<PAGE> 1
This filing is made pursuant
PROSPECTUS SUPPLEMENT to Rule 424(b)(3) under the
(TO PROSPECTUS DATED JUNE 2, 1995) Securities Act of 1933 in
connection with Registration
No. 33-59851
$193,363,570
LOGO FOOD 4 LESS HOLDINGS, INC. LOGO
13 5/8% SENIOR DISCOUNT DEBENTURES DUE 2005
------------------------------
This document is Supplement No. 1 (the "First Supplement") to the
Prospectus (the "Prospectus") of Food 4 Less Holdings, Inc. ("New Holdings")
dated June 2, 1995 and contained in the Registration Statement on Form S-1,
Registration No. 33-59851, concerning New Holdings' 13 5/8% Senior Discount
Debentures due 2005 (the "New Discount Debentures"). This First Supplement
contains information that updates and supplements the information contained in
the Prospectus. Prior to use of the Prospectus, you should determine if you have
the most recent Supplement to the Prospectus by contacting New Holdings. Such
inquiries or other questions concerning the matters described herein should be
directed to Jan Charles Gray, Esq., Senior Vice-President, General Counsel and
Secretary, 1100 West Artesia Boulevard, Compton, California 90220, (310)
884-4000.
The New Discount Debentures may be offered hereby from time to time by the
holder thereof named in the Prospectus (the "Selling Debentureholder"). The New
Discount Debentures were issued on June 14, 1995, the Closing Date of the Merger
(each as defined), in an aggregate principal amount (at maturity) of
$193,363,570 and will mature on July 15, 2005. 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 5/8% (representing the amortization of the
original issue discount) from the date of original issuance until June 15, 2000,
such that the Accreted Value (as defined) shall be equal to the full principal
amount (at maturity) of the New Discount Debentures on June 15, 2000. Beginning
on June 15, 2000, cash interest on the New Discount Debentures will accrue at a
rate of 13 5/8% per annum and will be payable semiannually in arrears on June 15
and December 15 of each year, commencing December 15, 2000.
------------------------------
SEE "RISK FACTORS" AT PAGE 17 OF THE PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW DISCOUNT
DEBENTURES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
This Prospectus relates to the public offering of the New Discount
Debentures by the Selling Debentureholder. See "Selling Debentureholder" in the
Prospectus. The Selling Debentureholder directly, through agents designated from
time to time, or through dealers or underwriters also to be designated, may sell
the New Discount Debentures from time to time on terms to be determined at the
time of sale. See "Plan of Distribution" in this First Supplement and in the
accompanying Prospectus.
The Selling Debentureholder and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholder in the distribution of the New
Discount Debentures may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the New Discount Debentures
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The Date of This First Supplement to the Prospectus is October 18, 1995
<PAGE> 2
(cover page continued)
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS" WITHIN
THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS, SAVINGS
AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH
SUCH CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL
STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY
OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE
FOREGOING, (3) ANY CORPORATION, PARTNERSHIP OR ORGANIZATION (OTHER THAN A
CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED FOR THE SOLE PURPOSE OF
PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO PURCHASES AT LEAST
$1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY, OR (4) ANY NATURAL
PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A
NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS AND
PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE SECURITIES
OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN
ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR OTHERWISE
TRANSFER SUCH SECURITY TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES
WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE
TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED
TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
SC-ii
<PAGE> 3
RECENT DEVELOPMENTS
FINANCIAL INFORMATION
Included in this First Supplement is a copy of New Holding's Quarterly
Report on Form 10-Q for the quarter ended July 16, 1995 (the "Second Quarter
10-Q"). The Second Quarter 10-Q reflects the consummation of the Merger and the
related transactions on June 14, 1995 and the results of operations of the
combined companies from such date until July 16, 1995.
New Holdings' third quarter ended on October 8, 1995; however, no financial
information for such period is available as of the date of this First
Supplement. Management anticipates that New Holdings' operating results for such
period will be consistent with recent trends and management's expectations. The
incurrence of additional, non-recurring, Merger-related expenses is expected to
contribute to the net loss for the period; however, management believes that
such net loss will not be as large as the net loss recorded in the quarter ended
July 16, 1995. Management does not anticipate that any restructuring charge or
extraordinary charge will be recorded for the third quarter.
OTHER DEVELOPMENTS
Since the end of the Second Quarter two executive officers of New Holdings
and Ralphs Grocery Company, Alan J. Reed (Senior Vice President and Chief
Financial Officer) and Terry Peets (Executive Vice President), have resigned
their positions. Greg Mays has been appointed Executive Vice President and Chief
Financial Officer of New Holdings and Ralphs Grocery Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- FOOD 4 LESS AND HOLDINGS
BT Securities Corporation ("BT Securities") obtained a limited partnership
interest (the "Interest") in RGC Partners, L.P. (the "Selling Debentureholder")
concurrently with the consummation of the Merger by contributing $2.5 million
initial Accreted Value of New Discount Debentures to the Selling
Debentureholder. BT Securities received such New Discount Debentures as partial
compensation for providing services to Food 4 Less in connection with the
Financing. In connection with the Merger, The Yucaipa Companies had agreed to
reduce its fee from Food 4 Less by an equivalent amount in order to permit Food
4 Less to pay such amount to BT Securities as compensation. See "Certain
Relationships and Related Transactions -- Food 4 Less and Holdings." Since the
date of the Merger, BT Securities has agreed to assign the Interest in the
Selling Debentureholder to The Yucaipa Companies.
PLAN OF DISTRIBUTION
On October 13, 1995, the Selling Debentureholder agreed to sell
$193,363,000 principal amount (at maturity) of New Discount Debentures at a
price equal to 77% of the Accreted Value thereof on October 20, 1995, the
closing date of the sale ("the Closing Date"). On the Closing Date, the
aggregate Accreted Value of the New Discount Debentures will be $104,719,600 and
the Accreted Value of each $1,000 principal amount (at maturity) New Discount
Debenture will be $541.57. The sale of the New Discount Debentures was effected
by BT Securities. BT Securities will receive a fee in the amount of 2% of the
aggregate Accreted Value of the New Discount Debentures on the Closing Date. As
contemplated by the registration rights agreement executed concurrently with the
consummation of the Merger, Holdings will reimburse the Selling Debentureholder
for such fee and provide customary indemnification to BT Securities for certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Selling Debentureholder" in the Prospectus. BT Securities and certain of
its affiliates are limited partners in the Selling Debentureholder with an
aggregate interest of less than 10%. See "Certain Relationships and Related
Transactions -- Food 4 Less and Holdings" in the Prospectus. Bankers Trust
Company, an affiliate of BT Securities, is the administrative agent and a lender
under the New Credit Facility. See "Description of New Credit Facility" in the
Prospectus. BT Securities and its affiliates own capital stock of Holdings. See
"Principal Stockholders" in the Prospectus. BT Securities and its affiliates
have from time to time provided investment banking and other financial services
to Holdings and its affiliates and may continue to do so in the future. In
consideration for such services, BT Securities and its affiliates have received
customary fees.
S-2
<PAGE> 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
JULY 16, 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/ / /.
At August 31, 1995, there were 16,796,928 shares of Common Stock
outstanding. There is no public market for the Common Stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
S-3
<PAGE> 5
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 July 16, 1995 and January 29, 1995......... 2
Consolidated statements of operations for the 12 weeks ended
July 16, 1995 and June 25, 1994............................................ 4
Consolidated statements of operations for the 24 weeks ended
July 16, 1995 and June 25, 1994............................................ 5
Consolidated statements of cash flows for the 24 weeks ended
July 16, 1995 and June 25, 1994............................................ 6
Consolidated statements of stockholders' equity as of July 16, 1995 and
January 29, 1995........................................................... 8
Notes to consolidated financial statements................................... 9
Management's Discussion and Analysis of Financial Condition and Results of
Item 2. Operations................................................................... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.......................... 22
Item 6. Exhibits and Reports on Form 8-K............................................. 23
Signatures................................................................... 24
Index to Exhibits
</TABLE>
S-4
<PAGE> 6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 16, JANUARY 29,
1995 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 51,379 $ 19,560
Trade receivables, net............................................ 59,273 23,377
Notes and other receivables....................................... 5,778 3,985
Inventories....................................................... 477,209 224,686
Patronage receivables from suppliers.............................. 2,405 5,173
Prepaid expenses and other........................................ 29,254 13,051
---------- ----------
Total current assets........................................... 625,298 289,832
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......................................................... 215,217 24,172
Leasehold improvements............................................ 221,534 110,020
Store equipment and fixtures...................................... 409,033 190,016
Construction in progress.......................................... 22,834 8,042
Leased property under capital leases.............................. 167,764 82,526
Leasehold interests............................................... 118,948 96,556
---------- ----------
1,341,202 534,820
Less: Accumulated depreciation and amortization................... 175,625 154,382
---------- ----------
Net property and equipment..................................... 1,165,577 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of $2,010
and $20,496 at July 16, 1995 and January 29, 1995,
respectively................................................... 86,263 25,469
Goodwill, less accumulated amortization of $45,072 and $38,560 at
July 16, 1995 and January 29, 1995, respectively............... 1,114,463 263,112
Other, net........................................................ 37,074 29,440
---------- ----------
$3,041,614 $1,000,695
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-5
<PAGE> 7
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JULY 16, JANUARY 29,
1995 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................................. $ 311,226 $ 190,455
Accrued payroll and related liabilities........................... 92,880 42,007
Accrued interest.................................................. 17,644 10,730
Other accrued liabilities......................................... 149,010 65,279
Income taxes payable.............................................. 1,491 293
Current portion of self-insurance liabilities..................... 57,169 28,616
Current portion of long-term debt................................. 13,438 22,263
Current portion of obligations under capital leases............... 18,499 4,965
---------- ----------
Total current liabilities...................................... 661,357 364,608
LONG-TERM SENIOR DEBT............................................... 1,160,580 320,901
OBLIGATIONS UNDER CAPITAL LEASES.................................... 122,613 40,675
SENIOR SUBORDINATED DEBT............................................ 801,929 145,000
SENIOR DISCOUNT DEBENTURES.......................................... 101,208 --
SENIOR DISCOUNT NOTES............................................... -- 65,136
DEFERRED INCOME TAXES............................................... 19,567 17,534
SELF-INSURANCE LIABILITIES.......................................... 89,881 41,872
LEASE VALUATION RESERVE............................................. 25,493 --
OTHER NON CURRENT LIABILITIES....................................... 75,285 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 July 16, 1995
(aggregate liquidation value of $167.9 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 July 16, 1995
(aggregate liquidation value of $31.2 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 July 16, 1995 and January 29, 1995,
respectively; 17,207,882 shares and 1,386,169 shares issued at
July 16, 1995 and January 29, 1995, respectively............... 17 14
Non-Voting Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at July 16, 1995 or January 29,
1995........................................................... -- --
Additional paid-in capital........................................ 57,745 105,580
Notes receivable from stockholders................................ (675) (702)
Retained deficit.................................................. (262,774) (112,225)
---------- ----------
(12,855) (7,333)
Treasury stock: 410,954 shares of common stock at July 16, 1995... (3,444) --
---------- ----------
Total stockholders' equity........................................ (16,299) (7,333)
---------- ----------
$3,041,614 $1,000,695
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
S-6
<PAGE> 8
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED
JULY 16, JUNE 25,
1995 1994
----------- ----------
<S> <C> <C>
SALES.............................................................. $ 857,344 $ 581,076
COST OF SALES (including purchases from related parties for 12
weeks ended July 16, 1995 and June 25, 1994 of $37,664 and
$29,646, respectively)........................................... 695,727 482,671
----------- ----------
GROSS PROFIT....................................................... 161,617 98,405
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET.................... 163,654 76,778
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED.............. 4,683 1,787
RESTRUCTURING CHARGE............................................... 63,587 --
----------- ----------
OPERATING INCOME (LOSS)............................................ (70,307) 19,840
INTEREST EXPENSE:
Interest expense, excluding amortization of deferred financing
costs......................................................... 37,915 16,235
Amortization of deferred financing costs......................... 1,600 1,262
----------- ----------
39,515 17,497
LOSS (GAIN) ON DISPOSAL OF ASSETS.................................. (19) 118
----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE AND PROVISION FOR INCOME
TAXES............................................................ (109,803) 2,225
PROVISION FOR INCOME TAXES......................................... 200 1,600
----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE.......................... (110,003) 625
EXTRAORDINARY CHARGE............................................... 35,358 --
----------- ----------
NET INCOME (LOSS).................................................. $ (145,361) $ 625
=========== ==========
PRIMARY EARNINGS PER COMMON SHARE:
Earnings (Loss) before extraordinary charges..................... $ (5.33) $ 0.42
Extraordinary charges............................................ (1.72) --
----------- ----------
Net earnings (loss).............................................. $ (7.05) $ 0.42
=========== ==========
Average Number of Common Shares Outstanding...................... 20,631,431 1,503,406
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-7
<PAGE> 9
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JULY 16, JUNE 25,
1995 1994
----------- ----------
<S> <C> <C>
SALES.............................................................. $1,480,942 $1,168,947
COST OF SALES (including purchases from related parties for the 24
weeks ended July 16, 1995 and June 25, 1994 of $79,434 and
$69,869, respectively)........................................... 1,212,157 961,853
---------- ----------
GROSS PROFIT....................................................... 268,785 207,094
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET.................... 255,006 167,226
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED.............. 6,512 3,559
RESTRUCTURING CHARGE............................................... 63,587 --
---------- ----------
OPERATING INCOME (LOSS)............................................ (56,320) 36,309
INTEREST EXPENSE:
Interest expense, excluding amortization of deferred financing
costs......................................................... 55,813 32,910
Amortization of deferred financing costs......................... 2,994 2,524
---------- ----------
58,807 35,434
LOSS (GAIN) ON DISPOSAL OF ASSETS.................................. (436) 96
PROVISION FOR EARTHQUAKE LOSSES.................................... -- 4,504
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE AND PROVISION FOR INCOME
TAXES............................................................ (114,691) (3,725)
PROVISION FOR INCOME TAXES......................................... 500 2,000
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE................................... (115,191) (5,725)
EXTRAORDINARY CHARGE............................................... 35,358 --
---------- ----------
NET LOSS........................................................... $ (150,549) $ (5,725)
========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges................................ $ (5.28) $ (4.14)
Extraordinary charges............................................ (1.62) --
---------- ---------
Net loss......................................................... $ (6.90) $ (4.14)
========== ==========
Average Number of Common Shares Outstanding...................... 21,811,279 1,382,224
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-8
<PAGE> 10
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JULY 16, JUNE 25,
1995 1994
----------- -----------
<S> <C> <C>
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Cash received from customers.................................... $ 1,480,754 $ 1,168,947
Cash paid to suppliers and employees............................ (1,459,333) (1,083,621)
Interest paid................................................... (42,120) (27,584)
Income taxes received (paid).................................... 100 (1,899)
Interest received............................................... 228 417
Other, net...................................................... (12,276) (2,753)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.................. (32,647) 53,507
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.................... 5,471 92
Payment for purchase of property and equipment.................. (30,427) (33,656)
Payment of acquisition costs, net of cash acquired.............. (440,620) (11,050)
Other, net...................................................... (639) 752
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES............................. (466,215) (43,862)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt.................... 1,021,084 --
Proceeds from the issuance of preferred stock................... 135,000 --
Payments of long-term debt...................................... (621,392) (3,829)
Payments of capital lease obligation............................ (3,294) (2,128)
Net change in Revolving Loan.................................... 2,700 --
Purchase of treasury stock, net................................. (3,444) (466)
Other, net...................................................... 27 (18)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.................. 530,681 (6,441)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 31,819 3,204
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................. 19,560 29,792
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 51,379 $ 32,996
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-9
<PAGE> 11
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JULY 16, JUNE 25,
1995 1994
---------- ---------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Net loss............................................................ $ (150,549) $(5,725)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Restructuring charge............................................. 63,587 --
Extraordinary charge............................................. 23,128 --
Depreciation and amortization.................................... 42,233 29,234
Accretion of discount notes...................................... 6,779 4,046
Gain on sale of assets........................................... (436) (22)
Change in assets and liabilities:
Accounts and notes receivable.................................. 4,765 2,491
Inventories.................................................... 23,590 (1,019)
Prepaid expenses and other..................................... 5,520 (58)
Accounts payable and accrued liabilities....................... (51,036) 31,550
Self-insurance liabilities..................................... (828) (7,091)
Income taxes payable........................................... 600 101
---------- -------
Total adjustments........................................... 117,902 59,232
---------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES...................... $ (32,647) $53,507
========== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Acquisition of stores:
Fair value of assets acquired, less cash acquired of $34,380 in
1995............................................................ $2,053,528 $11,187
Net cash paid in acquisition..................................... (440,620) (6,570)
Notes issued to seller........................................... (160,000) --
Capital contribution from stockholders........................... (20,000) --
---------- -------
Liabilities assumed.............................................. $1,432,908 $ 4,617
========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-10
<PAGE> 12
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK NON-VOTING
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 8 -- --
ISSUANCE OF PREFERRED STOCK (UNAUDITED)..... 16,683,244 166,832 3,100,000 31,000 -- -- -- --
CANCELLATION OF COMMON STOCK (UNAUDITED).... -- -- -- -- (5,783,244) (5) -- --
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 JULY 16, 1995 (UNAUDITED)....... 16,683,244 $161,832 3,100,000 $31,000 17,207,882 $17 -- $ --
========== ======== ========= ======= ========== === == =====
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
------------------
NUMBER ADDITIONAL TOTAL
OF STOCKHOLDERS' PAID-IN RETAINED STOCKHOLDER'S
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).............................. -- -- -- (8) -- --
ISSUANCE OF PREFERRED STOCK (UNAUDITED)............. -- -- -- -- -- 197,832
CANCELLATION OF COMMON STOCK (UNAUDITED)............ -- -- -- (57,827) -- (57,832)
PREFERRED STOCK ISSUANCE COSTS (UNAUDITED).......... -- -- -- -- -- (5,000)
PURCHASE OF TREASURY STOCK (UNAUDITED).............. (410,954) (3,444) -- -- -- (3,444)
PAYMENT ON STOCKHOLDER NOTES (UNAUDITED)............ -- -- 27 -- -- 27
ISSUANCE OF STOCK OPTIONS (UNAUDITED)............... -- -- -- 10,000 -- 10,000
NET LOSS (UNAUDITED).............................. -- -- -- -- (150,549) (150,549)
-------- ------- ----- -------- --------- --------
BALANCES AT JULY 16, 1995 (UNAUDITED)............... (410,954) $(3,444) $(675) $ 57,745 $(262,744) $(16,299)
======== ======= ===== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
S-11
<PAGE> 13
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 July 16, 1995 and the
consolidated statements of operations and cash flows for the interim periods
ended July 16, 1995 and June 25, 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 441 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, 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
("Ralphs"). 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 each
period.
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JULY 16, 1995 JUNE 25, 1994
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Sales................................................................ $2,506,633 $2,409,892
Loss before extraordinary charge..................................... (122,389) (110,940)
Net loss............................................................. (159,547) (153,713)
Loss per common share:
Loss before extraordinary charge................................... $ (7.29) $ (6.63)
Net loss........................................................... $ (9.50) $ (9.19)
</TABLE>
S-12
<PAGE> 14
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 each period, 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 $18,525,000 and
$16,531,000 at July 16, 1995 and January 29, 1995, respectively, and gross
profit and operating income would have been greater by $959,000 and $1,994,000
for the 12 and 24 weeks ended July 16, 1995, respectively, and less by
$2,256,000 and $1,521,000 for the 12 and 24 weeks ended June 25, 1994,
respectively.
Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the July 16, 1995 presentation.
4. RESTRUCTURING CHARGE
The Company has 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 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 is due primarily to the addition of the $16.1
million reserve for the closure of the warehouse and stores. The remaining
increase results from the identification of additional assets to be written-off.
During the 12 weeks ended July 16, 1995, the Company utilized $44.7 million of
the reserve for restructuring costs. The charges consisted of write-downs of
property, plant and equipment ($31.3 million); write-off of the Alpha Beta
trademark ($8.3 million); and write-off of other assets ($5.1 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.
5. EXTRAORDINARY CHARGE
The extraordinary charge of $35.4 million 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
S-13
<PAGE> 15
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
6. LONG-TERM SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's long-term senior debt is summarized as follows:
<TABLE>
<CAPTION>
JULY 15, JANUARY 29,
1995 1995
-------------- ------------
<S> <C> <C>
New Term Loan, principal due quarterly through 2003, with
interest payable quarterly in arrears....................... $ 600,000,000 $ --
Old Bank Term Loan, principal due quarterly through January
1999, with interest payable monthly in arrears.............. -- 125,732,000
10.45 percent Senior Notes principal due 2004 with interest
payable semi-annually in arrears............................ 520,326,000 --
10.45 percent Senior Notes principal due 2000 with interest
payable semi-annually in arrears............................ 4,674,000 175,000,000
Revolving Loan................................................ 30,000,000 27,300,000
13.625 percent Senior Discount Debentures due 2005, after June
2000 interest payable semi-annually in arrears.............. 101,208,000 --
15.25 percent 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 percent to 18.96 percent. Final
payments due through November 1996. Secured by equipment
with a net book value of $25.6 million...................... 4,676,000 --
10.0 percent 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 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 $2.1 million.............. 1,477,000 1,498,000
10.8 percent notes payable, collateralized equipment, due
September 1995, $72,000 of principal plus interest payable
monthly, plus balloon payment of $1,004,000................. 1,057,000 1,420,000
Other long-term debt.......................................... 3,808,000 4,214,000
-------------- ------------
1,275,226,000 408,300,000
Less -- current portion....................................... 13,438,000 22,263,000
-------------- ------------
$1,261,788,000 $386,037,000
============== ============
</TABLE>
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 July 16, 1995, $600 million was outstanding under the New Term Loans,
$30 million was outstanding under the Revolving Credit Facility, and $93.6
million of standby letters of credit had been issued on behalf of the Company. A
commitment fee of 1/2 of 1 percent is charged on the average daily unused
portion of the Revolving 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
S-14
<PAGE> 16
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2.75 percent or the adjusted Eurodollar Rate (as defined) plus a margin ranging
from 2.75 percent to 4.00 percent. At July 16, 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. At July 16, 1995, the interest rate on the Revolving
Credit Facility was 10.25 percent.
Quarterly principal installments on the New Term Loans continue to December
2003, with amounts payable in each year as follows: $1.6 million in fiscal 1995,
$19.7 million in fiscal 1996, $47.2 million in fiscal 1997, $60.1 million in
fiscal 1998, $63.7 million in fiscal 1999, $67.4 in fiscal 2000, $86.6 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.
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.
S-15
<PAGE> 17
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Scheduled maturities of principal of long-term senior debt at July 16, 1995
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995........................................... $ 3,269,000
1996........................................... 29,690,000
1997........................................... 47,448,000
1998........................................... 60,322,000
1999........................................... 65,225,000
Later years.................................... 1,069,272,000
--------------
$1,275,226,000
==============
</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 (the "Selling Stockholders") of the RSI common stock 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 exchanged (i) $149,722,000 principal amount
of the RGC 9% Senior Subordinated Notes due 2003 (the "Old RGC 9% Notes") and
(ii) $296,964,000 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, leaving an
outstanding balance of $278,000 on the Old RGC 9% Notes and an outstanding
balance of $3,036,000 on the Old RGC 10.25% Notes. These outstanding balances
are subject to a change of control provision in which each holder of the Old RGC
Notes has the right to require Ralphs to repurchase such holder's Old RGC Notes
at 101 percent of the principal amount thereof, together with accrued and unpaid
interest to the date of redemption. Each holder of the Old RGC Notes is required
to elect whether or not Ralphs shall repurchase the Old RGC Notes on August 31,
1995. 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
S-16
<PAGE> 18
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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.
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 July 16, 1995, the Company was in
compliance with the financial covenants of its debt agreements. At July 16,
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 July 16, 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 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
S-17
<PAGE> 19
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 outstanding
for the 12 weeks ended June 25, 1994 of 1,503,406 shares inclusive of the
dilutive effect of the 121,118 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 June 25, 1994, and as such, Holdings' primary and
fully diluted earnings per
S-18
<PAGE> 20
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
share were the same for this 12-week period. There was not a dilutive effect for
the 24 weeks ended June 25, 1994, or for the 12 and 24 weeks ended July 16,
1994, 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 to 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 in 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 July 16, 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.
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<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 12 weeks ended July 16, 1995
include seven weeks of the operations of F4L Supermarkets prior to the Merger
and five 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 will be accounted for as a purchase of RGC by the Company. 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 the Company'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 July 16, 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
July 16, 1995.
At July 16, 1995, the Company operated 326 conventional supermarkets and 53
Food 4 Less warehouse stores in Southern California. It also operated 62
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
August 27, 1995, 81 of 154 former Alpha Beta, Boys or Viva stores had been
converted to the Ralphs format.
At July 16, 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 consolidation of the
Company's warehousing and distribution facilities into three primary facilities
located in Compton, the Atwater District of Los Angeles and La Habra, California
is proceeding on schedule and all distribution functions are expected to be
managed centrally from the Compton facility in the third quarter of 1995.
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<PAGE> 22
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating results of
the Company for the 12 and 24 weeks ended July 16, 1995 and June 25, 1994:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
---------------------------------- -------------------------------------
JULY 16, 1995 JUNE 25, 1994 JULY 16, 1995 JUNE 25, 1994
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.............................. $ 857.3 100.0% $581.1 100.0% $1,480.9 100.0% $1,168.9 100.0%
Gross profit....................... 161.6 18.8 98.4 16.9 268.8 18.2 207.1 17.7
Selling, general, administrative
and other, net................... 163.7 19.1 76.8 13.2 255.0 17.2 167.2 14.3
Amortization of excess costs over
net assets acquired.............. 4.7 0.5 1.8 0.3 6.5 0.4 3.6 0.3
Restructuring charge............... 63.6 7.4 -- -- 63.6 4.3 -- --
Operating income (loss)............ (70.3) -8.2 19.8 3.4 (58.8) -3.8 36.3 3.1
Interest expense................... 39.5 4.6 15.5 2.7 52.5 4.0 31.4 2.7
Loss (gain) on disposal of
assets........................... -- -- 0.1 -- (0.4) -- 0.1 --
Provision for earthquake losses.... -- -- -- -- -- -- 4.5 0.4
Provision for income taxes......... 0.2 -- 1.6 0.3 0.5 -- 2.0 0.2
Income (loss) before extraordinary
charge........................... (110.0) -12.8 2.6 0.4 (115.2) -7.8 (1.7) -0.1
Extraordinary charge............... 35.4 4.1 -- -- 35.4 2.4 -- --
Net income (loss).................. $(145.4) -17.0 $ 2.6 0.4 $ (150.5) 10.2 $ (1.7) -0.1
</TABLE>
Sales. Sales per week increased $23.0 million, or 47.5%, from $48.4 million
in the 12 weeks ended June 25, 1994 to $71.4 million in the 12 weeks ended July
16, 1995 and increased $13.0 million, or 26.7%, from $48.7 million in the 24
weeks ended June 25, 1994 to $61.7 million in the 24 weeks ended July 16, 1995.
The increase in sales for the 12 and 24 weeks ended July 16, 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 3.6% and 2.5% for the 12 and 24 weeks ended July 16, 1995,
respectively. Management believes that the decline in comparable store sales is
primarily attributable to the continuing weak economy and additional competitive
store openings and remodels in Southern California. Notwithstanding these
factors, comparable store sales in fiscal 1995 are improving relative to recent
years.
Gross Profit. Gross profit increased as a percentage of sales from 16.9% in
the 12 weeks ended June 25, 1994 to 18.8% in the 12 weeks ended July 16, 1995
and increased from 17.7% in the 24 weeks ended June 25, 1994 to 18.2% in the 24
weeks ended July 16, 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 24 weeks ended July 16, 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 $76.8 million and $163.7 million
for the 12 weeks and $167.2 million and $255.0 million for the 24 weeks ended
June 25, 1994 and July 16, 1995, respectively. SG&A increased as a percentage of
sales from 13.2% to 19.1% and from 14.3% to 17.2% 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. SG&A during the 12 and 24 weeks ended July 16, 1995 was
also impacted by certain one-time costs associated with the integration of the
Company's operations. See "Operating Income (Loss)."
Restructuring Charge. The Company has 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.
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<PAGE> 23
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
is due primarily to the addition of the $16.1 million reserve for the closure of
the warehouse and stores. The remaining increase results from the identification
of additional assets to be written-off.
During the 12 weeks ended July 16, 1995, the Company utilized $44.7 million
of the reserve for restructuring costs. The charges consisted of write-downs of
property, plant and equipment ($31.3 million); write-off of the Alpha Beta
trademark ($8.3 million); and write-off of other assets ($5.1 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.
Operating Income (Loss). In addition to the factors discussed above,
operating income for the 12 and 24 weeks ended July 16, 1995 was impacted by
approximately $30 million of one-time 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 24 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 $15.5 million and $39.5 million for the 12 weeks and $31.4
million and $52.5 million for the 24 weeks ended June 25, 1994 and July 16,
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".
Income (Loss) Before Extraordinary Charge. Primarily as a result of the
factors discussed above, the Company's income before extraordinary charge
decreased from $2.6 million in the 12 weeks ended June 25, 1994 to a loss before
extraordinary charge of $110.0 million in the 12 weeks ended July 16, 1995, and
loss before extraordinary charge increased from $1.7 million in the 24 weeks
ended June 25, 1994 to $115.2 million in the 24 weeks ended July 16, 1995.
Extraordinary Charge. The extraordinary charge of $35.4 million 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.
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
S-22
<PAGE> 24
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 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 expires on
August 31, 1995, at which time Ralphs will be obligated to purchase up to $3.3
million of outstanding Old RGC Notes that may be tendered in the Change of
Control Offer.
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 August 31, 1995, $10.6 million was
drawn on the Revolving Credit Facility and $92.6 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.
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 during
fiscal 1995. However, there can be no assurance that the Company will continue
to generate cash flow from operations at historical levels or that it will be
able to make future borrowings under the Revolving Credit Facility.
During the 24 week period ended July 16, 1995, the Company used
approximately $32.6 million of cash for its operating activities compared to
cash provided by operating activities of $53.5 million for the 24 weeks
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<PAGE> 25
ended June 25, 1994. The decrease in cash from operating activities is due
primarily to changes in operating assets and liabilities for the 24 weeks ended
July 16, 1995, combined with a decrease in operating income due primarily to the
impact of certain one-time 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 July
16, 1995, this resulted in a working capital deficit of $36.1 million.
Cash used for investing activities was $366.2 million for the 24 weeks
ended July 16, 1995. Investing activities consisted primarily of $340.6 million
of acquisition costs associated with the Merger and capital expenditures of
$30.4 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 financing activities.
The capital expenditures discussed above were made to build 10 new stores
(4 of which had been completed at July 16, 1995), to remodel 7 stores (all of
which had been completed at July 16, 1995) and convert 122 conventional format
stores to the Ralphs banner in conjunction with the Merger (29 of which had been
completed at July 16, 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 $110 million) will be used to (i) complete construction of the 6
new stores in process at July 16, 1995 and begin construction on an additional
12 stores scheduled to open during the first half of fiscal 1996, (ii) convert
the remaining 93 conventional supermarkets to the Ralphs banner, (iii) convert
15 supermarkets from the Ralphs format to Food 4 Less warehouse stores and (iv)
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 July 16, 1995, the
Company had approximately $15.5 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.
Cash provided by financing activities was $440.9 million for the 24 weeks
ended July 16, 1995. Financing activities consisted primarily of the following;
(i) proceeds from issuance of new debt in the amount of $985.1 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 RGC Notes net of issuance costs of $64.9 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
$552.3 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
S-24
<PAGE> 26
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.
The Company is highly leveraged. At July 16, 1995, the Company's total
long-term indebtedness (including current maturities) and stockholder's deficit
were $2.2 billion and $16.3 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In connection with the Exchange Offers, F4L Supermarkets solicited consents
from the holders of the Old F4L Senior Notes, the Old F4L Senior Subordinated
Notes and the Old RGC Notes (collectively, the "Notes") to certain amendments
(collectively, the "Amendments") to each of the indentures (collectively, the
"Old Indentures") governing the Notes. The Amendments took effect on May 30,
1995. The Amendments eliminated covenants from the Old Indentures pertaining to
(a) limitations on restricted payments, (b) maintenance of net worth (c)
transactions with affiliates, (d) the incurrence of indebtedness, (e) dividend
and payment restrictions affecting subsidiaries or restrictions on preferred
stock of subsidiaries, (f) limitations on liens, (g) limitations on change of
control, (h) limitations on disposition of assets, (i) guarantees of
indebtedness, and (j) mergers and consolidations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to and in order to facilitate the Merger, Food 4 Less, Inc., a
Delaware corporation ("FFL"), and Food 4 Less Holdings, Inc., a California
corporation ("Old Holdings"), solicited consents to (i) the merger of FFL with
and into Old Holdings as the surviving corporation (the "FFL Merger") and (ii)
the merger of Old Holdings with and into Holdings as the surviving corporation
(the "Reincorporation Merger").
The number of FFL shares as to which consents to the FFL Merger were
delivered or withheld were 10,425,185 and 313,524 respectively. The number of
Old Holdings shares (after giving effect to the stock split described above) as
to which consents to the Reincorporation Merger were delivered or withheld were
22,580,241 and 738,451, respectively.
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<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
For the exhibits incorporated by reference and for the exhibits filed as
part of this Quarterly Report on Form 10-Q see the Index to Exhibits.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated June 14, 1995 with
respect to the acquisition by Food 4 Less Supermarkets, Inc. of Ralphs
Supermarkets, Inc. pursuant to a merger of Food 4 Less Supermarkets, Inc. with
and into Ralphs Supermarkets, Inc.
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<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.
FOOD 4 LESS HOLDINGS, INC.
/s/ ALAN J. REED
--------------------------------------
Alan J. Reed
Senior Vice President and
Chief Financial Officer
/s/ JAN CHARLES GRAY
--------------------------------------
Jan Charles Gray
Senior Vice President, General Counsel
and Secretary
/s/ ROBERT W. GOSSMAN
--------------------------------------
Robert W. Gossman
Group Vice President and
Controller
Dated: August 31, 1995
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<PAGE> 29
PROSPECTUS
FOOD 4 LESS HOLDINGS, INC.
[F4L LOGO] 13 5/8% SENIOR DISCOUNT DEBENTURES DUE 2005 [RALPHS LOGO]
------------------------------
The 13 5/8% Senior Discount Debentures due 2005 (the "New Discount
Debentures") of Food 4 Less Holdings, Inc., a Delaware corporation ("New
Holdings"), may be offered hereby from time to time by the holder thereof named
herein (the "Selling Debentureholder"). The New Discount Debentures will be
issued upon the Closing Date of the Merger (each as defined) in an aggregate
principal amount (at maturity) of $193,363,570 and will mature on July 15, 2005.
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 5/8%
(representing the amortization of the original issue discount) from the date of
original issuance until June 15, 2000, such that the Accreted Value (as defined)
shall be equal to the full principal amount (at maturity) of the New Discount
Debentures on June 15, 2000. Beginning on June 15, 2000, cash interest on the
New Discount Debentures will accrue at a rate of 13 5/8% per annum and will be
payable semiannually in arrears on June 15 and December 15 of each year,
commencing December 15, 2000.
The New Discount Debentures may be redeemed, in whole or in part at the
option of New Holdings, at any time after June 15, 2000, at the redemption
prices set forth herein, plus accrued and unpaid interest to the redemption
date. In addition, prior to June 15, 1998, New Holdings may, at its option, use
the Net Proceeds (as defined) of a Public Equity Offering (as defined) to redeem
up to an aggregate of 35% of the principal amount of the New Discount Debentures
at a redemption price equal to 110% of the Accreted Value thereof. Upon a Change
of Control (as defined), each holder of New Discount Debentures will have a
right to require New Holdings to repurchase such holder's New Discount
Debentures at a price equal to 101% of the Accreted Value or the principal
amount, plus accrued and unpaid interest, if any, thereof (as the case may be)
to the date of repurchase. The New Discount Debentures will be senior unsecured
obligations of New Holdings, will rank senior in right of payment to all
Subordinated Indebtedness (as defined) of New Holdings. At January 29, 1995, on
a pro forma basis after giving effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (each as defined) (and certain related
assumptions), the aggregate outstanding amount of Subordinated Indebtedness of
New Holdings would have been approximately $131.5 million. In addition, the New
Discount Debentures will effectively be subordinated to all liabilities
(including trade payables) of the Company which on the same pro forma basis
would have been approximately $2,833.1 million (excluding letters of credit) at
such date. New Holdings will receive no part of the proceeds of the sale of the
New Discount Debentures offered pursuant to this Prospectus but will incur
certain expenses, estimated at $861,983, in connection with the offering. See
"Description of the New Discount Debentures" and "Selling Debentureholder."
The New Discount Debentures will be issued (the "New Discount Debenture
Placement") in part to the Selling Debentureholder and in part to partners of
the Selling Debentureholders who will contribute their New Discount Debentures
to the Selling Debentureholder. A portion of the New Discount Debentures will be
issued as part of the consideration for the proposed merger (the "RSI Merger")
of Food 4 Less Supermarkets, Inc. ("Food 4 Less") with and into Ralphs
Supermarkets, Inc. ("RSI"). Immediately following the RSI Merger, Ralphs Grocery
Company ("RGC"), a wholly-owned subsidiary of RSI, will merge with and into RSI
(the "RGC Merger," and together with the RSI Merger, the "Merger") and RSI will
change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the
"Company"). Prior to the Merger, Food 4 Less, Inc. ("FFL"), the parent
corporation of Food 4 Less Holdings, Inc., a California corporation
("Holdings"), 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 its wholly-owned
subsidiary New Holdings (the "Reincorporation Merger"). See "The Merger and the
Financing."
------------------------------
SEE "RISK FACTORS" AT PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW DISCOUNT DEBENTURES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
This Prospectus relates to the public offering of the New Discount
Debentures by the Selling Debentureholder following the consummation of the
Merger. See "Selling Debentureholder." The Selling Debentureholder directly,
through agents designated from time to time, or through dealers or underwriters
also to be designated, may sell the New Discount Debentures from time to time on
terms to be determined at the time of sale. To the extent required, the specific
New Discount Debentures to be sold, the names of the Selling Debentureholder,
the respective purchase prices and public offering prices, the aggregate
principal amount of New Discount Debentures being offered, the terms of the
offering, the names of any such agent, dealer or underwriter, and any discounts,
commissions or other items constituting compensation from the Selling
Debentureholder, and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, with respect to a particular offer will be set
forth in an accompanying prospectus supplement. See "Plan of Distribution."
The Selling Debentureholder and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholder in the distribution of the New
Discount Debentures may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the New Discount Debentures
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
------------------------------
The date of this Prospectus is June 2, 1995
<PAGE> 30
(cover page continued)
In addition to the issuance of the New Discount Debentures by New Holdings,
as part of the financial and solicitation transactions required to consummate
the Merger, Food 4 Less is (A) offering $350 million principal amount of new
10.45% Senior Notes due 2004 (the "New F4L Senior Notes") pursuant to a public
offering (the "Senior Note Public Offering") and offering $100 million principal
amount of new 11% 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"), each
registered under the Securities Act, (B) offering to holders of its 10.45%
Senior Notes due 2000 (the "Old F4L Senior Notes") to exchange such Old F4L
Senior Notes for additional New F4L Senior Notes (which will be part of the same
issue as the New F4L Senior Notes offered pursuant to the Senior Notes Public
Offering) plus $5.00 in cash for each $1,000 principal amount of Old F4L Senior
Notes exchanged and offering to holders of its 13.75% Senior Subordinated Notes
due 2001 (the "Old F4L Senior Subordinated Notes," and together with the Old F4L
Senior Notes, the "Old F4L Notes") to exchange such Old F4L Senior Subordinated
Notes for new 13.75% Senior Subordinated Notes due 2005 (the "New F4L Senior
Subordinated Notes," and together with the New F4L Senior Notes, the "New F4L
Notes") plus $20.00 in cash for each $1,000 principal amount of Old F4L Senior
Subordinated Notes exchanged, in each case plus accrued and unpaid interest
thereon, (C) soliciting consents from 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"), (D) offering to holders of the 9%
Senior Subordinated Notes due 2003 of RGC (the "Old RGC 9% Notes") and to
holders of 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") (1)
to exchange such Old RGC Notes for 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 for each $1,000 principal amount of Old RGC
Notes exchanged and (2) to purchase any or all of such holders' Old RGC Notes
for $1,010.00 in cash per $1,000 principal amount accepted for purchase, in each
case plus accrued and unpaid interest thereon, and (E) soliciting consents from
the holders of 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 collectively as the "RGC
Offers," and together with the F4L Exchange Offers, the "Exchange Offers").
Concurrently with the Public Offerings, the F4L Exchange Offers and the RGC
Offers, Holdings, which currently owns 100% of the outstanding stock of Food 4
Less, is (A) offering 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 each $1,000 principal amount
(at maturity) of Discount Notes accepted for purchase and (B) soliciting
consents from the holders of 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"). See "The Merger and the Financing," "Description of Other
Indebtedness" and "The Exchange Offers and the Public Offerings."
Concurrently with issuance of the New Discount Debentures and the
consummation of the other financing transactions described above, Food 4 Less
and RGC intend to obtain new senior financing (the "Bank Financing") pursuant to
a senior bank facility of $925 million (the "New Credit Facility") and to obtain
$140 million in cash equity financing (the "New Equity Investment"). In
addition, New Holdings will issue as part of the consideration for the RSI
Merger $131.5 million principal amount of 13 5/8% Senior Subordinated
Pay-in-Kind Debentures due 2007 (the "Seller Debentures"). See "The Merger and
the Financing." The Exchange Offers, the Holdings Offer to Purchase and the
Public Offerings 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 New Discount Debenture Placement, the Other Debt
Financing Transactions, the New Equity Investment
ii
<PAGE> 31
(cover page continued)
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 purchase (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.
AVAILABLE INFORMATION
New Holdings has filed a Registration Statement (the "Registration
Statement") on Form S-1 with the Securities and Exchange Commission (the
"Commission") under the Securities Act, with respect to the New Discount
Debentures. 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.
In addition, whether or not it is required to do so by the rules and
regulations of the Commission, New Holdings is obligated under the New Discount
Debenture Indenture (as defined) to file with the Commission (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by Holdings'
independent certified public accountants and (ii) all reports that would be
required to be filed with the Commission on Form 8-K. New Holdings intends to
furnish to each holder of New Discount Debentures, 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 summarizes the contents and terms of documents not included
herewith. These documents are available upon request from 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.
iii
<PAGE> 32
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. 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 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.
New Holdings was incorporated in Delaware on December 19, 1994, under the
direction of its parent corporation, Food 4 Less Holdings, Inc., a California
corporation. 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 have any business operations of its own
and its assets consist solely of all of the outstanding capital stock of Food 4
Less. However, 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.
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 $3.1 billion, operating income
of approximately $183 million and $99 million and EBITDA (as defined) of
approximately $343 million and $211 million for the 52 weeks ended June 25, 1994
and the 31 weeks ended January 29, 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:
o 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 lowest overall prices while providing product selections
comparable to conventional supermarkets. Manage-
1
<PAGE> 33
ment 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.
o 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 conventional 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
2
<PAGE> 34
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.
o 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.
o 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.
o 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.
o 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.
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
3
<PAGE> 35
"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 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. As a result of the Reincorporation Merger, any Discount Notes
that remain outstanding following the Merger will become the obligations of New
Holdings.
As currently contemplated, the Merger will be financed through the
following transactions (collectively, the "Financing"):
o Borrowings of $600 million aggregate principal amount pursuant to the
New Term Loans (as defined) under the New Credit Facility to be provided
by a syndicate of banks 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"), $6.5 million of which is
anticipated to be drawn at closing.
o The issuance of $350 million of New F4L Senior Notes pursuant to the
Senior Note Public Offering.
o The issuance of $100 million of New RGC Notes pursuant to the
Subordinated Note Public Offering.
o 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." Each of BT Securities, CS First Boston
and DLJ is acting as an Underwriter in the Public Offerings and as a
Dealer Manager in the Exchange Offers and the Holdings Offer to
Purchase.
o 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 the Old F4L
Notes are exchanged pursuant to the F4L Exchange Offers.
4
<PAGE> 36
o 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 the 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 the holders of the Old RGC Notes to certain amendments to the Old
RGC Indentures. 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").
o 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.
o 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) $17.5
million, $2.5 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.
o The assumption by the Company, pursuant to the RGC Merger, of
approximately $162.9 million of other indebtedness of RGC and Food 4
Less.
o 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 June 1, 1995 had an accreted value of $688.43 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.
5
<PAGE> 37
The following table illustrates the sources and uses of funds to consummate
the Merger, assuming the transaction occurs as of June 15, 1995. Based upon
tenders received through May 26, 1995 (and, in the case of the Discount Notes,
anticipated tenders as of the Closing Date), this presentation assumes that
$423.0 million principal amount of Old RGC Notes is tendered into the RGC Offers
in exchange for New RGC Notes (representing 94.0% of the outstanding aggregate
principal amount of Old RGC Notes), $27.0 million principal amount of Old RGC
Notes is tendered into the RGC Offers for cash (representing 6.0% of the
outstanding aggregate principal amount of Old RGC Notes), $145.3 million
principal amount of Old F4L Senior Notes and $140.7 million principal amount of
Old F4L Senior Subordinated Notes are tendered into the F4L Exchange Offers
(representing 83.0% and 97.0% of the outstanding aggregate principal amount of
Old F4L Senior Notes and Old F4L Senior Subordinated Notes, respectively) and
$103.6 million principal amount (at maturity) of Discount Notes is tendered into
the Holdings Offer to Purchase (representing 100% of the outstanding aggregate
principal amount (at maturity) of Discount Notes). Although management believes
such assumptions are reasonable under the circumstances, actual sources and uses
may differ from those set forth below depending upon the outcome of the F4L
Exchange Offers, the RGC Offers and the Holdings Offer to Purchase.
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)................ $ 600.0 Purchase RSI Common Stock(j)....... $ 375.9
New Revolving Facility(b)........ 6.5 Purchase Old RGC Notes(k).......... 27.3
New F4L Senior Notes(c).......... 350.0 Purchase Discount Notes............ 84.4
Repay Ralphs 1992 Credit
New RGC Notes(d)................. 100.0 Agreement.......................... 238.2
New Equity Investment(e)......... 140.0 Repay F4L Credit Agreement......... 160.8
New Discount Debentures(f)....... 59.0 Pay Accrued Interest(l)............ 34.4
EAR Related Payments(m)............ 22.8
Repay Mortgage Indebtedness(n)..... 194.4
Purchase New Holdings Common
Stock(o)......................... 3.7
Fees and Expenses(p)............... 113.6
-------- --------
Total Cash Sources............ $1,255.5 Total Cash Uses.................... $1,255.5
======== ========
NON-CASH SOURCES NON-CASH USES
- --------------------------------------------- ---------------------------------------------
New F4L Senior Notes(g).......... $ 145.3 Old F4L Senior Notes Exchanged..... $ 145.3
Assumed Old F4L Senior Notes..... 29.7 Assumed Old F4L Senior Notes....... 29.7
New F4L Senior Subordinated Old F4L Senior Subordinated Notes
Notes......................... 140.7 Exchanged.......................... 140.7
Assumed Old F4L Senior Assumed Old F4L Senior Subordinated
Subordinated Notes............ 4.3 Notes.............................. 4.3
New RGC Notes(h)................. 423.0 Old RGC Notes Exchanged............ 423.0
New Discount Debentures(f)....... 41.0 Fees and Expenses(p)............... 22.5
Assumed Capital Leases and Other Assumed Capital Leases and Other
Debt.......................... 162.9 Debt............................... 162.9
Seller Debentures(i)............. 131.5 Purchase RSI Common Stock(i)....... 150.0
-------- --------
Total Non-Cash Sources........ $1,078.4 Total Non-Cash Uses................ $1,078.4
======== ========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company $925 million of financing under the New Credit Facility. It is
anticipated that the New Credit Facility will be syndicated to a number of
financial institutions for whom Bankers Trust will act as agent. The New
Credit Facility will provide for (i) term loans in the aggregate amount of
up to $600 million, comprised of a $275 million tranche with a six year
term (the "Tranche A Loan"), a $108.3 million tranche with a seven year
term (the "Tranche B Loan"), a $108.3 million tranche with an eight year
term (the "Tranche C Loan"), and a $108.4 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."
6
<PAGE> 38
(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.
(d) Represents New RGC Notes issued pursuant to the Subordinated Note Public
Offering.
(e) Does not include the $10 million equity contribution by Ralphs management.
See note (m) below. Concurrently with the New Equity Investment, certain
existing stockholders of New Holdings (formerly stockholders of FFL),
including affiliates of George Soros, will sell outstanding shares of New
Holdings stock to CLH 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 a portion of the New Discount Debentures having an aggregate
initial accreted value of $100 million, $59 million of which will be issued
for cash, $18.5 million of which will be issued to the RSI stockholders as
Merger consideration and $17.5 million, $2.5 million and $2.5 million of
which will be issued to Yucaipa, BT Securities and Apollo, respectively, in
satisfaction of fees otherwise payable by the Company and New Holdings in
connection with the Merger and the Financing.
(g) Represents New F4L Senior Notes issued pursuant to the 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 $18.5 million
initial accreted value of New Discount Debentures and $131.5 million
principal amount of the Seller Debentures as part of the purchase price for
the RSI common stock, up to $10 million of which Seller Debentures may be
put to Yucaipa on the closing date 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.
(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 $174.0 million, plus the estimated amount of the
prepayment fees payable with respect thereto.
(o) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(p) The $136.1 million in total cash and non-cash fees and expenses includes
advisory fees of $21.5 million to be paid to Yucaipa, other fees of $2.5
million to be paid to BT Securities and commitment fees of $5 million to be
paid to Apollo upon closing of the Merger. Of such amounts, $17.5 million
of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT
Securities' $2.5 million fee will be paid through the issuance of New
Discount Debentures in lieu of cash. Such New Discount Debentures will be
contributed by them to the partnership that will acquire all of the New
Discount Debentures. Yucaipa anticipates that it in turn will pay a cash
fee of approximately $3.5 million to Soros Fund Management in consideration
for advisory services which Soros Fund Management has rendered since 1991.
See "Certain Relationships and Related Transactions -- Food 4 Less and
Holdings."
7
<PAGE> 39
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]
8
<PAGE> 40
AFTER MERGER, FFL MERGER AND REINCORPORATION MERGER
[SEE EDGAR APPENDIX]
9
<PAGE> 41
THE OFFERING
<TABLE>
<S> <C>
ISSUER................... Food 4 Less Holdings, Inc., a Delaware corporation.
SECURITIES OFFERED....... $193,363,570 aggregate principal amount (at maturity) of 13 5/8%
Senior Discount Debentures due 2005, with an Accreted Value of
$100,000,000 on the issue date. The initial Accreted Value per
$1,000 principal amount of New Discount Debentures will be $517.16
(representing the original purchase price).
MATURITY DATE............ July 15, 2005.
INTEREST................. Until June 15, 2000, no interest will accrue on the New Discount
Debentures, but the New Discount Debentures will accrete in value
at a rate of 13 5/8% (representing the amortization of the
original issue discount) from the date of original issuance until
June 15, 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 15, 2000. Beginning on June 15,
2000, cash interest on the New Discount Debentures will accrue at
a rate of 13 5/8% per annum and will be payable semiannually in
arrears on June 15 and December 15 of each year, commencing
December 15, 2000, to the holders of record on the immediately
preceding June 1 and December 1. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months and
actual number of days elapsed.
ORIGINAL ISSUE
DISCOUNT............... The New Discount Debentures will be issued with original issue
discount equal to the difference between their issue price and
their stated redemption price at maturity. As a result, initial
holders of New Discount Debentures will be required to include
amounts in gross income before receiving cash payments
attributable to such gross income. See "Certain Federal Income Tax
Considerations."
OPTIONAL REDEMPTION...... The New Discount Debentures will be redeemable at the option of
New Holdings, in whole or in part, at any time on or after June
15, 2000, at the redemption prices set forth below plus accrued
and unpaid interest to the redemption date, if redeemed during the
12-month period beginning June 15 of the years indicated:
</TABLE>
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000................................................... 106.8125%
2001................................................... 105.1094%
2002................................................... 103.4063%
2003................................................... 101.7031%
2004 and thereafter.................................... 100.0000%
In addition, prior to June 15, 1998, New Holdings may at its
option use the Net Proceeds from a Public Equity Offering of New
Holdings or the Company to redeem up to an aggregate of 35% of the
principal amount of the New Discount Debentures at a redemption
price equal to 110% of the Accreted Value thereof.
RANKING.................. The New Discount Debentures will be senior unsecured obligations
of New Holdings and will rank senior in right of payment to all
Subordinated Indebtedness of New Holdings, including the Seller
Debentures. In addition, the New Discount Debentures will
effectively be subordinated to all liabilities (including trade
payables) of the Company. At January 29, 1995, on a pro
</TABLE>
10
<PAGE> 42
<TABLE>
<S> <C>
forma basis after giving effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related
assumptions) New Holdings would have had outstanding $131.5
million of Subordinated Indebtedness, and all liabilities
(including trade payables) of the Company would have been
approximately $2,833.1 million (excluding letters of credit).
CHANGE OF CONTROL........ Upon the occurrence of a Change of Control (as defined), each
holder of New Discount Debentures will have the right to require
New Holdings to repurchase such holder's New Discount Debentures
at a purchase price equal to 101% of the Accreted Value or the
principal amount plus accrued and unpaid interest, if any, thereof
(as the case may be) to the date of repurchase.
CERTAIN COVENANTS........ The New Discount Debenture Indenture will contain certain
covenants, including, but not limited to, covenants with respect
to the following: (i) limitation on 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 mergers and certain other transactions; and
(viii) limitations on preferred stock of subsidiaries.
USE OF PROCEEDS.......... New Holdings will not receive any of the proceeds from the sale of
the New Discount Debentures by the Selling Debentureholder. See
"Selling Debentureholder."
</TABLE>
11
<PAGE> 43
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined
financial data of New Holdings for the 52 weeks ended June 25, 1994 and for the
31 weeks ended January 29, 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 29, 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 31 weeks
ended January 29, 1995, with the results of operations of Ralphs for the 52
weeks ended July 17, 1994 and the results of operations and balance sheet data
as of and for the 32 weeks ended January 29, 1995, respectively. 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.
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED
JUNE 25, 1994 JANUARY 29, 1995
-------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
OPERATING DATA:
Sales......................................................... $5,053.5 $3,121.0
Gross profit.................................................. 1,048.2 627.7
Selling, general and administrative expenses.................. 833.1 506.4
Interest expense:
Cash....................................................... 220.1 133.1
Non-cash................................................... 47.8 30.8
Amortization of debt issuance costs........................ 13.7 8.1
-------- --------
Total interest expense........................................ 281.6 172.0
Net loss(a)................................................... (115.5) (73.6)
Ratio of earnings to fixed charges(b)......................... -- --
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficit)..................................................... $ (8.1)
Total assets.................................................................. 3,112.9
Total debt.................................................................... 2,216.2
Stockholders' equity.......................................................... 48.3
OTHER DATA:
Depreciation and amortization................................. $ 150.7 $ 87.9
Capital expenditures(c)....................................... 123.2 97.8
Stores open at end of period(d)............................... -- 395
EBITDA (as defined)(a)(e)(f).................................. $ 342.5 $ 211.3
EBITDA margin(g).............................................. 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 31 weeks ended January 29, 1995 do not include certain one-time
non-recurring costs related to (i) severance payments under certain
employment contracts with Food 4 Less management 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.
(b) 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
12
<PAGE> 44
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). New Holdings' pro forma earnings were insufficient to
cover pro forma fixed charges by approximately $115.5 million and $73.6
million for the 52 weeks ended June 25, 1994 and the 31 weeks ended January
29, 1995, respectively. However, such pro forma earnings included non-cash
charges of $221.8 million and $135.7 million, respectively, primarily
consisting of depreciation and amortization.
(c) Does not include Merger-related capital expenditures of $55.0 million and
$40.2 million for the 52 weeks ended June 25, 1994 and the 31 weeks ended
January 29, 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.
(d) 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.
(e) "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 New Holdings' operating performance or as a
measure of liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(f) 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.
(g) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
13
<PAGE> 45
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.
<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.).
14
<PAGE> 46
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 summary historical financial data of Food 4 Less presented below
as of and for the 52 weeks ended June 30, 1990, June 29, 1991 and June 27, 1992,
and the summary historical financial data of Holdings presented below as of and
for the 52 weeks ended June 26, 1993 and June 25, 1994 and the 31 weeks ended
January 29, 1995 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
32 weeks ended February 5, 1994 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.
Because New Holdings did not exist prior to December 19, 1994, no historical
financial data exists with respect thereto.
<TABLE>
<CAPTION>
FOOD 4 LESS HOLDINGS
------------------------------ -----------------------------------------------
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1990 1991(A) 1992 1993 1994(B) 1994 1995
-------- -------- -------- -------- -------- ------------ ----------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales........................................ $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,616.7 $1,556.5
Gross profit................................. 204.8 265.7 520.8 484.2 469.3 299.5 262.4
Selling, general, administrative and other
expenses................................... 157.8 213.1 469.7 434.9 388.8 252.3 222.4
Interest expense(c).......................... 50.8 50.1 70.2 73.6 77.0 47.6 48.4
Net loss(d).................................. (10.1) (9.6) (33.8) (31.2) (11.5) (6.2) (17.6)
Ratio of earnings to fixed charges(e)........ --(e) --(e) --(e) --(e) --(e) --(e) --(e)
BALANCE SHEET DATA (end of period)(f):
Working capital surplus (deficit)............ $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (13.8) $ (74.8)
Total assets................................. 574.7 980.0 998.5 957.8 980.1 957.4 1,000.7
Total debt(g)................................ 360.7 558.9 525.3 588.3 576.9 582.0 598.9
Redeemable stock............................. 5.1 -- -- -- -- -- --
Stockholder's equity (deficit)............... 20.6 84.6 50.8 22.6 10.0 15.8 (7.3)
OTHER DATA:
Depreciation and amortization(h)............. $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 34.8 $ 36.6
Capital expenditures......................... 36.4 34.7 60.3 53.5 57.5 29.1 49.0
Stores open at end of period................. 115 259 249 248 258 249 267
EBITDA (as defined)(i)....................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 79.8 $ 76.9
EBITDA margin(j)............................. 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, $3.4 million
for the 32 weeks ended February 5, 1994 and $3.4 million for the 31 weeks
ended January 29, 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 $9.8 million for the 53 weeks
ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended
June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25,
1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29,
1995, respectively. Included in the 52 weeks ended June 25, 1994, the 32
weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995 are
reduced employer contributions of $8.1 million, $3.7 million and $14.3
million, respectively, related to union, health and welfare benefit plans.
(e) 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, the 32 weeks ended February 5, 1994 and the
15
<PAGE> 47
31 weeks ended January 29, 1995, by approximately $9.1 million, $3.4
million, $25.6 million, $29.8 million, $8.8 million, $5.2 million and $17.6
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, $43.5 million for the 32 weeks ended
February 5, 1994 and $46.2 million for the 31 weeks ended January 29, 1995,
primarily consisting of depreciation, amortization and accretion of
interest.
(f) 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 February 5, 1994 reflect the Alpha Beta acquisition and the financings
and refinancings associated therewith. Balance sheet data as of June 25,
1994 and January 29, 1995 reflect the acquisition of the Food Barn stores.
(g) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(h) 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 32 weeks ended
February 5, 1994 and the 31 weeks ended January 29, 1995, depreciation and
amortization includes amortization of excess of cost over net assets
acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7
million, $4.7 million and $4.6 million, respectively.
(i) "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, provision for restructuring 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."
(j) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
16
<PAGE> 48
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
New Discount Debentures.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Merger and the Financing, New Holdings
will be highly leveraged. At January 29, 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 stockholders' equity would have been $2,216.2 million and $48.3 million,
respectively, and the Company would have had an additional $188.4 million
available to be borrowed under the New Revolving Facility. In addition, as of
January 29, 1995, after giving effect to the Merger, the Reincorporation Merger,
the FFL 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 $125.6 million. On the same
pro forma basis, for the 52 weeks ended June 25, 1994 and the 31 weeks ended
January 29, 1995, New Holdings' earnings before fixed charges would have been
inadequate to cover fixed charges by $115.5 million and $73.6 million,
respectively. However, such earnings include non-cash charges of $221.8 million
and $135.7 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 approximately $61
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 (including the New Discount Debentures) 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.
Based upon the current level of operations and anticipated cost savings,
New 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 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
17
<PAGE> 49
default under the documents governing the indebtedness of New Holdings could
have a significant adverse effect on the market value of the New Discount
Debentures.
HOLDING COMPANY STRUCTURE
Following the Merger, the FFL Merger and the Reincorporation Merger, New
Holdings will be a holding company and the assets of New Holdings will consist
solely of 100% of the outstanding shares of capital stock of the Company, which
will be pledged to secure New Holdings' guarantee obligations under the New
Credit Facility. New Holdings will be the sole obligor on the New Discount
Debentures, and the New Discount Debentures will not be guaranteed by any
subsidiary of New Holdings. Therefore, the New Discount Debentures will be
effectively subordinated to all indebtedness and other liabilities of the
Company and its subsidiaries. New Holdings will rely on dividends and other
advances and transfers of funds from the Company to provide the sole source of
funds necessary to meet its debt service obligations under the New Discount
Debentures. The ability of the Company to pay such dividends and make such
advances and transfers will be subject to applicable state laws regulating the
payment of dividends and to restrictions in the New Credit Facility, the
indentures governing the Old RGC Notes, the New RGC Notes, the Old F4L Senior
Notes, the New F4L Senior Notes, the Old F4L Senior Subordinated Notes and the
New F4L Senior Subordinated Notes, and other agreements governing indebtedness
of the Company and its subsidiaries. Claims of creditors of the Company and
subsidiaries, including general trade creditors, will generally have priority as
to the assets of the Company and its subsidiaries over the claims of New
Holdings and the holders of the New Discount Debentures. The New Discount
Debentures will effectively be subordinated to all liabilities (including trade
payables) of the Company which at January 29, 1995, on a pro forma basis after
giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the
Financing (and certain related assumptions) would have been approximately
$2,833.1 million (excluding letters of credit). In addition, at January 29,
1995, the Company and its subsidiaries had significant commitments under
operating leases. See "-- Leverage and Debt Service".
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. 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.
18
<PAGE> 50
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 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 31 weeks ended January 29, 1995 and the 32 weeks ended
January 29, 1995, Holdings and Ralphs experienced 4.6% and 3.2% 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."
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 30.2%, 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 warrant holders 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,
19
<PAGE> 51
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
$21.5 million, of which $17.5 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."
ABSENCE OF ESTABLISHED PUBLIC MARKET FOR THE NEW DISCOUNT DEBENTURES
There is no established market for the New Discount Debentures and there
can be no assurance as to the liquidity of any markets that may develop for the
New Discount Debentures, the ability of holders of the New Discount Debentures
to sell their New Discount Debentures, or the price at which holders would be
able to sell their New Discount Debentures. Future trading prices of the New
Discount Debentures will depend on many factors, including, among other things,
prevailing interest rates, New Holdings' operating results and the market for
similar securities.
NET LOSSES
Holdings has reported a net loss of $17.6 million for the 31 weeks ended
January 29, 1995, $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 31 weeks ended January 29, 1995, after giving
effect to the Merger, the FFL Merger, the Reincorporation Merger and the
Financing (and certain related assumptions), New Holdings would have reported a
net loss of approximately $115.5 million and $73.6 million, respectively. There
can be no assurance that New Holdings will not report net losses in the future.
20
<PAGE> 52
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 (or its designee), 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
Food 4 Less or EJDC if the Merger has not been consummated on or prior to June
30, 1995.
As currently contemplated, the Merger will be financed through the
following transactions:
o Borrowings of $600 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, $6.5 million
of which is anticipated to be drawn at closing.
o The issuance of $350 million of New F4L Senior Notes pursuant to the
Senior Note Public Offering.
o The issuance of $100 million of New RGC Notes pursuant to the
Subordinated Note Public Offering.
o 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 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."
o 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
21
<PAGE> 53
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.
o The RGC Offers by Food 4 Less to (i) exchange up to $450 million
aggregate principal amount of 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.
o 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.
o 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) $17.5
million, $2.5 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.
o The assumption by the Company, pursuant to the RGC Merger, of
approximately $162.9 million of other indebtedness of RGC and Food 4
Less.
o 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 June 1, 1995 had an accreted value of $688.43 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.
22
<PAGE> 54
The following table illustrates the sources and uses of funds to consummate
the Merger, assuming the transaction occurs as of June 15, 1995. Based upon
tenders received through May 26, 1995 (and, in the case of the Discount Notes,
anticipated tenders as of the Closing Date), this presentation assumes that
$423.0 million principal amount of Old RGC Notes is tendered into the RGC Offers
in exchange for New RGC Notes (representing 94.0% of the outstanding aggregate
principal amount of Old RGC Notes), $27.0 million principal amount of Old RGC
Notes is tendered into the RGC Offers for cash (representing 6.0% of the
outstanding aggregate principal amount of Old RGC Notes), $145.3 million
principal amount of Old F4L Senior Notes and $140.7 million principal amount of
Old F4L Senior Subordinated Notes are tendered into the F4L Exchange Offers
(representing 83.0% and 97.0% of the outstanding aggregate principal amount of
Old F4L Senior Notes and Old F4L Senior Subordinated Notes, respectively) and
$103.6 million principal amount (at maturity) of Discount Notes is tendered into
the Holdings Offer to Purchase (representing 100% of the outstanding aggregate
principal amount (at maturity) of Discount Notes). Although management believes
such assumptions are reasonable under the circumstances, actual sources and uses
may differ from those set forth below depending upon the outcome of the F4L
Exchange Offers, the RGC Offers and the Holdings Offer to Purchase.
SOURCES AND USES
(in millions)
<TABLE>
<CAPTION>
CASH SOURCES CASH USES
- --------------------------------------------- ---------------------------------------------
<S> <C> <C> <C>
New Term Loans(a).................. $ 600.0 Purchase RSI Common Stock(j)....... $ 375.9
New Revolving Facility(b).......... 6.5 Purchase Old RGC Notes(k).......... 27.3
New F4L Senior Notes(c)............ 350.0 Purchase Discount Notes............ 84.4
Repay Ralphs 1992 Credit
New RGC Notes(d)................... 100.0 Agreement.......................... 238.2
New Equity Investment(e)........... 140.0 Repay F4L Credit Agreement......... 160.8
New Discount Debentures(f)......... 59.0 Pay Accrued Interest(l)............ 34.4
EAR Related Payments(m)............ 22.8
Repay Mortgage Indebtedness(n)..... 194.4
Purchase New Holdings Common
Stock(o)........................... 3.7
Fees and Expenses(p)............... 113.6
-------- --------
Total Cash Sources............ $1,255.5 Total Cash Uses.................... $1,255.5
======== ========
NON-CASH SOURCES NON-CASH USES
- --------------------------------------------- ---------------------------------------------
New F4L Senior Notes(g)............ $ 145.3 Old F4L Senior Notes Exchanged..... $ 145.3
Assumed Old F4L Senior Notes....... 29.7 Assumed Old F4L Senior Notes....... 29.7
New F4L Senior Subordinated Old F4L Senior Subordinated Notes
Notes............................ 140.7 Exchanged.......................... 140.7
Assumed Old F4L Senior Subordinated Assumed Old F4L Senior Subordinated
Notes............................ 4.3 Notes............................ 4.3
New RGC Notes(h)................... 423.0 Old RGC Notes Exchanged............ 423.0
New Discount Debentures(f)......... 41.0 Fees and Expenses(p)............... 22.5
Assumed Capital Leases and Other Assumed Capital Leases and Other
Debt............................. 162.9 Debt............................... 162.9
Seller Debentures(i)............... 131.5 Purchase RSI Common Stock(i)....... 150.0
-------- --------
Total Non-Cash Sources........ $1,078.4 Total Non-Cash Uses................ $1,078.4
======== ========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company $925 million of financing under the New Credit Facility. It is
anticipated that the New Credit Facility will be syndicated to a number of
financial institutions for whom Bankers Trust will act as agent. The New
Credit Facility will provide for (i) the New Term Loans in the aggregate
amount of up to $600 million, comprised of the $275 million Tranche A Loan,
the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan, and
the $108.4 million Tranche D Loan; and (ii) the $325 million New Revolving
Facility. The Tranche A Loan may not be fully funded at the Closing Date.
The New Credit Facility will provide that the portion of the Tranche A Loan
not funded at the Closing Date will be available for a period of 91 days
following the Closing Date to fund the Change of Control Offer. See
"Description of the New Credit Facility."
(b) The New Revolving Facility will provide for a $325 million line of credit
which will be available for working capital requirements and general
corporate purposes. Up to $150 million of the New Revolving Facility may be
used to support standby letters of credit. The letters of credit will be
used to cover workers' compensation contingencies and for other purposes
permitted under the New Revolving Facility. The Company anticipates that
letters of credit for approximately $92.6 million will be issued under the
New Revolving Facility at closing, in replacement of existing letters of
credit, primarily to satisfy the State of California's requirements
relating to workers compensation self-insurance.
(c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public
Offering.
23
<PAGE> 55
(d) Represents New RGC Notes issued pursuant to the Subordinated Note Public
Offering.
(e) Does not include the $10 million equity contribution by Ralphs management.
See note (m) below. Concurrently with the New Equity Investment, certain
existing stockholders of New Holdings (formerly stockholders of FFL),
including affiliates of George Soros, will sell outstanding shares of New
Holdings stock to CLH, which in turn will sell such shares to the New
Equity Investors for an aggregate purchase price of $57.8 million (which
represents the same price per share as will be paid in the New Equity
Investment). In connection with the New Equity Investment, the New Equity
Investors will contribute the common stock so acquired to New Holdings in
consideration for newly-issued preferred shares. See "Description of
Capital Stock -- New Equity Investment."
(f) Represents a portion of the New Discount Debentures having an aggregate
initial accreted value of $100 million, $59 million of which will be issued
for cash, $18.5 million of which will be issued to the RSI stockholders as
Merger consideration and $17.5 million, $2.5 million and $2.5 million of
which will be issued to Yucaipa, BT Securities and Apollo, respectively, in
satisfaction of fees otherwise payable by the Company and New Holdings in
connection with the Merger and the Financing.
(g) Represents New F4L Senior Notes issued pursuant to the 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 $18.5 million
initial accreted value of New Discount Debentures and $131.5 million
principal amount of the Seller Debentures as part of the purchase price for
the RSI common stock, up to $10 million of which Seller Debentures may be
put to Yucaipa on the Closing Date at a purchase price equal to their
principal amount pursuant to the Put Agreement. In addition, Yucaipa will
be reimbursed by the Company for (i) any losses incurred upon the resale of
the $10 million principal amount of Seller Debentures which may be put to
it pursuant to the Put Agreement and (ii) its expenses in connection with
the Merger and the related transactions. See "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 $174.0 million, plus the estimated amount of the
prepayment fees payable with respect thereto.
(o) Represents the purchase of shares of New Holdings common stock from
stockholders who have exercised statutory dissenters' rights in connection
with the FFL Merger. There are no other shares subject to statutory
dissenters' rights.
(p) The $136.1 million in total cash and non-cash fees and expenses includes
advisory fees of $21.5 million to be paid to Yucaipa, other fees of $2.5
million to be paid to BT Securities and commitment fees of $5 million to be
paid to Apollo upon the closing of the Merger. Of such amounts, $17.5
million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee
and BT Securities' $2.5 million fee will be paid through the issuance of
New Discount Debentures in lieu of cash. Such New Discount Debentures will
be contributed by them to the partnership that will acquire all of the New
Discount Debentures. Yucaipa anticipates that it in turn will pay a cash
fee of approximately $3.5 million to Soros Fund Management in consideration
for advisory services, which Soros Fund Management has rendered since 1991.
See "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."
24
<PAGE> 56
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma combined capitalization of New
Holdings as of January 29, 1995, adjusted to give effect to the Merger, the FFL
Merger, the Reincorporation Merger and the Financing (and certain related
assumptions) and the application of the proceeds therefrom. Based upon tenders
received through May 26, 1995 (and, in the case of the Discount Notes,
anticipated tenders as of the Closing Date), this presentation assumes that
$423.0 million principal amount of Old RGC Notes is tendered into the RGC Offers
in exchange for New RGC Notes, $27.0 million principal amount of Old RGC Notes
is tendered into the RGC Offers for cash, $145.3 million principal amount of Old
F4L Senior Notes and $140.7 million principal amount of Old F4L Senior
Subordinated Notes are tendered into the 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.
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION
--------------
(IN MILLIONS)
<S> <C>
Cash............................................................................ $ 54.7
========
Short-term and current portion of long-term debt:
New Term Loans................................................................ $ 3.3
Other indebtedness............................................................ 24.3
--------
Total short-term and current portion of long-term debt................ $ 27.6
========
Long-term debt:
New Term Loans(a)............................................................. $ 596.7
New Revolving Facility(b)..................................................... 35.5
Other indebtedness............................................................ 131.9
New F4L Senior Notes(c)....................................................... 495.3
Old F4L Senior Notes.......................................................... 29.7
New RGC Notes(d).............................................................. 523.0
New F4L Senior Subordinated Notes............................................. 140.7
Old F4L Senior Subordinated Notes............................................. 4.3
New Discount Debentures (initial accreted value).............................. 100.0
Seller Debentures............................................................. 131.5
--------
Total long-term debt.................................................. 2,188.6
--------
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.............................................................. (197.9)
Treasury stock................................................................ (5.8)
--------
Total stockholders' equity................................................. 48.3
--------
Total capitalization.................................................. $2,236.9
========
</TABLE>
- ---------------
(a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to
which Bankers Trust has agreed, subject to certain conditions, to provide
the Company $925 million of financing under the New Credit Facility. It is
anticipated that the New Credit Facility will be syndicated to a number of
financial institutions for whom Bankers Trust will act as agent. The New
Credit Facility will provide for (i) the New Term Loans in the aggregate
amount of up to $600 million, comprised of the $275 million Tranche A Loan,
the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan and the
$108.4 million Tranche D Loan; and (ii) the $325 million New Revolving
Facility. The Tranche A Loan may not be fully funded at the Closing Date.
The New Credit Facility will provide that the portion of the Tranche A Loan
not funded at the Closing Date will be available for a period of 91 days
following the Closing Date to fund the Change of Control Offer. See
"Description of the New Credit Facility."
25
<PAGE> 57
(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."
26
<PAGE> 58
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 31 weeks
ended January 29, 1995, give effect to the Merger, the FFL Merger, the
Reincorporation Merger and the Financing (and certain related assumptions set
forth below) and the application of the proceeds therefrom as if such
transactions occurred on June 27, 1993, with respect to the pro forma operating
and other data, and as of January 29, 1995, with respect to the pro forma
balance sheet data. Such pro forma information combines the results of
operations of Holdings for the 52 weeks ended June 25, 1994 and the results of
operations and balance sheet data as of and for the 31 weeks ended January 29,
1995, with the results of operations of Ralphs for the 52 weeks ended July 17,
1994 and the results of operations and balance sheet data as of and for the 32
weeks ended January 29, 1995, respectively. For information regarding the
Merger, 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.
Reflecting tenders received through May 26, 1995 (and, in the case of the
Discount Notes, anticipated tenders as of the Closing Date), the pro forma
adjustments are based upon the following assumptions: (i) $423.0 million
principal amount of Old RGC Notes are tendered into the RGC Offers in exchange
for New RGC Notes, (ii) $27.0 million principal amount of Old RGC Notes are
tendered into the RGC Offers for cash, (iii) $145.3 million principal amount of
Old F4L Senior Notes and $140.7 million principal amount of Old F4L Senior
Subordinated Notes are tendered into the F4L Exchange Offers, and (iv) $103.6
million principal amount (at maturity) of Discount Notes are tendered into the
Holdings Offer to Purchase. The presentation also assumes that $100 million
principal amount of New RGC Notes are issued pursuant to the Subordinated Note
Public Offering and that $350 million principal amount of New F4L Senior Notes
are issued pursuant to the Senior Note Public Offering. In addition, the
unaudited pro forma combined financial statements have been prepared based upon
the assumption that upon consummation of the Merger, the Company will divest or
close 32 stores.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management believes are reasonable. The Merger
will be accounted for by 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.
27
<PAGE> 59
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
<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(l)................................... 469.1 388.8 (36.4)(a) 833.1
8.1 (b)
1.4 (d)
1.6 (e)
0.5 (f)
Amortization of excess cost over net assets
acquired...................................... 11.0 7.7 10.6 (g) 29.3
Provision for restructuring..................... 2.4 0.0 -- 2.4
-------- -------- ------- --------
Operating income........................... 150.9 72.8 (40.3) 183.4
Other expenses:
Interest expense -- cash...................... 93.2 57.0 69.9 (h) 220.1
Interest expense -- non-cash.................. 9.4 14.6 23.8 (h) 47.8
Amortization of debt issuance costs........... 6.4 5.5 1.8 (h) 13.7
Loss on disposal of assets.................... 1.8 -- -- 1.8
Provision for earthquake loss................. 11.0 4.5 -- 15.5
-------- -------- ------- --------
Earnings (loss) before income tax
provision(m)............................. 29.1 (8.8) (135.8) (115.5)
Income tax expense (benefit).................... (108.0) 2.7 105.3 (i) --
-------- -------- ------- --------
Net earnings (loss)(j)..................... $ 137.1 $ (11.5) $(241.1) $ (115.5)
======== ======== ======= ========
Ratio of earnings to fixed charges(k)...... 1.2x -- --
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
28
<PAGE> 60
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
32 WEEKS 31 WEEKS
ENDED ENDED
------------ ------------
RALPHS HOLDINGS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (AUDITED)
JANUARY 29, JANUARY 29, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales.......................................... $1,695.8 $1,556.5 $(131.3)(a) $3,121.0
Cost of sales.................................. 1,304.5 1,294.1 (107.6)(a) 2,493.3
2.5 (b)
(1.0)(c)
0.8 (d)
-------- -------- ------- --------
Gross profit.............................. 391.3 262.4 (26.0) 627.7
Selling, general and administrative
expenses(l).................................. 294.8 222.4 (18.3)(a) 506.4
4.8 (b)
1.4 (d)
1.0 (e)
0.3 (f)
Amortization of excess cost over net assets
acquired..................................... 6.8 4.6 6.0 (g) 17.4
Provision for restructuring.................... 0.0 5.1 -- 5.1
-------- -------- ------- --------
Operating income.......................... 89.7 30.3 (21.2) 98.8
Other expenses:
Interest expense -- cash..................... 60.5 35.3 37.3 (h) 133.1
Interest expense -- non-cash................. 5.6 9.6 15.6 (h) 30.8
Amortization of debt issuance costs.......... 3.6 3.4 1.1 (h) 8.1
Loss (gain) on disposal of assets............ 0.8 (0.4) -- 0.4
-------- -------- ------- --------
Earnings (loss) before income
tax provision(m)........................ 19.2 (17.6) (75.2) (73.6)
Income tax expense (benefit)................... 0.0 0.0 -- 0.0
-------- -------- ------- --------
Net earnings (loss)(j).................... $ 19.2 $ (17.6) $ (75.2) $ (73.6)
======== ======== ======= ========
Ratio of earnings to fixed charges(k)..... 1.2x -- --
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
29
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
(a) Reflects the anticipated closing or divestiture of 32 stores. Does not give
effect to the closure of 2 Food 4 Less stores open at October 1, 1994 which
were subsequently closed. Food 4 Less has determined that there is no
impairment of existing goodwill related to the store closures based on its
projection of future undiscounted cash flows.
(b) Represents the additional depreciation expense associated with the purchase
price allocation to property, plant and equipment of $160.0 million based on
the current estimate of fair market value. Property, plant and equipment is
being depreciated over an average useful life of 13 years. Depreciation
expense has been allocated among cost of sales and selling, general and
administrative expenses.
(c) Reflects the elimination of Ralphs historical LIFO provision.
(d) Reflects depreciation expense associated with approximately $36.8 million of
additional fixed assets required for the conversion of 23 Ralphs stores to
the Food 4 Less warehouse format and 122 Alpha Beta, Boys and Viva stores to
the Ralphs format.
(e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks
ended June 25, 1994 and $1.2 million for the 31 weeks ended January 29,
1995) and the elimination of an annual guarantee fee ($0.4 million for the
52 weeks ended June 25, 1994 and $0.2 million for the 31 weeks ended January
29, 1995) paid by Ralphs to EJDC.
(f) Reflects increased compensation resulting from new employment agreements
with certain of the current executive officers of Ralphs.
(g) Reflects the amortization of the excess of cost over net assets acquired in
the Merger ($21.6 million for the 52 weeks ended June 25, 1994 and $12.8
million for the 31 weeks ended January 29, 1995) and elimination of Ralphs'
historical amortization ($11.0 million for the 52 weeks ended June 25, 1994
and $6.8 million for the 31 weeks ended January 29, 1995). Amortization has
been calculated on the straight line basis over a period of 40 years.
(h) The following table presents a reconciliation of pro forma interest expense
and amortization of deferred financing costs:
<TABLE>
<CAPTION>
31 WEEKS
52 WEEKS ENDED
ENDED JANUARY 29,
JUNE 25, 1994 1995
------------- ----------------
<S> <C> <C>
Historical interest expense -- cash.......................................... $150.2 $ 95.8
------ ------
Plus: Interest on borrowings under:
New Credit Facility...................................................... 63.2 37.2
New F4L Senior Notes..................................................... 36.6 21.8
New RGC Notes............................................................ 57.5 34.3
Other bank fees.......................................................... 3.9 2.3
Other debt............................................................... 2.0 2.1
Less: Interest on borrowings under:
Old bank term loans:
Ralphs................................................................. (21.3) (15.5)
Food 4 Less............................................................ (11.5) (7.7)
Old RGC Notes............................................................ (43.9) (27.0)
Other debt............................................................... (16.6) (10.2)
------ ------
Pro forma adjustment....................................................... 69.9 37.3
------ ------
Pro forma interest expense -- cash........................................... $220.1 $133.1
====== ======
Historical interest expense -- non-cash...................................... $ 24.0 $ 15.2
Plus:
Interest on Seller Debentures............................................ 18.5 12.3
Accretion of New Discount Debentures..................................... 14.1 9.4
Less:
Accretion of Discount Notes.............................................. (8.8) (6.1)
------ ------
Pro forma interest expense -- non-cash....................................... $ 47.8 $ 30.8
====== ======
Historical amortization of debt issuance costs............................... $ 11.9 $ 7.0
Plus:
Financing and exchange/consent fees...................................... 8.6 5.1
Other fees and expenses.................................................. 4.6 2.7
Less:
Historical financing costs:
Ralphs................................................................... (6.1) (3.6)
Food 4 Less.............................................................. (5.3) (3.1)
------ ------
Pro forma adjustment....................................................... 1.8 1.1
------ ------
Pro forma amortization of debt issuance costs................................ $ 13.7 $ 8.1
====== ======
</TABLE>
(i) Represents the elimination of the historical income tax benefit of Ralphs
($108.0 million for the 52 weeks ended June 25, 1994) and Holdings income
tax expense ($2.7 million for the 52 weeks ended June 25, 1994) 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
30
<PAGE> 62
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 31 weeks ended January 29, 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, (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 31 weeks ended January 29, 1995 by
approximately $115.5 million and $73.6 million, respectively. However, such
pro forma earnings included non-cash charges of $221.8 million for the 52
weeks ended June 25, 1994 and $135.7 million for the 31 weeks ended January
29, 1995, primarily consisting of depreciation and amortization.
(l) Pro forma combined cost of sales and selling, general and administrative
expenses for the 52 weeks ended June 25, 1994 and the 31 weeks ended
January 29, 1995 include reduced employer contributions of $25.8 million
and $22.1 million, respectively, related to union health and welfare
benefit plans.
(m) The pro forma combined loss before income tax provision for the 52 weeks
ended June 25, 1994 and the 31 weeks ended January 29, 1995 includes
reductions in self insurance reserves of $26.4 million and $28.0 million,
respectively.
(n) "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."
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED
JUNE 25, 1994 JANUARY 29, 1995
-------------- ----------------
<S> <C> <C>
Historical EBITDA:
Ralphs EBITDA........................................................... $228.1 $143.5
EBITDA margin(1)...................................................... 8.4% 8.5%
Food 4 Less EBITDA...................................................... $130.5 $ 76.9
EBITDA margin......................................................... 5.0% 4.9%
Less: Pro Forma Adjustments(2)............................................ $(16.1) $ (9.1)
------ ------
Pro Forma EBITDA.......................................................... $342.5 $211.3
====== ======
Pro Forma EBITDA margin................................................. 6.8% 6.8%
====== ======
</TABLE>
- ---------------
(1) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
(2) Reflects primarily EBITDA (as defined) associated with closed or divested
stores and the adjustments referred to in notes (e) and (f) above.
31
<PAGE> 63
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RALPHS HOLDINGS
(HISTORICAL) (HISTORICAL)
(AUDITED) (AUDITED) PRO FORMA
JANUARY 29, 1995 JANUARY 29, 1995 ADJUSTMENTS PRO FORMA
---------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 35.1 $ 19.6 $ 0.0 (a) $ 54.7
Accounts receivable.......................... 43.6 23.4 -- 67.0
Inventories.................................. 221.4 224.7 39.9 (b) 486.0
Prepaid expense and other current assets..... 19.8 22.2 -- 42.0
-------- -------- ------- --------
Total current assets.................. 319.9 289.9 39.9 649.7
Investments.................................... 0.0 12.4 -- 12.4
Property, plant and equipment.................. 624.7 380.4 160.0 (c) 1,140.3
(22.8)(d)
(2.0)(e)
Excess of cost over net assets acquired, net... 365.4 263.1 496.7 (f) 1,125.2
Beneficial lease rights........................ 49.2 0.0 -- 49.2
Deferred debt issuance costs, net.............. 23.0 25.5 94.8 (g) 99.4
(43.9)(h)
Deferred income taxes.......................... 112.5 0.0 (112.5)(i) 0.0
Other assets................................... 15.2 29.4 (12.9)(d) 36.7
5.0 (j)
-------- -------- ------- --------
Total assets.......................... $1,509.9 $1,000.7 $ 602.3 $3,112.9
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 84.0 $ 27.2 $ (83.6)(k) $ 27.6
Short-term debt.............................. 51.5 0.0 (51.5)(l) 0.0
Accounts payable............................. 176.6 190.5 -- 367.1
Accrued expenses............................. 99.8 118.3 (17.6)(m) 207.0
4.7 (d)
1.8 (n)
Current portion of self-insurance reserves... 27.5 28.6 -- 56.1
-------- -------- ------- --------
Total current liabilities............. 439.4 364.6 (146.2) 657.8
Long-term debt................................. 883.0 571.7 733.9 (o) 2,188.6
Self-insurance reserves........................ 44.9 44.1 -- 89.0
Deferred income taxes.......................... 0.0 17.5 -- 17.5
Lease valuation reserve........................ 29.0 0.0 -- 29.0
Other non-current liabilities.................. 86.4 10.1 (27.8)(p) 82.7
11.0 (q)
3.0 (e)
-------- -------- ------- --------
Total liabilities..................... 1,482.7 1,008.0 573.9 3,064.6
-------- -------- ------- --------
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................... 175.2 105.6 10.0 (p) 59.9
(175.2)(t)
(57.8)(s)
2.1 (u)
Notes receivable from shareholders........... 0.0 (0.7) -- (0.7)
Retained deficit............................. (148.3) (112.2) (23.7)(v) (197.9)
148.3 (t)
(40.4)(d)
(1.8)(n)
(19.8)(w)
Treasury stock............................... -- -- (2.1)(u) (5.8)
(3.7)(x)
-------- -------- ------- --------
Total stockholders' equity(y)......... 27.2 (7.3) 28.4 48.3
-------- -------- ------- --------
Total liabilities and stockholders'
equity.............................. $1,509.9 $1,000.7 $ 602.3 $3,112.9
======== ======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
32
<PAGE> 64
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............................................................................ $ 600.0
New Revolving Facility.................................................................... 35.5
New F4L Senior Notes...................................................................... 350.0
New RGC Notes............................................................................. 100.0
New Equity Investment..................................................................... 140.0
New Discount Debentures................................................................... 59.0
Purchase Discount Notes................................................................... (84.4)
Purchase RSI Common Stock................................................................. (375.9)
Repay Ralphs 1992 Credit Agreement........................................................ (297.4)
Repay F4L Credit Agreement................................................................ (153.0)
Purchase Old RGC Notes.................................................................... (27.3)
Pay EAR liability......................................................................... (17.8)
Loan to affiliate......................................................................... (5.0)
Repay other Ralphs debt................................................................... (188.8)
Purchase New Holdings Common Stock........................................................ (3.7)
Accrued Interest.......................................................................... (17.6)
Fees and Expenses......................................................................... (113.6)
-------
Pro forma adjustment.............................................................. $ 0.0
=======
</TABLE>
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million)
and the write-up of merchandise inventory ($22.5 million); both to reflect
current estimated selling prices less costs of disposal and a reasonable
profit allowance for the selling effort of the acquiring company.
(c) Reflects the estimated write-up to fair value of Ralphs property, plant and
equipment as of the date of the Merger.
(d) Reflects estimated restructuring charge associated with closing 29 Food 4
Less conventional supermarkets or warehouse stores and converting 5 Food 4
Less conventional supermarkets to warehouse stores. Pursuant to the
settlement agreement with the State of California, 24 Food 4 Less stores (as
well as 3 Ralphs stores) must be closed by December 31, 1995. See
"Business -- California Settlement Agreement." Although not required by such
settlement agreement, an additional 5 under-performing stores selected by
the Company also are scheduled to be closed by December 31, 1995. The
restructuring charge consists of write-downs of property, plant and
equipment ($22.8 million), write-off of the Alpha Beta trademark ($8.6
million), write-off of other assets ($4.3 million), lease termination
expenses ($3.1 million) and miscellaneous expense accruals ($1.6 million).
The expected cash payments to be made in connection with the restructuring
charge total $7.1 million. It is expected that such cash payments will be
made by December 31, 1995. The estimated restructuring charge will be
recorded as an expense once the Merger is completed. No additional expenses
are expected to be incurred in future periods in connection with these
closings. Food 4 Less has determined that there is no impairment of existing
goodwill related to the store closures based on its projections of future
undiscounted cash flows.
(e) Reflects the anticipated closing of 3 Ralphs stores.
(f) Reflects the excess of costs over the fair value of the net assets of Ralphs
acquired in connection with the Merger ($862.1 million) and the elimination
of Ralphs historical excess of costs over the fair value of the net assets
acquired ($365.4 million). The purchase price and preliminary calculation of
the excess of cost over the net book value of assets acquired is as follows:
<TABLE>
<S> <C>
Purchase price:
Purchase of outstanding common equity.................................................. $ 525.9
Fees and expenses...................................................................... 51.1
--------
Total purchase price................................................................... $ 577.0
--------
Purchase price is financed by:
Seller Debentures...................................................................... $ 131.5
New Discount Debentures................................................................ 18.5
New Equity Investment.................................................................. 140.0
New borrowings......................................................................... 287.0
--------
$ 577.0
========
</TABLE>
33
<PAGE> 65
<TABLE>
<S> <C>
Preliminary calculation of purchase price allocated to assets and liabilities
based on management's estimate of fair values as of January 29, 1995:
Cash................................................................................... $ 35.1
Receivables............................................................................ 43.6
Inventories............................................................................ 261.3
Other current assets................................................................... 19.8
Property, fixtures and equipment....................................................... 782.7
Beneficial lease rights................................................................ 49.2
Goodwill............................................................................... 862.1
Other assets........................................................................... 18.0
Current liabilities.................................................................... (424.8)
Obligations under capital leases....................................................... (89.1)
Long-term debt......................................................................... (806.6)
Other non-current liabilities.......................................................... (174.3)
--------
$ 577.0
========
</TABLE>
<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..................................................................... 577.0
--------
Excess of purchase price to be allocated........................................... $1,047.9
========
Excess allocated to:
Inventories........................................................................ $ 39.9
Property, fixtures and equipment................................................... 160.0
Goodwill........................................................................... 862.1
Other non-current liabilities...................................................... (14.1)
--------
$1,047.9
========
</TABLE>
(g) Reflects the debt issuance costs associated with the New Credit Facility,
($29.4 million), the RGC Offers ($4.2 million), the F4L Exchange Offers
($2.9 million), the Senior Note Public Offering ($10.5 million) and the
Subordinated Note Public Offering ($3.0 million), the cash exchange payments
associated with the RGC Offers ($8.5 million) and the F4L Exchange Offers
($3.5 million) and other financing costs ($32.8 million). These amounts have
been capitalized as deferred financing costs.
(h) Reflects the elimination of deferred debt issuance costs associated with the
Ralphs 1992 Credit Agreement (as defined) ($6.3 million), the F4L Credit
Agreement (as defined) ($9.0 million), the Old RGC Notes ($10.4 million) and
the Old F4L Notes ($14.7 million) and other indebtedness of RGC and Food 4
Less ($3.5 million) to be repaid in connection with the Merger.
(i) Reflects the elimination of Ralphs deferred tax asset associated with
changes in the financial reporting basis of assets. The combined Company may
be required to record a valuation allowance on all or some deferred tax
assets in compliance with Financial Accounting Standard No. 109 "Accounting
for Income Taxes." This determination may be based, in part, on historical
or expected earnings. For purposes of these pro forma financial statements
it has been assumed that all deferred net tax assets have been fully
reserved.
(j) Represents a loan to a corporation owned by Yucaipa affiliates. The
corporation will invest the loan proceeds in a partnership that will
purchase New Discount Debentures. All proceeds received by the Company from
the repayment of the loan will be paid to former holders of Ralphs EARs in
satisfaction of the deferred EAR liability. See "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 ($3.3 million).
(l) Reflects the repayment of Ralphs' old revolving credit facility.
(m) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement
($1.5 million), the F4L Credit Agreement ($2.7 million), the Old RGC Notes
($5.5 million), the Old F4L Notes ($6.3 million) and other indebtedness of
RGC and Food 4 Less ($1.6 million) to be repaid in connection with the
Merger.
(n) Represents the liability to an executive under his employment contract due
to a change of control provision.
34
<PAGE> 66
(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............................................................................ $ 596.7
New Revolving Facility.................................................................... 35.5
New F4L Senior Notes...................................................................... 350.0
New RGC Notes............................................................................. 100.0
New Discount Debentures................................................................... 100.0
Seller Debentures......................................................................... 131.5
Purchase Discount Notes (book value)...................................................... (65.1)
Repay Ralphs 1992 Credit Agreement........................................................ (180.0)
Repay F4L Credit Agreement................................................................ (133.2)
Purchase Old RGC Notes.................................................................... (27.0)
Repay other Ralphs debt................................................................... (174.5)
-------
Net pro forma adjustment.......................................................... $ 733.9
=======
</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 29, 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 29, 1995 does
not include certain one-time non-recurring costs related to (i) severance
payments under certain employment contracts with Food 4 Less management
totaling $1.4 million that are subject to change of control provisions and
the achievement of earnings and sales targets, (ii) costs related to the
integration of the Company's operations which are estimated to be $50.0
million (includes an estimated $12.0 million related to termination and
severance costs) over a three-year period, (iii) other costs related to
warehouse closures, which costs are not presently determinable or (iv) any
contingent liability to reimburse Yucaipa in the event it incurs a loss on
the resale of $10 million of the Seller Debentures.
35
<PAGE> 67
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.
<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.
36
<PAGE> 68
(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.
37
<PAGE> 69
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, June 29, 1991 and June 27, 1992, and the
historical financial data of Holdings presented below as of and for the 52 weeks
ended June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995
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 32 weeks
ended February 5, 1994 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. Because New
Holdings did not exist prior to December 19, 1994, no historical financial data
exists with respect thereto.
<TABLE>
<CAPTION>
FOOD 4 LESS HOLDINGS
---------------------------------- --------------------------------------------------------
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1990 1991(A) 1992 1993 1994(B) 1994 1995
-------- -------- -------- -------- -------- ------------ ----------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales........................ $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,616.7 $1,556.5
Cost of sales................ 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,317.2 1,294.1
-------- -------- -------- -------- -------- -------- --------
Gross profit................. 204.8 265.7 520.8 484.2 469.3 299.5 262.4
Selling, general,
administrative and other
expenses................... 157.8 213.1 469.7 434.9 388.8 252.3 222.4
Amortization of excess cost
over net assets acquired... 5.3 5.3 7.8 7.6 7.7 4.7 4.6
Restructuring charge......... -- -- -- -- -- -- 5.1(d)
-------- -------- -------- -------- -------- -------- --------
Operating income............. 41.7 47.3 43.3 41.7 72.8 42.5 30.3
Interest expense(c).......... 50.8 50.1 70.2 73.6 77.0 47.6 48.4
Loss (gain) on disposal of
assets..................... -- 0.6 (1.3) (2.1) -- 0.1 (0.5)
Provision for earthquake
losses..................... -- -- -- -- 4.5 -- --
Provision for income taxes... 1.0 2.5 3.4 1.4 2.7 1.0 --
Extraordinary charge......... -- 3.7 (f) 4.8 (g) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss(e).................. $ (10.1) $ (9.6) $ (33.8) $ (31.2) $ (11.5) $ (6.2) $ (17.6)
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges(h)................. -- (h) -- (h) -- (h) -- (h) -- (h) --(h) --(h)
BALANCE SHEET DATA (end of
period)(i):
Working capital surplus
(deficit).................. $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (13.8) $ (74.8)
Total assets................. 574.7 980.0 998.5 957.8 980.1 957.4 1,000.7
Total debt(j)................ 360.7 558.9 525.3 588.3 576.9 582.0 598.9
Redeemable stock............. 5.1 -- -- -- -- -- --
Stockholder's equity
(deficit).................. 20.6 84.6 50.8 22.6 10.0 15.8 (7.3)
OTHER DATA:
Depreciation and
amortization(k)............ $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 34.8 $ 36.6
Capital expenditures......... 36.4 34.7 60.3 53.5 57.5 29.1 49.0
Stores open at end of
period..................... 115 259 249 248 258 249 267
EBITDA (as defined)(l)....... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 79.8 $ 76.9
EBITDA margin(m)............. 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 29, 1991 include the results of
Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha
Beta's sales for the two weeks ended June 29, 1991 were $59.2 million.
(b) Operating data for the 52 weeks ended June 25, 1994 include the results of
the Food Barn stores, which were not material, from March 29, 1994, the date
of the acquisition of the Food Barn stores.
(c) Interest expense includes non-cash charges related to the amortization of
deferred financing costs of $4.1 million for the 53 weeks ended June 30,
1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for
the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June
26, 1993,
38
<PAGE> 70
$5.5 million for the 52 weeks ended June 25, 1994, $3.4 million for the 32
weeks ended February 5, 1994 and $3.4 million for the 31 weeks ended January
29, 1995.
(d) Represents the recording of a restructuring charge for the write-off of
property and equipment in connection with the conversion of 11 conventional
format supermarkets to warehouse format stores.
(e) Net loss includes a pre-tax provision for self insurance, which is
classified in cost of sales, selling, general and administrative expenses,
and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9
million, $25.7 million, $24.8 million, and $9.8 million for the 53 weeks
ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended
June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25,
1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29,
1995, respectively. Included in the 52 weeks ended June 25, 1994, the 32
weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995 are
reduced employer contributions of $8.1 million, $3.7 million and $14.3
million, respectively, related to union health and welfare plans.
(f) Represents an extraordinary charge of $3.7 million (net of related income
tax benefit of $2.5 million) relating to the refinancing of certain
indebtedness in connection with the Alpha Beta acquisition and the write-off
of related debt issuance costs.
(g) Represents an extraordinary net charge of $4.8 million reflecting the
write-off of $6.7 million (net of related income tax benefit of $2.5
million) of deferred debt issuance costs as a result of the early redemption
of a portion of Food 4 Less' term loan facility under the F4L Credit
Agreement, partially offset by a $1.9 million extraordinary gain (net of a
related income tax expense of $0.7 million) on the replacement of partially
depreciated assets following the civil unrest in Los Angeles.
(h) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of loss before provision for income taxes and extraordinary charges,
plus fixed charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt issuance costs and one-third of rental expense
(the portion deemed representative of the interest factor). Earnings were
insufficient to cover fixed charges for the 53 weeks ended June 30, 1990,
the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25,
1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29,
1995 by approximately $9.1 million, $3.4 million, $25.6 million, $29.8
million, $8.8 million, $5.2 million and $17.6 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, $43.5 million for the 32 weeks ended February 5, 1994 and
$46.2 million for the 31 weeks ended January 29, 1995, primarily consisting
of depreciation, amortization and accretion of interest.
(i) 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 February 5, 1994 reflect the Alpha Beta acquisition
and the financings and refinancings associated therewith. Balance sheet data
as of June 25, 1994 and January 29, 1995 reflect the acquisition of the Food
Barn stores.
(j) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(k) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June
27, 1992, June 26, 1993 and June 25, 1994, and the 32 weeks ended February
5, 1994 and the 31 weeks ended January 29, 1995, depreciation and
amortization includes amortization of excess of cost over net assets
acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7
million, $4.7 million and $4.6 million, respectively.
(l) "EBITDA," as defined and presented historically by Holdings, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for incomes taxes, provision for earthquake
losses, provision for restructuring and the one-time adjustment to the
Teamsters Union sick pay accrual. EBITDA is a widely accepted financial
indicator of a company's ability to service debt. However, EBITDA should not
be construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Holdings' operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(m) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
39
<PAGE> 71
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
40
<PAGE> 72
"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 31 weeks ended January 29, 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, Holdings elected to restate its historical
financial statements to conform to Ralphs' classification of certain expenses.
The changes primarily involved the reclassification of certain labor,
41
<PAGE> 73
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 $129.1 million (unaudited) for the fiscal years ended June 27, 1992,
June 26, 1993, June 25, 1994 and the 32 weeks ended February 5, 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 $3.8 million (unaudited) for the fiscal
years ended June 27, 1992, June 26, 1993, June 25, 1994 and the 32 weeks ended
February 5, 1994. All historical financial information for Holdings and Food 4
Less included in this Prospectus reflects these reclassifications.
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, sales were $2,724.6
million, a decrease of $5.6 million or 0.2% from the fifty-two weeks ended
January 30, 1994. 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."
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<PAGE> 74
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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<PAGE> 75
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.
44
<PAGE> 76
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.
45
<PAGE> 77
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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<PAGE> 78
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"), for the 32 weeks ended February 5,
1994 and for the 31 weeks ended January 29, 1995:
<TABLE>
<CAPTION>
52 WEEKS ENDED
---------------------------------------------------------- 32 WEEKS ENDED 31 WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
---------------- ---------------- ---------------- ------------------ ------------------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.................. $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,616.7 100.0% $1,556.5 100.0%
Gross profit........... 520.8 17.9 484.2 17.7 469.3 18.1 299.5 18.5 262.4 16.9
Selling, general,
administrative and
other, net........... 469.7 16.1 434.9 15.9 388.8 15.0 252.3 15.6 222.4 14.3
Amortization of excess
costs over net assets
acquired............. 7.8 0.3 7.6 0.3 7.7 0.3 4.7 0.3 4.6 0.3
Restructuring charge... -- -- -- -- -- -- -- -- 5.1 0.3
Operating income....... 43.3 1.5 41.7 1.5 72.8 2.8 42.5 2.6 30.3 1.9
Interest expense....... 70.2 2.4 73.6 2.6 77.0 2.9 47.6 2.9 48.4 3.1
Loss (gain) on disposal
of assets............ (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.5) --
Provision for
earthquake losses.... -- -- -- -- 4.5 0.2 -- -- -- --
Provision for income
taxes................ 3.4 0.1 1.4 0.1 2.7 0.1 1.0 0.1 0.0 0.0
Loss before
extraordinary
charge............... (29.0) (1.0) (31.2) (1.1) (11.5) (0.4) (6.2) (0.4) (17.6) (1.1)
Extraordinary charge... 4.8 0.2 -- -- -- -- -- -- -- --
Net loss............... (33.8) (1.2) (31.2) (1.1) (11.5) (0.4) (6.2) (0.4) (17.6) (1.1)
</TABLE>
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 31 WEEKS ENDED JANUARY 29,
1995 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 32 WEEKS ENDED FEBRUARY 5,
1994
Sales
Sales per week decreased $0.3 million, or 0.6%, from $50.5 million per week
in the 32 weeks ended February 5, 1994, to $50.2 million per week in the 31
weeks ended January 29, 1995, primarily as a result of a 4.6% decline in
comparable store sales, partially offset by sales from new and acquired stores
opened since February 5, 1994. Management believes that the decline in
comparable store sales is attributable to the weak economy in Southern
California and, to a lesser extent, in Food 4 Less' other operating areas, and
competitive store openings and remodels in Southern California.
Gross Profit
Gross profit decreased as a percentage of sales from 18.5% in the 32 weeks
ended February 5, 1994, to 16.9% in the 31 weeks ended January 29, 1995. The
decrease in gross profit margin resulted primarily from pricing and promotional
activities related to Food 4 Less' "Total Value Pricing" program and an increase
in the number of warehouse format stores (which have lower gross margins
resulting from prices that are generally 5-12% below the prices in Food 4 Less'
conventional stores) from 48 at February 5, 1994, to 89 at January 29, 1995. The
decrease in the gross profit margin was partially offset by improvements in
product procurement.
Selling, General, Administrative and Other, Net
Selling, general, administrative and other expenses, net ("SG&A") were
$252.3 million and $222.4 million for the 32 weeks ended February 5, 1994 and
the 31 weeks ended January 29, 1995, respectively. SG&A decreased as a
percentage of sales from 15.6% to 14.3% for the same periods. Food 4 Less
experienced a reduction of workers' compensation and general liability
self-insurance costs of $14.8 million during the 31 weeks ended January 29, 1995
due to continued improvement in the cost and frequency of claims. The improved
experience was due primarily to cost control programs implemented by Food 4
Less, including
47
<PAGE> 79
awards for stores with the best loss experience, specific achievable goals for
each store, and increased monitoring of third-party administrators. In addition,
Food 4 Less maintained tight control of administrative expenses and store level
expenses, including payroll (due primarily to increased productivity),
advertising and other controllable store expenses. Because Food 4 Less'
warehouse stores have lower SG&A than conventional stores, the increase in the
number of warehouse stores, from 48 at February 5, 1994, to 89 at January 29,
1995, also contributed to decreased SG&A.
Food 4 Less participates in multi-employer health and welfare plans for its
store employees who are members of the UFCW. As part of the renewal of the
Southern California UFCW contract in October 1993, employers contributing to
UFCW health and welfare plans are to receive a pro rata share of the excess
reserves in the plans through a reduction of current employer contributions.
Food 4 Less' share of the excess reserves was $24.2 million, of which Holdings
recognized $3.7 million in the 32 weeks ended February 5, 1994 and $14.3 million
in the 31 weeks ended January 29, 1995, respectively. An additional $4.4 million
of credits was recognized during the period from February 6, 1994 through the
end of Fiscal 1994. The remainder of the excess reserves will be recognized as
the credits are taken during fiscal 1995.
On August 28, 1994, the Teamsters and Food 4 Less ratified a new contract
which, among other things, provided for the vesting of sick pay benefits
resulting in a one-time charge of $2.1 million which was recorded in the 31
weeks ended January 29, 1995.
Restructuring Charge
Food 4 Less has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 31 weeks ended January 29, 1995, Food 4 Less
recorded a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
Interest Expense
Interest expense (including amortization of deferred financing costs) was
$47.6 million and $48.4 million for the 32 weeks ended February 5, 1994 and the
31 weeks ended January 29, 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 during
the 31 weeks ended January 29, 1995. As a result of capital expenditures
subsequent to January 29, 1995, Food 4 Less has increased its borrowing under
the F4L Credit Agreement, which, coupled with increased rates, has increased its
interest expense and net loss during such period.
Net Loss
Primarily as a result of the factors discussed above, Holdings' net loss
increased from $6.2 million in the 32 weeks ended February 5, 1994 to $17.6
million in the 31 weeks ended January 29, 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.
48
<PAGE> 80
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 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.
49
<PAGE> 81
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 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. 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
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<PAGE> 82
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 $1.3
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 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 $600 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 $6.5 million is anticipated to be drawn
at the Closing Date. Food 4 Less will also issue up to $350 million principal
amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and
will issue up to $100 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 $160.8 million at
Food 4 Less and $238.2 million at Ralphs, to repay existing mortgage debt of
$174.0 million (excluding prepayment fees) at Ralphs and to pay $84.4 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 $34.4 million (as of June 15, 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 and to pay up to $113.6 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 June 15,
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 $225.9 million. Pursuant to the
New Credit Facility, the New Term Loans will be issued in four tranches: (i)
Tranche A, in the amount of $275 million, will have a six-year term;
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<PAGE> 83
(ii) Tranche B, in the amount of $108.3 million, will have a seven-year term;
(iii) Tranche C, in the amount of $108.3 million, will have an eight-year term;
and, (iv) Tranche D, in the amount of $108.4 million, will have a nine-year
term. The Tranche A Loan may not be fully funded at the Closing Date. The New
Credit Facility will provide that the portion of the Tranche A Loan not funded
at the Closing Date will be available for a period of 91 days following the
Closing Date to fund the Change of Control Offer. The New Term Loans will
require quarterly amortization payments aggregating $3.3 million in the first
year, $36.3 million in the second year and increasing thereafter. The New Credit
Facility will be guaranteed by New Holdings and each of the 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 New Discount Debenture Placement, 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 and approximately $17.6 million of cash
from operating activities during the 52-week period ended June 25, 1994 and the
31 weeks ended January 29, 1995, respectively (as compared to generating
approximately $30.2 million of cash from operating activities during the 32
weeks ended February 5, 1994). The decrease in cash from operating activities is
due primarily to changes in operating assets and liabilities and a decrease in
operating income. 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 $74.8 million at January 29,
1995. Subsequent to January 29, 1995, Holdings continued its practice of using
cash from operations for non-current purposes which increased the working
capital deficit.
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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 31 weeks ended January 29, 1995, Holdings' cash used in
investing activities was $42.6 million. Investing activities consisted primarily
of capital expenditures of $49.0 million, partially offset by $6.5 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds from
sale/leaseback transactions, were financed with cash provided by a combination
of financing and operating activities. The capital expenditures included the
costs associated with the conversion of 11 conventional format stores to the
Food 4 Less warehouse format. See "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. In May 1995, the F4L Credit Agreement was
further amended in order to accommodate Food 4 Less' new fiscal year end and to
make adjustments to Food 4 Less' financial covenants.
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 $11.6 million for the 31
weeks ended January 29, 1995, which consisted primarily of $27.3 million of
borrowings outstanding on the Revolving Credit Facility at January 29, 1995
partially offset by a $11.3 million repayment of the Term Loan. At January 29,
1995, $48.6 million of standby letters of credit had been issued under Food 4
Less' existing letter of credit facility.
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 approximately $61 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
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<PAGE> 85
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 cost savings and growth can be achieved. See "Risk
Factors -- Leverage and Debt Service."
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.
RECENT RESULTS
Ralphs. Ralphs sales for the 12 weeks ended April 23, 1995 (the "first
quarter") increased $21.5 million, or 3.5%, to $637.5 million from $616.0
million in the 12 weeks ended April 24, 1994. Comparable store sales in the
first quarter decreased 2.2% from the corresponding period in the prior year.
Operating income for the 12 weeks ended April 23, 1995 decreased $2.8 million to
$31.3 million from $34.1 million in the 12 weeks ended April 24, 1994. EBITDA
(as defined) in the first quarter of the current fiscal year decreased to $52.3
million from $52.7 million in the comparable period of the prior year. Ralphs
net earnings in the first quarter of the current fiscal year declined $3.5
million from $8.4 million in the first quarter of Fiscal 1994 to $4.9 million in
the first quarter of the current fiscal year. The decline in net earnings was
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largely attributable to an increased level of union health and welfare benefit
credits in the prior fiscal year. Such conditions continue to cause similar
decreases in operating income and net income through the period ended May 26,
1995 as compared to the same period in the preceding year.
Holdings. Holdings' sales for the 12 weeks ended April 23, 1995 increased
$35.7 million, or 6.1%, to $623.6 million from $587.9 million in the 12 week
period ended April 2, 1994. Comparable store sales decreased approximately 2.2%
from the 12 week period in the prior year. EBITDA (as defined) in the first
quarter of the current fiscal year decreased slightly to $30.1 million from
$30.2 million in the prior year's period. Food 4 Less' net loss decreased from
$6.3 million for the 12 weeks ended April 2, 1994 to $5.2 million for the 12
weeks ended April 23, 1995; however, Holdings' net loss for the 1994 period
reflected a charge of $4.5 million related to earthquake damage. Holdings'
increased borrowings for capital expenditures in the current fiscal year and the
resulting increased interest expense contributed to the net loss in the first
quarter of the current year.
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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, New Holdings would have had sales of approximately $5.1 billion and $3.1
billion, operating income of approximately $183 million and $99 million and
EBITDA (as defined) of approximately $343 million and $211 million for the 52
weeks ended June 25, 1994 and the 31 weeks ended January 29, 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 18.5% of sales (excluding meat, service
delicatessen and produce items) during Fiscal 1994. 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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<PAGE> 89
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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<PAGE> 90
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 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. 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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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 a
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> 92
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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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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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 1993, 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> 95
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 Teamsters 1,675 drivers and warehousemen September 13, 1998
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 January 29, 1995, Food 4 Less had a total of 6,157 full-time and 8,860
part-time employees as follows:
<TABLE>
<CAPTION>
EMPLOYEE TYPE UNION NON-UNION TOTAL
---------------------------------- ----- --------- ------
<S> <C> <C> <C>
Hourly............................ 12,348 573 12,921
Salaried.......................... -- 2,096 2,096
------ ----- ------
Total employees......... 12,348 2,669 15,017
</TABLE>
Of Food 4 Less' 15,017 total employees at January 29, 1995, 12,348 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.......................................... 6,869 Southern California October 6, 1996
clerks and meatcutters
Hospital and Service Employees................ 272 Southern California January 19, 1997
store porters
International Brotherhood of Teamsters........ 874 Southern California September 13, 1998
produce drivers
and warehousemen
UFCW.......................................... 927 Northern California March 7, 1998
clerks and meatcutters
UFCW.......................................... 3,115 Southern California February 25, 1996
clerks and meatcutters
Bakery and Confectionery Workers.............. 195 Southern California July 7, 1997
bakers
</TABLE>
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.
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 the 31 weeks ended January 29,
1995, earnings from licensing operations were
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approximately $77,000. 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 TOTAL SELLING
SUPERMARKETS SQUARE FEET SQUARE FEET
-------------- ----------- -----------
OWNED LEASED (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 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
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<PAGE> 99
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 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
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<PAGE> 100
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 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
69
<PAGE> 101
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.
70
<PAGE> 102
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> 103
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> 104
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> 105
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 payments aggregating $880,000 in connection with
the Merger.
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<PAGE> 106
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
$1,848.
75
<PAGE> 107
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR
VALUES -- RALPHS
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)
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>
76
<PAGE> 108
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
Neither New Holdings nor Holdings has operations of its own and neither New
Holdings' nor Holdings' executive officers receive any additional remuneration
for serving as executive officers of such companies. 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 $100,000 for services
rendered in all capacities to Food 4 Less and its subsidiaries for the 31 weeks
ended January 29, 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL YEAR -------------------- ALL OTHER
NAME AND PRINCIPAL POSITION ENDED SALARY($) BONUS($) COMPENSATION(4)($)
- --------------------------------------- ---------------- --------- -------- ------------------
<S> <C> <C> <C> <C>
Ronald W. Burkle, Chairman and......... January 29, 1995(5) -- -- --
Chief Executive Officer(1) June 25, 1994 -- -- --
June 26, 1993 -- -- --
June 27, 1992 -- -- --
George G. Golleher,.................... January 29, 1995(5) 298,100 250,000 3,329
President June 25, 1994 500,000 500,000 3,937
June 26, 1993 500,000 500,000 --
June 27, 1992 500,000 235,000 5,300
Greg Mays, Executive Vice-President.... January 29, 1995(5) 154,300 85,000 2,687
Finance/Administration and June 25, 1994 250,000 150,000 --
Chief Financial Officer(2) June 26, 1993 108,000 75,000 --
June 27, 1992 -- -- --
Joe Burkle,............................ January 29, 1995(5) 124,000 -- --
Executive Vice President(3) June 25, 1994 196,000 50,000 --
June 26, 1993 156,000 -- --
June 27, 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 $1.2 million in the 31 weeks ended
January 29, 1995 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 and Mr. Mays.
(5) Food 4 Less changed its fiscal year end from the 52 or 53-week period which
ends on the last Saturday in June to the 52 or 53-week period which ends on
the Sunday closest to January 31, resulting in a 31-week transition period.
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.
77
<PAGE> 109
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") 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 29, 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."
78
<PAGE> 110
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% 10,783,244 64.6% -- -- 32.7% 30.2%
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% 5,000,000 30.0% -- -- 13.7% 12.6%
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
79
<PAGE> 111
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 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.
80
<PAGE> 112
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) or (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
81
<PAGE> 113
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 all 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 41% 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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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.
The Company will seek the agreement of the current stockholders of FFL and
warrantholders of Holdings to become party to the 1995 Stockholders Agreement,
which would grant to such holders certain rights in replacement of two existing
stockholders agreements among FFL and its stockholders entered into in 1987 and
1991, respectively, and an agreement among Holdings and its warrantholders
executed in 1992.
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
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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 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 $21.5 million, plus reimbursement of expenses in connection with
the Merger and the related transactions. New Holdings will issue $17.5 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."
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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 or
its designee 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 designate a purchaser
for, or resell, the Seller 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 entity certain of whose members are associated with 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"), affiliates of BT
Securities, 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
its members 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) $17.5 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) $2.5 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 has filed 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, provided that
such 60-day holdback period may be shortened or waived by New Holdings with the
consent of the Underwriters for the Public Offerings. 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 (or at
such earlier time as New Holdings and the Underwriters for the Public Offerings
may agree). 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
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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."
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. In connection with the FFL Merger and the Reincorporation Merger,
New Holdings will become a party to a revised tax sharing agreement, which is
substantially similar to 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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DESCRIPTION OF THE NEW DISCOUNT DEBENTURES
GENERAL
The 13 5/8% Senior Discount Debentures due 2005 (the "New Discount
Debentures") will be issued under an indenture (the "New Discount Debenture
Indenture"), to be dated as of June 1, 1995, between New Holdings and United
States Trust Company of New York, as trustee (the "New Discount Debenture
Trustee").
The following summary of certain provisions of the New Discount Debentures
and the New Discount Debenture Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the New Discount Debentures and the New Discount Debenture Indenture, including
the definitions of certain terms therein and those terms made a part of the New
Discount Debenture Indenture by reference to the TIA. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions." A copy of the form of the New Discount Debenture
Indenture may be obtained from New Holdings.
As used below in this "Description of the New Discount Debentures," "New
Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation, as survivor
of the FFL Merger and the Reincorporation Merger, but not any of its
subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The New Discount Debentures will be limited in aggregate principal amount
at maturity to $193,363,570 and will mature on July 15, 2005. The New Discount
Debentures will be issued at a substantial discount from their principal amount.
Until June 15, 2000, no interest will accrue on the New Discount Debentures, but
the Accreted Value 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 15, 2000, on a semi-annual bond equivalent basis using a 360 day year
comprised of twelve 30-day months and actual number of days elapsed, such that
the Accreted Value shall be equal to the full principal amount of the New
Discount Debenture on June 15, 2000. The initial Accreted Value per $1,000
principal amount of New Discount Debentures will be $517.16 (representing the
original purchase price). Beginning on June 15, 2000, cash interest on the New
Discount Debentures will accrue at a rate of 13 5/8% per annum and will be
payable semiannually in arrears on June 15 and December 15 of each year,
commencing December 15, 2000, to the Holders of record on the immediately
preceding June 1 and December 1. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months and actual number of days elapsed.
The New Discount Debentures will be issued in fully registered form only,
without coupons, in denominations of $10.00 and integral multiples thereof.
Initially, the New Discount Debenture Trustee will act as Paying Agent and
Registrar for the New Discount Debentures. The New Discount Debentures may be
presented for registration of transfer and exchange at the offices of the
Registrar, which initially will be the New Discount Debenture Trustee's
corporate trust office. New Holdings may change any Paying Agent and Registrar
without notice to holders of the New Discount Debentures (the "Holders"). New
Holdings will pay the Accreted Value or principal, premium, if any, and interest
on the New Discount Debentures at the New Discount Debenture Trustee's corporate
office located in the Borough of Manhattan, The City of New York. At New
Holdings' option, interest may be paid at the New Discount Debenture Trustee's
corporate office or by check mailed to the registered holders of the New
Discount Debentures at their respective addresses set forth in the register of
Holders of New Discount Debentures. Unless otherwise designated by New Holdings,
New Holdings' office or agency in New York is the office of the New Discount
Debenture Trustee maintained for such purpose.
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OPTIONAL REDEMPTION
On or after June 15, 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, together with accrued and unpaid interest to the
redemption date, if redeemed during the twelve-month period commencing on June
15 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 15, 1998, New Holdings may use
the net proceeds of a Public Equity Offering of New Holdings or the Company 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.
NOTICES AND SELECTION
In the event of a redemption of less than all of the New Discount
Debentures at the option of New Holdings, such New Discount Debentures will be
selected for redemption by the New Discount Debenture Trustee pro rata, by lot
or by any other method that the New Discount Debenture Trustee considers fair
and appropriate and in such manner as complies with applicable legal and stock
exchange requirements, if any; provided, however, that any redemption pursuant
to the provisions relating to a Public Equity Offering shall be made on a pro
rata basis unless such method is otherwise legally prohibited. Notice of
redemption will be mailed at least 30 days but not more than 60 days before the
redemption date to each Holder whose New Discount Debentures are to be redeemed
at such Holder's registered address. New Discount Debentures in denominations of
$1,000 or less principal amount at maturity may be redeemed only in whole and
the New Discount Debenture Trustee may select for redemption portions (equal to
$1,000 principal amount at maturity or any integral multiple thereof) of the
principal amount of New Discount Debentures that have denominations larger than
$1,000 principal amount at maturity. If any New Discount Debenture is to be
redeemed in part, the notice of redemption relating to such New Discount
Debenture will state the portion of the principal amount (in integral multiples
of $10.00 principal amount at maturity) to be redeemed and that a New Discount
Debenture or New Discount Debentures in the principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
surrender of the original New Discount Debenture. On and after the redemption
date, interest will cease to accrue on the New Discount Debentures or portions
thereof called for redemption (unless New Holdings shall default in the payment
of the redemption price or accrued interest). New Discount Debentures that are
redeemed by New Holdings or that are purchased by New Holdings pursuant to a Net
Proceeds Offer as described under "-- Certain Covenants -- Limitation on Asset
Sales" below or pursuant to a Change of Control Offer as described under
"-- Change of Control" below or that are otherwise acquired by New Holdings will
be surrendered to the New Discount Debenture Trustee for cancellation.
RANKING
The New Discount Debentures will be senior unsecured obligations of New
Holdings and will rank senior in right of payment to all Subordinated
Indebtedness of New Holdings, including the Seller Debentures. In addition, the
New Discount Debentures will effectively be subordinated to all liabilities
(including trade payables) of the Company. As of January 29, 1995, on a pro
forma basis after giving effect to the Merger, the FFL Merger and the
Reincorporation Merger (and certain related assumptions), the aggregate
outstanding amount of Subordinated Indebtedness of New Holdings would have been
approximately $131.5 million. However, the New Discount Debentures will
effectively be subordinated to all liabilities (including trade
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payables) of the Company which on the same pro forma basis would have been
approximately $2,833.1 million (excluding letters of credit) at such date.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each Holder
will have the right to require the repurchase of such Holder's New Discount
Debentures pursuant to the offer described below (the "Change of Control
Offer"), at a purchase price equal to 101% of the Accreted Value thereof on the
Change of Control Payment Date (as defined below) (if such date is prior to June
15, 2000) or 101% of the principal amount thereof, plus accrued interest, if
any, to the Change of Control Payment Date (if such date is on or after June 15,
2000).
Within 30 days following the date upon which the Change of Control occurred
(the "Change of Control Date"), New Holdings must send, by first class mail, a
notice to each Holder, with a copy to the New Discount Debenture Trustee, which
notice shall govern the terms of the Change of Control Offer. Such notice shall
state, among other things, the purchase date, which must be no earlier than 30
days nor later than 40 days from the date such notice is mailed, other than as
may be required by law (the "Change of Control Payment Date"). Holders electing
to have a New Discount Debenture purchased pursuant to a Change of Control Offer
will be required to surrender the New Discount Debenture, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the New Discount
Debenture completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day prior to the Change of
Control Payment Date.
The New Discount Debenture Indenture will further provide that,
notwithstanding the foregoing, prior to the mailing of the notice of a Change of
Control Offer referred to above, within 30 days following any Change of Control,
New Holdings will cause the Company to either (a) repay in full and terminate
all commitments under Indebtedness under the Credit Agreement to the extent the
terms thereof require repayment upon a Change of Control (or offer to repay in
full and terminate all commitments under all such Indebtedness under the Credit
Agreement and repay the Indebtedness owed to each lender which has accepted such
offer) or (b) obtain the requisite consents under the Credit Agreement, the
terms of which require repayment upon a Change of Control, to permit the
repurchase of the New Discount Debentures as provided above. New Holdings shall
first comply with the covenant in the immediately preceding sentence before New
Holdings shall be required to repurchase New Discount Debentures pursuant to the
provisions described above. New Holdings' failure to comply with the covenants
described in this paragraph shall constitute an Event of Default under the New
Discount Debenture Indenture.
New Holdings will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other applicable provisions of the federal securities laws
in connection with a Change of Control Offer.
CERTAIN COVENANTS
The New Discount Debenture Indenture will contain, among other things, the
following covenants:
Limitation on Restricted Payments. The New Discount Debenture Indenture
will provide that New Holdings shall not, and shall cause each of its
Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at
the time of such proposed Restricted Payment, or after giving effect thereto,
(a) a Default or an Event of Default shall have occurred and be continuing, (b)
New Holdings or such Subsidiary could not incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Incurrences of Additional Indebtedness" below
or (c) the aggregate amount expended for all Restricted Payments, including such
proposed Restricted Payment (the amount of any Restricted Payment, if other than
cash, to be the fair market value thereof at the date of payment, as determined
in good faith by the Board of Directors of New Holdings, which determination
shall be evidenced by a Board Resolution), subsequent to the Issue Date, shall
exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such
aggregate Consolidated Net Income is a loss, minus 100% of such loss) of New
Holdings earned subsequent to the Issue Date and on or prior to the date the
proposed Restricted Payment occurs (the "Reference Date") plus (ii) 100% of the
aggregate Net Proceeds received by New
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Holdings from any person (other than a Subsidiary) from the issuance and sale
(including upon exchange or conversion for other securities of New Holdings)
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any
Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from
issuances and sales financed directly or indirectly using funds borrowed from
New Holdings or any Subsidiary, until and to the extent such borrowing is
repaid), plus (iii) 100% of the aggregate net cash proceeds received by New
Holdings as capital contributions to New Holdings after the Issue Date, plus
(iv) $25 million.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing as a consequence thereof, the provisions set forth in
the immediately preceding paragraph will not prevent (1) the payment of any
dividend within 60 days after the date of its declaration if the dividend would
have been permitted on the date of declaration, (2) the acquisition of any
shares of Capital Stock of New Holdings or the repurchase, redemption, or other
repayment of any Subordinated Indebtedness in exchange for or solely out of the
proceeds of the substantially concurrent sale (other than to a Subsidiary) of
shares of Qualified Capital Stock of New Holdings, (3) the repurchase,
redemption or other repayment of any Subordinated Indebtedness in exchange for
or solely out of the proceeds of the substantially concurrent sale (other than
to a Subsidiary) of Subordinated Indebtedness of New Holdings with an Average
Life equal to or greater than the then remaining Average Life of the
Subordinated Indebtedness repurchased, redeemed or repaid, (4) any payments by
New Holdings or any Subsidiary required to be made due to the exercise of
statutory dissenters', appraisal or similar rights by holders of common stock of
FFL in connection with the FFL Merger, and (5) Permitted Payments; provided,
however, that (x) the declaration of each dividend paid in accordance with
clause (1) above, each acquisition, repurchase, redemption or other repayment
made in accordance with, or of the type set forth in, clause (2) above, and each
payment described in clause (iii) of the definition of "Permitted Payments"
shall each be counted for purposes of computing amounts expended pursuant to
subclause (c) in the immediately preceding paragraph, and (y) no amounts paid
pursuant to clause (3) or (4) above or pursuant to clause (i), (ii), (iv) or (v)
of the definition of "Permitted Payments" shall be so counted.
Limitation on Incurrences of Additional Indebtedness. The New Discount
Debenture Indenture will provide that New Holdings shall not, and shall not
permit any Subsidiary to, directly or indirectly, incur, assume, guarantee,
become liable, contingently or otherwise, with respect to, or otherwise become
responsible for the payment of (collectively "incur") any Indebtedness other
than Permitted Indebtedness; provided, however, that if no Default with respect
to payment of principal of, or interest on, the New Discount Debentures or Event
of Default shall have occurred and be continuing at the time or as a consequence
of the incurrence of any such Indebtedness, (i) New Holdings may incur
Indebtedness if immediately before and immediately after giving effect to the
incurrence of such Indebtedness the Operating Coverage Ratio of New Holdings
would be greater than 2.0 to 1.0 and (ii) the Company or any subsidiary of the
Company may incur Indebtedness if immediately before and immediately after
giving effect to the incurrence of such Indebtedness the Operating Coverage
Ratio of the Company would be greater than 2.0 to 1.0.
Limitation on Liens. The New Discount Debenture Indenture will provide that
New Holdings shall not create, incur, assume or suffer to exist any Liens upon
any of its assets unless the New Discount Debentures are equally and ratably
secured by the Liens covering such assets, except for (i) existing and future
Liens securing Indebtedness and other obligations of New Holdings and its
Subsidiaries under the Credit Agreement and related documents or any refinancing
or replacement thereof in whole or in part permitted under the New Discount
Debenture Indenture, (ii) Permitted Liens, (iii) Liens securing Acquired
Indebtedness; provided that such Liens (x) are not incurred in connection with,
or in contemplation of, the acquisition of the property or assets acquired and
(y) do not extend to or cover any property or assets of New Holdings or any
Subsidiary other than the property or assets so acquired, (iv) Liens existing on
the Issue Date (after giving effect to the Merger), (v) Liens to secure
Capitalized Lease Obligations and certain other Indebtedness that is otherwise
permitted under the New Discount Debenture Indenture; provided that (A) any such
Lien is created solely for the purpose of securing such other Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
sales and excise taxes, installation and delivery charges and other direct costs
of, and other direct expenses paid or charged in connection therewith) of the
purchase (whether
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through stock or asset purchase, merger or otherwise) or construction or
improvement of the property subject thereto (whether real or personal, including
fixtures and other equipment), (B) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such costs and (C) such Lien does
not extend to or cover any property other than such item of property and any
improvement on such item; (vi) Liens in favor of the New Discount Debenture
Trustee under the New Discount Debenture Indenture and any substantially
equivalent Lien granted to any trustee or similar institution under any
indenture for Indebtedness permitted by the terms of the New Discount Debenture
Indenture; and (vii) any replacement, extension or renewal, in whole or in part,
of any Lien described in this or the foregoing clauses, including in connection
with any refinancing of the Indebtedness, in whole or in part, secured by any
such Lien; provided that to the extent any such clause limits the amount secured
by or the assets subject to such Liens, no replacement, extension or renewal
shall increase the amount or the assets subject to such Liens, except to the
extent that the Liens associated with such additional assets are otherwise
permitted under the New Discount Debenture Indenture.
Limitation on Asset Sales. The New Discount Debenture Indenture will
provide that neither New Holdings nor any of its Subsidiaries shall consummate
an Asset Sale unless (a) New Holdings or the applicable Subsidiary receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold and (b) upon consummation of an Asset Sale, New
Holdings or the applicable Subsidiary will, within 365 days of the receipt of
the proceeds therefrom, either: (i) apply or cause its Subsidiary to apply the
Net Cash Proceeds of any Asset Sale to (1) a Related Business Investment (2) an
investment in properties and assets that replace the properties and assets that
are the subject of such Asset Sale or (3) an investment in properties and assets
that will be used in the business of New Holdings and its Subsidiaries existing
on the Issue Date or in a business reasonably related thereto; (ii) in the case
of a sale of a store or stores, deem such Net Cash Proceeds to have been applied
to the extent of any capital expenditures made to acquire or construct a
replacement store in the general vicinity of the store sold within 365 days
preceding the date of the Asset Sale; (iii) apply or cause to be applied such
Net Cash Proceeds to the repayment of Pari Passu Indebtedness of New Holdings or
any Indebtedness of any Subsidiary; (iv) use such Net Cash Proceeds to secure
Letter of Credit Obligations to the extent the related letters of credit have
not been drawn upon or returned undrawn; or (v) after such time as the
accumulated Net Cash Proceeds equals or exceeds $20 million, apply or cause to
be applied such Net Cash Proceeds to the purchase of New Discount Debentures
tendered to New Holdings pursuant to an offer to purchase made by New Holdings
as set forth below (a "Net Proceeds Offer") for purchase at a price equal to
100% of the Accreted Value thereof on the date of purchase, if such date is
prior to June 15, 2000 or 100% of the principal amount thereof, plus accrued
interest to the date of purchase if such date is on or after June 15, 2000. A
Net Proceeds Offer as a result of an Asset Sale made by New Holdings or one of
its Subsidiaries shall not be required to be in excess of the Net Cash Proceeds
of such Asset Sale less the Net Cash Proceeds actually applied in accordance
with clauses (b)(i), (ii), (iii) or (iv) above; provided, however, that New
Holdings shall have the right to exclude from the foregoing provisions Asset
Sales subsequent to the Issue Date, the proceeds of which are derived from the
sale and substantially concurrent lease-back of one or more supermarkets and/or
related assets or equipment which are acquired or constructed by New Holdings or
a Subsidiary subsequent to the date that is six months prior to the Issue Date,
provided that any such sale and substantially concurrent lease-back occurs
within 270 days following such acquisition or the completion of such
construction, as the case may be.
Each Net Proceeds Offer will be mailed to record Holders of New Discount
Debentures as shown on the register of Holders not less than 325 nor more than
365 days after the relevant Asset Sale, with a copy to the New Discount
Debenture Trustee, shall specify the purchase date (which shall be no earlier
than 30 days nor later than 40 days from the date such notice is mailed) and
shall otherwise comply with the procedures set forth in the New Discount
Debenture Indenture. Upon receiving notice of the Net Proceeds Offer, Holders
may elect to tender the New Discount Debentures in whole or in part in integral
multiples of $10.00 in exchange for cash. To the extent Holders properly tender
New Discount Debentures in an amount exceeding the Net Proceeds Offer, New
Discount Debentures of tendering Holders will be repurchased on a pro rata basis
(based on amounts tendered).
New Holdings will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of New Discount Debentures pursuant to a Net Proceeds Offer.
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Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The New Discount Debenture Indenture will provide that New
Holdings shall not, and shall not permit any Subsidiary to, directly or
indirectly, create or suffer to exist, or allow to become effective any
consensual Payment Restriction with respect to any of its Subsidiaries, except
for (a) any such restrictions contained in (i) the Credit Agreement as in effect
on the Issue Date, as any such Payment Restriction may apply to any present or
future Subsidiary, (ii) the New Discount Debenture Indenture, the Seller
Debenture Indenture, the Senior Discount Note Indenture, the indentures with
respect to Existing Indebtedness and any other agreement in effect at or entered
into on the Issue Date, (iii) Indebtedness of a person existing at the time such
person becomes a Subsidiary (provided that (x) such Indebtedness is not incurred
in connection with, or in contemplation of, such person becoming a Subsidiary,
(y) such restriction is not applicable to any person, or the properties or
assets of any person, other than the person so acquired and (z) such
Indebtedness is otherwise permitted to be incurred pursuant to the provisions of
the covenant described under "-- Limitation on Incurrences of Additional
Indebtedness" above), (iv) secured Indebtedness otherwise permitted to be
incurred pursuant to the provisions of the covenants described under
"-- Limitation on Incurrences of Additional Indebtedness" and "-- Limitation on
Liens" above that limit the right of the debtor to dispose of the assets
securing such Indebtedness; (b) customary non-assignment provisions restricting
subletting or assignment of any lease or other agreement entered into by a
Subsidiary; (c) customary net worth provisions contained in leases and other
agreements entered into by a Subsidiary in the ordinary course of business; (d)
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary; (e) customary provisions
in joint venture agreements and other similar agreements; (f) restrictions
contained in Indebtedness incurred to refinance, refund, extend or renew
Indebtedness referred to in clause (a) above; provided that the restrictions
contained therein are not materially more restrictive taken as a whole than
those provided for in such Indebtedness being refinanced, refunded, extended or
renewed and (g) Payment Restrictions contained in any other Indebtedness
permitted to be incurred subsequent to the Issue Date pursuant to the provisions
of the covenant described under "-- Limitation on Incurrences of Additional
Indebtedness" above; provided that any such Payment Restrictions are ordinary
and customary with respect to the type of Indebtedness being incurred (under the
relevant circumstances) and, in any event, no more restrictive than the most
restrictive Payment Restrictions in effect on the Issue Date.
Limitation on Transactions with Affiliates. The New Discount Debenture
Indenture will provide that neither New Holdings nor any of its Subsidiaries
shall (i) sell, lease, transfer or otherwise dispose of any of its properties or
assets or issue securities (other than equity securities which do not constitute
Disqualified Capital Stock) to, (ii) purchase any property, assets or securities
(other than equity securities which do not constitute Disqualified Capital
Stock) from, (iii) make any Investment in, or (iv) enter into or suffer to exist
any contract or agreement with or for the benefit of, an Affiliate or
Significant Stockholder (or any Affiliate of such Significant Stockholder) of
New Holdings or any Subsidiary (an "Affiliate Transaction"), other than (x)
Affiliate Transactions permitted under the following paragraph and (y) Affiliate
Transactions in the ordinary course of business that are fair to New Holdings or
such Subsidiary, as the case may be, and on terms at least as favorable as might
reasonably have been obtainable at such time from an unaffiliated party;
provided, that (A) with respect to Affiliate Transactions involving aggregate
payments in excess of $1 million and less than $5 million, New Holdings or such
Subsidiary, as the case may be, shall have delivered an Officers' Certificate to
the New Discount Debenture Trustee certifying that such transaction or series of
transactions complies with clause (y) above (other than the requirement set
forth in such clause (y) that such Affiliate Transaction be in the ordinary
course of business), (B) with respect to Affiliate Transactions involving
aggregate payments in excess of $5 million and less than $15 million, New
Holdings or such Subsidiary, as the case may be, shall have delivered an
Officers' Certificate to the New Discount Debenture Trustee certifying that such
Affiliate Transaction complies with clause (y) above (other than the requirement
set forth in such clause (y) that such Affiliate Transaction be in the ordinary
course of business) and that such Affiliate Transaction has received the
approval of a majority of the disinterested members of the Board of Directors of
New Holdings or the Subsidiary, as the case may be, or, in the absence of any
such approval by the disinterested members of the Board of Directors of New
Holdings or the Subsidiary, as the case may be, that an Independent Financial
Advisor has reasonably and in good faith determined that the financial terms of
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such Affiliate Transaction are fair to New Holdings or such Subsidiary, as the
case may be, or that the terms of such Affiliate Transaction are at least as
favorable as might reasonably have been obtained at such time from an
unaffiliated party and that such Independent Financial Advisor has provided
written confirmation of such determination to the Board of Directors and (C)
with respect to Affiliate Transactions involving aggregate payments in excess of
$15 million, New Holdings or such Subsidiary, as the case may be, shall have
delivered to the New Discount Debenture Trustee, a written opinion from an
Independent Financial Advisor to the effect that the financial terms of such
Affiliate Transaction are fair to New Holdings or such Subsidiary, as the case
may be, or that the terms of such Affiliate Transaction are at least as
favorable as those that might reasonably have been obtained at the time from an
unaffiliated party.
The provisions of the foregoing paragraph shall not apply to (i) any
Permitted Payment, (ii) any Restricted Payment that is made in compliance with
the provisions of the covenant described under "-- Limitation on Restricted
Payments" above, (iii) reasonable and customary fees and compensation paid to,
and indemnity provided on behalf of, officers, directors, employees or
consultants of New Holdings or any Subsidiary, as determined by the Board of
Directors of New Holdings or any Subsidiary or the senior management thereof in
good faith, (iv) transactions exclusively between or among New Holdings and any
of its wholly-owned Subsidiaries or exclusively between or among such
wholly-owned Subsidiaries, provided such transactions are not otherwise
prohibited by the New Discount Debenture Indenture, (v) any agreement as in
effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) so long as
any such amendment is not disadvantageous to the Holders in any material
respect, (vi) the existence of, or the performance by New Holdings or any of its
Subsidiaries of its obligations under the terms of, any stockholder agreement
(including any registration rights agreement or purchase agreement related
thereto) to which it is a party as of the Issue Date and any similar agreements
which it may enter into thereafter; provided, however, that the existence of, or
the performance by New Holdings or any Subsidiaries of obligations under any
future amendment to, any such existing agreement or under any similar agreement
entered into after the Issue Date shall only be permitted by this clause (vi) to
the extent that the terms of any such amendment or new agreement are not
otherwise disadvantageous to the Holders in any material respect, (vii)
transactions permitted by, and complying with, the provisions of the covenant
described under "-- Limitation on Mergers and Certain Other Transactions" below,
and (viii) transactions with suppliers or other purchases or sales of goods or
services, in each case, in the ordinary course of business (including, without
limitation, pursuant to joint venture agreements) and otherwise in compliance
with the terms of the New Discount Debenture Indenture which are fair to New
Holdings or any Subsidiary, in the reasonable determination of the Board of
Directors or senior management of New Holdings, or are on terms at least as
favorable as might reasonably have been obtained at such time from an
unaffiliated party.
Limitations on Preferred Stock of Subsidiaries. The New Discount Debenture
Indenture will provide that New Holdings will not permit any of its Subsidiaries
to issue any Preferred Stock (other than to New Holdings or a wholly-owned
Subsidiary), or permit any person (other than New Holdings or a wholly-owned
Subsidiary) to own or hold an interest in any Preferred Stock of any such
Subsidiary, unless such Subsidiary would be entitled to incur Indebtedness in
accordance with the provisions described above under "-- Limitation on
Incurrence of Additional Indebtedness" in the aggregate principal amount equal
to the aggregate liquidation value of such Preferred Stock.
No Amendment to Subordination Provisions of Seller Debentures. The New
Discount Debenture Indenture will provide that New Holdings will not amend,
modify or alter the Seller Debenture Indenture in any way that would (i)
increase the principal of, advance the final maturity date of or shorten the
Weighted Average Life to Maturity of any Seller Debentures such that the final
maturity date of the Seller Debentures is earlier than the 91st day following
the final maturity date of the New Discount Debentures or (ii) amend the
provisions of Article Eleven of the Seller Debenture Indenture (which relates to
subordination) or the defined terms used therein in a manner that would be
adverse to the Holders of the New Discount Debentures; provided, however, that
it is understood that any amendment the purpose of which is to permit the
incurrence of additional Indebtedness under the Seller Debenture Indenture shall
not be construed as adversely affecting the subordination provisions of any
Seller Debentures.
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Limitations on Mergers and Certain Other Transactions. The New Discount
Debenture Indenture will provide that New Holdings, in a single transaction or
through a series of related transactions, shall not (i) consolidate with or
merge with or into any other person, or transfer (by lease, assignment, sale or
otherwise) all or substantially all of its properties and assets as an entirety
or substantially as an entirety to another person or group of affiliated persons
or (ii) adopt a Plan of Liquidation, unless, in either case, (1) either New
Holdings shall be the continuing person, or the person (if other than New
Holdings) formed by such consolidation or into which New Holdings is merged or
to which all or substantially all of the properties and assets of New Holdings
as an entirety or substantially as an entirety are transferred (or, in the case
of a Plan of Liquidation, any person to which assets are transferred) (New
Holdings or such other person being hereinafter referred to as the "Surviving
Person") shall be a corporation organized and validly existing under the laws of
the United States, any state thereof or the District of Columbia, and shall
expressly assume, by an indenture supplement, all the obligations of New
Holdings under the New Discount Debentures and the New Discount Debenture
Indenture; (2) immediately after and giving effect to such transaction and the
assumption contemplated by clause (1) above and the incurrence or anticipated
incurrence of any Indebtedness to be incurred in connection therewith, (A) the
Surviving Person shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of New Holdings immediately preceding the
transaction, and (B) the Surviving Person could incur at least $1 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the provisions of
the covenant described under the heading "-- Limitation on Incurrences of
Additional Indebtedness" above; and (3) immediately before and immediately after
and giving effect to such transaction and the assumption of the obligations as
set forth in clause (1) above and the incurrence or anticipated incurrence of
any Indebtedness to be incurred in connection therewith, no Default or Event of
Default shall have occurred and be continuing.
The New Discount Debenture Indenture will provide that upon any
consolidation or merger or any transfer of all or substantially all of the
assets of New Holdings or any adoption of a Plan of Liquidation by New Holdings
in accordance with the foregoing, the surviving person formed by such
consolidation or into which New Holdings is merged or to which such transfer is
made (or, in the case of a Plan of Liquidation, to which assets are transferred)
shall succeed to, and be substituted for, and may exercise every right and power
of, New Holdings under the New Discount Debenture Indenture with the same effect
as if such surviving person had been named as New Holdings therein; provided,
however, that solely for purposes of computing amounts described in subclause
(c) of the first paragraph of the covenant described under " -- Limitation on
Restricted Payments" above, any such surviving person shall only be deemed to
have succeeded to and be substituted for New Holdings with respect to periods
subsequent to the effective time of such merger, consolidation or transfer of
assets. When a successor corporation assumes all of the obligations of New
Holdings under the New Discount Debenture Indenture and under the New Discount
Debentures and agrees to be bound thereby, the predecessor shall be released
from such obligations.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more direct or indirect
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of New Holdings shall be deemed to be the transfer of
all or substantially all of the properties and assets of New Holdings.
EVENTS OF DEFAULT
The following events constitute "Events of Default" under the New Discount
Debenture Indenture: (i) failure to make any payment of interest on the New
Discount Debentures when due and the continuance of such default for a period of
30 days; (ii) failure to pay principal of, or premium, if any, on the New
Discount Debentures when due, whether at maturity, upon acceleration, redemption
or otherwise (including the failure to repurchase New Discount Debentures
tendered pursuant to the requirements set forth in the covenants described under
the headings "-- Certain Covenants -- Change of Control" and "-- Certain
Covenants -- Limitation on Asset Sales"), (iii) failure to comply with any other
agreement or covenant contained in, or provisions of, the New Discount
Debentures or the New Discount Debenture Indenture, if such failure continues
unremedied for 30 days after notice given by the New Discount Debenture Trustee
or
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the Holders of at least 25% in principal amount of the New Discount Debentures
then outstanding (except in the case of a default with respect to the covenants
described under the headings "-- Certain Covenants -- Limitation on Restricted
Payments," "-- Change of Control," "-- Certain Covenants -- Limitation on Asset
Sales" and "-- Certain Covenants -- Limitations on Mergers and Certain Other
Transactions," which shall constitute Events of Default with notice but without
passage of time); (iv) a default under any bond, debenture, or other evidence of
Indebtedness of New Holdings or of any Significant Subsidiary or under any
mortgage, indenture or other instrument under which there may be issued or by
which there may be secured or evidenced any such Indebtedness, whether such
Indebtedness now exists or shall hereafter be created, if both (A) such default
either (1) results from the failure to pay such Indebtedness at its stated final
maturity or (2) relates to an obligation (other than the obligation to pay any
principal of such Indebtedness at its stated final maturity) and results in the
holder or holders of such Indebtedness causing such Indebtedness to become due
prior to its stated final maturity and (B) the principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
in default for failure to pay principal at stated final maturity or the maturity
of which has been so accelerated, aggregates $25 million or more at any one time
outstanding; (v) New Holdings or any Significant Subsidiary (a) commences a
voluntary case or proceeding under any Bankruptcy Law with respect to itself,
(b) consents to the entry of a judgment, decree or order for relief against it
in an involuntary case or proceeding under any Bankruptcy Law, (c) consents to
the appointment of a Custodian of it or for all or substantially all of its
property, or (d) makes a general assignment for the benefit of its creditors;
(vi) a court of competent jurisdiction enters a judgment, decree or order for
relief in respect of New Holdings or any Significant Subsidiary in an
involuntary case or proceeding under any Bankruptcy Law, which shall (a) approve
as properly filed a petition seeking reorganization, arrangement, adjustment or
composition in respect of New Holdings or any Significant Subsidiary, (b)
appoint a Custodian of New Holdings or any Significant Subsidiary or for all or
any substantial part of their respective properties or (c) order the winding-up
or liquidation of New Holdings' or any Significant Subsidiary's affairs; and
such judgment, decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; (vii) the lenders under the Credit Agreement shall
commence judicial proceedings to foreclose upon any material portion of the
assets of New Holdings and its Subsidiaries; or (viii) any final judgment or
order for payment of money in excess of $25 million shall be entered against New
Holdings or any Significant Subsidiary by a court of competent jurisdiction and
shall remain undischarged for a period of 60 days after such judgment becomes
final and nonappealable. In the event of a declaration of acceleration because
an Event of Default set forth in clause (iv) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if either (i) the holders of the Indebtedness which is the subject
of such Event of Default have waived such failure to pay at maturity or have
rescinded the acceleration in respect of such Indebtedness within 90 days of
such maturity or declaration of acceleration, as the case may be, and no other
Event of Default has occurred during such 90-day period which has not been cured
or waived, or (ii) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured (and any acceleration based thereon of
such other Indebtedness has been rescinded), within 90 days of such maturity or
declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of New Holdings or any
Significant Subsidiary) occurs and is continuing, the New Discount Debenture
Trustee or the Holders of at least 25% in aggregate principal amount of the New
Discount Debentures then outstanding may declare the Default Amount due and
payable by notice in writing to New Holdings, the administrative agent under the
Credit Agreement and the New Discount Debenture Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become due and payable upon the first to occur of an acceleration under
the Credit Agreement, or five business days after receipt by New Holdings and
the administrative agent under the Credit Agreement of such Acceleration Notice.
If an Event of Default resulting from certain events of bankruptcy, insolvency,
receivership or reorganization shall occur with respect to New Holdings or a
Significant Subsidiary, the Default Amount shall ipso facto become immediately
due and payable without any declaration or other act on the part of the New
Discount Debenture Trustee or any of
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the Holders of the New Discount Debentures. Subject to certain conditions, the
Holders of a majority in aggregate principal amount of the New Discount
Debentures then outstanding, by notice to the New Discount Debenture Trustee,
may rescind an acceleration if all existing Events of Default are remedied. In
certain cases the Holders of at least a majority in principal amount of
outstanding New Discount Debentures may waive any past default and its
consequences, except a default in the payment of principal of or interest on any
of the New Discount Debentures.
The New Discount Debenture Indenture provides that if a Default or an Event
of Default occurs and is continuing thereunder and if it is known to the New
Discount Debenture Trustee, the New Discount Debenture Trustee shall mail to
each Holder of the New Discount Debentures notice of the uncured Default or
Event of Default within 90 days after such Default or Event of Default occurs;
provided, however, that, except in the case of a Default or Event of Default in
the payment of principal of, premium, if any, or interest on, any New Discount
Debenture, including the failure to make payment on the Change of Control
Payment Date pursuant to a Change of Control Offer or payment when due pursuant
to a Net Proceeds Offer, the New Discount Debenture Trustee may withhold such
notice if it in good faith determines that withholding such notice is in the
interest of the Holders.
The New Discount Debenture Indenture provides that no holder may pursue any
remedy thereunder unless the New Discount Debenture Trustee (i) shall have
failed to act for a period of 60 days after receiving written notice of a
continuing Event of Default by such Holder and a written request to act by
Holders of at least 25% in principal amount of the New Discount Debentures and
(ii) has received indemnification satisfactory to it; provided, however, that
such provision does not affect the right of any Holder to sue for enforcement of
any overdue payment on the New Discount Debentures.
Under the New Discount Debenture Indenture, two officers of New Holdings
are required to certify to the New Discount Debenture Trustee within 120 days
after the end of each fiscal year of New Holdings whether or not they know of
any Default or Event of Default that occurred during such fiscal year and, if
applicable, describe such Default or Event of Default and the status thereof.
DEFEASANCE OF INDENTURE
New Holdings may, at its option and at any time, elect to have New
Holdings' obligations discharged with respect to the outstanding New Discount
Debentures. Such Legal Defeasance means that New Holdings shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
New Discount Debentures except for (i) the rights of Holders of outstanding New
Discount Debentures to receive payments in respect of the principal of, premium,
if any, and interest on such New Discount Debentures when such payments are due
solely from the funds held by the New Discount Debenture Trustee in the trust
referred to below; (ii) New Holdings' obligations to issue temporary New
Discount Debentures, register the transfer or exchange of New Discount
Debentures, replace mutilated, destroyed, lost or stolen New Discount Debentures
and maintain an office or agency for payments in respect of the New Discount
Debentures and money for security payments held in trust in respect of the New
Discount Debentures; (iii) the rights, powers, trusts, duties and immunities of
the New Discount Debenture Trustee and New Holdings' obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the New Discount
Debenture Indenture. In addition, New Holdings may, at its option and at any
time elect to have the obligations of New Holdings released with respect to
certain covenants described above under "-- Certain Covenants" ("Covenant
Defeasance"), and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the New Discount
Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the New Discount Debentures, (i) New Holdings must have irrevocably
deposited with the New Discount Debenture Trustee, in trust, for the benefit of
the Holders of the New Discount Debentures, cash in U.S. dollars, U.S.
Government Obligations (as defined in the New Discount Debenture Indenture), or
a combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding New Discount
Debentures to redemption or maturity provided that the New Discount Debenture
Trustee shall have been irrevocably instructed to apply such money or the
proceeds of such U.S. Government Obligations to said payments with respect to
the New Discount Debentures on the Maturity Date or such redemption date, as the
case may be;
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(ii) in the case of Legal Defeasance, New Holdings shall have delivered to the
New Discount Debenture Trustee an opinion of counsel stating that (A) New
Holdings has received from, or there has been published by, the Internal Revenue
Service a ruling or (B) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of outstanding
New Discount Debentures will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, New Holdings shall have delivered to the New
Discount Debenture Trustee an opinion of counsel stating that the Holders of
outstanding New Discount Debentures will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clauses (v) and (vi) under
the first paragraph under "-- Events of Default" above are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, the New Discount Debenture
Indenture or any other material agreement or instrument to which New Holdings is
a party or by which it is bound (and in that connection, the New Discount
Debenture Trustee shall have received a certificate from the Agent under the
Credit Agreement to that effect with respect to such Credit Agreement if then in
effect); (vi) New Holdings shall have delivered to the New Discount Debenture
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) New Holdings shall have delivered to the New Discount
Debenture Trustee an Officers' Certificate stating that the deposit was not made
by New Holdings with the intent of preferring the Holders of the New Discount
Debentures over other creditors of New Holdings or with the intent of defeating,
hindering, delaying or defrauding creditors of Holdings, or others; and (viii)
New Holdings shall have delivered to the New Discount Debenture Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or Covenant
Defeasance, have been complied with.
SATISFACTION AND DISCHARGE
The New Discount Debenture Indenture will be discharged and will cease to
be of further effect as to all outstanding New Discount Debentures when either
(a) all New Discount Debentures theretofore authenticated and delivered (except
lost, stolen or destroyed New Discount Debentures which have been replaced or
paid and New Discount Debentures for whose payment money has theretofore been
deposited in trust and thereafter repaid to New Holdings) have been delivered to
the New Discount Debenture Trustee for cancellation; or (b)(i) all New Discount
Debentures not theretofore delivered to the New Discount Debenture Trustee for
cancellation have become due and payable by reason of the making of a notice of
redemption or otherwise and New Holdings has irrevocably deposited or caused to
be deposited with the New Discount Debenture Trustee as trust funds in trust for
the purpose an amount of money sufficient to pay and discharge the entire
indebtedness on the New Discount Debentures not theretofore delivered to the New
Discount Debenture Trustee for cancellation for principal, premium, if any, and
accrued interest to the date of maturity or redemption; (ii) New Holdings has
paid all sums payable by it under the New Discount Debenture Indenture; and
(iii) New Holdings has delivered irrevocable instructions to the New Discount
Debenture Trustee to apply the deposited money toward the payment of the New
Discount Debentures at maturity or the redemption date, as the case may be. In
addition, New Holdings must deliver an Officers' Certificate and an opinion of
counsel to the New Discount Debenture Trustee stating that all conditions
precedent to satisfaction and discharge have been complied with.
MODIFICATION OF THE NEW DISCOUNT DEBENTURE INDENTURE
The New Discount Debenture Indenture and the New Discount Debentures may be
amended or supplemented (and compliance with any provision thereof may be
waived) by New Holdings, the New Discount Debenture Trustee and the Holders of
at least a majority in aggregate principal amount of the New
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Discount Debentures then outstanding, except that (i) without the consent of
each Holder of New Discount Debentures affected, no such amendment, supplement
or waiver may (1) change the principal amount of New Discount Debentures whose
Holders must consent to an amendment, supplement or waiver of any provision of
the New Discount Debenture Indenture or the New Discount Debentures; (2) reduce
the rate or extend the time for payment of interest on any New Discount
Debenture; (3) reduce the Accreted Value of any New Discount Debenture; (4)
reduce the principal amount of any New Discount Debenture; (5) change the
Maturity Date of any New Discount Debenture, or alter the redemption provisions
in a manner adverse to any Holder; (6) make any changes in the provisions
concerning waivers of Defaults or Events of Default by Holders or the rights of
Holders to recover the principal of, interest on, or redemption payment with
respect to, any New Discount Debenture, or (7) make the principal of, or the
interest on, any New Discount Debentures payable with anything or in any manner
other than as provided for in the New Discount Debenture Indenture and the New
Discount Debentures as in effect on the date of the New Discount Debenture
Indenture and (ii) without the consent of Holders of not less than 75% in
aggregate principal amount of New Discount Debentures then outstanding, no such
amendment, supplement or waiver may change the Change of Control Payment Date or
the purchase price in connection with any repurchase of New Discount Debentures
pursuant to the covenant described under "-- Change of Control" above in a
manner adverse to any Holder or waive a Default or Event of Default resulting
from a failure to comply with the covenant described under "-- Change of
Control" above.
In addition, New Holdings and the New Discount Debenture Trustee may amend
the New Discount Debenture Indenture and the New Discount Debentures (a) to cure
any ambiguity, defect or inconsistency therein; provided, that such amendment or
supplement does not adversely affect the rights of any Holder or (b) to make any
other change that does not adversely affect the rights of any Holder thereunder
in any material respect.
THE NEW DISCOUNT DEBENTURE TRUSTEE
The Holders of a majority in principal amount of the outstanding New
Discount Debentures may remove the New Discount Debenture Trustee and appoint a
successor trustee with New Holdings' consent, by so notifying the New Discount
Debenture Trustee to be so removed and New Holdings. In addition, the Holders of
a majority in principal amount of the outstanding New Discount Debentures have
the right, subject to certain limitations, to direct the time, method and place
of conducting any proceeding for any remedy available to the New Discount
Debenture Trustee or of exercising any trust or power conferred on the New
Discount Debenture Trustee.
The New Discount Debenture Indenture provides that, in case a Default or an
Event of Default has occurred and is continuing, the New Discount Debenture
Trustee thereunder shall exercise such of the rights and powers vested in it by
the New Discount Debenture Indenture, and use the same degree of care and skill
in the exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. Subject to the latter
provision, the New Discount Debenture Trustee is under no obligation to exercise
any of its rights or powers under the New Discount Debenture Indenture at the
request, order or direction of any of the Holders, unless they shall have
offered to the New Discount Debenture Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred thereby. If
New Holdings fails to pay such amounts of principal of, or interest on, the New
Discount Debentures as shall have become due and payable upon demand as
specified in the New Discount Debenture Indenture, the New Discount Debenture
Trustee thereunder, at the request of the Holders of a majority in aggregate
principal amount of the New Discount Debentures at the time outstanding, and
upon being offered such reasonable indemnity as it may be required against the
costs, expenses and liabilities incurred by it, except as a result of its
negligence or bad faith, shall institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and collect in the
manner provided by law the monies adjudged or decreed to be payable.
The New Discount Debenture Indenture contains limitations on the rights of
the New Discount Debenture Trustee, should it become a creditor of New Holdings,
to obtain payment of claims in certain cases or to be realized on certain
property received by it in respect of any such claims, securities or otherwise.
The
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New Discount Debenture Trustee is permitted to engage in other transactions;
however, if the New Discount Debenture Trustee acquires any "conflicting
interest," it must eliminate such conflict or resign.
The New Discount Debenture Trustee is also the trustee for (a) the 11%
Senior Subordinated Notes due 2005 of the Company; (b) the 9% Senior
Subordinated Notes due 2003 of the Company; (c) the 10 1/4% Senior Subordinated
Notes due 2002 of the Company; (d) the 13.75% Senior Subordinated Notes due 2005
of the Company; and (e) the 13.75% Senior Subordinated Notes due 2001 of the
Company.
REPORTS
The New Discount Debenture Indenture will provide that to the extent
permitted by applicable law or regulation, whether or not New Holdings is
subject to the requirements of Section 13 or 15(d) of the Exchange Act, New
Holdings shall file with the SEC all quarterly and annual reports and such other
information, documents or other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) required to be
filed pursuant to such provisions of the Exchange Act. New Holdings shall file
with the New Discount Debenture Trustee, within 15 days after it files the same
with the SEC, copies of the quarterly and annual reports and the information,
documents, and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) that it is required to file
with the SEC pursuant to the New Discount Debenture Indenture. New Holdings
shall also comply with the other provisions of TIA sec. 314(a). If New Holdings
is not permitted by applicable law or regulations to file the aforementioned
reports, New Holdings (at its own expense) shall file with the New Discount
Debenture Trustee and mail, or cause the New Discount Debenture Trustee to mail,
to Holders at their addresses appearing in the register of New Discount
Debentures maintained by the Registrar at the time of such mailing within 5 days
after it would have been required to file such information with the SEC, all
information and financial statements, including any notes thereto and with
respect to annual reports, an auditors' report by an accounting firm of
established national reputation, and a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," comparable to the disclosure
that New Holdings would have been required to include in annual and quarterly
reports, information, documents or other reports, including, without limitation,
reports on Forms 10-K, 10-Q and 8-K, if New Holdings was subject to the
requirements of such Section 13 or 15(d) of the Exchange Act.
CERTAIN DEFINITIONS
"Accreted Value" means, per $1,000 principal amount (at maturity) of the
New Discount Debentures, (i) as of any date of determination prior to June 15,
2000, the sum of (A) $517.16, representing the initial purchase price of each
New Discount Debenture and (B) the portion of the excess of the principal amount
of each New Discount Debenture over such initial purchase price which shall have
been accreted through such date, such amount to be so accreted on a daily basis
and compounded semi-annually on each June 15 and December 15 at the rate of
13 5/8% per annum from the date of issuance of the New Discount Debentures
through the date of determination, computed on the basis of a 360-day year of
twelve 30-day months and (ii) from and after June 15, 2000, $1,000.
"Acquired Indebtedness" means Indebtedness of a person or any of its
subsidiaries existing at the time such person becomes a Subsidiary or assumed in
connection with the acquisition of assets from such person and not incurred by
such person in connection with, or in anticipation or contemplation of, such
person becoming a Subsidiary or such acquisition.
"Affiliate" means, with respect to any person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"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
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the New Discount Debenture Indenture, neither BT
Securities Corporation nor any of its Affiliates shall be deemed to be an
Affiliate of New Holdings or any of its Subsidiaries.
"Asset Sale" means, with respect to any person, any sale, transfer or other
disposition or series of sales, transfers or other dispositions (including,
without limitation, by merger or consolidation or by exchange of
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assets and whether by operation of law or otherwise) made by such person or any
of its subsidiaries to any person other than such person or one of its
wholly-owned subsidiaries (or, in the case of a sale, transfer or other
disposition by a Subsidiary, to any person other than New Holdings or a directly
or indirectly wholly-owned Subsidiary) of any assets of such person or any of
its subsidiaries including, without limitation, assets consisting of any Capital
Stock or other securities held by such person or any of its subsidiaries, and
any Capital Stock issued by any subsidiary of such person, in each case, outside
of the ordinary course of business, excluding, however, any sale, transfer or
other disposition, or series of related sales, transfers or other dispositions
(i) involving only Excluded Assets, (ii) resulting in Net Proceeds to New
Holdings and the Subsidiaries of $500,000 or less, (iii) pursuant to any
foreclosure of assets or other remedy provided by applicable law to a creditor
of New Holdings or any Subsidiary with a Lien on such assets, which Lien is
permitted under the New Discount Debenture Indenture, provided that such
foreclosure or other remedy is conducted in a commercially reasonable manner or
in accordance with any Bankruptcy Law, involving only Cash Equivalents or
inventory in the ordinary course of business or obsolete equipment in the
ordinary course of business consistent with past practices of New Holdings or
its Subsidiaries, (v) involving only the lease or sub-lease of any real or
personal property in the ordinary course of business or (vi) the proceeds of
such Asset Sale which are not applied as contemplated in "-- Certain
Covenants -- Limitation on Asset Sales" and which, together with all other such
Asset Sale proceeds, do not exceed $20 million.
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the number of years from the date of determination to the dates of each
successive scheduled principle payments of such debt security multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any person, the Board of
Directors of such person or any committee of the Board of Directors of such
person duly authorized, with respect to any particular matter, to exercise the
power of the Board of Directors of such person.
"Board Resolution" means, with respect to any person, a duly adopted
resolution of the Board of Directors of such person.
"Business Day" means a day that is not a Legal Holiday.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such person,
including Preferred Stock.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by any agency or instrumentality thereof and backed by the full faith and
credit of the United States of America, (ii) commercial paper rated the highest
grade by Moody's Investors Service, Inc and Standard & Poor's Ratings Group and
maturing not more than one year from the date of creation thereof, (iii) time
deposits with, and certificates of deposit and banker's acceptances issued by,
any bank having capital surplus and undivided profits aggregating at least $500
million and maturing not more than one year from the date of creation thereof,
(iv) repurchase agreements that are secured by a perfected security interest in
an obligation described in clause (i) and are with any bank described in clause
(iii), (v) shares of any money market mutual fund that (a) has at least 95% of
its assets invested continuously in the types of investments referred to in
clauses (i) and (ii) above, (b) has net assets of not less than $500 million,
and (c) has the highest rating obtainable from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. and (vi) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group.
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"Change of Control" means (I) the acquisition after the Issue Date, in one
or more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any person or entity (other than any Permitted
Holder) or (ii) any group of persons or entities (excluding any Permitted
Holders) who constitute a group (within the meaning of Section 13(d)(3) of the
Exchange Act), in either case, of any securities of New Holdings such that, as a
result of such acquisition, such person, entity or group beneficially owns
(within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, 40% or more of the then outstanding voting securities entitled to
vote on a regular basis for a majority of the Board of Directors of New Holdings
(but only to the extent that such beneficial ownership is not shared with any
Permitted Holder who has the power to direct the vote thereof); provided,
however, that no such Change of Control shall be deemed to have occurred if (A)
the Permitted Holders beneficially own, in the aggregate, at such time, a
greater percentage of such voting securities than such other person, entity or
group or (B) at the time of such acquisition, the Permitted Holders (or any of
them) possess the ability (by contract or otherwise) to elect, or cause the
election, of a majority of the members of New Holdings' Board of Directors or
(II) New Holdings ceasing to own 100% of the outstanding voting securities
entitled to vote on a regular basis to elect a majority of the Board of
Directors of the Company (other than in connection with a merger of New Holdings
and the Company).
"Company" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and
its successors, including, without limitation, Ralphs Supermarkets, Inc. (to be
renamed Ralphs Grocery Company) following the Merger.
"Consolidated Net Income" means, with respect to any person, for any
period, the aggregate of the net income (or loss) of such person and its
subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (a) the net income of any other person in which such
person or any of its subsidiaries has an interest (which interest does not cause
the net income of such other person to be consolidated with the net income of
such person and its subsidiaries in accordance with GAAP) shall be included only
to the extent of the amount of dividends or distributions actually paid to such
person or such subsidiary by such other person in such period; (b) the net
income of any subsidiary of such person that is subject to any Payment
Restriction shall be excluded to the extent such Payment Restriction actually
prevented the payment of an amount that otherwise could have been paid to, or
received by, such person or a subsidiary of such person not subject to any
Payment Restriction; provided, however, that with respect to the net income of
New Holdings, the net income of the Company and its wholly-owned subsidiaries
shall not be so excluded, notwithstanding the existence of any such Payment
Restriction, so long as the terms of any such consensual Payment Restriction
limiting the payment of dividends are not materially more restrictive at the
time of determination of Consolidated Net Income than the most restrictive
Payment Restriction limiting the payment of dividends in effect on the Issue
Date and so long as the Company continues to be a wholly-owned subsidiary of New
Holdings; and (c)(i) the net income (or loss) of any other person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all
gains realized upon or in connection with or as a consequence of the issuance of
the Capital Stock of such person or any of its subsidiaries and any gains on
pension reversions received by such person or any of its subsidiaries, (iv) all
gains and losses realized on the purchase or other acquisition by such person or
any of its subsidiaries of any securities of such person or any of its
subsidiaries, (v) all gains and losses resulting from the cumulative effect of
any accounting change pursuant to the application of Accounting Principles Board
Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii)
(A) all non-cash charges, (B) up to $10 million of severance costs and (C) any
other restructuring reserves or charges (provided, however, that any cash
payments actually made with respect to the liabilities for which such
restructuring reserves or charges were created shall be deducted from
Consolidated Net Income in the period when made), in each case, incurred by New
Holdings or any of its Subsidiaries in connection with the Merger, including,
without limitation, the divestiture of the Excluded Assets, (viii) losses
incurred by New Holdings and its Subsidiaries resulting from earthquakes and
(ix) with respect to New Holdings and its Subsidiaries, all deferred financing
costs written off in connection with the early extinguishment of any
Indebtedness, shall each be excluded.
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"Consolidated Net Worth" means, with respect to any person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
person and its subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Consulting Agreement" means that certain Consulting Agreement, dated as of
the Issue Date, between the Company, New Holdings and The Yucaipa Companies, as
such Consulting Agreement may be amended or replaced, so long as any amounts
paid under any amended or replacement agreement do not exceed the amounts
payable under such Consulting Agreement as in effect on the Issue Date.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among the Company as borrower, New Holdings as guarantor, certain of the
Company's subsidiaries, the Lenders referred to therein and Bankers Trust
Company, as administrative agent, as the same may be amended, extended, renewed,
restated, supplemented or otherwise modified (in each case, in whole or in part,
and without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any agreement governing Indebtedness incurred
to refund, replace or refinance any borrowings and commitments then outstanding
or permitted to be outstanding under such Credit Agreement or any such prior
agreement as the same may be amended, extended, renewed, restated, supplemented
or otherwise modified (in each case, in whole or in part, and without limitation
as to amount, terms, conditions, covenants and other provisions). The term
"Credit Agreement" shall include all related or ancillary documents, including,
without limitation, any guarantee agreements and security documents. New
Holdings shall promptly notify the New Discount Debenture Trustee of any such
refunding or refinancing of the Credit Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means (i) if the Date of Declaration (as defined below) is
prior to June 15, 2000, the unpaid Accreted Value of the New Discount Debentures
then outstanding as of the date on which the New Discount Debentures are
declared to be due and payable (the "Date of Declaration"), and (ii) if the Date
of Declaration is on or after June 15, 2000, the aggregate principal amount of
the New Discount Debentures then outstanding as of the Date of Declaration, plus
accrued and unpaid interest thereon to the Date of Declaration.
"Disqualified Capital Stock" means, (i) with respect to any person, any
Capital Stock of such person or its subsidiaries that, by its terms, by the
terms of any agreement related thereto or by the terms of any security into
which it is convertible, putable or exchangeable, is, or upon the happening of
an event or the passage of time would be, required to be redeemed or repurchased
by such person or its subsidiaries, including at the option of the holder, in
whole or in part, or has, or upon the happening of an event or passage of time
would have, a redemption or similar payment due, on or prior to the Maturity
Date or any other Capital Stock of such person or its subsidiaries designated as
Disqualified Capital Stock by such person at the time of issuance; provided,
however, that if such Capital Stock is either (a) redeemable or repurchasable
solely at the option of such person or (b) issued to employees of New Holdings
or its Subsidiaries or to any plan for the benefit of such employees, such
Capital Stock shall not constitute Disqualified Capital Stock unless so
designated; and (ii) with respect to any Subsidiary of New Holdings, any
Preferred Stock issued by a Subsidiary of New Holdings other than Preferred
Stock issued to New Holdings.
"EBDIT" means, with respect to any person, for any period, the Consolidated
Net Income of such person for such period, plus, in each case to the extent
deducted in computing Consolidated Net Income of such person for such period
(without duplication) (i) provisions for income taxes or similar charges
recognized by such person and its consolidated subsidiaries accrued during such
period, (ii) depreciation and amortization expense of such person and its
consolidated subsidiaries accrued during such period (but only to the extent not
included in Fixed Charges), (iii) Fixed Charges of such person and its
consolidated subsidiaries for such period, (iv) LIFO charges (credit) of such
person and its consolidated subsidiaries for such period, (v) the amount of any
restructuring reserve or charge recorded during such period in accordance with
GAAP, including any such reserve or charge related to the Merger, and (vi) any
other non-cash charges reducing Consolidated Net Income for such period
(excluding any such charge which requires an accrual of or a cash
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reserve for cash charges for any future period), less, without duplication, (i)
non-cash items increasing Consolidated Net Income of such person for such period
(excluding any such items which represent the reversal of any accrual of, or
cash reserve for, anticipated cash charges in any prior period) in each case
determined in accordance with GAAP and (ii) the amount of all cash payments made
by such person or its subsidiaries during such period to the extent that such
cash payment has been provided for in a restructuring reserve or charge referred
to in clause (v) above (and was not otherwise deducted in the computation of
Consolidated Net Income of such person for such period).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Excluded Assets" means assets of New Holdings or any Subsidiary required
to be disposed of by applicable regulatory authorities in connection with the
Merger.
"Existing Indebtedness" means the following indebtedness of the Company to
the extent outstanding on the Issue Date after giving effect to the Merger: (a)
the 10.45% Senior Notes due 2004 issued pursuant to an indenture dated as of the
Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture
dated as of April 15, 1992; (c) the 11% Senior Subordinated Notes due 2005
issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior
Subordinated Notes due 2003 issued pursuant to an indenture dated as of March
30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to
an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes
due 2005 issued pursuant to an indenture dated as of the Issue Date; and (g) the
13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated
as of June 15, 1991.
"FFL" means Food 4 Less, Inc., a Delaware corporation and its successors,
including, without limitation, Holdings following the FFL Merger and New
Holdings following the Reincorporation Merger.
"FFL Merger" means the merger, prior to the Merger and the Reincorporation
Merger, of FFL and Holdings.
"Fixed Charges" means, with respect to any person, for any period, the
aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued
or scheduled to be paid or accrued during such period (except to the extent
accrued in a prior period) in respect of all Indebtedness of such person and its
consolidated subsidiaries (including (a) original issue discount on any
Indebtedness (including (without duplication), in the case of New Holdings, any
original issue discount on the New Discount Debentures, the Senior Discount
Notes and the Seller Debentures but excluding amortization of debt issuance
costs and (b) the interest portion of all deferred payment obligations,
calculated in accordance with the effective interest method, in each case to the
extent attributable to such period, but excluding the amortization of debt
issuance costs) and (ii) dividend requirements on Preferred Stock of such person
and its consolidated subsidiaries (whether in cash or otherwise (except
dividends payable in shares of Qualified Capital Stock)) declared or paid or
required to be declared or paid, during such period (except to the extent
accrued in a prior period), and excluding items eliminated in consolidation. For
purposes of this definition, (a) interest on a Capitalized Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by the Board
of Directors of such person (as evidenced by a Board Resolution) to be the rate
of interest implicit in such Capitalized Lease Obligation in accordance with
GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest of such Indebtedness in effect on the date Fixed Charges are being
calculated, (c) interest on Indebtedness that may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rate, shall be deemed to have been based upon
the rate actually chosen, or, if none, then based upon such optional rate chosen
as New Holdings may designate, and (d) Fixed Charges shall be increased or
reduced by the net cost (including amortization of discount) or benefit
associated with Interest Swap Obligations attributable to such period. For
purposes of clause (ii) above, dividend requirements shall be increased to an
amount representing the pretax earnings that would be required to cover such
dividend requirements; accordingly, the increased amount shall be equal to a
fraction, the numerator of which is the amount of such dividend requirements and
the denominator of which is one (1) minus the applicable actual combined
federal, state, local and foreign income tax rate of such person and its
subsidiaries (expressed
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as a decimal), on a consolidated basis, for the fiscal year immediately
preceding the date of the transaction giving rise to the need to calculate Fixed
Charges.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of the Issue Date.
"Holdings" means Food 4 Less Holdings, Inc., a California corporation, and
its successors, including, without limitation, New Holdings, following the
Reincorporation Merger.
"Indebtedness" means with respect to any person, without duplication, (i)
all liabilities, contingent or otherwise, 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,
drafts accepted or similar instruments or letters of credit 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) created, incurred,
assumed or guaranteed by such person in the ordinary course of business of such
person in connection with obtaining goods, materials or services and due within
twelve months (or such longer period for payment as is customarily extended by
such trade creditor) of the incurrence thereof, which account is not overdue by
more than 90 days, according to the original terms of sale, unless such account
payable is being contested in good faith), or (c) for the payment of money
relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase
price of all Disqualified Capital Stock of such person or, if there is no such
maximum fixed repurchase price, the liquidation preference of such Disqualified
Capital Stock, plus accrued but unpaid dividends; (iii) reimbursement
obligations of such person with respect to letters of credit; (iv) obligations
of such person with respect to Interest Swap Obligations and Foreign Exchange
Agreements; (v) all liabilities of others of the kind described in the preceding
clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is
otherwise its legal liability, and (vi) all obligations of others secured by a
Lien to which any of the properties or assets (including, without limitation,
leasehold interests and any other tangible or intangible property rights) of
such person are subject, whether or not the obligations secured thereby shall
have been assumed by such person or shall otherwise be such person's legal
liability (provided that if the obligations so secured have not been assumed by
such person or are not otherwise such person's legal liability, such obligations
shall be deemed to be in an amount equal to the fair market value of such
properties or assets, as determined in good faith by the Board of Directors of
such person, which determination shall be evidenced by a Board Resolution). For
purposes of the preceding sentence, the "maximum fixed repurchase price" of any
Disqualified Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the New Discount Debenture
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock (or any equity security for which it
may be exchanged or converted), such fair market value shall be determined in
good faith by the Board of Directors of such person, which determination shall
be evidenced by a Board Resolution. For purposes of the New Discount Debenture
Indenture, Indebtedness incurred by any person that is a general partnership
(other than non-recourse Indebtedness) shall be deemed to have been incurred by
the general partners of such partnership pro rata in accordance with their
respective interests in the liabilities of such partnership unless any such
general partner shall, in the reasonable determination of the Board of Directors
of New Holdings, be unable to satisfy its pro rata share of the liabilities of
the partnership, in which case the pro rata share of any Indebtedness
attributable to such partner shall be deemed to be incurred at such time by the
remaining general partners on a pro rata basis in accordance with their
interests.
"Independent Financial Advisor" means a reputable accounting, appraisal or
a nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board of Directors of New Holdings, qualified to
perform the task for which such firm has been engaged and disinterested and
independent with respect to New Holdings and its Affiliates.
"Interest Swap Obligation" means any obligation of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic
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payments calculated by applying either a fixed or floating rate of interest on a
stated notional amount in exchange for periodic payments made by such person
calculated by applying a fixed or floating rate of interest on the same notional
amount; provided that the term "Interest Swap Obligation" shall also include
interest rate exchange, collar, cap, swap option or similar agreements providing
interest rate protection.
"Investment" by any person in any other person means any investment by such
person in such other person, whether by share purchase, capital contribution,
loan, advance (other than reasonable loans and advances to employees for moving
and travel expenses, as salary advances, or to permit the purchase of Qualified
Capital Stock of New Holdings or any of its Subsidiaries and other similar
customary expenses incurred, in each case in the ordinary course of business
consistent with past practice) or similar credit extension constituting
Indebtedness of such other person, and any guarantee of Indebtedness of any
other person.
"Issue Date" means the date of original issuance of the New Discount
Debentures pursuant to the New Discount Debenture Indenture.
"Letter of Credit Obligations" means Indebtedness of the Subsidiaries with
respect to letters of credit issued pursuant to the Credit Agreement, and for
purposes of the provisions of the New Discount Debenture Indenture summarized
under the heading "Limitations on Incurrences of Additional Indebtedness," the
aggregate principal amount of Indebtedness outstanding at any time with respect
thereto, shall be deemed to consist of (a) the aggregate maximum amount then
available to be drawn under all such letters of credit (the determination of
such maximum amount to assume compliance with all conditions for drawing), and
(b) the aggregate amount that has then been paid by, and not reimbursed to, the
issuers under such letters of credit.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property, or a security interest of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof, any option or
other agreement to sell which is intended to constitute or create a security
interest, mortgage, pledge or lien, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction); provided that in no event shall an operating lease be
deemed to constitute a Lien hereunder.
"Maturity Date" means July 15, 2005.
"Merger" means (i) the merger of Food 4 Less Supermarkets, Inc. into Ralphs
Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger)
pursuant to the Merger Agreement and (ii) immediately following the merger
described in clause (i) of this definition, the merger of Ralphs Grocery Company
into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such
merger and changing its name to "Ralphs Grocery Company" in connection with such
merger).
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
September 14, 1994, by and among Holdings, FFL, Food 4 Less Supermarkets, Inc.,
RSI and the stockholders of RSI, as such agreement is in effect on the Issue
Date.
"Net Cash Proceeds" means Net Proceeds of any Asset Sale received in the
form of cash or Cash Equivalents.
"Net Proceeds" means (a) in the case of any Asset Sale or any issuance and
sale by any person of Qualified Capital Stock, the aggregate net proceeds
received by such person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any Asset Sale, net
of the amount of cash applied to repay Indebtedness secured by the asset
involved in such Asset Sale), whether such proceeds are in cash or in property
(valued at the fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million
in good faith by the Board of Directors of such person, which determination
shall be evidenced by a Board Resolution) and (b) in the case of any conversion
or exchange of any outstanding Indebtedness or Disqualified Capital Stock of
such person for or into shares of Qualified Capital Stock of New Holdings, the
sum of (i) the fair market value of the proceeds received by New Holdings in
connection with the issuance of such Indebtedness or Disqualified Capital Stock
on the date of such issuance and (ii) any additional amount paid by the holder
to New Holdings upon such conversion or exchange.
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"New Discount Debentures" means the 13 5/8% Senior Discount Debentures due
2005 of New Holdings issued pursuant to the New Discount Debenture Indenture, as
such New Discount Debentures may be modified or amended from time to time and
refinancings thereof, to the extent such refinancing indebtedness is permitted
to be incurred under the New Discount Debenture Indenture.
"New Discount Debenture Indenture" means the indenture between New Holdings
and United States Trust Company of New York, as trustee, dated as of the Issue
Date, pursuant to which the New Discount Debentures will be issued, as amended
or supplemented from time to time in accordance with the terms thereof.
"New Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation,
and its successors.
"Operating Coverage Ratio" means, with respect to any person, the ratio of
(1) EBDIT of such person for the period (the "Pro Forma Period") consisting of
the most recent four full fiscal quarters for which financial information in
respect thereof is available immediately prior to the date of the transaction
giving rise to the need to calculate the Operating Coverage Ratio (the
"Transaction Date") to (2) the aggregate Fixed Charges of such person for the
fiscal quarter in which the Transaction Date occurs and the three fiscal
quarters immediately subsequent to such fiscal quarter (the "Forward Period")
reasonably anticipated by the Board of Directors of such person to become due
from time to time during such period. For purposes of this definition, if the
Transaction Date occurs prior to the first anniversary of the Merger, EBDIT for
the Pro Forma Period shall be calculated, in the case of New Holdings, after
giving effect on a pro forma basis to the Merger as if it had occurred on the
first day of the Pro Forma Period. In addition to, but without duplication of,
the foregoing, for purposes of this definition, EBDIT shall be calculated after
giving effect (without duplication), on a pro forma basis for the Pro Forma
Period (but no longer), to (a) any Investment, during the period commencing on
the first day of the Pro Forma Period to and including the Transaction Date (the
"Reference Period"), in any other person that, as a result of such Investment,
becomes a subsidiary of such person, (b) the acquisition, during the Reference
Period (by merger, consolidation or purchase of stock or assets) of any business
or assets, which acquisition is not prohibited by the Indenture, and (c) any
sales or other dispositions of assets (other than sales of inventory in the
ordinary course of business) occurring during the Reference Period, in each case
as if such incurrence, Investment, repayment, acquisition or asset sale had
occurred on the first day of the Reference Period. In addition, for purposes of
this definition, Fixed Charges shall be calculated after giving effect (without
duplication), on a pro forma basis for the Forward Period, to any Indebtedness
incurred or repaid on or after the first day of the Forward Period and prior to
the Transaction Date. If such person or any of its subsidiaries directly or
indirectly guarantees any Indebtedness of a third person, the Operating Coverage
Ratio shall give effect to the incurrence of such Indebtedness as if such person
or subsidiary had directly incurred such guaranteed Indebtedness.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Pari Passu Indebtedness" means, with respect to New Holdings, Indebtedness
that ranks pari passu in right of payment to the New Discount Debentures
(whether or not secured by any Lien) including the Senior Discount Notes, to the
extent any remain outstanding following the Merger.
"Payment Restriction" means, with respect to a subsidiary of any person,
any encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation, on the ability of (i) such subsidiary
to (a) pay dividends or make other distributions on its Capital Stock or make
payments on any obligation, liability or Indebtedness owed to such person or any
other subsidiary of such person, (b) make loans or advances to such person or
any other subsidiary of such person, or (c) transfer any of its properties or
assets to such person or any other subsidiary of such person, or (ii) such
person or any other subsidiary of such person to receive or retain any such (a)
dividends, distributions or payments, (b) loans or advances, or (c) transfer of
properties or assets.
"Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa
Companies or any entity controlled thereby or any of the partners thereof, (ii)
Apollo Advisors, L.P., Lion Advisors, L.P., or any entity controlled thereby or
any of the partners thereof, (iii) an employee benefit plan of New Holdings or
any Subsidiary, or any participant therein, (iv) a trustee or other fiduciary
holding securities under an employee
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benefit plan of New Holdings or any Subsidiary or (v) any Permitted Transferee
of any of the foregoing persons.
"Permitted Indebtedness" means (a) Indebtedness of the Company and its
subsidiaries (and the Company and each subsidiary (to the extent it is not an
obligor) may guarantee such Indebtedness) pursuant to (i) the Term Loans in an
aggregate principal amount at any time outstanding not to exceed $600 million
less the aggregate amount of all principal repayments thereunder pursuant to and
in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" above subsequent to the Issue Date, (ii)
the revolving credit facility under the Credit Agreement (including the Letter
of Credit obligations) in an aggregate principal amount at any time outstanding
not to exceed $325 million, less all permanent reductions thereunder pursuant to
and in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" above and (iii) any Indebtedness
incurred under the Credit Agreement pursuant to and in compliance with (A)
clause (o) of this definition and (B) the covenant described above under the
caption "-- Limitation on Incurrence of Additional Indebtedness" (other than
Permitted Indebtedness that is not incurred pursuant to clause (o) or this
clause (a) of this definition); (b) any guarantee by New Holdings of the
Indebtedness referred to in the foregoing clause (a); (c) Indebtedness of New
Holdings or a Subsidiary owed to and held by New Holdings or a Subsidiary; (d)
Indebtedness incurred by New Holdings or any Subsidiary in connection with the
purchase or improvement of property (real or personal) or equipment or other
capital expenditures in the ordinary course of business (including for the
purchase of assets or stock of any retail grocery store or business) or
consisting of Capitalized Lease Obligations, provided that (i) at the time of
the incurrence thereof, such Indebtedness, together with any other Indebtedness
incurred during the most recently completed four fiscal quarter period in
reliance upon this clause (d) does not exceed, in the aggregate, 3% of net sales
of New Holdings and its Subsidiaries during the most recently completed four
fiscal quarter period on a consolidated basis (calculated on a pro forma basis
if the date of incurrence is prior to the end of the fourth fiscal quarter
following the Merger) and (ii) such Indebtedness, together with all then
outstanding Indebtedness incurred in reliance upon this clause (d) does not
exceed, in the aggregate, 3% of the aggregate net sales of New Holdings and its
Subsidiaries during the most recently completed twelve fiscal quarter period on
a consolidated basis (calculated on a pro forma basis if the date of incurrence
is prior to the end of the twelfth fiscal quarter following the Merger); (e)
Indebtedness incurred by New Holdings or any Subsidiary in connection with
capital expenditures in an aggregate principal amount not exceeding $150
million, provided that such capital expenditures relate solely to the
integration of the operations of RSI, Food 4 Less Supermarkets, Inc. and their
respective subsidiaries as described in this Prospectus; (f) Indebtedness of New
Holdings or any Subsidiary incurred under Foreign Exchange Agreements and
Interest Swap Obligations; (g) guarantees incurred in the ordinary course of
business, by New Holdings or a Subsidiary, of Indebtedness of any other person
in the aggregate not to exceed $25 million at any time outstanding; (h)
guarantees by New Holdings or a Subsidiary of Indebtedness incurred by a
wholly-owned Subsidiary so long as the incurrence of such Indebtedness incurred
by such wholly-owned Subsidiary is permitted under the terms of the New Discount
Debenture Indenture; (i) Refinancing Indebtedness; (j) Indebtedness for letters
of credit relating to workers' compensation claims and self-insurance or similar
requirements in the ordinary course of business; (k) Existing Indebtedness and
other Indebtedness outstanding on the Issue Date (after giving effect to the
Merger); (l) Indebtedness arising from guarantees of Indebtedness of New
Holdings or any Subsidiary or other agreements of New Holdings or a Subsidiary
providing for indemnification, adjustment of purchase price or similar
obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or Subsidiary, other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition;
provided that the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually received by New
Holdings and its Subsidiaries in connection with such disposition; (m)
obligations in respect of performance bonds and completion guarantees provided
by New Holdings or any Subsidiary in the ordinary course of business; (n)
Indebtedness of New Holdings with respect to the Senior Discount Notes, if any,
the New Discount Debentures (including the accretion of the Senior Discount
Notes and the New Discount Debentures up to their respective stated principal
amount at maturity) and the Seller Debentures (including the issuance of
additional secondary securities in lieu of cash interest payments pursuant to
the
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terms of the Seller Debenture Indenture); and (o) additional Indebtedness of New
Holdings or any Subsidiary in an amount not to exceed $175 million at any time
outstanding.
"Permitted Investment" by any person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale or any other
disposition of assets not constituting an Asset Sale by reason of the $500,000
threshold contained in the definition thereof, (iii) cash and Cash Equivalents,
(iv) Investments existing on the Issue Date, (v) Investments specifically
permitted by and made in accordance with the provisions of the New Discount
Debenture Indenture summarized under "Limitation on Transactions with
Affiliates," (vi) Investments in any Subsidiary, or by any Subsidiary in New
Holdings or by any Subsidiary in other Subsidiaries, and (vii) additional
Investments in an aggregate amount not exceeding $15 million.
"Permitted Liens" means (i) Liens for taxes, assessments and governmental
charges or claims not yet due or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other like Liens arising in the ordinary course of business,
deposits made to obtain the release of such Liens, and with respect to amounts
not yet delinquent for a period of more than 60 days or being contested in good
faith by an appropriate process of law, and for which a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made; (iii) Liens incurred or pledges or deposits made in the ordinary course of
business to secure obligations under workers' compensation, unemployment
insurance and other types of social security or similar legislation; (iv) Liens
incurred or deposits made to secure the performance of tenders, bids, leases,
statutory obligations, surety and appeal bonds, government contracts,
performance and return of money bonds and other obligations of a like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (v) easements, rights-of-way, zoning or other
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances not interfering in any material respect with the business of New
Holdings or any of its Subsidiaries incurred in the ordinary course of business;
(vi) Liens upon specific items of inventory or other goods and proceeds of any
person securing such person's obligations in respect of bankers' acceptances
issued or created for the account of such person to facilitate the purchase,
shipment or storage of such inventory or other goods in the ordinary course of
business; (vii) Liens securing reimbursement obligations with respect to letters
of credit which encumber documents and other property relating to such letters
of credit and the products and proceeds thereof; (viii) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payment of
nondelinquent customs duties in connection with the importation of goods; (ix)
judgement and attachment Liens not giving rise to a Default or Event of Default;
(x) leases or subleases granted to others not interfering in any material
respect with the business of New Holdings or any Subsidiary; (xi) Liens
encumbering customary initial deposits and margin deposits, and other Liens
incurred in the ordinary course of business that are within the general
parameters customary in the industry, in each case securing Indebtedness under
Interest Swap Obligations and Foreign Exchange Agreements and forward contracts,
option futures contracts, futures options or similar agreements or arrangements
designed to protect New Holdings or any Subsidiary from fluctuations in the
price of commodities; (xii) Liens encumbering deposits made in the ordinary
course of business to secure nondelinquent obligations arising from statutory,
regulatory, contractual or warranty requirements of New Holdings or its
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made; (xiii) Liens arising out of
consignment or similar arrangements for the sale of goods entered into by New
Holdings or any Subsidiary in the ordinary course of business in accordance with
past practices; (xiv) any interest or title of a lessor in the property subject
to any lease, whether characterized as capitalized or operating other than any
such interest or title resulting from or arising out of a default by New
Holdings or any Subsidiary of its obligations under such lease; (xv) Liens
arising from filing UCC financial statements for precautionary purposes in
connection with true leases of personal property that are otherwise permitted
under the New Discount Debenture Indenture and under which New Holdings or any
Subsidiary is lessee; and (xvi) additional Liens securing Indebtedness of the
Company at any one time outstanding not exceeding the sum of (i) $25 million and
(ii) 10% of the aggregate Consolidated Net Income of the Company earned
subsequent to the Issue Date and on or prior to such time.
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"Permitted Payments" means (i) any payment by New Holdings or any
Subsidiary to The Yucaipa Companies or the principals or any Affiliate thereof
for consulting, management, investment banking or similar services, or for
reimbursement of losses, costs and expenses pursuant to the Consulting
Agreement, (ii) any payment by New Holdings or any Subsidiary to Apollo
Advisors, L.P. or the principals or any Affiliates thereof in an aggregate
amount not to exceed $5 million as a commitment fee in connection with the
purchase of equity securities of New Holdings on the Issue Date, (iii) any
payment by New Holdings or any Subsidiary (a) in connection with repurchases of
outstanding shares of New Holdings common stock following the death, disability
or termination of employment of management stockholders, and (b) of amounts
required to be paid by New Holdings or any Subsidiaries to participants or
former participants in employee benefit plans upon any termination of employment
by such participants, as provided in the documents related thereto, in an
aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any
Yearly Period (provided that any unused amounts may be carried over to any
subsequent Yearly Period subject to a maximum amount of $20 million in any
Yearly Period), (iv) the loan by New Holdings or any Subsidiary on the Issue
Date to RGC Investment Co. of not more than $5 million and (v) for so long as
the sole business activity of such partnership is to acquire, hold, sell,
exchange, transfer or otherwise dispose of all or any portion of the New
Discount Debentures and to manage its investment in the New Discount Debentures,
any payment by New Holdings or any Subsidiary to fund ongoing costs and expenses
of RGC Partners, L.P. pursuant to the Subscription Agreement and the
Registration Rights Agreement.
"Permitted Transferees" means, with respect to any person, (i) any
Affiliate of such person, (ii) the heirs, executors, administrators,
testamentary trustees, legatees or beneficiaries of any such person, (iii) a
trust, the beneficiaries of which, or a corporation or partnership, the
stockholders or general or limited partners of which, include only such person
or his or her spouse or lineal descendants, in each case to whom such person has
transferred the beneficial ownership of any securities of New Holdings, (iv) any
investment account whose investment managers and investment advisors consist
solely of such person and/or Permitted Transferees of such person and (v) any
investment fund or investment entity that is a subsidiary of such person or a
Permitted Transferee of such person.
"Plan of Liquidation" means, with respect to any person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such person to holders of
Capital Stock of such person.
"Preferred Stock" means, with respect to any person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over shares
of Capital Stock of any other class of such person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the New Discount Debenture Indenture, a
calculation in accordance with Article 11 of Regulation S-X under the Securities
Act as interpreted by New Holdings' chief financial officer or Board of
Directors in consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of common
stock of New Holdings or the Company pursuant to a registration statement filed
with the SEC in accordance with the Securities Act which public equity offering
results in gross proceeds to New Holdings or the Company of not less than $20
million.
"Qualified Capital Stock" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means, with respect to any person, Indebtedness
of such person issued in exchange for, or the proceeds from the issuance and
sale or disbursement of which are used to substantially concurrently repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole or
in part
109
<PAGE> 141
(collectively, "repay"), or constituting an amendment, modification or
supplement to, or a deferral or renewal of (collectively, an "amendment"), any
Indebtedness of such person existing on the Issue Date or Indebtedness (other
than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to
clauses (b), (d), (e), (i), (k) and (n) of the definition thereof) incurred in
accordance with the New Discount Debenture Indenture (a) in a principal amount
(or, if such Refinancing Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon the acceleration thereof,
with an original issue price) not in excess of (without duplication) (i) the
principal amount or the original issue price, as the case may be, of the
Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances
Indebtedness under a revolving credit facility or other agreement providing a
commitment for subsequent borrowings, with a maximum commitment not to exceed
the maximum commitment under such revolving credit facility or other agreement)
plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums,
penalties, fees and expenses actually incurred by such person in connection with
the repayment or amendment thereof and (b) with respect to Refinancing
Indebtedness that repays or constitutes an amendment to Subordinated
Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed
mandatory redemption or sinking fund requirement in an amount greater than or at
a time prior to the amounts and times specified in such repaid or amended
Subordinated Indebtedness, except to the extent that any such requirement
applies on a date after the Maturity Date and (y) shall contain subordination
and default provisions no less favorable in any material respect to Holders than
those contained in such repaid or amended Subordinated Indebtedness.
"Registration Rights Agreement" means that certain Registration Rights
Agreement by and between RGC Partners, L.P., New Holdings and Food 4 Less, as
such Registration Rights Agreement may be amended or replaced, so long as any
amounts paid under any amended or replacement agreement do not exceed the
amounts payable under such Registration Rights Agreement as in effect on the
Issue Date.
"Reincorporation Merger" means the merger, prior to the Merger, of Holdings
with and into New Holdings.
"Related Business Investment" means (i) any Investment by a person in any
other person a majority of whose revenues are derived from the operation of one
or more retail grocery stores or supermarkets or any other line of business
engaged in by New Holdings or any of its Subsidiaries as of the Issue Date; (ii)
any Investment by such person in any cooperative or other supplier, including,
without limitation, any joint venture which is intended to supply any product or
service useful to the business of New Holdings and any of its Subsidiaries as it
is conducted as of the Issue Date and as such business may thereafter evolve or
change; and (iii) any capital expenditure or Investment, in each case reasonably
related to the business of New Holdings and any of its Subsidiaries as it is
conducted as of the Issue Date and as such business may thereafter evolve or
change.
"Restricted Debt Prepayment" means any purchase, redemption, defeasance
(including, but not limited to in-substance or legal defeasance) or other
acquisition or retirement for value directly or indirectly by New Holdings or a
Subsidiary, prior to the scheduled maturity or prior to any scheduled repayment
of principal or any sinking fund payment, as the case may be, in respect of any
Subordinated Indebtedness.
"Restricted Payment" means any (i) Stock Payment or (ii) Investment (other
than a Permitted Investment) or (iii) Restricted Debt Prepayment.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Seller Debentures" means the 13 5/8% Senior Subordinated Pay-in-Kind
Debentures due 2007 of New Holdings, including any additional 13 5/8% Senior
Subordinated Pay-in-Kind Debentures due 2007 issued as interest thereon, in each
case issued pursuant to the Seller Debenture Indenture, as the same may be
modified or amended from time to time and refinancings thereof.
"Seller Debenture Indenture" means the indenture between New Holdings and
Norwest Bank Minnesota, N.A., as trustee, dated as of the Issue Date, pursuant
to which the Seller Debentures will be issued, as amended or supplemented from
time to time and refinancings thereof.
110
<PAGE> 142
"Senior Discount Notes" means the 15.25% Senior Discount Notes due 2004 of
Holdings issued pursuant to the Senior Discount Note Indenture, as the same may
be modified or amended from time to time and refinancings thereof, to the extent
such refinancing indebtedness is permitted to be incurred under the New Discount
Debenture Indenture.
"Senior Discount Note Indenture" means the indenture between Holdings and
United States Trust Company of New York, as trustee, dated as of December 15,
1992, pursuant to which the Senior Discount Notes were issued, as amended or
supplemented from time to time in accordance with the terms thereof.
"Significant Stockholder" means, with respect to any person, any other
person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such person
that are entitled to vote on a regular basis for the election of directors of
such person.
"Significant Subsidiary" means each subsidiary of New Holdings that is
either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation
S-X under the Securities Act and the Exchange Act (as such regulation is in
effect on the Issue Date) or (b) material to the financial condition or results
of operations of New Holdings and its Subsidiaries taken as a whole.
"Stock Payment" means, with respect to any person, (a) the declaration or
payment by such person, either in cash or in property, of any dividend on
(except, in the case of New Holdings, dividends payable solely in Qualified
Capital Stock of New Holdings), or the making by such person or any of its
subsidiaries of any other distribution in respect of, such person's Qualified
Capital Stock or any warrants, rights or options to purchase or acquire shares
of any class of such Capital Stock (other than exchangeable or convertible
Indebtedness of such person), or (b) the redemption, repurchase, retirement or
other acquisition for value by such person or any of its subsidiaries, directly
or indirectly, of such person's Qualified Capital Stock (and, in the case of a
Subsidiary, Qualified Capital Stock of New Holdings) or any warrants, rights or
options to purchase or acquire shares of any class of such Capital Stock (other
than exchangeable or convertible Indebtedness of such person), other than, in
the case of New Holdings, through the issuance in exchange therefor solely of
Qualified Capital Stock of New Holdings; provided however, that in the case of a
Subsidiary, the term "Stock Payment" shall not include any such payment with
respect to its Capital Stock or warrants, rights or options to purchase or
acquire shares of any class of its Capital Stock that are owned solely by New
Holdings or a wholly owned Subsidiary.
"Subordinated Indebtedness" means Indebtedness of New Holdings that is
subordinated in right of payment to the New Discount Debentures, including
Indebtedness under the Seller Debentures.
"Subscription Agreement" means that certain Subscription Agreement between
RGC Partners, L.P., New Holdings, Food 4 Less and the partnership investors
listed on Exhibit A thereto, as such Subscription Agreement may be amended or
replaced, so long as any amounts paid under any amended or replacement agreement
do not exceed the amounts payable under such Subscription Agreement as in effect
on the Issue Date.
"subsidiary" of any person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such person, by one or more subsidiaries of such person or by such person and
one or more subsidiaries of such person or (ii) a partnership in which such
person or a subsidiary of such person is, at the date of determination, a
general partner of such partnership, but only if such person or its subsidiary
is entitled to receive more than 50% of the assets of such partnership upon its
dissolution, or (iii) any other person (other than a corporation or a
partnership) 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, has (x) at least a majority ownership interest or (y) the
power to elect or direct the election of a majority of the directors or other
governing body of such person.
"Subsidiary" means any subsidiary of New Holdings.
"Term Loans" means the term loan facility under the Credit Agreement and
any agreement governing Indebtedness incurred to refund, replace or refinance
any borrowings outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions).
111
<PAGE> 143
"The Yucaipa Companies" means The Yucaipa Companies, a California general
partnership, or any successor thereto which is an Affiliate of Ronald W. Burkle
or his Permitted Transferees and which has been established for the sole purpose
of changing the form of The Yucaipa Companies from that of a partnership to that
of a limited liability company or any other form of entity which is not
materially adverse to the rights of the Holders under the New Discount Debenture
Indenture.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
"wholly-owned Subsidiary" means any Subsidiary all of the shares of Capital
Stock of which (other than directors' qualifying shares) are at the time
directly or indirectly owned by New Holdings.
"Yearly Period" means each fiscal year of New Holdings; provided that the
first Yearly Period shall begin on the Issue Date and shall end on January 28,
1996.
112
<PAGE> 144
THE EXCHANGE OFFERS AND THE PUBLIC OFFERINGS
THE RGC OFFERS
In addition to the issuance of the New Discount Debentures by New Holdings
as part of the Financing of 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 date (subject to the right of holders of record on relevant record
dates to receive interest due on an interest payment date.)
113
<PAGE> 145
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 New Discount Debenture Placement,
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
11%. Interest will be payable on the New RGC Notes on each June 15 and December
15, beginning December 15, 1995. The New RGC Notes will mature on June 15, 2005.
On or after June 15, 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 15 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000...................................... 105.500%
2001...................................... 103.667%
2002...................................... 101.833%
2003 and thereafter....................... 100.000%
</TABLE>
114
<PAGE> 146
In addition, on or prior to June 15, 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 111.000% of the principal amount thereof
if redeemed during the 12 months commencing on June 15, 1995, 109.429% of the
principal amount thereof if redeemed during the 12 months commencing on June 15,
1996 and 107.857% of the principal amount thereof if redeemed during the 12
months commencing on June 15, 1997, in each case plus accrued and unpaid
interest, if any, to the redemption date.
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 $550 million at any one time outstanding.
THE F4L EXCHANGE OFFERS
In addition to the issuance of the New Discount Debentures by New Holdings
as part of the Financing of 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 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 New Discount Debenture Placement and 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
115
<PAGE> 147
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.
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
116
<PAGE> 148
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 15 and December 15,
beginning December 15, 1995. The New F4L Senior Subordinated Notes will mature
on June 15, 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.
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
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<PAGE> 149
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. 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.
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<PAGE> 150
The New F4L Senior Notes will bear interest at a fixed rate per annum equal
to 10.45%. Interest will be payable on the New F4L Senior Notes on each June 15
and December 15, beginning December 15, 1995. The New F4L Senior Notes will
mature on June 15, 2004. On or after June 15, 2000 the New F4L Senior Notes may
be redeemed in whole at any time or in part from time to time, at the option of
the Company, at a redemption price equal to the applicable percentage of the
principal amount thereof set forth below, plus accrued and unpaid interest to
the redemption date, if redeemed during the 12 months commencing on June 15 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000..................................... 105.225%
2001..................................... 103.483%
2002..................................... 101.742%
2003 and thereafter...................... 100.000%
</TABLE>
In addition, on or prior to June 15, 1998, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the New F4L Senior Notes
originally issued, at a redemption price equal to 110.450% of the principal
amount thereof if redeemed during the 12 months commencing on June 15, 1995,
108.957% of the principal amount thereof if redeemed during the 12 months
commencing on June 15, 1996 and 107.464% of the principal amount thereof if
redeemed during the 12 months commencing on June 15, 1997, in each case plus
accrued and unpaid interest, if any, to the redemption date. In 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.
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 $525 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 $350 million principal
amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and
(ii) offering up to $100 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 $925 million of financing under the New Credit
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<PAGE> 151
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 $600 million, comprised of the $275 million Tranche A Loan, the $108.3
million Tranche B Loan, the $108.3 million Tranche C Loan, and the $108.4
million Tranche D Loan; and (ii) the $325 million New Revolving Facility 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 $10 million will be available for a period of 91 days following the
Closing Date to finance the Change of Control Offer.
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 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
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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 $33
million in the second year, $55 million in the third year, $59 million in the
fourth year, $62 million in the fifth year, and $66 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 $1.083 million for the first six years and $101.80 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 $1.083 million for the first seven years and $100.72 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 $1.083 million for the first eight years and $99.74 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 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.
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<PAGE> 153
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 New Discount Debentures.
DESCRIPTION OF OTHER INDEBTEDNESS
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 15, 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
15 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 15, 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.
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<PAGE> 154
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 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. Pursuant to the registration rights agreement, the holders of the
Seller Debentures have agreed not to make public resales of the Seller
Debentures for a period of 90 days following the Closing Date, provided that
such 90-day holdback period may be shortened or waived by New Holdings with the
consent of the Underwriters for the Public Offerings and, until all New Discount
Debentures have been publicly resold, the partnership which will acquire the New
Discount Debentures on the Closing Date. Such 90-day holdback period will not be
applicable to the put of $10 million aggregate principal amount of Seller
Debentures to Yucaipa (or its designee) pursuant to the Put Agreement.
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 June 1, 1995 had
an accreted value of $688.43 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
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<PAGE> 155
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 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.
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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.
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SELLING DEBENTUREHOLDER
This Prospectus relates to the sale by the Selling Debentureholder from
time to time of up to $193,363,570 aggregate principal amount (at maturity) of
the New Discount Debentures. The New Discount Debentures will be issued to or
contributed to the Selling Debentureholder as part of the Financing of the
Merger. See "Certain Relationships and Related Transactions -- Food 4 Less and
Holdings." Pursuant to the Registration Rights Agreement to be executed by and
among New Holdings, the Company and the Selling Debentureholder on the Closing
Date, the Selling Debentureholder will be granted the right to have the offer
and sale of the New Discount Debentures registered under the Securities Act.
Pursuant to such Registration Rights Agreement the Selling Debentureholder will
agree not to make public resales of the New Discount Debentures for a period of
60 days following the Closing Date, provided that such 60-day holdback period
may be shortened or waived by New Holdings with the consent of the Underwriters
for the Public Offerings. See "Plan of Distribution."
The following table provides certain information with respect to the
Selling Debentureholder and the amount of New Discount Debentures owned, offered
and to be owned after the Offering by the Selling Debentureholder:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF MAXIMUM AMOUNT AMOUNT OF
NEW DISCOUNT OF NEW DISCOUNT NEW DISCOUNT
DEBENTURES DEBENTURES TO BE DEBENTURES
OWNED BEFORE SOLD IN THE TO BE OWNED
SELLING DEBENTUREHOLDER OFFERING OFFERING AFTER OFFERING(1)
----------------------- ------------ ---------------- -----------------
<S> <C> <C> <C>
RGC Partners, L.P.(2) $193,363,570 $193,363,570 $ 0
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 900067
</TABLE>
- ---------------
(1) There is no assurance that the Selling Debentureholder will sell any or all
of the New Discount Debentures offered by it.
(2) For information regarding the relationship between RGC Partners, L.P., New
Holdings and affiliates or predecessors of New Holdings, see "Certain
Relationships and Related Transactions -- Food 4 Less and Holdings."
New Holdings will pay all costs and expenses incurred in connection with
the registration under the Securities Act of the New Discount Debentures offered
by the Selling Debentureholder including, without limitation, all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws (including reasonable fees and disbursements of counsel for the Selling
Debentureholder in connection with blue sky qualifications of the New Discount
Debentures), printing and duplicating expenses, messengers and delivery
expenses, fees and disbursements of counsel for New Holdings and all independent
certified public accountants (including the expenses of any annual audit,
special audit or "cold comfort" letters in connection with the registration),
securities acts liability insurance (if the registrant elects to obtain such
insurance), the reasonable fees and expenses of any special experts retained in
connection with the registration and fees and expenses of other persons retained
by the registrant. New Holdings will not receive any of the proceeds from the
sale of the New Discount Debentures by the Selling Debentureholder. New Holdings
also will reimburse the Selling Debentureholder for all expenses incurred in
connection with the resale of the New Discount Debentures, including
underwriting discounts and brokers' or dealers' commissions and mark-ups
(subject to certain limitations), incident thereto.
126
<PAGE> 158
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to New Holdings, has advised New Holdings that
the following discussion expresses their opinion as to the material federal
income tax consequences expected to result to holders from the purchase,
ownership and disposition of the New Discount Debentures. 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. 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 the New Discount Debentures may vary
depending upon such holder's particular situation. Certain holders (including
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. EACH PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NEW DISCOUNT
DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
STATED INTEREST
Holders of New Discount Debentures will be required to include stated
interest in gross income in accordance with the original issue discount rules
set forth below.
ORIGINAL ISSUE DISCOUNT
General Original Issue Discount Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception. The "issue price" of a
debt instrument that is part of an issue of debt instruments a substantial
amount of which is issued for money (such as the New Discount Debentures) will
be equal to the first price at which a substantial amount of such debt
instruments is sold for money.
The "stated redemption price at maturity" of a debt instrument is the sum
of its principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest" (defined generally as stated interest
that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
In general, the amount of original issue discount that a holder of a debt
instrument with original issue discount must include in gross income for federal
income tax purposes will be the sum of the daily portions of original issue
discount with respect to such debt instrument for each day during the taxable
year or portion of a taxable year on which such holder holds the debt
instrument. The daily portion is determined by allocating to each day of an
accrual period (generally, a six month period or a shorter or longer period from
the date of original issuance) a pro rata portion of an amount equal to the
"adjusted issue price" of the debt instrument at the beginning of the accrual
period multiplied by the yield to maturity of the debt instrument. The "adjusted
issue price" is the issue price of the debt instrument increased by the accrued
original issue discount for all prior accrual periods (and decreased by the
amount of cash payments made in all prior accrual periods, other than qualified
stated interest payments). The tax basis of the debt instrument in the hands of
the holder will be increased by the amount of original issue discount, if any,
on the debt instrument that is included in the holder's gross income and will be
decreased by the amount of any cash payments (other than qualified stated
interest payments) received with respect to the debt instrument, whether such
payments are denominated as principal or interest.
127
<PAGE> 159
Notwithstanding the original issue discount rules described in the
preceding paragraphs, a holder of a debt instrument would not be required to
include original issue discount in income if such holder's tax basis in the debt
instrument were to exceed the debt instrument's stated principal amount. In
addition, a holder would be permitted to offset any original issue discount
income by an amount equal to the excess of such holder's tax basis (if less than
or equal to the stated principal amount) over the issue price of the debt
instrument.
New Discount Debentures
Because the New Discount Debentures will be issued at a discount from their
principal amount and do not provide for the payment of interest until June 15,
2000, the New Discount Debentures will be issued with original issue discount
for federal income tax purposes. As a result, initial holders of New Discount
Debentures will be required to include amounts in gross income before receiving
cash payments attributable to such gross income. For purposes of computing
original issue discount, the issue price of the New Discount Debentures will be
determined as described above under the heading "-- General Original Issue
Discount Rules." Because none of the payments of stated interest on the New
Discount Debentures will constitute payments of qualified stated interest, the
stated redemption price at maturity of the New Discount Debentures will be equal
to the sum of their principal amount plus all payments of stated interest.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
Generally, under Section 163(e)(5) of the Code, original issue discount is
not deductible until paid with respect to any debt instrument issued by a
corporation which (i) has a maturity date which is more than five years from the
date of issue, (ii) has a yield to maturity which equals or exceeds five
percentage points over the applicable federal rate for the calendar month in
which the obligation is issued and (iii) has "significant original issue
discount." A debt instrument is treated as having "significant original issue
discount" if the aggregate amount that would be includible in gross income with
respect to such debt instrument for periods before the close any accrual period
ending after the date five years after the date of issue exceeds the sum of (i)
the aggregate amount of interest to be paid in cash under the debt instrument
before the close of such accrual period and (ii) the product of the initial
issue price of such debt instrument and its yield to maturity. Moreover, if the
debt instrument's yield to maturity excess the applicable federal rate plus six
percentage points, a ratable portion of the issuing corporation's deduction for
original issue discount (the "Disqualified OID") will be denied. For purposes of
the dividends-received deduction under Section 243 of the Code, the Disqualified
OID will be treated as a dividend to the extent it would have been so treated if
it had been distributed by the issuing corporation with respect to its stock.
Due to their maturity date, yield to maturity and amount of original issue
discount, the New Discount Debentures may be subject to the high yield discount
obligation rules described above, depending on the applicable federal rate in
effect on the date the New Discount Debentures are issued. If such rules were
applicable to the New Discount Debentures, New Holdings would not be permitted
to deduct any original issue discount on such New Discount Debentures until such
original issue discount were paid. In addition, the Disqualified OID would be
treated as a dividend for purposes of the dividends-received deduction under
Section 243 of the Code to the extent of New Holdings' current and accumulated
earnings and profits and would not be deductible by New Holdings.
128
<PAGE> 160
MARKET DISCOUNT
The Code generally requires holders of "market discount bonds" to treat as
ordinary income any gain realized on the disposition (or gift) of such bonds to
the extent of the market discount accrued during the holder's period of
ownership. A "market discount bond" is a debt obligation purchased at a market
discount, subject to a statutory de minimis exception. For this purpose, a
purchase at a market discount includes a purchase at or after the original issue
at a price below the stated redemption price at maturity, or, in the case of a
debt instrument issued with original issue discount, at a price below (a) its
"issue price," plus (b) the amount of original issue discount includible in
income by all prior holders of the debt instrument, minus (c) all cash payments
received by such previous holders. The accrued market discount generally equals
a ratable portion of the bond's market discount, based on the number of days the
taxpayer has held the bond at the time of such disposition, as a percentage of
the number of days from the date the taxpayer acquired the bond to its date of
maturity.
AMORTIZABLE BOND PREMIUM
Generally, if the tax basis of an obligation held as a capital asset
exceeds the "stated redemption price at maturity" of the obligation (as defined
under "Original Issue Discount -- General Original Issue Discount Rules"), such
excess will constitute amortizable bond premium that the holder may elect to
amortize under the constant interest rate method and deduct over the period from
his acquisition date to the obligation's maturity date. A holder who elects to
amortize bond premium must reduce his tax basis in the related obligation by the
amount of the aggregate deductions allowable for amortizable bond premium.
Amortizable bond premium will be treated under the Code as an offset to interest
income on the related debt instrument for federal income tax purposes, subject
to the promulgation of Treasury Regulations altering such treatment.
DISPOSITION
In general, a holder of New Discount Debentures will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of such New
Discount Debentures measured by the difference between (i) the amount of cash
and the fair market value of property received and (ii) the holder's tax basis
in the New Discount Debentures (as increased by any original issue discount and
market discount previously included in income by the holder and decreased by any
amortizable bond premium, if any, deducted over the term of the New Discount
Debentures). Subject to the market discount rules discussed above, any such gain
or loss will generally be long-term capital gain or loss, provided the New
Discount Debentures have been held for more than one year.
ELECTION
A holder of New Discount Debentures, subject to certain limitations, may
elect to include all interest and discount on the New Discount Debentures in
gross income under the constant yield method. For this purpose, interest
includes stated and unstated interest, acquisition discount, original issue
discount, de minimis market discount and market discount, as adjusted by any
acquisition premium. Such election, if made in respect of a market discount
bond, will constitute an election to include market discount in income currently
on all market discount bonds acquired by such holder on or after the first day
of the first taxable year to which the election applies. See "-- Market
Discount."
BACKUP WITHHOLDING
A holder of New Discount Debentures may be subject to backup withholding at
the rate of 31% with respect to interest paid on, original issue discount
accrued on and gross proceeds from the sale of, the New Discount Debentures
unless (i) such holder is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of New Discount Debentures who does not provide New
Holdings with his or her correct taxpayer identification number may be subject
to penalties imposed by the Service.
129
<PAGE> 161
New Holdings will report to holders of the New Discount Debentures and the
Service the amount of any "reportable payments" (including any interest paid and
any original issue discount accrued on the New Discount Debentures) and any
amount withheld with respect to the New Discount Debentures during the calendar
year.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW DISCOUNT DEBENTURES
IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH
HOLDER OF NEW DISCOUNT DEBENTURES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER FROM THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NEW DISCOUNT DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
The New Discount Debentures may be sold from time to time to purchasers
directly by the Selling Debentureholder. Alternatively, the Selling
Debentureholder may from time to time offer the New Discount Debentures through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Debentureholder and/or the purchasers of New Discount Debentures for whom they
may act as agents. The Selling Debentureholder and any underwriters, dealers or
agents that participate in the distribution of New Discount Debentures may be
deemed to be underwriters, and any profit on the sale of New Discount Debentures
by them and any discounts, commissions or concessions received by any such
underwriters, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. At the time a particular offer of New
Discount Debentures is made, to the extent required, a prospectus supplement
will be distributed which will set forth the aggregate amount of New Discount
Debentures being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, any discounts, commissions and
other items constituting compensation from the Selling Debentureholder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
The distribution of the New Discount Debentures may be effected from time
to time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. However, pursuant to
the Registration Rights Agreement to be executed by and among New Holdings, the
Company and the Selling Debentureholder on the Closing Date, the Selling
Debentureholder has agreed not to make public resales of the New Discount
Debentures for a period of 60 days following the Closing Date, provided that
such 60-day holdback period may be shortened or waived by New Holdings with the
consent of the Underwriters for the Public Offerings. New Holdings will agree to
use its best efforts to assist the partnership in the disposition of New
Discount Debentures and to pay all expenses, including underwriting discounts
and brokers' or dealers' commissions and mark-ups (subject to certain
limitations), incident thereto.
If underwriters are used in an offering of New Discount Debentures, the
name of each managing underwriter, if any, and any other underwriters and terms
of the transaction, including any underwriting discounts and other items
constituting compensation of the underwriters and dealers, if any, will be set
forth in the prospectus supplement relating to such offering and the New
Discount Debentures will be acquired by the underwriters for their own accounts
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time. It is anticipated that any underwriting agreement pertaining
to any New Discount Debentures will (1) entitle the underwriters to
indemnification by New Holdings against certain civil liabilities under the
Securities Act, or to contribution with respect to payments which the
underwriters may be required to make in respect thereof, (2) provide that the
obligations of the underwriters will be subject to certain conditions precedent
and (3) provide that the underwriters will be obligated to purchase all New
Discount Debentures offered in a particular offering if any such New Discount
Debentures are purchased.
130
<PAGE> 162
Under applicable rules and regulations of the Exchange Act, any person
engaged in the distribution of the New Discount Debentures may not
simultaneously engage in certain market making activities with respect to such
New Discount Debentures for a period of nine business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, the Selling Debentureholder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation Rules 10b-2, 10b-6 and 10b-7, which provisions may limit the timing
of purchases and sales of any of the Seller Debentures by the Selling
Debentureholder.
LEGAL MATTERS
The validity of the New Discount Debentures to be offered hereby will be
passed upon for 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 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, June 25, 1994 and January 29,
1995, and the related consolidated statements of operations, cash flows and
shareholders' equity for the 52 weeks ended June 27, 1992, the 52 weeks ended
June 26, 1993, the 52 weeks ended June 25, 1994 and the 31 weeks ended January
29, 1995, 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 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.
131
<PAGE> 163
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 29, 1995... F-29
Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31
weeks ended January 29, 1995........................................................ F-31
Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26,
1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31
weeks ended January 29, 1995........................................................ F-32
Consolidated statements of shareholders' equity (deficit) for the 52 weeks ended June
27, 1992,
June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995............. 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-52
Balance sheet as of January 4, 1995................................................... F-53
Notes to the balance sheet............................................................ F-54
</TABLE>
F-1
<PAGE> 164
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> 165
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29,
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................ $1,483,650 $1,509,914
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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 30, JANUARY 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. However, no settlement
agreement has been signed. The Company does not believe that the resolution of
F-15
<PAGE> 178
RALPHS SUPERMARKETS, INC.
(AS SUCCESSOR TO RALPHS GROCERY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 179
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> 180
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> 181
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> 182
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> 183
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> 184
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> 185
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> 186
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> 187
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> 188
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 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 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> 189
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 is expected to result in a restructuring charge for the New
Company. 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> 190
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, June 25, 1994 and January 29, 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the 52 weeks
ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks ended
January 29, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Food 4 Less
Holdings, Inc. and subsidiaries as of June 26, 1993, June 25, 1994 and January
29, 1995, and the results of their operations and their cash flows for the 52
weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks
ended January 29, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 18, 1995
F-28
<PAGE> 191
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
-------- -------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 25,089 $ 32,996 $ 19,560
Trade receivables, less allowances of $1,919, $1,386 and
$1,192 at June 26, 1993, June 25, 1994 and January
29, 1995, respectively............................... 22,048 25,039 23,377
Notes and other receivables............................. 1,278 1,312 3,985
Inventories............................................. 191,467 212,892 224,686
Patronage receivables from suppliers.................... 2,680 2,875 5,173
Prepaid expenses and other.............................. 6,011 6,323 13,051
-------- -------- ----------
Total current assets............................ 248,573 281,437 289,832
INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER
COOPERATIVES:
A.W.G................................................... 6,693 6,718 6,718
Certified and Other..................................... 6,657 5,984 5,686
PROPERTY AND EQUIPMENT:
Land.................................................... 23,912 23,488 23,488
Buildings............................................... 12,827 12,827 24,172
Leasehold improvements.................................. 81,049 97,673 110,020
Store equipment and fixtures............................ 129,178 148,249 157,607
Transportation equipment................................ 31,758 32,259 32,409
Construction in progress................................ 757 12,641 8,042
Leased property under capital leases.................... 77,553 78,222 82,526
Leasehold interests..................................... 93,863 93,464 96,556
-------- -------- ----------
450,897 498,823 534,820
Less: Accumulated depreciation and amortization......... 96,948 134,089 154,382
-------- -------- ----------
Net property and equipment........................... 353,949 364,734 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $11,611, $17,083 and $20,496 at June 26, 1993,
June 25, 1994 and January 29, 1995, respectively..... 33,778 28,536 25,469
Goodwill, less accumulated amortization of $26,254,
$33,945 and $38,560 at June 26, 1993, June 25, 1994
and January 29, 1995, respectively................... 280,895 267,884 263,112
Other, net.............................................. 27,295 24,787 29,440
-------- -------- ----------
$957,840 $980,080 $1,000,695
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-29
<PAGE> 192
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
-------- -------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................ $140,468 $180,708 $ 190,455
Accrued payroll and related liabilities................. 40,319 42,805 42,007
Accrued interest........................................ 5,293 5,474 10,730
Other accrued liabilities............................... 40,467 53,910 65,279
Income taxes payable.................................... 2,053 2,000 293
Current portion of self-insurance liabilities........... 23,552 29,492 28,616
Current portion of long-term debt....................... 12,778 18,314 22,263
Current portion of obligations under capital leases..... 2,865 3,616 4,965
-------- -------- ----------
Total current liabilities....................... 267,795 336,319 364,608
LONG-TERM DEBT............................................ 335,576 310,944 320,901
OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 40,675
SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000
SENIOR HOLDINGS DISCOUNT NOTES............................ 50,230 58,997 65,136
DEFERRED INCOME TAXES..................................... 22,429 14,740 17,534
SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 54,174
COMMITMENTS AND CONTINGENCIES............................. -- -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 1,600,000 shares
authorized and 1,385,265, 1,381,782 and 1,386,169
shares issued at June 26, 1993, June 25, 1994 and
January 29, 1995, respectively....................... 14 14 14
Additional paid-in capital.............................. 106,452 105,182 105,580
Notes receivable from shareholders...................... (714) (586) (702)
Retained deficit........................................ (83,119) (94,586) (112,225)
-------- -------- ----------
Total shareholders' equity (deficit)............ 22,633 10,024 (7,333)
-------- -------- ----------
$957,840 $980,080 $1,000,695
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-30
<PAGE> 193
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES....................................... $2,913,493 $2,742,027 $2,585,160 $1,616,720 $1,556,522
COST OF SALES (including purchases from
related parties of $277,812, $204,028,
$175,929, $108,264 (unaudited) and
$104,407 for the 52 weeks ended June 27,
1992, June 26, 1993, and June 25, 1994,
the 32 weeks ended February 5, 1994 and
the 31 weeks ended January 29, 1995,
respectively)............................. 2,392,655 2,257,835 2,115,842 1,317,216 1,294,147
---------- ---------- ---------- ---------- ----------
GROSS PROFIT................................ 520,838 484,192 469,318 299,504 262,375
SELLING, GENERAL, ADMINISTRATIVE AND OTHER,
NET....................................... 469,751 434,908 388,836 252,313 222,359
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS
ACQUIRED.................................. 7,795 7,571 7,691 4,723 4,615
RESTRUCTURING CHARGE........................ -- -- -- -- 5,134
---------- ---------- ---------- ---------- ----------
OPERATING INCOME............................ 43,292 41,713 72,791 42,468 30,267
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs............ 63,907 68,713 71,545 44,195 44,948
Amortization of deferred financing
costs.................................. 6,304 4,901 5,472 3,368 3,413
---------- ---------- ---------- ---------- ----------
70,211 73,614 77,017 47,563 48,361
LOSS (GAIN) ON DISPOSAL OF ASSETS........... (1,364) (2,083) 37 60 (455)
PROVISION FOR EARTHQUAKE LOSSES............. -- -- 4,504 -- --
---------- ---------- ---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY CHARGES..................... (25,555) (29,818) (8,767) (5,155) (17,639)
PROVISION FOR INCOME TAXES.................. 3,441 1,427 2,700 1,000 --
---------- ---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGES........... (28,996) (31,245) (11,467) (6,155) (17,639)
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) $ (6,155) $ (17,639)
========== ========== ========== ========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges......... $ (20.74) $ (22.43) $ (8.29) $ (4.45) $ (12.75)
Extraordinary charges..................... (3.45) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss.................................. $ (24.19) $ (22.43) $ (8.29) $ (4.45) $ (12.75)
========== ========== ========== ========== ==========
Average Number of Common Shares
Outstanding............................ 1,397,939 1,393,289 1,382,710 1,383,054 1,383,307
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE> 194
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 THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Cash received from customers........... $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 1,616,720 $ 1,556,522
Cash paid to suppliers and employees... (2,752,442) (2,711,779) (2,441,353) (1,561,092) (1,507,523)
Interest paid.......................... (56,234) (58,807) (56,762) (29,743) (33,553)
Income taxes (paid) refunded........... (4,665) 2,971 (247) 1,652 1,087
Interest received...................... 1,266 993 903 544 867
Other, net............................. 4,734 8,093 121 2,108 221
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................. 106,152 (16,502) 87,822 30,189 17,621
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment........................... 17,395 15,685 11,953 12,337 7,199
Payment for purchase of property and
equipment........................... (60,263) (53,467) (57,471) (29,090) (49,023)
Business acquisition costs, net of cash
acquired............................ (27,563) -- (11,050) -- --
Receivable received from seller of
business acquired................... 12,259 -- -- -- --
Other, net............................. (4,754) (18) 813 718 (797)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES.... (62,926) (37,800) (55,755) (16,035) (42,621)
CASH PROVIDED (USED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
debt................................ 177,500 26,557 28 28 --
Net increase (decrease) in revolving
loan................................ (23,900) 4,900 (4,900) 600 27,300
Payments of long-term debt............. (184,389) (14,319) (14,224) (10,571) (13,394)
Proceeds from the issuance of preferred
stock............................... -- 46,348 -- -- --
Proceeds from issuance of common stock,
net................................. 341 3,652 -- -- 269
Purchase of common stock, net.......... (313) (545) (1,192) (726) (57)
Payments of capital lease obligation... (2,814) (2,840) (3,693) (1,791) (2,278)
Deferred financing costs and other..... (6,656) (8,839) (179) (161) (276)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES............................. (40,231) 54,914 (24,160) (12,621) 11,564
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 2,995 612 7,907 1,533 (13,436)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD................. 21,482 24,477 25,089 25,089 32,996
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD....................... $ 24,477 $ 25,089 $ 32,996 $ 26,622 $ 19,560
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-32
<PAGE> 195
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 THIRTY-TWO THIRTY-ONE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss................................. $(33,814) $(31,245) $(11,467) $ (6,155) $(17,639)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization......... 61,181 62,541 62,555 38,123 40,036
Accretion of Holdings Discount
Notes............................... -- 3,882 8,767 5,395 6,139
Restructuring charge.................. -- -- -- -- 5,134
Extraordinary charge.................. 4,818 -- -- -- --
Loss (gain) on sale of assets......... (1,364) (4,613) 65 60 (455)
Equity loss on investments in supplier
cooperative......................... 472 207 -- -- --
Change in assets and liabilities, net
of effects from acquisition of
businesses:
Accounts and notes receivable....... (7,688) 17,145 (3,220) (2,139) (3,398)
Inventories......................... 202 17,697 (17,125) (10,254) (11,794)
Prepaid expenses and other.......... (2,834) (6,163) (5,717) (6,701) (11,239)
Accounts payable and accrued
liabilities...................... 71,369 (83,286) 55,301 5,614 18,715
Self-insurance liabilities.......... 15,034 2,935 (3,790) 3,594 (8,965)
Deferred income taxes............... 2,033 4,004 2,506 1,714 2,794
Income taxes payable................ (3,257) 394 (53) 938 (1,707)
-------- -------- -------- -------- --------
Total adjustments..................... 139,966 14,743 99,289 36,344 35,260
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................... $106,152 $(16,502) $ 87,822 $ 30,189 $ 17,621
======== ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of property and equipment
through issuance of capital lease
obligation............................ -- -- $ 2,575 -- $ 4,304
======== ======== ======== ======== ========
Reduction of goodwill and deferred income
taxes................................. -- -- $ 9,896 -- --
======== ======== ======== ======== ========
Acquisition of businesses:
Fair value of assets acquired......... -- -- $ 11,241 -- --
Net cash paid in acquisition.......... -- -- (11,050) -- --
-------- -------- -------- -------- --------
Liabilities assumed................... -- -- $ 191 -- --
======== ======== ======== ======== ========
Final purchase price allocation for the
Alpha Beta Acquisition:
Property and equipment valuation
adjustment.......................... $ 44,231 -- -- -- --
======== ======== ======== ======== ========
Additional acquisition liabilities.... $ 14,305 -- -- -- --
======== ======== ======== ======== ========
Deferred tax benefit.................. $ 12,800 -- -- -- --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-33
<PAGE> 196
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ --------------- TOTAL SHARE-
NUMBER NUMBER SHARE- ADD'L HOLDERS'
OF OF HOLDERS' PAID-IN RETAINED EQUITY
SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) (DEFICIT)
--------- ------ ------ ------ --------- -------- --------- ----------
<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
Net loss.......................... -- -- -- -- -- -- (17,639) (17,639)
Issuance of Common Stock.......... 5,504 -- -- -- (191) 460 -- 269
Purchase of Common Stock.......... (1,117) -- -- -- 5 (62) -- (57)
Payment of Shareholders' Notes.... -- -- -- -- 70 -- -- 70
--------- ---- ------ ------ ----- -------- --------- --------
BALANCES AT JANUARY 29, 1995........ 1,386,169 $ 14 -- $ -- $(702) $105,580 $(112,225) $ (7,333)
========= ==== ====== ====== ===== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE> 197
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> 198
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.
(c) Fiscal Years
In anticipation of the Merger (as defined in Note 13 -- Ralphs Merger), and
in order to align the Company's fiscal year end with the fiscal year end of RSI
(as defined in Note 13 -- Ralphs Merger), the Company, together with its
subsidiaries, changed its fiscal year end from the 52 or 53-week period which
ends on the last Saturday in June to the 52 or 53-week period which ends on the
Sunday closest to January 31, resulting in a 31-week transition period ended
January 29, 1995. As a result of the fiscal year end change, the 52-week period
ended June 27, 1992 is referred to as fiscal year 1992, the 52-week period ended
June 26, 1993 is referred to as fiscal year 1993, the 52-week period ended June
25, 1994 is referred to as fiscal year 1994, the 32-week period ended February
5, 1994 is referred to as the 1994 transition period, and the 31-week period
ended January 29, 1995 is referred to as the 1995 transition period. In
addition, information presented below concerning subsequent fiscal years starts
with fiscal year 1995, which will cover the 52 weeks ended January 28, 1996, and
will proceed sequentially forward.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
(e) Inventories
Inventories, which consist of grocery products, are stated at the lower of
cost or market. Cost has been principally determined using the last-in,
first-out ("LIFO") method. If inventories had been valued using the first-in,
first-out ("FIFO") method, inventories would have been higher by $13,103,000,
$13,802,000 and $16,531,000 at June 26, 1993, June 25, 1994 and January 29,
1995, respectively, and gross profit and operating income would have been
greater by $3,554,000, $4,441,000, $699,000, $2,565,000 (unaudited) and
$2,729,000 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25,
1994, the 32 weeks ended February 5, 1994, and the 31 weeks ended January 29,
1995, respectively.
(f) Pre-opening Costs
The costs associated with opening new stores are deferred and amortized
over one year following the opening of each new store.
(g) Closed Store Reserves
When a store is closed, the Company provides a reserve for the net book
value of any store assets, net of salvage value, and the net present value of
the remaining lease obligation, net of sublease income. For the 52 weeks ended
June 27, 1992, June 26, 1993, and June 25, 1994, the 32 weeks ended February 5,
1994 and the 31 weeks ended January 29, 1995, utilization of this reserve was
$4.0 million, $2.4 million, $1.1 million, $579,000 (unaudited) and $573,000,
respectively.
(h) Investments in Supplier Cooperatives
The investment in Certified is accounted for on the cost method. There are
certain restrictions on the sale of this investment.
F-36
<PAGE> 199
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>
Buildings and improvements.................. 5-40 years
Equipment and fixtures...................... 3-10 years
Property under capital leases and leasehold
interests................................. 3-45 years (lease term)
</TABLE>
(k) Deferred Financing Costs
Costs incurred in connection with the issuance of debt are amortized over
the term of the related debt using the effective interest method.
(l) Goodwill and Covenants Not to Compete
The excess of the purchase price over the fair value of the net assets of
businesses acquired is amortized on a straight-line basis over 40 years
beginning at the date of acquisition. Current and undiscounted future operating
cash flows are compared to current and undiscounted future goodwill amortization
to determine if an impairment of goodwill has occurred and is continuing. As of
January 29, 1995, no impairment existed.
Covenants not to compete, which are included in Other Assets, are amortized
on a straight-line basis over the term of the covenant.
(m) Income Taxes
On June 27, 1993, the Company prospectively adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts.
Under SFAS 109, the Company recognizes to a greater degree the future tax
benefits of expenses which have been recognized in the financial statements.
The implementation of SFAS No. 109 did not have a material effect on the
accompanying consolidated financial statements.
(n) Notes Receivable from Shareholders
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> 200
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 January 29, 1995 presentation.
F-38
<PAGE> 201
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT
Long-Term Debt
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JANUARY 29,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Bank Term Loan, principal due quarterly
through January 1999, with interest
payable monthly in arrears............... $148,478,000 $137,064,000 $125,732,000
10.45 percent Senior Notes principal due
2000 with interest payable semi-annually
in arrears............................... 175,000,000 175,000,000 175,000,000
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 65,136,000
Revolving Loan............................. 4,900,000 -- 27,300,000
10.625 percent first real estate mortgage
due 1998, $12,000 of principal plus
interest payable monthly secured by land
and building with a net book value of
$2,104,000............................... 1,558,000 1,521,000 1,498,000
9.2 to 9.25 percent notes payable,
collateralized by equipment, due
September 1994, $67,000 of principal plus
interest payable monthly, plus balloon
payment of $992,000...................... 1,772,000 1,103,000 --
10.8 percent notes payable, collateralized
by equipment, due September 1995, $72,000
of principal plus interest payable
monthly, plus balloon payment of
$1,004,000............................... 2,447,000 1,819,000 1,420,000
10.0 percent secured promissory note,
collateralized by the stock of Bell, due
1996, interest payable quarterly through
June 1996................................ 8,000,000 8,000,000 8,000,000
10.08 percent notes payable, collateralized
by equipment, due November 1996, $34,000
of principal plus interest payable
monthly, plus balloon payment of
$493,000................................. 1,515,000 1,242,000 1,070,000
10.15 percent notes payable, collateralized
by equipment, due December 1996, $45,000
of principal and interest payable
monthly, plus balloon payment of
$640,000................................. 1,994,000 1,675,000 1,422,000
10.0 percent real estate mortgage due 2000,
$8,000 of principal and interest payable
monthly.................................. 474,000 419,000 392,000
Other long-term debt....................... 2,216,000 1,415,000 1,330,000
------------ ------------ ------------
398,584,000 388,255,000 408,300,000
Less -- current portion.................... 12,778,000 18,314,000 22,263,000
------------ ------------ ------------
$385,806,000 $369,941,000 $386,037,000
============ ============ ============
</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 January 29, 1995, $125.7 million
was outstanding under the Bank Term Loan, $27.3 million was outstanding under
the Revolving Loan and $48.6 million of standby letters of
F-39
<PAGE> 202
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit had been issued on behalf of the Company. A commitment fee of 1/2 of 1
percent is charged on the average daily unused portion of the Revolving Loan and
the Letter of Credit Facility; such commitment fees are due quarterly in
arrears. Interest on borrowings under the Bank Term Loan is at the bank's Base
Rate (as defined) plus 1.25 percent or the Eurodollar Rate (as defined) plus 2.5
percent. At January 29, 1995, the weighted average interest rate on the Bank
Term Loan was 8.3 percent. Quarterly principal installments on the Bank Term
Loan continue to December 1998, with $19,829,000 payable in fiscal year 1995,
$22,661,000 payable in fiscal year 1996, $33,792,000 payable in fiscal year 1997
and $49,450,000 payable in fiscal year 1998. Interest on borrowings under the
Revolving Loan is at the bank's Base Rate (as defined) plus 1.25 percent. At
January 29, 1995, the interest rate on the Revolving Loan was 9.75 percent. To
the extent borrowings under the Revolving Loan are not paid earlier, they are
due in June 1996. The common stock of F4L-SoCal, Falley's, Cala and certain of
their direct and indirect subsidiaries has been pledged as security under the
Credit Agreement. The Credit Agreement has been amended to, among other things,
allow for the acceleration of the capital expenditures and other costs
associated with the conversion of 11 conventional stores to the warehouse
format. In May 1995, the Credit Agreement was further amended in order to, among
other things, accommodate the Company's new fiscal year end for financial
reporting purposes and to make adjustments to financial covenants of the
Company.
In April 1992, 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.
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 January 29, 1995,
the Company was in compliance with the financial covenants of its debt
agreements. At January 29, 1995, dividends and certain other payments are
restricted based on terms in the debt agreements.
On December 31, 1992, Holdings issued $103.6 million aggregate principal
amount of 15.25% Senior 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.
F-40
<PAGE> 203
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of principal of Long-Term Debt at January 29, 1995 are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995................................................... $ 22,263,000
1996................................................... 59,902,000
1997................................................... 33,991,000
1998................................................... 49,673,000
1999................................................... 88,976,000
Later years............................................ 153,495,000
------------
$408,300,000
============
</TABLE>
Senior Subordinated Debt
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, which are due on June 15, 2001, are subordinated to all
Senior Indebtedness (as defined) of the Company, and may be redeemed beginning
in 1996 at a redemption price of 106 percent. The redemption price declines
ratably to 100 percent in 2000.
(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 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rents................... $46,706,000 $44,504,000 $49,788,000 $29,830,000 $35,458,000
Rents based on sales............ 7,656,000 5,917,000 3,806,000 2,716,000 1,999,000
</TABLE>
Following is a summary of future minimum lease payments under operating
leases at January 29, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995................................................... $ 62,120,000
1996................................................... 58,163,000
1997................................................... 53,432,000
1998................................................... 47,064,000
1999................................................... 44,680,000
Later years............................................ 406,897,000
------------
$672,356,000
============
</TABLE>
The Company has entered into lease agreements for new supermarket sites
which were not in operation at January 29, 1995. Future minimum lease payments
under such operating leases generally begin when such supermarkets open and at
January 29, 1995 are: 1995 -- $2,170,000; 1996 -- $6,640,000;
1997 -- $6,890,000; 1998 -- $6,890,000; 1999 -- $6,890,000; later
years -- $145,425,000.
F-41
<PAGE> 204
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain leases qualify as capital leases under the criteria established in
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and
are classified on the consolidated balance sheets as leased property under
capital leases. Future minimum lease payments for the property under capital
leases at January 29, 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995.................................................... $ 9,564,000
1996.................................................... 8,957,000
1997.................................................... 8,050,000
1998.................................................... 6,236,000
1999.................................................... 5,739,000
Later years............................................. 40,841,000
-----------
Total minimum lease payments.................. 79,387,000
Less: amounts representing interest..................... 33,747,000
-----------
Present value of minimum lease payments................. 45,640,000
Less: current portion................................... 4,965,000
-----------
$40,675,000
===========
</TABLE>
Accumulated depreciation related to capital leases was $20,356,000,
$24,041,000 and $27,623,000 at June 26, 1993, June 25, 1994 and January 29,
1995, respectively.
The Company is leasing a distribution facility and four store locations
from the previous owner of Alpha Beta. The agreement contains a purchase option
for the land, buildings and improvements and equipment at a price that equals or
exceeds the estimated fair market value throughout the term of the lease.
(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>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995..................................................... $ --
1996..................................................... 795,000
1997..................................................... 1,420,000
1998..................................................... 1,520,000
1999..................................................... 1,504,000
Later years.............................................. 1,479,000
----------
$6,718,000
==========
</TABLE>
F-42
<PAGE> 205
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal....................... $2,507,000 $ -- $ 3,251,000 $(2,894,000)
State and other............... 934,000 82,000 712,000 100,000
---------- ---------- ----------- -----------
3,441,000 82,000 3,963,000 (2,794,000)
---------- ---------- ----------- -----------
Deferred:
Federal....................... -- 1,345,000 78,000 2,794,000
State and other............... -- -- (1,341,000) --
---------- ---------- ----------- -----------
-- 1,345,000 (1,263,000) 2,794,000
---------- ---------- ----------- -----------
$3,441,000 $1,427,000 $ 2,700,000 $ --
========== ========== =========== ===========
</TABLE>
A reconciliation of the provision (benefit) for income taxes to amounts
computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35%
for fiscal 1994 and the 1995 transition period is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate on
loss before provision for income taxes
and extraordinary charges................ $(8,689,000) $(10,138,000) $(3,068,000) $(6,173,000)
State and other taxes, net of federal tax
benefit.................................. 934,000 82,000 (1,000) 65,000
Alternative minimum tax.................... 2,507,000 -- -- --
Effect of permanent differences resulting
from:
Amortization of goodwill................. 2,706,000 2,850,000 2,820,000 1,701,000
Original issue discount.................. -- 208,000 526,000 387,000
Accounting limitation of deferred tax
benefit.................................. 5,983,000 8,425,000 2,423,000 4,020,000
----------- ------------ ----------- -----------
$ 3,441,000 $ 1,427,000 $ 2,700,000 $ --
=========== ============ =========== ===========
</TABLE>
F-43
<PAGE> 206
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for deferred taxes consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Depreciation................................ $ 6,282,000 $ 7,756,000 $ 2,536,000 $(1,513,000)
Difference between book and tax basis
of assets sold............................ 2,514,000 3,198,000 (4,223,000) 2,505,000
Deferred revenues and allowances............ (7,028,000) 40,000 (2,349,000) 707,000
Original issue discount..................... -- (1,308,000) (2,981,000) (2,066,000)
Pre-opening costs........................... 1,072,000 (512,000) 174,000 784,000
Accounts receivable reserves................ -- (270,000) 249,000 80,000
Unicap...................................... (124,000) (5,000) (536,000) (755,000)
Capital lease obligation.................... (2,010,000) (1,385,000) 2,792,000 527,000
Self-insurance reserves..................... (13,558,000) (4,082,000) (535,000) 5,523,000
Inventory shrink reserve.................... (528,000) 777,000 (869,000) (569,000)
LIFO........................................ 7,104,000 (554,000) (1,010,000) (1,303,000)
Closed store reserve........................ 964,000 1,092,000 440,000 176,000
Accrued expense............................. -- -- (582,000) 350,000
Accrued payroll and related liabilities..... (2,656,000) 193,000 1,721,000 (3,879,000)
Damaged inventory reimbursement............. 1,195,000 -- -- --
Acquisition costs........................... 4,974,000 2,626,000 1,397,000 (5,444,000)
Sales tax reserves.......................... -- (715,000) (418,000) 433,000
Deferred rent subsidy....................... -- (483,000) (624,000) (29,000)
Net operating loss usage.................... -- -- 5,782,000 (6,963,000)
Tax credits benefited....................... -- (1,392,000) (4,477,000) 1,711,000
Accounting limitation (recognition)
of deferred tax benefit................... 1,588,000 (3,283,000) 1,896,000 12,563,000
Other, net.................................. 211,000 (348,000) 354,000 (44,000)
----------- ----------- ----------- -----------
$ -- $ 1,345,000 $(1,263,000) $ 2,794,000
=========== =========== =========== ===========
</TABLE>
F-44
<PAGE> 207
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, JANUARY 29,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related
liabilities......................... $ 4,064,000 $ 2,448,000 $ 6,248,000
Other accrued liabilities.............. 14,796,000 18,271,000 18,467,000
Property and equipment................. 9,674,000 2,997,000 --
Self-insurance liabilities............. 30,907,000 27,744,000 25,204,000
Loss carryforwards..................... 27,863,000 20,675,000 27,638,000
Tax credit carryforwards............... 1,392,000 5,869,000 4,157,000
Other.................................. 1,223,000 580,000 570,000
------------ ------------ ------------
Gross deferred tax assets........... 89,919,000 78,584,000 82,284,000
Valuation allowance.................... (46,316,000) (35,467,000) (48,030,000)
------------ ------------ ------------
Net deferred tax assets............. $ 43,603,000 $ 43,117,000 $ 34,254,000
------------ ------------ ------------
Deferred tax liabilities:
Inventories............................ $(20,243,000) $(16,738,000) $(11,690,000)
Property and equipment................. (38,298,000) (30,516,000) (28,527,000)
Obligations under capital leases....... (5,802,000) (8,733,000) (9,261,000)
Other.................................. (1,689,000) (1,870,000) (2,310,000)
------------ ------------ ------------
Gross deferred tax liability........ (66,032,000) (57,857,000) (51,788,000)
------------ ------------ ------------
Net deferred tax liability.......... $(22,429,000) $(14,740,000) $(17,534,000)
============ ============ ============
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its
gross deferred tax assets at January 29, 1995 due primarily to financial and tax
losses in recent years. Under SFAS 109, this valuation allowance will be
adjusted in future periods as appropriate. However, the timing and extent of
such future adjustments to the allowance cannot be determined at this time.
At January 29, 1995, approximately $8,864,000 of the valuation allowance
for deferred tax assets will reduce goodwill when the allowance is no longer
required.
At January 29, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of $77,360,000, which expire in 2007 through 2009.
The Company has federal Alternative Minimum Tax ("AMT") credit carryforwards of
approximately $556,000 which are available to reduce future regular taxes in
excess of AMT. Currently, there is no expiration date for these credits.
FFL files a consolidated federal income tax return, under which the federal
income tax liability of FFL and its subsidiaries (which since June 23, 1989 and
December 8, 1992 include Supermarkets and Holdings, respectively) 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-45
<PAGE> 208
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 $1,167,000
during the 31 weeks ended January 29, 1995, $1,231,000 (unaudited) during the 32
weeks ended February 5, 1994, $2,270,000 during the 52 weeks ended June 25,
1994, $2,000,000 during the 52 weeks ended June 26, 1993, and $2,000,000 during
the 52 weeks ended June 27, 1992. Advisory fees paid or accrued were $170,000
during the 52 weeks ended June 25, 1994, $1,795,000 for the 52 weeks ended June
26, 1993, and $116,000 for the 52 weeks ended June 27, 1992. There were no such
advisory fees paid or accrued for the 31 weeks ended January 29, 1995 or for the
32 weeks ended February 5, 1994. Advisory fees paid or accrued for financing
transactions are capitalized and amortized over the term of the related
financing. In connection with the acquisitions of Alpha Beta, ABC and the Food
Barn Stores, the Company capitalized fees of $8,000,000, $500,000 and $92,000,
respectively, which were paid to this affiliated company for acquisition
services.
(8) COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to former stockholders of certain
predecessors for any prorated gains which may be realized within ten years of
the acquisition of the respective companies resulting from the sale of the
Certified stock. Such gains are only payable if Certified is purchased or
dissolved, or if the Company sells the shares to Certified within the period
noted above.
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 $1,818,000.
The Company has entered into lease agreements with the developers of
several new sites in which the Company has agreed to provide construction
financing. At January 29, 1995, the Company had capitalized construction costs
of $15,081,000 on total commitments of $19,250,000.
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against the Company and other major
supermarket chains located in Southern California, alleging that they conspired
to refrain from competing in and to fix the price of fluid milk above
competitive prices. Specifically, class actions were commenced by Diane Barela
and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and
December 23, 1992, respectively. To date, the Court has yet to certify any of
these classes, while a demurrer to the complaints was denied. The Company will
vigorously defend itself in these class action suits.
In addition, the Company or its subsidiaries are defendants in a number of
other cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion of
management, the resolutions of these matters will not have a material effect on
the Company's financial position or results of operations.
The Company self-insures its workers compensation and general liability.
For the 31 weeks ended January 29, 1995, the 32 weeks ended February 5, 1994,
and the 52 weeks ended June 25, 1994, June 26, 1993 and June 27, 1992,
self-insurance loss provisions were $6,304,000, $21,064,000 (unaudited),
$19,880,000,
F-46
<PAGE> 209
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$38,040,000 and $46,140,000, respectively. During the 52 weeks ended June 27,
1992, June 26, 1993 and June 25, 1994, the Company discounted its self-insurance
liability using a 7.0% discount rate. In the 1995 transition period, the Company
changed the discount rate to 7.5%. Management believes that this rate
approximates the time value of money over the anticipated payout period
(approximately 10 years) for essentially risk-free investments. The net
self-insurance liability would have been greater by $794,000 had the 7.0%
discount rate been applied during the 31 weeks ended January 29, 1995, as
opposed to the 7.5% discount rate.
The Company's historical self-insurance liability for the three most recent
fiscal years and the 1995 transition period is as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Self-insurance
liability............ $ 95,605,000 $100,773,000 $90,898,000 $ 84,286,000
Less: Discount......... (13,046,000) (15,279,000) (9,194,000) (11,547,000)
------------ ------------ ----------- ------------
Net self-insurance
liability............ $ 82,559,000 $ 85,494,000 $81,704,000 $ 72,739,000
============ ============ =========== ============
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $10 million, $14 million, $13 million, $15 million and $5 million
for its fiscal years ended in June 1995, 1996, 1997, 1998 and 1999,
respectively.
(9) EMPLOYEE BENEFIT PLANS
The Company implemented Statement of Position No. 93-6 (the "SOP"),
"Employer Accounting for Employee Stock Ownership Plans," effective June 26,
1994. The implementation of SOP No. 93-6 did not have a material effect on the
accompanying unaudited consolidated financial statements.
The Company and its subsidiaries sponsor several defined contribution
benefit plans. The full-time employees of Falley's who are not members of a
collective bargaining agreement are covered under a 401(k) plan under which the
Company matches certain employee contributions with cash or FFL stock (the
"Falley's ESOP"). As part of the original stock sale agreement between FFL and
the Falley's ESOP, which has been amended from time to time, a partnership which
owns stock of FFL has assumed the obligation to purchase any FFL shares as to
which terminated plan participants exercise a put option under the terms of
Falley's ESOP. The Company is not required to make cash payments to redeem the
shares. As part of that agreement, the Company may elect, after providing a
right of first refusal to the partnership, to purchase FFL shares put under the
provisions of the plan. However, the partnership's obligation to purchase such
FFL shares is unconditional, and any repurchase of shares by the Company is at
the Company's sole election. During the 31-week period ended January 29, 1995,
the Company did not purchase any of the FFL shares. FFL shares purchased by the
Company are classified as 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 31 weeks ended January 29, 1995, the Company recorded a charge
against operations of approximately $286,000 for benefits under the Union ESOPs.
There were no shares issued to the Union ESOPs at January 29, 1995.
F-47
<PAGE> 210
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Total charges against operations related to all employee benefit plans
sponsored by the Company and its subsidiaries were $337,000, $284,000, $103,000
(unaudited) and $699,000 for the 52 weeks ended June 27, 1992, the 52 weeks
ended June 26, 1993, the 32 weeks ended February 5, 1994 and the 52 weeks ended
June 25, 1994, respectively, and there were no such charges for the 31 weeks
ended January 29, 1995. No contributions were made with stock and no stock was
acquired by any plans in fiscal 1992, fiscal 1993, fiscal 1994 or in the 1995
transition period.
The Company contributes to multi-employer pension plans administered by
various trustees. Contributions to these plans are based upon negotiated wage
contracts. These plans may be deemed to be defined benefit plans. Information
related to accumulated plan benefits and plan net assets as they may be
allocated to the Company at January 29, 1995 is not available. The Company
contributed $78.6 million, $69.4 million, $57.2 million, $35.7 million
(unaudited) and $21.6 million to these plans for the 52 weeks ended June 27,
1992, June 26, 1993, June 25, 1994, the 32 weeks ended February 5, 1994 and the
31 weeks ended January 29, 1995, respectively. Management is not aware of any
plans to terminate such plans.
The United Food and Commercial Workers health and welfare plans were
overfunded and those employers who contributed to the plans are to receive a pro
rata share of the excess reserves in these plans through a reduction of current
contributions. The Company's share of the excess reserve was $24.2 million, of
which $8.1 million, $3.7 million (unaudited) and $14.3 million was recognized in
the 52 weeks ended June 25, 1994, the 32 weeks ended February 5, 1994 and the 31
weeks ended January 29, 1995, respectively, with the remainder to be recognized
in future periods as the credits are taken. Offsetting the reduction in employer
contributions was a $5.5 million union contract ratification bonus and
contractual wage increases.
(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.
F-48
<PAGE> 211
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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>
JANUARY 29, 1995
-----------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................... $ 19,560,000 $ 19,560,000
Short-term notes and other receivables.................. 6,364,000 6,364,000
Investments in and notes receivable from supplier
cooperatives.......................................... 12,404,000 --
Long-term debt for which it is:
- Practicable to estimate fair values................. 538,168,000 550,915,000
- Not practicable..................................... 15,132,000 --
</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 32 WEEKS 31 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29,
1992 1993 1994 1994 1995
---------- ---------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income.............. $1,266,000 $ 993,000 $ 903,000 $ 544,000 $ 867,000
Licensing fees............... 493,000 246,000 270,000 142,000 77,000
Other income (expense)....... 769,000 3,710,000 (177,000) 1,967,000 139,000
---------- ---------- --------- ---------- ----------
$2,528,000 $4,949,000 $ 996,000 $2,653,000 $1,083,000
========== ========== ========= ========== ==========
</TABLE>
(13) RALPHS MERGER
On September 14, 1994, Holdings, Supermarkets and FFL entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") with Ralphs
Supermarkets, Inc. ("RSI") and the stockholders of RSI. Pursuant to the terms of
the Merger Agreement, as amended, the Company will be merged with and into RSI
(the "RSI Merger"). Immediately following the RSI Merger, Ralphs Grocery Company
("RGC"), which is currently a wholly-owned subsidiary of RSI, will merge with
and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger"),
and RSI will change its name to Ralphs Grocery Company ("Ralphs"). Prior to the
Merger, FFL will merge with and into Holdings, which will be the surviving
corporation (the
F-49
<PAGE> 212
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"FFL Merger"). Immediately following the FFL Merger, Holdings will change its
jurisdiction of incorporation by merging into a newly-formed, wholly-owned
subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation
Merger"). As a result of the Merger, the FFL Merger and the Reincorporation
Merger, Ralphs will become a wholly-owned subsidiary of New Holdings. Conditions
to the consummation of the Merger include, among other things, the completion of
financing for the transaction and the receipt of other necessary consents. The
purchase price for RSI is approximately $1.5 billion, including the assumption
of debt.
The aggregate purchase price, payable to the stockholders of RSI in
connection with the Merger, consists of $375 million in cash, $131.5 million
initial principal amount of New Holdings 13 5/8% Senior Subordinated Pay-in-Kind
Debentures due 2007 and $18.5 million initial accreted value of New Holdings
13 5/8% Senior Discount Debentures due 2005. In addition, Ralphs will enter into
an agreement with a stockholder of RSI pursuant to which such stockholder will
act as a consultant to Ralphs with respect to certain real estate and general
commercial matters for a period of five years from the closing of the Merger in
exchange for the payment of a consulting fee.
The financing required to complete the Merger will include the issuance of
significant additional equity by New Holdings, the issuance of new debt
securities by Supermarkets and New Holdings and the incurrence of additional
bank financing by Ralphs. The equity issuance will be made to a group of
investors led by Apollo Advisors, L.P. and Apollo Advisors II, L.P., which has
committed to purchase up to $140 million in New Holdings stock. The issuance of
new debt securities is expected to consist of up to $295 million principal
amount of Senior Notes due 2004 and $200 million principal amount of Senior
Subordinated Notes due 2005 to be issued by Supermarkets and, in addition to the
debt securities to be issued to the stockholders of RSI, $81.5 million initial
accreted value of 13 5/8% Senior Discount Debentures due 2005 to be issued by
New Holdings. New Holdings will issue an additional $81.5 million of initial
accreted value of New Discount Debentures for $59.0 million in cash and $22.5
million in lieu of cash for fees associated with the Merger. Holdings will
redeem the Discount Notes, with a book value of $65.1 million at January 29,
1995, for $83.9 million in cash. The bank financing will be made pursuant to a
commitment by Bankers Trust Company to provide up to $1,075 million in such
financing. In connection with the receipt of new financing, Holdings and
Supermarkets will also be required to complete certain exchange offers, consent
solicitations, offers to repurchase, and other transactions with the holders of
Holdings', Supermarkets' and RGC's currently outstanding debt securities.
As of January 29, 1995, Ralphs had outstanding indebtedness of
approximately $1,018.5 million. Ralphs had sales of $2,724.6 million, operating
income of $145.6 million and earnings before income taxes of $32.1 million for
its most recent fiscal year ended January 29, 1995.
Upon consummation of the Merger, management anticipates that certain
non-recurring costs associated with the integration of operations will be
recorded as a restructuring charge. The charge will cover costs associated with
the writedown of property and equipment and related reserves associated with the
conversion of certain of the Company's conventional stores to warehouse stores
and the closure of certain of the Company's conventional stores as well as the
write-off of the Alpha Beta trademark. This restructuring charge has been
estimated at approximately $45.5 million. On December 14, 1994, the Company and
RSI entered into a Settlement Agreement (the "Settlement Agreement") with the
State of California. Under the Settlement Agreement, the Company must divest a
total of 27 stores (23 of the Company's conventional stores, 1 warehouse store
and 3 RGC stores). In addition, although not required pursuant to the Settlement
Agreement, an additional 5 under-performing stores are scheduled to be closed
following the Merger. It is anticipated that such closures and store conversions
will be substantially completed by December 31, 1995. The estimated
restructuring charge aggregating $45.5 million for the Company's 24 stores to be
divested under the Settlement Agreement, the 5 planned closures and the
conversion of 16 of the Company's conventional
F-50
<PAGE> 213
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stores to warehouse stores reflects (i) the writedown of property, plant and
equipment ($27.9 million), (ii) the write-off of the Alpha Beta trademark ($8.6
million), (iii) the write-off of other assets ($4.3 million), (iv) lease
termination expense ($3.1 million) and (v) miscellaneous expense accruals ($1.6
million). The expected cash payments to be made in connection with the
restructuring charge will total $7.1 million. It is expected that such cash
payments will be made by December 31, 1995. As a result of the completion of 11
of the 16 planned conventional store conversions by the Company during the
second quarter of the 1995 transition period, the Company has recorded a
non-cash restructuring charge for the write-off of property and equipment of
$5.1 million in its results of operations for the 31 weeks ended January 29,
1995. The Company has determined that there is no impairment of existing
goodwill related to the store closures based on its projections of future
undiscounted cash flows. The remaining estimated restructuring charge will be
recorded as an expense once the Merger is completed. The divestiture of the 3
RGC stores pursuant to the Settlement Agreement will be reflected in the
allocation of the purchase price and, therefore, will not give rise to any
restructuring charge.
(14) RESTRUCTURING CHARGE
The Company has converted 11 of its conventional format supermarkets to
warehouse format stores. During the 31 weeks ended January 29, 1995, the Company
recorded a restructuring charge for the write-off of property and equipment at
the 11 stores of $5.1 million.
F-51
<PAGE> 214
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-52
<PAGE> 215
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.
F-53
<PAGE> 216
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 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.
F-54
<PAGE> 217
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW DISCOUNT
DEBENTURES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THE NEW DISCOUNT DEBENTURES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH 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 TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Recent Developments........................ S-2
Report on Form 10-Q for the Quarter Ended
July 16, 1995............................ S-3
PROSPECTUS
Available Information...................... iii
Summary.................................... 1
Risk Factors............................... 17
The Merger and the Financing............... 21
Pro Forma Capitalization................... 25
Unaudited Pro Forma Combined Financial
Statements............................... 27
Selected Historical Financial Data of
Ralphs................................... 36
Selected Historical Financial Data of
Holdings................................. 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 40
Business................................... 56
Management................................. 71
Executive Compensation..................... 73
Principal Stockholders..................... 79
Description of Capital Stock............... 80
Certain Relationships and Related
Transactions............................. 83
Description of the New Discount
Debentures............................... 87
The Exchange Offers and the Public
Offerings................................ 113
Description of the New Credit Facility..... 119
Description of Other Indebtedness.......... 122
Selling Debentureholder.................... 126
Certain Federal Income Tax
Considerations........................... 127
Plan of Distribution....................... 130
Legal Matters.............................. 131
Experts.................................... 131
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
$193,363,570
[LOGO]
FOOD 4 LESS
HOLDINGS, INC.
13 5/8% SENIOR DISCOUNT
DEBENTURES DUE 2005
OCTOBER , 1995
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 218
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 8 and 9 of the Prospectus.
PAGE 8
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 9
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.
