<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
<TABLE>
<S> <C>
For Quarter Ended Commission File Number
October 8, 1995 33-59212
</TABLE>
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0642810
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
1100 West Artesia Boulevard
Compton, California 90220
(Address of principal executive offices) (Zip code)
</TABLE>
(310) 884-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
At November 22, 1995, there were 16,796,928 shares of Common Stock outstanding.
There is no public market for the Common Stock.
================================================================================
<PAGE> 2
FOOD 4 LESS HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of
October 8, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of operations for the 36 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the 36 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated statements of stockholders' equity as of
October 8, 1994 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE> 4
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
October 8, January 29,
ASSETS 1995 1995
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 64,792 $ 19,560
Trade receivables, net 71,631 23,377
Notes and other receivables 6,268 3,985
Inventories 476,884 224,686
Patronage receivables from suppliers 3,761 5,173
Prepaid expenses and other 45,534 13,051
---------- ----------
Total current assets 668,870 289,832
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
A. W. G. 7,288 6,718
Certified and Others 5,651 5,686
PROPERTY AND EQUIPMENT:
Land 185,872 23,488
Buildings 211,548 24,172
Leasehold improvements 224,092 110,020
Store equipment and fixtures 414,230 190,016
Construction in progress 47,504 8,042
Leased property under capital leases 179,646 82,526
Leasehold interests 115,942 96,556
---------- ----------
1,378,834 534,820
Less: Accumulated depreciation and amortization 192,759 154,382
---------- ----------
Net property and equipment 1,186,075 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $5,379 and $20,496 at October 8, 1995 and
January 29, 1995, respectively 94,210 25,469
Goodwill, less accumulated amortization of $55,072
and $38,560 at October 8, 1995 and
January 29, 1995, respectively 1,120,179 263,112
Other, net 24,736 29,440
---------- ----------
$3,107,009 $1,000,695
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE> 5
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
October 8, January 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 384,393 $ 190,455
Accrued payroll and related liabilities 95,399 42,007
Accrued interest 54,648 10,730
Other accrued liabilities 174,581 65,279
Income taxes payable 1,491 293
Current portion of self-insurance liabilities 59,284 28,616
Current portion of long-term debt 24,649 22,263
Current portion of obligations under capital leases 20,341 4,965
----------- -----------
Total current liabilities 814,786 364,608
LONG-TERM SENIOR DEBT 1,113,213 320,901
OBLIGATIONS UNDER CAPITAL LEASES 130,140 40,675
SENIOR SUBORDINATED DEBT 804,912 145,000
SENIOR DISCOUNT DEBENTURES 104,288 --
SENIOR DISCOUNT NOTES -- 65,136
DEFERRED INCOME TAXES 19,567 17,534
SELF-INSURANCE LIABILITIES 89,097 41,872
LEASE VALUATION RESERVE 24,655 --
OTHER NON CURRENT LIABILITIES 79,527 12,302
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Convertible Series-A Preferred Stock, $.01 par value,
25,000,000 shares authorized; 16,683,244 shares issued
at October 8, 1995 (aggregate liquidation value of
$170.6 million) and no shares at January 29, 1995 161,832 --
Convertible Series-B Preferred Stock, $.01 par value, 25,000,000
shares authorized; 3,100,000 shares issued at October 8, 1995
(aggregate liquidation value of $31.7 million) and no shares at
January 29, 1995 31,000 --
Common Stock, $.01 par value, 60,000,000 shares and
1,600,000 shares authorized at October 8, 1995
and January 29, 1995, respectively; 17,207,882 shares
and 1,386,169 shares issued at October 8, 1995 and
January 29, 1995, respectively 172 14
Non-Voting Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at October 8, 1995 or
January 29, 1995 -- --
Additional paid-in capital 57,591 105,580
Notes receivable from stockholders (643) (702)
Retained deficit (319,684) (112,225)
---------- ----------
(69,732) (7,333)
Treasury stock: No shares at January 29, 1995 and
410,954 shares of common stock at October 8, 1995 (3,444) --
---------- ----------
Total stockholders' equity (73,176) (7,333)
---------- ----------
$3,107,009 $1,000,695
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
3
<PAGE> 6
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
October 8, September 17,
1995 1994
------------ -------------
<S> <C> <C>
SALES $1,207,093 $ 598,698
COST OF SALES 965,976 495,656
---------- -----------
GROSS PROFIT 241,117 103,042
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 225,020 88,152
AMORTIZATION OF EXCESS COSTS OVER
NET ASSETS ACQUIRED 10,000 1,787
----------- -----------
OPERATING INCOME 6,097 13,103
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 59,546 17,085
Amortization of deferred financing costs 3,369 1,299
----------- -----------
62,915 18,384
LOSS (GAIN) ON DISPOSAL OF ASSETS 92 (458)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (56,910) (4,823)
PROVISION FOR INCOME TAXES -- 900
----------- -----------
NET LOSS $ (56,910) $ (5,723)
=========== ===========
PRIMARY EARNINGS (LOSS) PER COMMON SHARE: $ (3.39) $ (4.14)
=========== ===========
Average Number of Common Shares Outstanding 16,796,928 1,381,876
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 7
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
---------- -------------
<S> <C> <C>
SALES $2,688,035 $1,767,645
COST OF SALES 2,178,133 1,457,509
---------- ----------
GROSS PROFIT 509,902 310,136
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 480,026 255,378
AMORTIZATION OF EXCESS COSTS OVER
NET ASSETS ACQUIRED 16,512 5,346
RESTRUCTURING CHARGE 63,587 -
---------- ----------
OPERATING INCOME (LOSS) (50,223) 49,412
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 115,359 49,995
Amortization of deferred financing costs 6,363 3,823
---------- ----------
121,722 53,818
GAIN ON DISPOSAL OF ASSETS (344) (362)
PROVISION FOR EARTHQUAKE LOSSES -- 4,504
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE AND
PROVISION FOR INCOME TAXES (171,601) (8,548)
PROVISION FOR INCOME TAXES 500 2,900
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE (172,101) (11,448)
EXTRAORDINARY CHARGE 35,358 -
---------- ----------
NET LOSS $ (207,459) $ (11,448)
========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (8.55) $ (8.28)
Extraordinary charges (1.76) --
---------- ----------
Net loss $ (10.30) $ (8.28)
========== ==========
Average Number of Common Shares Outstanding 20,139,828 1,382,077
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 8
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
------------ ----------------
<S> <C> <C>
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Cash received from customers $2,688,035 $1,767,645
Cash paid to suppliers and employees (2,533,431) (1,666,125)
Interest paid (33,457)
Income taxes received (paid) 90 (3,550)
Interest received 528 1,105
Other, net (2,613)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 85,834 63,005
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 5,788 2,795
Payment for purchase of property and equipment (68,515) (50,406)
Payment of acquisition costs, net of cash acquired (456,250) (11,050)
Other, net (3,219) 752
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (522,196) (57,909)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,014,179 --
Proceeds from the issuance of preferred stock 135,000 --
Payments of long-term debt (628,730) (8,164)
Payments of capital lease obligation (8,170) (2,944)
Net change in Revolving Loan (27,300) 6,100
Purchase of treasury stock, net (3,444) (466)
Other, net 59 (26)
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 481,594 (5,500)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,232 (404)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 29,792
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,792 $ 29,388
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 9
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
----------- ------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss $ (207,459) $(11,448)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Restructuring charge 63,587 --
Extraordinary charge 23,128 --
Depreciation and amortization 85,959 43,535
Accretion of discount notes 13,939 6,422
Gain on sale of assets (344) (480)
Change in assets and liabilities:
Accounts and notes receivable (8,513) 2,294
Inventories 23,915 1,325
Prepaid expenses and other (11,677) (4,008)
Accounts payable and accrued liabilities 101,274 29,605
Self-insurance liabilities 1,435 (3,590)
Income taxes payable 590 (650)
---------- --------
Total adjustments 293,293 74,453
---------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 85,834 $ 63,005
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Acquisition of stores:
Fair value of assets acquired, less cash acquired
of $34,380 in 1995 $2,047,247 $ 11,241
Net cash paid in acquisition (456,250) (11,050)
Notes issued to seller (160,000) --
Capital contribution from stockholders (20,000) --
---------- --------
Liabilities assumed $1,410,997 $ 191
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE> 10
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Non-voting
Preferred Stock Preferred Stock -------------------------------------
Series A Series B Common Stock Common Stock
---------------------- ------------------- ------------------- ---------------
Number Number Number Number
of of of of
Shares Amount Shares Amount Shares Amount Shares Amount
---------- -------- --------- ------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29, 1995 -- $ -- -- $ -- 1,386,169 $ 14 -- $ --
Stock Split of Common Stock
(16.58609143 shares to 1 share)
(unaudited) -- -- -- -- 21,604,957 216 -- --
Issuance of Preferred Stock (unaudited) 16,683,244 $166,832 3,100,000 31,000 -- -- -- --
Cancellation of Common Stock (unaudited) -- -- -- -- (5,783,244) (58) -- --
Preferred Stock Issuance Costs (unaudited) -- (5,000) -- -- -- -- -- --
Purchase of Treasury Stock (unaudited) -- -- -- -- -- -- -- --
Payment on Stockholder Notes (unaudited) -- -- -- -- -- -- -- --
Issuance of Stock Options (unaudited) -- -- -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- ------ ------ ------
BALANCES AT October 8, 1995 (unaudited) 16,683,244 $161,832 3,100,000 $31,000 17,207,882 $ 172 -- --
========== ======== ========= ======= ========== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Non-voting
Treasury Stock
---------------------- Total
Number Stock- Add'l Stock-
of holders' Paid-In Retained holders'
Shares Amount Notes Capital Deficit Equity
---------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29, 1995 -- $ -- $(702) $105,580 $(112,225) $(7,333)
Stock Split of Common Stock
(16.58609143 shares to 1 share)
(unaudited) -- -- -- (216) -- --
Issuance of Preferred Stock (unaudited) -- -- -- -- -- 197,832
Cancellation of Common Stock (unaudited) -- -- -- (27,773) -- (57,831)
Preferred Stock Issuance Costs (unaudited) -- -- -- -- -- (5,000)
Purchase of Treasury Stock (unaudited) (410,954) (3,444) -- -- -- (3,444)
Payment on Stockholder Notes (unaudited) -- -- 59 -- -- 59
Issuance of Stock Options (unaudited) -- -- -- 10,000 -- 10,000
Net loss (unaudited) -- -- -- -- (207,459) (207,459)
---------- -------- ----- -------- --------- --------
BALANCES AT October 8, 1995 (unaudited) (410,954) $(3,444) $(643) $57,591 $(319,684) $(73,176)
========== ======== ===== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE> 11
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet and statement of stockholders'
equity of Food 4 Less Holdings, Inc. (referred to herein as
"Holdings," and together with its wholly owned subsidiary, Ralphs
Grocery Company, which is the successor to Food 4 Less Supermarkets,
Inc., as the "Company" as of October 8, 1995 and the consolidated
statements of operations and cash flows for the interim periods ended
October 8, 1995 and September 17, 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 in Holdings' annual
report filed on Form 10-K for the fiscal year ended January 29, 1995.
Results of operations for interim periods are not necessarily
indicative of the results for a full fiscal year.
2. ORGANIZATION AND ACQUISITION
The Company is a retail supermarket company with 412 stores
located in Southern California, Northern California and certain areas
of the Midwest. The Company's Southern California division includes
manufacturing facilities, with bakery and creamery operations, and
full-line warehouse and distribution facilities.
ACQUISITION
On June 14, 1995, Food 4 Less Supermarkets, Inc. ("F4L
Supermarkets") acquired all of the common stock of Ralphs
Supermarkets, Inc. ("RSI") in a transaction accounted for as a
purchase by F4L Supermarkets. The consideration for the acquisition
consisted of $375 million in cash, $131.5 million principal amount of
13.625% Senior Subordinated Pay-In-Kind Debentures due 2007 of
Holdings (the "Seller Debentures") and $18.5 million initial accreted
value of 13.625% Senior Discount Debentures due 2005 of Holdings (the
"New Discount Debentures"). F4L Supermarkets, Ralphs Supermarkets,
Inc. ("RSI") and RSI's wholly owned subsidiary Ralphs Grocery Company
("RGC") combined through mergers (the "Merger") in which RSI remained
as the surviving entity and changed its name to Ralphs Grocery Company
(referred to as "Ralphs" herein). The financial statements reflect
the preliminary allocation of the purchase price as certain appraisals
and other information needed to complete the purchase price allocation
have not been completed. The allocation of the purchase price will
be finalized in fiscal 1996.
The following unaudited pro forma information presents the
results of the Company's operations, adjusted to reflect interest
expense and depreciation and amortization, as though the Merger had
been consummated at the beginning of fiscal 1994.
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
------------ ----------------
(dollars in thousands, except share amounts)
<S> <C> <C>
Sales 3,713,726 3,623,986
Restructuring charge -- (63,587)
Integration costs -- (57,639)
Loss before extraordinary charge (57,261) (154,708)
Net loss (57,261) (197,481)
Loss per common share:
Loss before extraordinary charge (0.34) (9.25)
Net loss (0.34) (11.80)
</TABLE>
9
<PAGE> 12
The unaudited pro forma results of operations are not
necessarily indicative of the actual results of operations that would
have occurred had the purchase actually been made at the beginning of
fiscal 1994, or of the results which may occur in the future.
3. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, which consist primarily of grocery products,
are stated at the lower of cost or market. Cost has been principally
determined using the last-in, first-out ("LIFO") method. If
inventories had been valued using the first-in, first-out ("FIFO")
method, inventories would have been higher by $19,459,000 and
$16,531,000 at October 8, 1995 and January 29, 1995, respectively, and
gross profit and operating income would have been greater by $934,000
and $2,928,000 for the 12 and 36 weeks ended October 8, 1995,
respectively, greater by $1,020,000 for the 12 weeks ended September
17, 1994 and less by $501,000 for the 36 weeks ended September 17,
1994.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the October 8, 1995
presentation.
Other
The Financial Accounting Standards Board has issued a new
standard on accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets
to be held and used and long-lived assets and certain identifiable
intangibles to be disposed of (FASB Statement No. 121). The Company
will adopt the accounting standard in fiscal 1996. The Company does
not expect the change in accounting to have a material effect on the
Company's reported financial position or results of operations.
4. RESTRUCTURING CHARGE
During the quarter ended July 16, 1995, the Company has
recorded a $63.6 million one-time restructuring charge associated with
the closing of 39 stores and one warehouse facility. Pursuant to the
settlement agreement with the State of California, 24 Food 4 Less
stores (as well as 3 Ralphs stores) must be divested by December 31,
1995. Although not required by such settlement agreement, an
additional 15 under-performing stores are scheduled to be closed by
June 30, 1996. The restructuring charge consists of write-downs of
property, plant and equipment ($40.6 million) less estimated proceeds
($16.0 million); reserve for closed stores and warehouse facility
($16.1 million); write-off of the Alpha Beta trademark ($8.3 million);
write-off of other assets ($8.0 million); lease termination expenses
($4.0 million); and miscellaneous expenses ($2.6 million). The
expected cash payments to be made in connection with the restructuring
charge total $7.2 million. It is expected that cash payments will be
made by June 30, 1996. The increase in the restructuring charge over
previous estimates was due primarily to the addition of the $16.1
million reserve for the closure of the warehouse and stores. The
remaining increase resulted from the identification of additional
assets to be written-off. During the 36 weeks ended October 8, 1995,
the Company utilized $37.5 million of the reserve for restructuring
costs ($46.6 million of costs partially offset by $9.1 million of
proceeds from the divestiture of stores). The charges consisted of
write-downs of property, plant and equipment ($23.1 million);
write-off of the Alpha Beta trademark ($8.3 million); and write-off of
other assets ($6.1 million). No additional expenses are expected to
be incurred in future periods in connection with these closings. The
Company 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 addition of the Riverside
facility will likely result in an additional fourth quarter
restructuring charge, the amount of which has not yet been finalized.
(See Note 10 - "Subsequent Events.")
10
<PAGE> 13
5. EXTRAORDINARY CHARGE
The extraordinary charge of $35.4 million recorded during the
quarter ended July 16, 1995 relates to the refinancing of F4L
Supermarkets' old credit facility, 10.45% Senior Notes due 2000 (the
"Old F4L Senior Notes") and 13.75% Senior Subordinated Notes due 2001
(the "Old F4L Senior Subordinated Notes") and Holdings' 15.25% Senior
Discount Notes due 2004 in connection with the Merger and the
write-off of their related debt issuance costs.
11
<PAGE> 14
6. LONG-TERM SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's long-term senior debt is summarized as follows:
<TABLE>
<CAPTION>
October 8, January 29,
1995 1995
------------ --------------
<S> <C> <C>
New Term Loans, principal due quarterly through
2003, with interest payable quarterly in arrears. $ 594,873,000 $ --
Old Bank Term Loan, principal due quarterly through
January 1999, with interest payable monthly in arrears. -- 125,732,000
10.45% Senior Notes, principal due 2004 with
interest payable semi-annually in arrears. 520,326,000 --
10.45% Senior Notes, principal due 2000 with
interest payable semi-annually in arrears. 4,674,000 175,000,000
Revolving Loan. -- 27,300,000
13.625% Senior Discount Debentures due 2005,
after June 2000 interest payable semi-annually
in arrears. 104,289 --
15.25% Senior Discount Notes due 2004, after
December 15, 1997 interest payable semi-annually
in arrears. -- 65,136,000
Notes payable in varying monthly installments,
including interest ranging from 11.5% to 18.96%.
Final payments due through November 1996.
Secured by equipment with a net book value of
$24.9 million. 3,951,000 --
10.0% Secured Promissory Note, collateralized
by the stock of Bell, due June 1996, interest
payable quarterly through June 1996. 8,000,000 8,000,000
10.625% 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 $2.1 million. 1,466,000 1,498,000
10.8% notes payable, collateralized equipment,
due October 1995, $72,000 of principal plus
interest payable monthly, plus balloon payment of
$1,004,000 of principal and interest. 995,000 1,420,000
Other long-term debt. 3,577,000 4,214,000
------------- -----------
1,242,151,000 408,300,000
Less current portion. 24,649,000 22,263,000
------------- -----------
$1,217,502,000 $386,037,000
============= ===========
</TABLE>
12
<PAGE> 15
Long-Term Senior Debt
As part of the Merger financing, the Company entered into a
new credit agreement (the "New Credit Facility") with certain banks,
comprised of a $600 million term loan facility (the "New Term Loans")
and a revolving credit facility of $325 million (the "Revolving Credit
Facility") less amounts outstanding under a $150 million standby
letter of credit facility (the "Letter of Credit Facility").
At October 8, 1995, $594.9 million was outstanding under the
New Term Loans, there were no borrowings outstanding under the
Revolving Credit Facility, and $92.7 million of standby letters of
credit had been issued on behalf of the Company. A commitment fee of
one-half of one percent is charged on the average daily unused portion
of the Revolving Credit Facility; such commitment fees are due
quarterly in arrears. Interest on borrowings under the New Term Loans
is at the bank's Base Rate (as defined) plus a margin ranging from
1.50 percent to 2.75 percent or the adjusted Eurodollar Rate (as
defined) plus a margin ranging from 2.75 percent to 4.0 percent. At
October 8, 1995, the weighted average interest rate on the New Term
Loans was 9.12 percent. Interest on borrowings under the Revolving
Credit Facility is at the bank's Base Rate (as defined) plus a margin
of 1.50 percent or the Adjusted Eurodollar Rate (as defined) plus a
margin of 2.75 percent.
October 11, 1995, the Company entered into an interest rate
collar which effectively set interest rate limits on $300 million of
the Company's bank term debt. This interest rate collar, which was
effective as of October 19, 1995, limits the interest rate on $300
million to a range of 4.5% to 8.0% LIBOR for two years. The
agreement satisfies interest rate protection requirements under the
New Credit Facility.
Quarterly principal installments on the New Term Loans
continue to December 2003, with amounts payable in each year as
follows: $0.8 million in fiscal 1995, $19.5 million in fiscal 1996,
$46.6 million in fiscal 1997, $59.2 million in fiscal 1998, $62.8
million in fiscal 1999, $66.4 in fiscal 2000, $86.1 in fiscal 2001,
$102.9 in fiscal 2002 and $150.6 in fiscal 2003. The principal
installments can be accelerated from time to time by certain mandatory
prepayments which are required under the New Credit Facility. To
the extent that borrowings under the Revolving Credit Facility are not
paid earlier, they are due in December 2003. The common stock of
Ralphs and certain of its direct and indirect subsidiaries has been
pledged as security under the New Credit Facility.
F4L Supermarkets issued $350,000,000 of new 10.45% Senior
Notes due 2004 (the "New F4L Senior Notes") and exchanged
$170,326,000 principal amount of Old F4L Senior Notes (together
with the F4L New Senior Notes, the "Senior Notes"), for an equal
amount of the New F4L Senior Notes, leaving an outstanding balance
of $4,674,000 on the Old F4L Senior Notes. The New Senior Notes are
due on June 15, 2004 and the Old F4L Senior Notes are due in two equal
sinking fund payments on April 15, 1999 and 2000. The Senior Notes
are senior unsecured obligations of Ralphs and rank "pari passu" in
right of payment with other senior unsecured indebtedness of Ralphs.
However, the Senior Notes are effectively subordinated to all secured
indebtedness of Ralphs and its subsidiaries, including indebtedness
under the New Credit Facility. Interest on the New F4L Senior Notes
is payable semiannually in arrears on each June 15 and December 15,
commencing on December 15, 1995. Interest on the Old F4L Senior Notes
is payable semiannually in arrears on each April 15 and October 15.
The New F4L Senior Notes may be redeemed, at the option of
Ralphs, in whole at any time or in part from time to time, beginning
in fiscal 2000, at a redemption price of 105.225 percent. The
redemption price declines ratably to 100 percent in fiscal 2003. In
addition, on or prior to June 15, 1998, Ralphs, at its option, may
use the net cash proceeds of one or more public equity offerings to
redeem up to an aggregate of 35 percent of the principal amount of the
New F4L Senior Notes originally issued, at a redemption price equal to
110.450 percent, 108.957 percent, and 107.464 percent of the principal
amount thereof if redeemed during the 12 months commencing on June 1,
1995, June 1, 1996, and June 1, 1997, respectively, in each case plus
accrued and unpaid interest, if any, to the redemption date. The Old
F4L Senior Notes may be redeemed beginning in fiscal year 1996 at
104.48 percent, declining ratably to 100 percent in fiscal 1999.
13
<PAGE> 16
Holdings issued new 13.625% Senior Discount Debentures due
2005 (the "New Discount Debentures") in the aggregate principal
amount (at maturity) of $193,363,570. No interest will accrue on the
New Discount Debentures until June 15, 2000, but the New Discount
Debentures will accrete in value at a rate of 13.625 percent from June
14, 1995, until June 15, 2000, such that the Accreted Value (as
defined) on June 15, 2000 shall be equal to the full principal amount
of the New Discount Debentures at maturity. Beginning on June 15,
2000, cash interest on the New Discount Debentures will accrue at a
rate of 13.625 percent per annum and will be payable semiannually in
arrears on June 15 and December 15, of each year, commencing on
December 15, 2000.
The New Discount Debentures may be redeemed, in whole or in
part at the option of Holdings, at any time after June 15, 2000, at an
initial redemption price of 106.8125 percent. The redemption price
declines ratably to 100 percent in fiscal 2004. The New Discount
Debentures are senior unsecured obligations of Holdings and rank
senior in right of payment to all subordinated indebtedness of
Holdings.
Scheduled maturities of principal of long-term senior debt at
October 8, 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1995 $ 3,499,000
1996 32,074,000
1997 46,761,000
1998 59,418,000
1999 63,051,000
Later years 1,037,348,000
-------------
$1,242,151,000
=============
</TABLE>
Senior Subordinated Debt
Holdings issued $131,500,000 of new 13.625% Senior
Subordinated Pay-In-Kind Debentures due 2007 (the "Seller Debentures")
as partial consideration to the sellers of the RSI common stock (the
"Selling Stockholders") for the sale of such stock. Interest is
payable semiannually on each June 15 and December 15 commencing on
December 15, 1995. Holdings has 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 on each interest
payment date prior to and including June 15, 2000.
The Seller Debentures may be redeemed, in whole or in part at
the option of Holdings, at any time after June 15, 2000, at an initial
redemption price of 106.8125 percent. The redemption price declines
ratably to 100 percent in fiscal 2004. The Seller Debentures are
senior subordinated unsecured obligations of Holdings and are
subordinate in right of payment to all senior indebtedness of
Holdings.
Up to $10 million of the Seller Debentures were subject to an
agreement (the "Put Agreement") between The Yucaipa Companies
("Yucaipa") and the majority Selling Stockholder in which Yucaipa was
required to purchase up to $10 million of the Seller Debentures from
the Selling Stockholder upon a put by such Selling Stockholder. On
June 14, 1995, such Selling Stockholder put $10 million of the Seller
Debentures ("Put Debentures") to Yucaipa. Yucaipa then sold the Put
Debentures to Bankers Trust Company at a price of $6.5 million.
Holdings subsequently recorded a $3.5 million discount to the Seller
Debentures resulting in a beginning balance of $128 million, net of
the discount.
F4L Supermarkets issued $100,000,000 of new 11% Senior
Subordinated Notes due 2005 (the "New RGC Notes") and (i) exchanged
$142,192,000 principal amount of the RGC 9% Senior Subordinated
Notes due 2003 (the "Old RGC 9% Notes") and $281,813,000 principal
amount of the RGC 10.25% Senior Subordinated Notes due 2002 (the "Old
RGC 10.25% Notes," and together with the Old RGC 9% Notes, the "Old
RGC Notes") for an equal amount of the New RGC Notes, (ii) purchased
$7,530,000 principal amount of Old RGC 9% Notes and $15,151,000
principal amount of old RGC 10.25% Notes in conjunction with the
offers, and (iii) subsequently purchased $133,000
14
<PAGE> 17
principal amount of Old RGC 9% Notes and $964,000 principal amount of
Old RGC 10.25% Notes subject to the change of control provision,
leaving an outstanding balance of $145,000 on the Old RGC 9% Notes and
an outstanding balance of $2,072,000 on the Old RGC 10.25% Notes. The
New RGC Notes are senior subordinated unsecured obligations of
Ralphs and are subordinated in right of payment to all senior
indebtedness including Ralphs' obligations under the New Credit
Facility and the Senior Notes. Interest on the New RGC Notes is
payable semiannually in arrears on each June 15 and December 15,
commencing on December 15.
The New RGC Notes may be redeemed at the option of Ralphs, in
whole at any time or in part from time to time, beginning in fiscal
year 2000, at an initial redemption price of 105.5 percent. The
redemption price declines ratably to 100 percent in fiscal 2003. In
addition, on or prior to June 15, 1998, Ralphs may, at its option,
use the net cash proceeds of one or more public equity offerings to
redeem up to an aggregate of 35 percent of the principal amount of the
New RGC Notes originally issued, at a redemption price equal to 111
percent, 109.429 percent, and 107.857 percent of the principal amount
thereof if redeemed during the 12 months commencing on June 15, 1995,
June 15, 1996, and June 15, 1997, respectively, in each case plus
accrued and unpaid interest, if any, to the redemption date.
F4L Supermarkets exchanged $140,184,000 of the Old F4L Senior
Subordinated Notes for an equal amount of new 13.75% Senior
Subordinated Notes due 2005 (the "New F4L Senior Subordinated Notes,"
and together with the Old F4L Senior Subordinated Notes, the "13.75%
Senior Subordinated Notes"), leaving an outstanding balance of
$4,816,000 on the Old F4L Senior Subordinated Notes. The 13.75%
Senior Subordinated Notes are senior subordinated unsecured
obligations of Ralphs and are subordinated in right of payment to all
senior indebtedness including Ralphs' obligations under the New Credit
Facility and the Senior Notes. Interest on the 13.75% Senior
Subordinated Notes is payable semiannually in arrears on each June 15
and December 15 commencing on December 15, 1995. The 13.75% Senior
Subordinated Notes may be redeemed beginning in fiscal year 1996 at a
redemption price of 106.111 percent. The redemption price declines
ratably to 100 percent in fiscal 2000.
Financial Covenants
The New Credit Facility, among other things, requires the
Company to maintain minimum levels of net worth (as defined), to
maintain minimum levels of earnings, to maintain a hedge agreement to
provide interest rate protection, and to comply with certain ratios
related to fixed charges and indebtedness. In addition, the New
Credit Facility and the indentures governing the New F4L Senior Notes,
the New RGC Senior Notes, New F4L Senior Subordinated Notes, the
Seller Debentures and the New Discount Debentures limit, among other
things, additional borrowings, dividends on, and redemption of,
capital stock and the acquisition and the disposition of assets. At
October 8, 1995, the Company was in compliance with the financial
covenants of its debt agreements. At October 8, 1995, dividends and
certain other payments are restricted based on terms in the debt
agreements.
The proceeds of the New Credit Facility and the new debt
issuances (as described above) were used as sources of financing for
the Merger (See Footnote 2 -- "Organization and Acquisition").
7. STOCKHOLDERS' EQUITY
At October 8, 1995, Holdings' stockholders equity consisted of
the following; (i) the authorized capital stock of Holdings consisted
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) 16,796,928 shares of
Common Stock, 16,683,244 shares of Series A Preferred Stock and
3,100,000 shares of Series B Preferred Stock were outstanding and held
by approximately 100 holders of record and 410,954 shares of common
stock were held in treasury, (iii) 2,008,874 shares of Common Stock
were reserved for issuance upon the exercise of outstanding warrants
held by institutional investors, and (iv) 3,000,000 shares of Common
Stock were reserved for issuance upon the exercise of the stock
options (see footnote 4 - "Stock Options"). An additional 8,000,000
shares
15
<PAGE> 18
of Common Stock were reserved for issuance upon the exercise of a
warrant issued to Yucaipa upon closing of the Merger.
There is no public trading market for the capital stock of
Holdings. Holdings does not expect in the foreseeable future to pay
any dividends on its capital stock. Holders of Common Stock of
Holdings are entitled to dividends when and as declared by the Board
of Directors of 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 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 had 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 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 is convertible at the option of the
holder thereof into a number of shares of 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 Holdings equity securities which meets certain criteria, the shares
of Series A Preferred Stock will automatically convert into shares of
Common Stock of Holdings at the same rate as applicable to an optional
conversion.
The Series B Preferred Stock initially had an aggregate
liquidation preference of $31,000,000, or $10 per share, which
accretes as described below. The holders of Series B Preferred Stock
generally are not 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 will be
convertible at the option of the holder thereof into a number of
shares of 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
Holdings equity securities which meets certain criteria, shares of
Series B Preferred Stock will automatically convert into shares of
Non-Voting Common Stock of 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. The rate of accretion of the
liquidation preference may vary in the future based on certain
performance measures to which the company is subject.
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 dividend with respect thereof. Subject to certain exceptions,
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
Holdings, 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 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.
Prior to consummation of the Merger, Holdings effected a
stock split of its outstanding Common Stock. The stock split resulted
in the issuance of 16.58609143 shares of Common Stock for each
previously outstanding share of Common Stock.
8. EARNINGS PER SHARE
Primary earnings per share is computed based on the weighted
average number of shares of common stock and common stock equivalent
shares outstanding, after giving effect to the assumed exercise of
dilutive common stock purchase warrants issued in conjunction with the
placement of the Holdings Senior Discount Notes (the "Warrants").
Holdings had a weighted average number of shares
16
<PAGE> 19
outstanding for the 12 weeks ended September 17, 1994 of 1,381,782
shares inclusive of the dilutive effect of the 112,118 Warrants which
were outstanding for the entire 12-week period. The Warrants were the
only common stock equivalents outstanding for the 12-week period ended
September 17, 1994, and as such, Holdings' primary and fully diluted
earnings per share were the same for this 12-week period. There was
not a dilutive effect for the 36 weeks ended September 17, 1994, or
for the 12 and 36 weeks ended October 8, 1995, as the Company incurred
a loss in each of these periods.
9. STOCK OPTIONS
Holdings established the Food 4 Less Holdings, Inc. 1995 Stock
Option Plan (the "Plan") to grant officers and other key employees of
the Company the opportunity to acquire Holdings common stock and to
create an incentive for such persons to remain in the employ of the
Company. The Plan is administered by a committee (the "Committee")
which consists of selected members of the Holdings' Board of
Directors. The Committee may grant both incentive and non-qualified
stock options and each such option shall be evidenced by a written
Stock Option Agreement between the option holder and Holdings. Each
individual Stock Option Agreement may differ from person to person,
but must comply with the terms and conditions of the Plan.
The cumulative aggregate number of shares of common stock to
be issued under the Plan may not exceed 3,000,000 plus any shares
acquired by Holdings by repurchase of shares of common stock
previously issued to certain officers and other key employees under a
prior stock incentive program of Holdings.
The exercise price of each incentive stock option shall be
determined by the Committee, but, in the case of each incentive stock
option, shall not be less than 100% of the fair market value of the
common stock on the date of grant. The exercise price of each
non-qualified stock option is determined by the Committee at its
discretion.
The Committee determines the date that a particular option
shall become exercisable provided, however, that each option shall
become exercisable in full no later than five years after such option
is granted, and each option shall become exercisable as to at least
20% of the shares of common stock covered thereby on each anniversary
of the date such option is granted. The options are exercisable in
whole or in part and the expiration date which is determined on an
option-by-option basis by the Committee cannot exceed 10 years from
the date of issuance of such option.
Prior to the Merger, RSI had 1,500,000 Equity Appreciation
Rights ("EARs") outstanding that were granted under the 1988 Equity
Appreciation Rights Plan, as amended, to certain officers and key
employees of RGC. In connection with the Merger, a portion of the EAR
payment in the amount of $10 million was canceled in exchange for the
issuance of certain non-qualified stock options (collectively, the
"Reinvestment Options"). In addition to the Reinvestment Options,
Holdings granted stock options to certain management employees of the
Company and to one senior executive officer of Holdings. Compensation
expense was not recorded as the cancellation of the EAR liabilities in
consideration of the Reinvestment Options was deemed by management to
reflect fair and equal value. Each of the options granted in
connection with the Merger will expire on June 14, 2005. All of the
Reinvestment Options were fully exercisable upon the date of issuance.
At October 8, 1995, stock options covering 2,415,000 shares of
Holdings common stock , all of which were granted in connection with
the Merger, were the only options issued under the Plan and none of
these options had been exercised or canceled. Each of such stock
options has an exercise price of $10, which has been adjusted with
respect to each option holder to reflect the cancellation of the EAR
payments.
10. SUBSEQUENT EVENTS
On November 1, 1995, the Company entered into an agreement
with Smith's Food & Drug Centers, Inc. ("Smith's") to sublease (for
approximately 23 years, with renewal options through 2043) Smith's one
million square foot distribution center and creamery facility in
Riverside, California and to acquire certain operating assets and
inventory at that facility. The Company will pay approximately
$15 million for the operating assets (plus the cost of certain
additional assets based on a physical count) and will pay Smith's
cost, less certain discounts, for the inventory to be acquired (which
was valued at approximately $13.3 million based on inventory levels at
November 12, 1995). The Company will pay annual base rent of
approximately $8.8 million under the sublease. The transaction is
scheduled to be
17
<PAGE> 20
completed on or before January 29, 1996. This transaction will delay
and modify the previously planned integration for the existing Ralphs
and Food 4 Less warehouse facilities; however, the Company believes
the transaction will result in increased operating efficiencies, cost
offsets and reduced capital expenditures. The acquisition of the
Riverside facility, which is subject to certain conditions, including
the expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, will likely result in an additional fourth
quarter restructuring charge, the amount of which has not yet been
finalized.
On October 20, 1995, the holder (the "Holder") of the 13 5/8%
Senior Discount Debentures due 2005 of Holdings (the "New Discount
Debentures") sold $193,363,000 principal amount of the New Discount
Debentures at a price equal to 77% of the accreted value thereof. The
sale of the New Discount Debentures was effected by BT Securities
Corporation ("BT Securities"). BT Securities received a fee in the
amount of 2% ($2.1 million) of the aggregate accreted value of the
New Discount Debentures. Holdings reimbursed the Holder for such fee
and other expenses of the sale as contemplated by a registration
rights agreement executed concurrently with the consummation of the
Merger.
18
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On June 14, 1995, Food 4 Less Supermarkets, Inc. ("F4L Supermarkets")
completed its acquisition of Ralphs Supermarkets, Inc. ("RSI") and its wholly
owned subsidiary, Ralphs Grocery Company ("RGC"). The acquisition was
effected through the merger of F4L Supermarkets with and into RSI (the "RSI
Merger"), followed by the merger of RGC with and into RSI (the "RGC Merger"
and, together with the RSI Merger, the "Merger"). The surviving corporation in
the Merger was renamed Ralphs Grocery Company ("Ralphs"). Concurrently with
the consummation of the Merger, Ralphs received a significant equity
investment from its parent, Food 4 Less Holdings, Inc. ("Holdings," and
together with Ralphs, the "Company") and refinanced a substantial portion of
the existing indebtedness of F4L Supermarkets and RGC. See "Liquidity and
Capital Resources."
The Company's results of operations for the 36 weeks ended October 8,
1995 include 19 weeks of the operations of F4L Supermarkets prior to the Merger
and 17 weeks of operations of the combined Company. Management believes that
the Company's results of operations for periods ending after the consummation
of the Merger are not directly comparable to its results of operations for
periods ending prior to such date. This lack of comparability is attributed to
several factors, including the size of the combined Company (since the Merger
is expected to approximately double F4L Supermarkets' annual sales volume), the
addition of 174 conventional stores to the Company's overall store mix and the
material changes in the Company's capital structure.
The Merger is being accounted for as a purchase of RGC by F4L
Supermarkets. As a result, all financial statements for periods subsequent to
June 14, 1995, the date the Merger was consummated, will reflect RGC's assets
and liabilities at their estimated fair market values as of June 14, 1995. The
purchase price in excess of the fair market value of RGC's assets will be
recorded as goodwill and amortized over a 40-year period. The purchase price
allocation reflected in the Company's unaudited balance sheet at October 8,
1995 is based on management's preliminary estimates. The actual purchase
accounting adjustments, including adjustments to loss contingency accruals,
will be determined within one year following the Merger and may vary from the
preliminary estimates at October 8, 1995.
At October 8, 1995, the Company operated 291 conventional supermarkets
and 59 Food 4 Less warehouse stores in Southern California. It also operated
65 additional stores in Northern California and certain areas of the Midwest.
Following the Merger, the Company commenced the process of converting the
Company's Alpha Beta, Boys and Viva stores to the Ralphs format and also began
converting selected Ralphs stores to the Food 4 Less warehouse format. As of
October 8, 1995, 111 former Alpha Beta, Boys or Viva stores had been converted
to the Ralphs format and four former Ralphs stores had been converted to the
Food 4 Less warehouse format, with an additional six former Ralphs stores
currently being converted.
At October 8, 1995, the Company's bakery, creamery and deli
manufacturing operations and the management of major corporate departments had
been consolidated. The full integration of the Company's administrative
departments is expected to be completed by the end of fiscal 1995. The
previously planned integration and consolidation of the Company's warehousing
and distribution facilities into three primary facilities will be delayed and
modified as a result of the agreement with Smith's to lease its Riverside,
California distribution and creamery facility. (See Note 10 -- "Subsequent
Events.")
19
<PAGE> 22
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 and 36 weeks ended October 8, 1995 and
September 17, 1994:
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
-------------- --------------
OCTOBER 8, 1995 SEPTEMBER 17, 1994 OCTOBER 8, 1995 SEPTEMBER 17, 1994
--------------- ------------------- --------------- ------------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $1,207.1 100.0% $598.7 100.0% $2,688.0 100.0% $1,767.6 100.0%
Gross profit 241.1 20.0 103.0 17.2 509.9 19.0 310.1 17.5
Selling, general, administrative
and other, net 225.0 18.6 88.2 14.7 480.0 17.9 255.4 14.4
Amortization of excess costs over
net assets acquired 10.0 0.9 1.8 0.3 16.5 0.6 5.3 0.3
Restructuring charge -- -- -- -- 63.6 2.4 -- --
Operating income (loss) 6.1 0.5 13.1 2.2 (50.2) -1.9 49.4 2.8
Interest expense 62.9 5.2 18.4 3.1 121.7 4.5 53.8 3.0
Loss (gain) on disposal of assets 0.1 -- (0.5) -0.1 (0.3) -- (0.4) --
Provision for earthquake losses -- -- -- -- -- -- 4.5 0.3
Provision for income taxes -- -- 0.9 0.2 0.5 -- 2.9 0.2
Income (loss) before
extraordinary charge (56.9) -4.7 (5.7) -1.0 (172.1) -6.4 (11.4) -0.6
Extraordinary charge -- -- -- -- 35.4 1.3 -- --
Net income (loss) $(56.9) -4.7 $(5.7) -1.0 $(207.5) -7.7 $(11.4) -0.6
</TABLE>
Sales. Sales per week increased $50.7 million, or 101.6%, from $49.9
million in the 12 weeks ended September 17, 1994 to $100.6 million in the 12
weeks ended October 8, 1995 and increased $25.6 million, or 52.1%, from $49.1
million in the 36 weeks ended September 17, 1994 to $74.7 million in the 36
weeks ended October 8, 1995. The increase in sales for the 12 and 36 weeks
ended October 8, 1995, was primarily attributable to the addition of 174
conventional supermarkets acquired through the Merger. The sales increase was
partially offset by a comparable store sales decline of 3.0% and 2.4% for the
12 and 36 weeks ended October 8, 1995, respectively. Excluding stores
scheduled for divestiture or closing, the comparable store sales decreased 1.9%
and 1.4% for the 12 and 36 weeks ended October 8,1995, respectively.
Management believes that the decline in comparable store sales is partially
attributable to additional competitive store openings and remodels in Southern
California, as well as the Company's own new store openings and conversions.
Notwithstanding these factors, comparable store sales in fiscal 1995 have
improved relative to recent years.
Gross Profit. Gross profit increased as a percentage of sales from
17.2% in the 12 weeks ended September 17, 1994 to 20.0% in the 12 weeks ended
October 8, 1995 and increased from 17.5% in the 36 weeks ended September 17,
1994 to 19.0% in the 36 weeks ended October 8, 1995. The increase in gross
profit margin was primarily attributable to the addition of 174 conventional
supermarkets which diluted the effect of the Company's warehouse stores (which
have lower gross margins than the Company's conventional supermarkets) on its
overall gross margin for the period. Gross profit during the 12 and 36 weeks
ended October 8, 1995 was also impacted by certain one-time costs associated
with the integration of the Company's operations. See "Operating Income
(Loss)."
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $88.2 million and $225.0
million for the 12 weeks and $255.4 million and $480.0 million for the 36 weeks
ended September 17, 1994 and October 8, 1995, respectively. SG&A increased as
a percentage of sales from 14.7% to 18.6% and from 14.4% to 17.9% for the same
periods. The increase in SG&A as a percentage of sales was due primarily to
the addition of 174 conventional supermarkets acquired through the Merger. The
additional conventional supermarkets diluted the effect of the Company's
warehouse stores (which have lower SG&A than the Company's conventional
supermarkets) on its SG&A margin for the period.
20
<PAGE> 23
SG&A during the 12 and 36 weeks ended October 8, 1995 was also impacted by
certain one-time costs associated with the integration of the Company's
operations. See "Operating Income (Loss)."
Restructuring Charge. During the quarter ended July 16, 1995, the
Company recorded a $63.6 million one-time charge associated with the closing
of 39 stores and one warehouse facility. Pursuant to the settlement agreement
with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs
stores) must be divested by December 31, 1995. Although not required by such
settlement agreement, an additional 15 under-performing stores also are
scheduled to be closed by June 30, 1996. The restructuring charge consists of
write-downs of property, plant and equipment ($40.6 million) less estimated
proceeds ($16.0 million); reserve for closed stores and warehouse facility
($16.1 million); write-off of the Alpha Beta trademark ($8.3 million);
write-off of other assets ($8.0 million); lease termination expenses ($4.0
million); and miscellaneous expenses ($2.6 million). The expected cash
payments to be made in connection with the restructuring charge total $7.2
million. It is expected that cash payments will be made by June 30, 1996. The
increase in the restructuring charge over previous estimates was due primarily
to the addition of the $16.1 million reserve for the closure of the warehouse
and stores. The remaining increase resulted from the identification of
additional assets to be written-off. During the 36 weeks ended October 8,
1995, the Company utilized $37.5 million of the reserve for restructuring
costs ($46.6 million of costs partially offset by $9.1 million of proceeds from
the divestiture of stores). The charges consisted of write-downs of property,
plant and equipment ($23.1 million); write-off of the Alpha Beta trademark
($8.3 million); and write-off of other assets ($6.1 million). No additional
expenses are expected to be incurred in future periods in connection with these
closings. The Company 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 addition of the Riverside facility will likely
result in an additional fourth quarter restructuring charge, the amount of
which has not yet been finalized. (See Note 10 -- "Subsequent Events.")
Operating Income (Loss). In addition to the factors discussed above,
operating income for the 12 and 36 weeks ended October 8, 1995 was impacted
by approximately $28 million and $58 million, respectively, for costs
associated with the conversion of stores and integration of the Company's
operations. Management anticipates these costs to continue during fiscal 1995
until the integration plan is completed. During the 12 and 36 week periods,
these costs related primarily to (i) markdowns on clearance inventory at the
Company's Alpha Beta, Boy and Viva stores being converted to the Ralphs format,
(ii) the stepped-up advertising campaign promoting the store conversion program
and (iii) incremental labor costs associated with the training of Company
personnel following store conversions.
Provision for Earthquake Losses. On January 17, 1994, Southern
California was experienced a major earthquake which resulted in the temporary
closure 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). The pre-tax financial impact, net of
insurance recoveries, was $4.5 million. The Company reserved for this charge
during the 24 weeks ended June 25, 1994.
Interest Expense. Interest expense (including amortization of
deferred financing costs) was $18.4 million and $62.9 million for the 12 weeks
and $53.8 million and $121.7 million for the 36 weeks ended September 17, 1994
and October 8, 1995, respectively. The increase in interest expense was
primarily due to the increased indebtedness incurred in conjunction with the
Merger (see "Liquidity and Capital Resources").
Loss Before Extraordinary Charge. Primarily as a result of the
factors discussed above, the Company's loss before extraordinary charge
increased from $5.7 million in the 12 weeks ended September 17, 1994 to $56.9
million in the 12 weeks ended October 8, 1995, and from $11.4 million in the 36
weeks ended September 17, 1994 to $172.1 million in the 36 weeks ended October
8, 1995.
Extraordinary Charge. The extraordinary charge of $35.4 million
recorded during the quarter ended July 16, 1995 relates to the refinancing of
the F4L Supermarkets old credit facility, the 10.45% Senior Notes due 2000, and
the 13.75% Senior Subordinated Notes due 2001 and the Food 4 Less Holdings,
Inc. 15.25% Senior Discount Notes due 2004 in connection with the Merger and
the write-off of related debt issuance costs.
21
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The Company utilized total new financing proceeds of approximately
$525 million to consummate the Merger, which included the issuance of preferred
stock by Holdings to a group of investors led by Apollo Advisors, L.P. for cash
proceeds of approximately $140 million (the "New Equity Investment"). In
addition, Ralphs entered into a new credit facility (the "New Credit Facility")
pursuant to which, upon the closing of the Merger, it incurred $600 million
under the term loan portion of the New Credit Facility (the "New Term Loans")
and approximately $91.6 million under the standby letter of credit facility
(the "Letter of Credit Facility"). Holdings is a guarantor under the New
Credit Facility. Ralphs also issued $350 million aggregate principal amount of
new 10.45% Senior Notes due 2004 (the "New F4L Senior Notes") and $100 million
aggregate principal amount of new 11% Senior Subordinated Notes due 2005 (the
"New RGC Notes") pursuant to public offerings (the "Public Offerings").
The proceeds from the New Credit Facility, the Public Offerings and
the New Equity Investment and the issuance by Holdings of $59.0 million initial
accreted value of 13-5/8% Senior Discount Debentures due 2005 (the "New
Discount Debentures") for cash, $41.0 million in initial accreted value of
additional New Discount Debentures as Merger consideration and $131.5 million
aggregate principal amount of 13-5/8% Senior Subordinated Pay-in-Kind
Debentures due 2007 (the "Seller Debentures"), provided the sources of
financing required to consummate the Merger and to repay outstanding bank debt
of approximately $176.5 million at F4L Supermarkets and $228.9 million at RGC,
to repay existing mortgage debt of $174.0 million (excluding prepayment fees)
at RGC and to pay $84.4 million to the holders of the Senior Discount Notes due
2004 of Holdings (the "Discount Notes") (excluding related fees). Proceeds
from the New Credit Facility and the Public Offerings were used to pay the cash
portions of F4L Supermarkets' exchange offers and consent solicitations with
respect to (i) the 10.25% Senior Subordinated Notes due 2002 of RGC (the "Old
RGC 10.25% Notes") and the 9% Senior Subordinated Notes due 2003 of RGC (the
"Old RGC 9% Notes," and together with the old RGC 10.25% Notes, the "Old RGC
Notes") (collectively, the "RGC Exchange Offers"), and (ii) the 10.45% Senior
Notes due 2000 of F4L Supermarkets (the "Old F4L Senior Notes") and the 13.75%
Senior Subordinated Notes due 2001 of F4L Supermarkets (the "Old F4L Senior
Subordinated Notes") (collectively, the "F4L Exchange Offers," and together
with the RGC Exchange Offers, the "Exchange Offers"), as well as the Change of
Control Offer (as defined below) and accrued interest on all exchanged debt
securities in the amount of $27.8 million, to pay $17.8 million of the holders
of the RGC Equity Appreciation Rights and to loan $5.0 million to an affiliate
for the benefit of such holders, to pay approximately $137.1 million of fees
and expenses of the Merger and the related financing and to pay $3.4 million to
purchase shares of common stock of Holdings from certain dissenting
shareholders. Ralphs assumed certain existing indebtedness of F4L
Supermarkets and RGC in connection with the Exchange Offers pursuant to which
(i) holders of the Old RGC Notes exchanged approximately $424 million aggregate
principal amount of Old RGC Notes for an equal principal amount of New RGC
Notes, (ii) holders of the Old F4L Senior Notes exchanged approximately $170.3
million aggregate principal amount of Old F4L Senior Notes for an equal
principal amount of new F4L Senior Notes, and (iii) holders of the Old F4L
Senior Subordinated Notes exchanged approximately $140.2 million aggregate
principal amount of Old F4L Senior Subordinated Notes for an equal principal
amount of new 13.75% Senior Subordinated Notes due 2005. In addition, pursuant
to the terms of the indentures governing the Old RGC Notes, the consummation of
the Merger required Ralphs to make an offer to purchase all of the outstanding
Old RGC Notes that were not exchanged in the RGC Offers (the "Change of Control
Offer"). The Change of Control Offer resulted in the purchase of an additional
$1.1 million of outstanding Old RGC Notes.
The New Credit Agreement provides for a revolving credit facility of
$325 million (the "Revolving Credit Facility") less amounts outstanding under a
$150 million standby Letter of Credit Facility. At October 8, 1995, there were
no borrowings under the Revolving Credit Facility and $92.7 million of standby
letters of credit had been issued under the Letter of Credit Facility. Under
the terms of the New Credit Agreement, the Company is required to repay $1.6
million of the New Term Loans in fiscal 1995. The level of borrowings under
the Company's Revolving Credit Facility is dependent upon cash flows from
operations, the timing of disbursements, seasonal requirements and capital
expenditure activity. At November 20, 1995, the Company had $152.7 million
available for borrowing under the Revolving Credit Facility.
Cash flow from operations, amounts available under the Revolving
Credit Facility and leases are the Company's principal sources of liquidity.
The Company believes that these sources will be adequate to meet its
anticipated capital expenditures, working capital needs and debt service
requirements for the remainder of fiscal 1995. However, there can be no
assurance that the Company will continue to generate cash flow from
22
<PAGE> 25
operations at historical levels or that it will be able to make future
borrowings under the Revolving Credit Facility.
On October 11, 1995, the Company entered into an interest rate collar
which effectively set interest rate limits on $300 million of the Company's
bank term debt. This interest rate collar, which was effective as of October
19, 1995, limits the interest rate on $300 million to a range of 4.5% to 8.0%
LIBOR for two years. This agreement satisfies interest rate protection
requirements under the New Credit Facility.
During the 36 week period ending October 8, 1995, the Company provided
approximately $85.8 million of cash for its operating activities compared to
cash provided by operating activities of $63.0 million for the 36 weeks ending
September 17, 1994. The increase in cash from operating activities is due
primarily to changes in operating assets and liabilities for the 36 weeks
ending October 8, 1995, partially offset by a decrease in operating income due
primarily to the impact of certain costs associated with the integration of
the Company's operations subsequent to the Merger. The Company's principal
use of cash in its operating activities is inventory purchases. The Company's
high inventory turnover allows it to finance a substantial portion of its
inventory through trade payables, thereby reducing its short-term borrowing
needs. At October 8, 1995, this resulted in a working capital deficit of
$145.9 million.
Cash used for investing activities was $522.2 million for the 36 weeks
ended October 8, 1995. Investing activities consisted primarily of $456.3
million of acquisition costs associated with the Merger and capital
expenditures of $68.5 million, partially offset by $4.1 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds
from sale/leaseback transactions, were financed primarily from cash provided by
operating and financing activities.
The capital expenditures discussed above were made to build 11 new
stores (8 of which had been completed at October 8, 1995), to remodel 7 stores
(all of which had been completed at October 8, 1995) and convert 111
conventional format stores to the Ralphs banner in conjunction with the Merger
(all of which had been completed at October 8, 1995) and convert ten Ralphs
stores to the Food 4 Less warehouse format (4 of which had been completed at
October 8, 1995). The Company also acquired three stores in Northern
California during the 12 weeks ended October 8, 1995. The Company currently
anticipates that its aggregate capital expenditures for fiscal 1995 will be
approximately $141.5 million. The remaining portion of the fiscal 1995 capital
expenditure budget (approximately $70 million) will be used to (i) complete
construction of the 3 new stores in process at October 8, 1995 and begin
construction on an additional 11 stores scheduled to open during the first
half of fiscal 1996, (ii) complete the conversion of 15 supermarkets from the
Ralphs format to Food 4 Less warehouse stores, and (iii) complete the
transition of the La Habra based data center to the data center located in the
main office in Compton. Consistent with past practices, the Company intends to
finance these capital expenditures primarily with cash provided by operations
and through leasing transactions. At November 15, 1995, the Company had
approximately $13.5 million of unused equipment leasing facilities. No
assurance can be given that sources of financing for capital expenditures will
be available or sufficient. However, the capital expenditure program has
substantial flexibility and is subject to revision based on various factors,
including changes in business conditions, and cash flow requirements.
Management believes that if the Company were to substantially reduce or
postpone these programs, there would be no substantial impact on short-term
operating profitability. However, management also believes that the
construction of new stores is an important component of its operating strategy.
In the long term, if these programs were substantially reduced, management
believes its operating businesses, and ultimately its cash flow, would be
adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing markets
or to enter other markets. The Company has grown through acquisition in the
past and from time to time engages in discussions with potential sellers of
individual stores, groups of stores or other retail supermarket chains.
Currently the Company is focusing on the integration of its operations
following the Merger. For a discussion of the costs associated with the
sublease of the Riverside warehouse see Note 10 - "Subsequent Events."
Cash provided by financing activities was $481.6 million for the 36
weeks ended October 8, 1995. Financing activities consisted primarily of the
following; (i) proceeds from issuance of new debt in the amount of $1,014.2
million including proceeds of $600 million under the New Credit Agreement,
proceeds of $350 million from the issuance of New F4L Senior Notes and proceeds
of $100 million from the issuance of New
23
<PAGE> 26
RGC Notes net of issuance costs of $93.8 million and (ii) proceeds from cash
capital contributions by Holdings of $12.1 million. These sources were
partially offset by principal payments on long-term debt of $628.7 million
including: $125.7 million under the old credit agreement, $228.9 million under
the old RGC term loan; and $174.0 million in real estate loans.
Holdings has $100 million initial accreted value of the New Discount
Debentures and $131.5 million principal amount of the Seller Debentures
outstanding. Holdings is a holding company which has no assets other than the
capital stock of Ralphs. Holdings will be required to commence 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
approximately $61 million per annum. Subject to the limitations contained in
its debt instruments, Ralphs intends to make dividend payments to Holdings in
amounts which are sufficient to permit Holdings to service its cash interest
requirements. Ralphs may pay other dividends to Holdings in connection with
certain employee stock repurchases and for routine administrative expenses. In
connection with the resale of the New Discount Debentures by the holder thereof
(the "Holder" ) on October 20, 1995, a fee in the amount of 2% ($2.1 million)
of the aggregate accreted value of the Discount Debentures was paid to BT
Securities Corporation for effecting the sale. Holdings reimbursed the Holder
for such fee and other expenses of the sale as contemplated by a registration
rights agreement executed concurrently with the consummation of the Merger.
See "Note 10" of the Notes to Consolidated Financial Statements.
The Company is highly leveraged. At October 8, 1995, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $2.2 billion and $73.2 million, respectively. Based upon current
levels of operations and anticipated cost savings and future growth, the
Company believes that its cash flow from operations, together with available
borrowings under the Revolving Credit Facility and its other sources of
liquidity (including lease financing), 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 cost savings and growth can be achieved.
EFFECTS OF INFLATION AND COMPETITION
The Company's primary costs, inventory and labor, are affected by a
number of factors that are beyond its control, including availability and price
of merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain margins by adjusting its retail prices, but
competitive conditions may from time to time render it unable to do so while
maintaining its market share.
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.
24
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Distribution Center Transfer Agreement, dated as of
November 1, 1995, by and between Smith's Food & Drug
Centers, Inc., a Delaware corporation, and Ralphs
Grocery Company, relating to the Riverside,
California property (incorporated herein by reference
to Exhibit 10.1 to Ralphs Grocery Company's Quarterly
Report on Form 10-Q for the quarter ended October 8,
1995.)
27. Financial Data Schedule
(b) Reports on Form 8-K
None
25
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Los Angeles, State
of California.
Dated: November 22, 1995 FOOD 4 LESS HOLDINGS, INC.
/s/ Greg Mays
--------------------------------
Greg Mays
Executive Vice President
Finance & Administration
Chief Financial Officer
26
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<PERIOD-START> JAN-30-1995
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