no amendment, modification or waiver of Section 2.6, 4.6 or 5.2 that
adversely affects the rights or duties of Apollo thereunder, and no
amendment, modification or waiver of Section 5.1 that decreases the number
of directors that may be designated by Apollo thereunder, may be effected,
(ii) so long as Apollo beneficially owns at least 10% of the Shares
beneficially owned by Apollo on the Effective Date, without the consent of
Apollo, no amendment, modification or waiver of Section 2.7, 6.1 or this
Section 7.5 that adversely affects the rights or duties of Apollo thereunder
may be effected,
(iii) so long as the Other Purchasers beneficially own at least 25% of
the Shares beneficially owned by such Persons on the Effective Date, without
the consent of a majority of the Shares held by the Other Purchasers, no
amendment, modification or waiver of Section 2.6, 2.7, 4.6, 5.2, 6.1 or this
Section 7.5 that adversely affects the rights or duties of such Other
Purchasers thereunder, and no amendment, modification or waiver of Section
5.1 that decreases the number of directors that may be designated by the
Other Purchasers thereunder, may be effected,
(iv) so long as the Investors, in the aggregate, beneficially own at
least 25% of the Shares beneficially owned by such Persons on the Effective
Date, without the consent of a majority of the Shares then held by the
Investors no amendment, modification or waiver that adversely affects the
rights or duties of the Investors hereunder may be effected, and
(v) without the consent of each Investor adversely affected thereby, no
amendment, modification or waiver of Sections 4.5, 4.6(c), 7.5(b)(v) or 7.15
may be effected.
The parties hereto shall use their best efforts not to effect any amendments
to the Charter Documents that would circumvent the provisions of this Section
7.5(b).
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SECTION 7.6 Notices. All notices, demands, requests, consents or approvals
(collectively, "Notices") required or permitted to be given hereunder or which
are given with respect to this Agreement shall be in writing and shall be
personally delivered or mailed, registered or certified, return receipt
requested, postage prepaid (or by a substantially similar method), or delivered
by a reputable overnight courier service with charges prepaid, or transmitted by
hand delivery, telegram, telex or facsimile, addressed as set forth below, or
such other address (and with such other copy) as such party shall have specified
most recently by written notice. Notice shall be deemed given or delivered on
the date of service or transmission if personally served or transmitted by
telegram, telex or facsimile. Notice otherwise sent as provided herein shall be
deemed given or delivered on the third business day following the date mailed or
on the next business day following delivery of such notice to a reputable
overnight courier service.
To the Company or the Controlling Stockholders:
Food 4 Less Holdings, Inc.
1100 West Artesia Boulevard
Compton, California 90220
Attention: Byron E. Allumbaugh
Fax: (213) 884-4024
and
The Yucaipa Companies
10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Attn: Mark A. Resnik, Esq.
Fax: (310) 789-7201
with a copy (which shall not constitute notice) to:
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071
Attn: Thomas C. Sadler, Esq.
Fax: (213) 891-8763
To the Purchasers:
To the address specified on the signature page executed by each such
Purchaser.
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attn: Michael A. Woronoff, Esq.
Fax: (213) 687-5600
To the Other Investors:
To the address specified on the signature page executed by each such
Other Investor.
SECTION 7.7 Inspection. So long as this Agreement shall be in effect, this
Agreement and any amendments hereto and waivers hereof shall be distributed to
all parties hereto after becoming effective and shall be made available for
inspection at the principal office of the Company by any Investor.
SECTION 7.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICT OF LAWS, EXCEPT AS TO MATTERS OF CORPORATE GOVERNANCE,
WHICH SHALL BE INTERPRETED IN ACCORDANCE WITH THE GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE.
SECTION 7.9 Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
SECTION 7.10 Entire Agreement. This Agreement, together with the Stock
Purchase Agreement and the Registration Rights Agreement attached as Exhibit C
hereto, constitutes the entire agreement and understanding among the parties
hereto with respect to the subject matter hereof and thereof and supersedes any
and all prior agreements and understandings, written or oral, relating to the
subject matter hereof.
SECTION 7.11 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdictions, it being intended that
all rights and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.
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SECTION 7.12 Counterparts. This Agreement may be signed in counterparts,
each of which shall constitute an original and which together shall constitute
one and the same agreement.
SECTION 7.13 Required Approvals. If approval of this Agreement or any of
the transactions contemplated hereby shall be required by any governmental or
supra-governmental agency or instrumentality or is considered to be necessary or
advisable to all the parties hereto, all parties hereto shall use their best
efforts to obtain such approval. If any required approval is not obtained or it
becomes clear that such approval will not be granted, any party shall
immediately give the other parties hereto notice and the parties hereto shall
promptly meet and negotiate in good faith to modify their respective obligations
as necessary.
SECTION 7.14 Consistency. In the event of a conflict between this Agreement
on the one hand and the Charter Documents or any agreement relating to the
securities of the Company or its Subsidiaries on the other hand, the terms and
provisions of this Agreement shall be deemed to set forth the true intentions of
the parties (to the extent permitted by applicable law) and shall supersede the
terms of any other agreement.
SECTION 7.15 Public Disclosure. The Company shall not, and shall not permit
any of its Subsidiaries to, make any public announcements or disclosures
relating or referring to any Investor, any of its affiliates, or any of their
respective directors, officers, partners, employees or agents (including,
without limitation, any Person designated as a director of the Company or RGC
pursuant to the terms hereof) unless such Investor has consented to the form and
substance thereof, which consent shall not be unreasonably withheld except to
the extent such disclosure is, in the opinion of counsel, required by law or by
stock exchange regulation, provided that (i) any such required disclosure shall
only be made, to the extent consistent with the law, after consultation with
such Investor and (ii) no such announcement or disclosure (except as required by
law or by stock exchange regulation) shall identify any such Person without such
Investor's prior consent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOOD 4 LESS HOLDINGS, INC.
RALPHS GROCERY COMPANY
THE YUCAIPA COMPANIES
FFL PARTNERS
YUCAIPA CAPITAL FUND, L.P.
F4L EQUITY PARTNERS, L.P.
YUCAIPA/F4L PARTNERS
RONALD W. BURKLE
GEORGE G. GOLLEHER
THE PURCHASERS
THE OTHER INVESTORS
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EXHIBIT A TO STOCKHOLDERS AGREEMENT
RESTATED CERTIFICATE OF INCORPORATION
OF
FOOD 4 LESS HOLDINGS, INC.
Food 4 Less Holdings, Inc., a corporation existing under the laws of the
State of Delaware which was originally incorporated on December 19, 1994 (the
"Corporation"), does hereby certify:
FIRST: That the Certificate of Incorporation of the Corporation is hereby
amended and restated to read as follows:
1. The name of the corporation is:
Food 4 Less Holdings, Inc.
2. The address of its registered office in the State of Delaware is 32
Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The name
of its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
3. The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to issue is 135,000,000, consisting of 60,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"); 25,000,000 shares of
Non-Voting Common Stock, par value $.01 per share (the "Non-Voting Common
Stock"); and 50,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock").
(a) Common Stock and Non-Voting Common Stock. Except as provided below, the
Common Stock and Non-Voting Common Stock shall have the same rights and
privileges and shall rank equally, share ratably and be identical in all
respects as to all matters, including rights in liquidation. Subject to the
rights of holders of Preferred Stock, when, as and if dividends are declared on
the Common Stock or Non-Voting Common Stock, whether payable in cash, in
property or in securities of the corporation, the holders of Common Stock and
Non-Voting Common Stock shall be entitled to share equally, share for share, in
such dividends; provided, that if the Corporation shall declare dividends on the
Common Stock or Non-Voting Common Stock that are payable in securities of the
Corporation that are entitled to vote for the election of directors or otherwise
entitled to vote, the Corporation shall make available to each such holder, at
such holder's request, dividends consisting of securities of the Corporation
that are not voting securities but which are otherwise identical to such voting
securities in all material respects, and which are convertible into or
exchangeable for such voting securities subject to certain conditions. The
holders of Common Stock shall be entitled to one vote per share on all matters
to be voted on by the stockholders of the corporation, and except as otherwise
expressly required by law, the holders of Non-Voting Common Stock shall have no
right to vote on any matter to be voted on by the stockholders of the
corporation (including, without limitation, any election or removal of the
directors of the corporation) and the Non-Voting Common Stock shall not be
included in determining the number of shares voting or entitled to vote on such
matters.
(b) Preferred Stock. The Board of Directors is expressly authorized at any
time, and from time to time, to provide for the issuance of shares of Preferred
Stock in one or more series, with such voting powers, full or limited or without
voting powers, and with such powers, designations, preferences and relative,
participating, optional or other rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in this Certificate of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
(i) the designation of and number of shares constituting such series;
(ii) the dividend rate, if any, of such series, the conditions and dates
upon which such dividends shall be payable, the preference or relation which
such dividends shall bear to the dividends payable on any other class or
classes or on any other series of any other class or classes of capital
stock, and whether such dividends shall be cumulative or noncumulative;
(iii) whether the shares of such series shall be subject to redemption
by the corporation, and, if made subject to such redemption, the times,
prices and other terms and conditions of such redemption;
(iv) the terms and amounts of any sinking fund provided for the purchase
or redemption of the shares of such series;
(v) the extent, if any, to which the shares of such series shall be
convertible into or exchangeable for shares of any other class or classes or
of any other series of any class or classes of capital stock of the
corporation, and, if provision be made for conversion or exchange, the time,
prices, rates, adjustments, and other terms and conditions of such
conversion or exchange;
(vi) the extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with respect to the
election of directors or otherwise;
(vii) the restrictions, if any, on the issue or reissue of any
additional preferred stock; and
(viii) the rights of the holders of the shares of such series upon the
dissolution of, or upon the distribution of assets of, the corporation.
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5. The name and mailing address of the incorporator is:
Linda B. Jankovic
LATHAM & WATKINS
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
6. In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, amend or repeal the
bylaws of the corporation.
7. Election of directors need not be by written ballot unless the bylaws of
the corporation shall so provide.
8. No director of this corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.
SECOND: That, thereafter by written consent of the holder of all of the
outstanding shares of Common Stock of the Corporation in accordance with Section
228 of the General Corporation Law of the State of Delaware, the necessary
number of shares required by Statute were voted in favor of the Restated
Certificate of Incorporation.
THIRD: That this Restated Certificate of Incorporation be duly adopted in
accordance with the provisions of Section 242 and 245 of the General Corporation
Law of the State of Delaware.
IN WITNESS WHEREOF, FOOD 4 LESS HOLDINGS, INC., pursuant to the General
Corporation Law of the State of Delaware, has caused this Restated Certificate
of Incorporation to be signed by Ronald W. Burkle, its President on this day
of May 1995.
FOOD 4 LESS HOLDINGS, INC.
By: Ronald W. Burkle
Title: President
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EXHIBIT B TO STOCKHOLDERS AGREEMENT
RESTATED BYLAWS
OF
FOOD 4 LESS HOLDINGS, INC.
ARTICLE I
OFFICES
SECTION 1. The registered office shall be in the City of Dover, County of
Kent, State of Delaware.
SECTION 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. All meetings of the stockholders shall be held at any place
either within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
SECTION 2. The annual meeting of stockholders shall be held each year on a
date and a time designated by the Board of Directors. At each annual meeting
directors shall be elected and any other proper business may be transacted.
SECTION 3. A majority of the stock issued and outstanding and entitled to
vote at any meeting of stockholders, the holders of which are present in person
or represented by proxy, shall constitute a quorum for the transaction of
business except as otherwise provided by law, by the Certificate of
Incorporation, or by these Bylaws. A quorum, once established, shall not be
broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.
SECTION 4. When a quorum is present at any meeting, the vote of the holders
of a majority of the stock having voting power present in person or represented
by proxy shall decide any question brought before such meeting, unless the
question is one upon which by express provision of the statutes, or the
Certificate of Incorporation, or these Bylaws, a different vote is required in
which case such express provision shall govern and control the decision of such
question.
SECTION 5. At each meeting of the stockholders, each stockholder having the
right to vote may vote in person or may authorize another person or persons to
act for him by proxy appointed by an instrument in writing subscribed by such
stockholder and bearing a date not more than three years prior to said meeting,
unless said instrument provides for a longer period. All proxies must be filed
with the Secretary of the corporation at the beginning of each meeting in order
to be counted in any vote at the meeting. Each stockholder shall have one vote
for each share of stock having voting power, registered in his name on the books
of the corporation on the record date set by the Board of Directors as provided
in Article V, Section 6 hereof. All elections shall be had and all questions
decided by a plurality vote.
SECTION 6. Special meetings of the stockholders, for any purpose, or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or the Secretary at the request in writing of a majority of the Board
of Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding,
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 7. Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given which notice
shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting. If mailed, notice is given when deposited in the United States
mail, postage paid, directed to the stockholder at his address as it appears on
the records of the corporation.
SECTION 8. The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the
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meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
SECTION 9. Unless otherwise provided in the Certificate of Incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or to an officer
or agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty days of the earliest dated consent delivered in the manner required
by this Section 9 to the corporation, written consents signed by a sufficient
number of holders to take action are delivered to the corporation by delivery to
its registered office in Delaware, its principal place of business or to an
officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. The number of directors which shall constitute the whole Board
shall be nine (9). The directors need not be stockholders. Except as provided in
Section 2 of this Article, the directors shall be elected at the annual meeting
of the stockholders (or any special meeting of the stockholders called for the
purpose of electing directors) and each director elected shall hold office until
his successor is elected and qualified; provided, however, that except as
otherwise provided for in that certain Stockholders Agreement dated as of April
, 1995 of the corporation (the "Stockholders Agreement") or restricted by the
Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed, either with or without cause, from the Board of
Directors at any meeting of stockholders by a majority of the stock represented
and entitled to vote thereat.
SECTION 2. Except as provided for in the Stockholders Agreement, vacancies
on the Board of Directors by reason of death, resignation, retirement,
disqualification, removal from office, or otherwise, and newly created
directorship resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director. The directors so chosen shall hold
office until the next annual election of directors and until their successors
are duly elected and shall qualify, unless sooner displaced. If there are no
directors in office, then, except as provided for in the Stockholders Agreement,
an election of directors may be held in the manner provided by statute. If, at
the time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole Board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
of the total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
SECTION 3. The property and business of the corporation shall be managed by
or under the direction of its Board of Directors, and in a manner consistent
with the requirements of Section 5.2 of the Stockholders Agreement, as long as
such agreement remains effective and enforceable. Except as provided in the
Stockholders Agreement, in addition to the powers and authorities by these
Bylaws expressly conferred upon them, the Board may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the Certificate of Incorporation or by these Bylaws directed or required to
be exercised or done by the stockholders.
SECTION 4. Notwithstanding anything to the contrary contained herein,
election, renewal and filling of vacancies on the Board of Directors shall be
effected in accordance with the terms and provisions set forth in Article V of
the Stockholders Agreement, as long as such agreement remains effective and
enforceable.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 5. The directors may hold their meetings and have one or more
offices, and keep the books of the corporation outside of the State of Delaware.
SECTION 6. Regular meetings of the Board of Directors may be held without
notice at such time and place as shall from time to time be determined by the
Board.
SECTION 7. Special meetings of the Board of Directors may be called by the
President on forty-eight hours' notice to each director, either personally or by
mail or by telegram; special meetings shall be called by the President or the
Secretary in like manner and on like notice on the written request of two
directors unless the Board consists of only one director; in which case special
meetings shall be called by the President or Secretary in like manner or on like
notice on the written request of the sole director.
SECTION 8. At all meetings of the Board of Directors a majority of the
authorized number of directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the vote of a majority of the
directors present at any meeting at which
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there is a quorum, shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute, by the Certificate of Incorporation,
by these Bylaws or by the Stockholders Agreement. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum.
SECTION 9. Unless otherwise restricted by the Certificate or Incorporation
or these Bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
SECTION 10. Unless otherwise restricted by the Certificate of Incorporation
or these Bylaws, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in a meeting of the Board of
Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
COMMITTEES OF DIRECTORS
SECTION 11. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, including an audit
committee and an executive committee (as provided for in Section 5.1 of the
Stockholders Agreement), each such committee to consist of one or more of the
directors of the corporation, and having authority to take such action as set
forth in Section 5.1 of the Stockholders Agreement, as long as such agreement
remains effective and enforceable. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the Stockholders Agreement
and in the resolution of the Board of Directors, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the Bylaws of the corporation; and, unless the resolution or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 12. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
SECTION 13. Unless otherwise restricted by the Certificate of Incorporation
or these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
INDEMNIFICATION
SECTION 14(a). The corporation shall indemnify to the maximum extent
permitted by law any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or
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not opposed to the best interests of the corporation and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such Court of Chancery or such other court shall deem proper.
(c) To the extent that a director or officer of the corporation shall be
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b), or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the director or officer is proper
in the circumstances because he has met the applicable standard of conduct set
forth in paragraphs (a) and (b). Such determination shall be made (1) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses, including attorneys' fees, incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Section 14.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Section 14 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Section 14.
(h) For the purposes of this Section 14, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers so that any
person who is or was a director or officer of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Section with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this Section 14, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include service
as a director or officer of the corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Section 14.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Section 14 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of this corporation shall be chosen by the
Board of Directors and shall include a Chairman of the Board of Directors or a
President, or both, and a Secretary. The corporation may also have at the
discretion of the Board of Directors such other officers as are desired,
including a Vice-Chairman of the Board of Directors, a Chief Executive Officer,
a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 hereof. In the event there are two or more Vice
Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these Bylaws otherwise provide.
SECTION 2. The Board of Directors, at its first meeting after each annual
meeting of stockholders, shall choose the officers of the corporation.
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SECTION 3. The Board of Directors may appoint such other officers and agents
as it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board.
SECTION 4. The salaries of all officers and agents of the corporation shall
be fixed by the Board of Directors.
SECTION 5. The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. If the office of any
officer or officers becomes vacant for any reason, the vacancy shall be filled
by the Board of Directors.
SECTION 6. Powers of attorney, proxies, waivers of notice of meeting,
consents and other instruments relating to securities owned by the Corporation
may be executed in the name of and on behalf of the Corporation by the President
or any Vice President and any such officer may, in the name of and on behalf of
the Corporation, take all such action not otherwise prohibited by the
Stockholders Agreement as any such officer may deem advisable to vote in person
or by proxy at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present.
CHAIRMAN OF THE BOARD
SECTION 7. The Chairman of the Board, if such an officer be elected, shall,
if present, preside at all meetings of the Board of Directors and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the Board of Directors or prescribed by these Bylaws. If there is no
President, the Chairman of the Board shall in addition be the Chief Executive
Officer of the corporation and shall have the powers and duties prescribed in
Section 7 of this Article IV.
PRESIDENT
SECTION 8. Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, if there be such an
officer, the President shall be the Chief Executive Officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
VICE PRESIDENTS
SECTION 9. In the absence or disability of the President, the Vice
Presidents in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the Board of Directors, shall perform
all the duties of the President, and when so acting shall have all the powers of
and be subject to all the restrictions upon the President. The Vice Presidents
shall have such other duties as from time to time may be prescribed for them,
respectively, by the Board of Directors.
SECRETARY AND ASSISTANT SECRETARY
SECTION 10. The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep in
safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
SECTION 11. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, or if
there be no such determination, the Assistant Secretary designated by the Board
of Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
TREASURER AND ASSISTANT TREASURER
SECTION 12. The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with
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such surety or sureties as shall be satisfactory to the Board of Directors, for
the faithful performance of the duties of his office and for the restoration of
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
SECTION 13. The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors, or if
there be no such determination, the Assistant Treasurer designated by the Board
of Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. Every holder of stock of the corporation shall be entitled to
have a certificate signed by, or in the name of the corporation by, the Chairman
or Vice Chairman of the Board of Directors, or the President or a Vice
President, and by the Secretary or an Assistant Secretary, or the Treasurer or
an Assistant Treasurer of the corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.
SECTION 2. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
SECTION 3. If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
LOST, STOLEN OR DESTROYED CERTIFICATES
SECTION 4. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
SECTION 5. Upon surrender to the corporation, or the transfer agent of the
corporation, of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
SECTION 6. FIXING RECORD DATE. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
SECTION 7. The corporation shall be entitled to treat the holder of record
of any share or shares of stock as the holder in fact thereof and accordingly
shall not be bound to recognize any equitable or other claim or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, save as expressly provided by the laws of the State of
Delaware.
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ARTICLE VI
GENERAL PROVISIONS
DIVIDENDS
SECTION 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
SECTION 2. Before payment of any dividend there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interests of the
corporation, and the directors may abolish any such reserve.
CHECKS
SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers as the Board of Directors may from
time to time designate.
FISCAL YEAR
SECTION 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
SECTION 5. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
NOTICES
SECTION 6. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
SECTION 7. Whenever any notice is required to be given under the provisions
of the statutes or of the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ANNUAL STATEMENT
SECTION 8. The Board of Directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VII
AMENDMENTS
SECTION 1. These Bylaws may be altered, amended or repealed or new Bylaws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal Bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal Bylaws.
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EXHIBIT C TO STOCKHOLDERS AGREEMENT
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into as of
June , 1995 by and among THE YUCAIPA COMPANIES, a California general
partnership ("Yucaipa"), FOOD 4 LESS HOLDINGS, INC., a Delaware corporation
("F4L Holdings"), and RALPHS GROCERY COMPANY, a Delaware corporation ("RGC"), as
successor to Food 4 Less Supermarkets, Inc., a Delaware corporation ("F4L
Supermarkets").
W I T N E S S E T H:
WHEREAS, RGC and its subsidiaries are in the business of operating
supermarkets;
WHEREAS, Yucaipa has the ability to provide certain general business and
financial consultation and advice to RGC in connection with the operation of its
business;
WHEREAS, F4L Supermarkets, Yucaipa and Yucaipa Management Company are
parties to that certain Amended and Restated Consulting Agreement dated as of
June 17, 1991 (the "Old Consulting Agreement");
WHEREAS, to the date hereof Yucaipa has provided services to F4L
Supermarkets pursuant to the Old Consulting Agreement;
WHEREAS, RGC is the successor to F4L Supermarkets, and the wholly-owned
subsidiary of F4L Holdings, by operation of merger effective the date hereof
(the "Effective Date"); and
WHEREAS, the parties desire to terminate the Old Consulting Agreement and to
replace it in its entirety by this Agreement;
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
of the parties hereto and other good and valuable consideration had and received
by each of the parties to this Agreement, receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. CONSULTING.
RGC hereby engages Yucaipa as an independent contractor and consultant, to
provide general business consultation and advice to RGC and its subsidiaries in
connection with the operation of their businesses.
SECTION 2. CONSULTING SERVICES.
Yucaipa through its partners and/or employees shall provide RGC with
consultation and advice, when and as requested by RGC, in such fields as
supermarket operations, planning and development, budgeting, accounting, general
business management, and legal matters. All partners and employees of Yucaipa or
any of its affiliates (other than F4L Holdings and its subsidiaries) who serve
RGC or any subsidiary of RGC as an officer, director or employee shall do so
without charge during the term of this Agreement, except for the fees and
charges specifically provided for herein.
SECTION 3. CONSULTING FEES.
RGC shall pay the following consulting fees to Yucaipa in consideration of
the services rendered by Yucaipa pursuant to Section 2 above:
(a) RGC shall pay to Yucaipa a consulting fee of $4,000,000 in cash, on
the Effective Date, in consideration of the consulting services to be
rendered by Yucaipa during the period commencing on July 1, 1995 and ending
June 30, 1996.
(b) To the extent not previously paid, on the Effective Date RGC shall
pay to Yucaipa a consulting fee with respect to the partial month commencing
on the Effective Date and ending June 30, 1995 equal to $11,111.11 times the
number of days remaining in such current calendar month (from and including
the Effective Date), provided that RGC may credit against such payment a
prorated portion of the $166,666.67 consulting fee that was paid by F4L
Supermarkets to Yucaipa on June 1, 1995 pursuant to the Old Consulting
Agreement (such prorated portion to equal $5,555.55 times the number of days
remaining in the current calendar month, from and including the Effective
Date).
(c) Commencing July 1, 1996, RGC shall pay to Yucaipa a periodic
consulting fee equal to $333,333.33 per month, payable in cash on the first
day of each calendar month and past due on the fifteenth day of such
calendar month.
(d) To the extent not previously paid, on the Effective Date RGC shall
pay to Yucaipa a prorated portion of the 2 1/2% Fee (as defined in the Old
Consulting Agreement) that would have been payable by F4L Supermarkets under
Section 3(b) of the Old Consulting Agreement for F4L Supermarkets' fiscal
year ending June 24, 1995, with such prorated portion to equal (i) 2 1/2% of
the excess of F4L Supermarkets' EBITDA (as defined in the Old Consulting
Agreement) for the last thirteen four-week fiscal reporting periods ("Fiscal
Periods") of F4L Supermarkets completed prior to the Effective Date and for
which financial data are available (which financial data need not be
audited, but which financial data must be prepared in accordance with
generally accepted
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accounting principles in a manner consistent with the financial statements
contained in F4L Supermarkets' quarterly and annual reports on Forms 10-Q
and 10-K filed with the Securities and Exchange Commission for periods
included within such last thirteen Fiscal Periods), over the Minimum
Threshold (as defined in the Old Consulting Agreement), times (ii) the
number of days elapsed from June 25, 1994 to the Effective Date, divided by
(iii) 365. The fee payable under this Section 3(c) shall be in lieu of all
or any portion of the 2 1/2% Fee that might otherwise remain payable under
the Old Consulting Agreement but for its termination pursuant to Section 12
hereof.
SECTION 4. INVESTMENT BANKING SERVICES.
F4L Holdings, RGC and their respective subsidiaries (or any one of them) may
retain or employ Yucaipa as a financial advisor and/or investment banker in
connection with any acquisition or disposition transaction by F4L Holdings, RGC
or any of their respective subsidiaries other than a sale of all of the
outstanding capital stock of, or all or substantially all of the assets of, F4L
Holdings or RGC. The parties expressly agree that the services contemplated by
this Section 4 shall not include financial advisory or investment banking
services in connection with debt or equity financings or equipment lease
arrangements. If any retention of Yucaipa by F4L Holdings, RGC or any of their
respective subsidiaries pursuant to this Section 4 is made pursuant to a
retention or engagement agreement containing terms varying from or in addition
to the terms contained in this Agreement, such agreement shall be reasonably
acceptable to a majority of the disinterested members of the Board of Directors
of F4L Holdings or RGC, as the case may be, that are neither affiliates of
Yucaipa nor designated or nominated to such Board of Directors by Yucaipa or any
of its affiliates.
SECTION 5. INVESTMENT BANKING FEES.
F4L Holdings or RGC, as applicable, shall pay to Yucaipa a cash fee for
providing any financial advisory or investment banking services pursuant to
Section 4 above in connection with the acquisition or disposition transactions
specified therein (other than disposition transactions with respect to (i) any
of the 48 stores designated for divestiture or closing in connection with the
Merger (as defined herein) or (ii) any other stores designated for divestiture
or closing in the ordinary course of business), equal to 1% of the amount or
value of all cash and noncash consideration actually paid or received (including
assumed indebtedness) by F4L Holdings, RGC or any of their respective
subsidiaries, as the case may be, in connection therewith.
SECTION 6. REIMBURSEMENT OF EXPENSES.
RGC shall reimburse Yucaipa for all of its reasonable out-of-pocket costs
and expenses incurred in connection with the performance of its obligations
under this Agreement. Yucaipa shall bill RGC for the amount of all such expenses
monthly, and shall provide RGC with a reasonable itemization of such expenses.
Notwithstanding the foregoing, the aggregate amount of such costs and expenses
for which Yucaipa may be reimbursed in connection with the rendering of
consulting services under Section 2 hereof shall not exceed $300,000 in any
fiscal year of RGC (which maximum amount shall be prorated for the period
beginning the Effective Date and ending on the last day of RGC's current fiscal
year). In addition to the foregoing, RGC shall reimburse Yucaipa for all of its
reasonable out-of-pocket costs and expenses incurred in connection with the
rendering by Yucaipa of financial advisory or investment banking services to F4L
Holdings, RGC and/or their subsidiaries, in connection with any acquisition or
disposition transaction, debt or equity financing or equipment leasing
arrangement, whether or not Yucaipa is obligated to render such services or has
a right to be paid any fee relating thereto under Sections 4 or 5 of this
Agreement.
SECTION 7. TERM OF AGREEMENT.
The term of this Agreement shall be for a period of five (5) years
commencing on the Effective Date; provided, however, that the term shall be
automatically renewed annually for a term of five (5) years on July 1 of each
year, unless at least ninety (90) days prior notice is given by either party
electing not to so renew this Agreement.
SECTION 8. TERMINATION.
8.1 Termination at Will. RGC and F4L Holdings, acting jointly, may
terminate this Agreement at any time by giving Yucaipa at least ninety (90) days
written notice of such termination.
8.2 Termination for Cause.
(a) RGC and F4L Holdings on the one hand, or Yucaipa on the other hand,
may terminate this Agreement if the other party shall fail to reasonably perform
any material covenant, agreement, term or provision of this Agreement to be
kept, observed or performed by it and such failure shall continue for a period
of sixty (60) days after written notice from the other party, which notice shall
describe the alleged failure with particularity; provided that Yucaipa shall use
its best efforts to cause RGC and F4L Holdings to perform each material
covenant, agreement, term and provision of this Agreement. Notwithstanding the
foregoing, any failure or alleged failure of RGC, F4L Holdings or Yucaipa to
perform any material covenant, agreement, term or provision of this Agreement
shall not constitute cause for termination of this Agreement if the same shall
be occasioned by or result from force majeure, directly or indirectly.
(b) Yucaipa may terminate this Agreement if RGC or F4L Holdings shall
fail to make any payment due to Yucaipa hereunder, if such payment is not made
in full within twenty (20) days after written notice of such failure; provided
that Yucaipa shall use its best efforts to cause RGC and F4L Holdings to make
all such payments in a timely manner.
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8.3 Termination for Change of Control. This Agreement may be
terminated, at the election of Yucaipa or RGC, if during the term hereof there
shall have been a change in control of F4L Holdings or RGC, which for purposes
of this Agreement shall be deemed to have occurred upon any of the following
events: (a) the acquisition after the Effective Date, in one or more
transactions, of "beneficial ownership" (within the meaning of Rule 13d-3(a)(1)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by
any person (other than Yucaipa or any of its partners or affiliates) or any
group of persons (excluding any group which includes Yucaipa or any of its
partners or affiliates) who constitute a group (within the meaning of Section
13(d)(3) of the Exchange Act) of any securities of F4L Holdings or RGC such
that, as a result of such acquisition, such person or group beneficially owns
(within the meaning of Rule 13d-3(a)(1) under the Exchange Act) 51% or more of
F4L Holdings' or RGC's then outstanding voting securities entitled to vote on a
regular basis for a majority of the Board of Directors of F4L Holdings or RGC;
or (b) the sale of all or substantially all of the assets of F4L Holdings or RGC
(including, without limitation, by way of merger, consolidation, lease or
transfer) in a transaction where F4L Holdings or RGC or the beneficial owners of
common stock of F4L Holdings or RGC do not receive (i) voting securities
representing a majority of the voting power entitled to vote on a regular basis
for the Board of Directors of the acquiring entity or of an affiliate which
controls the acquiring entity, or (ii) securities representing a majority of the
equity interest in the acquiring entity or of an affiliate which controls the
acquiring entity, if other than a corporation; provided, however, that no change
in control shall be deemed to have occurred under (a) or (b) above upon any
transfer, sale or disposition of shares of common stock of F4L Holdings or RGC
in any transaction between F4L Holdings or RGC and any person or persons who are
affiliates of F4L Holdings on the Effective Date.
8.4 Payments upon Termination.
(a) In the event of any termination pursuant to Section 8.1 or Section
8.2(b) (if Yucaipa has elected to terminate because of a failure to pay by RGC
or F4L Holdings), RGC shall pay to Yucaipa an amount equal to the total
consulting fees that would have been earned by Yucaipa under Section 3 hereof
during the remaining term of this Agreement as if the Agreement had not been
terminated; provided that a discount rate of 10% shall be applied in valuing,
for purposes of such payment, the consulting fees otherwise payable during the
remaining term of this Agreement.
(b) In the event of any termination prior to June 30, 1996 pursuant to
Section 8.2(a) if RGC and F4L Holdings have elected to terminate because of a
material failure of performance by Yucaipa, Yucaipa promptly shall refund to RGC
a prorated portion of the $4,000,000 fee received by it under Section 3(a), with
such refunded portion to equal $4,000,000 times (i) the number of days remaining
from the date of such termination to June 30, 1996 divided by (ii) 365.
(c) In the event of any termination pursuant to Section 8.3, RGC shall
pay to Yucaipa an amount equal to the total consulting fees that would have been
earned by Yucaipa under Section 3 hereof during the period commencing on the
date of such change of control and ending on the fifth anniversary of the
Effective Date, as if the Agreement had not been terminated; provided that (i) a
discount rate of 10% shall be applied in valuing, for purposes of such payment,
the consulting fees otherwise payable during such period and (ii) if such
termination occurs on or after the fifth anniversary of the Effective Date, no
payment shall be due to Yucaipa as a result of such termination.
(d) Such amount, if any, which shall be due Yucaipa pursuant to this
Section 8.4 in the event of any such termination shall be due and payable to
Yucaipa, in full, as of the date of such termination. The parties intend that
should the foregoing payments be determined to constitute liquidated damages,
such payments shall in all events be deemed reasonable.
SECTION 9. MERGER ADVISORY FEES.
(a) On the Effective Date, (i) RGC shall be obligated to pay Yucaipa an
advisory fee with respect to the transactions contemplated by that certain
Agreement and Plan of Merger dated as of September 14, 1994 (the "Merger
Agreement") by and among Food 4 Less, Inc., F4L Holdings, F4L Supermarkets,
Ralphs Supermarkets, Inc. ("Ralphs") and the stockholders of Ralphs, in the
amount of $19,000,000; provided that $15,000,000 of such fee will be satisfied
through the issuance by F4L Holdings to Yucaipa of $15,000,000 initial accreted
value of its 13 5/8% Senior Discount Debentures due 2005, and the remaining
$4,000,000 of such fee will be paid by RGC in cash, and (ii) RGC will reimburse
Yucaipa for all reasonable out-of-pocket costs and expenses incurred in
connection with such transactions (including, without limitation, all such costs
and expenses incurred by Yucaipa in connection with the Merger and the Financing
(each as defined in the Merger Agreement)).
(b) Yucaipa hereby represents and warrants that none of F4L Holdings, RGC or
any of their respective subsidiaries has paid or is obligated to pay, directly
or indirectly, any consideration (including, without limitation, any consulting
or other fees) to George Soros or any of his affiliates for advisory or similar
services, for the purchase of equity interests in F4L Holdings owned by George
Soros and his affiliates, or otherwise in connection with the Merger or the
Financing.
SECTION 10. REIMBURSEMENT UPON RESALE OF DEBENTURES.
10.1 RGC shall reimburse Yucaipa (or its designee) a cash amount equal to
(i) any loss incurred by Yucaipa (or its designee) upon the resale to any
unaffiliated third party of the $10,000,000 aggregate principal amount of
13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 (the "Seller
Debentures") of F4L Holdings which may be acquired by Yucaipa (or its designee)
on the Effective Date pursuant to the terms of that certain Put Agreement dated
as of June , 1995 (the "Put Agreement") between The Edward J. DeBartolo
Corporation and Yucaipa, (ii) without duplication of the foregoing, all
reasonable out-of-pocket costs and expenses incurred by Yucaipa (or its
designee) in connection with the resale (whether or not consummated) of the
Seller Debentures, and (iii) the net amount of any liability for federal or
state taxes incurred by Yucaipa (or its designee) in its current tax year with
respect to the
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reimbursement provided for in this Section 10.1; provided, however, that Yucaipa
(or its designee) shall refund to RGC an amount equal to any tax benefit
available to Yucaipa (or its designee) as a result of the resale of the Seller
Debentures to the extent that, and at the time that, Yucaipa (or its designee)
realizes such tax benefit (whether by offset against additional taxes or
otherwise).
10.2 Yucaipa (or its designee) shall contribute to the capital of F4L
Holdings the net amount of any gain (after provision for federal and state
taxes) realized by Yucaipa (or its designee) upon the resale to any unaffiliated
third party of the Seller Debentures (less any amounts due and payable by RGC to
Yucaipa (or its designee) pursuant to clause (ii) of Section 10.1 hereof).
Immediately following any such capital contribution to F4L Holdings, F4L
Holdings will in turn contribute to the capital of RGC the amounts received by
it under this Section 10.2.
SECTION 11. NOTICES.
11.1 Manner of Notice. All notices, statements or other documents which
any party shall be required or shall desire to give to the others hereunder
shall be in writing and shall be given by the parties hereto only as follows:
(a) by personal delivery, (b) by addressing it as indicated below, and by
depositing it certified mail, postage prepaid, in the U.S. mail, first class
(airmail if the address is outside of the country in which such notice is
deposited), or (c) by addressing it as indicated below, and by delivering it
toll prepaid to a telegraph, cable company or courier service (e.g., Federal
Express).
11.2 Delivery of Notice; Addresses. If so delivered, mailed, telegraphed,
cabled or couriered, each such notice, statement or other document shall, except
as herein expressly provided, be conclusively deemed to have been given when
personally delivered, or on the third business day after the date of mailing, or
on the date of delivery to a telegraph or cable company or on the first business
day after delivery to a courier service, as the case may be. The addresses of
the parties shall be those of which the other parties actually receives written
notice pursuant to this Section 11 and until further notice are:
<TABLE>
<S> <C>
If to Yucaipa: The Yucaipa Companies
10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, CA 90067
Attention: Mark A. Resnik
If to RGC: Ralphs Grocery Company
1100 West Artesia Boulevard
Compton, California 90220
Attention: Chief Executive Officer
If to F4L Holdings: Food 4 Less Holdings, Inc.
c/o Ralphs Grocery Company
1100 West Artesia Boulevard
Compton, California 90220
Attention: Chief Executive Officer
</TABLE>
SECTION 12. MISCELLANEOUS.
12.1 Termination of Old Consulting Agreement. The parties to this
Agreement hereby acknowledge and agree that, effective the date hereof, the Old
Consulting Agreement shall be terminated and superseded in its entirety by this
Agreement, and that no party thereto has any obligations thereunder, including
without limitation, the payment of any termination fees or other amounts, except
as specifically provided for herein; provided that any costs and expenses
incurred prior to the date hereof, and as to which Yucaipa is entitled to
reimbursement under Section 6 of the Old Consulting Agreement, or any loss, cost
or liability as to which Yucaipa is entitled to indemnity under Section 10.8 of
the Old Consulting Agreement, shall remain subject to such reimbursement or
indemnity in accordance with the terms thereof.
12.2 Contingent Liability of F4L Holdings. The parties to this
Agreement hereby acknowledge and agree that RGC shall be the primary obligor
with respect to its obligations hereunder and that F4L Holdings shall be
contingently liable for the performance of any and all obligations of RGC
hereunder.
12.3 Entire Agreement; Amendments. This Agreement contains all of the
terms and conditions agreed upon by the parties hereto in connection with the
subject matter hereof. This Agreement may not be amended, modified or changed
except by written instrument signed by all of the parties hereto.
12.4 Assignment; Successors. This Agreement shall not be assigned and
is not assignable by any party without the prior written consent of each of the
other parties hereto; provided, however, that Yucaipa may assign, without the
prior consent of F4L Holdings or RGC, its rights and obligations under this
Agreement to any of its affiliates controlled by Ronald Burkle, and provided
further, that Yucaipa may assign the right to receive any payment hereunder to
any other person or entity as security for a bona fide obligation. Subject to
the preceding sentence, this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns.
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12.5 Captions. All captions and headings are inserted for the
convenience of the parties, and shall not be used in any way to modify, limit,
construe or otherwise affect this Agreement.
12.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal domestic laws of the State of California, without
reference to the choice of law principles thereof.
12.7 Attorneys' Fees. If any legal action is brought concerning any
matter relating to this Agreement, or by reason of any breach of any covenant,
condition or agreement referred to herein, the prevailing party shall be
entitled to have and recover from the other party to the action all costs and
expenses of suit, including attorneys' fees.
12.8 Severability. If any term, provision or condition of this Agreement
is determined by a court or other judicial or administrative tribunal to be
illegal, void or otherwise ineffective or not in accordance with public policy,
the remainder of this Agreement shall not be affected thereby and shall remain
in full force and effect.
12.9 Interpretation. In the event of a dispute hereunder, this Agreement
shall be interpreted in accordance with its fair meaning and shall not be
interpreted for or against any party hereto on the ground that such party
drafted or caused to be drafted this Agreement or any part hereof.
12.10 Indemnity. The parties to this Agreement shall indemnify and hold
one another and their respective officers, directors, employees and agents,
harmless from any and all loss, cost, liability and damage (including attorneys'
fees) arising out of or connected with, or claimed to arise out of or be
connected with, any act performed or omitted to be performed under this
Agreement, provided such act or omission was taken in good faith, and in the
event of criminal proceedings that the indemnitee had no reasonable cause to
believe his conduct was unlawful. An adverse judgment or plea of nolo contendere
shall not, of itself, create a presumption that the indemnitee did not act in
good faith or that he had reasonable cause to believe his conduct was unlawful.
Expenses incurred in defending a civil or criminal action shall be paid by the
indemnitor upon receipt of an undertaking by or on behalf of the indemnitee to
repay such amount if it be later shown that such person was not entitled to
indemnification.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
THE YUCAIPA COMPANIES
FOOD 4 LESS HOLDINGS, INC.
RALPHS GROCERY COMPANY
CONSENT TO TERMINATION
OF OLD CONSULTING AGREEMENT
Yucaipa Management Company ("YMC") hereby acknowledges and agrees that,
effective as of the date written above, that certain Amended and Restated
Consulting Agreement dated as of June 17, 1991 to which it was a signatory shall
be terminated as contemplated by Section 12.1 of the foregoing Agreement.
YUCAIPA MANAGEMENT COMPANY
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ANNEX B
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of June , by and
among Food 4 Less Holdings, Inc., a Delaware corporation (the "Company"), and
each other person executing this Agreement (the "Investors").
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. Capitalized terms used herein and not otherwise
defined herein have the meanings ascribed to them in the Stockholders Agreement
(the "Stockholders Agreement") dated as of the date hereof among the Company,
Ralphs Grocery Company, a Delaware corporation, the Investors and certain other
stockholders of the Company. In addition, the following terms shall have the
meanings ascribed to them below:
"Demanding Holder" means any Holder who has initiated a registration request
in compliance with Section 2.1(a); provided, that if such request was initiated
by Other Purchasers or their transferees, (i) "Demanding Holders" shall include
each Other Purchaser and each such transferee who has requested to have included
in a Demand Registration Registrable Securities pursuant to the notice provision
of Section 2.1(a) and (ii) any action required or permitted to be taken under
this Agreement by any Demanding Holders shall be taken by action of the holders
of a majority of the Registrable Securities held by such Demanding Holders.
"Demand Registration" means a registration of Registrable Securities under
the Securities Act pursuant to a request made under Section 2.1.
"Holder" means each Investor that holds Registrable Securities and any party
who shall hereafter acquire from an Investor and hold Registrable Securities
pursuant to the provisions of, and subject to the rights and restrictions set
forth in, the Stockholders Agreement.
"Registrable Security" means each Share until (i) it has been effectively
registered under the Securities Act and disposed of pursuant to an effective
registration statement (other than the Registration Statement on Form S-4 filed
in connection with the Holdings Merger), (ii) it is sold under circumstances in
which all of the applicable conditions of Rule 144 (or any similar provisions
then in force) under the Securities Act are met, including a sale pursuant to
the provisions of Rule 144(k) or (iii) it has been otherwise Transferred and the
certificate or other evidence of ownership for it is not required to bear the
legend required pursuant to the Stockholders Agreement and it may be resold by
the person receiving such certificate without registration under the Securities
Act.
"Requisite Share Number" on any date means a number of Registrable
Securities representing not less than 40% of the issued and outstanding
Registrable Securities held in the aggregate on such date by the Other
Purchasers and their transferees.
"Selling Holder" means a Holder who sells or proposes to sell Registrable
Securities pursuant to a registration statement under the Securities Act.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal in an underwritten offering and not as part of such
dealer's market-making activities.
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1 Demand Registration. (a) Request for Registration by the
Purchasers. At any time and from time to time on or after the earlier of (i) the
second anniversary of the Effective Date and (ii) the consummation of a
Qualified IPO, (A) the Other Purchasers and transferees of Other Purchasers
owning, individually or in the aggregate, at least the Requisite Share Number
may make a total of two written requests for a Demand Registration of not less
than 10% of the Registrable Securities held by all Other Purchasers and
transferees of Other Purchasers and (B) Apollo may make a total of two written
requests for a Demand Registration of not less than 10% of its Registrable
Securities; provided, that (1) the Company shall in no event be obligated to
effect more than two Demand Registrations in any 12-month period, and (2) if any
request for a Demand Registration pursuant to (A) or (B) above shall be made
prior to the earliest to occur of an Initial Public Offering or a Qualified IPO,
then the Company shall not be obligated to effect such Demand Registration
unless the Shares to be included therein (including those sold for the account
of the Company, any Piggy-Back Holders and all other Persons) equals or exceeds
5% (on a fully diluted basis) of the outstanding Shares. Each such request will
specify the number of Registrable Securities proposed to be sold and will also
specify the intended method of disposition thereof.
The Company shall give written notice of any registration request by Other
Purchasers and transferees of Other Purchasers, which request complies with this
Section 2.1(a), within 10 days after the receipt thereof, to each Other
Purchaser and transferee of an Other Purchaser who did not initially join in
such request. Within 20 days after receipt of such notice, any such Other
Purchaser or transferee may request in writing that Registrable Securities be
included in such registration, and the Company shall include in the Demand
Registration the Registrable Securities of each such Other Purchaser and
transferee of an Other Purchaser requested to be so included,
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subject to the provisions of Section 2.3. Each such request shall specify the
number of shares of Registrable Securities proposed to be sold and the intended
method of disposition thereof.
(b) Effective Registration. A registration will not be deemed to have been
effected as a Demand Registration unless it has been declared effective by the
Commission and the Company has complied in all material respects with its
obligations under this Agreement with respect thereto; provided that if, after
it has become effective, the offering of Registrable Securities pursuant to such
registration is or becomes the subject of any stop order, injunction or other
order or requirement of the Commission or any other governmental or
administrative agency, or if any court prevents or otherwise limits the sale of
Registrable Securities pursuant to the registration (for any reason other than
the acts or omissions of the Holders), such registration will be deemed not to
have been effected. If (i) a registration requested pursuant to this Section 2.1
is deemed not to have been effected or (ii) the registration requested pursuant
to this Section 2.1 does not remain effective for a period of at least 200 days
beyond the effective date thereof or until the consummation of the distribution
by the Holders of the Registrable Securities included in such registration
statement, then such registration statement shall not count as one of the two
Demand Registrations that may be requested by the Demanding Holder(s) in
question and the Company shall continue to be obligated to effect a registration
pursuant to this Section 2.1.
The Demanding Holders may withdraw all or any part of the Registrable
Securities from a Demand Registration at any time (whether before or after the
filing or effective date of such Demand Registration), and if all such
Registrable Securities are withdrawn, to withdraw the demand related thereto. If
at any time a registration statement is filed pursuant to a Demand Registration,
and subsequently a sufficient number of Registrable Securities are withdrawn
from the Demand Registration so that such registration statement does not cover
at least the required amounts specified by Section 2.1(a), and an additional
number of Registrable Securities is not so included, the Company may (or shall,
if requested by the Demanding Holders) withdraw the registration statement,
provided that if the Demanding Holders bear the expenses associated with such
withdrawn registration statement, such registration statement will not count as
a Demand Registration and the Company shall continue to be obligated to effect a
registration pursuant to this Section 2.1. If the Demanding Holders determine to
bear such expenses, such expenses shall be borne by the Demanding Holder(s)
whose withdrawal of Registrable Securities resulted in such registration
statement not covering the specified required amounts.
(c) Selection of Underwriter. If the Demanding Holders so elect, the
offering of Registrable Securities pursuant to a Demand Registration shall be in
the form of an underwritten offering. The Demanding Holders shall select one or
more nationally recognized firms of investment bankers to act as the
book-running managing Underwriter or Underwriters in connection with such
offering and shall select any additional investment bankers and managers to be
used in connection with the offering; provided that such investment bankers and
managers must be reasonably satisfactory to the Company.
SECTION 2.2 Piggy-Back Registration. If at any time the Company proposes
to file a registration statement under the Securities Act with respect to an
offering of equity securities by the Company for its own account or for the
account of any securityholders of any class of its equity securities (other than
(i) a registration statement on Form S-4 or S-8 (or any substitute form that may
be adopted by the Commission) or (ii) a registration statement filed in
connection with an exchange offer or offering of securities solely to the
Company's existing securityholders), including a registration statement relating
to a Demand Registration, then the Company shall give written notice of such
proposed filing to the Holders as soon as practicable (but in no event less than
20 days before the anticipated filing date), and such notice shall offer such
Holders the opportunity to register such number of shares of Registrable
Securities as each such Holder may request (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended method of distribution thereof) (a "Piggy-Back Registration").
The Company shall use its best efforts to cause the managing Underwriter or
Underwriters of a proposed underwritten offering to permit the Registrable
Securities requested by the Holders thereof to be included in a Piggy-Back
Registration (the "Piggy-Back Holders") to be included on the same terms and
conditions as any similar securities of the Company or any other securityholder
included therein and to permit the sale or other disposition of such Registrable
Securities in accordance with the intended method of distribution thereof. Any
Holder shall have the right to withdraw its request for inclusion of its
Registrable Securities in any registration statement pursuant to this Section
2.2 by giving written notice to the Company of its request to withdraw. Subject
to the provisions of Section 2.1, the Company may withdraw a Piggy-Back
Registration at any time prior to the time it becomes effective, provided that
the Company shall reimburse the Piggy-Back Holders for all reasonable
out-of-pocket expenses (including counsel fees and expenses) incurred prior to
such withdrawal.
No registration effected under this Section 2.2, and no failure to effect a
registration under this Section 2.2, shall relieve the Company of its
obligations pursuant to Section 2.1, and no failure to effect a registration
under this Section 2.2 and to complete the sale of Shares in connection
therewith shall relieve the Company of any other obligation under this Agreement
(including, without limitation, the Company's obligations under Sections 3.2 and
4.1).
SECTION 2.3 Reduction of Offering. (a) Demand Registration. The Company may
include in a Demand Registration shares of Common Stock for the account of the
Company and Registrable Securities for the account of the Piggy-Back Holders and
Shares for the account of other holders thereof exercising contractual
piggy-back rights, on the same terms and conditions as the Registrable
Securities to be included therein for the account of the Demanding Holders;
provided, however, that (i) if the managing Underwriter or Underwriters of any
underwritten offering described in Section 2.1 have informed the Company in
writing that it is their opinion that the total number of shares which the
Demanding Holders, the Company, any Piggy-Back Holders and any such other
holders intend to include in such offering is such as to materially and
adversely affect the success of such offering, then (x) the number of Shares to
be offered for the account of the Company (if any) shall be reduced (to zero, if
necessary) and (y) thereafter, if necessary, the number of Shares to be offered
for the account of such Piggy-Back Holders and such other holders shall be
reduced (to zero, if necessary), in the
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case of this clause (y) pro rata in proportion to the respective number of
Shares requested to be registered to the extent necessary to reduce the total
number of Shares requested to be included in such offering to the number of
Shares, if any, recommended by such managing Underwriters (and if the number of
Shares to be offered for the account of each such Person has been reduced to
zero, and the number of Shares requested to be registered by the Demanding
Holders exceeds the number of Shares recommended by such managing Underwriters,
then the number of Shares to be offered for the account of the Demanding Holders
shall be reduced pro rata in proportion to the respective number of Shares
requested to be registered by the Demanding Holders) and (ii) if the offering is
not underwritten, no other party (other than Piggy-Back Holders and any other
holders exercising contractual piggy-back rights not subject to the reduction
contemplated by this clause (ii)), including the Company, shall be permitted to
offer securities under any such Demand Registration unless a majority of the
Shares held by the Demanding Holder or Holders consent to the inclusion of such
shares therein.
(b) Piggy-Back Registration. (i) Notwithstanding anything contained herein,
if the managing Underwriter or Underwriters of any underwritten offering
described in Section 2.2 have informed, in writing, the Piggy-Back Holders that
it is their opinion that the total number of Shares that the Company and Holders
of Registrable Securities and any other Persons desiring to participate in such
registration intend to include in such offering is such as to materially and
adversely affect the success of such offering, then the number of Shares to be
offered for the account of the Piggy-Back Holders and all such other Persons
(other than the Company) participating in such registration shall be reduced (to
zero, if necessary) or limited pro rata in proportion to the respective number
of Shares requested to be registered to the extent necessary to reduce the total
number of Shares requested to be included in such offering to the number of
Shares, if any, recommended by such managing Underwriters; provided, however,
that (A) if such offering is effected for the account of Demanding Holders
pursuant to Section 2.1, then the number of Shares to be offered for the account
of each Person shall be reduced in accordance with Section 2.3(a), and (B) if
such offering is effected for the account of any other securityholder of the
Company, pursuant to the demand registration rights of such securityholder, then
(x) the number of Shares to be offered for the account of the Company (if any)
shall be reduced (to zero, if necessary) and (y) thereafter, if necessary, the
number of Shares to be offered for the account of the Piggy-Back Holders and any
other holders that have requested to include Shares in such registration (but
not such securityholders who have exercised their demand registration rights)
shall be reduced (to zero, if necessary), in the case of this clause (y) pro
rata in proportion to the respective number of Shares requested to be
registered, to the extent necessary to reduce the total number of Shares
requested to be included in such offering to the number of Shares, if any,
recommended by such managing Underwriters.
(ii) If the managing Underwriter or Underwriters of any underwritten
offering described in Section 2.2 notify the Piggy-Back Holders or other Persons
requesting inclusion in such offering that the kind of securities that the
Piggy-Back Holders, the Company and any other Persons desiring to participate in
such registration intend to include in such offering is such as to materially
and adversely affect the success of such offering, then (A) the Company shall
afford the Piggy-Back Holders the opportunity to exercise, convert or exchange
such securities for or into Common Stock concurrently with the consummation of
such offering and include such shares of Common Stock in such offering, subject
to clause (i) above, and (B) if one or more Piggy-Back Holders do not so
exercise, convert or exchange such securities, the Shares to be included in such
offering by such Piggy-Back Holders shall be reduced as described in clause (i)
above or if such reduction would, in the judgment of the managing Underwriter or
Underwriters, be insufficient to substantially eliminate the adverse effect that
inclusion of the Shares requested to be included would have on such offering,
such Shares will be excluded from such offering.
ARTICLE III
REGISTRATION PROCEDURES
SECTION 3.1 Filings; Information. Whenever the Company is required to
effect or cause the registration of Registrable Securities pursuant to Section
2.1, the Company will use its best efforts to effect the registration and the
sale of such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible prepare and file with
the Commission a registration statement on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to
be registered thereunder in accordance with the intended method of
distribution thereof, and use its best efforts to cause such filed
registration statement to become and remain effective for a period of not
less than 200 days (or such shorter period as is required to complete the
distribution of the shares); provided that the Company may postpone the
filing of a registration statement for a period of not more than 135 days
from the date of receipt of the request in accordance with Section 2.1 if
the Company reasonably determines that such a filing would adversely affect
any proposed financing or acquisition by the Company and furnishes to the
Demanding Holder a certificate signed by an executive officer of the Company
to such effect; provided that the Company shall only be entitled to postpone
any such filing one time in any twelve-month period. If the Company
postpones the filing of a Registration Statement, it shall promptly notify
the Purchasers in writing when the events or circumstances permitting such
postponement have ended.
(b) The Company will as expeditiously as possible prepare and file with
the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement continuously effective
(subject to the penultimate paragraph of this Section 3.1) for a period of
not less than 200 days or such shorter period which will terminate when all
securities covered by such registration statement have been sold (but not
before the expiration of the 90-day period referred to in Section 4(3) of
the Securities Act and Rule 174 thereunder, if applicable) and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by each Selling Holder
thereof set forth in such registration statement.
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(c) The Company will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, furnish to each Selling
Holder, counsel representing such Selling Holders, and each Underwriter, if
any, of the Registrable Securities covered by such registration statement
copies of such registration statement as proposed to be filed, together with
exhibits thereto, which documents will be subject to review and comment by
the foregoing within five days after delivery, and thereafter furnish to
such Selling Holder, counsel and Underwriter, if any, for their review and
comment such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto and
documents incorporated by reference therein), the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents or information as such Selling Holder, counsel or
Underwriter may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by such Selling Holder.
(d) After the filing of the registration statement, the Company will
promptly notify each Selling Holder of Registrable Securities covered by
such registration statement, and (if requested by any such Selling Holder)
confirm such notice in writing, (i) when a prospectus or any prospectus
supplement or post-effective amendment has been filed and, with respect to a
registration statement or any post-effective amendment, when the same has
become effective, (ii) of any request by the Commission or any other Federal
or state governmental authority for amendments or supplements to a
registration statement or related prospectus or for additional information,
(iii) of the issuance by the Commission or any other Federal or state
governmental authority of any stop order suspending the effectiveness of a
registration statement or the initiation of any proceedings for that
purpose, (iv) if at any time when a prospectus is required by the Securities
Act to be delivered in connection with sales of the Registrable Securities
the representations and warranties of the Company contained in any agreement
contemplated by Section 3.1(h) (including any underwriting agreement) cease
to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose, (vi) of the happening of any event which
makes any statement made in such registration statement or related
prospectus or any document incorporated or deemed to be incorporated therein
by reference untrue in any material respect or which requires the making of
any changes in a registration statement, prospectus or documents
incorporated therein by reference so that, in the case of the registration
statement, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, and that in the case of the
prospectus, it will not contain any untrue statement of a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
and (vii) of the Company's reasonable determination that a post-effective
amendment to a registration statement would be necessary.
(e) The Company will use its best efforts to (i) register or qualify the
Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any Selling Holder reasonably (in
light of such Selling Holder's intended plan of distribution) requests, and
(ii) cause such Registrable Securities to be registered with or approved by
such other governmental agencies or authorities in the United States as may
be necessary by virtue of the business and operations of the Company and do
any and all other acts and things that may be reasonably necessary or
advisable to enable such Selling Holder to consummate the disposition of the
Registrable Securities owned by such Selling Holder; provided that the
Company will not be required to (A) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this paragraph (e), (B) subject itself to taxation in any such jurisdiction
or (C) consent to general service of process in any such jurisdiction.
(f) The Company will take all reasonable actions required to prevent the
entry, or obtain the withdrawal, of any order suspending the effectiveness
of a registration statement, or the lifting of any suspension of the
qualification (or exemption from qualification) of any Registrable
Securities for sale in any jurisdiction, at the earliest moment.
(g) Upon the occurrence of any event contemplated by paragraph
3.1(d)(vi) or 3.1(d)(vii) above, the Company will (i) prepare a supplement
or post-effective amendment to such registration statement or a supplement
to the related prospectus or any document incorporated therein by reference
or file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities being sold thereunder, such
prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (ii) promptly make available to each Selling
Holder any such supplement or amendment.
(h) The Company will enter into customary agreements (including, if
applicable, an underwriting agreement in customary form and which is
reasonably satisfactory to the Company) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of
such Registrable Securities (the Selling Holders may, at their option,
require that any or all of the representations, warranties and covenants of
the Company to or for the benefit of such Underwriters also be made to and
for the benefit of such Selling Holders).
(i) The Company will make available to each Selling Holder (and will
deliver to their counsel) and each Underwriter, if any, subject to
restrictions imposed by the United States federal government or any agency
or instrumentality thereof, copies of all correspondence between the
Commission and the Company, its counsel or auditors and will also make
available for inspection by any Selling Holder, any Underwriter
participating in any disposition pursuant to such registration statement and
any attorney, accountant or other professional retained by any such Selling
Holder or Underwriter (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's
officers and employees to supply all information reasonably requested by any
Inspectors in connection with such registration statement. Records which the
Company determines, in good faith, to be confidential and which it notifies
the Inspectors are confidential shall not be disclosed by the
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Inspectors unless (i) the disclosure of such Records is necessary to avoid
or correct a misstatement or omission in such registration statement or (ii)
the disclosure or release of such Records is requested or required pursuant
to oral questions, interrogatories, requests for information or documents or
a subpoena or other order from a court of competent jurisdiction or other
process; provided that prior to any disclosure or release pursuant to clause
(ii), the Inspectors shall provide the Company with prompt notice of any
such request or requirement so that the Company may seek an appropriate
protective order or waive such Inspectors' obligation not to disclose such
Records; and, provided further, that if failing the entry of a protective
order or the waiver by the Company permitting the disclosure or release of
such Records, the Inspectors, upon advice of counsel, are compelled to
disclose such Records, the Inspectors may disclose that portion of the
Records which counsel has advised the Inspectors that the Inspectors are
compelled to disclose. Each Selling Holder agrees that information obtained
by it solely as a result of such inspections (not including any information
obtained from a third party who, insofar as is known to the Selling Holder
after reasonable inquiry, is not prohibited from providing such information
by a contractual, legal or fiduciary obligation to the Company) shall be
deemed confidential and shall not be used by it as the basis for any market
transactions in the securities of the Company or its Affiliates unless and
until such information is made generally available to the public. Each
Selling Holder further agrees that it will, upon learning that disclosure of
such Records is sought in a court of competent jurisdiction, give notice to
the Company and allow the Company, at its expense, to undertake appropriate
action to prevent disclosure of the Records deemed confidential.
(j) The Company will furnish to each Selling Holder and to each
Underwriter, if any, a signed counterpart, addressed to such Selling Holder
or Underwriter, of (i) an opinion or opinions of counsel to the Company, and
(ii) a comfort letter or comfort letters from the Company's independent
public accountants, each in customary form and covering such matters of the
type customarily covered by opinions or comfort letters, as the case may be,
as the Selling Holders or the managing Underwriter therefor reasonably
requests.
(k) The Company will otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its securityholders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities
Act.
(l) The Company will use its best efforts (a) to cause any class of
Registrable Securities to be listed on a national securities exchange (if
such shares are not already so listed) and on each additional national
securities exchange on which similar securities issued by the Company are
then listed (if any), if the listing of such Registrable Securities is then
permitted under the rules of such exchange or (b) to secure designation of
all such Registrable Securities covered by such registration statement as a
NASDAQ "national market system security" within the meaning of Rule 11Aa2-1
of the Commission or, failing that, to secure NASDAQ authorization for such
Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register as such
with respect to such Registrable Securities with the National Association of
Securities Dealers, Inc. (the "NASD").
(m) The Company will appoint a transfer agent and registrar for all such
Registrable Securities covered by such registration statement not later than
the effective date of such registration statement.
(n) Prior to the effective date of the first Demand Registration or the
first Piggy-Back Registration, whichever shall occur first, (i) provide the
transfer agent with printed certificates for the Registrable Securities in a
form eligible for deposit with The Depository Trust Company, and (ii)
provide a CUSIP number for the Registrable Securities.
(o) In connection with an underwritten offering, the Company will
participate, to the extent reasonably requested by the managing Underwriter
for the offering or the Selling Holders, in customary efforts to sell the
securities under the offering, including, without limitation, participating
in "road shows"; provided that the Company shall not be obligated so to
participate in more than one such offering in any 12-month period.
The Company may require each Selling Holder to promptly furnish in writing
to the Company such information regarding the distribution of the Registrable
Securities by such Selling Holder as the Company may from time to time
reasonably request and such other information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the Commission or the NASD. The Company may
exclude from such registration any Holder who fails to provide such information.
Each Selling Holder agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Sections 3.1(d)(iii),
(v), (vi) and (vii) hereof, such Selling Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the registration statement
covering such Registrable Securities until such Selling Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 3.1(g)
hereof, and, if so directed by the Company, such Selling Holder will deliver to
the Company all copies, other than permanent file copies, then in such Selling
Holder's possession of the most recent prospectus covering such Registrable
Securities at the time of receipt of such notice. In the event the Company shall
give such notice, the Company shall extend the period during which such
registration statement shall be maintained effective (including the period
referred to in Section 3.1(a) hereof) by the number of days during the period
from and including the date of the giving of notice pursuant to Section
3.1(d)(iii), (v), (vi) or (vii) hereof to the date when the Company shall make
available to the Selling Holders a prospectus supplemented or amended to conform
with the requirements of Section 3.1(g) hereof.
In connection with any registration of Registrable Securities pursuant to
Section 2.2, the Company will take the actions contemplated by paragraphs (c),
(d), (e), (i), (j), (k), (l) and (n) above.
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SECTION 3.2 Registration Expenses. In connection with the Demand
Registrations pursuant to Section 2.1 hereof, and any registration statement
filed pursuant to Section 2.2 hereof, the Company shall pay the following
registration expenses incurred in connection with the registration hereunder
(the "Registration Expenses"): (i) all registration and filing fees, (ii) fees
and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) printing expenses, (iv) the
Company's internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties)
and all fees and expenses incident to the performance of or compliance with this
Agreement by the Company, (v) the fees and expenses incurred in connection with
the listing of the Registrable Securities, (vi) reasonable fees and
disbursements of counsel for the Company and customary fees and expenses for
independent certified public accountants retained by the Company (including the
expenses of any comfort letters or costs associated with the delivery by
independent certified public accountants of a comfort letter or comfort letters
requested pursuant to Section 3.1(j) hereof), (vii) the reasonable fees and
expenses of any special experts retained by the Company in connection with such
registration, and (viii) reasonable fees and expenses of one firm of counsel for
the Holders (together with necessary local counsel fees and expenses), which
counsel shall be chosen by the Demanding Holders or, if none, by the Holders of
a majority of the Registrable Securities being included in such Registration
Statement. The Company shall have no obligation to pay any underwriting fees,
discounts or commissions attributable to the sale of Registrable Securities.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1 Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Selling Holder, its partners, officers,
directors, employees and agents, and each Person, if any, who controls such
Selling Holder within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, together with the partners, officers, directors,
employees and agents of such controlling Person (collectively, the "Controlling
Persons"), from and against any loss, claim, damage, liability, reasonable
attorneys' fee, cost or expense and costs and expenses of investigating and
defending any such claim (collectively, the "Damages"), joint or several, and
any action in respect thereof to which such Selling Holder, its partners,
officers, directors, employees and agents, and any such Controlling Person may
become subject under the Securities Act or otherwise, insofar as such Damages
(or proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities or
any preliminary prospectus, or arises out of, or are based upon, any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based upon information furnished in writing to the Company by a
Selling Holder or Underwriter expressly for use therein, and shall reimburse
each Selling Holder, its partners, officers, directors, employees and agents,
and each such Controlling Person for any legal and other expenses reasonably
incurred by that Selling Holder, its partners, officers, directors, employees
and agents, or any such Controlling Person in investigating or defending or
preparing to defend against any such Damages or proceedings; provided, however,
that the Company shall not be liable to any Selling Holder to the extent that
(a) any such Damages arise out of or are based upon an untrue statement or
omission made in any preliminary prospectus if (i) such Holder failed to send or
deliver a copy of the final prospectus with or prior to the delivery of written
confirmation of the sale by such Selling Holder to the Person asserting the
claim from which such Damages arise, and (ii) the final prospectus would have
corrected such untrue statement or such omission; or (b) any such Damages arise
out of or are based upon an untrue statement or omission in any prospectus if
(x) such untrue statement or omission is corrected in an amendment or supplement
to such prospectus, and (y) having previously been furnished by or on behalf of
the Company with copies of such prospectus as so amended or supplemented, such
Holder thereafter fails to deliver such prospectus as so amended or supplemented
prior to or concurrently with the sale of a Registrable Security to the Person
asserting the claim from which such Damages arise. The Company also agrees to
indemnify any Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Selling Holders provided in
this Section 4.1.
SECTION 4.2 Indemnification by Holders of Registrable Securities. Each
Selling Holder agrees, severally but not jointly, to indemnify and hold harmless
the Company, its officers, directors, employees and agents and each Person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, together with the partners, officers,
directors, employees and agents of such controlling Person, to the same extent
as the foregoing indemnity from the Company to such Selling Holder, but only
with reference to information related to such Selling Holder, or its plan of
distribution, furnished in writing by such Selling Holder or on such Selling
Holder's behalf expressly for use in any registration statement or prospectus
relating to the Registrable Securities, or any amendment or supplement thereto,
or any preliminary prospectus. In case any action or proceeding shall be brought
against the Company or its officers, directors, employees or agents or any such
controlling Person or its partners, officers, directors, employees or agents, in
respect of which indemnity may be sought against such Selling Holder, such
Selling Holder shall have the rights and duties given to the Company, and the
Company or its officers, directors, employees or agents, controlling Person, or
its partners, officers, directors, employees or agents, shall have the rights
and duties given to such Selling Holder, under Section 4.1. Each Selling Holder
also agrees to indemnify and hold harmless each other Selling Holder and any
Underwriters of the Registrable Securities, and their respective officers and
directors and each Person who controls each such other Selling Holder or
Underwriter on substantially the same basis as that of the indemnification of
the Company provided in this Section 4.2. The Company shall be entitled to
receive indemnities from Underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution, to
the same extent as provided above, with respect to information so furnished in
writing by such Persons specifically for inclusion in any prospectus or
registration statement. In no event shall the liability of any Selling Holder be
greater in amount than the
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dollar amount of the proceeds (net of payment of all expenses) received by such
Selling Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
SECTION 4.3 Conduct of Indemnification Proceedings. Promptly after receipt
by any Person in respect of which indemnity may be sought pursuant to Section
4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the commencement
of any action, the Indemnified Party shall, if a claim in respect thereof is to
be made against the Person against whom such indemnity may be sought (an
"Indemnifying Party") notify the Indemnifying Party in writing of the claim or
the commencement of such action, provided that the failure to notify the
Indemnifying Party shall not relieve it from any liability except to the extent
of any material prejudice resulting therefrom. If any such claim or action shall
be brought against an Indemnified Party, and it shall notify the Indemnifying
Party thereof, the Indemnifying Party shall be entitled to participate therein,
and, to the extent that it wishes, jointly with any other similarly notified
Indemnifying Party, to assume the defense thereof with counsel reasonably
satisfactory to the Indemnified Party; provided, that the Indemnifying Party
acknowledges, in a writing in form and substance reasonably satisfactory to such
Indemnified Party, such Indemnifying Party's liability for all Damages of such
Indemnified Party to the extent specified in, and in accordance with, this
Article IV. After notice from the Indemnifying Party to the Indemnified Party of
its election to assume the defense of such claim or action, the Indemnifying
Party shall not be liable to the Indemnified Party for any legal or other
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation; provided that the
Indemnified Party shall have the right to employ separate counsel to represent
the Indemnified Party and its controlling Persons who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the Indemnified Party against the Indemnifying Party, but the fees and
expenses of such counsel shall be for the account of such Indemnified Party
unless (i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) in the reasonable judgment of
the Indemnifying Party and such Indemnified Party, representation of both
parties by the same counsel would be inappropriate due to actual or potential
conflicts of interest between them, it being understood, however, that the
Indemnifying Party shall not, in connection with any one such claim or action or
separate but substantially similar or related claims or actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all Indemnified
Parties, or for fees and expenses that are not reasonable. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any claim or pending or threatened proceeding in respect of which
the Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party, unless such settlement includes
an unconditional release of such Indemnified Party from all liability arising
out of such claim or proceeding. Whether or not the defense of any claim or
action is assumed by the Indemnifying Party, such Indemnifying Party will not be
subject to any liability for any settlement made without its consent, which
consent will not be unreasonably withheld.
SECTION 4.4 Contribution. If the indemnification provided for in this
Article IV is unavailable to the Indemnified Parties in respect of any Damages
referred to herein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Damages (i) as between the Company and the
Selling Holders on the one hand and the Underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Holders on the one hand and the Underwriters on the
other from the offering of the Registrable Securities, or if such allocation is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits but also the relative fault of the Company and
the Selling Holders on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such Damages, as
well as any other relevant equitable considerations, and (ii) as between the
Company on the one hand and each Selling Holder on the other, in such proportion
as is appropriate to reflect the relative fault of the Company and of each
Selling Holder in connection with such statements or omissions, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Holders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Holders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the prospectus. The relative
fault of the Company and the Selling Holders on the one hand and of the
Underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and the Selling Holders or by the Underwriters. The
relative fault of the Company on the one hand and of each Selling Holder on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 4.4, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Registrable Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, and no Selling Holder shall be required to contribute any
amount in excess of the amount by which the total price at which the Registrable
Securities of such Selling Holder were offered to the public (less underwriting
discounts and commissions) exceeds the amount of any damages which such Selling
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No
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Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. Each Selling Holder's
obligation to contribute pursuant to this Section 4.4 is several and not joint.
The indemnity, contribution and expense reimbursement obligations contained
in this Article IV are in addition to any liability any Indemnifying Party may
otherwise have to an Indemnified Party or otherwise. The provisions of this
Article IV shall survive, notwithstanding any transfer of the Registrable
Securities by any Holder or any termination of this Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 Participation in Underwritten Registrations. No Person may
participate in any underwritten registration hereunder unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements, and (b) completes and executes all questionnaires,
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements and these registration rights;
provided that (i) no Selling Holder shall be required to make any
representations or warranties except those which relate solely to such Holder
and its intended method of distribution, and (ii) the liability of each such
Holder to any Underwriter under such underwriting agreement will be limited to
liability arising from misstatements or omissions regarding such Holder and its
intended method of distribution and any such liability shall not exceed an
amount equal to the amount of net proceeds such Holder derives from such
registration; provided, however, that in an offering by the Company in which any
Holder requests to be included in a Piggy-Back Registration, the Company shall
use its best efforts to arrange the terms of the offering such that the
provisions set forth in clauses (i) and (ii) of this Section 5.1 are true;
provided further, that if the Company fails in its best efforts to so arrange
the terms, the Holder may withdraw all or any part of its Registrable Securities
from the Piggy-Back Registration and the Company shall reimburse such Holder for
all reasonable out-of-pocket expenses (including counsel fees and expenses)
incurred prior to such withdrawal.
SECTION 5.2 Rules 144 and 144A. The Company covenants that it will file any
reports required to be filed by it under the Securities Act and the Exchange Act
and that it will take such further action as any Holder may reasonably request,
all to the extent required from time to time to enable Holders to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the
Securities Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the Commission. Upon the request
of any Holder, the Company will deliver to such Holder a written statement as to
whether it has complied with such requirements.
SECTION 5.3 Holdback Agreements. (a) Restrictions on Public Sale by Holder
of Registrable Securities. Each Holder agrees not to effect any public sale or
distribution of the issue being registered or of a similar security of the
Company, or any securities convertible into or exchangeable or exercisable for
such securities, including a sale pursuant to Rule 144 or Rule 144A under the
Securities Act, during the 14 days prior to, and during the 90-day period
beginning on, the effective date of any registration statement filed by the
Company (except as part of such registration), in the case of an underwritten
public offering, if, and to the extent, requested by the managing underwriter or
underwriters.
The foregoing provisions shall not apply to any Holder that is prevented by
applicable statute or regulation from entering into any such agreement;
provided, however, that any such Holder shall undertake not to effect any public
sale or distribution of the class of securities covered by such registration
statement (except as part of such underwritten offering) during such period
unless it has provided 60 days' prior written notice of such sale or
distribution to the managing underwriter.
(b) Restrictions on Sale by the Company and Others. The Company agrees and
it shall use its best efforts to cause its Affiliates to agree (i) not to effect
any public sale or distribution of any securities similar to those being
registered in accordance with Section 2.1 hereof, or any securities convertible
into or exchangeable or exercisable for such securities, during the 14 days
prior to, and during the 90-day period beginning on, the effective date of any
registration statement (except as part of such registration statement), in the
case of an underwritten offering, if, and to the extent, reasonably requested by
the managing Underwriter or Underwriters, and (ii) to use its best efforts to
ensure that any agreement entered into after the date of the Stockholders
Agreement pursuant to which the Company issues or agrees to issue any privately
placed securities (other than to officers or employees) shall contain a
provision under which holders of such securities agree not to effect any sale or
distribution of any such securities during the periods described in (i) above,
in each case including a sale pursuant to Rule 144 or Rule 144A under the
Securities Act (except as part of any such registration, if permitted);
provided, however, that the provisions of this paragraph (b) shall not prevent
(x) the conversion or exchange of any securities pursuant to their terms into or
for other securities or (y) the issuance of any securities to employees of the
Company or pursuant to any employee plan.
SECTION 5.4 Amendment and Modification. Any provision of this Agreement may
be waived, provided that such waiver is set forth in a writing executed by the
party against whom the enforcement of such waiver is sought. This Agreement may
not be amended, modified or supplemented other than by a written instrument
signed by (a) the Company, (b) the holders of a majority of the Registrable
Securities held by the Purchasers and (c) at least two unrelated Purchasers;
provided, however, that (i) so long as Apollo beneficially owns at least 25% of
the Registrable Securities held by Apollo on the Effective Date, without the
consent of Apollo, no amendment or modification which adversely affects the
rights or duties of Apollo hereunder may be effected, (ii) so long as the Other
Purchasers beneficially own at least 25% of the Registrable Securities held by
such Persons on the Effective Date, without the consent of a majority of the
Registrable Securities held by the Other Purchasers, no amendment or
modification which adversely affects the rights or duties of such Other
Purchasers hereunder may be effected and (iii) so long as the Investors
beneficially own at least 25% of the Shares beneficially
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owned by such Persons on the Effective Date, without the consent of a majority
of the Registrable Securities held by the Investors, no amendment or
modification which adversely affects the rights or duties of such Investors
hereunder may be effected. No course of dealing between or among any Persons
having any interest in this Agreement will be deemed effective to modify, amend
or discharge any part of this Agreement or any rights or obligations of any
Person under or by reason of this Agreement.
SECTION 5.5 Successors and Assigns; Entire Agreement. (a) This Agreement
and all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns and executors,
administrators and heirs; provided, that (i) except as otherwise specifically
permitted pursuant to this Agreement, neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by the Company
without the prior written consent of each of the Holders and (ii) Apollo may
assign a right to request a Demand Registration solely in connection with a
Transfer to any single Person or group of affiliated Persons (in a single
transaction or series of related transactions) of at least 25% of the
Registrable Securities held by it on the date hereof.
(b) This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
SECTION 5.6 Separability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless that provision held
invalid shall substantially impair the benefits of the remaining portions of
this Agreement.
SECTION 5.7 Notices. All notices, demands, requests, consents or approvals
(collectively, "Notices") required or permitted to be given hereunder or which
are given with respect to this Agreement shall be in writing and shall be
personally delivered or delivered by a reputable overnight courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or such other address as such party shall have
specified most recently by written notice. Notice shall be deemed given or
delivered on the date of service or transmission if personally served or
transmitted by telegram, telex or facsimile. Notice otherwise sent as provided
herein shall be deemed given or delivered on the next business day following
delivery of such notice to a reputable overnight courier service.
To the Company:
Food 4 Less Holdings, Inc.
1100 West Artesia Boulevard
Compton, California 90220
Attn: Byron E. Allumbaugh
Fax: (213) 884-4024
with a copy (which shall not constitute notice) to:
The Yucaipa Companies
10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Attn: Mark A. Resnik, Esq.
Fax: (310) 789-7201
and
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071
Attn: Thomas C. Sadler, Esq.
Fax: (213) 891-8763
To Apollo:
Apollo Advisors, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, California 90067
Attn: Peter Copses
Fax: (310) 201-4166
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<PAGE> 224
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue
34th Floor
Los Angeles, California 90071
Attn: Michael A. Woronoff, Esq.
Fax: (213) 687-5600
To the Other Purchasers or the Other Investors:
To the address specified on the signature page of the Stockholders
Agreement executed by such Other Purchaser.
SECTION 5.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal law of the State of New York, without
giving effect to principles of conflicts of law.
SECTION 5.9 Headings. The headings in this Agreement are for convenience of
reference only and shall not constitute a part of this Agreement, nor shall they
affect their meaning, construction or effect.
SECTION 5.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
SECTION 5.11 Further Assurances. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
SECTION 5.12 Termination. Unless sooner terminated in accordance with its
terms or as otherwise herein provided, this Agreement shall terminate upon the
earlier to occur of (i) the mutual agreement by the parties hereto, (ii) with
respect to any Holder, such Holder ceasing to own any Registrable Securities or
(iii) the fifteenth anniversary of the Effective Date.
SECTION 5.13 Remedies. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that the remedy at law, including
monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
SECTION 5.14 Pronouns. Whenever the context may require, any pronouns used
herein shall be deemed also to include the corresponding neuter, masculine or
feminine forms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOOD 4 LESS HOLDINGS, INC.
THE INVESTORS
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EDGAR APPENDIX
This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T
regarding graphic and image information. It describes material appearing on
pages 7 and 8 of the Prospectus.
PAGE 9
The chart consists of two columns which graphically illustrate the
respective corporate structures of Food 4 Less and Ralphs before the Merger.
Food 4 Less' corporate structure illustrates that Food 4 Less, Inc. ("FFL") owns
Food 4 Less Holdings, Inc. ("Holdings"), which, in turn, owns Food 4 Less
Supermarkets, Inc. ("Food 4 Less") which, in turn, owns several other Food 4
Less subsidiaries. The Ralphs' corporate structure illustrates that Ralphs
Supermarkets, Inc. ("RSI"), owns Ralphs Grocery Company ("RGC") which, in turn,
owns Crawford Stores, Inc. A dotted arrow has been drawn from the box
representing Food 4 Less to the box representing RSI to simulate the RSI Merger.
A dotted arrow has been drawn from the box representing RGC to the box
representing RSI to simulate the RGC Merger. A dotted arrow has been drawn to
the box representing Holdings from the box representing FFL to simulate the FFL
Merger.
PAGE 10
The chart illustrates the corporate structure of the Company after the
Merger and the FFL Merger. The corporate structure illustrates that New Holdings
owns the Company which, in turn, is the parent of all other subsidiaries of the
Company. The anticipated debt obligations of New Holdings are placed in order of
ranking next to the box representing New Holdings and the anticipated debt
obligations of the Company are placed in order of ranking next to the box
representing the Company.
