<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
For Quarter Ended Commission File Number
July 14, 1996 33-88894
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0642810
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
1100 West Artesia Boulevard
Compton, California 90220
(Address of principal executive offices) (Zip code)
(310) 884-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
At August 28, 1996, there were 17,207,882 shares of Common Stock outstanding.
There is no public market for the Common Stock.
<PAGE> 2
FOOD 4 LESS HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of
January 28, 1996 and July 14, 1996 . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
July 16, 1995 and July 14, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of operations for the 24 weeks ended
July 16, 1995 and July 14, 1996 . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the 24 weeks ended
July 16, 1995 and July 14, 1996 . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated statements of stockholders' equity as of
January 28, 1996 and July 14, 1996 . . . . . . . . . . . . . . . . . . . . . 8
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE> 4
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 28, July 14,
ASSETS 1996 1996
------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,983 $ 61,517
Trade receivables, net 60,948 62,831
Notes and other receivables 6,452 5,128
Inventories 502,669 466,172
Patronage receivables from suppliers 4,557 2,588
Prepaid expenses and other 34,855 21,200
---------- ----------
Total current assets 677,464 619,436
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 7,288 7,020
Certified Grocers of California and others 4,926 4,926
PROPERTY AND EQUIPMENT:
Land 183,125 171,542
Buildings 196,551 176,455
Leasehold improvements 251,856 201,877
Fixtures and equipment 441,760 387,615
Construction in progress 61,296 47,096
Leased property under capital leases 189,061 202,738
Leasehold interests 114,475 110,661
---------- ----------
1,438,124 1,297,984
Less: Accumulated depreciation and amortization 226,451 241,280
---------- ----------
Net property and equipment 1,211,673 1,056,704
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $6,964 and $12,032 at January 28, 1996 and
July 14, 1996, respectively 94,100 95,021
Goodwill, less accumulated amortization of $60,407
and $76,592 at January 28, 1996 and
July 14, 1996, respectively 1,173,445 1,333,421
Other, net 19,233 24,558
---------- ----------
$3,188,129 $3,141,086
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE> 5
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 28, July 14,
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) 1996 1996
------------ --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 385,500 $ 335,766
Accrued payroll and related liabilities 94,011 106,240
Accrued interest 23,870 24,204
Other accrued liabilities 276,162 264,333
Income taxes payable 596 1,050
Current portion of self-insurance liabilities 21,785 50,000
Current portion of senior debt 31,735 15,468
Current portion of obligations under capital leases 22,261 26,097
---------- ----------
Total current liabilities 855,920 823,158
SENIOR DEBT, net of current portion 1,226,302 1,232,703
OBLIGATIONS UNDER CAPITAL LEASES 130,784 135,105
SENIOR SUBORDINATED DEBT 671,222 671,222
HOLDINGS DEBENTURES 247,917 263,808
DEFERRED INCOME TAXES 17,988 17,988
SELF-INSURANCE LIABILITIES 127,200 103,412
LEASE VALUATION RESERVE 25,182 23,368
OTHER NON-CURRENT LIABILITIES 74,412 128,522
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDER'S EQUITY:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000
shares authorized; 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; 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, 60,000,000 shares authorized
at January 28, 1996 and July 14, 1996; 17,207,882 shares
issued at January 28, 1996 and July 14, 1996 172 172
Non-Voting Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at January 28, 1996 or
July 14, 1996 -- --
Additional capital 56,991 56,991
Notes receivable from stockholders (602) (593)
Retained deficit (434,643) (504,054)
---------- ----------
(185,251) (254,653)
Treasury stock: 421,237 shares of common stock at
January 28, 1996 and July 14, 1996 (3,547) (3,547)
---------- ----------
Total stockholders' equity (deficit) (188,798) (258,200)
---------- ----------
$3,188,129 $3,141,086
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE> 6
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks 12 Weeks
Ended Ended
July 16, July 14,
1995 1996
---------- ----------
<S> <C> <C>
SALES $ 857,344 $1,243,768
COST OF SALES 695,727 981,521
---------- ----------
GROSS PROFIT 161,617 262,247
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 163,654 218,876
AMORTIZATION OF GOODWILL 4,683 8,983
RESTRUCTURING CHARGE 63,587 --
---------- ----------
OPERATING INCOME (LOSS) (70,307) 34,388
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 37,915 62,114
Amortization of deferred financing costs 1,600 1,732
---------- ----------
39,515 63,846
LOSS (GAIN) ON DISPOSAL OF ASSETS (19) 119
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE
AND PROVISION FOR INCOME TAXES (109,803) (29,577)
PROVISION FOR INCOME TAXES 200 --
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE (110,003) (29,577)
EXTRAORDINARY CHARGE 35,358 --
---------- ----------
NET LOSS $ (145,361) $ (29,577)
========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (5.33) $ (0.80)
Extraordinary charges (1.72) --
---------- ----------
Net loss $ (7.05) $ (0.80)
========== ==========
Average Number of Common Shares and
Equivalents Outstanding 20,631,431 36,991,126
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 7
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Ended Ended
July 16, July 14,
1995 1996
-------------- --------------
<S> <C>
SALES $1,480,942 $2,474,576
COST OF SALES 1,212,157 1,963,692
---------- ----------
GROSS PROFIT 268,785 510,884
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 255,006 436,211
AMORTIZATION OF GOODWILL 6,512 16,185
RESTRUCTURING CHARGE 63,587 --
---------- ----------
OPERATING INCOME (LOSS) (56,320) 58,488
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 55,813 122,715
Amortization of deferred financing costs 2,994 5,068
---------- ----------
58,807 127,783
LOSS (GAIN) ON DISPOSAL OF ASSETS (436) 116
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE
AND PROVISION FOR INCOME TAXES (114,691) (69,411)
PROVISION FOR INCOME TAXES 500 --
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE (115,191) (69,411)
EXTRAORDINARY CHARGE 35,358 --
---------- ----------
NET LOSS $ (150,549) $ (69,411)
========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (5.28) $ (1.88)
Extraordinary charges (1.62) --
---------- ----------
Net loss $ (6.90) $ (1.88)
========== ==========
Average Number of Common Shares and
Equivalents Outstanding 21,811,279 36,991,126
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 8
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Ended Ended
July 16, July 14,
1995 1996
---------- ----------
<S> <C> <C>
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Cash received from customers $1,480,754 $2,474,576
Cash paid to suppliers and employees (1,459,333) (2,298,404)
Interest paid (42,120) (106,490)
Income taxes refunded (paid) 100 --
Interest received 228 1,031
Other, net (12,276) (116)
---------- ----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (32,647) 70,597
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 5,471 20,537
Payment for purchase of property and equipment (30,427) (55,840)
Payment of acquisition costs, net of cash acquired (440,620) (10,172)
Other, net (639) (3,191)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (466,215) (48,666)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,021,084 94,625
Proceeds from the issuance of preferred stock 135,000 --
Payments of long-term debt (621,392) (56,791)
Payments of capital lease obligation (3,294) (12,551)
Net increase (decrease) in revolving loan 2,700 (47,700)
Purchase of treasury stock, net (3,444) --
Other, net 27 (5,980)
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 530,681 (28,397)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 31,819 (6,466)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 67,983
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,379 $ 61,517
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 9
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Ended Ended
July 16, July 14,
1995 1996
-------------- --------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(150,549) $(69,411)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Restructuring charge 63,587 --
Extraordinary charge 23,128 --
Depreciation and amortization 42,233 79,926
Non-cash interest expense 6,779 15,891
Loss (gain) on sale of assets (436) 116
Change in assets and liabilities, net of effects
from acquisition of business:
Accounts and notes receivable 4,765 1,410
Inventories 23,590 36,497
Prepaid expenses and other 5,520 8,731
Accounts payable and accrued liabilities (51,036) (6,990)
Self-insurance liabilities (828) 4,427
Income taxes payable 600 --
---------- --------
Total adjustments 117,902 140,008
---------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (32,647) $ 70,597
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Acquisition of stores:
Fair value of assets acquired, less cash acquired
Of $34,380 in 1995 $2,053,528 $ --
Net cash aid in acquisition (440,620) --
Notes issued to seller (160,000) --
Capital contribution from stockholders (20,000) --
---------- --------
Liabilities assumed $1,432,908 $ --
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE> 10
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Non-voting
Series A Series B Common Stock Common Stock
---------------------- -------------------- ------------------- ---------------
Number Number Number Number
of of of of
Shares Amount Shares Amount Shares Amount Shares Amount
---------- -------- --------- ------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 28, 1996 16,683,244 $161,831 3,100,000 $31,000 17,207,882 $172 -- $ --
Payments on Stockholder's Notes -- -- -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- ---- ---- ----
BALANCES AT JULY 14, 1996 (UNAUDITED) 16,683,244 $161,831 3,100,000 $31,000 17,207,882 $172 -- $ --
========== ======== ========= ======= ========== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Total
--------------------- Stock-
Number Stock- holders'
of holders' Add'l Retained Equity
Shares Amount Notes Capital Deficit (Deficit)
-------- ------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 28, 1996 (421,237) $(3,547) $(602) $56,991 $(434,643) $(188,798)
Payments on Stockholder's Notes -- -- 9 -- -- 9
Net loss (unaudited) -- -- -- -- (69,411) (69,411)
--------- -------- --------- ------- ---------- ---------
BALANCES AT JULY 14, 1996 (UNAUDITED) (421,237) $(3,547) $(593) $56,991 $(504,054) $(258,200)
========= ======== ===== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE> 11
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet and statement of stockholders'
equity of Food 4 Less Holdings, Inc. (referred to herein as
"Holdings," and together with its wholly owned subsidiary, Ralphs
Grocery Company, which is the successor to Food 4 Less Supermarkets,
Inc., as the "Company") as of July 14,1996 and the consolidated
statements of operations and cash flows for the interim periods ended
July 16, 1995 and July 14, 1996 are unaudited, but include all
adjustments (consisting of only normal recurring accruals) which the
Company considers necessary for a fair presentation of its
consolidated financial position, results of operations and cash flows
for these periods. These interim financial statements do not include
all disclosures required by generally accepted accounting principles,
and, therefore, should be read in conjunction with the Company's
financial statements and notes thereto included in Holdings' latest
annual report filed on Form 10-K for the fiscal year ended January
28, 1996. Results of operations for interim periods are not
necessarily indicative of the results for a full fiscal year.
2. ORGANIZATION AND ACQUISITION
The Company, a wholly-owned subsidiary of Food 4 Less
Holdings, Inc. ("Holdings"), is a retail supermarket company with a
total of 402 stores which are located in Southern California (340),
Northern California (26) and certain areas of the Midwest (36). The
Company is the second largest conventional supermarket chain in
Southern California, operating 264 stores under the "Ralphs" name,
and the largest warehouse supermarket chain in Southern California,
operating 76 warehouse stores under the "Food 4 Less" name. The
Company has achieved strong competitive positions in each of its
marketing areas by successfully tailoring its merchandising strategy
to the particular needs of the individual communities it serves. In
addition, the Company is a vertically integrated supermarket company
with major manufacturing facilities, including bakery and creamery
operations, and full-line warehouse and distribution facilities
servicing its Southern California operations. The Company 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 So-Cal.
Ralphs Merger
On June 14, 1995, F4L Supermarkets acquired all of the common
stock of Ralphs Supermarkets, Inc. ("RSI") in a transaction accounted
for as a purchase by F4L Supermarkets. The consideration for the
acquisition consisted of $388.1 million in cash, $131.5 million
principal amount of 13-5/8% Senior Subordinated Pay-In-Kind Debentures
due 2007 of Holdings (the "Seller Debentures") and $18.5 million
initial accreted value of 13-5/8% Senior Discount Debentures due 2005
of Holdings (the "New Discount Debentures"). F4L Supermarkets, RSI
and RSI's wholly owned subsidiary Ralphs Grocery Company ("RGC")
combined through mergers (the "Merger") in which RSI remained as the
surviving entity and changed its name to Ralphs Grocery Company
(referred to as the "Company" herein).
The Company finalized the allocation of the RSI purchase price
in the second quarter of 1996. The change in the allocation of the
purchase price is primarily attributable to an adjustment in the
valuation of fixed assets.
9
<PAGE> 12
The following unaudited pro forma information presents the
results of the Company's operations, adjusted to reflect interest
expense and depreciation and amortization, as though the Merger had
been consummated at the beginning of fiscal 1995.
<TABLE>
<CAPTION>
24 Weeks Ended
July 16, 1995
-----------------------
(dollars in thousands,
except share amounts)
<S> <C>
Sales $2,506,633
Restructuring charge (75,187)
Loss before extraordinary charge (207,245)
Net loss (245,669)
Loss per share:
Loss before extraordinary charge (5.60)
Net loss (6.64)
</TABLE>
The unaudited pro forma results of operations are not
necessarily indicative of the actual results of operations that would
have occurred had the purchase actually been made at the beginning of
fiscal 1995, or of the results which may occur in the future.
3. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, which consist primarily of grocery products, are
stated at the lower of cost or market. Cost has been principally
determined using the last-in, first-out ("LIFO") method. If
inventories had been valued using the first-in, first-out ("FIFO")
method, inventories would have been higher by $18.7 million and $21.2
million at January 28, 1996 and July 14, 1996, respectively, and
gross profit and operating income would have been greater by $1.0
million and $2.0 million for the 12 and 24 weeks ended July 16,
1995, respectively, and greater by $1.2 million and $2.5 million for
the 12 and 24 weeks ended July 14, 1996, respectively.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the July 14, 1996
presentation.
Recent Accounting Pronouncements
In the first quarter of fiscal 1996, the Company adopted
Statement of Financial Accounting Standard No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS 121). The adoption of SFAS 121 had no impact on
the Company's financial position or on its results of operations.
4. RESTRUCTURING CHARGE
During fiscal 1995, the Company recorded a $75.2 million
charge associated with the closure of 58 former F4L Supermarkets
stores and one former F4L Supermarkets warehouse facility. The
stores were closed to comply with a settlement agreement with the
State of California in connection with the Merger or due to
under-performance. Three RGC stores were also required to be sold to
comply with the settlement agreement. 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
10
<PAGE> 13
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 of the reserve for
restructuring costs. The charges consisted mainly of write-downs of
property and equipment ($16.8 million) and expenditures associated
with the closed stores and the warehouse facility ($3.3 million)
offset by adjustments to proceeds and other assets.
On December 29, 1995, the Company consummated an agreement
with Smith's Food & Drug Centers, Inc. ("Smith's") to sublease its
one million square foot distribution center and creamery facility in
Riverside, California for approximately 23 years, with renewal options
through 2043, and to acquire certain operating assets and inventory at
that facility. In addition, the Company also acquired nine of
Smith's Southern California stores which became available when Smith's
withdrew from the California market. As a result of the acquisition
of the Riverside distribution center and creamery, the Company closed
its La Habra distribution center in the first quarter of fiscal 1996.
Also, the Company closed nine of its smaller and less efficient stores
which were near the stores acquired from Smith's. During the fourth
quarter of fiscal year 1995, the Company recorded a $47.9 million
restructuring charge to recognize the cost of closing these
facilities, 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 of the reserve for restructuring
costs. The charges consisted mainly of write-downs of property and
equipment ($10.7 million) offset by adjustments to closure costs and
lease termination expenses.
5. DEBT
On June 6, 1996, the Company issued $100.0 million aggregate
principal amount of 10.45% Senior Notes due 2004 (the "Private Notes")
in a private placement effected pursuant to Rule 144A under the
Securities Act of 1933, as amended. The terms of the Private Notes
are substantially identical to those of the Company's 10.45% Senior
Notes due 2004 (the "1995 Senior Notes"), which were issued in a
registered offering on June 14, 1995 and of which $520.3 million
aggregate principal amount is outstanding. The Private Notes were
issued with original issue discount resulting in gross proceeds to the
Company of $94.6 million.
The 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:
<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
11
<PAGE> 14
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 will expire on August
30, 1996, unless extended by the Company.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On June 14, 1995, Food 4 Less Supermarkets, Inc. ("F4L Supermarkets")
completed its acquisition of Ralphs Supermarkets, Inc. ("RSI") and its wholly
owned subsidiary, Ralphs Grocery Company ("RGC"). The acquisition was
effected through the merger of F4L Supermarkets with and into RSI (the "RSI
Merger"), followed by the merger of RGC with and into RSI (the "RGC Merger"
and, together with the RSI Merger, the "Merger"). The surviving corporation in
the Merger was renamed Ralphs Grocery Company ("Ralphs"). Concurrently with
the consummation of the Merger, Ralphs received a significant equity
investment from its parent, Food 4 Less Holdings, Inc. ("Holdings," and
together with Ralphs, the "Company") and refinanced a substantial portion of
the existing indebtedness of F4L Supermarkets and RGC.
The Company's results of operations for the 24 weeks ended July 14,
1996 reflect operations for the combined Company, while the results of
operations for the 24 weeks ended July 16, 1995 reflect nineteen weeks of
operations of F4L Supermarkets prior to the Merger and five weeks of operations
of the combined Company. Management believes that the Company's results of
operations for periods ending after the consummation of the Merger are not
directly comparable to its results of operations for periods ending prior to
such date. This lack of comparability as a result of the Merger is
attributable to several factors, including the size of the combined Company
(the Merger approximately doubled F4L Supermarkets' annual sales), the addition
of 174 conventional stores to the Company's overall store mix and the material
changes in the Company's capital structure.
The Merger is being accounted for as a purchase of RGC by F4L
Supermarkets. As a result, all financial statements for periods subsequent to
June 14, 1995, the date the Merger was consummated, reflect RGC's net assets at
their estimated fair market values as of June 14, 1995. The purchase price in
excess of the fair market value of RGC's net assets was recorded as goodwill
and is being amortized over a 40-year period.
At July 14, 1996, the Company operated 264 conventional supermarkets
and 76 Food 4 Less warehouse stores in Southern California. It also operated
62 additional stores in Northern California and certain areas of the Midwest.
Following the Merger, the Company converted F4L Supermarkets' Alpha Beta, Boys
and Viva stores to the Ralphs format and converted selected Ralphs stores to
the Food 4 Less warehouse format.
As of July 14, 1996, the Company's bakery, creamery and deli
manufacturing operations and the management of major corporate departments had
been consolidated and the integration of the Company's administrative
departments was substantially completed. The previously planned integration
and consolidation of the Company's warehousing and distribution facilities into
three primary facilities has been modified and will now be completed by the end
of the fiscal year. This delay was a result of the acquisition of the Smith's
Riverside, California distribution and creamery facility (the "Smith's
distribution center"). The consolidation of warehousing and distribution
facilities is being accomplished by the closing of 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.
13
<PAGE> 16
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 and 24 weeks ended July 16, 1995 and July
14, 1996, respectively:
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
------------------------------------ ------------------------------------
July 16, 1995 July 14, 1996 July 16, 1995 July 14, 1996
------------- ------------- ------------- -------------
(dollars in millions)
(unaudited)
<S> <C> <C> <C> <C>
Sales $857.3 100.0 % $1,243.8 100.0 % $1,480.9 100.0 % $2,474.6 100.0 %
Gross profit 161.6 18.8 262.2 21.1 268.8 18.2 510.9 20.6
Selling, general, administrative
and other, net 163.7 19.1 218.8 17.6 255.0 17.2 436.2 17.6
Amortization of goodwill 4.7 0.5 9.0 0.7 6.5 0.4 16.2 0.7
Restructuring charge 63.6 7.4 -- -- 63.6 4.3 -- --
Operating income (loss) (70.3) (8.2) 34.4 2.8 (56.3) (3.8) 58.5 2.4
Interest expense 39.5 4.6 63.8 5.1 58.8 4.0 127.8 5.2
Loss (gain) on disposal of assets -- -- 0.1 -- (0.4) -- 0.1 --
Provision for income taxes 0.2 -- -- -- 0.5 -- -- --
Loss before
extraordinary charge (110.0) (12.8) (29.6) (2.4) (115.2) (7.8) (69.4) (2.8)
Extraordinary charge 35.4 4.1 -- -- 35.4 2.4 -- --
Net loss $(145.4) (17.0)% $(29.6) (2.4)% $(150.5) (10.2)% $(69.4) (2.8)%
</TABLE>
Sales. Sales per week increased $32.3 million, or 45.2 percent, from
$71.4 million in the 12 weeks ended July 16, 1995 to $103.7 million in the 12
weeks ended July 14, 1996 and 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 12 and 24 weeks ended
July 14, 1996 was primarily attributable to the addition of 174 conventional
supermarkets acquired through the Merger. Excluding stores being divested or
closed in connection with the Merger, comparable store sales increased 2.4
percent for the 12 weeks ended July 14, 1996. Comparable store sales have
been improving each quarter since the Merger and this quarter represents the
first quarter the Company has achieved positive comparable store sales. In
addition, excluding stores being divested or closed in connection with the
Merger, and excluding the 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, the Company opened 12
stores (4 Ralphs conventional supermarkets and 8 Food 4 Less price impact
warehouse stores), divested or closed 18 smaller, less efficient stores and
completed one remodel.
Gross Profit. Gross profit increased as a percentage of sales from
18.8 percent in the 12 weeks ended July 16, 1995 to 21.1 percent in the 12
weeks ended July 14, 1996 and 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 the Company's
warehouse stores (which have lower gross margins than the Company's
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 managment programs instituted by the Company are realized. Gross
profit during the 12 and 24 weeks ended July 14, 1996 was also impacted by
certain one-time costs associated with the integration of the Company's
operations. See "Operating Income (Loss)."
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $163.7 million and $218.8
million for the 12 weeks and $255.0 million and $436.2 million for the 24
weeks ended July 16, 1995 and July 14, 1996, respectively. SG&A decreased as a
percentage of sales from 19.1 percent to 17.6 percent for the 12 weeks ended
July 16, 1995 and the 12 weeks ended July 14, 1996, respectively, and
increased as a percentage
14
<PAGE> 17
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 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 the Company's
warehouse stores (which have lower SG&A than the Company's conventional
supermarkets) on its SG&A margin for the period. SG&A during the 12 and 24
weeks ended July 14, 1996 was also impacted by certain one-time costs
associated with the integration of the Company's operations. The reduction in
SG&A as a percentage of sales in the second quarter of 1996 also reflects the
results of an enhancement of expense and labor controls at the store level.
See "Operating Income (Loss)."
Operating Income. In addition to the factors discussed above,
operating income for the 12 and 24 weeks ended July 14, 1996 was impacted by
approximately $5.9 million and $13.5 million, respectively, 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 $39.5 million and $63.8 million for the 12 weeks
and $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, the
Company's net loss decreased from $145.4 million in the 12 weeks ended July 16,
1995 to $29.6 million in the 12 weeks ended July 14, 1996, and the Company's
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the $325.0 million
revolving credit facility (the "Revolving Facility") and lease financing are
the Company's principal sources of liquidity. The Company believes that these
sources will be adequate to meet its anticipated capital expenditure, working
capital and debt service requirements for the following twelve months.
However, there can be no assurance that the Company will continue to generate
cash flow from operations at historical levels or that it will be able to make
future borrowings under the Revolving Facility.
During the 24 week period ending July 14, 1996, cash provided by
operating activities was approximately $70.6 million compared to cash used by
operating activities of approximately $32.6 million for the 24 weeks ending
July 16, 1995. The increase in cash from operating activities is due primarily
to a significant improvement in operating income for the 24 weeks ending July
14,1996, partially offset by the impact of certain costs associated with the
integration of the Company's operations subsequent to the Merger. The
Company's principal use of cash in its operating activities is inventory
purchases. The Company's high inventory turnover rate allows it to finance a
substantial portion of its inventory through trade payables, thereby reducing
its short-term borrowing needs. At July 14, 1996, this resulted in a working
capital deficit of $203.7 million.
Cash used for investing activities was $48.7 million for the 24 weeks
ended July 14, 1996. Investing activities consisted primarily of capital
expenditures of $55.8 million, partially offset by $20.5 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 relate to 31 new stores (17
of which had been completed at July 14, 1996) and the remodeling of 7 stores
(all of which had been completed at July 14, 1996). The Company currently
anticipates that its aggregate capital expenditures for fiscal 1996 will be
approximately $120.0 million ($95.0 million, net of expected capital leases),
of which approximately $111.0 million relate to ongoing expenditures for new
stores, equipment and maintenance and approximately $9.0 million relate to
Merger-related and other non-recurring items.
15
<PAGE> 18
Consistent with past practices, the Company intends to finance these capital
expenditures primarily with cash provided by operations and through leasing
transactions. At August 27, 1996, the Company 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 the Company
were to substantially reduce or postpone these programs, there would be no
substantial impact on short-term operating profitability. However, management
also believes that the construction of new stores is an important component of
its operating strategy. Consequently, management believes that if these
programs were substantially reduced, future operating results, and ultimately
its cash flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing markets
or to enter other markets. The Company has grown through acquisitions in the
past and from time to time engages in discussions with potential sellers of
individual stores, groups of stores or other retail supermarket chains.
The Company continues to monitor and evaluate the performance of
individual stores as well as operating markets in relation to its overall
business objectives. As a result of this evaluation, alternative strategies
may be considered by the Company which could result in the disposition of
certain assets.
Cash used by financing activities was $28.4 million for the 24 weeks
ended July 14, 1996. Financing activities consisted primarily of a $47.7
million reduction of the amount outstanding under the Revolving Facility,
principal payments on long-term debt and payments on capital leases of $69.3
million, offset by proceeds from issuance of the Private Notes of $94.6
million. At July 14, 1996, there was $79.7 million of borrowings under the
Revolving Facility and $86.5 million of standby letters of credit had been
issued. At August 27, 1996, the Company had $165.3 million available for
borrowing under the Revolving Facility.
Holdings has $115.3 million accreted value of the New Discount
Debentures and $148.5 million principal amount of the Seller Debentures.
Holdings is a holding company which has no assets other than the capital stock
of Ralphs. Holdings will be required to commence semi-annual cash payments of
interest on the New Discount Debentures and the Seller Debentures commencing
five years from their date of issuance in the amount of approximately $61
million per annum. Subject to the limitations contained in its debt
instruments, Ralphs intends to make dividend payments to Holdings in amounts
which are sufficient to permit Holdings to service its cash interest
requirements. Ralphs may pay other dividends to Holdings in connection with
certain employee stock repurchases and for routine administrative expenses.
The Company is highly leveraged. At July 14, 1996, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $2.3 billion and $258.2 million, respectively. Based upon
current levels of operations and anticipated cost savings and future growth,
the Company believes that its cash flow from operations, together with
available borrowings under the Revolving Facility and its other sources of
liquidity (including lease financing), will be adequate to meet its anticipated
requirements for working capital, capital expenditures, integration costs and
debt service payments. However, there can be no assurance that the Company's
business will continue to generate cash flow at or above current levels or that
future cost savings and growth can be achieved.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical facts, all matters discussed in this report
which are forward looking involve risks and uncertainties. Potential risks and
uncertainties include, but are not limited to, competitive pressures from other
major supermarket operators, economic conditions in the
16
<PAGE> 19
Company's primary markets and other uncertainties detailed from time to time in
the Company's Securities and Exchange Commission filings.
EFFECTS OF INFLATION AND COMPETITION
The Company's primary costs, inventory and labor, are affected by a
number of factors that are beyond its control, including availability and price
of merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain margins by adjusting its retail prices, but
competitive conditions may from time to time render it unable to do so while
maintaining its market share.
The supermarket industry is highly competitive and characterized by
narrow profit margins. The Company's competitors in each of its operating
divisions include national and regional supermarket chains, independent and
specialty grocers, drug and convenience stores, and the newer "alternative
format" food stores, including warehouse club stores, deep discount drug stores
and "super centers". Supermarket chains generally compete on the basis of
location, quality of products, service, price, product variety and store
condition. The Company regularly monitors its competitors' prices and adjusts
its prices and marketing strategy as management deems appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standard No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121).
The adoption of SFAS 121 had no impact on the Company's financial position or
on its results of operations.
17
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Indenture for the 10.45% Senior Notes due 2004, dated
as of June 6, 1996, by and among Ralphs Grocery
Company, the subsidiary guarantors identified therein
and Norwest Bank Minnesota, National Association, as
trustee (incorporated herein by reference to Exhibit
4.9 of Ralphs Grocery Company's Registration
Statement on Form S-4, No. 333-07005, as filed with
the Securities and Exchange Commission on June 27,
1996).
27. Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Los Angeles, State
of California.
Dated: August 28, 1996 FOOD 4 LESS HOLDINGS, INC.
/s/ Greg Mays
-----------------------------------
Greg Mays
Executive Vice President
Finance & Administration
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AND UNAUDITED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 24 WEEKS ENDED JULY 14, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> JUL-14-1996
<CASH> 61,517
<SECURITIES> 0
<RECEIVABLES> 69,478
<ALLOWANCES> (1,519)
<INVENTORY> 466,172
<CURRENT-ASSETS> 619,436
<PP&E> 1,297,984
<DEPRECIATION> (241,280)
<TOTAL-ASSETS> 3,141,086
<CURRENT-LIABILITIES> 823,158
<BONDS> 2,302,838
0
192,831
<COMMON> 57,163
<OTHER-SE> (508,194)
<TOTAL-LIABILITY-AND-EQUITY> 3,141,086
<SALES> 2,474,576
<TOTAL-REVENUES> 2,474,576
<CGS> 1,963,692
<TOTAL-COSTS> 1,963,692
<OTHER-EXPENSES> 452,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,783
<INCOME-PRETAX> (69,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,411)
<EPS-PRIMARY> (1.88)
<EPS-DILUTED> 0
</TABLE>
