<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
For Quarter Ended Commission File Number
October 6, 1996 33-88894
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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)
(310) 884-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
At November 20, 1996, there were 17,207,882 shares of Common Stock outstanding.
There is no public market for the Common Stock.
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<PAGE> 2
FOOD 4 LESS HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of
January 28, 1996 and October 6, 1996 . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
October 8, 1995 and October 6, 1996 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of operations for the 36 weeks ended
October 8, 1995 and October 6, 1996 . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the 36 weeks ended
October 8, 1995 and October 6, 1996 . . . . . . . . . . . . . . . . . . . . . 6
Consolidated statements of stockholders' equity as of
January 28, 1996 and October 6, 1996 . . . . . . . . . . . . . . . . . . . . 8
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE> 4
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 28, October 6,
ASSETS 1996 1996
------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,983 $ 67,022
Trade receivables, net 60,948 61,043
Notes and other receivables 6,452 5,314
Inventories 502,669 482,805
Patronage receivables from suppliers 4,557 3,742
Prepaid expenses and other 34,855 28,383
------------ -----------
Total current assets 677,464 648,309
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 7,288 7,020
Certified Grocers of California and others 4,926 4,926
PROPERTY AND EQUIPMENT:
Land 183,125 171,542
Buildings 196,551 176,582
Leasehold improvements 251,856 193,948
Fixtures and equipment 441,760 389,640
Construction in progress 61,296 62,472
Leased property under capital leases 189,061 201,012
Leasehold interests 114,475 110,539
------------ -----------
1,438,124 1,305,735
Less: Accumulated depreciation and amortization 226,451 260,821
------------ -----------
Net property and equipment 1,211,673 1,044,914
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $6,964 and $14,826 at January 28, 1996 and
October 6, 1996, respectively 94,100 91,484
Goodwill, less accumulated amortization of $60,407
and $84,810 at January 28, 1996 and
October 6, 1996, respectively 1,173,445 1,325,204
Other, net 19,233 25,042
------------ -----------
$3,188,129 $3,146,899
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 5
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 28, October 6,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1996 1996
------------ --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 385,500 $ 375,227
Accrued payroll and related liabilities 94,011 102,967
Accrued interest 23,870 55,584
Other accrued liabilities 276,162 250,457
Income taxes payable 596 1,050
Current portion of self-insurance liabilities 21,785 48,251
Current portion of senior debt 31,735 28,090
Current portion of obligations under capital leases 22,261 26,977
---------- ----------
Total current liabilities 855,920 888,603
SENIOR DEBT, net of current portion 1,226,302 1,186,990
OBLIGATIONS UNDER CAPITAL LEASES 130,784 131,275
SENIOR SUBORDINATED DEBT 671,222 671,222
HOLDINGS DEBENTURES 247,917 272,210
DEFERRED INCOME TAXES 17,988 17,988
SELF-INSURANCE LIABILITIES 127,200 105,967
LEASE VALUATION RESERVE 25,182 71,440
OTHER NON-CURRENT LIABILITIES 74,412 79,670
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000
shares authorized; 16,683,244 shares issued at January 28,
1996 and October 6, 1996 (aggregate liquidation value of
$174.2 million and $182.7 million at January 28, 1996
and October 6, 1996, respectively) 161,831 161,831
Convertible Series B Preferred Stock, $.01 par value,
25,000,000 shares authorized; 3,100,000 shares issued
at January 28, 1996 and October 6, 1996 (aggregate liquidation
value of $32.4 million and $34.0 million at January 28, 1996
and October 6, 1996, respectively) 31,000 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized
at January 28, 1996 and October 6, 1996; 17,207,882 shares
issued at January 28, 1996 and October 6, 1996 172 172
Additional capital 56,991 56,991
Notes receivable from stockholders (602) (592)
Retained deficit (434,643) (524,321)
---------- ----------
(185,251) (274,919)
Treasury stock: 421,237 shares of common stock at
January 28, 1996 and October 6, 1996 (3,547) (3,547)
---------- ----------
Total stockholders' equity (deficit) (188,798) (278,466)
---------- ----------
$3,188,129 $3,146,899
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 6
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
October 8, October 6,
1995 1996
-------------- --------------
<S> <C> <C>
SALES $1,207,093 $1,221,018
COST OF SALES 965,976 944,939
---------- ----------
GROSS PROFIT 241,117 276,079
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 225,020 223,051
AMORTIZATION OF GOODWILL 10,000 8,218
---------- ----------
OPERATING INCOME 6,097 44,810
---------- ----------
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 59,546 62,123
Amortization of deferred financing costs 3,369 2,794
---------- ----------
62,915 64,917
LOSS ON DISPOSAL OF ASSETS 92 160
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (56,910) (20,267)
PROVISION FOR INCOME TAXES -- --
---------- ----------
NET LOSS $ (56,910) $ (20,267)
========== ==========
LOSS PER COMMON SHARE $ (1.56) $ (0.55)
========== ==========
Average Number of Common Shares and
Equivalents Outstanding 36,580,172 36,569,889
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 7
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, October 6,
1995 1996
-------------- --------------
<S> <C> <C>
SALES $ 2,688,035 $ 3,695,594
COST OF SALES 2,178,133 2,908,631
----------- ----------
GROSS PROFIT 509,902 786,963
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 480,026 659,262
AMORTIZATION OF GOODWILL 16,512 24,403
RESTRUCTURING CHARGE 63,587 --
----------- ----------
OPERATING INCOME (LOSS) (50,223) 103,298
----------- ----------
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 115,359 184,838
Amortization of deferred financing costs 6,363 7,862
----------- ----------
121,722 192,700
LOSS (GAIN) ON DISPOSAL OF ASSETS (344) 276
----------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE
AND PROVISION FOR INCOME TAXES (171,601) (89,678)
PROVISION FOR INCOME TAXES 500 --
----------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE (172,101) (89,678)
EXTRAORDINARY CHARGE 35,358 --
----------- ----------
NET LOSS $ (207,459) $ (89,678)
=========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charge $ (5.88) $ (2.45)
Extraordinary charges (1.21) --
----------- ----------
Net loss $ (7.09) $ (2.45)
=========== ==========
Average Number of Common Shares and
Equivalents Outstanding 29,246,401 36,569,889
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 8
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, October 6,
1995 1996
-------------- --------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $ 2,688,035 $ 3,695,594
Cash paid to suppliers and employees (2,533,431) (3,443,282)
Interest paid (54,436) (128,831)
Income taxes refunded 90 --
Interest received 528 1,610
Other, net 344 (276)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101,130 124,815
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 5,788 23,680
Payment for purchase of property and equipment (68,515) (74,328)
Payment of acquisition costs, net of cash acquired (456,250) (5,573)
Other, net (3,219) (2,530)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (522,196) (58,751)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,105,000 94,625
Proceeds from the issuance of preferred stock 137,500 --
Payments of long-term debt (643,526) (58,284)
Payments of capital lease obligations (8,170) (18,730)
Decrease in revolving loan, net (27,300) (79,400)
Purchase of treasury stock, net (3,444) --
Other, net (93,762) (5,236)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 466,298 (67,025)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,232 (961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 67,983
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,792 $ 67,022
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 9
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks 36 Weeks
Ended Ended
October 8, October 6,
1995 1996
-------------- --------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(207,459) $(89,678)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Restructuring charge 63,587 --
Extraordinary charge 35,358 --
Depreciation and amortization 85,959 119,487
Non-cash interest expense 17,005 24,396
Loss (gain) on sale of assets (344) 276
Change in assets and liabilities, net of effects
from acquisition of business:
Accounts and notes receivable (8,513) 1,858
Inventories 23,915 19,864
Prepaid expenses and other (11,677) (906)
Accounts payable and accrued liabilities 101,274 44,285
Self-insurance liabilities 1,435 5,233
Income taxes payable 590 --
---------- ---------
Total adjustments 308,589 214,493
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 101,130 $ 124,815
========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Acquisition of Ralphs Supermarkets, Inc.:
Fair value of assets acquired, less cash acquired
Of $34,380 in 1995 $2,047,247 $ --
Net cash paid in acquisition (456,250) --
Notes issued to seller (160,000) --
Capital contribution from stockholders (20,000) --
---------- ---------
Liabilities assumed $1,410,997 $ --
========== =========
Fixed assets acquired through the issuance of capital leases $ 14,300 $ 23,912
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE> 10
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock Treasury 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
28, 1996 16,683,244 $161,831 3,100,000 $31,000 17,207,882 $172 (421,237) $(3,547)
Payments on
Stockholder's
Notes -- -- -- -- -- -- -- --
Net loss
(unaudited) -- -- -- -- -- -- -- --
-------- ------- --------- ------- ------- ---- --------- -------
BALANCES AT
OCTOBER
6, 1996
(UNAUDITED) 16,683,244 $161,831 3,100,000 $31,000 17,207,882 $172 (421,237) $(3,547)
========== ======= ========= ====== ========== === ========= ========
Total
Stock-
Stock- holders'
holders' Add'l Retained Equity
Notes Capital Deficit (Deficit)
------ ------- --------- ----------
<C> <C> <C> <C>
BALANCES AT
JANUARY
28, 1996 $(602) $56,991 $(434,643) $(188,798)
Payments on
Stockholder's
Notes 10 -- -- 10
Net loss
(unaudited) -- -- (89,678) (89,678)
----- ------ --------- ---------
BALANCES AT
OCTOBER
6, 1996
(UNAUDITED) $(592) $56,991 $(524,321) $(278,466)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE> 11
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet and statement of stockholders'
equity of Food 4 Less Holdings, Inc. (referred to herein as
"Holdings," and together with its wholly owned subsidiary, Ralphs
Grocery Company, which is the successor to Food 4 Less Supermarkets,
Inc., as the "Company") as of October 6, 1996 and the consolidated
statements of operations and cash flows for the interim periods ended
October 8, 1995 and October 6, 1996 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' latest
annual report filed on Form 10-K for the fiscal year ended January
28, 1996. Results of operations for interim periods are not
necessarily indicative of the results for a full fiscal year.
2. ORGANIZATION AND ACQUISITION
The Company, a wholly-owned subsidiary of Food 4 Less
Holdings, Inc. ("Holdings"), is a retail supermarket company with a
total of 406 stores which are located in Southern California (343),
Northern California (27) and certain areas of the Midwest (36). In
Southern California, the Company operates 266 stores under the
"Ralphs" name and 77 warehouse stores under the "Food 4 Less" name.
The Company has achieved strong competitive positions in each of its
marketing areas by successfully tailoring its merchandising strategy
to the particular needs of the individual communities it serves. In
addition, the Company is a vertically integrated supermarket company
with major manufacturing facilities, including bakery and creamery
operations, and full-line warehouse and distribution facilities
servicing its Southern California operations.
Ralphs Merger
On June 14, 1995, 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 $388.1 million in cash, $131.5 million
principal amount of 13-5/8% Senior Subordinated Pay-In-Kind Debentures
due 2007 of Holdings (the "Seller Debentures") and $18.5 million
initial accreted value of 13-5/8% 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
(referred to as the "Company" herein).
The Company finalized the allocation of the RSI purchase price
in the second quarter of 1996. The change in the allocation of the
purchase price was primarily attributable to an adjustment in the
valuation of fixed assets.
9
<PAGE> 12
The following unaudited pro forma information presents the
results of the Company's operations, adjusted to reflect interest
expense and depreciation and amortization, as though the Merger had
been consummated at the beginning of fiscal 1995.
<TABLE>
<CAPTION>
36 Weeks Ended
October 8, 1995
------------------
(dollars in thousands,
except share amounts)
<S> <C>
Sales $3,713,726
Restructuring charge (75,187)
Loss before extraordinary charge (264,155)
Net loss (302,579)
Loss per share:
Loss before extraordinary charge (7.14)
Net loss (8.18)
</TABLE>
The unaudited pro forma results of operations are not
necessarily indicative of the actual results of operations that would
have occurred had the purchase actually been made at the beginning of
fiscal 1995, 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 $18.7 million and $22.5
million at January 28, 1996 and October 6, 1996, respectively, and
gross profit and operating income would have been greater by $0.9
million and $2.9 million for the 12 and 36 weeks ended October 8,
1995, respectively, and greater by $1.2 million and $3.7 million for
the 12 and 36 weeks ended October 6, 1996, respectively.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the October 6, 1996
presentation.
Recent Accounting Pronouncements
In the first quarter of fiscal 1996, the Company adopted
Statement of Financial Accounting Standard No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS 121). The adoption of SFAS 121 had no impact on
the Company's financial position or on its results of operations.
4. RESTRUCTURING CHARGE
During fiscal 1995, the Company recorded a $75.2 million
charge associated with the closure of 58 former F4L Supermarkets
stores and one former F4L Supermarkets warehouse facility. The
stores were closed to comply with a settlement agreement with the
State of California in connection with the Merger or due to
under-performance. Three RGC stores were also required to be sold to
comply with the settlement agreement. During fiscal year 1995, the
Company utilized $34.7 million of the reserve for restructuring costs
($50.0 million of costs partially offset by $15.3 million of proceeds
from the divestiture of stores). During the 36 weeks ended October 6,
1996, the Company utilized $20.6 million of the reserve for
restructuring costs, consisting mainly of write-downs of property and
equipment
10
<PAGE> 13
($16.8 million) and expenditures associated with the closed stores and
the warehouse facility ($5.0 million) offset by adjustments to
proceeds and other assets.
On December 29, 1995, the Company consummated an agreement
with Smith's Food & Drug Centers, Inc. ("Smith's") to sublease its
one million square foot distribution center and creamery facility in
Riverside, California for approximately 23 years, with renewal options
through 2043, and to acquire certain operating assets and inventory at
that facility. In addition, the Company also acquired nine of
Smith's Southern California stores which became available when Smith's
withdrew from the California market. As a result of the acquisition
of the Riverside distribution center and creamery, the Company closed
its La Habra distribution center in the first quarter of fiscal 1996.
Also, the Company closed nine of its smaller and less efficient stores
which were near the stores acquired from Smith's. During the fourth
quarter of fiscal year 1995, the Company recorded a $47.9 million
restructuring charge to recognize the cost of closing these
facilities. During the 36 weeks ended October 6, 1996, the Company
utilized $16.1 million of the reserve for restructuring costs,
consisting mainly of write-downs of property and equipment ($14.5
million) and lease termination expenses ($1.6 million).
5. DEBT
On June 6, 1996, the Company issued $100.0 million aggregate
principal amount of 10.45% Senior Notes due 2004 (the "Private Notes")
in a private placement effected pursuant to Rule 144A under the
Securities Act of 1933, as amended. The terms of the Private Notes
are substantially identical to those of the Company's 10.45% Senior
Notes due 2004 (the "1995 Senior Notes"), which were issued in a
registered offering on June 14, 1995 and of which $520.3 million
aggregate principal amount is outstanding. The Private Notes were
issued with original issue discount resulting in gross proceeds to the
Company of $94.6 million.
The $94.6 million of gross proceeds from the Private Notes was
used to (i) repay $22.7 million of New Term Loans, which was due
within the following twelve months, (ii) repay $21.7 million of
additional New Term Loans, pro rata over the term thereof, (iii) repay
$47.6 million in borrowings under the New Revolving Facility (without
any reduction in amounts available for future borrowing thereunder)
and (iv) pay fees and expenses related to the Private Notes of
approximately $2.6 million.
On July 25, 1996, the Company initiated an offer to exchange
(the "Exchange Offer") $1,000 principal amount of its 10.45% Senior
Notes due 2004 (the "Exchange Notes"), which exchange has been
registered under the Securities Act of 1933, as amended, for each
$1,000 principal amount of its Private Notes, of which $100.0 million
in aggregate principal amount was issued on June 6, 1996. The
Exchange Notes bear interest at the same rate and on the same terms
as the Private Notes. The Exchange Offer was completed on August 30,
1996.
11
<PAGE> 14
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")
merged with Ralphs Supermarkets, Inc. ("RSI") and its wholly owned subsidiary,
Ralphs Grocery Company ("RGC") (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.
The Company's results of operations for the 36 weeks ended October 6,
1996 reflect operations for the combined Company, while the results of
operations for the 36 weeks ended October 8, 1995 reflect 19 weeks of
operations of F4L Supermarkets prior to the Merger and 17 weeks of operations
of the combined Company. Management believes that the Company's results of
operations for periods ending after the consummation of the Merger are not
directly comparable to its results of operations for periods ending prior to
such date. This lack of comparability as a result of the Merger is
attributable to several factors, including the size of the combined Company
(the Merger approximately doubled F4L Supermarkets' annual sales), 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 was accounted for as a purchase of RGC by F4L Supermarkets.
As a result, all financial statements for periods subsequent to June 14, 1995,
the date the Merger was consummated, reflect RGC's net assets at their
estimated fair market values as of June 14, 1995. The purchase price in excess
of the fair market value of RGC's net assets was recorded as goodwill and is
being amortized over a 40-year period.
At October 6, 1996, the Company operated 266 Ralphs conventional
supermarkets and 77 Food 4 Less price impact warehouse stores in Southern
California. It also operated 27 stores in Northern California and 36 stores in
certain areas of the Midwest. Following the Merger, the Company converted F4L
Supermarkets' Alpha Beta, Boys and Viva stores to the Ralphs format and
converted selected Ralphs stores to the Food 4 Less warehouse format.
As of October 6, 1996, the Company's bakery, creamery and deli
manufacturing operations and the management of major corporate departments had
been consolidated and the integration of the Company's administrative
departments was substantially completed. The previously planned integration
and consolidation of the Company's warehousing and distribution facilities into
three primary facilities has been modified and is expected to be completed by
the end of the fiscal year. This delay was a result of the acquisition of the
Smith's Riverside, California distribution and creamery facility (the
"Riverside distribution facility").
On October 29, 1996, the Company finalized an agreement ("the
Agreement") with American Stores Company ("American Stores") which resulted in
termination of the Company's leases for the La Habra facility and two stores
leased from American Stores. In addition, as required by the Company's
settlement agreement with the State of California entered into at the date of
the Merger, the Agreement resulted in the sale of one store to American Stores.
In addition, the Company entered into a new lease for the bakery facility at La
Habra, which it will continue to operate, and modified the terms of two other
store leases. Operations at the La Habra distribution facility were previously
discontinued as part of the Company's ongoing consolidation of warehouse and
distribution facilities which began with the acquisition of the Riverside
distribution facility in December 1995. The effectiveness of the termination
of the La Habra facility lease and the new bakery lease are subject to American
Stores obtaining certain entitlements related to its future plans for the La
Habra facility.
12
<PAGE> 15
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 and 36 weeks ended October 8, 1995 and
October 6, 1996, respectively:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
---------------------------------- -----------------------------------
October 8, 1995 October 6, 1996 October 8, 1995 October 6, 1996
--------------- --------------- --------------- ---------------
(dollars in millions)
(unaudited)
<S> <C> <C> <C> <C>
Sales $1,207.1 100.0 % $1,221.0 100.0% $2,688.0 100.0 % $3,695.6 100.0%
Gross profit 241.1 20.0 276.1 22.6 509.9 19.0 787.0 21.3
Selling, general, administrative
and other, net 225.0 18.6 223.1 18.3 480.0 17.9 659.3 17.8
Amortization of goodwill 10.0 0.8 8.2 0.7 16.5 0.6 24.4 0.7
Restructuring charge -- -- -- -- 63.6 2.4 -- --
Operating income (loss) 6.1 0.5 44.8 3.7 (50.2) (1.9) 103.3 2.8
Interest expense 62.9 5.2 64.9 5.3 121.7 4.5 192.7 5.2
Loss (gain) on disposal of assets 0.1 -- 0.2 -- (0.3) -- 0.3 --
Provision for income taxes -- -- -- -- 0.5 -- -- --
Loss before
extraordinary charge (56.9) (4.7) (20.3) (1.7) (172.1) (6.4) (89.7) (2.4)
Extraordinary charge -- -- -- -- 35.4 1.3 -- --
Net loss $(56.9) (4.7)% $(20.3) (1.7)% $(207.5) (7.7)% $(89.7) (2.4)%
</TABLE>
Sales. Sales per week increased $1.2 million, or 1.2 percent, from
$100.6 million in the 12 weeks ended October 8, 1995 to $101.8 million in the
12 weeks ended October 6, 1996 and increased $28.0 million, or 37.5 percent,
from $74.7 million in the 36 weeks ended October 8, 1995 to $102.7 million in
the 36 weeks ended October 6, 1996. The increase in sales is primarily
attributable to new store openings and the improved performance of converted
stores partially offset by the closing of 65 smaller stores since the Merger.
Excluding stores being divested or closed in connection with the Merger,
comparable store sales increased 1.5 percent for the 12 weeks ended October 6,
1996. Comparable store sales trends have been improving each quarter since
the Merger and this quarter represents the second consecutive quarter the
Company has achieved positive comparable store sales. In addition, excluding
stores being divested or closed in connection with the Merger, and excluding
the estimated impact from last year's Northern California labor dispute,
comparable store sales increased 1.2 percent for the 36 weeks ended October 6,
1996. During the 12 weeks ended October 6, 1996, the Company opened five
stores (three Ralphs conventional supermarkets, one Food 4 Less price impact
warehouse store and one new warehouse store in Northern California), divested
or closed two smaller, less efficient stores and completed six remodels. This
brings the total new store openings to seven Ralphs conventional supermarkets,
nine Food 4 Less price impact warehouse stores and one Northern California
warehouse store since the beginning of the fiscal year. The Company has also
divested or closed 20 stores and completed nine remodels this fiscal year.
On September 11, 1996, the Company launched its new "First in Southern
California" marketing campaign. The new marketing campaign highlights the fact
that more shoppers are choosing Ralphs than any other supermarket in Southern
California. The focus of the new campaign is on lower regular retail prices
while emphasizing those programs that enhance Ralphs' offerings such as
selection, quality, premier perishable departments and customer service.
Gross Profit. Gross profit increased as a percentage of sales from
20.0 percent in the 12 weeks ended October 8, 1995 to 22.6 percent in the 12
weeks ended October 6, 1996 and increased from 19.0 percent in the 36 weeks
ended October 8, 1995 to 21.3 percent in the 36 weeks ended October 6, 1996.
The increase in gross profit margin reflects a reduction in warehousing and
distribution costs as a result of the consolidation of the Company's
distribution operations, as well
13
<PAGE> 16
as a reduction in the cost of goods sold as the benefits of inventory
management programs instituted by the Company are realized. The planned
consolidation of the Company's distribution operations into three modern,
efficient facilities located in Compton, Glendale and Riverside continues on
schedule with the expected completion by the end of fiscal 1996. Gross profit
during the 36 weeks ended October 6, 1996 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 $225.0 million and $223.1
million for the 12 weeks and $480.0 million and $659.3 million for the 36 weeks
ended October 8, 1995 and October 6, 1996, respectively. SG&A decreased as a
percentage of sales from 18.6 percent to 18.3 percent for the 12 weeks ended
October 8, 1995 and October 6, 1996, respectively, and decreased as a
percentage of sales from 17.9 percent to 17.8 percent for the 36 weeks ended
October 8, 1995 and October 6, 1996, respectively. The reduction in SG&A as a
percentage of sales in the third quarter of 1996 reflects the results of
tighter expense and labor controls at store level and administrative cost
reductions. SG&A during the 36 weeks ended October 6, 1996 was also impacted
by certain one-time costs associated with the integration of the Company's
operations. See "Operating Income (Loss)."
Operating Income (Loss). In addition to the factors discussed above,
operating income for the 36 weeks ended October 6, 1996 was impacted by
approximately $13.5 million of costs associated with the integration of the
Smith's distribution center and the continuing integration of the stores
acquired from Smith's.
Interest Expense. Interest expense (including amortization of
deferred financing costs) was $62.9 million and $64.9 million for the 12 weeks
and $121.7 million and $192.7 million for the 36 weeks ended October 8, 1995
and October 6, 1996, respectively. The increase in interest expense for the 36
weeks ended October 6, 1996 was primarily due to the increased indebtedness
incurred in conjunction with the Merger. See "Liquidity and Capital
Resources."
Net Loss. Primarily as a result of the factors discussed above, the
Company's net loss decreased from $56.9 million in the 12 weeks ended October
8, 1995 to $20.3 million in the 12 weeks ended October 6, 1996, and from $207.5
million in the 36 weeks ended October 8, 1995 to $89.7 million in the 36 weeks
ended October 6, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the $325.0 million
revolving credit facility (the "Revolving Facility") and lease financing are
the Company's principal sources of liquidity. The Company believes that these
sources will be adequate to meet its anticipated capital expenditure, working
capital and debt service requirements for the following twelve months.
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 Facility.
During the 36 week period ending October 6, 1996, cash provided by
operating activities was approximately $124.8 million compared to cash provided
by operating activities of approximately $101.1 million for the 36 weeks
ending October 8, 1995. The increase in cash from operating activities is due
primarily to a significant improvement in operating income for the 36 weeks
ending October 6,1996, partially offset by the impact of certain expenditures
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 rate allows it to
finance a substantial portion of its inventory through trade payables, thereby
reducing its short-term borrowing needs. At October 6, 1996, this resulted in
a working capital deficit of $240.3 million.
Cash used for investing activities was $58.8 million for the 36 weeks
ended October 6, 1996. Investing activities consisted primarily of capital
expenditures of $74.3 million, partially offset by $23.7 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds
from sale/leaseback transactions, were financed primarily from cash provided by
operating and financing activities.
14
<PAGE> 17
The capital expenditures discussed above relate to 34 new stores (22
of which had been completed at October 6, 1996) and the remodeling of 29
stores (15 of which had been completed at October 6, 1996). The Company
currently anticipates that its aggregate capital expenditures for fiscal 1996
will be approximately $120.0 million ($95.0 million, net of expected capital
leases), of which approximately $111.0 million relate to ongoing expenditures
for new stores, equipment and maintenance and approximately $9.0 million relate
to Merger-related and other non-recurring items. Consistent with past
practices, the Company intends to finance these capital expenditures primarily
with cash provided by operations and through leasing transactions. No
assurance can be given that sources of financing for capital expenditures will
be available or sufficient to finance its anticipated capital expenditure
requirements; however, management believes the capital expenditure program has
substantial flexibility and is subject to revision based on various factors,
including changes in business conditions and cash flow requirements.
Management believes that if the Company were to substantially reduce or
postpone these programs, there would be no substantial impact on short-term
operating profitability. However, management also believes that the
construction of new stores is an important component of its operating strategy.
Consequently, management believes that if these programs were substantially
reduced, future operating results, and ultimately its cash flow, would be
adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing markets
or to enter other markets. The Company has grown through acquisitions in the
past and from time to time engages in discussions with potential sellers of
individual stores, groups of stores or other retail supermarket chains.
The Company continues to monitor and evaluate the performance of
individual stores as well as operating markets in relation to its overall
business objectives. As a result of this evaluation, alternative strategies
may be considered by the Company which could result in the disposition of
certain assets.
Cash used by financing activities was $67.0 million for the 36 weeks
ended October 6, 1996. Financing activities consisted primarily of a $79.4
million net reduction of the amount outstanding under the Revolving Facility,
principal payments on long-term debt and payments on capital leases of $77.0
million, offset by proceeds from issuance of the Private Notes of $94.6
million. At October 6, 1996, there was $48.0 million of net borrowings under
the Revolving Facility and $86.5 million of outstanding standby letters of
credit. At November 19, 1996, the Company had $174.1 million available for
borrowing under the Revolving Facility. The Company entered into an amendment
and waiver to its Credit Agreement in connection with the transaction with
American Stores relating to the Company's La Habra facility as described above.
Holdings has $118.9 million accreted value of the New Discount
Debentures and $153.3 million principal amount of the Seller Debentures.
Holdings' only asset is 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 December 15, 2000 in the amount
of approximately $61 million per annum. Subject to the limitations contained
in its debt instruments, Ralphs intends to make dividend payments to Holdings
in amounts which are sufficient to permit Holdings to service its cash interest
requirements. Ralphs may pay other dividends to Holdings in connection with
certain employee stock repurchases and for routine administrative expenses.
The Company is highly leveraged. At October 6, 1996, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $2.3 billion and $278.5 million, respectively. Based upon
current levels of operations and future growth, the Company believes that its
cash flow from operations, together with available borrowings under the
Revolving Facility and its other sources of liquidity (including lease
financing), will be adequate to meet its anticipated requirements for working
capital, capital expenditures, integration costs and debt service payments.
However, there can be no assurance 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.
15
<PAGE> 18
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical facts, all matters discussed in this report
which are forward looking involve risks and uncertainties. Potential risks and
uncertainties include, but are not limited to, competitive pressures from other
major supermarket operators, pending litigation, economic conditions in the
Company's primary markets and other uncertainties detailed from time to time in
the Company's Securities and Exchange Commission filings.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standard No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121).
The adoption of SFAS 121 had no impact on the Company's financial position or
on its results of operations.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the legal proceedings referenced in the Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996, on
September 13, 1996, a class action lawsuit titled McCampbell, et al. v.
Ralphs Grocery Company, et al. was filed in the Superior Court of the
State of California, County of San Diego, against the Company and two
other grocery store chains operating in the Southern California area.
The complaint alleges, among other things, that the Company and others
conspired to fix the retail price of eggs in Southern California. The
plaintiffs claim that the defendants' actions violate provisions of the
California Cartwright Act and constitute unfair competition.
Plaintiffs seek damages they purport to have sustained as a result of
the defendants' alleged actions, which damages may be trebled under the
applicable statute, and an injunction from future acts in restraint of
trade and unfair competition. Because the case was recently filed,
discovery has just commenced. Management of the Company intends to
defend this action vigorously and the Company has filed an answer to
the complaint denying the plaintiffs' allegations and setting forth
several defenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Los Angeles, State
of California.
Dated: November 20, 1996 FOOD 4 LESS HOLDINGS, INC.
/s/ Greg Mays
--------------------------------
Greg Mays
Executive Vice President
Finance & Administration
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AND UNAUDITED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 36 WEEKS ENDED OCTOBER 6, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> OCT-06-1996
<CASH> 67,022
<SECURITIES> 0
<RECEIVABLES> 67,901
<ALLOWANCES> (1,544)
<INVENTORY> 482,805
<CURRENT-ASSETS> 648,309
<PP&E> 1,305,735
<DEPRECIATION> (260,821)
<TOTAL-ASSETS> 3,146,899
<CURRENT-LIABILITIES> 888,603
<BONDS> 2,261,697
0
192,831
<COMMON> 57,163
<OTHER-SE> (528,460)
<TOTAL-LIABILITY-AND-EQUITY> 3,146,899
<SALES> 3,695,594
<TOTAL-REVENUES> 3,695,594
<CGS> 2,908,631
<TOTAL-COSTS> 2,908,631
<OTHER-EXPENSES> 683,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192,700
<INCOME-PRETAX> (89,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (89,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (89,678)
<EPS-PRIMARY> (2.45)
<EPS-DILUTED> 0
</TABLE>
