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FILE NO. 33-88896
FILED PURSUANT TO RULE 424(b)(3)
PROSPECTUS
FOOD 4 LESS HOLDINGS, INC.
13 5/8% SENIOR SUBORDINATED
PAY-IN-KIND DEBENTURES DUE 2007
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The 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller
Debentures") of Food 4 Less Holdings, Inc., a Delaware corporation ("Holdings"),
may be offered hereby from time to time by certain holders thereof named herein
(the "Selling Debentureholders"). The Seller Debentures were issued on June 14,
1995, the closing date ("Closing Date") of the Merger (as defined), in an
aggregate principal amount of $131.5 million and will mature on June 15, 2007.
Interest on the Seller Debentures is payable semi-annually on each June 15 and
December 15, at the rate of 13 5/8% per annum. 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 on or prior to June 15, 2000. The Secondary Securities which may be issued
from time to time, and as of June 15, 1996 were outstanding in an aggregate
principal amount of approximately $18.6 million, are included in the Seller
Debentures offered by this Prospectus. See "Description of the Seller
Debentures."
The Seller Debentures may be redeemed, in whole or in part at the option of
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, 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 Seller Debentures originally issued at a
redemption price equal to 110% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date. Upon a Change of Control (as defined),
each holder of Seller Debentures will have a right to require Holdings to
repurchase such holder's Seller Debentures at a price equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of repurchase.
The Seller Debentures are senior subordinated unsecured obligations of Holdings
and rank subordinate in right of payment to all Senior Indebtedness (as defined)
of Holdings. At July 14, 1996, the aggregate outstanding amount of Senior
Indebtedness of Holdings (excluding guarantees by Holdings of certain Senior
Indebtedness of the Company (as defined) included in the total liabilities of
the Company set forth below) was approximately $115.3 million of accreted value
of New Discount Debentures (as defined) that will accrete to approximately
$193.4 million at June 15, 2000. In addition, the Seller Debentures are
effectively subordinated to all liabilities (including trade payables) of the
Company which at July 14, 1996, was approximately $3,135.5 million (excluding
letters of credit) at such date. Holdings will receive no part of the proceeds
of the sale of the Seller Debentures offered pursuant to this Prospectus but
will incur certain expenses in connection with the offering. See "Description of
the Seller Debentures" and "Selling Debentureholders."
The Seller Debentures were issued to the former stockholders of Ralphs
Supermarkets, Inc. ("RSI"), as part of the consideration for the merger (the
"RSI Merger") of Food 4 Less Supermarkets, Inc. ("Food 4 Less") with and into
RSI. Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), a
wholly-owned subsidiary of RSI, merged with and into RSI (the "RGC Merger," and
together with the RSI Merger, the "Merger") and RSI changed its name to Ralphs
Grocery Company ("Ralphs Grocery Company" or the "Company").
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SEE "RISK FACTORS" AT PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SELLER DEBENTURES.
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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.
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This Prospectus relates to the public offering of the Seller Debentures
following the consummation of the Merger. See "Selling Debentureholders." The
Selling Debentureholders directly, through agents designated from time to time,
or through dealers or underwriters also to be designated, may sell the Seller
Debentures from time to time on terms to be determined at the time of sale. To
the extent required, the specific Seller Debentures to be sold, the names of the
Selling Debentureholders, the respective purchase prices and public offering
prices, the aggregate principal amount of Seller 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 Debentureholders, 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 Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Seller 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 Seller Debentures purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act.
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The date of this Prospectus is September 4, 1996
LOGO LOGO
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(cover page continued)
AVAILABLE INFORMATION
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 Seller Debentures. Each of Holdings and
the Company 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 or the Company 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, Holdings is obligated under the Seller 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. Holdings intends to furnish to each holder of Seller
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 Holdings 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.
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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.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, appearing elsewhere in this
Prospectus. Unless the context otherwise requires, the terms "Food 4 Less" and
"RSI," as used herein, refer to Food 4 Less Supermarkets, Inc. ("Food 4 Less")
and Ralphs Supermarkets, Inc. ("RSI") and their consolidated subsidiaries,
respectively, prior to the consummation of the merger between them which
occurred on June 14, 1995 (the "Merger"). "Holdings" refers to Food 4 Less
Holdings, Inc. and includes, unless the context otherwise requires, all of its
consolidated subsidiaries. The "Company" refers to Ralphs Grocery Company as the
surviving and renamed subsidiary corporation of Holdings following the
consummation of the Merger and includes, unless the context otherwise requires,
all of its consolidated subsidiaries. Holdings does not have any business
operations of its own and its assets consist solely of all of the outstanding
capital stock of the Company. As used herein, "Southern California" means Los
Angeles, Orange, Ventura, San Bernardino, Riverside, San Diego, Kern and Santa
Barbara counties. Except as otherwise stated, references in this Prospectus to
numbers of stores are as of July 14, 1996. The statements contained in this
summary with respect to the Company's anticipated cost savings and future
operational strategies or results are forward-looking statements which are
inherently uncertain and subject to a number of factors that could cause actual
results to differ materially from the current estimates. See "Risk
Factors -- Ability to Achieve Anticipated Cost Savings."
THE COMPANY
The combination of RSI and Food 4 Less on June 14, 1995 created the largest
food retailer in Southern California. The Company operates 340 Southern
California stores with an estimated 28% market share in Los Angeles and Orange
Counties. The Company operates 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 operates 26
conventional format stores and 36 warehouse format stores in Northern California
and the Midwest. Management believes the Merger has provided the Company with
the following benefits:
- - TWO LEADING COMPLEMENTARY FORMATS. The Company operates 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. The Company operates 264 Ralphs conventional format stores and 76
Food 4 Less warehouse format stores in the region. The Ralphs stores 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 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 offer consumers the lowest overall prices while providing
product selections comparable to conventional supermarkets. Management
believes that 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 16 new
Food 4 Less warehouse stores and 20 new Ralphs stores during fiscal years 1996
and 1997.
- - SUBSTANTIAL COST SAVINGS OPPORTUNITIES. At the time of the Merger, management
estimated that approximately $90 million of net annual cost savings (as
compared to the costs of RSI and Food 4 Less for the pro forma combined fiscal
year ended June 25, 1994) could be achieved by the end of the fourth full year
of combined operations following the Merger. Management also estimated that
approximately $117 million in Merger-related capital expenditures and $50
million of other non-recurring costs would be required to complete store
conversions, integrate operations and expand warehouse facilities over the
same period. Although the Company has experienced delays in the realization of
certain of the cost savings anticipated at the time of the Merger, the Company
believes that the full amount of the $90 million in net annual cost savings
will still be realized within such time frame, as described in further detail
below. Moreover, since the Merger the Company has invested approximately $70.3
million of the scheduled capital expenditures, spent approximately $45.0
million of other non-recurring costs in integrating its operations
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and expanding its warehouse facilities and has substantially completed the
extensive store conversion program which was undertaken pursuant to the Merger.
See "-- Post-Merger Events."
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 has eliminated most of the
separate advertising associated with Food 4 Less' prior Alpha Beta, Boys and
Viva formats. Since RSI's former advertising program covered the Southern
California region, the Company was able to advertise for all of its Southern
California stores under the existing Ralphs program. At the time of the
Merger, management estimated that annual advertising cost savings of
approximately $19 million, as compared to such costs for the pro forma
combined fiscal year ended June 25, 1994, could be achieved in the first full
year of combined operations following the Merger. On an annualized basis,
such cost savings have been achieved.
- -- REDUCED STORE OPERATIONS EXPENSE. Management plans to reduce store operations
costs as a result of both reduced labor and benefit costs and reduced
non-labor expenses. Store-level labor savings are expected to be achieved by
applying Ralphs' labor scheduling, computerized record keeping and other
advanced store systems 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. At the time of the Merger, management
estimated that annual store operations cost savings of approximately $21
million could be achieved by the fourth full year of combined operations
after certain required capital expenditures are made. Although the Company
has experienced higher-than-anticipated store operations expenses and delays
in realizing these cost savings, the Company continues to believe that such
cost savings will be achieved by the fourth full year of combined operations.
See "-- Post-Merger Events."
- -- INCREASED VOLUME PURCHASING EFFICIENCIES. The combined volume requirements
and leading market position of the Company have allowed 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. At the time of the Merger,
management estimated that annual purchasing cost savings of approximately $19
million could be achieved by the second full year of combined operations. The
Company believes that the realization of such cost savings is substantially
on schedule.
- -- WAREHOUSING AND DISTRIBUTION EFFICIENCIES. Consolidating the Company's
warehousing and distribution operations into RSI's two primary facilities
located in Compton, California and the Glendale, California vicinity and the
modern distribution center located in Riverside, California (the "Riverside
Facility") which was subleased in December 1995 from Smith's Food & Drug
Centers, Inc. ("Smith's"), will result in lower outside storage,
transportation and labor costs. In addition, occupancy costs have been
reduced as a result of the closure of the Food 4 Less La Habra facility and
certain other facilities. At the time of the Merger, management estimated
that annual warehousing and distribution cost savings of approximately $16
million could be achieved by the third full year of combined operations after
certain capital expenditures on existing facilities were completed. In the
first year of combined operations, the Company experienced
higher-than-expected distribution expenses for the reasons discussed below.
See "-- Post-Merger Events." Moreover, the acquisition of the Riverside
Facility resulted in revisions to the Company's operating plan following the
Merger, necessitating some delay in the achievement of cost savings projected
for the first and second years of combined operations. However, management
believes that the Riverside Facility provides the Company with the
opportunity to obtain substantial additional efficiencies, and that
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the annual cost savings of $16 million originally projected for the third year
of combined operations can still be achieved.
- -- CONSOLIDATED MANUFACTURING. RSI and Food 4 Less operated manufacturing
facilities that produced similar products or had excess capacity. At the time
of the Merger, management believed that consolidating meat, bakery, dairy,
and other manufacturing and processing operations, and discontinuing external
purchases of certain goods that can be manufactured internally, should
achieve annual cost savings of approximately $10 million by the second full
year of combined operations. Due in part to plan revisions relating to the
acquisition of the Riverside Facility, which includes a creamery, management
believes that the realization of such level of cost savings will be deferred
to the third year of combined operations.
- -- CONSOLIDATED ADMINISTRATIVE FUNCTIONS. The Company has begun 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. At the time of the Merger,
management estimated that annual savings of approximately $15 million
associated with consolidating administrative functions should be achieved by
the second full year of combined operations. To date, the Company has
achieved annualized savings in administrative expense in excess of $15
million, and management believes that further savings in this area will be
obtained.
- - TECHNOLOGICALLY ADVANCED WAREHOUSING AND DISTRIBUTION. The Company utilizes
technologically advanced warehousing and distribution systems, which include
(i) the Riverside Facility, which is a one million square foot manufacturing
and distribution center consisting of a creamery and an integrated warehouse
for dry grocery, dairy/deli and frozen food storage, (ii) a 17 million cubic
foot high-rise automated storage and retrieval system warehouse in the
Glendale, California vicinity (the "ASRS") for non-perishable items and (iii)
a 5.4 million cubic foot perishable service center in Compton, California (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 will enable the Company to meet the combined inventory
requirements of all stores with fewer employees and lower operating and
occupancy-related expenses.
- - STORE LOCATIONS. As a result of Ralphs' 123-year history and Alpha Beta
Company's ("Alpha Beta") 92-year history in Southern California, the Company
has valuable and well established store locations, many of which are in
densely populated metropolitan areas.
- - RECENTLY REMODELED AND NEW STORE BASE. The Company has a modern,
technologically advanced store base. During the five years ended January 28,
1996, on a combined basis, RSI and Food 4 Less opened 81 new stores and
remodeled 173 stores. Approximately 62.3% of the Company's stores have been
opened or remodeled during the last five years.
- - EXPERIENCED MANAGEMENT TEAM. The executive officers of the Company have
extensive experience in the supermarket industry. The Company's management
expertise combines the strengths of the former management teams of both RSI
and Food 4 Less, including strong store operations experience, a reputation
for quality and service, and demonstrated effectiveness in cost control and
the acquisition and integration of supermarket companies.
THE MERGER
On June 14, 1995, Food 4 Less Supermarkets, Inc. ("Food 4 Less") merged
into Ralphs Supermarkets, Inc. ("RSI") (the "RSI Merger"). Immediately following
the RSI Merger, Ralphs Grocery Company ("RGC"), which was a wholly-owned
subsidiary of RSI, merged with and into RSI (the "RGC Merger," and together with
the RSI Merger, the "Merger"), and RSI changed its name to Ralphs Grocery
Company. The Company is a wholly-owned subsidiary of Food 4 Less Holdings, Inc.
("Holdings"). The purchase price for RSI was approximately $1.5 billion,
including the assumption of debt. The consideration payable to the
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stockholders of RSI consisted of $388.1 million in cash, $131.5 million
principal amount of Seller Debentures and $18.5 million initial accreted value
of the 13 5/8% Senior Discount Debentures due 2005 (the "New Discount
Debentures") issued by Holdings.
POST-MERGER EVENTS
The Company has substantially completed its integration plan to convert and
rationalize the store formats of Ralphs and Food 4 Less. Since the Merger, the
Company has converted 111 former Alpha Beta, Boys and Viva stores to the Ralphs
format, converted 13 former Ralphs stores to the Food 4 Less warehouse store
format, and opened 23 new stores, including nine Southern California stores
acquired from Smith's which became available when Smith's withdrew from the
California market. The Company has sold or closed 63 stores as a result of
divestitures required by the State of California and other steps taken to
improve the average size and quality of its store base. As a result of the
closure and divestiture of smaller stores and the opening of larger stores, the
average square footage per store in Southern California has increased
approximately 10% from 36,100 square feet to 39,700 square feet.
Subsequent to the Merger, the Company experienced lower sales and higher
costs in certain areas of its operations than originally anticipated. The
shortfall in sales primarily resulted from achieving less benefit from the
Company's advertising program and experiencing greater competitive activity than
originally expected. Although the largest impact was experienced by the
Company's Alpha Beta, Boys and Viva stores which were converted to the Ralphs
format, the base RSI stores were also affected. In addition, the Company's
operating margins were affected by delays in the implementation of certain
buying and other programs to lower the cost of goods, excessive price markdowns
in stores undergoing conversion and a less advantageous than expected product
mix in certain stores.
The realization of cost savings has been delayed in certain areas. In
particular, store operating expenses were higher than anticipated, due primarily
to lower productivity and higher labor costs than originally anticipated. In
addition, the Company experienced higher than expected costs in introducing RSI
merchandising and service standards into the smaller conventional supermarkets
formerly operated by Food 4 Less. Also, as the Company's backstage facilities
were integrated, the Company experienced higher than expected warehouse and
distribution costs resulting from, among other things, higher than expected
inventory levels, delays in the transfer of distribution personnel from Food 4
Less to RSI facilities, and other backstage operational inefficiencies.
The Company is taking a number of specific steps to improve sales and
margins, eliminate the recurrence of unexpected integration-related costs and
fully realize opportunities for efficiencies afforded by the Merger, including
the following:
- - During the first quarter of fiscal 1996, the Company implemented the first
phase of a new marketing program designed to improve sales at its smaller
stores. The key component of this program involves streamlining and
remerchandising the product and service offerings currently in those stores
which the Company believes are more appropriately reserved for its larger
stores. The Company also intends to implement a revised marketing plan
designed to improve sales at its base Ralphs stores.
- - During the first quarter of fiscal 1996, the Company implemented a labor
productivity and cost reduction program. As part of this program, headcount
reductions of approximately 1,100 at the store level and 200 at the corporate
level have already been made. The earnings benefit of the foregoing reductions
will be realized during the remainder of 1996 and beyond.
- - In addition to the acquisition of the nine stores from Smith's, in December
1995 the Company subleased Smith's one million square foot distribution center
and creamery facility in Riverside, California. The facility allows the
Company to consolidate distribution operations into three modern, efficient
facilities located in Compton, Glendale and Riverside, California. The
elimination of six smaller and less efficient warehouse facilities will reduce
transportation between facilities, management overhead and outside storage
costs. Moreover, the consolidation will enable better inventory management,
which is expected to result in the reduction of inventory levels. The
Riverside Facility is also expected to reduce previously planned
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capital expenditures. Although such acquisition has resulted in substantial
revisions to the Company's plan with respect to its storage, distribution and
manufacturing functions, and consequent delays in estimated cost savings, the
Company expects that the consolidation of such functions will be completed by
the third quarter of fiscal 1996, resulting in greatly strengthened and
streamlined backstage operations.
In March 1996 the Company amended the New Credit Facility to conform the
financial covenants therein to the Company's actual post-Merger results and
revised projections. Following the adoption of these amendments, the Company
believes that the covenant levels contained in the New Credit Facility are
consistent with anticipated operating results for fiscal 1996. In June 1996 the
Company issued $100 million aggregate principal amount of 10.45% Senior Notes
due 2004 (the "1996 Senior Notes") at a price to investors of $94.6 million, and
used the proceeds thereof to repay a portion of indebtedness outstanding under
the New Credit Facility.
THE YUCAIPA COMPANIES
Holdings and the Company are controlled by 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. The other supermarket
companies presently controlled or managed by Yucaipa are Dominick's Finer Foods,
Inc. and Smith's Food & Drug Centers, Inc. Such companies, together with the
Company, operate a total of approximately 652 stores with aggregate sales of
approximately $11 billion per year.
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THE OFFERING
<TABLE>
<S> <C>
ISSUER................... Food 4 Less Holdings, Inc., a Delaware corporation.
SECURITIES OFFERED....... $131.5 million initial aggregate principal amount of 13 5/8%
Senior Subordinated Pay-In-Kind Debentures due 2007 (together with
all Secondary Securities issued from time to time in payment of
interest thereon).
MATURITY DATE............ June 15, 2007.
INTEREST RATE............ The Seller Debentures bear interest at the rate of 13 5/8% per
annum.
INTEREST PAYMENTS........ Interest is paid semiannually on each June 15 and December 15.
Holdings has the option, in its sole discretion, to issue
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.
ORIGINAL ISSUE
DISCOUNT............... Because interest on the Seller Debentures can, at the option of
Holdings, be paid in cash or in Secondary Securities up to June
15, 2000, the Seller Debentures were issued with original issue
discount equal to the difference between their issue price and
their stated redemption price at maturity. As a result, holders of
Seller Debentures may 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 Seller Debentures will be redeemable at the option of
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%
</TABLE>
<TABLE>
<S> <C>
In addition, prior to June 15, 1998, Holdings may at its option
use the Net Proceeds from a Public Equity Offering to redeem up to
an aggregate of 35% of the principal amount of the Seller
Debentures originally issued, at a redemption price equal to 110%
of the principal amount thereof plus accrued and unpaid interest
to the redemption date.
RANKING.................. The Seller Debentures are senior subordinated unsecured
obligations of Holdings and rank subordinate in right of payment
to all Senior Indebtedness of Holdings. At July 14, 1996, Holdings
had outstanding $115.3 million (in accreted value) of Senior
Indebtedness (excluding guarantees by Holdings of certain Senior
Indebtedness of the Company included in the total liabilities of
the Company set forth below). In addition, the Seller Debentures
are effectively subordinated to all liabilities (including trade
payables) of the Company which at July 14, 1996 would have been
approximately $3,135.5 million (excluding letters of credit) at
such date.
CHANGE OF CONTROL........ Upon the occurrence of a Change of Control (as defined), each
holder will have the right to require Holdings to repurchase such
holder's Seller Debentures at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to
the date of repurchase.
CERTAIN COVENANTS........ The Seller Debenture Indenture contains 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;
</TABLE>
6
<PAGE> 10
<TABLE>
<S> <C>
(iii) limitation on senior subordinated indebtedness; (iv)
limitation on liens; (v) limitation on asset sales; (vi)
limitation on dividend and other payment restrictions affecting
subsidiaries; (vii) limitation on transactions with affiliates;
(viii) limitation on mergers and certain other transactions; and
(ix) limitations on preferred stock of subsidiaries.
USE OF PROCEEDS.......... Holdings will not receive any of the proceeds from the sale of the
Seller Debentures by the Selling Debentureholders. See "Selling
Debentureholders."
</TABLE>
7
<PAGE> 11
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 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, the 31 weeks ended January 29,
1995 and the 52 weeks ended January 28, 1996 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 24 weeks ended July 16, 1995 and July
14, 1996 have been derived from unaudited 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 "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.
<TABLE>
<CAPTION>
FOOD 4 LESS HOLDINGS
------------------- ---------------------------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 29, JANUARY 28, JULY 16, JULY 14,
1991(A) 1992 1993 1994(B) 1995(C) 1996(D) 1995 1996(D)
-------- -------- -------- -------- ----------- ----------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT STORE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales......................... $1,606.6 $2,913.5 $2,742.0 $2,585.2 $ 1,556.5 $ 4,335.1 $1,480.9 $2,474.6
Gross profit(e)............... 265.7 520.8 484.2 469.3 262.4 849.1 268.8 510.9
Selling, general,
administrative and other,
net......................... 213.1 469.7 434.9 388.8 222.4 785.6 255.0 436.2
Interest expense(f)........... 50.1 70.2 73.6 77.0 48.4 202.7 58.8 127.8
Net loss(g)................... (9.6 ) (33.8 ) (31.2 ) (11.5 ) (17.6) (322.4) (150.5 ) (69.4 )
Ratio of earnings to fixed
charges(h).................. -- (h) -- (h) -- (h) -- (h) --(h) --(h) -- (h) -- (h)
BALANCE SHEET DATA
(end of period)(i):
Working capital surplus
(deficit)................... $ 13.7 $ (66.3 ) $ (19.2 ) $ (54.9 ) $ (74.8) $ (178.5) $ (36.1 ) $(203.7 )
Total assets.................. 980.0 998.5 957.8 980.1 1,000.7 3,188.1 3,041.6 3,141.1
Total debt(j)................. 558.9 525.3 588.3 576.9 598.9 2,330.2 2,218.3 2,344.4
Stockholder's equity
(deficit)................... 84.6 50.8 22.6 10.0 (7.3) (188.8) (16.3 ) (258.2 )
OTHER DATA:
Depreciation and
amortization(k)............. $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 36.6 $ 125.3 $ 39.2 $ 74.9
Capital expenditures.......... 34.7 60.3 53.5 57.5 49.0 122.4 30.4 55.8
Stores open at end of
period...................... 259 249 248 258 267 408 441 402
EBITDA (as defined)(l)........ $ 80.7 $ 101.7 $ 103.8 $ 130.6 $ 76.9 $ 245.1 $ 79.5 $ 150.3
EBITDA margin(m).............. 5.0 % 3.5 % 3.8 % 5.1 % 4.9% 5.7% 5.4 % 6.1 %
</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
10 Food Barn stores, which were not material, from March 29, 1994, the date
of the Food Barn acquisition.
(c) Holdings 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.
(d) Operating data for the 52 weeks ended January 28, 1996 and the 24 weeks
ended July 14, 1996 include the results of RSI from June 14, 1995 (the
Merger date).
(e) Cost of sales has been principally determined using the last-in, first-out
("LIFO") method of valuing inventory. If cost of sales had been determined
using the first-in, first-out ("FIFO") method, gross profit would have been
greater by $2.1 million, $3.6 million, $4.4 million, $0.7 million, $2.7
million, $2.2 million, $2.0 million and $2.5 million for the 52 weeks ended
June 29, 1991, June 27, 1992, June 26, 1993, and June 25, 1994, the 31 weeks
ended January 29, 1995, the 52 weeks ended January 28, 1996 and the 24 weeks
ended July 16, 1995 and July 14, 1996, respectively.
(f) Interest expense includes non-cash charges related to the amortization of
deferred financing costs of $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 31 weeks ended January 29, 1995, $8.2 million
for the 52 weeks ended January 28, 1996, $3.0 million for the 24 weeks ended
July 16, 1995 and $5.1 million for the 24 weeks ended July 14, 1996.
8
<PAGE> 12
(g) 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 $15.1 million, $51.1 million, $43.9 million, $25.7
million, $9.8 million, $32.6 million, $11.1 million and $21.2 million for
the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993, and June 25,
1994, the 31 weeks ended January 29, 1995, the 52 weeks ended January 28,
1996, the 24 weeks ended July 16, 1995 and the 24 weeks ended July 14, 1996,
respectively. Included in the 52 weeks ended June 25, 1994, the 31 weeks
ended January 29, 1995, the 52 weeks ended January 28, 1996 and the 24 weeks
ended July 14, 1996 are reduced employer contributions of $8.1 million,
$14.3 million, $26.1 million and $4.8 million, respectively, related to
union health and welfare benefit plans.
(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 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 52 weeks ended June 29,
1991, June 27, 1992, June 26, 1993 and June 25, 1994, the 31 weeks ended
January 29, 1995, the 52 weeks ended January 28, 1996, the 24 weeks ended
July 16, 1995 and the 24 weeks ended July 14, 1996, by approximately $3.4
million, $25.6 million, $29.8 million, $8.8 million, $17.6 million, $283.5
million, $114.7 million and $69.4 million, respectively. However, such
earnings included non-cash charges of $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, $46.2 million for the 31 weeks ended January 29, 1995,
$226.6 million for the 52 weeks ended January 28, 1996, $112.6 million for
the 24 weeks ended July 16, 1995 and $95.8 million for the 24 weeks ended
July 14, 1996, primarily consisting of depreciation and amortization and the
write-off of property and equipment associated with stores closed as a
result of the Merger, stores closed due to under-performance, stores closed
in connection with the acquisition of the nine stores from Smith's, and
warehouses to be closed as a result of the acquisition of the Riverside
Facility. In addition, earnings for the 52 weeks ended January 28, 1996 were
reduced by cash restructuring charges of $54.1 million.
(i) Balance sheet data as of June 29, 1991, June 27, 1992 and June 26, 1993
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 10 Food Barn stores. Balance sheet data as
of January 28, 1996, July 16, 1995 and July 14, 1996 reflect the Merger and
the financings associated therewith.
(j) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(k) For the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June
25, 1994, the 31 weeks ended January 29, 1995, the 52 weeks ended January
28, 1996, the 24 weeks ended July 16, 1995 and the 24 weeks ended July 14,
1996, depreciation and amortization includes amortization of goodwill of
$5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.6 million, $21.8
million, $6.5 million and $16.2 million, respectively.
(l) "EBITDA (as defined)," as 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, a one-time charge in the 1995 transition period
for Teamsters Union sick pay benefits, $75.0 million of one-time costs
incurred in connection with the Merger in fiscal year 1995 and $13.5 million
of one-time costs incurred in connection with the acquisition of the
Riverside Facility and nine former Smith's stores in the 24 weeks ended July
14, 1996. 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.
9
<PAGE> 13
SUMMARY HISTORICAL FINANCIAL DATA OF RGC AND RSI
The following table sets forth summary historical financial data of RGC (as
the predecessor of RSI) as of and for 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 "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>
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT STORE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Sales............................................. $ 2,889.2 $ 2,843.8 $ 2,730.2 $ 2,724.6
Gross profit...................................... 614.0 626.6 636.5 623.6
Selling, general and administrative expenses(a)... 459.2 470.0 471.0 467.0
Interest expense(b)............................... 130.2 125.6 108.8 112.7
Net earnings (loss)(c)............................ (41.2) (76.1) 138.4(i) 32.1
Ratio of earnings to fixed charges(d)............. --(d) 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit)................. $ (114.2) $ (122.0) $ (73.0) $ (119.5)
Total assets...................................... 1,357.6 1,388.5 1,483.7 1,509.9
Total debt(e)..................................... 941.9 1,029.8 998.9 1,018.5
Redeemable stock.................................. 3.0 -- -- --
Stockholders' equity (deficit).................... (57.2) (133.3) 5.1 27.2
OTHER DATA:
Depreciation and amortization(f).................. $ 76.6 $ 76.9 $ 74.5 $ 76.0
Capital expenditures.............................. 50.4 102.7 62.2 64.0
Stores open at end of period...................... 158 159 165 173
EBITDA (as defined)(g)............................ $ 225.8 $ 227.3 $ 230.2 $ 230.2
EBITDA margin(h).................................. 7.8% 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $2.6
million, $3.3 million, $3.4 million and $2.6 million for 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 $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 $31.2 million, $36.9
million, $36.3 million, and $20.0 million, for 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, 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
52 weeks ended February 2, 1992 by approximately $27.7 million.
(e) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
10
<PAGE> 14
(f) For 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 and $11.0 million, respectively.
(g) "EBITDA," as defined and presented historically by RSI, 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 RSI's 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 the 52 weeks ended January 30,
1994 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs
Supermarkets, Inc.).
11
<PAGE> 15
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
Seller Debentures.
LEVERAGE AND DEBT SERVICE
Holdings is highly leveraged. At July 14, 1996, Holdings' total
indebtedness (including current maturities) and stockholder's deficit were
$2,344.4 million and $258.2 million, respectively, and the Company had an
additional $158.8 million available to be borrowed under the New Revolving
Facility (as defined). In addition, as of January 28, 1996, scheduled payments
under operating leases of the Company and its subsidiaries for the twelve months
following such date were $143.5 million. For the 52 weeks ended January 28,
1996, after giving pro forma effect to the Merger and the related financings
(and certain related assumptions) and the offering of the 1996 Senior Notes (and
the application of proceeds therefrom), Holdings' earnings before fixed charges
were inadequate to cover fixed charges by $326.1 million. However, such earnings
included non-cash charges of $276.4 million primarily consisting of the
write-off of property and equipment associated with stores closed as a result of
the Merger, stores closed due to under-performance, stores closed in connection
with the acquisition of the nine stores from Smith's, warehouses to be closed as
a result of the acquisition of the Riverside Facility and depreciation and
amortization. In addition, pro forma earnings for the 52 weeks ended January 28,
1996 were reduced by cash restructuring charges of $54.1 million. For the 24
weeks ended July 14, 1996, Holdings' earnings before fixed charges were
inadequate to cover fixed charges by $69.4 million. However, such earnings
included non-cash charges of $95.8 million primarily consisting of depreciation
and amortization. Holdings will be required to make semi-annual cash payments of
interest on the New Discount Debentures and the Seller Debentures commencing in
June 2000 in the amount of approximately $61 million per annum. Holdings'
ability to make scheduled payments of the principal of, or interest on, or to
refinance its Indebtedness (including the Seller 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, anticipated cost savings from
the Merger and future growth, Holdings believes that the Company's 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,
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 future cost savings and growth can be 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 and the fact
that substantially all of its assets are pledged to secure the borrowings under
the New Credit Facility and other secured obligations.
Holdings' high level of debt will have several important effects on its
future operations, including the following: (a) 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 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 the Holdings' debt service requirements, funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes, may be limited. 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
12
<PAGE> 16
material adverse effect on the Company's future operations. Moreover, any
default under the documents governing the indebtedness of Holdings could have a
significant adverse effect on the market value of the Seller Debentures.
HOLDING COMPANY STRUCTURE
Holdings is a holding company and the assets of Holdings consist solely of
100% of the outstanding shares of capital stock of the Company, which are
pledged to secure Holdings' guarantee obligations under the New Credit Facility.
Holdings is the sole obligor on the Seller Debentures, and the Seller Debentures
are not guaranteed by any subsidiary of Holdings. Therefore, the Seller
Debentures are effectively subordinated to all indebtedness and other
liabilities of the Company and its subsidiaries. Holdings relies 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 Seller
Debentures. The ability of the Company to pay such dividends and make such
advances and transfers is subject to applicable state laws regulating the
payment of dividends and to restrictions in the New Credit Facility, the
indentures governing the 1996 Senior Notes, the 1995 Senior Notes, the 1992
Senior Notes, the 1995 11% Senior Subordinated Notes, the 1995 13.75% Senior
Subordinated Notes, the Old RGC Notes and the 1991 Senior Subordinated Notes
(each as defined), 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 Holdings and the holders
of the Seller Debentures. At July 14, 1996, the aggregate outstanding amount of
Senior Indebtedness of Holdings (excluding guarantees by Holdings of certain
Senior Indebtedness of the Company) was approximately $115.3 million in accreted
value of New Discount Debentures. The Seller Debentures are effectively
subordinated to all liabilities (including trade payables) of the Company which
were approximately $3,135.5 million (excluding letters of credit) at such date.
In addition, at July 14, 1996, 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
"Summary -- Post-Merger Events" and "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 formerly maintained by either Food 4 Less or Ralphs can continue to
be achieved by the combined Company for all periods 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. The estimates of potential cost savings contained in this Prospectus
are forward looking statements that are inherently uncertain. Except for savings
already realized, actual cost savings, if any, could differ materially from
those projected. All of these forward looking statements are based on estimates
and assumptions made by management of each company, which although believed to
be reasonable, are inherently uncertain and difficult to predict; therefore,
undue reliance should not be placed upon such estimates. There can be no
assurance that the savings anticipated in these forward looking statements will
be achieved. The following important factors, among others, could cause the
Company not to achieve the cost savings contemplated herein (principally those
set forth in "Summary -- the Company" and "-- Post Merger Events") or otherwise
cause the Company's results of operations to be adversely affected in future
periods: (i) increased competitive pressures from existing competitors and new
entrants, including price-cutting strategies, store openings and remodels; (ii)
further unanticipated costs and difficulties related to the Merger and the
integration strategy; (iii) loss or retirement of key members of management or
the termination of the Company's Consulting Agreement with Yucaipa; (iv)
inability to negotiate more favorable terms with suppliers; (v) increases in
interest rates or the Company's cost of borrowing or a default under any
material debt agreements; (vi) inability to develop new stores in advantageous
locations or to successfully convert or
13
<PAGE> 17
remodel existing stores; (vii) prolonged labor disruption; (viii) deterioration
in general or regional economic conditions; (ix) adverse state or federal
legislation or regulation that increases the costs of compliance, or adverse
findings by a regulator with respect to existing operations; (x) loss of
customers or continuing sales weakness as a result of the conversion of store
formats; (xi) adverse determinations in connection with pending or future
litigations or other material claims against the Company; (xii) inability to
achieve future sales levels or other operating results that support the cost
savings; (xiii) the unavailability of funds for capital expenditures; (xiv)
increases in labor costs; (xv) inability to control inventory levels; and (xvi)
continuing operational inefficiencies in distribution or other Company systems.
Many of such factors are beyond the control of the Company. In addition, there
can be no assurance that unforeseen costs and expenses or other factors will not
offset the estimated cost savings or other components or the Company's plan in
whole or in part. It should be noted that numerous unanticipated costs, and
delays in the realization of certain projected cost savings, have arisen since
the Merger, as described above under "Summary -- The Company" and "--
Post-Merger Events." There can be no assurance that such costs and delays will
not continue to be ongoing, or that new or additional unforeseen costs or delays
will arise either in connection with the integration or the Company's operations
or the ongoing conduct of its business.
REGIONAL ECONOMIC CONDITIONS
A substantial percentage of the Company's business (representing
approximately 90% of sales) is 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 in recent periods. For the 52 weeks ended
January 28, 1996, the Company experienced a 1.9% decline in comparable store
sales as compared to the comparable period in the prior year (giving pro forma
effect to the combined sales of Food 4 Less and Ralphs for the period prior to
the Merger). Excluding stores scheduled for divestiture or closing, pro forma
comparable store sales declined 1.2%. For the 52 weeks ended June 25, 1994, and
the 52 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 6.9% and
3.7% declines, respectively, in comparable store sales as compared with the
corresponding period in the prior year. These declines primarily reflected the
weak economy in Southern California, lower levels of price inflation in certain
food product categories, and increased competitive store openings in Southern
California. Additionally, the decline during the 52 weeks ended January 28, 1996
reflected the impact of the Company's own new store openings and conversions.
However, the Company's comparable store sales have begun to improve in the
recent fiscal year. For the 24 weeks ended July 14, 1996, the Company
experienced a 1.0% increase in comparable store sales as compared to the
corresponding period in the prior year (pro forma for the Merger and excluding
the impact of a labor dispute that affected the Company's Northern California
stores in 1995). 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."
14
<PAGE> 18
CONTROL OF THE COMPANY
Affiliates of Yucaipa and Apollo Advisors, L.P. have beneficial ownership
of approximately 42.3% and 30.2%, respectively, of the outstanding capital stock
of Holdings. Pursuant to a stockholders' agreement (the "1995 Stockholders
Agreement") which was entered into by the 1995 Equity Investors (as defined
herein) and certain other stockholders and warrantholders of the Company,
Holdings and the Company have boards consisting of nine and ten members,
respectively, and (i) Yucaipa has the right to elect six directors to the board
of Holdings and seven directors to the board of the Company, (ii) Apollo has the
right to elect two directors to the board of each of Holdings and the Company
and (iii) the other 1995 Equity Investors have the right to elect one director
to the board of each of Holdings and the Company. Under the 1995 Stockholders
Agreement, unless and until Holdings has effected an initial public offering of
its equity securities meeting certain criteria, Holdings and its subsidiaries,
including the Company, may not take certain actions without the approval of the
Holdings directors which the 1995 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 Holdings
and the contractual rights described above, the voting and management control of
Holdings is highly concentrated. Yucaipa, acting with the consent of the
directors elected by the 1995 Equity Investors, has the ability to direct the
actions of Holdings with respect to matters such as the payment of dividends,
material acquisitions and dispositions and other extraordinary corporate
transactions. Yucaipa is a party to a consulting agreement with the Company,
pursuant to which Yucaipa renders certain management and advisory services to
the Company, and receives fees for such services. Yucaipa also received certain
fees in connection with the consummation of the Merger, including an advisory
fee of $21.5 million, of which $17.5 million was paid through the issuance of
New Discount Debentures by Holdings. See "Certain Relationships and Related
Transactions," "Principal Stockholders" and "Description of Capital Stock."
SUBORDINATION OF THE SELLER DEBENTURES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Seller Debentures is subordinated to the prior
payment in full of all existing and future Senior Indebtedness of Holdings. In
addition, the Seller Debentures are effectively subordinated to all liabilities
(including trade payables) of the Company. In the event of the bankruptcy,
liquidation, dissolution, reorganization or other winding up of Holdings, the
assets of Holdings will be available to pay obligations on the Seller Debentures
only after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Seller
Debentures. In addition, under certain circumstances, Holdings may not pay
principal of, premium, if any, or interest on, or any other amounts owing in
respect of, the Seller Debentures, or purchase, redeem or otherwise retire the
Seller Debentures, if a payment default or a non-payment default exists with
respect to certain Senior Indebtedness and, in the case of a non-payment
default, a payment blockage notice has been received by the Trustee (as
defined). See "Description of the Seller Debentures -- Ranking."
ABSENCE OF ESTABLISHED PUBLIC MARKET FOR THE SELLER DEBENTURES
There is no established market for the Seller Debentures and there can be
no assurance as to the liquidity of any markets that may develop for the Seller
Debentures, the ability of holders of the Seller Debentures to sell their Seller
Debentures, or the price at which holders would be able to sell their Seller
Debentures. Future trading prices of the Seller Debentures will depend on many
factors, including, among other things, prevailing interest rates, Holdings'
operating results and the market for similar securities.
NET LOSSES
Holdings has reported a net loss of $69.4 million for the 24 weeks ended
July 14, 1996, $322.4 million for the 52 weeks ended January 28, 1996, $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 and $9.6 million for the 52 weeks
ended June 29, 1991. After giving pro forma effect to the Merger and the related
financings (and certain related assumptions) as though they had occurred at the
beginning of fiscal year 1995, Holdings would have reported a net loss of
approximately $366.6 million
15
<PAGE> 19
for the 52 weeks ended January 28, 1996. There can be no assurance that Holdings
will not report net losses in the future.
THE MERGER AND THE FINANCING
On June 14, 1995, Food 4 Less merged into RSI. Immediately following the
RSI Merger, Ralphs Grocery Company, which was a wholly-owned subsidiary of RSI,
merged with and into RSI pursuant to the RGC Merger, and RSI changed its name to
Ralphs Grocery Company. The purchase price for RSI was approximately $1.5
billion, including the assumption of debt. The consideration payable to the
stockholders of RSI consisted of $388.1 million in cash, $131.5 million
principal amount of the Seller Debentures and $18.5 million initial accreted
value of the New Discount Debentures which were issued by Holdings.
The Merger was financed through the following principal transactions:
- Borrowings of $600 million aggregate principal amount pursuant to term
loans (the "New Term Loans") under a senior bank facility (the "New
Credit Facility") provided by a syndicate of banks led by Bankers Trust.
The New Credit Facility also provides for a $325 million revolving credit
facility (the "New Revolving Facility").
- The issuance by the Company of $350 million of 10.45% Senior Notes due
2004 (the "1995 Senior Notes") and $100 million of 11% Senior
Subordinated Notes due 2005 (the "1995 11% Senior Subordinated Notes").
- The issuance of preferred stock in a private placement by Holdings to a
group of investors (the "1995 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 1995
Equity Investment. Concurrently with the 1995 Equity Investment, the 1995
Equity Investors purchased outstanding shares of Holdings capital stock
from a stockholder of Holdings for a purchase price of $57.8 million.
- The exchange by Food 4 Less of (a) $170.3 million aggregate principal
amount of the 10.45% Senior Notes due 2000 of Food 4 Less (the "1992
Senior Notes") for $170.3 million aggregate principal amount of the 1995
Senior Notes plus $5.00 in cash per $1,000 principal amount exchanged and
(b) $140.2 million aggregate principal amount of the 13.75% Senior
Subordinated Notes due 2001 of Food 4 Less (the "1991 Senior Subordinated
Notes") for $140.2 million aggregate principal amount of the 13.75%
Senior Subordinated Notes due 2005 of the Company (the "1995 13.75%
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 1992 Senior Notes and 1991 Senior Subordinated Notes to
certain amendments to the indentures governing such notes.
- The offers by Food 4 Less to (i) exchange up to $450 million aggregate
principal amount of the Old RGC Notes (as defined herein) for up to $450
million aggregate principal amount of the 1995 11% Senior Subordinated
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 indenture governing the Old RGC Notes.
- The placement by Holdings pursuant to the New Discount Debenture
Placement of $100 million initial accreted value of New Discount
Debentures to a partnership including Yucaipa, the selling stockholders
of Ralphs, an affiliate of George Soros, Apollo, and an affiliate of each
of BT Securities, CS First Boston and DLJ. The $100 million initial
accreted value of New Discount Debentures included (a) $18.5 million that
was issued to the RSI stockholders, (b) $17.5 million, $2.5 million and
$2.5 million that was issued to Yucaipa, BT Securities and Apollo,
respectively, in satisfaction of fees otherwise payable by the Company
and Holdings in connection with the Merger and the related
16
<PAGE> 20
financing and (c) $59 million that was issued for cash to the partnership
described above. The $41 million initial accreted value of New Discount
Debentures issued to the RSI stockholders, Apollo, BT Securities and
Yucaipa were contributed to such partnership by the recipients thereof.
- The assumption by the Company, pursuant to the Merger, of approximately
$162.9 million of other indebtedness of RGC and Food 4 Less.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of Holdings as of July
14, 1996. The table should be read in conjunction with the historical
consolidated financial statements of Holdings and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CAPITALIZATION
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Cash........................................................................ $ 61.5
========
Short-term and current portion of long-term debt:
New Term Loans............................................................ $ 12.5
Other indebtedness........................................................ 3.0
Capital leases............................................................ 26.1
--------
Total short-term and current portion of long-term debt............ $ 41.6
========
Long-term debt:
New Term Loans............................................................ $ 530.8
New Revolving Facility(a)................................................. 79.7
1996 Senior Notes......................................................... 94.6
1995 Senior Notes......................................................... 520.3
1992 Senior Notes......................................................... 4.7
Other indebtedness........................................................ 2.6
Capital leases............................................................ 135.1
1995 11% Senior Subordinated Notes........................................ 524.0
1995 13.75% Senior Subordinated Notes..................................... 140.2
1991 Senior Subordinated Notes............................................ 4.8
Old RGC Notes............................................................. 2.2
New Discount Debentures (accreted value).................................. 115.3
Seller Debentures (net of debt discount).................................. 148.5
--------
Total long-term debt.............................................. $ 2,302.8
--------
Stockholder's equity:
Series A Preferred Stock.................................................. 161.8
Series B Preferred Stock.................................................. 31.0
Common stock, $.01 par value.............................................. 0.2
Additional paid-in capital................................................ 57.0
Notes receivable(b)....................................................... (0.6)
Retained deficit.......................................................... (504.1)
Treasury stock............................................................ (3.5)
--------
Total stockholder's deficit............................................ (258.2)
--------
Total capitalization.............................................. $ 2,044.6
========
</TABLE>
- ---------------
(a) The New Revolving Facility provides for a $325 million line of credit which
is available for working capital requirements and general corporate
purposes. Up to $150 million of the New Revolving Facility may be used to
support 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. As of August 28, 1996, letters of credit for
approximately $86.5 million had been issued under the New Revolving
Facility, primarily to satisfy the State of California's requirements
relating to workers' compensation self-insurance.
(b) Represents notes receivable from shareholders of Holdings with respect to
the purchase of Holdings' common stock.
18
<PAGE> 22
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations of
Holdings for the 52 weeks ended January 28, 1996 gives effect to the Merger and
the financing thereof (and certain related assumptions set forth below) and the
offering of the 1996 Senior Notes (and the application of the proceeds
therefrom) as if such transactions occurred on January 30, 1995. Such pro forma
information combines the results of operations of Holdings for the 52 weeks
ended January 28, 1996 with the results of operations of RSI for the period from
January 30, 1995 to June 13, 1995 (unaudited).
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management believes are reasonable. The Merger
was accounted for by Holdings as a purchase of RSI by Holdings and RSI's assets
and liabilities were recorded at their estimated fair market values at the date
of the Merger.
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 RSI, together with the related notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
RSI HOLDINGS
(HISTORICAL) (HISTORICAL)
(UNAUDITED) (AUDITED)
JUNE 13, JANUARY 28, PRO FORMA PRO FORMA
1995 1996 ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales........................................ $ 1,025.7 $ 4,335.1 $ $5,360.8
Cost of sales................................ 794.4 3,486.0 1.6(a) 4,282.0
-------- -------- ------ --------
Gross profit............................... 231.3 849.1 (1.6) 1,078.8
Selling, general, administrative and other,
net........................................ 179.1 785.6 3.1(a) 968.6
0.6(b)
0.2(c)
Amortization of goodwill..................... 4.1 21.8 4.9(d) 30.8
Provision for restructuring.................. 0.0 123.1 123.1
-------- -------- ------ --------
Operating income (loss).................... 48.1 (81.4) (10.4) (43.7 )
Other expense
Interest expense -- cash................... 35.7 170.5 26.7(e) 232.9
Interest expense -- non-cash............... 3.2 24.0 13.1(e) 40.3
Amortization of debt issuance costs........ 2.1 8.2 (0.2)(e) 10.1
Gain on disposal of assets................... (0.3) (0.6) (0.9 )
-------- -------- ------ --------
Earnings (loss) before income tax provision
and extraordinary charges............... 7.4 (283.5) (50.0) (326.1 )
Income tax expense (benefit)................. 0.0 0.5 (0.5)(f) --
-------- -------- ------ --------
Earnings (loss) before extraordinary
charges................................. 7.4 (284.0) (49.5) (326.1 )
Extraordinary charges........................ 0.0 38.4 2.1(g) 40.5
-------- -------- ------ --------
Net earnings (loss)........................ $ 7.4 $ (322.4) $ (51.6) $ (366.6 )
======== ======== ====== ========
Ratio of earnings to fixed charges(h)...... 1.15x -- --
======== ======== ========
</TABLE>
19
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
(a) 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.
(b) Reflects additional Yucaipa management fees ($0.8 million) and the
elimination of an annual guarantee fee ($0.2 million) paid by Ralphs to its
former controlling stockholder.
(c) Reflects increased compensation resulting from new employment agreements
with certain of the current executive officers of Ralphs.
(d) Reflects the amortization of goodwill acquired in the Merger ($9.0 million)
and elimination of Ralphs' historical amortization ($4.1 million).
Amortization has been calculated on the straight line basis over a period
of 40 years.
(e) The following table presents a reconciliation of pro forma interest expense
and amortization of deferred financing costs:
<TABLE>
<CAPTION>
52 WEEKS ENDED
JANUARY 28, 1996
---------------------
<S> <C>
(DOLLARS IN MILLIONS)
Historical interest expense -- cash................................. $ 206.2
----------
Plus: Interest on borrowings under:
New Credit Facility............................................ 21.0
1996 Senior Notes.............................................. 11.0
1995 Senior Notes.............................................. 14.1
1995 Senior Subordinated Notes................................. 22.2
Less: Interest on borrowings associated with indebtedness retired
at the time of the Merger:
Old bank term loans:
Ralphs....................................................... (10.1)
Food 4 Less.................................................. (6.2)
Old RGC Notes.................................................. (16.9)
Other debt..................................................... (8.4)
----------
Pro forma adjustment.............................................. 26.7
----------
Pro forma interest expense -- cash.................................. $ 232.9
==============
Historical interest expense -- non-cash............................. $ 27.2
Plus:
Interest on Seller Debentures for a full fiscal year........... 18.9
Accretion of New Discount Debentures for a full fiscal year.... 14.1
Less:
Interest on Seller Debentures from Merger to January 28,
1996.......................................................... (11.4)
Accretion of New Discount Debentures from Merger to January 28,
1996.......................................................... (8.5)
----------
Pro forma adjustment................................................ 13.1
----------
Pro forma interest expense -- non-cash.............................. $ 40.3
==============
Historical amortization of debt issuance costs...................... $ 10.3
Plus:
Financing and exchange/consent fees............................ 3.8
Less:
Historical financing costs associated with indebtedness retired
at the time of the Merger:
Ralphs....................................................... (2.1)
Food 4 Less.................................................. (1.9)
----------
Pro forma adjustment.............................................. (0.2)
----------
Pro forma amortization of debt issuance costs....................... $ 10.1
==============
</TABLE>
(f) Represents the elimination of the historical Holdings income tax expense.
(g) Relates to the write-off of debt issuance costs associated with
indebtedness retired in connection with the offering of the 1996 Senior
Notes.
20
<PAGE> 24
(h) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, 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).
Holdings' pro forma earnings were inadequate to cover pro forma fixed
charges by approximately $326.1 million. However, such pro forma earnings
included non-cash charges of $249.2 million primarily consisting of the
write-off of property and equipment associated with stores closed as a
result of the Merger, stores closed in connection with the acquisition of
the nine stores from Smith's, warehouses to be closed as a result of the
acquisition of the Riverside Facility and depreciation and amortization. In
addition, pro forma earnings for the 52 weeks ended January 28, 1996 were
reduced by cash restructuring charges of $54.1 million.
21
<PAGE> 25
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 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, the 31 weeks ended January 29, 1995 and the 52 weeks
ended January 28, 1996 have been derived from the financial statements of
Holdings and Food 4 Less audited by Arthur Andersen LLP, independent public
accountants. The historical financial data of Holdings, presented below as of
and for the 24 weeks ended July 16, 1995 and July 14, 1996 have been derived
from unaudited financial statements of the Company 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 "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.
<TABLE>
<CAPTION>
HOLDINGS
FOOD 4 LESS ---------------------------------------------------------------------------
----------------------- 31 WEEKS 52 WEEKS
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED JANUARY JANUARY ENDED ENDED
JUNE 29, JUNE 27, JUNE 26, JUNE 25, 29, 28, JULY 16, JULY 14,
1991(A) 1992 1993 1994(B) 1995(C) 1996(D) 1995 1996(D)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT STORE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales..................... $1,606,559 $2,913,493 $2,742,027 $2,585,160 $1,556,522 $4,335,109 $1,480,942 $2,474,576
Cost of sales(e).......... 1,340,841 2,392,655 2,257,835 2,115,842 1,294,147 3,485,993 1,212,157 1,963,692
---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Gross profit(e)........... 265,718 520,838 484,192 469,318 262,375 849,116 268,785 510,884
Selling, general,
administrative and
other, net.............. 213,083 469,751 434,908 388,836 222,359 785,576 255,006 436,211
Amortization of
goodwill................ 5,315 7,795 7,571 7,691 4,615 21,847 6,512 16,185
Restructuring charge...... -- -- -- -- 5,134(f ) 123,083(g ) 63,587 --
---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Operating income
(loss)(e)............... 47,320 43,292 41,713 72,791 30,267 (81,390 ) (56,320) 58,488
Interest expense(h)....... 50,084 70,211 73,614 77,017 48,361 202,651 58,807 127,783
Loss (gain) on disposal of
assets.................. 623 (1,364) (2,083) 37 (455 ) (547 ) (436) 116
Provision for earthquake
losses.................. -- -- -- 4,504(i) -- -- -- --
Provision for income
taxes................... 2,505 3,441 1,427 2,700 -- 500 500 --
---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Loss before extraordinary
charges................. (5,892) (28,996) (31,245) (11,467) (17,639 ) (283,994 ) (115,191) (69,411)
Extraordinary charges..... 3,757(j) 4,818(k) -- -- -- 38,424(l ) 35,358 --
---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Net loss(m)............... $ (9,649) $ (33,814) $ (31,245) $ (11,467) $ (17,639 ) $(322,418 ) $ (150,549) $ (69,411)
========== ========== ========== ========== ========== ========== ======== ==========
Ratio of earnings to
fixed................... --(n) -- (n) --(n) --(n) --(n ) --(n ) --(n) --(n)
charges(n)
NON-CASH CHARGES:
Depreciation and
amortization of property
and equipment........... $ 20,399 $ 37,898 $ 37,426 $ 41,380 $ 25,966 $ 92,282 $ 27,054 $ 57,993
Amortization of goodwill
and other assets........ 11,453 16,979 20,214 15,703 10,657 33,047 12,185 16,865
Amortization of deferred
financing costs......... 5,177 6,304 4,901 5,472 3,413 8,193 2,994 5,068
BALANCE SHEET DATA
(end of period)(o):
Working capital surplus
(deficit)............... $ 13,741 $ (66,254) $ (19,222) $ (54,882) $ (74,776 ) $(178,456 ) $ (36,059) $ (203,722)
Total assets.............. 979,958 998,451 957,840 980,080 1,000,695 3,188,129 3,041,614 3,141,086
Total debt(p)............. 558,943 525,340 588,313 576,869 598,940 2,330,221 2,218,267 2,344,403
Stockholder's equity
(deficit)............... 84,557 50,771 22,633 10,024 (7,333 ) (188,798 ) (16,299) (258,200)
OTHER DATA:
Depreciation and
amortization(q)......... $ 31,852 $ 54,877 $ 57,640 $ 57,083 $ 36,623 $ 125,329 $ 39,239 $ 74,858
Capital expenditures...... 34,652 60,263 53,467 57,741 49,023 122,355 30,427 55,840
Stores open at end of
period.................. 259 249 248 258 267 408 441 402
EBITDA (as defined)(r).... $ 80,667 $ 101,723 $ 103,794 $ 130,573 $ 76,853 $ 245,146 $ 79,473 $ 150,264
EBITDA margin(s).......... 5.0% 3.5% 3.8% 5.1% 4.9 % 5.7 % 5.4% 6.1%
</TABLE>
22
<PAGE> 26
- ---------------
(a) Operating data for the 52 weeks ended June 29, 1991 include the results of
Alpha Beta from June 17, 1991, the date of its acquisition only. 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
10 Food Barn stores, which were not material, from March 29, 1994, the date
of the Food Barn acquisition.
(c) Holdings 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.
(d) Operating data for the 52 weeks ended January 28, 1996 and the 24 weeks
ended July 14, 1996 include the results of RSI from June 14, 1995 (the
Merger date).
(e) Cost of sales has been principally determined using the last-in, first-out
("LIFO") method of valuing inventory. If cost of sales had been determined
using the first-in, first-out ("FIFO") method, gross profit and operating
income would have been greater by $2.1 million, $3.6 million, $4.4 million,
$0.7 million, $2.7 million, $2.2 million, $2.0 million and $2.5 million for
the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993, and June 25,
1994, the 31 weeks ended January 29, 1995, the 52 weeks ended January 28,
1996 and the 24 weeks ended July 16, 1995 and July 14, 1996, respectively.
(f) The Company converted 11 of its conventional supermarkets to warehouse
stores. During the 31 weeks ended January 29, 1995, Holdings recorded a
non-cash restructuring charge for the write-off of property and equipment at
the 11 stores of $5.1 million.
(g) Holdings recorded a $75.2 million restructuring charge associated with the
closing of 58 stores and one warehouse facility in the 52 weeks ended
January 28, 1996. Pursuant to the settlement agreement with the State of
California, 24 Food 4 Less stores (as well as 3 Ralphs stores) were required
to be divested and an additional 34 under-performing stores were closed.
Holdings also recorded a $47.9 million restructuring charge associated with
the closing of 9 stores and one warehouse facility in the 52 weeks ended
January 28, 1996, in conjunction with the agreement with Smith's to lease
the Riverside warehouse facility and 9 stores.
(h) Interest expense includes non-cash charges related to the amortization of
deferred financing costs.
(i) On January 17, 1994, Southern California was struck by a major earthquake
which resulted in the temporary closing of 31 of Company's stores. The
closures were caused primarily by loss of electricity, water, inventory, or
damage to the affected stores. All but one of the closed stores reopened
within a week of the earthquake. The final closed store reopened on March
24, 1994. Holdings is insured, subject to deductibles, against earthquake
losses (including business interruption). The pre-tax charge to earnings,
net of insurance recoveries, was approximately $4.5 million.
(j) Represents an extraordinary charge of $3.8 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.
(k) 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' bank term loan, 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.
(l) Represents an extraordinary charge of $38.4 million relating to the
refinancing of Food 4 Less' old credit facility, 10.45% Senior Notes due
2000 (the "1992 Senior Notes"), 13.75% Senior Subordinated Notes due 2001
(the "1991 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.
(m) 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 $15.1 million, $51.1 million, $43.9 million, $25.7
million, $9.8 million, $32.6 million, $11.1 million and $21.2 million for
the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993, and June 25,
1994, the 31 weeks ended January 29, 1995, the 52 weeks ended January 28,
1996, the 24 weeks ended July 16, 1995 and the 24 weeks ended July 14, 1996,
respectively. Included in the 52 weeks ended June 25, 1994, the 31 weeks
ended January 29, 1995, the 52 weeks ended January 28, 1996 and the 24 weeks
ended July 14, 1996 are reduced employer contributions of $8.1 million,
$14.3 million, $26.1 million and $4.8 million, respectively, related to
union health and welfare benefit plans.
(n) 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 52 weeks ended June 29,
1991, June 27, 1992, June 26, 1993 and June 25, 1994, the 31 weeks ended
January 29, 1995, the 52 weeks ended January 28, 1996, the 24 weeks ended
July 16, 1995 and the 24 weeks ended July 14, 1996, by approximately $3.4
million, $25.6 million, $29.8 million, $8.8 million, $17.6 million, $283.5
million, $114.7 million and $69.4 million, respectively. However, such
earnings included non-cash charges of $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, $46.2 million for the 31 weeks ended January 29, 1995,
$202.6 million for the 52 weeks ended January 28, 1996, $112.6 million for
the 24 weeks ended July 16, 1995 and $95.8 million for the 24 weeks ended
July 14, 1996, primarily consisting of depreciation and amortization and the
write-off of property and equipment associated with stores closed as a
result of the Merger, stores closed due to under-performance, stores closed
in connection with the acquisition of the nine stores from Smith's, and
warehouses to be closed as a result of the acquisition of the Riverside
Facility. In addition, earnings for the 52 weeks ended January 28, 1996 were
reduced by cash restructuring charges of $54.1 million.
(o) Balance sheet data as of June 29, 1991, June 27, 1992 and June 26, 1993
reflect the Alpha Beta acquisition and the financings and refinancings
associated therewith. Balance sheet data as of June 25, 1994, January 29,
1995 and April 23, 1995 reflect the acquisition of 10 Food Barn stores.
Balance sheet data as of January 28, 1996, July 16, 1995 and July 14, 1996
reflect the Merger and the financings associated therewith.
(p) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(q) Depreciation and amortization includes amortization of goodwill.
23
<PAGE> 27
(r) "EBITDA (as defined)," as 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, a one-time charge in the 1995 transition period
for Teamsters Union sick pay benefits, $75.0 million of one-time costs
incurred in connection with the Merger in fiscal year 1995 and $13.5 million
of one-time costs incurred in connection with the acquisition of the
Riverside Facility and nine former Smith's stores in the 24 weeks ended July
14, 1996. 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."
(s) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
24
<PAGE> 28
SELECTED HISTORICAL FINANCIAL DATA OF RGC AND RSI
The following table presents selected historical financial data of RGC (as
the predecessor of RSI) as of and for 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 "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>
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29,
1992 1993 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT STORE DATA)
OPERATING DATA:
Sales........................................................ $2,889.2 $2,843.8 $2,730.2 $2,724.6
Cost of sales................................................ 2,275.2 2,217.2 2,093.7 2,101.0
-------- -------- -------- --------
Gross profit................................................. 614.0 626.6 636.5 623.6
Selling, general and administrative expenses(a).............. 459.2 470.0 471.0 467.0
Provision for equity appreciation rights..................... 18.3 -- -- --
Amortization of excess of cost over net assets acquired...... 11.0 11.0 11.0 11.0
Provisions for restructuring and tax indemnification
payments(b).................................................. 10.0 7.1 2.4 --
-------- -------- -------- --------
Operating income............................................. 115.5 138.5 152.1 145.6
Interest expense(c)........................................ 130.2 125.6 108.8 112.7
Loss on disposal of assets and provisions for legal
settlement and earthquake losses(d)...................... 13.0 10.1 12.9 0.8
Income tax expense (benefit)................................. 13.5 8.3 (108.0)(e) --
Cumulative effect of change in accounting for post-retirement
benefits other than pensions............................... -- -- -- --
Extraordinary item-debt refinancing, net of tax benefits..... -- (70.6) -- --
-------- -------- -------- --------
Net earnings (loss)(f)....................................... $ (41.2) $ (76.1) $ 138.4 $ 32.1
======== ======== ======== ========
Ratio of earnings to fixed charges(g)........................ --(g) 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit)............................ $(114.2) $(122.0) $ (73.0) $(119.5)
Total assets................................................. 1,357.6 1,388.5 1,483.7 1,509.9
Total debt(h)................................................ 941.9 1,029.8 998.9 1,018.5
Redeemable stock............................................. 3.0 -- -- --
Stockholders' equity (deficit)............................... (57.2) (133.3) 5.1 27.2
OTHER DATA:
Depreciation and amortization(i)............................. $ 76.6 $ 76.9 $ 74.5 $ 76.0
Capital expenditures......................................... 50.4 102.7 62.2 64.0
Stores open at end of period................................. 158 159 165 173
EBITDA (as defined)(j)....................................... $ 225.8 $ 227.3 $ 230.2 $ 230.2
EBITDA margin(k)............................................. 7.8% 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $2.6
million, $3.3 million, $3.4 million and $2.6 million for 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 RSI's 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 $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 $13.0 million, $2.6 million, $1.9 million
and $0.8 million for 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
25
<PAGE> 29
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.
(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 $31.2 million, $36.9 million, $36.3
million, and $20.0 million, for 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, 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 52 weeks ended February 2, 1992 by $27.7 million.
(h) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
(i) For 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 and $11.0 million, respectively.
(j) "EBITDA (as defined)" and presented historically by RGC and RSI, represents
net 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 RSI's 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.
26
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On June 14, 1995, Food 4 Less completed its acquisition of RSI and its
wholly owned subsidiary, RGC. The acquisition was effected through the merger of
Food 4 Less 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 (the "Company"). Concurrently with the consummation of the Merger, the
Company received a significant equity investment from its parent, Food 4 Less
Holdings, Inc. ("Holdings") and refinanced a substantial portion of the existing
indebtedness of Food 4 Less and RGC. See "Liquidity and Capital Resources."
Holdings does not have any business operations of its own and its assets consist
solely of all of the outstanding capital stock of the Company.
Holdings' results of operations for the 52 weeks ended January 28, 1996
include 20 weeks of the operations of Food 4 Less prior to the Merger and 32
weeks of operations of post-Merger Holdings. Management believes that Holdings'
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 post-Merger Holdings
(since the Merger approximately doubled Food 4 Less' annual sales volume), the
addition of 174 conventional stores to Holdings' overall store mix and the
material changes in Holdings' capital structure.
The Merger is being accounted for as a purchase of RSI by Food 4 Less. As a
result, all financial statements for periods subsequent to June 14, 1995, the
date the Merger was consummated, reflect RSI'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 RSI's net assets was recorded as goodwill and is being amortized
over a 40-year period. 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 previously reported is primarily attributable to an adjustment in
the valuation of fixed assets.
At July 14, 1996, Holdings operated 264 conventional supermarkets and 76
Food 4 Less warehouse stores in Southern California. It also operated 62 stores
in Northern California and certain areas of the Midwest. Following the Merger,
Holdings converted Food 4 Less' Alpha Beta, Boys and Viva stores to the Ralphs
format and converted selected Ralphs stores to the Food 4 Less warehouse format.
As of July 14, 1996, Holdings' bakery, creamery and deli manufacturing
operations and the management of major corporate departments had been
consolidated and the integration of Holdings' administrative departments was
substantially completed. The previously planned integration and consolidation of
Holdings' warehousing and distribution facilities into three primary facilities
will be delayed and modified as a result of the agreement with Smith's to lease
its Riverside, California distribution and creamery facility. See "Southern
California Division -- Warehousing and Distribution."
Following the consummation of the Merger, sales in Holdings' Southern
California Division fell short of anticipated levels for the second half of
fiscal 1995. This shortfall resulted primarily from achieving less benefit from
Holdings' advertising program and experiencing greater competitive activity than
originally expected. Although the largest impact was experienced by Holdings'
Alpha Beta, Boys and Viva stores which were converted to the Ralphs format, the
base Ralphs stores were also affected. In addition, Holdings' operating margins
were affected by delays in the implementation of certain buying and other
programs to lower the cost of goods, excessive price markdowns in stores
undergoing conversion and a less advantageous than expected product mix in
certain stores. Greater than anticipated transition expenses were also
experienced in integrating store operation and inventory distribution functions.
As a result of these various factors, in March 1996, Holdings amended the New
Credit Facility to conform the financial covenants contained therein to
Holdings' actual post-Merger results. Following the adoption of these
amendments, Holdings believes that the covenant levels contained in the New
Credit Facility are consistent with anticipated operating results for fiscal
1996. See "Summary -- The Company -- Post-Merger Events."
27
<PAGE> 31
Holdings 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. References to fiscal year 1993, fiscal year 1994, the 1995
transition period and fiscal year 1995 are to the 52-week period ended June 26,
1993, the 52-week period ended June 25, 1994, the 31-week period ended January
29, 1995, and the 52-week period ending January 28, 1996, respectively. The
operating results for the 1995 transition period are not directly comparable to
those of fiscal 1993, fiscal 1994 or fiscal 1995, as these periods include 52
weeks of operations.
RESULTS OF OPERATIONS OF HOLDINGS
The following table sets forth the selected unaudited operating results of
Holdings for the 24 weeks ended July 16, 1995 and July 14, 1996:
<TABLE>
<CAPTION>
24 WEEKS ENDED
-----------------------------------------
<S> <C> <C> <C> <C>
JULY 16, 1995 JULY 14, 1996
------------------ ------------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
Sales.................................................. $1,480.9 100.0% $2,474.6 100.0%
Gross profit........................................... 268.8 18.2 510.9 20.6
Selling, general, administrative and other, net........ 255.0 17.2 436.2 17.6
Amortization of goodwill............................... 6.5 0.4 16.2 0.7
Restructuring charge................................... 63.6 4.3 -- --
Operating income (loss)................................ (56.3) (3.8) 58.5 2.4
Interest expense....................................... 58.8 4.0 127.8 5.2
Loss (gain) on disposal of assets...................... (0.4) -- 0.1 --
Provision for income taxes............................. 0.5 -- -- --
Loss before extraordinary charge....................... (115.2) (7.8) (69.4) (2.8)
Extraordinary charge................................... 35.4 2.4 -- --
Net loss............................................... $ (150.5) (10.2)% $ (69.4) (2.8)%
</TABLE>
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JULY 14,
1996 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JULY 14,
1995.
Sales
Sales per week increased $41.4 million, or 67.1 percent, from $61.7 million
in the 24 weeks ended July 16, 1995 to $103.1 million in the 24 weeks ended July
14, 1996. The increase in sales for the 24 weeks ended July 14, 1996 was
primarily attributable to the addition of 174 conventional supermarkets acquired
through the Merger. Comparable store sales trends have been improving each
quarter since the Merger and the second quarter of 1996 represents the first
quarter Holdings has achieved positive comparable store sales. Excluding stores
being divested or closed in connection with the Merger, and excluding the impact
from last year's Northern California labor dispute, comparable store sales
increased 1.0 percent for the 24 weeks ended July 14, 1996. During the 24 weeks
ended July 14, 1996, Holdings opened 12 stores (4 Ralphs conventional
supermarkets and 8 Food 4 Less warehouse stores), divested or closed 18 smaller,
less efficient stores and completed one remodel.
Gross Profit
Gross profit as a percentage of sales increased from 18.2 percent in the 24
weeks ended July 16, 1995 to 20.6 percent in the 24 weeks ended July 14, 1996.
The increase in gross profit margin was primarily attributable to the addition
of 174 conventional supermarkets which offset the effect of Holdings' warehouse
stores (which have lower gross margins than Holdings' conventional supermarkets)
on its overall gross margin for the period. This increase also reflects a
reduction in the cost of goods sold as the benefits of inventory management
programs instituted by Holdings are realized. Gross profit during the 24 weeks
ended July 14,
28
<PAGE> 32
1996 was also impacted by certain one-time costs associated with the integration
of Holdings' operations. See "-- Operating Income" below.
Selling, General, Administrative and Other, Net
Selling, general, administrative and other expenses ("SG&A") were $255.0
million and $436.2 million for the 24 weeks ended July 16, 1995 and July 14,
1996, respectively. SG&A increased as a percentage of sales from 17.2 percent to
17.6 percent for the 24 weeks ended July 16, 1995 and the 24 weeks ended July
14, 1996, respectively. The increase in SG&A as a percentage of sales for the
1996 24-week period was due primarily to the addition of 174 conventional
supermarkets acquired through the Merger. The additional conventional
supermarkets offset the effect of Holdings' warehouse stores (which have lower
SG&A than Holdings' conventional supermarkets) on its SG&A margin for the
period. SG&A during the 24 weeks ended July 14, 1996 was also impacted by
certain one-time costs associated with the integration of Holdings' operations.
The increase in SG&A as a percentage of sales was partially offset by the
results of an enhancement of expense and labor controls at the store level. See
"-- Operating Income" below.
Operating Income
In addition to the factors discussed above, operating income for the 24
weeks ended July 14, 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
$58.8 million and $127.8 million for the 24 weeks ended July 16, 1995 and July
14, 1996, respectively. The increase in interest expense 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, Holdings' net loss
decreased from $150.5 million in the 24 weeks ended July 16, 1995 to $69.4
million in the 24 weeks ended July 14, 1996.
The following table sets forth the historical operating results of Holdings
for the 52 weeks ended June 26, 1993 and June 25, 1994, the 31 weeks ended
January 29, 1995 and the 52 weeks ended January 28, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR 1995 FISCAL YEAR
1993 1994 TRANSITION PERIOD 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Sales................................. $2,742.0 100.0% $2,585.2 100.0% $1,556.5 100.0% $4,335.1 100.0%
Gross profit.......................... 484.2 17.7 469.3 18.1 262.4 16.9 849.1 19.6
Selling, general, administrative and
other, net.......................... 434.9 15.9 388.8 15.0 222.4 14.3 785.6 18.1
Amortization of goodwill.............. 7.6 0.3 7.7 0.3 4.6 0.3 21.8 0.5
Restructuring charge.................. 0.0 0.0 0.0 0.0 5.1 0.3 123.1 2.8
Operating income (loss)............... 41.7 1.5 72.8 2.8 30.3 1.9 (81.4) (1.9)
Interest expense...................... 73.6 2.7 77.0 3.0 48.4 3.1 202.7 4.7
Loss (gain) on disposal of assets..... (2.1) (0.1) 0.0 0.0 (0.5) (0.0) (0.5) (0.0)
Provision for earthquake losses....... 0.0 0.0 4.5 0.2 0.0 0.0 0.0 0.0
Provision for income taxes............ 1.4 0.1 2.7 0.1 0.0 0.0 0.5 0.0
Loss before extraordinary charge...... (31.2) (1.1) (11.5) (0.4) (17.6) (1.1) (284.0) (6.6)
Extraordinary charge.................. 0.0 0.0 0.0 0.0 0.0 0.0 38.4 0.9
Net loss.............................. (31.2) (1.1) (11.5) (0.4) (17.6) (1.1) (322.4) (7.4)
</TABLE>
29
<PAGE> 33
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY
28, 1996 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 31 WEEKS ENDED JANUARY
29, 1995.
Sales
Sales per week increased $33.2 million, or 66.1 percent, from $50.2 million
in the 31 weeks ended January 29, 1995 to $83.4 million in the 52 weeks ended
January 28, 1996. The increase in sales was primarily attributable to the
addition of 174 conventional supermarkets acquired through the Merger. The sales
increase was partially offset by a pro forma comparable store sales (includes
the combined sales of Food 4 Less and RGC for the period prior to the Merger)
decline of 1.9 percent for the 52 weeks ended January 28, 1996 as compared to
the 52 weeks ended January 28, 1995. Excluding stores scheduled for divestiture
or closing, pro forma comparable store sales decreased 1.2 percent. Management
believes the decline in comparable store sales was primarily attributable to
additional competitive store openings and remodels in Southern California, as
well as the Company's own new store openings and conversions.
Gross Profit
Gross profit increased as a percentage of sales from 16.9 percent in the 31
weeks ended January 29, 1995 to 19.6 percent in the 52 weeks ended January 28,
1996. The increase in gross profit margin was primarily attributable to the
addition of 174 conventional supermarkets which diluted the effect of Holdings'
warehouse stores (which have lower gross margins than Holdings' conventional
supermarkets) on its overall gross margin for the period. Gross profit was also
impacted by certain one-time costs associated with the integration of Holdings'
operations. See "Operating Income (Loss)."
Selling, General, Administrative and Other, Net
SG&A expenses were $222.4 million and $785.6 million for the 31 weeks ended
January 29, 1995 and the 52 weeks ended January 28, 1996, respectively. SG&A
increased as a percentage of sales from 14.3 percent to 18.1 percent 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 Holdings' warehouse
stores (which have lower SG&A than Holdings' conventional supermarkets) on its
SG&A margin for the period. Holdings participates in multi-employer health and
welfare plans for its store employees who are members of the United Food and
Commercial Workers Union ("UFCW"). As part of the renewal of the Southern
California UFCW contract in October 1993, employers contributing to UFCW health
and welfare plans received a pro rata share of the excess reserves in the plans
through a reduction of current employer contributions. Holdings' share of the
excess reserves recognized in fiscal 1995 was $26.1 million, which partially
offset the increase in SG&A. SG&A was also impacted by certain one-time costs
associated with the integration of Holdings' operations. See "-- Operating
Income (Loss)."
Restructuring Charge
During fiscal 1995, Holdings recorded a $75.2 million charge associated
with the closure of 58 stores formerly owned by Food 4 Less and one former Food
4 Less warehouse facility. Twenty-four of these stores were required to be
closed pursuant to a settlement agreement with the State of California in
connection with the Merger. Three RGC stores were also required to be sold.
Thirty-four of the closed stores were under-performing stores formerly owned by
Food 4 Less. The $75.2 million restructuring charge consisted of write-downs of
property and equipment ($52.2 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). During fiscal year 1995, Holdings 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). The charges consisted
of write-downs of property and equipment ($33.2 million); write-off of the Alpha
Beta trademark ($8.3 million); and expenditures associated with the closed
stores and the warehouse facility, write-off of other assets, lease termination
expenditures and miscellaneous expenditures ($8.5 million). Future lease
payments
30
<PAGE> 34
of approximately $19.1 million will be offset against the remaining reserve.
Management believes that the remaining reserve is adequate to complete the
planned restructuring.
On December 29, 1995, the Company entered into an agreement with 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, at an annual rent of approximately $8.8 million. Concurrently with
such agreement, the Company also acquired certain operating assets and inventory
at that facility for a purchase price of approximately $20.2 million. 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
year 1996. Also, the Company closed nine of its stores which were near the
acquired former Smith's stores. During the fourth quarter of fiscal year 1995,
Holdings recorded an additional $47.9 million restructuring charge to recognize
the cost of closing these facilities, consisting of write-downs of property and
equipment ($16.1 million), closure costs ($2.2 million), and lease termination
expenses ($29.6 million).
Operating Income (Loss)
In addition to the factors discussed above, operating income includes
charges of approximately $75 million for costs associated with the conversion of
stores and integration of Holdings' operations. These costs related primarily to
(i) markdowns on clearance inventory at Food 4 Less' Alpha Beta, Boys and Viva
stores converted to the Ralphs format, (ii) an advertising campaign announcing
the Merger, and (iii) incremental labor cost associated with the training of
Holdings personnel following store conversions. In addition, Holdings has
experienced higher than anticipated warehousing and distribution costs since the
Merger, primarily due to the delay in the planned consolidation of Holdings'
distribution facilities resulting from the acquisition of the Smith's Riverside
distribution center. Holdings has taken steps to reduce these increased costs in
future periods.
Interest Expense
Interest expense (including amortization of deferred financing costs) was
$48.4 million for the 31 weeks ended January 29, 1995 and $202.7 million for the
52 weeks ended January 28, 1996. The increase in interest expense was primarily
due to the increased indebtedness incurred in conjunction with the Merger. See
"Liquidity and Capital Resources."
Loss Before Extraordinary Charge
Primarily as a result of the factors discussed above, Holdings' loss before
extraordinary charge increased from $17.6 million for the 1995 transition period
to $284.0 million for fiscal year 1995.
Extraordinary Charge
An extraordinary charge of $38.4 million was recorded during fiscal year
1995 relating to retirement of indebtedness of Food 4 Less in connection with
the Merger and the write-off of the related deferred financing costs.
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 percent from $2,742.0 million in the
52 weeks ended June 26, 1993 to $2,585.2 million in the 52 weeks ended June 25,
1994. The decrease in sales resulted primarily from a 6.9 percent decline in
comparable store sales. The decline in comparable store sales primarily
reflected (i) the weak 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 promotional activity. This
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<PAGE> 35
decrease in sales was partially offset by sales from new and remodeled stores
opened or acquired during fiscal 1994.
Gross Profit
Gross profit increased as a percent of sales from 17.7 percent in the 52
weeks ended June 26, 1993 to 18.1 percent in the 52 weeks ended June 25, 1994.
The increase in gross profit margin was attributable to improvements in product
procurement and an increase in vendors' participation in Holdings' promotional
costs. These improvements were partially offset by an increase in the number of
warehouse format stores (which have lower gross margins) 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 expenses were $434.9 million and $388.8 million for fiscal year 1993
and fiscal year 1994, respectively. SG&A decreased as a percent of sales from
15.9 percent to 15.0 percent for the same periods. Holdings experienced a
reduction of workers' compensation and general liability self-insurance costs of
$18.2 million due primarily to cost control programs implemented by Holdings,
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 Holdings' exposure. In
addition, Holdings maintained tight control of administrative expenses and store
level expenses, including payroll (due primarily to increased productivity),
advertising, and other controllable store expenses. Because Holdings' 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.
Holdings recognized $8.1 million in fiscal 1994 for its share of the excess
UFCW health and welfare plan reserves. Offsetting the reduction in employer
contributions was a $5.5 million contract ratification bonus and contractual
wage increases.
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.
Interest Expense
Interest expense (including amortization of deferred financing costs)
increased $3.4 million from $73.6 million to $77.0 million for the 52 weeks
ended June 26, 1993 and June 25, 1994, respectively. The increase in interest
expense is due to additional indebtedness from the issuance in December 1992 of
Holdings' Senior Discount Notes due 2004, partially offset by reduced borrowings
under Holdings' revolving and term loans.
Provision for Earthquake Losses
On January 17, 1994, Southern California was struck by a major earthquake
which resulted in the temporary closure of 31 of Holdings' 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. Holdings is
insured against earthquake losses (including business interruption), subject to
certain deductibles. The pre-tax loss, net of insurance recoveries, 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.
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RESULTS OF OPERATIONS OF RSI
The following table sets forth the historical operating results of RSI for
the 52 weeks ended January 30, 1994 ("Fiscal 1993") and January 29, 1995
("Fiscal 1994"):
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------
JANUARY 30, 1994 JANUARY 29, 1995
------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales.................................................. $2,730.2 100.0% $2,724.6 100.0%
Cost of sales.......................................... 2,093.7 76.7 2,101.0 77.1
Selling, general and administrative expenses........... 471.0 17.2 467.0 17.2
Operating income(a).................................... 152.1 5.6 145.6 5.3
Net interest expense................................... 108.8 4.0 112.7 4.1
Provision for earthquake losses(b)..................... 11.0 0.4 -- --
Income tax expense (benefit)........................... (108.0) (4.0) -- --
Net earnings........................................... $ 138.4 5.1 $ 32.1 1.2
</TABLE>
- ---------------
(a) Operating income reflects a charge of $2.4 million in Fiscal 1993 for
expenses relating to closing of central bakery operation. The charge
reflected a portion of the 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 RSI'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 29,
1995 WITH RSI'S 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, RSI 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. RSI's
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. RSI
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 RSI Savings Plan in February 1994, a new marketing
campaign specifically designed to enhance customer value. See
"Business -- Advertising and Promotion."
On January 17, 1994, an earthquake in Southern California caused
considerable damage in Los Angeles and surrounding areas. Several RSI
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. RSI 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 RSI
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.
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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
RSI's ASRS and PSC facilities along with the ongoing implementation of new
computer-controlled 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 RSI's warehousing costs of non-perishable items
markedly, enabling it to take advantage of advance buying opportunities and
minimize "out-of-stocks." RSI 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 RSI's warehouse distribution costs.
Over the last several years, RSI has been implementing modifications in its
workers compensation and general liability insurance programs. RSI 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 RSI 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
SG&A expenses 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 RSI. RSI 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.
RSI 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 pro rata share of excess reserve in these health care benefit plans
through a reduction in current maintenance payments. RSI's 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.
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<PAGE> 38
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 RSI 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, RSI 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 RGC 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 RSI's indebtedness that impose
limitations on the declaration or payment of dividends. RSI's 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.
LIQUIDITY AND CAPITAL RESOURCES
Holdings utilized new financing proceeds of approximately $525 million,
which were paid to the former RSI stockholders, to consummate the Merger. The
new financing proceeds included the issuance of preferred stock by Holdings to
the 1995 Equity Investors for cash proceeds of approximately $140 million. In
addition, the Company entered into the New Credit Facility pursuant to which,
upon the closing of the Merger, it incurred $600 million under the New Term
Loans and approximately $91.6 million of standby letters of credit under the
$325 million New Revolving Facility. The Company also issued $350 million
aggregate principal amount of new 10.45% Senior Notes due 2004 (the "1995 Senior
Notes") and $100 million aggregate principal amount of new 11% Senior
Subordinated Notes due 2005 (the "1995 11% Senior Subordinated Notes") pursuant
to public offerings (the "Public Offerings").
The proceeds from the New Credit Facility, Public Offerings and the 1995
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 consideration for the Merger and for associated fees and
$131.5 million aggregate principal
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<PAGE> 39
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
Food 4 Less and $228.9 million at RGC, existing mortgage debt of $174.0 million
(excluding prepayment fees) at RGC and $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
also were used (i) to pay the cash portions of Food 4 Less' exchange offers and
consent solicitations with respect to the 10.25% Senior Subordinated Notes due
2002 of RGC (the "Old RGC 10.25% Notes"), the 9% Senior Subordinated Notes due
2003 of RGC (the "Old RGC 9% Notes," and together with the old RGC 10.25% Notes,
the "Old RGC Notes") (collectively, the "RGC Exchange Offers"), the 10.45%
Senior Notes due 2000 of Food 4 Less (the "1992 Senior Notes") and the 13.75%
Senior Subordinated Notes due 2001 of Food 4 Less (the "1991 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, (ii) to pay $17.8 million to the holders of the RGC
Equity Appreciation Rights, (iii) to loan $5.0 million to an affiliate for the
benefit of such holders, (iv) to pay approximately $93.3 million of fees and
expenses of the Merger and the related financing, and (v) to pay $3.5 million to
purchase shares of common stock of Holdings from certain dissenting
shareholders. In addition, Holdings issued $22.5 million of its New Discount
Debentures in consideration for certain Merger-related services. The Company
assumed certain existing indebtedness of Food 4 Less and RGC in connection with
the Exchange Offers, pursuant to which (i) holders of the Old RGC Notes
exchanged approximately $424.0 million aggregate principal amount of Old RGC
Notes for an equal principal amount of 1995 11% Senior Subordinated Notes, (ii)
holders of the 1992 Senior Notes exchanged approximately $170.3 million
aggregate principal amount of 1992 Senior Notes for an equal principal amount of
1995 Senior Notes, and (iii) holders of the 1991 Senior Subordinated Notes
exchanged approximately $140.2 million aggregate principal amount of 1991 Senior
Subordinated Notes for an equal principal amount of new 13.75% Senior
Subordinated Notes due 2005 (the "1995 13.75% Senior Subordinated Notes"). In
addition, pursuant to the terms of the indentures governing the Old RGC Notes,
the consummation of the Merger required the Company to make an offer to purchase
all of the outstanding Old RGC Notes that were not exchanged in the RGC Offers
(the "Change of Control Offer"). The Change of Control Offer resulted in the
purchase of an additional $1.1 million of outstanding Old RGC Notes.
At July 14, 1996, there were borrowings of $79.7 million under the New
Revolving Facility and $86.5 million of letters of credit had been issued. Under
the terms of the New Credit Facility, the Company was required to repay $1.6
million of the New Term Loans in fiscal 1995. The New Term Loans require
quarterly amortization payments (after giving effect to application of the
proceeds of the offering of the 1996 Senior Notes) aggregating $2.3 million in
fiscal year 1996, $39.2 million in fiscal year 1997 and increasing thereafter.
The level of borrowings under the Company's New Revolving Facility is dependent
upon cash flows from operations, the timing of disbursements, seasonal
requirements and capital expenditure activity. The Company is required to reduce
loans outstanding under the New Revolving Facility to $150.0 million for a
period of not less than 30 consecutive days during the period between the first
day of the fourth fiscal quarter of 1996 and the last day of the first fiscal
quarter of 1997. On June 6, 1996, the Company issued $100 million aggregate
principal amount of its 10.45% Senior Notes due 2004 (the "1996 Senior Notes").
The estimated net proceeds of the offering of the 1996 Senior Notes were used to
prepay $44.4 million in borrowings under the New Term Loans, including $22.7
million in principal installments due within the twelve months following the
offering of the 1996 Senior Notes, and to repay $47.6 million in borrowings
under the New Revolving Facility, without any reduction in amounts available for
future borrowing under the New Revolving Facility. At July 14, 1996, Holdings
had $158.8 million available for borrowing under the New Revolving Facility.
On October 11, 1995, the Company entered into an interest rate collar which
effectively set interest rate limits on $300 million of the Company's bank term
debt. This interest rate collar, which was effective as of October 19, 1995,
limits the interest rate payable on $300 million of outstanding debt under the
New Credit Facility to a range of 4.5 percent to 8.0 percent for two years, thus
satisfying the interest rate protection requirements under the New Credit
Facility.
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<PAGE> 40
Cash flow from operations, amounts available under the New Revolving
Facility and lease financing are Holdings' principal sources of liquidity.
Holdings believes that these sources will be adequate to meet its anticipated
capital expenditure, working capital and debt service requirements during fiscal
1996.
During fiscal year 1995, cash used by operating activities was
approximately $16.8 million as compared to cash provided by operating activities
of approximately $17.6 million for the 1995 transition period. The decrease in
cash from operating activities is due to changes in operating assets and
liabilities in fiscal year 1995 and a decrease in operating income due primarily
to the impact of certain costs associated with the integration of Holdings'
operations subsequent to the Merger. Holdings' principal use of cash in its
operating activities is inventory purchases. Holdings' high inventory turnover
allows it to finance a substantial portion of its inventory through trade
payables, thereby reducing its short-term borrowing needs. At January 28, 1996,
this resulted in a working capital deficit of $178.5 million.
Cash used for investing activities was $505.4 million for fiscal year 1995.
Investing activities consisted primarily of $403.3 million of acquisition costs
associated with the Merger and capital expenditures of $122.4 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 operating and financing activities.
The capital expenditures discussed above were made to (i) build 20 new
stores (11 of which have been completed), (ii) remodel 11 stores, (iii) convert
111 conventional format stores to the Ralphs banner in conjunction with the
Merger, and (iv) convert 13 Ralphs stores to the Food 4 Less warehouse format.
Holdings also acquired three stores in Northern California during fiscal 1995.
Holdings currently anticipates that its aggregate capital expenditures for
fiscal 1996 will be approximately $105.0 million (or $95.0 million, net of
expected capital leases), of which approximately $96.0 million relate to ongoing
expenditures for new stores, equipment and maintenance (including a project to
repair earthquake damage at Holdings' Glendale "picking" warehouse) and
approximately $9.0 million relate to Merger-related and other non-recurring
items. Consistent with past practices, Holdings intends to finance these capital
expenditures primarily with cash provided by operations and through leasing
transactions. At July 14, 1996, Holdings had approximately $2.8 million of
unused equipment leasing facilities. 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 Holdings 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 future
operating strategy. Consequently, management believes 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 Holdings could make to expand within its existing markets or
to enter other markets. Holdings 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. Holdings 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 provided by financing activities was $570.7 million for fiscal year
1995. Financing activities consisted primarily of proceeds from issuance of new
debt in the amount of $1,105.5 million, including proceeds of $600 million under
the New Credit Facility, $350 million from the issuance of 1995 Senior Notes and
$100 million from the issuance of 1995 11% Senior Subordinated Notes, net of
issuance costs of $100.0 million. These sources were partially offset by
principal payments on long-term debt of $661.1 million including: $125.7 million
to retire borrowings under the old credit agreement, $228.9 million to
extinguish the old RGC term loan; and $174.0 million to repay certain real
estate loans.
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At July 14, 1996, Holdings had outstanding $115.3 million initial accreted
value of New Discount Debentures and $150.1 million principal amount of Seller
Debentures. Holdings is a holding company which has no assets other than the
capital stock of the Company. 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,
the Company intends to make dividend payments to Holdings in amounts which are
sufficient to permit Holdings to service its cash interest requirements. The
Company may pay other dividends to Holdings in connection with certain employee
stock repurchases and for routine administrative expenses.
RSI and Food 4 Less had significant net operating loss carryforwards for
regular federal income tax purposes. As a result of the Merger, Holdings'
ability to utilize such loss carryforwards in future periods is limited to
approximately $15.6 million per year with respect to Food 4 Less net operating
loss carryforwards and approximately $15.0 million per year with respect to
RSI's net operating loss carryforwards. Holdings files a consolidated federal
income tax return, under which the federal income tax liability of Holdings and
its subsidiaries is determined on a consolidated basis. Holdings is a party to 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 Holdings and has taxable income, the Company will pay to Holdings
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
Holdings and its other subsidiaries, Holdings will credit to the Company the
amount of such reduction in the consolidated tax liability. These credits are
passed between Holdings 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 Holdings and the Company of such state and local taxes. See "Certain
Relationships and Related Transactions." The Company will continue to be a party
to an indemnification agreement with Federated Department Stores, Inc. and
certain other parties. Pursuant to the terms of such agreement, the Company made
an annual tax payment of $1.0 million in 1995 and will make an annual tax
payment of $1.0 million in 1996, with the final tax payment of $5.0 million in
1997.
Holdings is highly leveraged. At July 14, 1996, Holdings' total
indebtedness (including current maturities) and stockholder's deficit were
$2,344.4 million and $258.2 million, respectively, and Holdings had an
additional $158.8 million available to be borrowed under the New Revolving
Facility. Based upon current levels of operations, anticipated cost savings from
the Merger 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 lease financing), will be adequate
to meet its anticipated requirements for working capital, capital expenditures,
interest payments and scheduled principal payments over the next several years.
There can be no assurance, however, that Holdings' 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
Holdings' 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, Holdings 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. Holdings' 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. Holdings
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate.
38
<PAGE> 42
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal year 1996, Holdings 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 Holdings' financial position or on its
results of operations.
39
<PAGE> 43
BUSINESS
Ralphs Grocery Company (the "Company"), formerly known as Food 4 Less
Supermarkets, Inc. ("Food 4 Less"), a wholly-owned subsidiary of Food 4 Less
Holdings, Inc. ("Holdings"), is a retail supermarket company with a total of 402
stores which are located in Southern California (340), Northern California (26)
and certain areas of the Midwest (36). The Company is the largest supermarket
company in Southern California. The Company operates 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.
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 a bakery and creamery operations, and full-line warehouse and
distribution facilities servicing its Southern California operations.
On June 14, 1995, Holdings acquired all of the common stock of Ralphs
Supermarkets, Inc. ("RSI") in a transaction accounted for as a purchase by Food
4 Less. 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"). Food 4 Less, 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.
Food 4 Less was organized by The Yucaipa Companies ("Yucaipa"), a private
investment group, in connection with the June 1989 acquisition of Breco Holding
Company, Inc. ("BHC"), which owned Boys, Viva, and Cala stores. Concurrently
with the acquisition of BHC (the "BHC Acquisition"), Food 4 Less, Inc. ("FFL"),
a corporation controlled by an affiliate of Yucaipa, contributed to Food 4 Less
all of the outstanding capital stock of Falley's, Inc. ("Falley's"), which owned
Food 4 Less' Midwestern stores and its Food 4 Less Southern California stores.
Food 4 Less added six stores to its Northern California Division by acquiring
Bell Markets, Inc. ("Bell") on June 30, 1989, and added seven stores to its
Southern California Division by acquiring certain operating assets of ABC Market
Corp. ("ABC") on January 15, 1990. On June 17, 1991, Food 4 Less acquired all of
the outstanding capital stock of Alpha Beta Company ("Alpha Beta"), which
operated 142 stores in seven Southern California counties (the "Alpha Beta
Acquisition"). On March 29, 1994, Food 4 Less added ten warehouse format stores
(formerly operated under the name "Food Barn") to its Midwestern Division which
it acquired from Associated Wholesale Grocers, Inc.
The Company operates both conventional and warehouse format stores under
various names. The following table sets forth by retail format the number of
stores operated by each of the Company's three divisions at July 14, 1996:
<TABLE>
<CAPTION>
SOUTHERN NORTHERN
CALIFORNIA CALIFORNIA MIDWESTERN TOTAL
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Ralphs.............................. 264 -- -- 264
Cala................................ -- 8 -- 8
Bell................................ -- 13 -- 13
Falley's............................ -- -- 5 5
-- --
--- ---
Total Conventional............. 264 21 5 290
Food 4 Less......................... 76 -- 31 107
FoodsCo............................. -- 5 -- 5
-- --
--- ---
Total Warehouse................ 76 5 31 112
-- --
--- ---
Total Stores................... 340 26 36 402
=== == == ===
</TABLE>
40
<PAGE> 44
SOUTHERN CALIFORNIA DIVISION
The Southern California Division operates 340 supermarkets in eight
counties under the names "Ralphs" and "Food 4 Less." The Company's Southern
California stores account for approximately 90 percent of the Company's sales.
The combination of RGC and Food 4 Less has created the largest food
retailer in Southern California. Since the Merger, the Company has consolidated
all of its stores in the region under its two leading complementary formats. The
Company operates the second largest conventional supermarket chain in the region
under the "Ralphs" name and the largest price impact warehouse supermarket chain
under the "Food 4 Less" name. Management believes the consolidation of its
formats in Southern California has improved 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.
Ralphs Conventional Format. The Company operates 264 Ralphs stores in
Southern California. All of the Company's conventional stores in the region use
the "Ralphs" name and are operated under a single format. Each store is
merchandised to appeal to the local community it serves and offers competitive
pricing with emphasis on overall value. 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. 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
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 many in-store branch banks) and 24-hour operations in most
stores.
Food 4 Less Warehouse Format. The Company operates 76 stores in Southern
California which target the price-conscious segment of the market in both urban
and suburban areas under the name "Food 4 Less." Food 4 Less is a
warehouse-style, price impact store which is positioned to offer the lowest
overall prices in its marketing areas by passing on to the consumer savings
achieved through labor efficiencies and lower overhead and advertising costs
associated with the warehouse format, while providing the product selection and
variety associated with a conventional 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 unpacking, and customers
bag their own groceries. Labor costs are also reduced because the stores
generally do not have labor-intensive 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.
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 the sales floor
are used to store inventory, which 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. Management believes that there is a
significant segment of the market, encompassing a wide range of demographic
groups, which prefers to shop in a warehouse format supermarket because of its
lowest overall pricing. The Company plans to continue its rapid growth of the
Food 4 Less format by opening 10 new warehouse format stores in fiscal 1996,
seven of which were acquired from Smith's.
ADVERTISING AND PROMOTION
As a result of the consolidation of conventional format stores in Southern
California under the "Ralphs" name, the Company eliminated 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
41
<PAGE> 45
California region, the Company will be able to expand the number of Ralphs
stores without significantly increasing advertising costs.
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." The Ralphs Savings Plan, a marketing campaign designed to
enhance customer value, 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 campaign, Ralphs'
private label offering of approximately 2,800 products provides value to the
customer.
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.
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.
WAREHOUSING AND DISTRIBUTION
In March 1996, the Company commenced operations in a state-of-the-art
distribution and creamery facility located in Riverside, California which was
acquired from Smith's (the "Riverside Facility"). The technologically-advanced
90-acre complex is expected to improve the quality, service and productivity of
the Company's distribution and manufacturing operations. The Riverside Facility
has more than one million square feet of warehousing and manufacturing space
consisting of a 675,000 square foot dry grocery service center, 270,000 square
foot refrigerated and frozen food facility and a 115,000 square foot creamery
facility. The Riverside Facility sublease runs for approximately 23 years, with
renewal options through 2043, and provides for annual rent of approximately $8.8
million. The Company also acquired certain operating assets and inventory at the
Riverside Facility when it entered into the sublease for a purchase price of
approximately $20.2 million.
The acquisition of the Riverside Facility allows the Company to consolidate
distribution into three modern, efficient facilities located in Compton,
Glendale and Riverside, California. This consolidation is being accomplished by
closing the Company's La Habra warehouse, Carson warehouse, Long Beach Avenue
warehouse and the Slauson frozen food warehouse, as well as several other
outside frozen food, deli and general merchandise facilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation." The
elimination of the smaller and less efficient warehouse facilities will reduce
transportation between facilities, management overhead and outside storage
costs. Moreover, the consolidation will enable better inventory management,
which is expected to result in the reduction of inventory levels. The Riverside
Facility is also expected to reduce previously planned capital expenditures. The
consolidation of the Company's distribution facilities is expected to be
completed by the third quarter of fiscal year 1996, resulting in greatly
strengthened and streamlined backstage operations.
The Riverside Facility also increases distribution capacity of the Company
by increasing storage capacity to 120,000 pallets and increasing the assortment
of items that are internally supported (increasing dry grocery from 10,000 to
14,000 SKUs and perishable and frozen items by 1,500 SKUs).
The Company also operates a 17 million cubic foot high-rise automated
storage and retrieval system ("ASRS") warehouse for non-perishable items, near
Glendale, California. The automated warehouse has a
42
<PAGE> 46
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's Glendale "picking" warehouse
was damaged in the Northridge earthquake and is scheduled to undergo renovation
in the current fiscal year. Its operations will be transferred to the Riverside
Facility during the renovation period. The ASRS facility can hold substantially
more inventory and requires fewer employees to operate than a conventional
warehouse of equal size.
The Company's third major Southern California distribution center is its
5.4 million cubic foot facility in Compton, California designed to process and
store all perishable products (the "Perishables Service Center" or "PSC"). This
facility was constructed in 1992 and has enabled the Company to have the ability
to deliver perishable products to its stores on a daily basis, thereby improving
the freshness and quality of these products.
Combined shipments from the Company's Southern California warehouse
facilities accounted for approximately 75 percent of the Southern California
Division's total purchases during the 52 weeks ended January 28, 1996.
Additional purchases, consisting of mostly general merchandise, approximating 2
percent of the division's total during this same period, were made through
Certified Grocers of California, Ltd. ("Certified"), a food distribution
cooperative in which the Company is a member.
The Company is party to a joint venture with a subsidiary of Certified
which operates a general merchandise warehouse in Fresno, California. Management
is continuing to evaluate the role of such warehouse in the operation of the
combined Company.
MANUFACTURING
The Riverside Facility's creamery is the production point for all fluid
milk products bound for sale in the Company's Food 4 Less warehouse stores.
Bottled water, fruit juice and ice for the entire Company will also be processed
and packaged at the Riverside creamery. Milk bound for the Company's Ralphs
conventional stores, as well as all ice cream and ice cream products, will
continue to be processed at the Company's existing creamery in Compton,
California. The Compton facility also processes selected delicatessen items,
including packaged salads and cheese, and produces cultured products including
sour cream and yogurt.
In addition to the foregoing facilities, the Company will continue to
operate a 316,000 square foot bakery in La Habra, California to manufacture a
broad line of baked goods.
PRIVATE LABEL PROGRAM
Through its private label program, the Company offers a diverse array of
grocery and general merchandise items under its own brand names which include
"Ralphs," "Private Selection," "Perfect Choice," "Plain Wrap" and "Equality."
The Company has entered into several private label licensing arrangements which
allow it to utilize recognized brand names on an exclusive basis 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, the Company has entered into an agreement to distribute
private label dry grocery and frozen products under the "Sunny Select" and
"Grocers Pride" labels. The Company's private label products provide quality
comparable to that of national brands at significantly lower prices, while the
Company's gross margins on private label products are generally higher than on
national brands. The Company believes that its private label program is one of
the most successful in the supermarket industry, and the Company intends to
continue the growth of its private label program in the future.
STORE OPERATIONS AND RETAIL SYSTEMS
The Southern California Division's store equipment and facilities are
generally in excellent condition. The Ralphs stores range in size from
approximately 15,600 square feet to 69,500 square feet and average approximately
35,300 square feet. The Southern California Food 4 Less stores are generally
larger and range
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<PAGE> 47
in size from approximately 27,400 square feet to 84,300 square feet, and average
approximately 49,700 square feet. The Company believes the Southern California
Division's warehouse and distribution system and the design of its stores permit
the Company to decrease in-store stockroom space and thereby increase available
selling area.
The Southern California Division's management information systems and
optical scanning technology reduce the labor costs attributable to product
pricing and customer check-out, and provide the Company's management with
information that facilitates purchasing and receiving, inventory management,
warehouse reordering and management of accounts payable. All of the Company's
Southern California Division stores currently offer an electronic funds transfer
system which allows customers to make purchases, obtain cash or check approvals
in transactions linked to their bank accounts. In addition, the Company's stores
now offer customers the convenience of making purchases with major credit cards.
EXPANSION AND DEVELOPMENT
As a result of Ralphs' 123-year history and Alpha Beta's 92-year history in
Southern California, the Company has valuable and well-established store
locations, many of which are in densely populated metropolitan areas.
Additionally, the Company has a technologically advanced store base. During
fiscal 1995, the Company acquired 174 stores through the Merger, opened 6 new
Food 4 Less stores and 5 new Ralphs stores in Southern California, converted 124
stores from Alpha Beta, Boys and Viva formats to the Ralphs and Food 4 Less
formats, closed 44 stores and remodeled 11 stores.
The Company plans to expand the Southern California Division by opening new
stores as well as replacing older and smaller stores. The Company intends to
continue to focus its new store construction and store conversion efforts during
fiscal 1996 and future years on the Food 4 Less format, which has proven to have
a strong appeal to value conscious consumers across a wide range of demographic
groups. To this end, the Company plans to continue its store expansion program
in Southern California by opening 25 new stores during fiscal 1996 (including
the nine stores acquired from Smith's, seven of which will be Food 4 Less
stores), and additional stores in subsequent years. During fiscal year 1996, in
Southern California, the Company plans to remodel 21 conventional format stores
and 4 of the warehouse format stores. The Company's merger, 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."
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, there is competition for new
store sites, and it is possible that this competition might adversely affect the
timing of its new store program. From time to time, the Company also closes or
sells marginal stores.
NORTHERN CALIFORNIA AND MIDWESTERN DIVISIONS
The Northern California Division of Food 4 Less operates 21 conventional
supermarkets in the greater San Francisco Bay area under the "Cala" and "Bell"
names, and five warehouse format stores under the "FoodsCo" name. Management
believes that the Northern California Division has excellent store locations in
the city of San Francisco that would be very difficult to replicate. The
Midwestern Division of Food 4 Less operates 36 stores, of which 31, 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 36
stores, 32 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
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<PAGE> 48
Midwestern Division and the FoodsCo 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 8,500 square feet to 32,500 square feet, and average
approximately 19,500 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 41,800 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 37,900 square feet.
The Northern California Division purchases merchandise from a number of
suppliers; however, approximately 36 percent 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.
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 70 percent 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 percent of all
case-ready fresh meat items sold in its stores at its central meat plant located
in Topeka, Kansas.
Since the beginning of fiscal 1991, the Northern California Division has
remodeled 13 stores, opened six new stores and, in fiscal 1995, acquired three
stores from Roger Wilco, now operated as Bell stores. The Northern California
Division Food 4 Less warehouse stores were renamed as FoodsCo warehouse stores
in fiscal 1994 following the sale by the Company of the exclusive rights to use
the "Food 4 Less" name in Northern California to Fleming Companies, Inc., which
previously held a non-exclusive license. See "Licensing Operations" for further
discussion of the amendment to the Fleming license.
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 28 at June 26, 1993 to 38 at January 28, 1996. During the last
five fiscal years, the Midwestern Division has opened two new stores, acquired
ten stores, closed three stores and remodeled eight stores. While the Company
has no definitive plans to construct or acquire new stores in the Midwestern
Division in fiscal 1996, the Company intends to focus future expansion there on
its Food 4 Less 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.
The Southern California Division competes with several large national and
regional chains, principally Albertsons, Hughes, Lucky, 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 Albertson's and Dillons, as well as independent
grocery and "alternative format" stores such as Hypermarket USA. The Company
positions its warehouse format supermarkets as the overall low-price leaders in
each marketing area in which they operate.
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<PAGE> 49
EMPLOYEES
The Company believes that its relationship with its employees is excellent.
At January 28, 1996, the Company had a total of 30,101 employees, as shown in
the table below.
<TABLE>
<CAPTION>
SOUTHERN NORTHERN
CALIFORNIA CALIFORNIA MIDWESTERN TOTAL
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Administrative............................ 1,573 64 41 1,678
Warehouse, manufacturing and
transportation.......................... 3,318 -- 61 3,379
Stores.................................... 21,540 2,123 1,381 25,044
------ ----- ----- ------
Total........................... 26,431 2,187 1,483 30,101
====== ===== ===== ======
</TABLE>
Of the Company's 30,101 total employees at January 28, 1996, there were
26,369 employees covered by union contracts, principally with the United Food
and Commercial Workers Union (the "UFCW"). The table below sets forth
information regarding the Company's union contracts which cover more than 100
employees.
<TABLE>
<CAPTION>
DATE(S) OF
UNION NUMBER OF EMPLOYEES COVERED EXPIRATION
<S> <C> <C>
UFCW 15,737 Southern California October 3, 1999
Division clerks and meatcutters
Hospital and Service Employees 606 Southern California January 19, 1997
Division store porters
International Brotherhood of Teamsters 2,802 Southern California September 13, 1998
Division drivers and
warehousemen
UFCW 2,034 Northern California March 7, 1998
Division clerks and meatcutters
UFCW 3,708 Southern California February 26, 2000
Division clerks and meatcutters
Bakery and Confectionery Workers 219 Southern California February 9, 1997
Division bakers
</TABLE>
LICENSING OPERATIONS
The Company owns the "Food 4 Less" trademark and service mark and licenses
the "Food 4 Less" name for use by others. In fiscal 1995, earnings from
licensing operations were approximately $328,000. 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, the Company amended its
licensing agreement with Fleming to give Fleming exclusive use of the Food 4
Less name in Northern California and the Company exclusive use in Southern
California (the "Amendment"). With the exception of Northern California, and
subject to the Amendment and certain proximity restrictions, the Company retains
the right to open and operate its own "Food 4 Less" warehouse supermarkets
throughout the United States. As of January 28, 1996, there were 174 Food 4 Less
warehouse supermarkets in 15 states, including the 99 stores owned or leased and
operated by the Company. Of the remaining 75 stores, Fleming operates 15 under
license, 15 are operated under sublicenses from Fleming and 45 are operated by
other licensees.
46
<PAGE> 50
PROPERTIES
At January 28, 1996 the Company operated 408 supermarkets, as set forth in
the table below:
<TABLE>
<CAPTION>
NUMBER OF
SUPERMARKETS AVERAGE
---------------- TOTAL SQUARE FEET/
DIVISION OWNED LEASED SQUARE FEET FACILITY
------------------------------------------ ----- ------ ----------- ------------
<S> <C> <C> <C> <C>
Southern California....................... 60(a) 285 13,151,000 38,100
Northern California....................... -- 27 637,000 23,600
Midwestern................................ 2(b) 34 1,299,000 36,100
</TABLE>
- ---------------
(a) Includes fifteen stores located on real property subject to ground leases.
(b) Includes one store that is partially owned and partially leased.
Most of the Southern California Division's store locations are held
pursuant to long-term leases, many of which, in the opinion of management, have
below-market rental rates or other favorable lease terms. The average remaining
term (including all renewal options) of the Company's supermarket leases is
approximately 30 years.
In addition to the supermarkets, the Company operates three main warehouse
and distribution centers in Southern California. The newly acquired 90 acre
Riverside Facility has more than one million square feet of warehousing and
manufacturing space consisting of a creamery and several warehouses for dry
grocery, dairy/deli and frozen food storage. The Riverside Facility sublease
runs for approximately 23 years, with renewal options through 2043, and provides
for annual rent of approximately $8.8 million. The 170,000 square foot high-rise
automated storage and retrieval system warehouse ("ASRS") located in the Atwater
district of Los Angeles, near Glendale, California (which for ease of reference
is referred to throughout this Prospectus as the Glendale, California
warehouse), opened in 1987, handles non-perishable items, is ten stories high
and has a capacity of approximately 50,000 pallets. The Perishable Service
Center ("PSC") in Compton, opened in 1992, is a 5.4 million cubic foot facility
designed to process and store all perishable products.
The Company also has manufacturing operations located in Compton that
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. The bakery operation is located at the La Habra complex and
measures 316,000 square feet.
The Company's former central office, manufacturing and warehouse complex in
La Habra, California was leased for a term ending 2001. Due to the increase in
warehouse space, the La Habra distribution center and a number of smaller
warehouses used by the Company have become obsolete and it is expected that by
the third quarter of fiscal year 1996, the Company will have consolidated its
warehousing operations into the three main centers described above. The Company
has recorded a restructuring charge which includes a $29.6 million provision for
lease termination expenses in connection with the closure of the La Habra and
other warehouses (as well as certain other properties). See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
LEGAL PROCEEDINGS
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 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. Merits discovery
in these actions has been stayed pending discovery on class certification
issues. Most defendants in the actions, not including the Company, have reached
tentative settlement agreements, and certain of the settlements have been
approved by the trial court, subject to pending appeals. The Company is
continuing to actively defend itself in these class action suits.
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<PAGE> 51
The Company is 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 Company or its subsidiaries are defendants in a number of
other cases currently in litigation or are the subject of 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.
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 its ASRS warehouse property located near
Glendale. 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 the ASRS
grocery warehouse 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 Ralphs' grocery warehouse. Since that time, the Regional
Board has requested further investigation by Ralphs. Ralphs conducted the
requested investigations and 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 ASRS grocery
warehouse. The Company 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 its property. On or about October 12, 1995, the EPA mailed a
Special Notice Letter to 44 parties, including the Company as owner and operator
of the Glendale property, naming them as potentially responsible parties
("PRPs"). The Company and other PRPs have agreed to enter into negotiations over
a consent decree with the EPA to implement a remedial design and reimburse
oversight costs. The PRPs have also agreed to an Alternative Dispute Resolution
Process to allocate the costs among themselves. 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.
The Company removed underground storage tanks and remediated soil
contamination at the Glendale warehouse 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 grocery warehouse property, management does not believe that the
costs of remediating such contamination will be material to the Company.
Apart from the ASRS warehouse property, the Company has had environmental
assessments performed on most 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.
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 previously released hydrocarbons. In connection with the acquisition of
Alpha Beta, the seller (who is also the lessor of the La Habra facility) agreed
to retain responsibility, subject to certain limitations, for remediation of the
release.
The Company 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.
48
<PAGE> 52
MANAGEMENT
The following table sets forth certain information regarding the executive
officers and directors of the Holdings as of August 28, 1996. Directors serve
until the election and qualification of their successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ------------------------------------------------
<S> <C> <C>
Ronald W. Burkle 43 Chairman and Director
George G. Golleher 48 Chief Executive Officer and Director
Alfred A. Marasca 55 President and Chief Operating Officer
Joe S. Burkle 73 Chief Executive Officer -- Falley's and Director
Greg Mays 50 Executive Vice President -- Finance and
Administration and Chief Financial Officer
Jan Charles Gray 49 Senior Vice President, General Counsel and
Secretary
Byron E. Allumbaugh 64 Director
Robert Beyer 36 Director
Peter Copses 38 Director
Patrick L. Graham 46 Director
John Kissick 54 Director
Mark A. Resnik 49 Director
</TABLE>
Ronald W. Burkle has been Chairman and Director since June 1995. Mr. Burkle
was a Director, Chairman of the Board and Chief Executive Officer of Food 4 Less
from its inception in 1989 until the Merger. Mr. Burkle co-founded The Yucaipa
Companies, Inc. in 1986 and served as Director, Chairman of the Board, President
and Chief Executive Officer of FFL from 1987 and of Holdings from 1992 until the
Merger, respectively. Mr. Burkle has been Chairman of the Board of Dominick's
Finer Foods, Inc. since March 1995 and served as Chief Executive Officer from
March 1995 until January 1996. Mr. Burkle also served as Chairman of the Board
of Smitty's Supermarkets, Inc. from June 1994 until its merger in May 1996 with
Smith's Food & Drug Centers, Inc. ("Smith's"). Mr. Burkle now serves as a
Director and the Chief Executive Officer of Smith's. He has also served as a
Director of Kaufman & Broad Home Corporation, Inc. since March 1995. Mr. Burkle
is the son of Joe S. Burkle.
George G. Golleher has been Chief Executive Officer since January 1996 and
a Director since June 1995. He was Vice Chairman from June 1995 to January 1996.
He was a Director of Food 4 Less from its inception in 1989 and was the
President and Chief Operating Officer of Food 4 Less from January 1990 until the
Merger. From 1986 through 1989, Mr. Golleher served as Senior Vice
President -- Finance and Administration of The Boys Markets, Inc. Mr. Golleher
has served as a Director of Dominick's Finer Foods, Inc., an affiliate of The
Yucaipa Companies, since March 1995.
Alfred A. Marasca has been President and Chief Operating Officer since June
1995. He was President and Chief Operating Officer of RGC from February 1994
until the Merger. He was President of RGC from 1993 to 1994, Executive Vice
President -- Retail from 1991 to 1993, and Executive Vice President -- Marketing
from 1985 to 1991.
Joe S. Burkle has been a Director since June 1995 and Chief Executive
Officer of Falley's, Inc. since 1987. He was a Director and Executive Vice
President of Food 4 Less from its inception in 1989 until the Merger. 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 & Administration and
Chief Financial Officer since September 1995. He was Executive Vice
President -- Finance & Administration from June 1995 to September 1995. He was
Executive Vice President -- Finance & Administration and Chief Financial Officer
of Food 4 Less and of Holdings from December 1992 until the Merger. From 1989 to
1991, Mr. Mays was
49
<PAGE> 53
Chief Financial Officer of Almac's, Inc. and, from 1991 to December 1992, he was
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.
Jan Charles Gray has been Senior Vice President, General Counsel and
Secretary since June 1995. He was Senior Vice President, General Counsel and
Secretary of RGC from 1988 until the Merger. He was Senior Vice President and
General Counsel of RGC from 1985 to 1988 and Vice President and General Counsel
from 1978 to 1985.
Byron E. Allumbaugh has been a Director since June 1995. He was Chief
Executive Officer from June 1995 to January 1996. He was Chairman of the Board
and Chief Executive Officer of RGC from 1976 until the Merger. He also is a
Director of the Ahmanson Company, El Paso Natural Gas Company, Automobile Club
of Southern California and Ultramar, Inc.
Robert Beyer has been a Director since June 1995. He has been a Group
Managing Director of Trust Company of the West ("TCW") since 1995. Mr. Beyer was
Co-Chief Executive Officer of Crescent Capital Corporation, a registered
investment advisor, from 1991 until its acquisition by TCW in 1995. From 1986 to
1991, Mr. Beyer was a member of the investment banking department of Drexel
Burnham Lambert, Incorporated. From 1983 to 1986, Mr. Beyer was a member of the
investment banking department of Bear, Stearns & Co., Inc.
Peter Copses has been a Director since June 1995. He has been a Principal
since 1990 of Apollo Advisors, L.P. which, together with an affiliate, acts as
managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and
Apollo Investment Fund III, L.P., private securities investment funds, and of
Lion Advisors, L.P., which acts as financial advisor to and representative for
certain institutional investors with respect to securities investments. Mr.
Copses is a Director of Dominicks Finer Foods, Inc., Family Restaurants, Inc.,
Forum Group, Inc. and Zale Corporation.
Patrick L. Graham has been a Director since June 1995. He joined The
Yucaipa Companies 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 Paine Webber, Inc. from 1990 to 1992.
From 1982 to 1990, he was a Managing Director of the Corporate Finance
Department of Drexel Burnham Lambert, Inc. and an Associate Director of the
Corporate Finance Department of Bear Stearns & Co., Inc. Mr. Graham served as a
Director of Smitty's Supermarkets, Inc. from June 1994 until May 1996 and of
Dominick's Finer Foods, Inc. since March 1995.
John Kissick has been a Director since June 1995. He is a principal of
Apollo Advisors, L.P. which, together with an affiliate, acts as managing
general partner of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo
Investment Fund III, L.P., private securities investment funds, and of Lion
Advisors, L.P., which acts as financial advisor to and representative for
certain institutional investors with respect to securities investments. From
1990 to 1991, Mr. Kissick was a consultant with Kissick & Associates, a private
investment advisory firm. He serves as Director of Continental Graphics
Holdings, Inc., Converse, Inc., The Florsheim Shoe Company, Inc. and Furniture
Brands International, Inc.
Mark A. Resnik has been a Director since June 1995. He was a Director, Vice
President and Secretary of Food 4 Less from its inception in 1989 until the
Merger. He co-founded The Yucaipa Companies, Inc. in 1986 and served as a
Director, Vice President and Secretary of FFL from 1987 until the Merger. Mr.
Resnik has served as a Director of Smitty's Supermarkets, Inc. from June 1994
until May 1996 and of Dominick's Finer Foods, Inc. since March 1995.
Holdings does not currently pay any fees or remuneration to its directors
for service on the board or any board committee, but will reimburse directors
for their ordinary out-of-pocket expenses.
Messrs. R. Burkle, Golleher, J. Burkle, Allumbaugh, Beyer, Copses, Graham,
Kissick and Resnik are directors of the Company.
50
<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer and the other four most highly compensated executive
officers of Holdings (the "Named Executive Officers"), whose total salary and
bonus for the 52 weeks ended January 28, 1996 exceeded $100,000 for services
rendered in all capacities to Holdings and its subsidiaries for the same time
period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------------------------------
TRANSITION NO. OF SHARES
PERIOD/FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ENDED SALARY BONUS OPTIONS(6) COMPENSATION(7)
- ------------------------------ ---------------- -------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Byron E. Allumbaugh(1) January 28, 1996 $883,333 $ 547,692 820,227 $ 1,848
Chairman of the Company January 29, 1995(8) $ -- $ -- -- $ --
June 25, 1994 $ -- $ -- -- $ --
June 26, 1993 $ -- $ -- -- $ --
George G. Golleher(2) January 28, 1996 $503,205 $1,950,000(9) 200,000 $ 1,783
Chief Executive Officer January 29, 1995(8) $298,100 $ 300,000 -- $ 3,329
June 25, 1994 $500,000 $ 500,000 -- $ 3,937
June 26, 1993 $500,000 $ 500,000 -- --
Alfred A. Marasca(3) January 28, 1996 $466,667 $ 333,846 300,000 $ 3,000
President and January 29, 1995(8) $ -- $ -- -- $ --
Chief Operating Officer June 25, 1994 $ -- $ -- -- $ --
June 26, 1993 $ -- $ -- -- $ --
Greg Mays(4) January 28, 1996 $286,378 $ 355,000(9) -- $ 1,783
Executive Vice President -- January 29, 1995(8) $154,300 $ 85,000 -- $ 2,687
Finance/Administration and June 25, 1994 $250,000 $ 150,000 -- $ --
Chief Financial Officer June 26, 1993 $108,000 $ 75,000 -- $ --
Jan Charles Gray(5) January 28, 1996 $221,667 $ 147,901 204,940 $ 1,198
Senior Vice President,
General January 29, 1995(8) $ -- $ -- -- $ --
Counsel and Secretary June 25, 1994 $ -- $ -- -- $ --
June 26, 1993 $ -- $ -- -- $ --
</TABLE>
- ---------------
(1) During fiscal 1995, Byron E. Allumbaugh became Chairman of the Company.
(2) During fiscal 1995, George G. Golleher became Chief Executive Officer.
(3) During fiscal 1995, Alfred A. Marasca became President and Chief Operating
Officer.
(4) During fiscal 1995, Greg Mays became Executive Vice President - Finance &
Administration and Chief Financial Officer.
(5) During fiscal 1995, Jan Charles Gray became Senior Vice President, General
Counsel and Secretary.
(6) All options shown were granted in connection with the Merger. Of such
options, 220,227, 100,000 and 174,940 were granted to Messrs. Allumbaugh,
Marasca and Gray, respectively, in exchange for the cancellation of certain
payments to such individuals under RGC equity appreciation rights.
(7) The amounts shown in this column represent annual payments by Holdings to
the Employee Profit Sharing and Retirement Program of Holdings.
(8) Holdings changed its fiscal year from the 52 or 53-week period which ends on
the last Saturday in June to the 52 to 53-week period which ends on the
Sunday closest to January 31, resulting in a 31-week transition period.
(9) Includes payment of a special bonus upon change of control, in connection
with the Merger, for George Golleher and Greg Mays in the amount of
$1,750,000 and $150,000, respectively.
51
<PAGE> 55
The following table sets forth information concerning options granted in
fiscal 1995 to each of the Named Executive Officers pursuant to Holdings' 1995
Stock Option Plan. All options are exercisable for shares of Holdings' Common
Stock.
OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
INDIVIDUAL GRANTS OF STOCK PRICE
--------------------------------------------------------------- APPRECIATION
NO. OF % OF TOTAL OPTIONS EXERCISE OR FOR OPTION TERM
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION ----------------------
GRANTED(1)(2) IN FISCAL YEAR ($/SH) DATE 5% ($) 10%($)
------------- -------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Byron E. Allumbaugh... 820,227 34.1% 7.32 6/14/05 7,356,572 15,270,514
George G. Golleher.... 200,000 8.3% 10.00 6/14/05 1,257,789 3,187,484
Alfred A. Marasca..... 300,000 12.5% 6.67 6/14/05 2,885,684 5,780,227
Greg Mays............. -- -- -- -- -- --
Jan Charles Gray...... 189,940 7.9% 0.79 6/14/05 2,943,870 4,776,502
15,000 0.6% 10.00 6/14/05 94,334 239,061
</TABLE>
- ---------------
(1) All options shown were granted in connection with the Merger. Of such
options, 220,227, 100,000 and 174,940 were granted to Messrs. Allumbaugh,
Marasca and Gray, respectively, in exchange for the cancellation of certain
payments of such individuals under RGC equity appreciation rights.
(2) All options are immediately exercisable except for 15,000 options held by
Mr. Gray, which vest over a five-year period commencing June 14, 1996.
The following tables sets forth for each of the Named Executive Officers,
as to outstanding options at January 28, 1996, the number of unexercised options
and the aggregate unrealized appreciation on "in-the-money" unexercised options
held at such date. No options were exercised by any of the Named Executive
Officers during fiscal 1995.
1995 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
NAME EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/UNEXERCISABLE ($)
- --------------------------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Byron E. Allumbaugh.......................... 820,227/0 2,198,208/0
George G. Golleher........................... 200,000/0 0/0
Alfred A. Marasca............................ 300,000/0 999,000/0
Greg Mays.................................... -- --
Jan Charles Gray............................. 189,940/15,000 1,749,347/0
</TABLE>
CONSULTING AND EMPLOYMENT AGREEMENTS
The employment agreement between the Company and Byron Allumbaugh provides
for a salary of $1 million for the first year following the Merger and $1.25
million for subsequent years. Mr. Allumbaugh is entitled to a bonus equal to his
salary in each year if certain prescribed earnings targets (the "Earnings
Targets") for the year are reached.
In connection with the consummation of the Merger, Food 4 Less' board of
directors 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 then
existing employment agreement. As a condition of the payment of such bonus, Mr.
Golleher's existing employment agreement was cancelled, and he entered into a
new agreement which
52
<PAGE> 56
provides for an annual salary currently equal to $750,000 plus a bonus equal to
his salary in each year if the Earnings Targets are reached. Mr. Golleher's new
employment agreement continues in effect certain additional rights, including
the right to be elected to Holdings' board of directors and the right to require
Holdings to repurchase certain of his shares of Holdings stock upon his death,
disability or termination without cause.
The employment agreement between the Company and Alfred Marasca provides
for a salary currently equal to $600,000 per annum and an annual bonus equal to
his salary if the Earnings Targets for the year are reached.
The employment agreement between the Company and Greg Mays provides for a
salary currently equal to $300,000 per annum and an annual bonus equal to 60
percent of his salary if the Earnings Targets for the year are reached. Mr. Mays
also received a special bonus of $150,000 in fiscal 1995 upon the change of
control in connection with the Merger.
The employment agreement between the Company and Jan Charles Gray provides
for a salary currently equal to $225,000 per annum and an annual bonus equal to
50 percent of his salary if the Earnings Targets for the year are reached.
The new employment agreements described above are for a term of three years
and 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
specified period and the employee may terminate the agreement 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.
The Company's consulting agreement with Mr. Joe Burkle provides for
compensation of $3,000 per week. Mr. Burkle provides the management and
consulting services of an executive vice president under the consulting
agreement. 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 the Company terminates for reasons other than
for good cause, the payments due under the agreement continue for the balance of
the term.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Holdings does not have a board committee performing the functions of a
compensation committee. Byron E. Allumbaugh, Director, and George G. Golleher,
Chief Executive Officer of Holdings, together with Al Marasca, President, and
Greg Mays, Executive Vice President, made decisions with regard to Holdings'
executive officer compensation for fiscal 1995.
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).
Holdings 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").
Non-Qualified Retirement Plans. To allow Holdings' 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 Holdings participate in the Ralphs Grocery Company Supplemental
Executive Retirement Plan (the "SERP") and the Ralphs Grocery Company Retirement
Supplement Plan (the "Supplement Plan"). The SERP and the Supplement Plan also
modify the benefit formula under the Retirement Plan in other respects. Holdings
has purchased split dollar life insurance policies for participants under the
SERP. Under certain circumstances, the cash surrender value of certain split
dollar life insurance policies will offset Holdings' obligations under the SERP.
53
<PAGE> 57
The following table sets forth the combined estimated annual benefits
payable in the form of a (single) life annuity under the Retirement Plan, the
SERP and the Supplement Plan (unreduced by the cash surrender value of any life
insurance policies) to a participant in the above plans who is retiring at a
normal retirement date on January 1, 1996 for the specified final average
salaries and years of credited service.
<TABLE>
<CAPTION>
FINAL YEARS OF CREDITED SERVICE
AVERAGE ------------------------------------------------------------
SALARY 15 20 25 30 35
- --------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 19,348 $ 25,798 $ 32,347 $ 38,697 $ 45,146
200,000 41,848 55,798 69,747 83,697 97,646
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
1,040,000 and above 312,000 416,000 520,000 624,000 624,000
</TABLE>
Messrs. Allumbaugh, Golleher, Marasca, Mays and Gray have completed 38, 11,
39, 8 and 32 years of credited service, respectively. Compensation covered by
the SERP and Supplement 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 SERP and Supplement 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 Holdings pursuant to the insurance agreements entered into by
Holdings and the executive. Benefits are not subject to any deduction for social
security offset.
54
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership of Common Stock and Series A
Preferred Stock and Series B Preferred Stock of Holdings by each person who, to
the knowledge of Holdings, owns 5 percent or more of Holdings' outstanding
voting stock, by each person who is a director or Named Executive Officer of the
Company, and by all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B
STOCK(1)(2) PREFERRED STOCK(1) PREFERRED 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)....... 17,795,939 63.1% -- -- -- -- 39.6% 37.1%
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 Blvd.
Los Angeles, CA 90067
---------- ---- ---------- ---- --------- ----- ---- ----
Total....................... 20,304,856 72.0% -- -- -- -- 45.2% 42.3%
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)........................ -- -- -- -- -- -- -- --
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% 10,733,244 64.3% -- -- 32.7% 30.2%
BT Investment Partners, Inc.(10)
130 Liberty Street
New York, NY 10006................ 509,812 2.5% 900,000 5.4% 3,100,000 100.0% 3.8% 11.3%
Other 1995 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 (14
persons)(2)(4)(5)(6)(7)........... 21,104,856 74.8% -- -- -- -- 47.0% 44.0%
</TABLE>
- ---------------
(1) Gives effect to the assumed exercise of outstanding warrants, held by
certain institutional investors, to acquire 2,008,874 shares of Holdings
common stock.
(2) Gives effect to the exercise of options held by Byron E. Allumbaugh, George
G. Golleher and Alfred A. Marasca under a management stock option plan,
covering 600,000, 200,000 and 200,000 shares, respectively. Does not give
effect to the exercise of additional options to purchase up to 2,000,00
shares of Holdings common stock which have been or may be granted under
such stock option plan.
(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, Yucaipa F4L, LLC and Yucaipa/F4L
Partners. These entities are affiliated partnerships which are controlled,
directly or indirectly, by Ronald W. Burkle. The foregoing entities are
parties to a stockholders agreement with other Holdings investors which
gives to Yucaipa the right to elect a majority of the directors of
Holdings.
(5) Share amount and percentages shown for Yucaipa include a warrant to
purchase 8,000,000 shares of Holdings Common Stock held by Yucaipa. Such
warrant will become exercisable only upon the occurrence of an initial
public offering or certain sale transactions involving Holdings.
(6) Certain management stockholders who own in the aggregate 431,096 shares of
Common Stock 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 June 14, 2005. The 431,096 shares have
been
55
<PAGE> 59
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 options).
(7) Does not include additional options to purchase 220,227 shares, 100,000
shares and 174,940 shares of Holdings Common Stock held by Messrs.
Allumbaugh, Marasca and Gray, respectively, which options were issued at
the time of the Ralphs Merger in exchange for the cancellation of certain
payments due to such individuals under RGC equity appreciation rights.
(8) Mr. Mays owns 8,890 of the 431,096 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. (collectively,
"Apollo"), 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
purchased Series A Preferred Stock of Holdings in connection with the
Merger. Pursuant to the 1995 Stockholders Agreement, certain corporate
actions by Holdings and its subsidiaries require the consent of the
directors whom the 1995 equity investors, including Apollo and BTIP, are
entitled to elect to the Holdings Board of Directors. 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
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 authorized and outstanding capital stock
of the Company and Holdings, including the terms of the 1995 Equity Investment
which was made in Holdings in connection with the Merger.
THE COMPANY
The authorized capital stock of the Company consists of 1,600,000 shares of
Common Stock, $.01 par value per share, of which 1,513,938 shares are
outstanding. All of such outstanding shares are owned by Holdings. There is no
public trading market for the Common Stock of the Company. The indentures that
govern outstanding debt securities of the Company contain certain restrictions
on the payment of cash dividends with respect to the Company's Common Stock. In
addition, the New Credit Facility also restricts such payments. Subject to the
limitations contained in the New Credit Facility and such indentures, holders of
Common Stock of the Company are entitled to dividends when and as declared by
the Board of Directors from funds legally available therefor, and upon
liquidation, are entitled to share ratably in any distribution to holders of
Common Stock. All holders of Common Stock are entitled to one vote per share on
any matter coming before the stockholders for a vote.
HOLDINGS
The authorized capital stock of Holdings consists 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. Of such
authorized shares, (i) 17,207,882 shares of Common Stock, 16,683,244 shares of
Series A Preferred Stock and 3,100,000
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shares of Series B Preferred Stock are outstanding and held by approximately 100
holders of record, (ii) 2,008,874 shares of Common Stock are reserved for
issuance upon the exercise of outstanding warrants held by institutional
investors, and (iii) 3,000,000 shares of Common Stock are reserved for issuance
upon the exercise of employee stock options. An additional 8,000,000 shares of
Common Stock are reserved for issuance upon the exercise of a warrant issued to
Yucaipa upon closing of the Merger. See "-- Yucaipa Warrant" below.
There is no public trading market for the capital stock of Holdings.
Holdings does not expect in the foreseeable future to pay any dividends on its
capital stock. Holders of Common Stock of Holdings are entitled to dividends
when and as declared by the Board of Directors of Holdings from funds legally
available therefor, and upon liquidation, are entitled to share ratably in any
distribution to holders of Common Stock. All holders of Holdings Common Stock
are entitled to one vote per share on any matter coming before the stockholders
for a vote.
Upon issuance, the Series A Preferred Stock initially had an aggregate
liquidation preference of $166,832,440, or $10 per share, which accretes 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
initially 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.
Upon issuance, 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 initially 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 accretes 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 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.
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, Holdings is prohibited from declaring dividends
with respect to, or redeem, purchase or otherwise
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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.
1995 STOCKHOLDERS AGREEMENT
Under the terms of the 1995 Stockholders Agreement (which was entered into
by Holdings, Yucaipa and its affiliates, the 1995 Equity Investors and other
stockholders), the 1995 Equity Investors holding Series A Preferred Stock are
entitled to nominate three directors to the Board of Directors of each of
Holdings and the Company (the "Series A Directors"), of which two directors are
nominees of Apollo and one director is a nominee of the other 1995 Equity
Investors holding Series A Preferred Stock. The 1995 Stockholders Agreement
gives to Yucaipa the right to nominate six directors of Holdings and seven
directors of the Company, and the boards of Holdings and the Company 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 Holdings has effected an initial public offering of
its equity securities meeting certain criteria, 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 1995 Equity Investors 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 Holdings stock it
holds. In certain circumstances, Yucaipa will have the right to compel the
participation of the 1995 Equity Investors and other stockholders in sales of
all the outstanding shares of Holdings stock.
YUCAIPA WARRANT
Upon closing of the Merger, Holdings issued to Yucaipa a warrant to
purchase up to 8,000,000 shares of Holdings Common Stock. The initial exercise
price of such warrant is such that the warrant will have no value unless and
until the value of the shares representing 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 Holdings completes an initial
public offering of equity securities meeting certain criteria, or in connection
with certain sale transactions involving Holdings, in either case effected on or
prior to the fifth anniversary of the Merger. 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 Merger if 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 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
Holdings is a party to a consulting agreement with Yucaipa which provides
for certain management and financial services to be performed by Yucaipa for the
benefit of Holdings and its subsidiaries. The services of Messrs. R. Burkle,
Graham and Resnik, acting in their capacities as directors, and the services of
other Yucaipa personnel are provided to Holdings pursuant to this agreement. See
"Management." Messrs. R. Burkle, Graham and Resnik are partners of Yucaipa. The
consulting agreement provides for an annual management fee payable by Holdings
to Yucaipa in the amount of $4 million. In addition, Holdings may retain Yucaipa
in an advisory capacity in connection with acquisition or sale transactions, in
which case Holdings will pay Yucaipa an advisory fee, except that the retention
of Yucaipa in connection with a sale of
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Holdings in its entirety would require approval by a majority of the
disinterested directors. The agreement has a five-year term, which is
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 Holdings, provided that Yucaipa will be entitled to
full monthly payments under the agreement for the remaining term thereof, unless
Holdings terminates for cause pursuant to the terms of the agreement. Yucaipa
may terminate the agreement if Holdings fails to make a payment due thereunder,
or if there occurs a change of control (as defined in the agreement) of
Holdings, and upon any such termination Yucaipa will be entitled to full monthly
payments for the remaining term of the agreement. Pursuant to the agreement,
Yucaipa earned a total of $3.6 million in management fees for fiscal 1995.
Pursuant to the Yucaipa consulting agreement upon closing of the RSI
Merger, Yucaipa received an advisory fee from the Company in the amount of $21.5
million, which was paid in cash and New Discount Debentures, plus reimbursement
of expenses in connection with the RSI Merger and the related transactions. Upon
closing of the RSI Merger, Yucaipa paid a cash fee of approximately $3.5 million
to Soros Fund Management in consideration for advisory services, which Soros
Management has rendered since 1991. Additionally, upon closing of the RSI
Merger, Yucaipa received a warrant to purchase 8,000,000 shares of Holdings
common stock exercisable under certain conditions. In consideration for its
commitment to purchase preferred stock as part of the 1995 Equity Investment,
Apollo received a fee of $5 million from Holdings upon closing of the RSI
Merger, which fee was paid in cash and notes.
In connection with the execution of the definitive Agreement and Plan of
Merger ("the Merger Agreement") between Food 4 Less, Holdings, FFL and RSI,
Yucaipa entered into the Put Agreement with the majority stockholder of RSI,
pursuant to which such RSI stockholder was entitled to put up to $10 million
aggregate principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures
due 2007 (the "Seller Debentures"), issued as part of the consideration for the
RSI Merger, to Yucaipa on the closing date of the Merger. The Yucaipa consulting
agreement provided that the Company reimburse Yucaipa for any loss and expenses
incurred by Yucaipa upon the resale of such Seller Debentures to any
unaffiliated third party. Pursuant to such agreement, the Company reimbursed an
affiliate of Yucaipa the amount of $3.5 million upon the closing of the Merger.
Holdings files a consolidated federal income tax return, under which the
federal income tax liability of Holdings and its subsidiaries is determined on a
consolidated basis. Holdings is a party to 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 Holdings and has
taxable income, the Company will pay to Holdings 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 Holdings and its other
subsidiaries, Holdings will credit to the Company the amount of such reduction
in the consolidated tax liability. These credits are passed between Holdings 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 Holdings and the
Company of such state and local taxes.
As part of the financing for the RSI Merger, Holdings issued $100 million
initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New
Discount Debentures"), which was acquired by a partnership comprised of an
affiliate of Yucaipa and certain other investors. The $17.5 million initial
accreted value of New Discount Debentures contributed to the partnership by the
Yucaipa affiliate consists of New Discount Debentures issued in partial payment
of the Yucaipa consulting fee due upon closing of the RSI Merger, as described
above. Holdings granted to the partnership certain registration rights with
respect to the New Discount Debentures, and paid substantially all expenses of
the partnership in connection with the resale of the New Discount Debentures,
including underwriting discounts and brokers' commissions (subject to certain
limitations).
On October 20, 1995, the holder of the New Discount Debentures sold all of
such New Discount Debentures at a price equal to 77 percent of the accreted
value thereof. The sale of the New Discount Debentures was effected by BT
Securities Corporation ("BT Securities"). BT Securities received a fee in the
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amount of 2 percent ($2.1 million) of the aggregate accreted value of the New
Discount Debentures. Holdings reimbursed the selling holder for such fee and
other expenses of the sale as contemplated by a registration rights agreement
executed concurrently with the consummation of the Merger.
A contribution of $5 million was made to the partnership that purchased and
subsequently sold the New Discount Debentures, by an affiliate of Holdings. This
affiliate borrowed the $5 million from the Company to fund its contribution to
the partnership. Holders of RGC equity appreciation rights ("EARs"), including
Messrs. Allumbaugh, Marasca and Gray, agreed to defer the receipt of $5 million
cash otherwise payable by RGC upon settlement of the EARs at the time of the
Merger, pending repayment of the $5 million loan made by the Company as
described above. When the New Discount Debentures were resold by the
partnership, and the proceeds from such resale distributed to the partners, all
of the approximately $2.1 million in total proceeds received by the affiliate
were applied to repayment of the loan, and the portion of the loan not repaid
was forgiven by the Company and the EAR holders.
Management believes that the terms of the transactions described above are
or were fair to Holdings and are or were on terms at least as favorable to
Holdings 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 SELLER DEBENTURES
GENERAL
The 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the
"Seller Debentures") were issued under an indenture (the "Seller Debenture
Indenture"), dated as of June 1, 1995, between Holdings and Norwest Bank
Minnesota, N.A., as trustee (the "Trustee"). The Seller Debentures were issued
to the stockholders of RSI upon the Closing Date of the Merger as part of the
consideration for the merger of Food 4 Less with and into RSI.
The following summary of certain provisions of the Seller Debentures and
the Seller 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 Seller
Debentures and the Seller Debenture Indenture, including the definitions of
certain terms therein and those terms made a part of the Seller 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 Seller Debenture Indenture may be
obtained from Holdings.
PRINCIPAL, MATURITY AND INTEREST
The Seller Debentures initially were issued in the aggregate principal
amount of $131.5 million and will mature on June 15, 2007. The Seller Debentures
bear interest at the rate of 13 5/8% per annum and interest accrues on the
Seller Debentures beginning from the most recent date to which interest has been
paid. Interest is payable semiannually in arrears on June 15 and December 15 of
each year to the Holders of record on the immediately preceding June 1 and
December 1. The first interest payment date on the Seller Debentures was
December 15, 1995. Interest is computed on the basis of a 360-day year comprised
of twelve 30-day months and actual number of days elapsed. Holdings may, on each
interest payment date on or prior to June 15, 2000, at its option and in its
sole discretion, pay interest in additional Seller Debentures ("Secondary
Securities") in lieu of the payment in whole or in part of interest in cash on
the Seller Debentures as provided in the Seller Debenture Indenture. As of June
15, 1996, Holdings has issued an aggregate principal amount of $18.6 million of
Secondary Securities which constitute a portion of the outstanding Seller
Debentures offered hereby.
The Seller Debentures were issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof; provided,
however, that Secondary Securities issued in lieu of cash interest payments
pursuant to the Seller Debenture Indenture or Seller Debentures issued upon
registration of transfer of such Secondary Securities may be in denominations of
greater or less than $1,000. Initially, the Trustee will act as Paying Agent and
Registrar for the Seller Debentures. The Seller Debentures may be presented for
registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. Holdings may change any
Paying Agent and Registrar without notice to holders of the Seller Debentures
(the "Holders"). Holdings will pay principal, premium, if any, and interest on
the Seller Debentures at the Trustee's corporate office located in the Borough
of Manhattan, The City of New York. At Holdings' option, interest may be paid at
the Trustee's corporate trust office or by check mailed to the registered
holders of the Seller Debentures at their respective addresses set forth in the
register of Holders of Seller Debentures. Until otherwise designated by
Holdings, Holdings' office or agency in New York is the office of the Trustee
maintained for such purpose.
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OPTIONAL REDEMPTION
On or after June 15, 2000, the Seller Debentures may be redeemed, at the
option of 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 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, Holdings may use the
net proceeds of a Public Equity Offering of Holdings or the Company to redeem up
to 35% of the Seller Debentures at a redemption price equal to 110% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption.
NOTICES AND SELECTION
In the event of a redemption of less than all of the Seller Debentures at
the option of Holdings, such Seller Debentures will be selected for redemption
by the Trustee pro rata, by lot or by any other method that the 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 Seller Debentures are to be
redeemed at such Holder's registered address. Seller Debentures in denominations
larger than $1,000 may be redeemed in part. On and after the redemption date,
interest will cease to accrue on the Seller Debentures or portions thereof
called for redemption (unless Holdings shall default in the payment of the
redemption price or accrued interest). Seller Debentures that are redeemed by
Holdings or that are purchased by 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 Holdings will be surrendered to the
Trustee for cancellation.
RANKING
The Seller Debentures are senior subordinated unsecured obligations of
Holdings and are subordinate in right of payment to all Senior Indebtedness of
Holdings including indebtedness under the New Discount Debentures. As of July
14, 1996, the aggregate outstanding amount of Senior Indebtedness of Holdings
(excluding guarantees by Holdings of certain Senior Indebtedness of the Company)
was approximately $115.3 million of accreted value of New Discount Debentures.
In addition, the Seller Debentures are effectively subordinated to all
liabilities (including trade payables) of the Company which were approximately
$3,135.5 million (excluding letters of credit) at such date.
SUBORDINATION OF THE SELLER DEBENTURES
The payment of the Obligations with respect to the Seller Debentures are
subordinated in right of payment, as set forth in the Seller Debenture
Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
incurred including, with respect to Designated Senior Indebtedness, any interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against Holdings in a bankruptcy
case under Title 11 of the United States Code.
Upon any payment of distribution of assets or securities of Holdings of any
kind or character, whether in cash, property or securities, upon any
dissolution, winding up, total or partial liquidation or reorganization of
Holdings (including, without limitation, in bankruptcy, insolvency, or
receivership proceedings or upon any
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assignment for the benefit of creditors or any other marshalling of Holdings'
assets and liabilities and whether voluntary or involuntary), the holders of
Senior Indebtedness shall first be entitled to receive payment in full in cash
or Cash Equivalents of all amounts payable under Senior Indebtedness before the
Holders of Seller Debentures will be entitled to receive any payment with
respect to the Seller Debentures (excluding Permitted Subordinated
Reorganization Securities) and until all Obligations with respect to Senior
Indebtedness are paid in full in cash or Cash Equivalents, any distribution to
which the Holders of Seller Debentures would be entitled (excluding Permitted
Subordinated Reorganization Securities) shall be made to the holders of Senior
Indebtedness.
No direct or indirect payment (other than payments previously made pursuant
to the provisions described under "-- Defeasance of Indenture" below or payments
in Secondary Securities) by or on behalf of Holdings of Obligations on the
Seller Debentures whether pursuant to the terms of the Seller Debentures or upon
acceleration or otherwise shall be made if, at the time of such payment, there
exists a default in the payment of all or any portion of principal of, premium,
if any, or interest on any Designated Senior Indebtedness or any other Senior
Indebtedness which, at the time of determination, is equal to or greater than
$50 million in aggregate principal amount ("Significant Senior Indebtedness")
(and the Trustee has received written notice thereof), and such default shall
not have been cured or waived by or on behalf of the holders of such Designated
Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or
shall have ceased to exist, until such default shall have been cured or waived
or shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been discharged
or paid in full in cash or Cash Equivalents, after which Holdings shall resume
making any and all required payments in respect of the Seller Debentures,
including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Trustee of written notice from the holders of a majority of the outstanding
principal amount of the Designated Senior Indebtedness or their representative,
or (b) if such event of default results from the acceleration of the Seller
Debentures, the date of such acceleration, no such payment (other than payments
previously made pursuant to the provisions described under "-- Defeasance of
Indenture" below or payments in Secondary Securities) may be made by Holdings
upon or in respect of the Seller Debentures for a period ("Payment Blockage
Period") commencing on the earlier of the date of receipt of such notice or the
date of such acceleration and ending 179 days thereafter (unless (x) such
Payment Blockage Period shall be terminated by written notice to the Trustee
from the holders of a majority of the outstanding principal amount of such
Designated Senior Indebtedness or their representative who delivered such notice
or (y) such default is cured or waived, or ceases to exist or such Designated
Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents),
after which Holdings shall resume making any and all required payments in
respect of the Seller Debentures, including any missed payments. Notwithstanding
anything herein to the contrary, in no event will a Payment Blockage Period
extend beyond 179 days from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be commenced with
respect to the Seller Debentures during any period of 365 consecutive days. No
event of default which existed or was continuing on the date of the commencement
of any Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be, or be made, the
basis for the commencement of a second Payment Blockage Period by the holders of
such Designated Senior Indebtedness or their representative whether or not
within a period of 365 consecutive days unless such event of default shall have
been cured or waived for a period of not less than 90 consecutive days.
If Holdings fails to make any payment on the Seller Debentures when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Seller Debenture Indenture and would enable the Holders of
Seller Debentures to accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of
Holdings, Holders of the Seller Debentures may recover less, ratably, than
holders of Senior Indebtedness.
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As of July 14, 1996, the aggregate amount of Senior Indebtedness
outstanding was approximately $115.3 million of accreted value of New Discount
Debentures that will accrete to approximately $193.4 million by June 15, 2000.
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 Seller Debentures
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest, if any, to the Change of Control Payment Date (as defined below).
Within 30 days following the date upon which the Change of Control occurred
(the "Change of Control Date"), Holdings must send, by first class mail, a
notice to each Holder, with a copy to the 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 Seller
Debenture purchased pursuant to a Change of Control Offer will be required to
surrender the Seller Debenture, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Seller 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 Seller Debenture Indenture further provides 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, 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
Seller Debentures as provided above. Holdings shall first comply with the
covenant in the immediately preceding sentence before Holdings shall be required
to repurchase Seller Debentures pursuant to the provisions described above.
Holdings' failure to comply with the covenants described in this paragraph shall
constitute an Event of Default under the Seller Debenture Indenture.
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 Seller Debenture Indenture contains, among other things, the following
covenants:
Limitation on Restricted Payments. The Seller Debenture Indenture provides
that 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) 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 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 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
Holdings from any person (other than a Subsidiary) from the issuance and sale
(including upon exchange or conversion for other securities of 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
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Holdings or any Subsidiary, until and to the extent such borrowing is repaid),
plus (iii) 100% of the aggregate net cash proceeds received by Holdings as
capital contributions to 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 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 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 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 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 Seller Debenture
Indenture provides that 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 Seller Debentures or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, (i) Holdings may incur Indebtedness if
immediately before and immediately after giving effect to the incurrence of such
Indebtedness the Operating Coverage Ratio of 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 Senior Subordinated Indebtedness. The Seller Debenture
Indenture provides that Holdings shall not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that by its terms is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in right of payment to the Seller Debentures.
Limitation on Liens. The Seller Debenture Indenture provides that Holdings
shall not create, incur, assume or suffer to exist any Lien of any kind securing
any Pari Passu Indebtedness, any Subordinated Indebtedness or any Affiliate
Obligation upon any property or assets of Holdings owned on the Issue Date or
acquired after the Issue Date, or any income or profits therefrom, unless the
Securities are secured equally and ratably with (or prior to in the case of
Subordinated Indebtedness) to the obligation or liability secured by such Lien,
and except for any Lien securing Acquired Indebtedness created prior to the
incurrence of such Indebtedness by Holdings; provided that any such Lien only
extends to the assets that were subject to such Lien securing such Acquired
Indebtedness prior to the related acquisition by Holdings.
Limitation on Asset Sales. The Seller Debenture Indenture provides that
neither Holdings nor any of its Subsidiaries shall consummate an Asset Sale
unless (a) 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, 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
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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
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
Senior Indebtedness or Pari Passu Indebtedness of 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 Seller Debentures tendered to Holdings for purchase
at a price equal to 100% of the aggregate principal amount thereof, plus accrued
interest to the date of purchase pursuant to an offer to purchase made by
Holdings as set forth below (a "Net Proceeds Offer"). A Net Proceeds Offer as a
result of an Asset Sale made by 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 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 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 Seller
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 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 Seller Debenture Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders may elect to tender the Seller Debentures in
whole or in part in integral multiples of $1,000 in exchange for cash. To the
extent Holders properly tender Seller Debentures in an amount exceeding the Net
Proceeds Offer, Seller Debentures of tendering Holders will be repurchased on a
pro rata basis (based on amounts tendered).
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 Seller
Debentures pursuant to a Net Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Seller Debenture Indenture provides that 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 Holdings
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
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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 Seller Debenture Indenture
provides that neither 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 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 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, Holdings or such Subsidiary, as the case may be, shall
have delivered an Officers' Certificate to the 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,
Holdings or such Subsidiary, as the case may be, shall have delivered an
Officers' Certificate to the 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 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 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 such
Affiliate Transaction are fair to 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, Holdings or
such Subsidiary, as the case may be, shall have delivered to the Trustee, a
written opinion from an Independent Financial Advisor to the effect that the
financial terms of such Affiliate Transaction are fair to 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 Holdings or any Subsidiary, as determined by the Board of
Directors of Holdings or any Subsidiary or the senior management thereof in good
faith, (iv) transactions exclusively between or among 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
Seller 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 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
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thereafter; provided, however, that the existence of, or the performance by
Holdings or any of its 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 of the Securities 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 Seller Debenture Indenture which are fair to Holdings or
any Subsidiary, in the reasonable determination of the Board of Directors or
senior management of 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 Seller Debenture
Indenture provides that Holdings shall not permit any of its Subsidiaries to
issue any Preferred Stock (other than to Holdings or a wholly-owned Subsidiary),
or permit any person (other than 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.
Limitations on Mergers and Certain Other Transactions. The Seller Debenture
Indenture provides that 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 Holdings shall be the
continuing person, or the person (if other than Holdings) formed by such
consolidation or into which Holdings is merged or to which all or substantially
all of the properties and assets of 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) (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 Holdings under the Seller Debentures and the
Seller 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 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 Seller Debenture Indenture provides that upon any consolidation or
merger or any transfer of all or substantially all of the assets of Holdings or
any adoption of a Plan of Liquidation by Holdings in accordance with the
foregoing, the surviving person formed by such consolidation or into which
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, Holdings under the
Seller Debenture Indenture with the same effect as if such surviving person had
been named as 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 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 Holdings under the Seller Debenture Indenture
and under the Seller Debentures and agrees to be bound thereby, the predecessor
shall be released from such obligations.
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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 Holdings shall be deemed to be the transfer of all
or substantially all of the properties and assets of Holdings.
EVENTS OF DEFAULT
The following events constitute "Events of Default" under the Seller
Debenture Indenture : (i) failure to make any payment of interest on the Seller
Debentures when due and the continuance of such default for a period of 30 days;
(ii) failure to pay principal of the Seller Debentures when due, whether at
maturity, upon acceleration, redemption or otherwise (including the failure to
repurchase Seller 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"), whether or
not such payment shall be prohibited by the provisions set forth under the
heading "-- Subordination"; (iii) failure to comply with any other agreement or
covenant contained in, or provisions of, the Seller Debentures or the Seller
Debenture Indenture, if such failure continues unremedied for 30 days after
notice given by the Trustee or the holders of at least 25% in principal amount
of the Seller 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 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)
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 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
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
Holdings or any Significant Subsidiary, (b) appoint a Custodian of 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 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 Holdings and its
Subsidiaries; or (viii) any final judgment or order for payment of money in
excess of $25 million shall be entered against 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.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of Holdings or any
Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of
at least 25% in aggregate principal amount of the Seller Debentures then
outstanding may declare the aggregate principal amount of the Seller Debentures
outstanding due and payable by notice in writing to Holdings, the administrative
agent under the Credit Agreement and the 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
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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
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 Holdings, all unpaid principal and accrued interest on the Seller Debentures
then outstanding shall ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any of the Holders of the
Seller Debentures. Subject to certain conditions, the Holders of a majority in
principal amount of the Seller Debentures then outstanding, by notice to the
Trustee, may rescind an acceleration if all existing Events of Default are
remedied. In certain cases the Holders of a majority in principal amount of
outstanding Seller Debentures may waive any past default and its consequences,
except a default in the payment of principal of or interest on any of the Seller
Debentures.
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 if such other Indebtedness has
been rescinded), within 90 days of such maturity or declaration of acceleration,
as the case may be.
The Seller Debenture Indenture provides that if a Default or an Event of
Default occurs and is continuing thereunder, and if it is known to the Trustee,
the Trustee shall mail to each Holder of the Seller 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 Seller 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 Trustee may withhold such notice if it in
good faith determines that withholding such notice is in the interest of the
Holders.
The Seller Debenture Indenture provides that no holder may pursue any
remedy thereunder unless the Trustee (i) shall have failed to act for a period
of 60 days after receiving 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 Seller 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 Seller
Debentures.
Under the Seller Debenture Indenture, two officers of Holdings are required
to certify to the Trustee within 120 days after the end of each fiscal year of
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 and
the status thereof.
DEFEASANCE OF INDENTURE
Holdings may, at its option and at any time, elect to have Holdings'
obligations discharged with respect to the outstanding Seller Debentures. Such
Legal Defeasance means that Holdings shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Seller Debentures except
for (i) the rights of Holders of outstanding Seller Debentures to receive
payments in respect of the principal of, premium, if any, and interest on such
Seller Debentures when such payments are due solely from the funds held by the
Trustee in the trust referred to below; (ii) Holdings' obligations to issue
temporary Seller Debentures, register the transfer or exchange of Seller
Debentures, replace mutilated, destroyed, lost or stolen Seller Debentures and
maintain an office or agency for payments in respect of the Seller Debentures
and money for security payments held in trust in respect of the Seller
Debentures; (iii) the rights, powers, trusts, duties and immunities of the
Trustee and Holdings' obligations in connection therewith; and (iv) the Legal
Defeasance
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provisions of the Seller Debenture Indenture. In addition, Holdings may, at its
option and at any time elect to have the obligations of 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 Seller Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Seller Debentures, (i) Holdings must have irrevocably deposited
with the Trustee, in trust, for the benefit of the Holders of the Seller
Debentures, cash in U.S. dollars, U.S. Government Obligations (as defined in the
Seller 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 Seller Debentures to redemption or maturity provided that the
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 Seller Debentures on the Maturity Date or such redemption date, as the case
may be; (ii) in the case of Legal Defeasance, Holdings shall have delivered to
the Trustee an opinion of counsel stating that (A) 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 Seller 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, Holdings shall have delivered to the Trustee an opinion of counsel
stating that the Holders of outstanding Seller 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 Seller
Debenture Indenture or any other material agreement or instrument to which
Holdings is a party or by which it is bound (and in that connection, the 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)
Holdings shall have delivered to the 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) Holdings shall have
delivered to the Trustee an Officer's Certificate stating that the deposit was
not made by Holdings with the intent of preferring the Holders of the Seller
Debentures over other creditors of Holdings or with the intent of defeating,
hindering, delaying or defrauding creditors of Holdings, or others; and (viii)
Holdings shall have delivered to the 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 Seller Debenture Indenture will be discharged and will cease to be of
further effect as to all outstanding Seller Debentures when either (a) all
Seller Debentures theretofore authenticated and delivered (except lost, stolen
or destroyed Seller Debentures which have been replaced or paid and Seller
Debentures for whose payment money has theretofore been deposited in trust and
thereafter repaid to Holdings) have been delivered to the Trustee for
cancellation; or (b)(i) all Seller Debentures not theretofore delivered to the
Trustee for cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise and Holdings has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
an amount of money sufficient to pay and discharge the entire indebtedness on
the Seller Debentures not theretofore delivered to the Trustee for cancellation
for principal, premium, if any, and accrued interest to the date of maturity or
redemption; (ii) Holdings has paid all sums payable by it under the Seller
Debenture Indenture; and (iii) Holdings has delivered irrevocable instructions
to the Trustee to apply the deposited money toward the payment of the Securities
at maturity or the redemption date, as the case may
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be. In addition, Holdings must deliver an Officers' Certificate and an opinion
of counsel to the Trustee stating that all conditions precedent to satisfaction
and discharge have been complied with.
MODIFICATION OF THE SELLER DEBENTURE INDENTURE
The Seller Debenture Indenture and the Seller Debentures may be amended or
supplemented (and compliance with any provision thereof may be waived) by
Holdings, the Trustee and the Holders of at least fifty-four percent (54%) in
aggregate principal amount of the Seller Debentures then outstanding (or at
least a majority in aggregate principal amount of the outstanding Seller
Debentures in the event that The Edward J. DeBartolo Corporation, an Ohio
corporation, shall cease to beneficially own at least a majority in aggregate
principal amount of the outstanding Seller Debentures), except that (A) without
the consent of each Holder of Seller Debentures affected, no such amendment,
supplement or waiver may (1) change the principal amount of Seller Debentures
whose Holders must consent to an amendment, supplement or waiver of any
provision of the Seller Debenture Indenture or the Seller Debentures; (2) reduce
the rate or extend the time for payment of interest on any Seller Debenture; (3)
reduce the principal amount of any Seller Debenture; (4) change the Maturity
Date of any Seller Debenture, or alter the redemption provisions in a manner
adverse to any Holder; (5) 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 Seller
Debenture, or (6) make the principal of, or the interest on, any Seller
Debenture payable with anything or in any manner other than as provided for in
the Seller Debenture Indenture and the Seller Debentures as in effect on the
date of the Seller Debenture Indenture.
Without the consent of the Holders of at least 75% in aggregate principal
amount of the Seller 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 the Seller Debentures pursuant to the
requirements set forth in the covenant described under the heading "-- Change of
Control" in a manner adverse to any Holder or waive a Default or Event of
Default resulting from a failure to comply with the requirements set forth in
the covenant described under the heading "-- Change of Control".
Without the consent of the Holders of at least 66 2/3% in aggregate
principal amount of the Seller Debentures then outstanding, no change may be
made to the subordination provisions of the Seller Debenture Indenture that
adversely affects the rights of any Holder under such subordination provisions.
No amendment, supplement or waiver may make any change that adversely
affects the rights under the subordination provisions of the Seller Debenture
Indenture of any holders of Senior Indebtedness unless the holders of such
Senior Indebtedness consent to the change.
In addition, Holdings and the Trustee may amend the Seller Debenture
Indenture and the Seller 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 in any material respect.
THE TRUSTEE
The Holders of a majority in principal amount of the outstanding Seller
Debentures may remove the Trustee and appoint a successor trustee with Holdings'
consent, by so notifying the Trustee to be so removed and Holdings. In addition,
the Holders of a majority in principal amount of the outstanding Seller
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
Trustee or of exercising any trust or power conferred on the Trustee.
The Seller Debenture Indenture provides that, in case a Default or an Event
of Default has occurred and is continuing, the Trustee thereunder shall exercise
such of the rights and powers vested in it by the Seller 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 Trustee is under no obligation to
exercise any of its rights or powers under the Seller Debenture Indenture
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at the request, order or direction of any of the Holders, unless they shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred thereby. If Holdings fails to pay
such amounts of principal of, or interest on, the Seller Debentures as shall
have become due and payable upon demand as specified in the Seller Debenture
Indenture, the Trustee thereunder, at the request of the Holders of a majority
in aggregate principal amount of the Seller 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 Seller Debenture Indenture contains limitations on the rights of the
Trustee, should it become a creditor of 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 Trustee is permitted to engage in
other transactions; however, if the Trustee acquires any "conflicting interest,"
it must eliminate such conflict or resign.
The Trustee is also the trustee for the 10.45% Senior Notes due 2004 (the
"1995 Senior Notes") of the Company and the 10.45% Senior Notes due 2000 of the
Company (the "1992 Senior Notes").
REPORTS
The Seller Debenture Indenture provides that to the extent permitted by
applicable law or regulation, whether or not Holdings is subject to the
requirements of Section 13 or 15(d) of the Exchange Act, 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. Holdings shall file with the 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 Seller
Debenture Indenture. Holdings shall also comply with the other provisions of TIA
sec. 314(a). If Holdings is not permitted by applicable law or regulations to
file the aforementioned reports, Holdings (at its own expense) shall file with
the Trustee and mail, or cause the Trustee to mail, to Holders at their
addresses appearing in the register of Seller 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 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
Holdings was subject to the requirements of such Section 13 or 15(d) of the
Exchange Act.
CERTAIN DEFINITIONS
"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 Seller Debenture Indenture, neither BT Securities
Corporation nor any of its Affiliates shall be deemed to be an Affiliate of
Holdings or any of its Subsidiaries.
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"Affiliate Obligation" means any contractual obligation (not constituting
Indebtedness) between Holdings and any Affiliate, other than obligations
relating to the purchase or sale of goods in the ordinary course of business
made in compliance with the covenant entitled "Limitation on Transactions with
Affiliates."
"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 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 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 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 Holdings or any Subsidiary with a
Lien on such assets, which Lien is permitted under the Seller Debenture
Indenture, provided that such foreclosure or other remedy is conducted in a
commercially reasonable manner or in accordance with any Bankruptcy Law, (iv)
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 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
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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.
"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 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 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 Holdings' Board of Directors or (II)
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 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
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
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
Holdings or any of its Subsidiaries in connection with the Merger,
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including, without limitation, the divestiture of the Excluded Assets, (viii)
losses incurred by Holdings and its Subsidiaries resulting from earthquakes and
(ix) with respect to Holdings and its Subsidiaries, all deferred financing costs
written off in connection with the early extinguishment of any Indebtedness,
shall each be excluded.
"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 Holdings, the Company 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, 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. Holdings
shall promptly notify the 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.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the Credit
Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement,
any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $50 million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by Holdings. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements incurred to refund, replace or refinance the entirety of the
borrowings and commitments then outstanding or permitted to be outstanding
thereunder.
"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 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 Holdings, any Preferred Stock issued by a
Subsidiary of Holdings other than Preferred Stock issued to Holdings.
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"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 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 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 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 Holdings, any
original issue discount on the New Discount Debentures, the Holdings 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
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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 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 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 Delaware corporation, and
its successors.
"Holdings Discount Notes" means the 15.25% Senior Discount Notes due 2004
of Food 4 Less Holdings, Inc., a California corporation, issued pursuant to the
Holdings Discount Note Indenture, as such Holdings Discount Notes 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.
"Holdings Discount Note Indenture" means the indenture between Food 4 Less
Holdings, Inc., a California corporation, and United States Trust Company of New
York, as trustee, dated as of December 15, 1992, pursuant to which the Holdings
Discount Notes were issued, as amended or supplemented from time to time in
accordance with the terms thereof.
"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; (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
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determined pursuant to the Seller 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 Seller 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 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 Holdings, qualified to perform
the task for which such firm has been engaged and disinterested and independent
with respect to 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 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 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 first issuance of the Seller Debentures
pursuant to the Seller 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 Seller 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.
"Loan Documents" means the Credit Agreement and all promissory notes,
guarantees, security agreements, pledge agreements, deeds of trust, mortgages,
letters of credit and other instruments, agreements and documents executed
pursuant thereto or in connection therewith, including all amendments,
supplements, extensions, renewals, restatements, replacements or refinancings
thereof, or other modifications (in whole or in part, and without limitation as
to amount, terms, conditions, covenants or other provisions) thereof from time
to time.
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"Maturity Date" means June 15, 2007.
"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 Holdings, the sum
of (i) the fair market value of the proceeds received by 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 Holdings
upon such conversion or exchange.
"New Discount Debentures" means the 13 5/8% Senior Discount Debentures due
2005 of 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 Holdings and
United States Trust Company of New York, as trustee, dated as of the Issue Date,
pursuant to which the New Discount Debentures were issued, as amended or
supplemented from time to time in accordance with the terms thereof.
"New Discount Debenture Registration Rights Agreement" means that certain
Registration Rights Agreement by and among Holdings, the Company and RGC
Partners, L.P. 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.
"Obligations" means all obligations of every nature whether for principal,
reimbursements, interest, fees, expenses, indemnities or otherwise, and whether
primary, secondary, direct, indirect, contingent, fixed or otherwise (including
obligations of performance) under the documentation governing any Indebtedness.
"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 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
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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 Holdings, Indebtedness
that ranks pari passu in right of payment to the Seller Debentures (whether or
not secured by any Lien).
"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 Holdings or any
Subsidiary, or any participant therein, (iv) a trustee or other fiduciary
holding securities under an employee benefit plan of 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 Holdings of the
Indebtedness referred to in the foregoing clause (a); (c) Indebtedness of
Holdings or a Subsidiary owed to and held by Holdings or a Subsidiary; (d)
Indebtedness incurred by 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
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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 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 first anniversary of 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 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 third anniversary of
the Merger); (e) Indebtedness incurred by 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 Holdings or any Subsidiary incurred under Foreign Exchange Agreements and
Interest Swap Obligations; (g) guarantees incurred in the ordinary course of
business, by 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 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 Seller 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 Holdings or
any Subsidiary or other agreements of 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 aggregate
liability in respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by Holdings and its Subsidiaries in connection with
such disposition; (m) obligations in respect of performance bonds and completion
guarantees provided by Holdings or any Subsidiary in the ordinary course of
business; (n) Indebtedness of Holdings with respect to the Holdings Discount
Notes, if any, the New Discount Debentures (including the accretion of the
Holdings 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 terms of the Seller Debenture Indenture); and (o) additional
Indebtedness of 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 Seller Debenture
Indenture summarized under "Limitation on Transactions with Affiliates," (vi)
Investments in any Subsidiary or by any Subsidiary in Holdings or by any
Subsidiary in other Subsidiaries, and (vii) additional Investments in an
aggregate amount not exceeding $15 million.
"Permitted Payments" means (i) any payment by 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 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 Holdings
on the Issue Date, (iii) any payment by Holdings or any Subsidiary (a) in
connection with repurchases of outstanding shares of Holdings common stock
following the death, disability or termination of employment of management
stockholders, and (b) of amounts required to be paid by 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
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Yearly Period), (iv) the loan by 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 Holdings or any Subsidiary to fund ongoing costs and expenses of RGC
Partners, L.P. pursuant to the Subscription Agreement and the New Discount
Debenture Registration Rights Agreement.
"Permitted Subordinated Reorganization Securities" means securities of
Holdings issued in a plan of reorganization in a case under the Bankruptcy Law
relating to Holdings which constitutes either (y) Capital Stock (other than
Disqualified Capital Stock with the reference to "Maturity Date" in the
definition of such term modified to relate to the final stated maturity of any
debt securities issued in such plan of reorganization to the holders of
Designated Senior Indebtedness ("Senior Reorganization Securities")) and (z)
debt securities of Holdings which are (i) unsecured, (ii) have no scheduled
mandatory amortization thereon prior to the final stated maturity of the Senior
Reorganization Securities and (iii) are subordinated in right of payment to the
Senior Reorganization Securities to at least the same extent as the Seller
Debentures are subordinated to Designated Senior Indebtedness.
"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 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 Seller Debenture Indenture, a calculation in
accordance with Article 11 of Regulation S-X under the Securities Act as
interpreted by 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 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 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 (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 Seller
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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.
"Reincorporation Merger" means the merger, prior to the Merger, of Food 4
Less Holdings, Inc., a California corporation, with and into Food 4 Less
Holdings, a Delaware corporation.
"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 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 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 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 Holdings, including any Secondary Securities 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, to the extent such refinancing indebtedness is permitted
to be incurred under the New Discount Debenture Indenture.
"Seller Debenture Indenture" means the indenture between Holdings and
Norwest Bank Minnesota, N.A., as trustee, dated as of the Issue Date, pursuant
to which the Seller Debentures were issued, as amended or supplemented from time
to time and refinancings thereof.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on (such Senior Indebtedness being deemed to include for all purposes of the
Article of the Seller Debenture Indenture entitled "Subordination" the amount
required to fully secure in cash undrawn Letter of Credit Obligations under the
Credit Agreement and such interest on Senior Indebtedness being deemed to
include for all purposes of such Article interest accruing after the filing of a
petition initiating any proceeding pursuant to any Bankruptcy Law in accordance
with and at the rate (including any rate applicable upon any default, to the
extent lawful) specified in any document evidencing the Senior Indebtedness,
whether or not the claim for such interest is allowed as a claim after such
filing in any proceeding under such Bankruptcy Law), and all other obligations
with respect to, any Indebtedness of Holdings (and, in the case of the Credit
Agreement, all obligations of
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<PAGE> 88
Holdings for fees, expenses, indemnities and other amounts payable thereunder or
in connection therewith), whether outstanding on the Issue Date or thereafter
created, incurred, assumed or guaranteed or in effect guaranteed by Holdings
(including, without limitation, Indebtedness under the Credit Agreement),
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing such Indebtedness expressly provides that such Indebtedness shall not
be senior in right of payment to the Securities. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall include the principal of, premium,
if any, and interest on all obligations of every nature of Holdings from time to
time owed or guaranteed by Holdings with respect to the Credit Agreement, the
New Discount Debentures and the Holdings Discount Notes, if any. Notwithstanding
the foregoing, "Senior Indebtedness" shall not include (i) any Pari Passu
Indebtedness or any Subordinated Indebtedness, (ii) any Indebtedness
constituting Disqualified Capital Stock, (iii) Indebtedness of Holdings to any
Subsidiary, (iv) that portion of any Indebtedness which is incurred in violation
of the covenant of the Seller Debenture Indenture entitled "Limitation on
Additional Indebtedness", (v) Indebtedness to, or guaranteed on behalf of, any
shareholder, director, officer or employee of Holdings or of any Subsidiary
(including, without limitation, amounts owed for compensation), (vi)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, and (vii) any liability for federal,
state, local or other taxes owed or owing by Holdings.
"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 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 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 Holdings, dividends payable solely in Qualified Capital
Stock of 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 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 Holdings,
through the issuance in exchange therefor solely of Qualified Capital Stock of
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 Holdings or a wholly owned Subsidiary.
"Subordinated Indebtedness" means Indebtedness of Holdings that is
subordinated in right of payment to the Seller Debentures.
"Subscription Agreement" means that certain Subscription Agreement between
RGC Partners, L.P., Holdings, the Company and the partnership investors listed
on Exhibit A thereto, as such Subscription Agreement may be amended or replaced,
so long as any amounts paid by Holdings and the Company under any amended or
replacement agreement do not exceed the amounts payable by Holdings and the
Company 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
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<PAGE> 89
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 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).
"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 Seller Debenture
Indenture.
"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 Holdings.
"Yearly Period" means each fiscal year of Holdings; provided that the first
Yearly Period shall begin on the Issue Date and shall end on January 28, 1996.
DESCRIPTION OF THE NEW CREDIT FACILITY
The following is a summary of the 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 entered into in
connection with the New Credit Facility. A copy of the Loan Agreement is
available upon request from Holdings.
GENERAL
The New Credit Facility was entered into June 14, 1995 and provided for (i)
term loans in the aggregate amount of $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 (ii) the $325 million New Revolving
Facility under which working capital loans may be made and commercial or letters
of credit in the maximum aggregate amount of up to $150 million may be issued,
under which approximately $86.5 million of letters of credit were outstanding as
of July 14, 1996. On July 14, 1996, the outstanding principal amount of the
Tranche A Loan, Tranche B Loan, Tranche C Loan and Tranche D Loan was $243.8
million, $99.4 million, $99.9 million and $100.1 million, respectively.
Proceeds of the New Term Loans and loans under the Revolving Credit
Facility, together with proceeds from the other debt and equity financing
transactions completed concurrently, were used to fund the cash requirements for
the acquisition of RSI, refinance existing indebtedness of Ralphs and Food 4
Less, and pay various fees, expenses and other costs associated with the Merger
and the related financing. The New Revolving Facility is used 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 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 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
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<PAGE> 90
Tranche C Loan 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 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
certain amounts and if the Company meets certain financial tests. Up to $30
million of the New Revolving Facility is available as a swingline facility and
loans outstanding under the swingline facility 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 pays the issuing bank a fee of 0.25% on each standby letter
of credit and each commercial letter of credit and pays 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 is 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 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 required the Company to
enter into hedging agreements to limit its exposure to increases in interest
rates for a period of not less than two years in an aggregate notional amount of
not less than $300 million. The New Credit Facility may be prepaid in whole or
in part without premium or penalty.
AMORTIZATION; PREPAYMENTS
The Tranche A Loan will mature on June 14, 2001 and will be subject to
amortization, commencing on September 15, 1996 on a quarterly basis in aggregate
annual amounts of $9.5 million in the second year, $53.2 million in the third
year, $56.8 million in the fourth year, $60.4 million in the fifth year, and
$63.9 million in the sixth year. The Tranche B Loan will mature on June 14, 2002
and will be subject to amortization on a quarterly basis in aggregate annual
amounts of $1.0 million for the first six years and $94.3 million in the seventh
year. The Tranche C Loan will mature on June 14, 2003 and will be subject to
amortization on a quarterly basis in aggregate annual amounts of $1.0 million
for the first seven years and $93.9 million in the eighth year. The Tranche D
Loan will mature on June 14, 2004 and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.0 million for the first eight
years and $93.0 million in the ninth year. The New Revolving Facility will
mature on June 14, 2001. The Company is required to reduce loans outstanding
under the New Revolving Facility to (i) $150 million for a period of not less
than 30 consecutive days during the period from the fourth Fiscal Quarter in
Fiscal Year 1996 to the first Fiscal Quarter in Fiscal Year 1997, (ii) to $110
million for a period of not less than 30 consecutive days during the period from
the fourth Fiscal Quarter in Fiscal Year 1997 to the first Fiscal Quarter in
Fiscal Year 1998 and (iii) to $75 million for a period not less than 30
consecutive days during each subsequent 12-month period. The Company is required
to make certain prepayments, subject to certain exceptions, on the New Credit
Facility with 75% (100% for Fiscal Years 1995, 1996 and 1997) 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, Tranche B Loans, Tranche
C Loans, and 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
Holdings and all active subsidiaries of the Company (including the
Subsidiary Guarantors) have guaranteed the Company's obligations under the New
Credit Facility. The Company's obligations and the
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guarantees of its subsidiaries are 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). Holdings' guarantee is secured by a pledge of the stock
of the Company. The Company's obligations also are 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 is 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 requires that the Company maintain certain specified
financial covenants, including a minimum fixed charge coverage, a minimum
EBITDA, a maximum ratio of total debt to EBITDA and a minimum net worth.
EVENTS OF DEFAULT
The New Credit Facility also provides for customary events of default. The
occurrence of any of such events of default could result in acceleration of the
Company's obligations under the New Credit Facility and foreclosure on the
collateral securing such obligations, which could have material adverse results
to holders of the Seller Debentures.
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<PAGE> 92
DESCRIPTION OF OTHER HOLDINGS INDEBTEDNESS
THE NEW DISCOUNT DEBENTURES
The New Discount Debentures were issued in the New Discount Debenture
Placement upon consummation of the Merger. The New Discount Debentures will have
an aggregate principal amount of $193,363,570 at maturity and will mature on
July 15, 2005. The New Discount Debentures are senior unsecured obligations of
Holdings and rank senior in right of payment to all subordinated indebtedness of
Holdings, including the Seller Debentures. Until June 15, 2000, no interest will
accrue on the New Discount Debentures, but the Accreted Value (as defined in the
indenture governing the New Discount Debentures (the "New Debenture Indenture"))
will accrete at a rate of 13 5/8% (representing the amortization of the original
issue discount) from the date of original issuance until June 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. The initial Accreted
Value per $1,000 principal amount of New Discount Debentures was $519.92
(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 semi-annually in arrears on each 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.
On or after June 15, 2000, the New Discount Debentures may be redeemed, at
the option of Holdings, in whole at any time or in part from time to time, at a
redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest, to the redemption
date, if redeemed during the twelve-month period commencing on June 15 in the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------------ ----------------
<S> <C>
2000...................................... 106.8125%
2001...................................... 105.1094%
2002...................................... 103.4063%
2003...................................... 101.7031%
2004 and thereafter....................... 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to June 15, 1998, Holdings may use the
net proceeds of a Public Equity Offering (as defined in the New Debenture
Indenture) of 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.
In the event of a Change of Control (as defined in the New Debenture
Indenture), each holder has the right to require the repurchase of such holder's
New Discount Debentures at a purchase price equal to 101% of the Accreted Value
thereof on the Change of Control Payment Date (as defined in the New Debenture
Indenture) (if such date is prior to June 15, 2000) or 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the Change of
Control Payment Date (if such date is on or after June 15, 2000).
The New Debenture Indenture contains 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 New Debenture Indenture), or engage in certain transactions with
affiliates. Under certain circumstances, Holdings will be required to make an
offer to purchase New Discount Debentures at a price equal to 100% of the
Accreted Value thereof on the date of purchase, if such date is prior to June
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, with the proceeds
of certain Asset Sales (as defined in the New Debenture Indenture). The New
Debenture Indenture will contain certain customary events of defaults, which
will include the failure to pay interest and principal, the failure to comply
with certain covenants in the New Discount Debentures or the New Debenture
Indenture, a default under certain indebtedness, the imposition of certain final
judgments or warrants of attachment and certain events occurring under
bankruptcy laws.
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Pursuant to the terms of a registration rights agreement entered into by
Holdings, Holdings filed a shelf registration statement with the Commission with
respect to the New Discount Debentures and paid the expenses related thereto.
Pursuant to such registration statement, the initial holder of the New Discount
Debentures sold its entire interest in the New Discount Debentures.
DESCRIPTION OF COMPANY INDEBTEDNESS
The 1995 Senior Notes. The 1995 Senior Notes were issued upon consummation
of the Merger in an aggregate principal amount of $520.3 million. The 1995
Senior Notes are senior unsecured obligations of the Company and are guaranteed
on a senior basis by the Company's wholly-owned subsidiaries. The 1995 Senior
Notes rank senior in right of payment to all subordinated indebtedness of the
Company, including the 1995 11% Senior Subordinated Notes, the Old RGC Notes,
the 1995 13.75% Senior Subordinated Notes and the 1991 Senior Subordinated
Notes. However, the 1995 Senior Notes are effectively subordinated to all
secured indebtedness of the Company and its subsidiaries, including indebtedness
under the New Credit Facility. The 1995 Senior Notes bear interest at the rate
of 10.45% per annum, payable on each June 15 and December 15. The 1995 Senior
Notes will mature on June 15, 2004.
The 1995 Senior Notes will be redeemable, at the option of the Company, in
whole at any time or in part from time to time, on and after June 15, 2000, at
the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on June 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>
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 1995 Senior Notes originally
issued, at a redemption price equal to 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.
The 1995 Senior Note Indenture 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 1995 Senior Notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
The 1995 Senior Note Indenture contains certain covenants, including, but
not limited to, covenants with respect to the following: (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 guarantees of certain indebtedness; (vii)
limitation on transactions with affiliates; (viii) limitation on mergers and
certain other transactions; and (ix) limitations on preferred stock of
subsidiaries.
A portion of the 1995 Senior Notes were issued in exchange for 1992 Senior
Notes outstanding at the time of the Merger. A total of $4.7 million aggregate
principal amount of 1992 Senior Notes that were not exchanged at the time of the
Merger remain outstanding. The 1992 Senior Notes mature on April 15, 2000. In
connection with the Merger, the indenture governing the 1992 Senior Notes was
amended to eliminate substantially all of the restrictive covenants contained
therein.
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The 1996 Senior Notes. The 1996 Senior Notes were issued on June 6, 1996
in an aggregate principal amount of $100 million. The 1996 Senior Notes are
senior unsecured obligations of the Company and are guaranteed on a senior basis
by the Company's wholly-owned subsidiaries. The 1996 Senior Notes rank senior in
right of payment to all subordinated indebtedness of the Company, including the
1995 11% Senior Subordinated Notes, the Old RGC Notes, the 1995 13.75% Senior
Subordinated Notes and the 1991 Senior Subordinated Notes. However, the 1996
Senior Notes are effectively subordinated to all secured indebtedness of the
Company and its subsidiaries, including indebtedness under the New Credit
Facility. The 1996 Senior Notes bear interest at the rate of 10.45% per annum,
payable on each June 15 and December 15. The 1996 Senior Notes will mature on
June 15, 2004. The terms of the 1996 Senior Notes were designed to mirror the
terms of the 1995 Senior Notes. Accordingly, the indenture governing the 1996
Senior Notes contains terms, covenants and conditions which are substantially
identical in all material respects to the terms contained in the indenture
governing the 1995 Senior Notes.
The 1995 11% Senior Subordinated Notes. The 1995 11% Senior Subordinated
Notes were issued upon consummation of the Merger in an aggregate principal
amount of $524.0 million. The 1995 11% Senior Subordinated Notes are
subordinated to the prior payment when due of all Senior Indebtedness (as
defined in the indenture (the "1995 11% Senior Subordinated Note Indenture")
governing the 1995 11% Senior Subordinated Notes) and are guaranteed on a senior
subordinated basis by the Company's wholly-owned subsidiaries. The 1995 11%
Senior Subordinated Notes bear interest at a rate of 11% per annum, payable on
each June 15 and December 15. The 1995 11% Senior Subordinated Notes will mature
on June 15, 2005. On or after June 15, 2000, the 1995 11% 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 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...................................................... 104.125 %
2001...................................................... 102.750 %
2002...................................................... 101.375 %
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 from one or more Public Equity Offerings to redeem up
to an aggregate of 35% of the principal amount of the 1995 11% Senior
Subordinated Notes originally issued, at a redemption price equal to 111% of the
principal amount thereof if redeemed during the 12 months commencing on June 15,
1995, 109.625% of the principal amount thereof if redeemed during the 12 months
commencing on June 15, 1996 and 108.25% 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 1995 11% Senior Subordinated Note Indenture 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 1995 11% Senior Subordinated
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 1995 11% Senior Subordinated 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.
A portion of the 1995 11% Senior Subordinated Notes were issued in exchange
for Old RGC Notes outstanding at the time of the Merger. A total of $2.1 million
aggregate principal amount of Old RGC 10 1/4%
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<PAGE> 95
Notes, and $0.1 million aggregate principal amount of Old RGC 9% Notes, that
were not exchanged at the time of the Merger remain outstanding. The Old RGC
10 1/4% Notes mature on July 15, 2002 and the Old RGC 9% Notes mature on April
1, 2003. The Old RGC Notes, like the 1995 11% Senior Subordinated Notes, are
subordinated to the prior payment when due of the Senior Indebtedness of the
Company. In connection with the Merger, the indentures governing the Old RGC
Notes were amended to eliminate substantially all of the restrictive covenants
contained therein.
The 1995 13.75% Senior Subordinated Notes. The 1995 13.75% Senior
Subordinated Notes were issued upon consummation of the Merger in an aggregate
principal amount of $140.2 million. The 1995 13.75% Senior Subordinated Notes
are subordinated to the prior payment when due of all Senior Indebtedness (as
defined in the indenture (the "1995 13.75% Senior Subordinated Note Indenture")
governing the 1995 13.75% Senior Subordinated Notes) and are guaranteed on a
senior subordinated basis by the Company's wholly-owned subsidiaries. The 1995
13.75% Senior Subordinated Notes bear interest at a rate of 13.75% per annum,
payable on each June 15 and December 15. The 1995 13.75% Senior Subordinated
Notes will mature on June 15, 2005. On or after June 15, 1996, the 1995 13.75%
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 1995 13.75%
Senior Subordinated Notes has the right to require the Company to repurchase
such holder's 1995 13.75% Senior Subordinated Notes at a price equal to 101% of
their principal amount, plus accrued interest, if any, to the date of
repurchase.
The 1995 13.75% Senior Subordinated Notes are subject to certain covenants
as provided in the 1995 13.75% Senior Subordinated Note Indenture. These
covenants impose certain limitations on the ability of the Company 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 the Company.
The 1995 13.75% Senior Subordinated Notes were issued in exchange for 1991
Senior Subordinated Notes outstanding at the time of the Merger. A total of $4.8
million aggregate principal amount of 1991 Senior Subordinated Notes that were
not exchanged at the time of the Merger remain outstanding. The 1991 Senior
Subordinated Notes mature on June 15, 2001. The 1991 Senior Subordinated Notes,
like the 1995 13.75% Senior Subordinated Notes, are subordinated to the prior
payment when due of the Senior Indebtedness of the Company. In connection with
the Merger, the indenture governing the 1991 Senior Subordinated Notes was
amended to eliminate substantially all of the restrictive covenants contained
therein.
SELLING DEBENTUREHOLDERS
This Prospectus relates to the sale by the Selling Debentureholders from
time to time of (i) up to $131.5 million initial aggregate principal amount of
the Seller Debentures that were issued to the stockholders of RSI as part of the
consideration they received upon consummation of the Merger and (ii) additional
Seller Debentures that may from time to time be issued by Holdings in payment of
interest thereon. As of the date of this Prospectus, the aggregate principal
amount of outstanding Seller Debentures was approximately $150.1 million.
Pursuant to the Merger Agreement, the Selling Debentureholders were granted the
right to have the offer and sale of the Seller Debentures registered under the
Securities Act.
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<PAGE> 96
The following table provides certain information with respect to the
Selling Debentureholders and the amount of Seller Debentures owned, offered and
to be owned after the offering by each Selling Debentureholder:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT
PRINCIPAL OF SELLER PRINCIPAL
AMOUNT OF DEBENTURES TO AMOUNT OF
SELLER DEBENTURES BE SELLER DEBENTURES
OWNED BEFORE SOLD IN THE TO BE OWNED
SELLING DEBENTUREHOLDERS OFFERING(1) OFFERING(1) AFTER OFFERING(2)
- -------------------------------------------- ----------------- -------------- -----------------
<S> <C> <C> <C>
Apollo Investment Fund III, L.P. $ 90,000,000 $ 90,000,000 $ 0
Apollo Overseas Partners III, L.P.
Apollo (U.K.) Partners III, L.P.(3)
2 Manhattanville Road
Purchase, NY 10577
BT Securities Corporation(4) 12,337,335 12,337,335 0
130 Liberty Street
New York, NY 10006
BankAmerica Capital Corp. 5,000,000 5,000,000 0
231 South LaSalle Street
Chicago, IL 60697
Paloma Partners Management Co. 2,000,000 2,000,000 0
Greenwich American Center
2 American Lane
Greenwich, CT 06836
Invesco Funds Group Inc. 3,000,000 3,000,000 0
7800 East Union Ave.
Denver Corporate Center
Tower 2, Suite 900
Denver, CO 80237
Cerberus Partners, L.P. 2,000,000 2,000,000 0
950 Third Ave.
20th Floor
New York, NY 10022
TCW Shared Opportunity Fund, II, L.P. 3,500,000 3,500,000 0
11100 Santa Monica Blvd.
Suite 2050
Los Angeles, CA 90025
The City of New York Employees Retirement 1,000,000 1,000,000 0
Systems Fixed Income Account
c/o Lazard Freres Asset Management
Rockefeller Plaza, 58th Floor
New York, NY 10020
SAFRA Republic Management 500,000 500,000 0
(GUERNSEY) Limited Short Term High Yield
Fund
Republic National Bank Bldg.
Rue de Pre
Saint Peter Port
Guernsey
Channel Islands ILU
Goldman, Sachs & Co. 7,819,588 7,819,588 0
85 Broad Street
New York, NY 10004
Huff Alternative Income Fund 7,500,000 7,500,000 0
c/o 85 Broad Street
New York, NY 10004
</TABLE>
93
<PAGE> 97
<TABLE>
<CAPTION>
MAXIMUM AMOUNT
PRINCIPAL OF SELLER PRINCIPAL
AMOUNT OF DEBENTURES TO AMOUNT OF
SELLER DEBENTURES BE SELLER DEBENTURES
OWNED BEFORE SOLD IN THE TO BE OWNED
SELLING DEBENTUREHOLDERS OFFERING(1) OFFERING(1) AFTER OFFERING(2)
- -------------------------------------------- ----------------- -------------- -----------------
<S> <C> <C> <C>
John Hancock High Yield Bond Fund $ 3,000,000 $ 3,000,000 $ 0
John Hancock Strategic Income Fund
101 Huntington Avenue
7th Floor
Boston, MA 02199
Putnam High Yield Trust 11,219,390 11,219,390 0
Putnam Diversified Income Trust
Putnam Capital Managers Diversified
Income Trust
Ameritech Corporation
One Post Office Square
9th Floor
Boston, MA 02109
Bank of Nova Scotia(5) 6,352,550 6,352,550 0
Scotia Plaza
44 King Street West
Toronto, Ontario
</TABLE>
- ---------------
(1) In addition to the principal amount of Seller Debentures set forth in the
table, the Seller Debentures that may be offered for sale by the Selling
Debentureholders pursuant to this Prospectus include the Seller Debentures
that may be issued from time to time in lieu of cash interest payments
thereon. See "Description of the Seller Debentures."
(2) There is no assurance that the Selling Debentureholders will sell any or all
of the Seller Debentures offered by them.
(3) Includes Seller Debentures owned by one or more entities managed by or
affiliated with Apollo Advisors, L.P. or Apollo Advisors II, L.P.
(collectively, "Apollo"), together with certain affiliates or designees of
Apollo. In addition to the Seller Debentures that it may acquire, Apollo
holds 1,285,165 shares of Holdings common stock and 10,733,244 shares of
Series A Preferred Stock of Holdings. Apollo has the right, pursuant to the
1995 Stockholders Agreement, to elect two directors to the Board of
Directors of Holdings. See "Principal Stockholders" and "Description of
Capital Stock."
(4) BT Securities Corporation acted as lead underwriter with respect to the
public offering of debt securities issued by the Company to finance the
Merger, for which it received a customary underwriting discount. BT
Securities Corporation also acted as placement agent for the issuance of the
1996 Senior Notes. Bankers Trust, an affiliate of BT Securities Corporation,
is administrative agent and a lender under the New Credit Facility. See
"Description of the New Credit Facility." BT Securities Corporation has
provided services to Food 4 Less in connection with the procurement of
financing and in consideration therefor Food 4 Less paid to BT Securities
Corporation a fee of $2.5 million upon closing of the Merger. Such fee was
satisfied through the issuance by Holdings to BT Securities Corporation of
$2.5 million initial accreted value of New Discount Debentures. BT
Securities Corporation also served as a dealer manager and solicitation
agent in connection with the debt exchange offers undertaken by the Company
in connection with the Merger, and received customary fees in connection
with such services. In addition, affiliates of BT Securities Corporation
invested in the capital stock of Holdings pursuant to the New Equity
Investment. After the Merger, such affiliates owned in the aggregate
approximately 900,000 shares of Series A Preferred Stock and approximately
3,100,000 shares of Series B Preferred Stock. See "The Merger and the
Financing," "Principal Stockholders" and "Description of Capital Stock." BT
Securities Corporation has from time to time provided investment banking and
financial advisory services to one or more of Food 4 Less, Holdings, and the
Company and/or their respective affiliates and may continue to do so in the
future. BT Securities Corporation has received customary fees for such
services.
(5) The $6,352,550 principal amount of Seller Debentures held by Bank of Nova
Scotia may be acquired by other holders of Seller Debentures listed in the
table above. Accordingly, the $6,352,550 principal amount of Seller
Debentures is included in the holdings of Bank of Nova Scotia as well as the
holdings of other holders reflected in the above table.
Holdings will pay all costs and expenses incurred in connection with the
registration under the Securities Act of the Seller Debentures offered by the
Selling Debentureholders 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
Debentureholders in connection with blue sky qualifications of the Seller
Debentures), printing and duplicating expenses, messengers and delivery
expenses, fees and disbursements of counsel for 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. Holdings will not receive any of the proceeds from the sale
of the Seller Debentures by the Selling Debentureholders.
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<PAGE> 98
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to Holdings, has advised 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 Seller 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 Seller 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 SELLER DEBENTURES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
STATED INTEREST
Holders of Seller Debentures will be required to include stated interest in
gross income in accordance with their method of accounting for tax purposes.
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 issued in exchange for stock, such as a Seller Debenture,
depends on whether the debt instrument or the stock is treated as "traded on an
established securities market." If the debt instrument is "traded on an
established securities market," its issue price will be its trading price
immediately following issuance. If the stock is so traded (but the debt
instrument received in exchange therefor is not), the issue price of the debt
instrument received will generally be equal to the fair market value of the
stock exchanged therefor.
If neither the debt instrument nor the stock is traded on an established
securities market, the issue price of the debt instrument will be equal to its
stated principal amount, assuming the debt instrument provides for "adequate
stated interest" (i.e., interest at least equal to the applicable federal rate),
and will be equal to its "imputed principal amount" (the sum of the present
values of all payments due under the debt instrument, using a discount rate
equal to the applicable federal rate) if either the debt instrument does not
provide for "adequate stated interest" or in the case of any "potentially
abusive situation" (including certain recent sales transactions).
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 period corresponding to the interval between
payment dates) a pro
95
<PAGE> 99
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 and on the first day of the current accrual period, 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.
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.
Seller Debentures
Because interest on the Seller Debentures can, at the option of Holdings,
be paid in cash or in Secondary Securities, no payments made on the Seller
Debentures will be treated as qualified stated interest. In addition, assuming
that the issue price of the Seller Debentures is at least equal to their stated
principal amount (i.e., the Seller Debentures are not issued at a discount), it
will be presumed for purposes of computing original issue discount on the Seller
Debentures that Holdings will not exercise its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures. As a
result, the Seller Debentures will initially be treated as having been issued
with original issue discount equal to the excess of their stated redemption
price at maturity (which will be equal to the sum of the principal amount plus
all payments of stated interest) over their issue price. If, in fact, Holdings
exercises its option to issue Secondary Securities in lieu of paying cash
interest on the Seller Debentures, the Secondary Securities will not be treated
as payments of interest on the Seller Debentures. In this event, the Seller
Debentures and the Secondary Securities will be treated as a single original
issue discount obligation which will be deemed to be reissued for an issue price
equal to the original issue price of the Seller Debentures plus the principal
amount of the Secondary Securities issued with respect thereto, and will have
original issue discount equal to the excess of the stated redemption price at
maturity of such obligation (which will be equal to the sum of the principal
amounts of the Seller Debentures and the Secondary Securities plus all payments
of stated interest on such debt instruments) over the newly determined issue
price. The Seller Debentures will similarly be deemed to be reissued with a new
issue price each time Holdings exercises its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures.
If the issue price of the Seller Debentures is less than their stated
principal amount (i.e., if the Seller Debentures are issued at a discount), then
it will be presumed for purposes of computing original issue discount on the
Seller Debentures that Holdings will exercise its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures. In this
case, the Seller Debentures will be treated as having been issued with original
issue discount equal to the excess of their stated redemption price at maturity
(which will be equal to the sum of the principal amounts of the Seller
Debentures and the Secondary Securities plus all payments of stated interest)
over their issue price. If, in fact, Holdings pays cash interest on the Seller
Debentures instead of issuing Secondary Securities, such cash payments will be
treated as retiring a pro rata portion of the Seller Debentures (including any
Secondary Securities), and will result in taxable gain or loss to holders equal
to the difference between the amount of such cash payments and the holders'
allocable adjusted tax basis in the portion of the Seller Debentures (including
any Secondary Securities) so retired.
Because of the complexity of the application of the original issue discount
rules to the Seller Debentures, holders of Seller Debentures are strongly urged
to consult their tax advisors regarding the treatment of the Seller Debentures
under these rules.
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<PAGE> 100
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 exceeds 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 Seller 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 Seller Debentures are issued. If such rules were
applicable to the Seller Debentures, Holdings would not be permitted to deduct
any original issue discount on such Seller 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 Holdings' current and accumulated earnings and profits
and would not be deductible by Holdings.
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
(other than payments constituting qualified stated interest) 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 amount payable at maturity of the obligation, 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 (or an earlier call date, if
the use of such date produces a smaller amount of amortizable bond premium). 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 Seller Debentures will recognize gain or loss upon
the sale, exchange, redemption or other taxable disposition of such Seller
Debentures measured by the difference between (i) the amount of cash and the
fair market value of property received (except to the extent attributable to
accrued interest on the Seller Debentures) and (ii) the holder's tax basis in
the Seller Debentures (as increased by any original issue discount and market
discount previously included in income by the holder and decreased by any
amortizable
97
<PAGE> 101
bond premium, if any, deducted over the term of the Seller 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 Seller Debentures have
been held for more than one year.
ELECTION
A holder of Seller Debentures, subject to certain limitations, may elect to
include all interest and discount on the Seller 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 Seller 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 Seller 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 Seller Debentures who does not provide Holdings
with his or her correct taxpayer identification number may be subject to
penalties imposed by the Service.
Holdings will report to holders of the Seller Debentures and the Service
the amount of any "reportable payments" (including any interest paid and any
original issue discount accrued on the Seller Debentures) and any amount
withheld with respect to the Seller 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 SELLER DEBENTURES IN
LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH
HOLDER OF SELLER DEBENTURES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER FROM THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SELLER DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
The Seller Debentures may be sold from time to time to purchasers directly
by any of the Selling Debentureholders. Alternatively, the Selling
Debentureholders may from time to time offer the Seller Debentures through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Debentureholders and/or the purchasers of Seller Debentures for whom they may
act as agents. The Selling Debentureholders and any underwriters, dealers or
agents that participate in the distribution of Seller Debentures may be deemed
to be underwriters, and any profit on the sale of Seller 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 Seller Debentures is
made, to the extent required, a prospectus supplement will be distributed which
will set forth the aggregate amount of Seller 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 Debentureholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
The distribution of the Seller 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.
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<PAGE> 102
If underwriters are used in an offering of Seller 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 Seller 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 Seller Debentures
will (1) entitle the underwriters to indemnification by 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 Seller Debentures offered in a particular offering if any such
Seller Debentures are purchased.
Under applicable rules and regulations of the Exchange Act, any person
engaged in the distribution of the Seller Debentures may not simultaneously
engage in certain market making activities with respect to such Seller
Debentures for a period of nine business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, each 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 Selling Debentureholders.
LEGAL MATTERS
The validity of the Seller Debentures to be offered hereby were passed upon
for Holdings by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated balance sheets of Food 4 Less Holdings, Inc. and
subsidiaries as of June 25, 1994, January 29, 1995 and January 28, 1996 and the
related consolidated statements of operations, cash flows and stockholders'
equity for the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994,
the 31 weeks ended January 29, 1995 and the 52 weeks ended January 28, 1996, and
the related financial statement schedules included in this Prospectus and
elsewhere in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated statements of operations of Ralphs Supermarkets, Inc. for
the years ended January 30, 1994 and 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.
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<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FOOD 4 LESS HOLDINGS, INC.:
Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-2
Consolidated balance sheets as of June 25, 1994, January 29, 1995, January 28, 1996
and July 14, 1996 (unaudited)....................................................... F-3
Consolidated statements of operations for the 52 weeks ended June 26, 1993 and June
25, 1994,
the 31 weeks ended January 29, 1995, the 52 weeks ended January 28, 1996, the 24
weeks ended July 16, 1995 (unaudited) and the 24 weeks ended July 14, 1996
(unaudited)......................................................................... F-5
Consolidated statements of cash flows for the 52 weeks ended June 26, 1993 and June
25, 1994,
the 31 weeks ended January 29, 1995, the 52 weeks ended January 28, 1996, the 24
weeks ended July 16, 1995 (unaudited) and the 24 weeks ended July 14, 1996
(unaudited)......................................................................... F-6
Consolidated statements of stockholders' equity (deficit) for the 52 weeks ended June
26, 1993 and June 25, 1994, the 31 weeks ended January 29, 1995, the 52 weeks ended
January 28, 1996 and the 24 weeks ended July 14, 1996............................... F-8
Notes to consolidated financial statements............................................ F-9
RALPHS SUPERMARKETS, INC.:
Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-32
Consolidated statements of operations for the years ended January 30, 1994 and January
29, 1995............................................................................ F-33
Notes to consolidated financial statements............................................ F-34
</TABLE>
F-1
<PAGE> 104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Food 4 Less Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Food 4 Less
Holdings, Inc. (a Delaware corporation) and subsidiaries (the Company) as of
June 25, 1994, January 29, 1995 and January 28, 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the 52 weeks ended June 26, 1993 and June 25, 1994, the 31 weeks ended
January 29, 1995, and the 52 weeks ended January 28, 1996. 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 25, 1994, January 29, 1995, and
January 28, 1996, and the results of their operations and their cash flows for
the 52 weeks ended June 26, 1993 and June 25, 1994, the 31 weeks ended January
29, 1995, and the 52 weeks ended January 28, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 19, 1996
F-2
<PAGE> 105
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
JANUARY JANUARY
JUNE 25, 29, 28, JULY 14,
1994 1995 1996 1996
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................ $ 32,996 $ 19,560 $ 67,983 $ 61,517
Trade receivables, less allowances of
$1,386, $1,192, $1,954 and $1,519 at
June 25, 1994, January 29, 1995,
January 28, 1996 and July 14, 1996,
respectively.......................... 25,039 23,377 60,948 62,831
Notes and other receivables.............. 1,312 3,985 6,452 5,128
Inventories.............................. 212,892 224,686 502,669 466,172
Patronage receivables from suppliers..... 2,875 5,173 4,557 2,588
Prepaid expenses and other............... 6,323 13,051 34,855 21,200
-------- ---------- ---------- ----------
Total current assets............. 281,437 289,832 677,464 619,436
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
Associated Wholesale Grocers.......... 6,718 6,718 7,288 7,020
Certified Grocers of California and
Other............................... 5,984 5,686 4,926 4,926
PROPERTY AND EQUIPMENT:
Land..................................... 23,488 23,488 183,125 171,542
Buildings................................ 12,827 24,172 196,551 176,455
Leasehold improvements................... 97,673 110,020 251,856 201,877
Equipment and fixtures................... 180,508 190,016 441,760 387,615
Construction in progress................. 12,641 8,042 61,296 47,096
Leased property under capital leases..... 78,222 82,526 189,061 202,738
Leasehold interests...................... 93,464 96,556 114,475 110,661
-------- ---------- ---------- ----------
498,823 534,820 1,438,124 1,297,984
Less: Accumulated depreciation and
amortization.......................... 134,089 154,382 226,451 241,280
-------- ---------- ---------- ----------
Net property and equipment............ 364,734 380,438 1,211,673 1,056,704
OTHER ASSETS:
Deferred financing costs, less
accumulated amortization of $17,083,
$20,496, $6,964 and $12,032 at June
25, 1994, January 29, 1995, January
28, 1996 and July 14, 1996,
respectively.......................... 28,536 25,469 94,100 95,021
Goodwill, less accumulated amortization
of $33,945, $38,560, $60,407 and
$76,592 at June 25, 1994, January 29,
1995, January 28, 1996 and July 14,
1996, respectively.................... 267,884 263,112 1,173,445 1,333,421
Other, net............................... 24,787 29,440 19,233 24,558
-------- ---------- ---------- ----------
$980,080 $1,000,695 $3,188,129 $3,141,086
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 106
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------
JUNE 25, JANUARY 29, JANUARY 28, JULY 14,
1994 1995 1996 1996
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable.................................................... $180,708 $ 190,455 $ 385,500 $ 335,766
Accrued payroll and related liabilities............................. 42,805 42,007 94,011 106,240
Accrued interest.................................................... 5,474 10,730 23,870 24,204
Other accrued liabilities........................................... 53,910 65,279 276,162 264,333
Income taxes payable................................................ 2,000 293 596 1,050
Current portion of self-insurance liabilities....................... 29,492 28,616 21,785 50,000
Current portion of senior debt...................................... 18,314 22,263 31,735 15,468
Current portion of obligations under capital leases................. 3,616 4,965 22,261 26,097
-------- ---------- ---------- ----------
Total current liabilities.................................... 336,319 364,608 855,920 823,158
SENIOR DEBT, net of current portion................................... 310,944 320,901 1,226,302 1,232,703
OBLIGATIONS UNDER CAPITAL LEASES...................................... 39,998 40,675 130,784 135,105
SENIOR SUBORDINATED DEBT.............................................. 145,000 145,000 671,222 671,222
HOLDINGS DEBENTURES................................................... 58,997 65,136 247,917 263,808
DEFERRED INCOME TAXES................................................. 14,740 17,534 17,988 17,988
SELF-INSURANCE LIABILITIES............................................ 52,212 44,123 127,200 103,412
LEASE VALUATION RESERVE............................................... -- -- 25,182 23,368
OTHER NON-CURRENT LIABILITIES......................................... 11,846 10,051 74,412 128,522
COMMITMENTS AND CONTINGENCIES......................................... -- -- -- --
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000
shares authorized; no shares issued at June 25, 1994 and January
29, 1995 and 16,683,244 shares issued at January 28, 1996 and July
14, 1996 (aggregate liquidation value of $174.2 million and $179.8
million at January 28, 1996 and July 14, 1996, respectively)...... -- -- 161,831 161,831
Convertible Series B Preferred Stock, $.01 par value, 25,000,000
shares authorized; no shares issued at June 25, 1994 and January
29, 1995 and 3,100,000 shares issued at January 28, 1996 and July
14, 1996 (aggregate liquidation value of $32.4 million and $33.4
million at January 28, 1996 and July 14, 1996, respectively)...... -- -- 31,000 31,000
Common Stock, $.01 par value, 1,600,000 shares, 1,600,000 shares,
60,000,000 shares and 60,000,000 shares authorized at June 25,
1994, January 29, 1995, January 28, 1996 and July 14, 1996,
respectively; 1,381,782 shares, 1,386,169 shares, 17,207,882
shares and 17,207,882 shares issued at June 25, 1994, January 29,
1995, January 28, 1996 and July 14, 1996, respectively............ 14 14 172 172
Non-Voting Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at June 25, 1994, January 29, 1995,
January 28, 1996 or July 14, 1996................................. -- -- -- --
Additional capital.................................................. 105,182 105,580 56,991 56,991
Notes receivable from stockholders.................................. (586) (702) (602) (593)
Retained deficit.................................................... (94,586) (112,225) (434,643) (504,054)
-------- ---------- ---------- ----------
10,024 (7,333) (185,251) (254,653)
Treasury stock; no shares of common stock at June 25, 1994 and
January 29, 1995 and 421,237 shares at January 28, 1996 and July
14, 1996.......................................................... -- -- (3,547) (3,547)
-------- ---------- ---------- ----------
Total stockholders' equity (deficit)......................... 10,024 (7,333) (188,798) (258,200)
-------- ---------- ---------- ----------
$980,080 $ 1,000,695 $ 3,188,129 $ 3,141,086
======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 107
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
------------------------------------------------------------------------------
52 WEEKS
52 WEEKS 52 WEEKS 31 WEEKS ENDED 24 WEEKS 24 WEEKS
ENDED ENDED ENDED JANUARY ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, 28, JULY 16, JULY 14,
1993 1994 1995 1996 1995 1996
---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
SALES......................................... $2,742,027 $2,585,160 $ 1,556,522 $4,335,109 $1,480,942 $2,474,576
COST OF SALES (including purchases from
related parties of $204,028, $175,929,
$104,407, $141,432, $79,434 and $47,863 for
the 52 weeks ended June 26, 1993 and June
25, 1994, the 31 weeks ended January 29,
1995, the 52 weeks ended January 28, 1996,
the 24 weeks ended July 16, 1995 and the 24
weeks ended July 14, 1996, respectively).... 2,257,835 2,115,842 1,294,147 3,485,993 1,212,157 1,963,692
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT.................................. 484,192 469,318 262,375 849,116 268,785 510,884
SELLING, GENERAL, ADMINISTRATIVE AND OTHER,
NET......................................... 434,908 388,836 222,359 785,576 255,006 436,211
AMORTIZATION OF GOODWILL...................... 7,571 7,691 4,615 21,847 6,512 16,185
RESTRUCTURING CHARGE.......................... -- -- 5,134 123,083 63,587 --
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)....................... 41,713 72,791 30,267 (81,390) (56,320 ) 58,488
INTEREST EXPENSE:
Interest expense, excluding amortization of
deferred financing costs.................. 68,713 71,545 44,948 194,458 55,813 122,715
Amortization of deferred financing costs.... 4,901 5,472 3,413 8,193 2,994 5,068
---------- ---------- ---------- ---------- ---------- ----------
73,614 77,017 48,361 202,651 58,807 127,783
LOSS (GAIN) ON DISPOSAL OF ASSETS............. (2,083) 37 (455) (547) (436 ) 116
PROVISION FOR EARTHQUAKE LOSSES............... -- 4,504 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY CHARGE........................ (29,818) (8,767) (17,639) (283,494) (114,691 ) (69,411 )
PROVISION FOR INCOME TAXES.................... 1,427 2,700 -- 500 500 --
---------- ---------- ---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE.............. (31,245) (11,467) (17,639) (283,994) (115,191 ) (69,411 )
EXTRAORDINARY CHARGE.......................... -- -- -- 38,424 35,358 --
---------- ---------- ---------- ---------- ---------- ----------
NET LOSS...................................... $ (31,245) $ (11,467) $ (17,639) $ (322,418) $ (150,549 ) $ (69,411 )
---------- ---------- ---------- ---------- ---------- ----------
LOSS PER COMMON SHARE:
Loss before extraordinary charge............ $ (1.35) $ (0.50) $ (0.77) $ (9.02) $ (5.28 ) $ (1.88 )
Extraordinary charge........................ -- -- -- (1.22) (1.62 ) --
---------- ---------- ---------- ---------- ---------- ----------
Net loss.................................... $ (1.35) $ (0.50) $ (0.77) $ (10.24) $ (6.90 ) $ (1.88 )
---------- ---------- ---------- ---------- ---------- ----------
Average Number of Common Shares
Outstanding............................... 23,109,219 22,933,754 22,943,656 31,476,632 21,811,279 36,991,126
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 108
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28, JULY 16, JULY 14,
1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Cash received from customers........... $ 2,742,027 $ 2,585,160 $ 1,556,522 $ 4,335,109 $1,480,754 $ 2,474,576
Cash paid to suppliers and employees... (2,711,779) (2,441,353) (1,507,523) (4,197,875) (1,459,333 ) (2,298,404)
Interest paid.......................... (58,807) (56,762) (33,553) (157,441) (42,120 ) (106,490)
Income taxes refunded (paid)........... 2,971 (247) 1,087 256 100 --
Interest received...................... 993 903 867 2,562 228 1,031
Other, net............................. 8,093 121 221 547 (12,276 ) (116)
----------- ----------- ----------- ----------- ---------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................. (16,502) 87,822 17,621 (16,842) (32,647 ) 70,597
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment............................ 15,685 11,953 7,199 21,373 5,471 20,537
Payment for purchase of property and
equipment............................ (53,467) (57,471) (49,023) (122,355) (30,427 ) (55,840)
Payment of acquisition costs, net of
cash acquired........................ -- (11,050) -- (403,301) (440,620 ) (10,172)
Other, net............................. (18) 813 (797) (1,120) (639 ) (3,191)
----------- ----------- ----------- ----------- ---------- -----------
NET CASH USED BY INVESTING ACTIVITIES.... (37,800) (55,755) (42,621) (505,403) (466,215 ) (48,666)
CASH PROVIDED (USED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
debt................................. 26,557 28 -- 1,105,500 1,021,084 94,625
Net increase (decrease) in revolving
loan................................. 4,900 (4,900) 27,300 100,100 2,700 (47,700)
Payments of long-term debt............. (14,319) (14,224) (13,394) (661,119) (621,392 ) (56,791)
Proceeds from issuance of preferred
stock, net........................... 46,348 -- -- 137,500 135,000 --
Proceeds from issuance of common stock,
net.................................. 3,652 -- 269 -- -- --
Purchase of treasury stock, net........ -- -- -- (3,547) (3,444 ) --
Purchase of common stock, net.......... (545) (1,192) (57) -- -- --
Payments of capital lease obligation... (2,840) (3,693) (2,278) (15,314) (3,294 ) (12,551)
Deferred financing costs and other,
net.................................. (8,839) (179) (276) (92,452) 27 (5,980)
----------- ----------- ----------- ----------- ---------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES............................. 54,914 (24,160) 11,564 570,668 530,681 (28,397)
----------- ----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 612 7,907 (13,436) 48,423 31,819 (6,466)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. 24,477 25,089 32,996 19,560 19,560 67,983
----------- ----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 25,089 $ 32,996 $ 19,560 $ 67,983 $ 51,379 $ 61,517
=========== =========== =========== =========== ========== ===========
</TABLE>
F-6
<PAGE> 109
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28, JULY 16, JULY 14,
1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING
ACTIVITIES:
Net loss............................... $ (31,245) $ (11,467) $ (17,639) $ (322,418) $ (150,549 ) $ (69,411)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization........ 62,541 62,555 40,036 133,522 42,233 79,926
Non-cash interest expense............ 3,882 8,767 6,139 23,877 6,779 15,891
Restructuring charge................. -- -- 5,134 123,083 63,587 --
Extraordinary charge................. -- -- -- 38,424 23,128 --
Loss (gain) on sale of assets........ (4,613) 65 (455) (547) (436 ) 116
Change in assets and liabilities, net
of effects from acquisition of
businesses:
Accounts and notes receivable...... 17,145 (3,220) (3,398) (74) 4,765 1,410
Inventories........................ 17,697 (17,125) (11,794) 762 23,590 36,497
Prepaid expenses and other......... (5,956) (5,717) (11,239) (18,291) 5,520 8,731
Accounts payable and accrued
liabilities..................... (83,286) 55,301 18,715 3,327 (51,036 ) (6,990)
Self-insurance liabilities......... 2,935 (3,790) (8,965) 737 (828 ) 4,427
Deferred income taxes.............. 4,004 2,506 2,794 454 -- --
Income taxes payable............... 394 (53) (1,707) 302 600 --
----------- ----------- ----------- ----------- ----------- -----------
Total adjustments...................... 14,743 99,289 35,260 305,576 117,902 140,008
----------- ----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES............................. $ (16,502) $ 87,822 $ 17,621 $ (16,842) $ (32,647 ) $ 70,597
============ ============ ============ ============ =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment
through issuance of capital lease
obligation........................... $ -- $ 2,575 $ 4,304 $ 24,008 $ -- $ --
============ ============ ============ ============ =========== ============
Reduction of goodwill and deferred
income taxes......................... $ -- $ 9,896 $ -- $ -- $ -- $ --
============ ============ ============ ============ =========== ============
Acquisition of stores in fiscal year
1994 and RSI in fiscal year 1995
Fair value of assets acquired,
including goodwill, net of cash
acquired of $34,380 in fiscal
year 1995....................... $ -- $ 11,241 $ -- $ 2,098,220 $2,053,528 $ --
Net cash paid in acquisition....... -- (11,050) -- (403,301) (440,620 ) --
Notes issued to seller............. -- -- -- (150,000) (160,000 ) --
Notes issued to advisor............ -- -- -- (12,000) (20,000 ) --
----------- ----------- ----------- ----------- ----------- -----------
Liabilities assumed................ $ -- $ 191 $ -- $ 1,532,919 $1,432,908 $ --
============ ============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 110
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK NON-VOTING TREASURY
SERIES A SERIES B COMMON STOCK COMMON STOCK STOCK
--------------------- ------------------- ------------------- --------------- --------
NUMBER NUMBER NUMBER NUMBER NUMBER
OF OF OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- -------- ---------- ------- ---------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 27, 1992....... -- $ -- -- $ -- 1,398,514 $ 14 -- $ -- (3,637)
Net loss...................... -- -- -- -- -- -- -- -- --
Issuance of Common Stock
Warrants.................... -- -- -- -- -- -- -- -- --
Purchase of Treasury Stock.... -- -- -- -- -- -- -- -- -- (9,612)
Elimination of Treasury
Stock....................... -- -- -- -- (13,249) -- -- -- 13,249
--
---------- -------- ---------- ------- ---------- ---- --- --------
BALANCES AT JUNE 26, 1993....... -- -- -- -- 1,385,265 14 -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
Purchase of Common Stock...... -- -- -- -- (3,483) -- -- -- --
Payments of Stockholders'
Notes....................... -- -- -- -- -- -- -- -- --
--
---------- -------- ---------- ------- ---------- ---- --- --------
BALANCES AT JUNE 25, 1994....... -- -- -- -- 1,381,782 14 -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
Issuance of Common Stock...... -- -- -- -- 5,504 -- -- -- --
Purchase of Common Stock...... -- -- -- -- (1,117) -- -- -- --
Payments of Stockholders'
Notes....................... -- -- -- -- -- -- -- -- --
--
---------- -------- ---------- ------- ---------- ---- --- --------
BALANCES AT JANUARY 29, 1995.... -- -- -- -- 1,386,169 14 -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
Payments of Stockholders'
Notes....................... -- -- -- -- -- -- -- -- --
Stock split of Common Stock
(16.58609143 shares to 1
share)...................... -- -- -- -- 21,604,957 216 -- -- --
Purchase of Treasury Stock.... -- -- -- -- -- -- -- -- (421,237)
Issuance of Preferred Stock... 10,900,000 109,000 3,100,000 31,000 -- -- -- -- --
Conversion of Common Stock to
Preferred Stock............. 5,783,244 57,831 -- -- (5,783,244) (58) -- -- --
Preferred Stock Issuance
Costs....................... -- (5,000) -- -- -- -- -- -- --
Exchange RGC liability for
stock options............... -- -- -- -- -- -- -- -- --
Repurchase Stock Options...... -- -- -- -- -- -- -- -- --
--
---------- -------- ---------- ------- ---------- ---- --- --------
BALANCES AT JANUARY 28, 1996.... 16,683,244 161,831 3,100,000 31,000 17,207,882 172 -- -- (421,237)
Payments on Stockholders'
Notes....................... -- -- -- -- -- -- -- -- --
Net loss (unaudited).......... -- -- -- -- -- -- -- -- --
--
---------- -------- ---------- ------- ---------- ---- --- --------
BALANCES AT JULY 14, 1996
(unaudited)................... 16,683,244 $161,831 3,100,000 $31,000 17,207,882 $172 -- $ -- (421,237)
========== ======== ========== ======= ========== ==== == === ========
<CAPTION>
STOCK-
STOCK- ADD'L HOLDERS'
HOLDERS' PAID-IN RETAINED EQUITY
AMOUNT NOTES CAPITAL DEFICIT (DEFICIT)
------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES AT JUNE 27, 1992....... $ (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.... (770 ) 225 -- -- (545)
Elimination of Treasury
Stock....................... 1,199 -- (1,199) -- --
------- ----- ------- --------- ---------
BALANCES AT JUNE 26, 1993....... -- (714) 106,452 (83,119) 22,633
Net loss...................... -- -- -- (11,467) (11,467)
Purchase of Common Stock...... -- 78 (1,270) -- (1,192)
Payments of Stockholders'
Notes....................... -- 50 -- -- 50
------- ----- ------- --------- ---------
BALANCES AT JUNE 25, 1994....... -- (586) 105,182 (94,586) $ 10,024
Net loss...................... -- -- -- (17,639) (17,639)
Issuance of Common Stock...... -- (191) 460 -- 269
Purchase of Common Stock...... -- 5 (62) -- (57)
Payments of Stockholders'
Notes....................... -- 70 -- -- 70
------- ----- ------- --------- ---------
BALANCES AT JANUARY 29, 1995.... -- (702) 105,580 (112,225) (7,333)
Net loss...................... -- -- -- (322,418) (322,418)
Payments of Stockholders'
Notes....................... -- 100 -- -- 100
Stock split of Common Stock
(16.58609143 shares to 1
share)...................... -- -- (216) -- --
Purchase of Treasury Stock.... (3,547 ) -- -- -- (3,547)
Issuance of Preferred Stock... -- -- -- -- 140,000
Conversion of Common Stock to
Preferred Stock............. -- -- (57,773) -- --
Preferred Stock Issuance
Costs....................... -- -- -- -- (5,000)
Exchange RGC liability for
stock options............... -- -- 10,000 -- 10,000
Repurchase Stock Options...... -- -- (600) -- (600)
------- ----- ------- --------- ---------
BALANCES AT JANUARY 28, 1996.... (3,547 ) (602) 56,991 (434,643) (188,798)
Payments on Stockholders'
Notes....................... -- 9 -- -- 9
Net loss (unaudited).......... -- -- -- (69,411) (69,411)
------- ----- ------- --------- ---------
BALANCES AT JULY 14, 1996
(unaudited)................... $(3,547) $ (593) $ 56,991 $(504,054) $(258,200)
======= ===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 111
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 Delaware corporation, owns all of the outstanding capital
stock of Ralphs Grocery Company ("Ralphs"), which is the successor through
merger to Food 4 Less Supermarkets, Inc. ("Food 4 Less"). See "Ralphs Merger"
below. The Company is a multiple format supermarket operator that tailors its
retail strategy to the particular needs of the individual communities it serves.
The Company operates in three geographic areas: Southern California, Northern
California and certain areas of the Midwest. Ralphs has four first-tier
subsidiaries: Cala Co. ("Cala"), Falley's, Inc. ("Falley's"), Food 4 Less of
Southern California, Inc. ("F4L-SoCal"), formerly known as Breco Holding
Company, Inc. ("BHC") and Crawford Stores, Inc. 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.
Ralphs Merger
On June 14, 1995, Food 4 Less, Food 4 Less Holdings, Inc., a California
corporation ("Old Holdings"), and Food 4 Less, Inc. ("FFL") (which owned a
majority of the stock of Old Holdings) completed 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, Food 4 Less was merged with and into RSI (the "RSI Merger").
Immediately following the RSI Merger, pre-Merger Ralphs Grocery Company ("RGC"),
which was a wholly-owned subsidiary of RSI, merged with and into RSI (the "RGC
Merger," and together with the RSI Merger, the "Merger"), and RSI changed its
name to Ralphs Grocery Company ("Ralphs"). Prior to the Merger, FFL merged with
and into Old Holdings, which was the surviving corporation (the "FFL Merger").
Immediately following the FFL Merger, Old Holdings changed its jurisdiction of
incorporation by merging into a newly-formed, wholly-owned subsidiary
("Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a
result of the Merger, the FFL Merger and the Reincorporation Merger, Ralphs
became a wholly-owned subsidiary of Holdings.
The purchase price for the outstanding capital stock of RSI was $538.1
million; the Company paid $388.1 million in cash, issued $131.5 million
principal amount of its 13 5/8% Senior Subordinated Pay-in-Kind Debentures due
2007 (the "Seller Debentures"), and issued $18.5 million initial accreted value
of its 13 5/8% Senior Discount Debentures due 2005 (the "New Discount
Debentures"). The Company also paid fees associated with the acquisition of
$47.8 million (including a prepayment premium on outstanding mortgage debt of
RGC of $19.7 million), which was offset by RGC's cash on hand at the Merger date
of $32.6 million.
The proceeds from the New Credit Facility, the 1995 Senior Notes, the 1995
11% Senior Subordinated Notes and the New Equity Investment (all as defined
below), and the issuance by the Company of $59.0 million initial accreted value
of New Discount Debentures for cash, provided the sources of financing required
to consummate the Merger and to repay outstanding bank debt of Food 4 Less and
RGC of $176.5 million and $228.9 million, respectively, to repay existing
mortgage debt of $174.0 million of RGC, and to pay $84.4 million to the holders
of the Company's Senior Discount Notes due 2004 (the "Discount Notes"). In
addition, Ralphs exchanged certain of its newly issued senior notes and senior
subordinated notes for outstanding indebtedness of RGC and Food 4 Less. Proceeds
from the New Credit Facility also were used to pay certain exchange and consent
solicitation fees associated with the above transactions, and to pay accrued
interest on all exchanged debt securities in the amount of $27.8 million, to pay
$17.8 million to the holders of the RGC Equity Appreciation Rights, to loan $5.0
million to an affiliate for the benefit of such holders, to pay approximately
$93.3 million of fees and expenses of the Merger and the related financing, and
to pay $3.5 million to purchase shares of common stock of Old Holdings from
certain dissenting shareholders. In addition, Holdings issued $22.5 million of
its New Discount Debentures in consideration for certain Merger-related
services.
F-9
<PAGE> 112
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the closure of two former RGC warehouse facilities and
nine former RGC stores (including three stores which were part of an antitrust
settlement agreement with the State of California), the Company recorded a
reserve of $24.9 million in the purchase price allocation. This reserve includes
lease termination costs, write-off of the property and equipment at these
locations and closure costs. These closures are expected to be completed by the
end of fiscal year 1996. Also, a reserve of $12.0 million was recorded for
administrative cost reductions mainly associated with duplicative personnel.
The following unaudited pro forma information for the 52 weeks ended
January 29, 1995 and the 52 weeks ended January 28, 1996 presents the results of
the Company's operations, adjusted to reflect interest expense and depreciation
and amortization, as though the Merger had been completed on January 31, 1994.
The unaudited pro forma information for the 24 weeks ended July 16, 1995 is
presented as though the Merger was completed on January 30, 1995 (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE
------------------------------------------
52 WEEKS 52 WEEKS 24 WEEKS
ENDED ENDED ENDED
JANUARY 29, JANUARY 28, JULY 16,
1995 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Sales.......................................... $ 5,301,411 $ 5,360,800 $2,506,633
Restructuring charge........................... (128,217) -- (75,187)
Loss before extraordinary charge............... (261,632) (130,924) (207,245)
Net loss....................................... (300,056) (130,924) (245,669)
Loss per share:
Loss before extraordinary charge............. (15.20) (7.61) (5.60)
Net loss..................................... (17.44) (7.61) (6.64)
</TABLE>
Incremental costs of $74.8 million associated with the integration of RGC
into the Company, including advertising the conversion of Food 4 Less stores to
the Ralphs format, combining the Food 4 Less and RGC warehousing and
distribution functions and markdowns recorded at converted stores and stores
closed, were recorded in the actual statement of operations for fiscal year 1995
and are recorded in the pro-forma 52 weeks ended January 29, 1995 only. The
unaudited pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchases actually
been made on January 31, 1994, or of the results which may occur in the future.
The accompanying consolidated financial statements include the preliminary
allocation of the RGC purchase price. Certain appraisals and other analyses
needed to determine the fair market value of RGC's net assets as of the Merger
date are not yet completed. The final purchase price allocation will be
completed by June 1996.
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 $11.2 million.
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, the Company acquired all of the common stock of Alpha
Beta for $270.5 million in a transaction accounted for as a purchase.
F-10
<PAGE> 113
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and its wholly-owned subsidiaries. The results of operations of
pre-Merger Ralphs Grocery Company and all previous acquisitions have been
excluded from the consolidated financial statements for periods prior to their
respective acquisition dates. All intercompany transactions have been eliminated
in consolidation.
Fiscal Years
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 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 31-week period ended January 29, 1995 is referred to as the 1995 transition
period and the 52-week period ended January 28, 1996 is referred to as fiscal
year 1995. In addition, information presented below concerning subsequent fiscal
years starts with fiscal year 1996, which will cover the 53 weeks ended February
2, 1997 and will proceed sequentially forward.
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.
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 $13.8 million,
$16.5 million, $18.7 million and $21.2 million (unaudited) at June 25, 1994,
January 29, 1995, January 28, 1996 and July 14, 1996, respectively, and gross
profit and operating income would have been greater by $4.4 million, $0.7
million, $2.7 million, $2.2 million, $2.0 million (unaudited) and $2.5 million
(unaudited) for fiscal year 1993, fiscal year 1994, the 1995 transition period,
fiscal year 1995, the first quarter of fiscal year 1995 and the 24 weeks ended
July 14, 1996, respectively.
Pre-opening Costs
The costs associated with opening new stores are deferred and amortized
over one year following the opening of each new store.
Closed Store Reserves
When a store is closed, the Company provides a reserve for the net book
value of its property and equipment, net of salvage value, and the net present
value of the remaining lease obligation, net of sublease income. For fiscal year
1993, fiscal year 1994, the 1995 transition period and fiscal year 1995 (which
includes activity due to the Merger), utilization of this reserve was $2.4
million, $1.1 million, $0.6 million and $23.0 million, respectively.
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-11
<PAGE> 114
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
Goodwill
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 28, 1996, no impairment existed.
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.
The implementation of SFAS 109 did not have a material effect on the
accompanying consolidated financial statements.
Notes Receivable from Stockholders
Notes receivable from stockholders represent loans to employees of the
Company for purchases of Holdings' common stock. The notes are due over various
periods, bear interest at the prime rate, and are secured by each stockholder's
shares of Holdings' common stock.
Self-Insurance
The Company is self-insured for a portion of its workers' compensation,
general liability and automobile accident claims. The Company establishes
reserves based on an independent actuary's valuation of open claims reported and
an estimate of claims incurred but not yet filed.
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.
F-12
<PAGE> 115
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision for Earthquake Losses
On January 17, 1994, Southern California was struck by 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, or 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 loss, net of insurance recoveries, was
approximately $4.5 million.
Extraordinary Items
For the 52 weeks ended January 28, 1996, the Company recorded an
extraordinary charge relating to the refinancing of Food 4 Less' Old Credit
Facility, 10.45% Senior Notes due 2000 (the "1992 Senior Notes"), 13.75% Senior
Subordinated Notes due 2001 (the "1991 Senior Subordinated Notes"), the
repayment of Holdings' 15.25% Senior Discount Notes due 2004 in connection with
the Merger and the write-off of their related debt issuance costs.
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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued 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) and Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). The Company will be required to adopt SFAS 121 and SFAS 123 in
fiscal year 1996. The Company does not expect that the adoption of SFAS 121 or
SFAS 123 will have a material effect on its financial position or its results of
operations in fiscal year 1996.
Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the fiscal year 1995 presentation.
F-13
<PAGE> 116
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's senior debt is summarized as follows:
<TABLE>
<CAPTION>
AS OF
------------------------------------------------
JUNE 25, JANUARY 29, JANUARY 28,
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
New Term Loans................................. $ -- $ -- $ 590,426,000
Old Term Loan.................................. 137,064,000 125,732,000 --
10.45% Senior Notes, principal due 2004 with
interest payable semi-annually in arrears.... -- -- 520,326,000
10.45% Senior Notes, principal due 2000 with
interest payable semi-annually in arrears.... 175,000,000 175,000,000 4,674,000
New Revolving Facility......................... -- -- 127,400,000
Old Revolving Loan............................. -- 27,300,000 --
10.0% secured promissory note, collateralized
by the stock of Bell, due June 1996, interest
payable quarterly............................ 8,000,000 8,000,000 8,000,000
Other senior debt.............................. 9,194,000 7,132,000 7,211,000
------------ ------------ --------------
329,258,000 343,164,000 1,258,037,000
Less -- current portion........................ 18,314,000 22,263,000 31,735,000
------------ ------------ --------------
$310,944,000 $320,901,000 $1,226,302,000
============ ============ ==============
</TABLE>
Senior Debt
As part of the Merger financing, the Company entered into a new bank credit
agreement (the "New Credit Facility") comprised of a $600.0 million term loan
facility (the "New Term Loans") and a revolving credit facility of $325.0
million (the "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 $150.0 million may be issued.
At January 28, 1996, $590.4 million was outstanding under the New Term
Loans, $127.4 million was outstanding under the New Revolving Facility, and
$92.7 million of standby letters of credit had been issued on behalf of the
Company. A commitment fee of one-half of one percent per annum is charged on the
average daily unused portion of the New Revolving Facility; such commitment fees
are due quarterly in arrears. Interest on borrowings under the New Term Loans is
due quarterly in arrears and is at the bank's Base Rate (as defined) plus a
margin ranging from 1.50 percent to 2.75 percent or the Adjusted Eurodollar Rate
(as defined) plus a margin ranging from 2.75 percent to 4.00 percent. At January
28, 1996, the weighted average interest rate on the New Term Loans was 9.19
percent. Interest on borrowings under the New Revolving 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 January 28, 1996,
the interest rate on the New Revolving Facility was 9.05 percent.
On October 11, 1995, the Company entered into an interest rate collar
agreement with the New Credit Facility Administrative Agent which effectively
set interest rate limits on $300.0 million of the Company's New Term Loans. This
interest rate collar, which was effective as of October 19, 1995, limits the
interest rate fluctuation of the Adjusted Eurodollar Rate (as defined) to a
range between 4.5 percent and 8.0 percent for two years. This agreement
satisfies the interest rate protection requirements under the New Credit
Facility.
Quarterly principal installments on the New Term Loans continue to December
2003, with amounts payable in each year as follows: $19.3 million in fiscal
1996, $46.0 million in fiscal 1997, $58.5 million in fiscal
F-14
<PAGE> 117
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, $62.0 million in fiscal 1999, $65.6 million in fiscal 2000, and $339.0
million thereafter. The principal installments can be accelerated if the Company
receives proceeds on the sale of certain of its assets in the future. To the
extent that borrowings under the New Revolving 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.
Food 4 Less issued $350.0 million of 10.45% Senior Notes due 2004 (the
"1995 Senior Notes") and exchanged $170.3 million principal amount of 1995
Senior Notes for an equal amount of the 10.45% F4L Senior Notes due 2000 (the
"1992 Senior Notes") (together with the 1995 Senior Notes, the "Senior Notes"),
leaving an outstanding balance of $4.7 million of the 1992 Senior Notes. The
1992 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 1995 Senior Notes is payable semiannually
in arrears on each June 15 and December 15. Interest on the 1992 Senior Notes is
payable semiannually in arrears on each April 15 and October 15.
The 1995 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 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 1995
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 15, 1995, June 15, 1996, and June 15,
1997, respectively, in each case plus accrued and unpaid interest, if any, to
the redemption date. The 1992 Senior Notes may be redeemed beginning in fiscal
year 1996 at 104.48 percent, declining ratably to 100 percent in fiscal year
1999.
Scheduled maturities of principal of senior debt at January 28, 1996 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------
<S> <C>
1996......................................................... $ 31,735,000
1997......................................................... 46,246,000
1998......................................................... 58,739,000
1999......................................................... 62,280,000
2000......................................................... 65,805,000
Later years.................................................. 993,232,000
--------------
$1,258,037,000
==============
</TABLE>
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 interest payment dates on the Private Notes are June 15 and December
15, with a maturity date of June 15, 2004. The Private Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after June 15,
2000, at the following redemption prices if redeemed during the twelve-month
period commencing on June 15 of the years set forth below:
F-15
<PAGE> 118
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------------- ----------
<S> <C>
2000............................................................ 105.225%
2001............................................................ 103.483%
2002............................................................ 101.742%
2003 and thereafter............................................. 100.000%
</TABLE>
in each case plus accrued and unpaid interest to the date of redemption.
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 percent of the principal amount of the Private Notes
originally issued, at a redemption price equal to 108.957% of the principal
amount thereof if redeemed during the twelve months commencing on June 15, 1996
and 107.464% of the principal amount thereof if redeemed during the twelve
months commencing on June 15, 1997, in each case plus accrued and unpaid
interest to the redemption date.
The Private Notes are senior unsecured obligations of the Company and rank
"pari passu" in right of payment with other senior unsecured indebtedness of the
Company. However, the Private Notes are effectively subordinated to all secured
indebtedness of the Company and its subsidiaries, including indebtedness under
the New Credit Facility.
The $94.6 million of gross proceeds from the Private Notes was used to (i)
repay $22.7 million of New Term Loans principal, which was due within the
following twelve months, (ii) repay $21.7 million of additional New Term Loans
principal, 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 will bear interest at the same rate and on the same terms as
the Private Notes. The Exchange Offer expired on August 30, 1996.
Senior Subordinated Debt
Concurrent with the Merger, Ralphs issued $100.0 million of 11% Senior
Subordinated Notes due 2005 (the "1995 11% Senior Subordinated Notes") and (i)
exchanged $142.2 million principal amount of the RGC 9% Senior Subordinated
Notes due 2003 (the "Old RGC 9% Notes") and $281.8 million 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 1995 11% Senior Subordinated Notes, (ii) purchased $7.5 million principal
amount of Old RGC 9% Notes and $15.2 million principal amount of Old RGC 10.25%
Notes in conjunction with the offers, and (iii) subsequently purchased $0.1
million principal amount of Old RGC 9% Notes and $1.0 million principal amount
of Old RGC 10.25% Notes subject to the change of control provision, leaving an
outstanding balance of $0.1 million on the Old RGC 9% Notes and an outstanding
balance of $2.1 million on the Old RGC 10.25% Notes. The 1995 11% Senior
Subordinated Notes are senior subordinated unsecured obligations of Ralphs and
are subordinated in right of payment to all senior indebtedness, including
Ralphs' obligations under the New Credit Facility and the Senior Notes. Interest
on the 1995 11% Senior Subordinated Notes is payable semiannually in arrears on
each June 15 and December 15.
The 1995 11% Senior Subordinated 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
F-16
<PAGE> 119
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption price declines ratably to 100 percent in fiscal year 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 1995 11% Senior
Subordinated 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.
Food 4 Less exchanged $140.2 million 13.75% Senior Subordinated Notes due
2005 (the "1995 13.75% Senior Subordinated Notes") for an equal amount of 13.75%
Senior Subordinated Notes due 2001 (the "1991 Senior Subordinated Notes," and
together with the 1995 13.75% Senior Subordinated Notes, the "13.75% Senior
Subordinated Notes") of Food 4 Less, leaving an outstanding balance of $4.8
million of the 1991 Senior Subordinated Notes. The 13.75% Senior Subordinated
Notes are senior subordinated unsecured obligations of Ralphs and are
subordinated in right of payment to all senior indebtedness, including Ralphs'
obligations under the New Credit Facility and the Senior Notes. Interest on the
13.75% Senior Subordinated Notes is payable semiannually in arrears on each June
15 and December 15 commencing on December 15, 1995. The 1995 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 year 2000.
At the time of the Merger, Holdings issued $100.0 million of its New
Discount Debentures. At January 28, 1996, the balance of the New Discount
Debentures was $108.6 million. Interest on the New Discount Debentures accretes
at the rate of 13 5/8% until June 15, 2000, when cash interest will accrue and
be payable semiannually commencing December 15, 2000. The New Discount
Debentures may be redeemed, at the option of Holdings, beginning in fiscal year
2000 at a redemption price of 106.8125 percent, which declines annually until
fiscal year 2004 when they may be redeemed at 100.0 percent. The New Discount
Debentures are senior unsecured obligations of Holdings and rank senior in right
of payment to the Seller Debentures.
Holdings issued $131.5 million of its Seller Debentures as partial
consideration to the sellers of the RSI common stock (the "Selling
Stockholders"). At January 28, 1996, the balance of the Seller Debentures was
$139.4 million. Interest is payable semi-annually 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. Secondary Securities were issued on
December 15, 1995 in lieu of a cash payment. 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, including the New
Discount Debentures.
Up to $10.0 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 $10.0
million of the Seller Debentures from the Selling Stockholder upon a put by such
Selling Stockholder. Holdings agreed to reimburse Yucaipa for the loss, if any,
to be incurred when Yucaipa performed under the Put Agreement and subsequently
sold the securities for cash. On June 14, 1995, such Selling Stockholder put
$10.0 million of the Seller Debentures ("Put Debentures") to Yucaipa. Yucaipa
then sold the Put Debentures to BT Securities Corporation at a price of $6.5
million. Holdings subsequently reimbursed Yucaipa for its loss and recorded a
$3.5 million discount to the Seller Debentures resulting in a beginning balance
of $128.0 million, net of the discount.
Holdings redeemed its Discount Notes in connection with the Merger.
Holdings paid $84.4 million to retire these notes, which included a prepayment
premium of $15.3 million.
F-17
<PAGE> 120
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Covenants
The New Credit Facility, among other things, requires the Company to
maintain minimum levels of net worth (as defined), to maintain minimum levels of
earnings, to maintain a hedge agreement to provide interest rate protection, and
to comply with certain ratios related to fixed charges and indebtedness. During
fiscal 1995, certain financial covenants and other terms of the New Credit
Facility were amended to, among other things, provide for the acquisition of the
Smith's Food and Drug Centers, Inc. ("Smith's") Riverside distribution center
and creamery facility, the acquisition of certain operating assets and inventory
at that facility, the acquisition of nine of the Smith's Southern California
stores and the closure of up to nine stores in conjunction with these
acquisitions. In addition, the New Credit Facility and the indentures governing
Holdings' and Ralphs' debt securities limit, among other things, additional
borrowings, dividends on, and redemption of, capital stock and the acquisition
and the disposition of assets. At January 28, 1996, the Company was in
compliance with the financial covenants of its debt agreements. At January 28,
1996, dividends and certain other payments are restricted based on terms in the
debt agreements.
4. LEASES
The Company's operations are conducted primarily in leased properties.
Substantially all leases contain renewal options. Rental expense under operating
leases was as follows:
<TABLE>
<CAPTION>
FOR THE
-----------------------------------------------------------
52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28,
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Minimum rents................. $44,504,000 $49,788,000 $33,458,000 $97,752,000
Rents based on sales.......... 5,917,000 3,806,000 1,999,000 3,439,000
</TABLE>
Following is a summary of future minimum lease payments under operating
leases at January 28, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
<S> <C>
1996................................................. $ 123,705,000
1997................................................. 116,285,000
1998................................................. 105,502,000
1999................................................. 102,714,000
2000................................................. 98,506,000
Later years.......................................... 772,372,000
--------------
$1,319,084,000
==============
</TABLE>
The Company has entered into lease agreements for new supermarket sites and
one warehouse facility which were not in operation at January 28, 1996. Future
minimum lease payments under such operating leases generally begin when such
facilities open and at January 28, 1996 are: 1996 -- $19.8 million;
1997 -- $35.2 million; 1998 -- $35.2 million; 1999 -- $35.3 million;
2000 -- $35.3 million; later years -- $561.0 million.
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
F-18
<PAGE> 121
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as leased property under capital leases. Future minimum lease payments for the
property under capital leases at January 28, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------
<S> <C>
1996................................................... $ 37,373,000
1997................................................... 34,820,000
1998................................................... 28,818,000
1999................................................... 22,644,000
2000................................................... 17,353,000
Later years............................................ 123,686,000
------------
Total minimum lease payments................. 264,694,000
Less: amounts representing interest.................... 111,649,000
------------
Present value of minimum lease payments................ 153,045,000
Less: current portion.................................. 22,261,000
------------
$130,784,000
============
</TABLE>
Accumulated depreciation related to assets financed under capital leases
was $24.0 million, $27.6 million and $42.7 million at June 25, 1994, January 29,
1995 and January 28, 1996, 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>
1996..................................................... $ --
1997..................................................... 1,060,000
1998..................................................... 1,520,000
1999..................................................... 1,504,000
2000..................................................... 1,478,000
Later years.............................................. 1,726,000
----------
$7,288,000
==========
</TABLE>
F-19
<PAGE> 122
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 JANUARY
JUNE 26, JUNE 25, JANUARY 29, 28,
1993 1994 1995 1996
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Current:
Federal........................ $ -- $ 3,251,000 $(2,894,000) $ --
State and other................ 82,000 712,000 100,000 46,000
---------- ----------- ----------- --------
82,000 3,963,000 (2,794,000) 46,000
---------- ----------- ----------- --------
Deferred:
Federal........................ 1,345,000 78,000 2,794,000 --
State and other................ -- (1,341,000) -- 454,000
---------- ----------- ----------- --------
1,345,000 (1,263,000) 2,794,000 454,000
---------- ----------- ----------- --------
$1,427,000 $ 2,700,000 $ -- $500,000
========== =========== =========== ========
</TABLE>
A reconciliation of the provision (benefit) for income taxes to amounts
computed at the federal statutory rates of 34 percent for fiscal 1993, 35
percent for fiscal 1994, the 1995 transition period and fiscal 1995 is as
follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28,
1993 1994 1995 1996
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate
on loss before provision for income
taxes and extraordinary charges..... $(10,138,000) $(3,068,000) $(6,173,000) $(112,670,000)
State and other taxes, net of federal
tax benefit......................... 82,000 (1,000) 65,000 (18,057,000)
Alternative minimum tax............... -- -- -- --
Effect of permanent differences
resulting primarily from:
Amortization of goodwill............ 2,850,000 2,820,000 1,701,000 (1,665,000)
Original issue discount............. 208,000 526,000 387,000 306,000
Tax credits and other................. -- -- -- 3,769,000
Accounting limitation of deferred tax
benefit............................. 8,425,000 2,423,000 4,020,000 128,817,000
------------ ----------- ----------- -------------
$ 1,427,000 $ 2,700,000 $ -- $ 500,000
============ =========== =========== =============
</TABLE>
F-20
<PAGE> 123
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 31 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28,
1993 1994 1995 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Depreciation............................ $ 7,756,000 $ 2,536,000 $(1,513,000) $ (460,000)
Difference between book and tax basis of
assets sold........................... 3,198,000 (4,223,000) 2,505,000 --
Deferred revenues and allowances........ 40,000 (2,349,000) 707,000 --
Inventory............................... -- -- -- (8,479,000)
Original issue discount................. (1,308,000) (2,981,000) (2,066,000) (1,217,000)
Pre-opening costs....................... (512,000) 174,000 784,000 --
Accounts receivable reserves............ (270,000) 249,000 80,000 --
Unicap.................................. (5,000) (536,000) (755,000) --
Capital lease obligation................ (1,385,000) 2,792,000 527,000 (502,000)
Self-insurance reserves................. (4,082,000) (535,000) 5,523,000 2,104,000
Inventory shrink reserve................ 777,000 (869,000) (569,000) --
LIFO.................................... (554,000) (1,010,000) (1,303,000) --
Closed store reserve.................... 1,092,000 440,000 176,000 --
Accrued expense......................... -- (582,000) 350,000 (26,304,000)
Accrued payroll and related
liabilities........................... 193,000 1,721,000 (3,879,000) (6,206,000)
Damaged inventory reimbursement......... -- -- -- --
Acquisition costs....................... 2,626,000 1,397,000 (5,444,000) --
Tax intangibles......................... -- -- -- 6,234,000
Sales tax reserves...................... (715,000) (418,000) 433,000 --
State taxes............................. -- -- -- (21,902,000)
Deferred rent subsidy................... (483,000) (624,000) (29,000) --
Net operating losses.................... -- -- -- (73,406,000)
Net operating loss usage................ -- 5,782,000 (6,963,000) --
Tax credits............................. -- -- -- 3,601,000
Tax credits benefited................... (1,392,000) (4,477,000) 1,711,000 --
Accounting limitation (recognition) of
deferred tax benefit.................. (3,283,000) 1,896,000 12,563,000 128,817,000
Other, net.............................. (348,000) 354,000 (44,000) (1,826,000)
----------- ----------- ----------- ------------
$ 1,345,000 $(1,263,000) $ 2,794,000 $ 454,000
=========== =========== =========== ============
</TABLE>
F-21
<PAGE> 124
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 25, JANUARY 29, JANUARY 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related liabilities....... $ 2,448,000 $ 6,248,000 $ 27,579,000
Other accrued liabilities..................... 18,271,000 18,467,000 79,559,000
Obligations under capital leases.............. -- -- 37,584,000
Property and equipment........................ 2,997,000 -- --
Self-insurance liabilities.................... 27,744,000 25,204,000 49,773,000
Loss carryforwards............................ 20,675,000 27,638,000 166,390,000
Tax credit carryforwards...................... 5,869,000 4,157,000 913,000
State taxes................................... -- -- 31,473,000
Other......................................... 580,000 570,000 18,024,000
------------ ------------ -------------
Gross deferred tax assets.................. 78,584,000 82,284,000 411,295,000
Valuation allowance........................... (35,467,000) (48,030,000) (306,560,000)
------------ ------------ -------------
Net deferred tax assets.................... $ 43,117,000 $ 34,254,000 $ 104,735,000
------------ ------------ -------------
Deferred tax liabilities:
Inventories................................... $(16,738,000) $(11,690,000) $ (9,762,000)
Property and equipment........................ (30,516,000) (28,527,000) (106,116,000)
Obligations under capital leases.............. (8,733,000) (9,261,000) --
Other......................................... (1,870,000) (2,310,000) (611,000)
Tax intangibles............................... -- -- (6,234,000)
------------ ------------ -------------
Gross deferred tax liability............... (57,857,000) (51,788,000) (122,723,000)
------------ ------------ -------------
Net deferred tax liability................. $(14,740,000) $(17,534,000) $ (17,988,000)
============ ============ =============
</TABLE>
The Company recorded a valuation allowance to reserve a portion of its
gross deferred tax assets at January 28, 1996 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 28, 1996, approximately $139.0 million of the valuation
allowance for deferred tax assets will reduce goodwill when the allowance is no
longer required.
At January 28, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of $475.4 million, which expire from 2007 through
2011. The Company has federal Alternative Minimum Tax ("AMT") credit
carryforwards of approximately $0.9 million which are available to reduce future
regular taxes in excess of AMT. Currently, there is no expiration date for these
credits.
A portion of the loss carryforwards described above are subject to the
provisions of the Tax Reform Act of 1986, specifically Internal Revenue Code
Section 382. The law limits the use of net operating loss carryforwards when
changes of ownership of more than 50 percent occur during a three-year testing
period. Due to the merger, the ownership of Food 4 Less and RSI changed in
excess of 50 percent. As a result, Holdings' utilization of approximately $78.0
million of Food 4 Less' and $187.0 million of RSI's federal net operating losses
will be subject to an annual usage limitation. Holdings' annual limitations
under Section 382 for Food 4 Less' and RSI's net operating losses are
approximately $15.6 million and $15.0 million, respectively. Furthermore, all of
Holdings' pre-Merger RSI net operating losses and a portion of Holdings' Ralphs
post-Merger losses will reduce goodwill when utilized in future federal income
tax returns.
F-22
<PAGE> 125
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings files a consolidated federal income tax return, under which the
federal income tax liability of Holdings and its subsidiaries is determined on a
consolidated basis. Holdings is a party to a federal income tax sharing
agreement with Ralphs and certain of its subsidiaries (the "Tax Sharing
Agreement"). The Tax Sharing Agreement provides that in any year in which Ralphs
is included in any consolidated tax liability of Holdings and has taxable
income, Ralphs will pay to Holdings the amount of the tax liability that Ralphs
would have had on such due date if it had been filing a separate return.
Conversely, if Ralphs generates losses or credits which actually reduce the
consolidated tax liability of Holdings and its other subsidiaries, Holdings will
credit to Ralphs the amount of such reduction in the consolidated tax liability.
These credits are passed between Holdings and Ralphs 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 Holdings and Ralphs of such state and local taxes.
The Company currently has an Internal Revenue Service examination in
process covering the years 1990 through 1993. Management believes that any
required adjustment to the Company's tax liabilities will not have a material
adverse impact on its financial position or results of operations.
7. RELATED PARTY TRANSACTIONS
The Company has a five-year consulting agreement with an affiliated company
effective June 14, 1995 for management, financing, acquisition and other
services. The agreement is automatically renewed on June 14 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 $4 million plus advisory
fees for certain acquisition and financing transactions, if the affiliated
company is retained by Ralphs.
Management services expenses were $2.0 million during fiscal year 1993,
$2.3 million during fiscal year 1994, $1.2 million during the 1995 transition
period and $3.6 million during fiscal year 1995. Advisory fees were $1.8 million
during fiscal year 1993, $0.2 million during fiscal year 1994 and $21.5 million
during fiscal year 1995. There were no such advisory fees for the 1995
transition period. Advisory fees for financing transactions are capitalized and
amortized over the term of the related financing.
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 certain
Certified stock. Such gains are only payable if Certified is purchased or
dissolved, or if the Company sells such Certified Stock within the period noted
above.
In connection with the bankruptcy reorganization of Federated Department
Stores, Inc. ("Federated") and its affiliates, Federated agreed to pay certain
potential tax liabilities relating to RGC as a member of the affiliated group of
companies comprising Federated and its subsidiaries. In consideration thereof,
RSI and RGC agreed to pay Federated a total of $10 million, payable $1 million
on each of February 3, 1992, 1993, 1994, 1995 and 1996 and $5 million on
February 3, 1997. In the event Federated is required to pay certain tax
liabilities, RSI and RGC agreed to reimburse Federated up to an additional $10
million, subject to certain adjustments. Pursuant to the terms of the Merger,
the $5 million payment and the potential $10 million payment will be paid in
cash.
The Company is a partner in a supplier partnership, in which it is
contingently liable for the partnership's long-term debt. The Company's portion
of such debt is approximately $1,505,000.
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 28, 1996, the Company had capitalized construction costs
of $20.4 million on total commitments of $24.0 million.
F-23
<PAGE> 126
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 fiscal year 1993, fiscal year 1994, the 1995 transition period and fiscal
year 1995, the selfinsurance loss provisions were $38.0 million, $19.9 million,
$6.3 million and $32.6 million, respectively. During fiscal year 1993 and fiscal
year 1994, the Company discounted its self-insurance liability using a 7.0
percent discount rate. In the 1995 transition period, the Company changed the
discount rate to 7.5 percent. In fiscal 1995, the Company changed the discount
rate to 7.0 percent. 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 Company's historical self-insurance liability at the end of the three
most recent fiscal years and the 1995 transition period is as follows:
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
JUNE 26, JUNE 25, JANUARY 29, JANUARY 28,
1993 1994 1995 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Self-insurance liability......... $100,773,000 $90,898,000 $ 84,286,000 $161,391,000
Less: Discount................... (15,279,000) (9,194,000) (11,547,000) (12,406,000)
------------ ----------- ------------ ------------
Net self-insurance liability..... $ 85,494,000 $81,704,000 $ 72,739,000 $148,985,000
=========== ========== =========== ===========
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $21.8 million, $35.4 million, $31.6 million, $21.5 million and
$13.1 million for the fiscal year 1996, the fiscal year 1997, the fiscal year
1998, the fiscal year 1999 and the fiscal year 2000, respectively.
Environmental Matters
In January 1991, the California Regional Water Quality Control Board for
the Los Angeles Region (the "Regional Board") requested that RGC conduct a
subsurface characterization of its Glendale warehouse property located in the
Atwater District of Los Angeles. 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 RGC's grocery warehouse 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 RGC's grocery warehouse. Since that time, the
Regional Board has requested further investigation by RGC. RGC conducted the
requested investigations and 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 Company's grocery
warehouse. The Company 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 the Company's property. On or about October 12, 1995, the EPA
mailed a
F-24
<PAGE> 127
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Special Notice Letter to 44 parties, including Ralphs as owner and operator of
the Glendale property, naming them as potentially responsible parties ("PRPs").
Ralphs and other PRPs have agreed to enter into negotiations over a consent
decree with the EPA to implement a remedial design and reimburse oversight
costs. The PRPs have also agreed to an Alternative Dispute Resolution Process to
allocate the costs among themselves. 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.
RGC removed underground storage tanks and remediated soil contamination at
the grocery warehouse 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 grocery
warehouse property, management does not believe that the costs of remediating
such contamination will be material to the Company.
Apart from the grocery warehouse property, RGC had environmental
assessments performed on most 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.
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 previously released hydrocarbons. In connection with the acquisition of
Alpha Beta, the seller (who is also the lessor of the La Habra facility) agreed
to retain responsibility, subject to certain limitations, for remediation of the
release.
The Company 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. EMPLOYEE BENEFIT PLANS
As a result of the Merger, the Company adopted certain employee benefit
plans previously sponsored by RGC. These employee benefit plans include the
Ralphs Grocery Company Retirement Plan (the "Pension Plan"), the Ralphs Grocery
Company Supplemental Executive Retirement Plan (the "SERP"), and the Ralphs
Grocery Company Retirement Supplement Plan (the "Retirement Supplement Plan").
Pension Plan
The Pension Plan covers substantially all employees not already covered by
collective bargaining agreements with at least one year of credited service
(defined at 1,000 hours). Employees who were employed by Food 4 Less and who are
otherwise eligible to participate in the Pension Plan became eligible to
participate in fiscal year 1995. The Company's policy is to fund pension costs
at or above the minimum annual requirement.
SERP
The SERP covers certain key officers of the Company. 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 the Company's obligations under the SERP.
F-25
<PAGE> 128
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retirement Supplement Plan
The Retirement Supplement Plan is a non-qualified retirement plan designed
to provide eligible participants with benefits based on earnings over the
indexed amount of $150,000.
The following actuarially determined components were included in the net
expense for the above plans for fiscal year 1995 (dollars in thousands):
<TABLE>
<S> <C>
Service cost....................................................... $ 2,841
Interest cost on projected benefit obligation...................... 2,543
Actual return on assets............................................ (3,223)
Net amortization and deferral...................................... 1,365
-------
Net pension expense...................................... $ 3,526
=======
</TABLE>
The funded status of the Pension Plan (based on December 1995 asset values)
is as follows:
<TABLE>
<CAPTION>
AS OF
JANUARY 28,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Assets Exceed Accumulated Benefits:
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ 42,446
Accumulated benefit obligation........................ 43,256
Projected benefit obligation.......................... 63,913
Plan assets at fair value............................. 44,552
--------
Projected benefit obligation in excess of Plan Assets... (19,361)
Unrecognized net loss................................... 4,136
Unrecognized prior service cost......................... 1,100
--------
Accrued pension cost.................................. $(14,125)
========
</TABLE>
The funded status of the SERP and Retirement Supplement Plan (based on
December 1995 asset values) is as follows:
<TABLE>
<CAPTION>
AS OF
JANUARY 28,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Accumulated Benefits Exceed Assets:
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ (4,863)
Accumulated benefit obligation........................ (4,908)
Projected benefit obligation.......................... (11,778)
Plan assets at fair value............................. --
--------
Projected benefit obligation in excess of Plan Assets... (11,778)
Unrecognized net loss................................... 544
Unrecognized prior service cost......................... 1,846
--------
Accrued pension cost.................................. $ (9,388)
========
</TABLE>
The discount rate used for fiscal year 1995 was 7.5 percent. A long-term
rate of return on assets of 9.0 percent was also used in the actuarial
valuation.
F-26
<PAGE> 129
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Employee Stock Ownership 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 the SOP did not have a material effect on the
accompanying 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, a portion of
which is invested in Holdings stock (the "Falley's ESOP"). As is required
pursuant to IRS and ERISA requirements, any participant who receives stock from
the Falley's ESOP has the right to put that stock to Falley's or an affiliate of
Falley's. However, as part of the original stock sale agreement among the then
stockholders of Falley's, FFL and the Falley's ESOP, which has been amended from
time to time, a partnership which owns stock of Holdings entered into an
agreement with Falley's and Holdings to assume the obligation to purchase any
Holdings shares as to which terminated plan participants exercise a put option
under the terms of Falley's ESOP. As a result, neither Falley's nor the Company
is 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 Holdings shares put under the provisions of the
plan. However, the partnership's obligation to purchase such Holdings shares is
unconditional, and any repurchase of shares by the Company is at the Company's
sole election. During fiscal year 1995, the Company did not purchase any of the
Holdings shares. As of November 3, 1995, the fair value of the shares allocated
which are subject to repurchase obligation by the partnership referred to above
was approximately $14.6 million.
In addition, 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 fiscal year 1995 and the 1995 transition period, the
Company recorded a charge against operations of approximately $0.8 million and
$0.3 million, respectively, for benefits under the Union ESOPs. There were no
shares issued to the Union ESOPs or to the Company's profit sharing plan at
January 28, 1996.
Defined Contribution Plan
The Company sponsors the Ralphs Grocery Company Savings Plan
Plus -- Primary, the Ralphs Grocery Savings Plan Plus -- Basic and the Food 4
Less Supermarkets, Inc. Profit Sharing and Retirement Plan (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 provides for both
pre-tax and after-tax contributions by participating employees. With certain
limitations, participants may elect to contribute on a pre-tax basis to the
401(k) Plan. The Company has committed to match a minimum of 20 percent of an
employee's contribution to the 401(k) Plan that does not exceed 5 percent of the
employee's compensation. Expenses under the 401(k) Plan for fiscal years 1993,
1994 and 1995 were $0.3 million, $0.7 million and $0.7 million, respectively.
Multi-Employer Benefit Plans
The Company contributes to multi-employer benefit 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
F-27
<PAGE> 130
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company at January 28, 1996 is not available. The Company contributed $69.4
million, $57.2 million, $21.6 million and $102.1 million to these plans for
fiscal year 1993, fiscal year 1994, the 1995 transition period and fiscal year
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 received a pro rata
share of the excess reserves in the plans through reduction of current
contributions. The Company's share of the excess reserve was $24.2 million, of
which $8.1 million, $14.3 million and $1.8 million was recognized in fiscal year
1994, the 1995 transition period, and fiscal year 1995, respectively. Offsetting
the reduction in employer contributions was a $5.5 million union contract
ratification bonus and contractual wage increases in the 1995 transition period.
Post-Retirement Medical Benefit Plan
The Company adopted a postretirement medical benefit plan ("Postretirement
Medical Plan"), previously sponsored by RGC, which covers 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 provides outpatient, inpatient and various other covered services. Such
benefits are funded from the Company's general assets. The calendar 1995 year
deductible is $1,000 per individual, indexed to the Medical Consumer Price
Index.
The net periodic cost of the Postretirement Medical Plan include the
following components for fiscal year 1995 (dollars in thousands):
<TABLE>
<S> <C>
Service cost......................................................... $ 468
Interest cost........................................................ 561
Return on plan assets................................................ --
Net amortization and deferral........................................ (116)
-----
Net postretirement benefit cost.................................... $ 913
=====
</TABLE>
The funded status of the postretirement benefit plan is as follows (dollars
in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 2,208
Fully eligible plan participants.................................. 1,483
Other active plan participants.................................... 10,862
Plan assets at fair value......................................... --
---------
Accumulated postretirement obligations in excess of plan assets... (14,553)
Unrecognized loss................................................. 562
Unrecognized prior service cost................................... (3,246)
---------
Accrued postretirement benefit obligation......................... $(17,237)
=========
</TABLE>
Service cost was calculated using a medical cost trend of 10.5 percent and
a decreasing medical cost trend rate of 14 percent and 8 percent for 1993 and
1994, respectively. A medical cost trend rate of 13 percent was used for fiscal
year 1995, and a decreasing rate of 12 percent and 6 percent for future years.
The discount rate was 7.5 percent for the Company expense for the fiscal year.
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 1995 service and interest cost to 26 percent. The
accumulated postretirement benefit obligation at January 28, 1996 would also
increase by 30 percent.
F-28
<PAGE> 131
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL STOCK
Preferred Stock
As part of the financing of the Merger, Holdings issued shares of its newly
authorized Series A and Series B Preferred Stock, par value $0.01. The Series A
Preferred Stockholders have voting rights identical to those of the Common
Stockholders. The Series B Preferred Stockholders have no voting rights. The
Series A and Series B Preferred Stock has a liquidation preference which was
initially equal to $10.00 per share. The liquidation preference increases 7.0
percent per annum, compounded quarterly until the later of June 2000 or the date
the Company first reports EBDIT (as defined) of at least $500.0 million for any
four consecutive quarters. In addition, the liquidation preference will increase
by 2.0 percent per annum if the Company fails to reach EBDIT (as defined) of at
least $400.0 million for four consecutive quarters prior to July 1998; this
EBDIT (as defined) threshold increases to $425.0 million in July 1999 and $450.0
million in July 2000. The Series A and Series B Preferred Stock rank pari passu
in right of payment upon liquidation. 5,783,244 shares of Holdings Common Stock
were exchanged for an equal number of Series A Preferred Shares at the Merger
date.
Holdings issued 10,900,000 shares of its Series A Preferred Stock and
3,100,000 shares of its Series B Preferred Stock for $140.0 million in
connection with the Merger (the "New Equity Investment"). The Company paid $2.5
million in cash and issued $2.5 million of its New Discount Debentures to a
Series A Preferred Stockholder for services performed in connection with this
preferred stock sale.
Common Stock
Holdings recorded a 16.58609143 for 1 stock split of its Common Stock on
June 9, 1995. The "Average Number of Common Shares Outstanding" and the "Loss
Per Common Share" in the accompanying Consolidated Statements of Operations for
fiscal years 1993 and 1994 and the 1995 transition period have been
retroactively adjusted to reflect this stock split.
In connection with the extinguishment of $10.0 million of RGC's EAR
liability at the Merger date and as an incentive to certain executives of the
Company, Holdings granted options to purchase a total of 2,415,000 shares of its
Common Stock. Options to purchase 2,007,500 shares were fully exercisable at
prices ranging from $0.79 to $7.32 per share. Prior to January 28, 1996, 82,500
of these options were repurchased. Options to purchase 200,000 shares are fully
exercisable at $10.00 per share. Options to purchase 207,500 shares at $10.00
per share vest in equal annual installments over five years beginning in June
1996. Before the end of fiscal year 1995, 62,500 of these options expired
without having been exercised. The remaining above options expire in June 2005.
On the date of the Merger, Holdings issued a warrant to an affiliated
company covering 8,000,000 shares of Holdings Common Stock exercisable at a
price of $30.50 per share upon a Qualified IPO (as defined) or a Qualified Sale
Event (as defined). The warrant will expire on June 14, 2000 unless certain
performance measures are met, in which case the warrant will expire on June 14,
2002.
Holdings also has outstanding 2,008,874 warrants for the purchase of an
equal number of shares of its Common Stock at a price of less than $0.01 per
share. These warrants may be exercised beginning December 31, 1997, or earlier
upon certain events.
Holdings has reserved an additional 585,000 shares of its Common Stock for
future stock option grants.
F-29
<PAGE> 132
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
Cash and Cash Equivalents
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
Short-Term Notes and Other Receivables
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
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.
Long-Term Debt
The fair value of the Senior Notes, the 1995 11% Senior Subordinated Notes
and the 13.75% Senior Subordinated Notes is based on quoted market prices. The
New Term Loans and the New Revolving Facility are estimated to be recorded at
the fair value of the debt. 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>
AS OF
JANUARY 28, 1996
---------------------------------
CARRYING FAIR
AMOUNT VALUE
-------------- --------------
<S> <C> <C>
Cash and cash equivalents............................ $ 67,983,000 $ 67,983,000
Short-term notes and other receivables............... 6,452,000 6,452,000
Investments in and notes receivable from supplier
cooperatives (not practicable)..................... 12,214,000 --
Long-term debt for which it is:
- Practicable to estimate fair values.............. 2,010,871,000 1,967,595,000
- Not practicable.................................. 166,305,000 --
</TABLE>
12. RESTRUCTURING CHARGE
During fiscal 1995, the Company recorded a $75.2 million charge associated
with the closure of 58 former Food 4 Less stores and one former Food 4 Less
warehouse facility. Twenty-four of these stores were required to be closed
pursuant to a settlement agreement with the State of California in connection
with the Merger. Three RGC stores were also required to be sold. Thirty-four of
the closed stores were under-performing former Food 4 Less stores. The $75.2
million restructuring charge consisted of writedowns of property and equipment
($52.2 million) less estimated proceeds ($16.0 million); reserve for closed
stores and warehouse
F-30
<PAGE> 133
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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). 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 24 weeks ended July 14, 1996, the Company
utilized $19.1 million (unaudited) of the reserve for restructuring costs. The
charges consisted mainly of write-downs of property and equipment ($16.8
million) (unaudited) and expenditures associated with the closed stores and the
warehouse facility ($3.3 million) (unaudited) offset by adjustments to proceeds
and other assets.
On December 29, 1995, the Company consummated an agreement with 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 year 1996. Also, the Company closed nine of its stores
which were near the acquired former Smith's stores. 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, consisting of write-downs of
property and equipment ($16.1 million), closure costs ($2.2 million), and lease
termination expenses ($29.6 million). During the 24 weeks ended July 14, 1996,
the Company utilized $10.2 million (unaudited) of the reserve for restructuring
costs. The charges consisted mainly of write-downs of property and equipment
($10.7 million) (unaudited) offset by adjustments to closure costs and lease
termination expenses.
F-31
<PAGE> 134
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ralphs Supermarkets, Inc.:
We have audited the accompanying consolidated statements of operations of
Ralphs Supermarkets, Inc. and subsidiaries for the years ended January 30, 1994
and 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 results of operations of Ralphs
Supermarkets, Inc. and subsidiaries for the years ended January 30, 1994 and
January 29, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 9, 1995
F-32
<PAGE> 135
RALPHS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 30, 1994 JANUARY 29, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Sales................................................ $2,730,157 100.0% $2,724,604 100.0%
Cost of sales........................................ 2,093,727 76.7 2,101,033 77.1
---------- ----- ---------- -----
Gross profit....................................... 636,430 23.3 623,571 22.9
Selling, general and administrative expenses....... 471,000 17.2 467,022 17.2
Amortization of excess cost over net assets
acquired........................................ 10,996 0.4 10,996 0.4
Provision for restructuring........................ 2,374 0.1 -- --
---------- ----- ---------- -----
Operating income................................... 152,060 5.6 145,553 5.3
Other expenses:
Interest expense, net.............................. 108,755 4.0 112,651 4.1
Loss on disposal of assets......................... 1,940 0.1 784 0.0
Provision for legal settlement..................... -- -- -- --
Provision for earthquake losses.................... 11,048 0.4 -- --
---------- ----- ---------- -----
Earnings before income taxes......................... 30,317 1.1 32,118 1.2
Income tax benefit................................... (108,049) (4.0) -- --
---------- ----- ---------- -----
Net earnings......................................... $ 138,366 5.1% $ 32,118 1.2%
========= ===== ========= =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 136
RALPHS SUPERMARKETS, INC.
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 Company would be
obligated to pay the Affiliated Group. However, such additional liability, if
any, is limited to $10 million subject to certain adjustments.
F-34
<PAGE> 137
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 results of operations
for Ralphs Supermarkets, Inc. and subsidiaries ("Ralphs") for the years ended
January 30, 1994 and January 29, 1995.
(b) Reporting Period
Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal
year-ends are as follows:
January 30, 1994 (Fiscal 1993)
January 29, 1995 (Fiscal 1994)
(c) Depreciation and Capitalized Interest
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 1993 and 1994 was $.740 million and $.324
million, respectively.
(d) 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.
F-35
<PAGE> 138
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) Income Taxes
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.
(j) Reclassification
Certain amounts in the accompanying financial statements have been
reclassified to conform to the current year's presentation.
(k) 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.
F-36
<PAGE> 139
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(l) Advertising
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was $16.4 million and $18.2 million
in fiscal 1993 and 1994, respectively.
(m) 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) 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-37
<PAGE> 140
RALPHS SUPERMARKETS, INC.
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>
(4) SELF-INSURANCE
Ralphs is a qualified self-insurer in the State of California for worker's
compensation and for automobile liability. For fiscal 1993 and 1994 self
insurance loss provisions amounted to (in thousands) $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.
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.
(5) 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
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
F-38
<PAGE> 141
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-39
<PAGE> 142
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(6) 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 1993 or fiscal 1994.
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>
F-40
<PAGE> 143
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current
Federal.................................................... $ (2,424) $ 713
State...................................................... 3,500 2,653
----------- -----------
$ 1,076 $ 3,366
----------- -----------
Deferred
Federal.................................................... $ (109,125) $(3,366)
State...................................................... -- --
----------- -----------
$ (109,125) $(3,366)
----------- -----------
Total income tax benefit................................... $ (108,049) $ --
========= ========
</TABLE>
The differences between income tax expense and income taxes computed using
the top marginal U.S. Federal income tax rate of 35% for fiscal 1993 and fiscal
1994 applied to earnings before income taxes were as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amount of expected expense (benefit) computed using the
statutory Federal rate..................................... $ 10,611 $ 11,241
Utilization of financial operating loss.................... (10,611) (11,241)
State income taxes, net of Federal income tax benefit...... 3,500 2,653
Accounting limitation (recognition) of deferred tax
benefit................................................. (109,125) (3,366)
Alternative minimum tax.................................... 625 --
Other, net................................................. (3,049) 713
----------- -----------
Total income tax benefit........................... $ (108,049) $ --
========= ========
</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 deferred
tax assets. In addition, the Act also provided for the deductibility of certain
intangibles, including costs in excess gross assets acquired.
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
F-41
<PAGE> 144
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(8) 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.
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.
F-42
<PAGE> 145
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following actuarially determined components were included in the net
pension expense:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost................................................ $ 2,228 $ 2,901
Interest cost on projected benefit obligation............... 2,838 3,821
Actual return on assets..................................... (2,695) (1,447)
Net amortization and deferral............................... (46) (1,100)
----------- -----------
Net pension expense....................................... $ 2,325 $ 4,175
======== ========
</TABLE>
Service costs for fiscal 1993 was 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 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
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
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Multi-employer pension plans........................ $17,687 $ 8,897
======== ========
Multi-employer health and welfare................... $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 1993 and 1994
were $431,774 and $446,826, respectively.
F-43
<PAGE> 146
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1993 and 1994 was $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 1993 and 1994 was $3.0 million and
$3.1 million, respectively.
The aforementioned incentive plans may be cancelled by the Board of
Directors at any time.
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
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost.......................................... $ 1,767 $ 1,396
Interest cost......................................... 1,603 1,387
Return on plan assets................................. -- --
Net amortization and deferral......................... -- (228)
----------- -----------
Net postretirement benefit cost..................... $ 3,370 $ 2,555
======== ========
</TABLE>
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-44
<PAGE> 147
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) 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>
(10) 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-45
<PAGE> 148
RALPHS SUPERMARKETS, INC.
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.
(11) 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
F-46
<PAGE> 149
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
F-47
<PAGE> 150
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-48
<PAGE> 151
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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 SELLER DEBENTURES
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SELLER 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>
Available Information...................... ii
Summary.................................... 1
Risk Factors............................... 12
The Merger and the Financing............... 16
Pro Forma Capitalization................... 18
Unaudited Pro Forma Combined Statement of
Operations............................... 19
Selected Historical Financial Data of
Holdings................................. 22
Selected Historical Financial Data of RGC
and RSI.................................. 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 27
Business................................... 40
Management................................. 49
Executive Compensation..................... 51
Principal Stockholders..................... 55
Description of Capital Stock............... 56
Certain Relationships and Related
Transactions............................. 58
Description of the Seller Debentures....... 61
Description of the New Credit Facility..... 86
Description of Other Holdings
Indebtedness............................. 89
Description of Company Indebtedness........ 90
Selling Debentureholders................... 92
Certain Federal Income Tax
Considerations........................... 95
Plan of Distribution....................... 98
Legal Matters.............................. 99
Experts.................................... 99
Index to Financial Statements.............. F-1
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</TABLE>
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-------------------------
PROSPECTUS
-------------------------
LOGO LOGO
FOOD 4 LESS
HOLDINGS, INC.
13 5/8% SENIOR SUBORDINATED
PAY-IN-KIND DEBENTURES
DUE 2007
SEPTEMBER 4, 1996
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