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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For Fiscal Year Ended Commission File Number
February 2, 1997 33-59212
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. 90220
Compton, California (Zip code)
(Address of principal executive offices)
(310) 884-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: None
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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
At April 18, 1997, there were 17,207,882 shares of Common Stock
outstanding. As of such date, none of the outstanding shares of Common Stock
were held by persons other than affiliates and employees of the registrant, and
there was no public market for the Common Stock.
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PART I
ITEM 1. BUSINESS
GENERAL
Food 4 Less Holdings, Inc. ("Holdings," or together with its
subsidiaries, the "Company") was incorporated in California in 1992 and
reincorporated in Delaware in June 1995. 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 Supermarkets, Inc. ("F4L
Supermarkets"). F4L Supermarkets, RSI and RSI's wholly-owned subsidiary, Ralphs
Grocery Company ("RGC"), combined through mergers (the "Merger") in which RSI
remained as the surviving entity and changed its name to Ralphs Grocery Company
("Ralphs"). The Company does not have any business operations of its own and its
assets consist solely of all the outstanding capital stock of Ralphs.
The Company is a retail supermarket company with a total of 405 stores
which are located in Southern California (342) , Northern California (27) and
certain areas of the Midwest (36). The Company is the largest supermarket
operator in Southern California, with an estimated market share of 26 percent 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 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.
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The Company operates both conventional and warehouse format stores
utilizing a retail strategy tailored 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, under six
different retail formats. The following table sets forth by retail format the
number of stores operated by each of the Company's three divisions at February
2, 1997 (unless otherwise indicated, all references to numbers of stores and
other store data in this Annual Report on Form 10-K are as of February 2, 1997):
<TABLE>
<CAPTION>
Southern Northern
California California Midwestern Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Ralphs 263 - - 263
Cala - 8 - 8
Bell - 13 - 13
Falley's - - 5 5
------ ----- ----- -----
Total Conventional 263 21 5 289
Food 4 Less 79 - 31 110
FoodsCo - 6 - 6
------ ----- ------ ------
Total Warehouse 79 6 31 116
------ ----- ----- -----
Total Stores 342 27 36 405
====== ===== ===== =====
</TABLE>
SOUTHERN CALIFORNIA DIVISION
The Southern California Division operates 342 supermarkets in eight
counties under the names "Ralphs" and "Food 4 Less." The Company's Southern
California stores accounted for approximately 90 percent of the Company's sales
for the 53 weeks ended February 2, 1997.
The combination of RGC and F4L Supermarkets created the largest
supermarket operator 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 263 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 stores stock
between 35,000 and 45,000 merchandise items, 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 79 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
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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.
Marketing and Merchandising
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 F4L Supermarkets' conventional Alpha Beta,
Boys and Viva formats. Because the Company's advertising program covers the
Southern California region, the Company has been able to expand the number of
Ralphs stores without significantly increasing advertising costs.
The Company utilizes innovative and aggressive marketing programs in an
effort to increase sales, market share and profitability. In September 1996, the
Company launched its "First in Southern California" marketing program, which
emphasizes Ralphs' lower regular retail prices in conjunction with its premier
quality, wide selection and enhanced customer service. The new marketing
campaign also highlights the Company's belief that more shoppers are choosing
Ralphs than any other supermarket in Southern California. The program is
designed to increase store traffic and sales by a coordinated use of media
advertisement and targeted use of price promotions and double coupon offerings.
Management believes that consumers' favorable response to the "First in Southern
California" marketing campaign has resulted in increased customer traffic at its
stores and has contributed to the increase in 1996 fourth quarter comparable
store sales in Southern California of 3.5 percent. The Company continues to
emphasize its successful merchandising programs and exceptional product mix,
including its home meal replacement program and strong private label program.
The Company intends to continue to expand its home meal replacement program in
its conventional supermarkets. The Company's home meal replacement program
offers a wide range of pre-packaged fresh, refrigerated and frozen food items.
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 program provides quality
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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.
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 up to certain limits. 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, Distribution and Manufacturing
In March 1996, the Company commenced operations in a state-of-the-art
distribution and creamery facility located in Riverside, California (the
"Riverside Facility") which was acquired from Smith's Food & Drug Center, Inc
("Smith's") in December 1995. The technologically-advanced 90- acre complex has
improved the quality, service and productivity of the Company's distribution and
manufacturing operations. The Riverside Facility, which was originally opened in
1994 by Smith's, has more than one million square feet of warehousing and
manufacturing space consisting of a 675,000 square foot dry grocery service
center, a 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 allowed the Company to
eliminate certain of its smaller and less efficient warehouse facilities and to
consolidate its distribution operations into the Riverside Facility and two
other modern, efficient facilities located in Compton and Glendale, California.
The consolidation of the distribution operations allowed the Company to reduce
transportation costs, management overhead and outside storage costs and to
improve its inventory management.
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 ASRS warehouse has a ground floor area of 170,000
square feet and capacity of approximately 50,000 pallets. Guided by computer
software, ten-story high cranes move pallets from the receiving dock to
programmed locations in the ASRS warehouse while recording the location and time
of storage. Goods are retrieved and delivered by the cranes to conveyors leading
to an adjacent "picking" warehouse where individual store orders are filled and
shipped. The Company's Glendale "picking" warehouse (together with the ASRS, the
"Glendale Facility") was damaged in the Northridge earthquake. Its operations
were transferred to the Riverside Facility while it was being renovated.
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The Company completed its renovation of the Glendale "picking" warehouse in
March 1997. The Glendale 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 "Compton Facility"). This facility was
constructed in 1992 and has provided the Company with 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 78 percent of the Southern California
Division's total purchases during the 53 weeks ended February 2, 1997.
Additional purchases, consisting of mostly general merchandise, approximating
one 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 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 are processed and
packaged at the Riverside Facility creamery. Milk bound for the Company's Ralphs
conventional stores, as well as all ice cream and ice cream products, are
processed at the Company's existing creamery in Compton, California. The Company
also processes selected delicatessen items, including packaged salads and
cheeses, and produces cultured products, including sour cream and yogurt in
Compton.
In October 1996, the Company finalized an agreement (the "Agreement")
with American Stores Company ("American Stores") which resulted in termination
of the Company's leases for the La Habra facility and two stores leased from
American Stores. In addition, as required by the Company's settlement agreement
with the State of California entered into at the date of the Merger, the Company
sold one store to American Stores. The Company also entered into a new lease for
the bakery facility at La Habra, which it will continue to operate, and modified
the terms of two other store leases. Operations at the La Habra distribution
facility were previously discontinued as part of the Company's ongoing
consolidation of warehouse and distribution facilities which began with the
acquisition of the Riverside Facility in December 1995.
Store Operations and Retail Systems
The Company has a modern store base with over 60 percent of its stores
having been either opened or remodeled in the last five years. Since the Merger,
the Company has closed 74 smaller, underperforming stores, opened 37 stores, and
expanded or remodeled 23 stores. During fiscal 1996, the Company opened 26 new
stores and remodeled 20 stores. These improvements to its store base have
resulted in an increase in Southern California average store size of
approximately 11.6 percent. In addition, as a result of Ralphs' 124 year history
in Southern California, the Company has valuable and well-established store
locations, many of which are in densely populated metropolitan areas.
The Southern California Division's store equipment and facilities are
generally in excellent condition. The Ralphs stores range in size from
approximately 18,900 square feet to 87,000 square feet and average approximately
37,700 square feet. The Southern California Food 4 Less stores are generally
larger and range in size from approximately 27,400 square feet to 109,300 square
feet, and average approximately 55,200 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.
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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 as well as 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
The Company's merger, expansion, remodeling and conversion efforts have
required, and will continue to require, the funding of significant capital
expenditures. Remodels and new store 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 Company's anticipated expansion 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NORTHERN CALIFORNIA AND MIDWESTERN DIVISIONS
The Northern California Division of the Company operates 21 conventional
supermarkets in the greater San Francisco Bay area under the "Cala" and "Bell"
names, and six 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 the Company operates 36 stores, of which 31, including
ten former "Food Barn" stores which the Company 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 emphasize lowest overall prices rather than
promoting special prices on individual items. The Northern California Division's
conventional stores range in size from approximately 8,900 square feet to 32,800
square feet, and average approximately 19,300 square feet. The Northern
California Division's warehouse stores range in size from approximately 29,100
square feet to 59,700 square feet, and average approximately 43,300 square feet.
The Midwestern Division's conventional stores range in size from approximately
18,100 square feet to 30,900 square feet, and average approximately 25,000
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
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delivery to its stores by Certified and other vendors. The Company's Southern
California warehouse facilities supply a portion of the merchandise sold in the
Northern California Division stores.
The Company is party to a joint venture with a subsidiary of Certified
which operates a general merchandise warehouse in Fresno, California. Management
has been holding discussions with Certified concerning the possible termination
of the joint venture.
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 15 stores, opened seven 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.
("Fleming"), which previously held a non-exclusive license. See "Licensing
Operations" for further discussion of the amendment to the Fleming license.
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 Albertson's, 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 Company's
primary competitor in Southern California was recently acquired by a multi-
regional supermarket chain, which may increase competitive pressure for the
Company. 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.
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 1996, earnings from
licensing operations were approximately $244,000. An exclusive license with the
right to sublicense the "Food 4 Less" name
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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, 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 February 2, 1997, there were
179 Food 4 Less warehouse supermarkets in 12 states, including the 110 stores
owned or leased and operated by the Company. Of the remaining 69 stores, 7 are
operated by Fleming under licenses, 10 are operated under sublicenses from
Fleming and 52 are operated by other licensees.
GOVERNMENTAL REGULATION
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.
EMPLOYEES
The Company believes that its relationship with its employees is
excellent. At February 2, 1997, the Company had a total of 27,254 employees, as
shown in the table below.
<TABLE>
<CAPTION>
Southern Northern
California California Midwestern Total
------ ----- ----- ------
<S> <C> <C> <C> <C>
Administrative 1,138 61 48 1,247
Warehouse, manufacturing and
transportation 3,350 - 58 3,408
Stores 20,097 1,144 1,358 22,599
------ ----- ----- ------
Total 24,585 1,205 1,464 27,254
====== ===== ===== ======
</TABLE>
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Of the Company's 27,254 total employees at February 2, 1997, there were
23,419 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>
UNION NUMBER OF EMPLOYEES COVERED DATE(S) OF EXPIRATION
- ----- --------------------------- ---------------------
<S> <C> <C>
UFCW 14,214 Southern California October 3, 1999
Division clerks and
meatcutters
UFCW 3,690 Southern California February 26, 2000
Division clerks and
meatcutters
International Brotherhood of Teamsters 2,867 Southern California September 13, 1998
Division drivers
and warehousemen
UFCW 1,054 Northern California March 7, 1998
Division clerks and
meatcutters
Hotel Employees and Restaurant Workers 839 Southern California September 11, 2000
Division culinary workers
Hospital and Service Employees 549 Southern California January 19, 1997 (a)
Division store porters
Bakery and Confectionery Workers 206 Southern California July 7, 2000
Division bakers
</TABLE>
(a) Although negotiations for a new union contract are in progress, there
can be no assurance that a new contract will be reached on terms
satisfactory to the Company or that labor costs will not increase.
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ITEM 2. PROPERTIES
At February 2, 1997, the Company operated 405 supermarkets, as set forth
in the table below:
<TABLE>
<CAPTION>
Number of
Supermarkets Aveeraage
------------------ Total Square Feet/
Division Owned Leased Square Feet Facility
- -------- ----- ------ ----------- --------
<S> <C> <C> <C> <C>
Southern California 62(a) 280 14,237,000 41,600
Northern California - 27 665,000 24,600
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 Glendale Facility, consisting
of a 170,000 square foot high-rise automated storage and retrieval system
warehouse and adjacent "picking" warehouse located in the Atwater District of
Los Angeles near Glendale, California, was opened in 1987 and handles
non-perishable items. It is ten stories high and has a capacity of approximately
50,000 pallets. The Compton facility was opened in 1992 and 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
packaged salads. 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
facility in La Habra, California was leased for a term ending 2001. Operations
at the La Habra facility were discontinued as part of the Company's
consolidation of warehouse and distribution facilities which began with the
acquisition of the Riverside Facility in December 1995. On October 29, 1996, the
Company finalized an agreement (the "Agreement") with American Stores Company
("American Stores") which resulted in termination of the Company's leases for
the La Habra facility and two stores leased from American Stores. In addition,
as required by the Company's settlement agreement with the State of California
entered into at the date of the Merger, the Company sold one store to American
Stores. In addition, the Company entered into a new lease for the bakery
facility at La Habra, which it will continue to operate, and modified the terms
of two other store leases. In fiscal 1995, the Company 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 Operations" and Note 4 of "Notes to
Consolidated Financial Statements."
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ITEM 3. 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. A class has been
certified consisting of all purchasers of milk in Los Angeles from December 7,
1988. The plaintiffs seek unspecified damages. 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 a
pending appeal. The Company is continuing to actively defend itself in these
class action suits.
On September 13, 1996 a class action lawsuit titled McCampbell, et al.
v. Ralphs Grocery Company, et al. was filed in the Superior Court of the State
of California, County of San Diego, against the Company and two other grocery
store chains operating in the Southern California area. The complaint alleges,
among other things, that the Company and others conspired to fix the retail
price of eggs in Southern California. The plaintiffs claim that the defendants'
actions violate provisions of the California Cartwright Act and constitute
unfair competition. The Plaintiffs seek unspecified damages they purport to have
sustained as a result of the defendants' alleged actions, which damages may be
trebled under the applicable statute, and an injunction from future actions in
restraint of trade and unfair competition. Discovery has commenced and the
action has been certified as a class. Management of the Company intends to
defend this action vigorously and the Company has filed an answer to the
complaint denying the plaintiffs' allegations and setting forth several
defenses.
On December 20, 1996, a lawsuit titled Bundy, et al. v. Ralphs Grocery
Company, et al. was filed in the Los Angeles Superior Court against the Company.
The complaint was filed by eight individual plaintiffs who were terminated in
conjunction with the Company's restructuring. The plaintiffs claim that they
were wrongfully terminated for discriminatory reasons and that the Company
engaged in various fraudulent practices. The plaintiffs seek compensatory
damages in excess of $15 million, special and punitive damages. Management of
the Company believes that the plaintiff's claims are without merit and intends
to defend this action vigorously.
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 the Company conduct
a subsurface characterization of its Glendale Facility property located in the
Atwater District of Los Angeles, near Glendale, California. 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 Glendale Facility 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 Company's
Glendale Facility. Since that time, the Regional Board has requested further
investigation by the Company. The
11
<PAGE> 13
Company 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 Glendale
Facility. 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 Facility property, naming them as potentially responsible
parties ("PRPs"). On November 26, 1996, the EPA issued an Administrative Order
for Remedial Action (EPA Docket No. 97-06) against more than 60 respondents,
including the Company, in connection with the Superfund site. Under the order,
these PRP's are required to take certain actions, over an approximately 270-day
period, in connection with the implementation of interim remedies for the
treatment of groundwater.
Pursuant to the terms of the EPA's order, the PRPs have submitted a plan
for construction of an interim remedy to extract and remediate groundwater over
the next fourteen years. The PRPs have also submitted an offer to the EPA for
the reimbursement of a portion of the EPA's past costs. Estimates given to the
PRPs by environmental consultants and attorneys are that the total costs for the
remedy, including construction, operation and reimbursement to the government,
will most likely range between $55 million and $75 million in present value 1997
dollars.
In April 1997, an arbitration award allocation of 58.8% of such costs to
Lockheed Martin Corporation ("Lockheed") was confirmed by the Superior Court,
Los Angeles County. That judgment is now on appeal to California Court of
Appeal, seeking to reduce the Lockheed allocation. The remaining 26 current
Glendale PRPs have been engaged in Alternative Dispute Resolution ("ADR")
efforts. The Company believes that taking into account the Lockheed appeal, the
range of remediation costs and the results of the ADR allocation process, the
Company's allocable share of remedy costs, in present value 1997 dollars, will
likely fall within a range of $0.5 million to $2.0 million, with the likely
range from $0.5 million to $0.8 million.
It is anticipated that the EPA will issue a further administrative order
to PRPs for the construction of the remedy some time in 1997, to be followed by
negotiation of a consent decree with the PRPs. Such a consent decree would
provide contribution protection from lawsuits by other non-signatory PRPs.
Although responsibilities for compliance under federal CERCLA law are joint and
several, the Glendale PRPs include many very substantial companies as members,
such that the Company anticipates that the results of the PRPs' ADR allocation
process will be enforceable to limit the Company's exposure.
The Company removed underground storage tanks and remediated soil
contamination at the Glendale Facility property. In some instances, the removals
and the contamination were associated with grocery business operations; in
others, they were associated with prior property users. The Company has received
correspondence from the Regional Board confirming the successful completion of
the remediation.
Apart from the Glendale Facility, 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.
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.
12
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no public trading market for the Company's common stock, $.01
par value per share (the "Common Stock"). As of April 18, 1997, there were 98
holders of record of the Common Stock.
The Company has never paid and does not expect in the foreseeable future
to pay any dividends on its Common Stock. The indentures governing the Company's
outstanding debt securities contain certain restrictions on the payment of cash
dividends with respect to Ralphs' Common Stock, and Ralphs' bank credit facility
also restricts such payments.
14
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
THE COMPANY
The following table sets forth certain selected consolidated historical
financial data of the Company and its predecessor, F4L Supermarkets. The
operating and balance sheet data for the Company set forth in the table below as
of and for the 53 weeks ended February 2, 1997, the 52 weeks ended January 28,
1996, the 31 weeks ended January 29, 1995, the 52 weeks ended June 25, 1994,
June 26, 1993, and June 27, 1992 have been derived from the financial statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants. The following information should be read in conjunction with
the historical financial statements of the Company and related notes and "Item 7
- -- Management Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere herein.
The historical financial information set forth below for the 31 weeks
ended January 29, 1995 and all prior periods reflect the operations of the
Company and its consolidated subsidiaries. The historical financial information
for the 52 weeks ended January 28, 1996 and the 53 weeks ended February 2, 1997
reflect the acquisition of RSI on June 14, 1995.
15
<PAGE> 17
<TABLE>
<CAPTION>
F4L Supermarkets The Company
----------- -----------------------------
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
June 27, June 26, June 25,
1992 1993 1994(a)
----------- ----------- -----------
(in thousands, except store data)
<S> <C> <C> <C>
Operating Data:
Sales $ 2,913,493 $ 2,742,027 $ 2,585,160
Cost of sales (d) 2,392,655 2,257,835 2,115,842
----------- ----------- -----------
Gross profit (d) 520,838 484,192 469,318
Selling, general, administrative
and other, net 469,751 434,908 388,836
Amortization of goodwill 7,795 7,571 7,691
Loss (gain) on disposal of assets (1,364) (2,083) 37
Restructuring charge - - -
----------- ----------- -----------
Operating income (loss) (d) 44,656 43,796 72,754
Interest expense 70,211 73,614 77,017
Provision for earthquake losses - - 4,504(g)
Provision for income taxes 3,441 1,427 2,700
----------- ----------- -----------
Loss before
extraordinary charges (28,996) (31,245) (11,467)
Extraordinary charges 4,818(h) - -
----------- ----------- -----------
Net loss(j) $ (33,814) $ (31,245) $ (11,467)
=========== =========== ===========
Non-Cash Charges:
Depreciation and amortization
of property and equipment $ 37,898 $ 37,426 $ 41,380
Amortization of goodwill and
other assets 16,979 20,214 15,703
Non-cash interest expense - 3,882 8,767
Amortization of deferred
financing costs 6,304 4,901 5,472
Store Data:
Stores at end of period 249 248 258
Annual sales per selling square foot $ 538 $ 533 $ 487
Balance Sheet Data (end of period)(l):
Working capital deficit $ (66,254) $ (19,222) $ (54,882)
Total assets 998,451 957,840 980,080
Total long-term debt 509,829 572,670 554,939
Shareholders' equity (deficit) 50,771 22,633 10,024
</TABLE>
<TABLE>
<CAPTION>
The Company
-----------------------------------------------------
31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 29, January 28, February 2,
1995(b) 1996(c) 1997
----------- ----------- -----------
(in thousands, except store data)
<S> <C> <C> <C>
Operating Data:
Sales $ 1,556,522 $ 4,335,109 $ 5,516,259
Cost of sales (d) 1,294,147 3,485,993 4,326,230
----------- ----------- -----------
Gross profit (d) 262,375 849,116 1,190,029
Selling, general, administrative
and other, net 222,359 785,576 987,425
Amortization of goodwill 4,615 21,847 38,650
Loss (gain) on disposal of assets (455) (547) 9,317
Restructuring charge 5,134(e) 123,083(f) -
----------- ----------- -----------
Operating income (loss) (d) 30,722 (80,843) 154,637
Interest expense 48,361 202,651 284,217
Provision for earthquake losses - - -
Provision for income taxes - 500 -
----------- ----------- -----------
Loss before
extraordinary charges (17,639) (283,994) (129,580)
Extraordinary charges - 38,424(i) -
----------- ----------- -----------
Net loss(j) $ (17,639) $ (322,418) $ (129,580)
=========== =========== ===========
Non-Cash Charges:
Depreciation and amortization
of property and equipment $ 25,966 $ 92,282 $ 129,008
Amortization of goodwill and
other assets 10,657 33,047 40,669
Non-cash interest expense 6,139 23,877 35,789
Amortization of deferred
financing costs 3,413 8,193 10,667
Store Data:
Stores at end of period 267 408 405
Annual sales per selling square foot $ 452(k) $ 477 $ 485
Balance Sheet Data (end of period)(l):
Working capital deficit $ (74,776) $ (178,456) $ (182,641)
Total assets 1,000,695 3,188,129 3,131,993
Total long-term debt 571,712 2,276,225 2,344,406
Shareholders' equity (deficit) (7,333) (188,798) (319,268)
</TABLE>
(See footnotes on following page)
16
<PAGE> 18
(a) Operating data for the 52 weeks ended June 25, 1994 include the results
of the Food Barn Stores, which were not material, from March 29, 1994,
the date of the acquisition of 10 Food Barn Stores.
(b) F4L Supermarkets 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.
(c) Operating data for the 52 weeks ended January 28, 1996 reflect the
acquisition of RSI on June 14, 1995.
(d) Cost of sales has been principally determined using the last-in,
first-out ("LIFO") method of valuing inventory. If cost of goods sold
had been determined using the first-in, first-out ("FIFO") method, gross
profit and operating income would have been greater by $3,554,000,
$4,441,000, $699,000, $2,729,000, $2,214,000 and 5,580,000 for the 52
weeks ended 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 53 weeks ended February 2, 1997, respectively.
(e) The Company converted 11 of its conventional supermarkets to warehouse
stores. During the 31 weeks ended January 29, 1995, the Company recorded
a non-cash restructuring charge for the write-off of property and
equipment at the 11 stores of $5.1 million.
(f) The Company 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. The Company 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.
(g) On January 17, 1994, Southern California was struck by a major
earthquake which resulted in the temporary closing of 31 of the
Company's stores. The closures were caused primarily by loss of
electricity, water, inventory, or 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. The Company 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.
(h) 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 financing costs as a result of the early redemption
of a portion of the Company's bank term loan, partially offset by a $1.9
million extraordinary gain (net of related income tax expense of $0.7
million) on the replacement of partially depreciated assets following
the civil unrest in Los Angeles.
(i) Represents an extraordinary charge of $38.4 million relating to the
refinancing of F4L Supermarkets' old credit facility, 10.45% Senior
Notes due 2000 (the "Old F4L Senior Notes"), 13.75% Senior Subordinated
Notes due 2001 (the "Old F4L Senior Subordinated Notes") and Holdings'
15.25% Senior Discount Notes due 2004 in connection with the Merger and
the write-off of their related debt issuance costs.
(j) 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 $51.1 million, $43.9 million, $25.7
million, $9.8 million, $32.6 million and $29.2 million for the 52 weeks
ended 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 53
weeks ended February 2, 1997, respectively. Included in the 52 weeks
ended June 25, 1994, the 31 weeks ended January 29, 1995 and the 52
weeks ended January 28, 1996 are reduced employer contributions of $8.1
million, $14.3 million and $26.1 million, respectively, related to union
health and welfare benefit plans. Included in the 53 weeks ended
February 2, 1997 are reduced employer contributions of $17.8 million
related to union pension and health and welfare benefit plans. The
multi-employers' union health and welfare plans to which the Company
contributes are 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.
(k) Amount represents the Company's sales for the 1995 transition period
divided by total selling square feet prorated for the 31 weeks ended
January 29, 1995.
(l) Balance sheet data as of June 25, 1994 reflect the acquisition of 10
Food Barn Stores. Balance sheet data as of January 28, 1996 reflect the
Merger and the financings and refinancings associated therewith.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
On June 14, 1995, Holdings and F4L Supermarkets completed their
acquisition of RSI and its wholly owned subsidiary, RGC. Concurrently with the
consummation of the Merger, the Company refinanced a substantial portion of the
existing indebtedness of the Company and RGC. See "Business -- The Merger and
the Financing."
Since the Merger, the Company has converted 111 former Alpha Beta, Boys
and Viva stores to the Ralphs format, converted 13 former Ralphs format stores
to the Food 4 Less warehouse store format, and opened 37 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
74 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 11.6 percent from 36,100 square feet at the time of the
Merger to 40,300 square feet at the end of fiscal 1996.
Following the consummation of the Merger, sales in the Company's
Southern California Division fell short of anticipated levels for the second
half of fiscal 1995. This shortfall resulted primarily from achieving less
benefit from the Company's advertising program and experiencing greater
competitive activity than originally expected. 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 was also 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 and difficulties in introducing RGC merchandising and
service standards into the smaller conventional supermarkets formerly operated
by F4L Supermarkets. 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 F4L
Supermarkets to Ralphs facilities, and other backstage operational
inefficiencies.
At the beginning of fiscal 1996, the Company streamlined its management
structure and implemented several strategic initiatives designed to improve its
sales and margins. These changes have contributed to the Company's improved
results in fiscal 1996.
In the first quarter of fiscal 1996, the Company began to implement new
marketing initiatives designed to improve its sales performance. Comparable
store sales trends have been improving since that time. Comparable store sales
growth was positive in each of the last three quarters of fiscal 1996, and
reached 2.9 percent for the fourth quarter, which resulted in comparable store
sales growth of 1.8 percent for fiscal 1996. On September 11, 1996, the Company
launched its new "First in Southern California" marketing campaign. The new
marketing campaign highlights the Company's belief that more shoppers are
choosing Ralphs than any other supermarket in Southern California. The focus of
the new campaign is on lower retail prices while emphasizing those programs that
enhance Ralphs' offerings such as selection, quality, premier perishable
departments and customer service.
During the first quarter of fiscal 1996, the Company implemented a labor
productivity and cost reduction program. As a result, significant reductions
were made in store and corporate headcount
18
<PAGE> 20
levels. In addition, through the sublease of Smith's distribution center and
creamery in Riverside, California, the Company was able to consolidate its
distribution operations into three modern, efficient facilities located in
Compton, Glendale and Riverside, California. The elimination of certain smaller
and less efficient facilities allowed the Company to reduce transportation
costs, management overhead and outside storage costs and to improve its
inventory management.
Operating results improved each quarter during fiscal 1996, and the
Company's EBITDA margin (defined as earnings before interest, taxes,
depreciation, amortization, provision for postretirement benefits, gain/loss on
disposal of assets, Merger-related transition costs and LIFO charges) improved
from 5.7 percent in fiscal 1995 to 6.4 percent in fiscal 1996. The Company's
EBITDA margin in the fourth quarter of 1996 was 6.7 percent, a 21.8 percent
improvement from the comparable period in 1995. The Company's improved EBITDA
margin reflects the various initiatives which management has implemented. Gross
margin improvements reflect a reduction in warehousing and distribution costs as
a result of the consolidation of the Company's distribution operations, as well
as a reduction in the cost of goods sold as the benefits of inventory management
programs instituted by the Company are realized. SG&A expenses were reduced as a
percentage of sales as a result of tighter expense and labor controls at store
level and administrative cost reductions.
As a result of the operating improvements which occurred during fiscal
1996, the Company refinanced its existing bank credit agreement (the "Credit
Facility") in order to reduce interest expense. The refinancing of the Credit
Facility was completed on April 17, 1997. The refinancing was structured as an
amendment and restatement of the existing credit facility (the "Refinanced
Credit Facility") and the amended facility consists of a $325.0 million
Revolving Credit Facility, a $200.0 million Term Loan A Facility and a $350.0
million Term Loan B Facility. Prior to the refinancing of the Credit Facility,
on March 26, 1997, the Company issued $155.0 million of 11% Senior Subordinated
Notes due 2005 at a price of 105.5 percent of their principal amount and issued
a redemption notice for $140.2 million aggregate principal amount of the
Company's outstanding 13.75% Senior Subordinated Notes due 2005 (the "1995
13.75% Senior Subordinated Notes") and $4.8 million aggregate principal amount
of the Company's outstanding 13.75% Senior Subordinated Notes due 2001 (the
"1991 13.75% Senior Subordinated Notes," and together with the 1995 13.75%
Senior Subordinated Notes, the "13.75% Senior Subordinated Notes"). The 13.75%
Senior Subordinated Notes were redeemed on April 28, 1997. It is anticipated
that the refinancing of the Credit Facility, together with the lower interest
cost associated with the replacement of the 13.75% Senior Subordinated Notes
with the 1997 11% Senior Subordinated Notes offering, will reduce the Company's
annual interest expense by approximately $12 million. See "Debt Refinancing."
ACCOUNTING PRESENTATION
The Company's results of operations for the 53 weeks ended February 2,
1997 reflect operations for the combined Company, while the results of
operations for the 52 weeks ended January 28, 1996 reflect 20 weeks of
operations of F4L Supermarkets prior to the Merger and 32 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 (since the Merger
approximately doubled F4L Supermarkets' annual sales volume), the addition of
174 conventional stores to the Company's overall store mix and the material
changes in the Company's capital structure.
The Merger has been accounted for as a purchase of Ralphs by Holdings.
As a result, all financial statements for periods subsequent to June 14, 1995,
the date the Merger was consummated, reflect Ralphs' net assets at their
estimated fair market values as of June 14, 1995.
19
<PAGE> 21
The purchase price in excess of the fair market value of Ralphs' net assets was
recorded as goodwill and is being amortized over a 40-year period. The Company
finalized the allocation of the Ralphs purchase price in the second quarter of
fiscal 1996.
The Company operates within a conventional 52 or 53-week accounting
fiscal year. The Company changed its fiscal year-end from the last Saturday in
June to 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
31-week period ended January 29, 1995 is referred to as the 1995 transition
period, the 52-week period ended January 28, 1996 is referred to as fiscal 1995
and the 53-week period ended February 2, 1997 is referred to as fiscal 1996. The
operating results for the 1995 transition period are not directly comparable to
those of fiscal 1996 or 1995, as these periods include 53 and 52 weeks of
operations, respectively.
20
<PAGE> 22
RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth the historical operating results of the
Company for the 52 weeks ended June 25, 1994, the 31 weeks ended January 29,
1995, the 52 weeks ended January 28, 1996 and the 53 weeks ended February 2,
1997:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year Fiscal Year
1994 Transition Period 1995 1996
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Sales $2,585.2 100.0% $1,556.5 100.0% $4,335.1 100.0% $5,516.3 100.0%
Gross profit 469.3 18.1 262.4 16.9 849.1 19.6 1,190.0 21.6
Selling, general, administrative
and other, net 388.8 15.0 222.4 14.3 785.6 18.1 987.4 17.9
Amortization of goodwill 7.7 0.3 4.6 0.3 21.8 0.5 38.7 0.7
Loss (gain) on disposal
of assets 0.0 0.0 (0.5) (0.0) (0.5) (0.0) 9.3 0.2
Restructuring charge 0.0 0.0 5.1 0.3 123.1 2.8 0.0 0.0
Operating income (loss) 72.8 2.8 30.7 2.0 (80.8) (1.9) 154.6 2.8
Interest expense 77.0 2.9 48.4 3.1 202.7 4.7 284.2 5.2
Provision for earthquake
losses 4.5 0.2 0.0 0.0 0.0 0.0 0.0 0.0
Provision for income taxes 2.7 0.1 0.0 0.0 0.5 0.0 0.0 0.0
Loss before extraordinary
charge (11.5) (0.4) (17.6) (1.1) (284.0) (6.6) (129.6) (2.3)
Extraordinary charge 0.0 0.0 0.0 0.0 38.4 0.9 0.0 0.0
Net loss (11.5) (0.4) (17.6) (1.1) (322.4) (7.4) (129.6) (2.3)
</TABLE>
COMPARISON OF THE COMPANY'S RESULTS OF OPERATIONS FOR THE 53 WEEKS ENDED
FEBRUARY 2, 1997 WITH THE COMPANY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
JANUARY 28, 1996.
Sales. Sales per week increased $20.7 million, or 24.8 percent, from
$83.4 million in the 52 weeks ended January 28, 1996 to $104.1 million in the 53
weeks ended February 2, 1997. The increase in sales was primarily attributable
to the addition of 174 conventional supermarkets acquired through the Merger,
and to new store openings and the improved performance of converted stores
partially offset by the closing of 74 smaller stores since the Merger.
Comparable store sales trends have been improving each quarter since the Merger,
and the fourth quarter represents the third consecutive quarter the Company has
achieved positive comparable store sales, increasing by 2.9 percent. Excluding
stores being divested or closed in connection with the Merger, comparable store
sales for fiscal 1996 increased 1.8 percent. During fiscal 1996, 26 stores have
been opened and 30 stores have been closed. Management believes the increase in
comparable store sales was primarily attributable to additional consumers'
favorable response to the Company's "First in Southern California" marketing
program.
Gross Profit. Gross profit increased as a percentage of sales from 19.6
percent in the 52 weeks ended January 28, 1996 to 21.6 percent in the 53 weeks
ended February 2, 1997. The increase in gross profit margin reflects a reduction
in warehousing and distribution costs as a result of the consolidation of the
Company's distribution operations, as well as a reduction in the cost of goods
sold as the benefits of inventory management programs instituted by the Company
are realized. The increase in gross profit margin was also attributable to the
addition of RGC's conventional supermarkets which diluted the effect of the
Company's warehouse stores (which have lower gross margins than the Company's
conventional supermarkets) on its overall gross margin for the period. Gross
profit in 1995 was also impacted by certain one-time costs associated with the
integration of the Company's operations. See "Operating Income (Loss)."
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $785.6 million and $987.4
million for the 52 weeks ended January 28, 1996 and the 53 weeks ended February
2, 1997, respectively. SG&A decreased as a percentage
21
<PAGE> 23
of sales from 18.1 percent to 17.9 percent for those periods. The reduction in
SG&A as a percentage of sales reflects the results of tighter expense and labor
controls at store level and administrative costs reductions. The decrease in
SG&A as a percentage of sales was offset by an increase in SG&A due primarily to
the addition of RGC's conventional supermarkets acquired through the Merger. The
additional conventional supermarkets diluted the effect of the Company's
warehouse stores which have lower SG&A than the Company's conventional
supermarkets. The Company 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 1995, 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. The Company's share of the excess
reserves recognized in fiscal 1996 was $17.8 million, which partially offset the
increase in SG&A. SG&A was also impacted in fiscal 1995 and 1996 by certain
one-time costs associated with the integration of the Company's operations. See
"Operating Income (Loss)."
Restructuring Charge. During fiscal 1995, the Company approved and
implemented a restructuring plan designed to restructure its operations in
connection with the Merger. A total of 58 stores were planned to be closed, 27
of which were required to be sold pursuant to a settlement agreement with the
State of California in connection with the Merger. The remaining 31 stores were
under-performing stores. In addition, the Company closed two duplicate warehouse
facilities no longer required by the merged entity. In accordance with this
plan, the Company recorded a restructuring charge of $75.2 million, consisting
of write-downs of property and equipment (net of estimated proceeds); provisions
for lease obligations; write-downs of other assets and miscellaneous expenses.
Approximately $28.4 million is expected to involve cash disbursements and $46.8
million is expected to involve non-cash write-downs. The Company's planned
method of disposition is to sell or sublease the disposed stores/warehouse
facilities. Stores closed as part of this restructuring plan contributed $91.7
million and $33.9 million in sales, and recognized operating losses of $0.6
million and $2.3 million, for fiscal 1995 and fiscal 1996, respectively. During
fiscal 1995, the Company incurred cash expenditures of $2.5 million and non-cash
charges of $32.2 million, related primarily to write-downs of property and
equipment and other assets and payments of lease obligations. During fiscal
1996, the Company incurred cash expenditures of $6.5 million and non-cash
expenditures of $11.6 million, consisting primarily of write-downs of property
and equipment and payments of lease obligations. At February 2, 1997,
approximately $22.4 million of the restructuring accrual remained accrued on the
Company's balance sheet, consisting primarily of provisions for lease
obligations. As of February 2, 1997, the Company has completed a majority of the
restructuring actions, although certain lease obligations will continue through
2010.
On December 29, 1995, the Company consummated an agreement with Smith's
Food and Drug Centers ("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. The Company also
acquired nine of Smith's Southern California stores. As a result of this
agreement, the Company approved and implemented a restructuring plan designed to
restructure its distribution operations by closing its existing La Habra
distribution center and nine of its smaller and less efficient stores that were
located near the stores acquired from Smith's. In accordance with this plan, the
Company recorded a restructuring charge of $47.9 million, consisting of
write-downs of property and equipment and provisions for lease obligations.
Approximately $29.6 million is expected to involve cash disbursements and $18.3
million is expected to involve non-cash write-downs. The Company's planned
method of disposition is to sell or sublease the disposed stores/distribution
facility. Stores closed as part of this restructuring plan contributed $40.1
million and $23.2 million in sales, and contributed operating income of $2.0
million and $0.3 million, for fiscal 1995 and fiscal 1996, respectively. The
Company completed the closure of its La Habra distribution facility in the first
quarter of fiscal 1996. No charges were incurred against the restructuring
accrual in fiscal 1995. During fiscal 1996, the Company incurred cash
expenditures of $15.6 million and non-cash charges
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<PAGE> 24
of $15.3 million, consisting primarily of write-downs of property and equipment
and payments of lease obligations. At February 2, 1997, approximately $17.0
million of the restructuring accrual remained accrued on the Company's balance
sheet, consisting primarily of provisions for lease obligations and provisions
for property and equipment. As of February 2, 1997, the Company has completed a
majority of the restructuring actions, with remaining actions expected to be
completed by the end of fiscal 1997, although certain lease obligations will
continue through 2000.
Operating Income (Loss). In addition to the factors discussed above,
operating income for fiscal year 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 and
approximately $8.9 million associated with closed store reserves.
Interest Expense. Interest expense (including amortization of deferred
financing costs) was $202.7 million for the 52 weeks ended January 28, 1996 and
$284.2 million for the 53 weeks ended February 2, 1997. The increase in interest
expense was primarily due to the increased indebtedness incurred in conjunction
with the Merger. See "Liquidity and Capital Resources."
Loss Before Extraordinary Charge. Primarily as a result of the factors
discussed above, the Company's loss before extraordinary charge decreased from
$284.0 million for fiscal year 1995 to $129.6 million in fiscal year 1996.
COMPARISON OF THE COMPANY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY
28, 1996 WITH THE COMPANY'S 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 F4L Supermarkets 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 the Company's warehouse stores (which have lower gross margins than
the Company's conventional supermarkets) on its overall gross margin for the
period. Gross profit 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 $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 the Company's warehouse stores (which have
lower SG&A than the Company's conventional supermarkets) on its SG&A margin for
the period. The Company participates in multi-employer health and welfare plans
for its store employees who are members of the United Food and Commercial
Workers Union ("UFCW").
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<PAGE> 25
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. The Company's 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
the Company's operations. See "Operating Income (Loss)."
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. 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 F4L
Supermarkets stores. 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, 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). 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 of approximately $19.1 million will be offset
against the remaining reserve.
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).
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 the Company's
operations. These costs related primarily to (i) markdowns on clearance
inventory at F4L Supermarkets' 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 Company personnel
following store conversions. In addition, the Company has experienced higher
than anticipated warehousing and distribution costs since the Merger, primarily
due to the delay in the planned consolidation of the Company's distribution
facilities resulting from the acquisition of the Smith's Riverside distribution
center.
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."
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<PAGE> 26
Loss Before Extraordinary Charge. Primarily as a result of the factors
discussed above, the Company's 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 F4L
Supermarkets in connection with the Merger and the write-off of the related
deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under 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 during fiscal
1997.
At February 2, 1997, there were borrowings of $99.4 million under the
Revolving Facility and $89.1 million of standby letters of credit had been
issued. Under the terms of the 1995 Credit Facility, the Company was required to
make amortization payments of $2.2 million in 1996. In addition, the Company
prepaid term loans in the amount of $46.8 million with proceeds from 1996 10.45%
Senior Notes and proceeds from asset sales. The Term Loans require quarterly
amortization payments aggregating $4.3 million in fiscal year 1997, $4.3 million
in fiscal year 1998, $29.0 million in fiscal year 1999 and increasing
thereafter. The level of borrowings under the Company's Revolving Facility is
dependent upon cash flows from operations, the timing of disbursements, seasonal
requirements and capital expenditure activity. The Company was required to
reduce loans outstanding under the 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. At April 18, 1997, the Company had $140.7 million available for
borrowing under the Revolving Facility. The Company also entered into an
amendment and waiver to its Credit Agreement in connection with the transaction
with American Stores relating to the Company's La Habra facility as described
above.
During fiscal year 1996, cash provided by operating activities was
approximately $133.7 million as compared to cash used by operating activities of
approximately $16.8 million in fiscal year 1995. The increase in cash from
operating activities is due primarily to a significant improvement in operating
income for the 53 weeks ended February 2, 1997. 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 February 2, 1997, this resulted in a working capital deficit of $182.6
million, which is not significantly changed from the January 28, 1996 working
capital deficit of $178.5 million.
Cash used for investing activities was $111.1 million for fiscal year
1996. Investing activities consisted primarily of capital expenditures of $123.6
million, partially offset by $25.6 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 32 new stores (26 of
which had been completed at February 2, 1997) and the remodeling of 29 stores
(24 of which had been completed at February 2, 1997). The Company currently
anticipates that its aggregate capital expenditures for fiscal 1997 will be
approximately $155.0 million (or $140.0 million, net of expected capital
leases). Consistent with past practices, the Company intends to finance these
capital expenditures primarily with cash provided by operations and through
leasing transactions. No assurance can be given that sources of financing for
capital expenditures will be available or sufficient to finance its anticipated
25
<PAGE> 27
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 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 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 $22.9 million for fiscal year
1996. Financing activities consisted primarily of a $28.0 million net reduction
of the amount outstanding under the Revolving Facility, principal payments on
long-term debt and payments on capital leases of $87.5 million, offset by
proceeds from the June 1996 issuance of $100.0 million aggregate principal
amount of 10.45% Senior Notes due 2004 (the "1996 10.45% Senior Notes"). The
terms of the 1996 10.45% Senior Notes are substantially identical to those of
the Company's 1995 10.45% Senior Notes, which were issued in a registered
offering in June 1995 and of which $520.3 million aggregate principal amount is
outstanding. The 1996 10.45% Senior Notes were issued with original issue
discount resulting in gross proceeds to the Company of $94.6 million.
The $94.6 million of gross proceeds from the 1996 10.45% Senior Notes
was used to (i) repay $22.7 million of Term Loans, which was due within the
following twelve months, (ii) repay $21.7 million of additional Term Loans, pro
rata over the term thereof, (iii) repay $47.6 million in borrowings under the
Revolving Facility (without any reduction in amounts available for future
borrowing thereunder) and (iv) pay fees and expenses related to the 1996 10.45%
Senior Notes of approximately $2.6 million.
In November 1996, the Company amended the Term Loans to pay down $125
million of one of the four original tranches (Tranche A) and initiated new
tranches, Tranche E, Tranche F and Tranche G, in the amounts of $75.0 million,
$25.0 million and $25 million, respectively. The amortization of the new
tranches mirrored the maturity of the initial Tranche B, initial Tranche C and
initial Tranche D.
Holdings has outstanding $123.8 million accreted value of Discount
Debentures and $159.9 million principal amount of Seller Debentures outstanding.
Holdings is a holding company which has no assets other than the capital stock
of Ralphs. Holdings will be required to commence semi-annual cash payments of
interest on the Discount Debentures and the Seller Debentures commencing
December 15, 2000 in the amount of approximately $61 million per annum. Subject
to the limitations contained in its debt instruments, Ralphs intends to make
dividend payments to Holdings in amounts which are sufficient to permit Holdings
to service its cash interest requirements. Ralphs may pay other dividends to
Holdings in connection with certain employee stock repurchases and for routine
administrative expenses.
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<PAGE> 28
The Company has entered into an interest rate collar agreement with the
Credit Facility Administrative Agent that effectively sets interest rate limits
on the Company's term loans. The notational principal amount at February 2, 1997
and January 28, 1996 was $325 million. The agreement, which was entered into on
October 11, 1995 and expires on October 21, 1997, limits the interest rate
fluctuation of the 3-month Adjusted Eurodollar Rate (as defined) to a range
between 4.5 percent and 8.0 percent. The agreement requires quarterly cash
settlement for interest rate fluctuations outside of the limits. The agreement
satisfies the interest rate protection requirements under the Credit Facility.
As of February 2, 1997 and January 28, 1996, the 3-month Adjusted Eurodollar
Rate was 5.56 percent and 5.50 percent, respectively. No adjustments to interest
expense were recorded during fiscal year 1996 or 1995 as a result of this
agreement.
The Company is highly leveraged. At February 2, 1997, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $2.4 billion and $319.3 million, respectively. Based upon current
levels of operations and anticipated cost savings and future growth, the Company
believes that its cash flow from operations, together with available borrowings
under the Revolving 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.
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.
DEBT REFINANCING
On March 26, 1997, the Company issued $155 million of 11% Senior
Subordinated Notes due 2005 (the "1997 11% Senior Subordinated Notes") and
called all of the 13.75% Senior Subordinated Notes. The terms of the 1997 11%
Senior Subordinated Notes are substantially identical to those of the Company's
11% Senior Subordinated Notes due 2005 issued in 1995. The 1997 11% Senior
Subordinated Notes were issued at a premium price of 105.5, resulting in gross
proceeds of $163.5 million. The proceeds were used to (i) redeem an aggregate of
$145.0 million of its outstanding 13.75% Senior Subordinated Notes and (ii) pay
accrued interest, call premiums, fees and expenses related to the 1997 11%
Senior Subordinated Notes. The redemption price was 106.1 percent of the
principal amount outstanding.
On April 17, 1997, the Company replaced its existing credit facilities
(the "Refinanced Credit Facility") with a facility with lower interest rates and
a longer average life. The refinancing was structured as an amendment and
restatement of the existing Credit Facility and the amended facility consists of
a $325.0 million Revolving Credit Facility, a $200.0 million Term Loan A
Facility and a $350.0 million Term Loan B Facility. The new Term Loan A and Term
Loan B facilities replaced the existing term loan facilities with an outstanding
principal balance of $540.4 million at the time of refinancing.
Borrowings under the Refinanced Credit Facility bear interest at the
bank's Base Rate (as defined) plus a margin ranging from 0.25 percent to 1.25
percent for the Revolving Credit Facility and the Term Loan A Facility and the
bank's Base Rate (as defined) plus a margin ranging from 0.75 percent to 1.75
percent for the Term Loan B Facility or the Eurodollar Rate (as defined) plus a
margin ranging from 1.25 percent to 2.25 percent for the Revolving Credit
Facility and the Term Loan A Facility and the Eurodollar Rate (as defined) plus
a margin ranging from 1.75 percent to 2.75 percent for the Term Loan B Facility.
The interest rate for the Revolving Credit Facility and the Term Loan A Facility
currently is the bank's Base Rate (as defined) plus a margin of 0.75 percent or
the Eurodollar Rate (as defined) plus a margin of 1.75 percent. The interest
rate for the Term Loan B Facility currently is the bank's Base Rate (as defined)
plus a margin of 1.25 percent or the Eurodollar rate ( as defined) plus a margin
of 2.25 percent.
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<PAGE> 29
Quarterly principal installments on the Refinanced Credit Facility
continue to 2004, with amounts payable in each year as follows: $2.6 million in
fiscal 1997, $3.5 million in fiscal 1998, $25.5 million in fiscal 1999, $62.6
million in fiscal 2000, $87.5 million in fiscal 2001 and $368.3 million
thereafter.
Certain other terms and provisions of the previous Credit Facility were
also changed including, but not limited to, application of proceeds from
selected asset sales and stock offerings and permitted capital expenditures.
Management believes that this refinancing provides increased operational and
financial flexibility through lower interest costs and lower short-term loan
amortization.
As a result of the refinancings described above, the Company will incur
an extraordinary loss in the first quarter of fiscal 1997 of approximately $48.9
million, consisting of the call premium on the 13.75% Senior Subordinated Notes
and write-off of deferred financing costs.
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.
FORWARD-LOOKING STATEMENTS
When used in this annual report on Form 10-K, the words "estimate,"
"expect," "project" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements speak only as of the date
hereof. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain and difficult to predict; therefore, undue
reliance should not be placed upon such estimates. Such statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected. These factors include, but are not limited to:
(i) increased competitive pressures from existing competitors and new entrants,
including price-cutting strategies, store openings and remodels; (ii) loss or
retirement of key members of management or the termination of the Company's
Consulting Agreement with Yucaipa; (iii) inability to negotiate more favorable
terms with suppliers; (iv) increases in interest rates or the Company's cost of
borrowing or a default under any material debt agreements; (v) inability to
develop new stores in advantageous locations or to successfully convert or
remodel additional stores; (vi) prolonged labor disruption; (vii) deterioration
in general or regional economic conditions; (viii) adverse state or federal
legislation or regulation that increases the costs of compliance, or adverse
findings by a regulator with respect to existing operations; (ix) loss of
customers or sales weakness; (x) adverse determinations in connection with
pending or future litigations or other material claims against the Company; (xi)
inability to achieve future sales
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<PAGE> 30
levels or other operating results that support the cost savings; (xii) the
unavailability of funds for capital expenditures; (xiii) increases in labor
costs; (xiv) inability to control inventory levels; and (xv) operational
inefficiencies in distribution or other Company systems. Many of such factors
are beyond the control of the Company. Following the Merger, the Company has
experienced certain unanticipated costs and delays in the realization of certain
projected cost savings. There can be no assurance that new or additional
unforeseen costs or delays will not arise either in connection with the
integration or the Company's operations or the ongoing conduct of its business.
Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on page 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers and directors of the Company as of April 18, 1997. Directors
serve until the election and qualification of their successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ronald W. Burkle............. 44 Chairman of the Board and Director
George G. Golleher........... 49 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 &
Administration
John Standley................ 34 Senior Vice President and Chief Financial Officer
Harley DeLano................ 59 President - Cala Foods
Tony Schnug.................. 52 Group Senior Vice President - Support
Operations
Christopher Hall............. 32 Group Vice President - Finance, Controller and
Chief Accounting Officer
Robert I. Bernstein.......... 34 Director
Robert Beyer................. 37 Director
Peter Copses................. 38 Director
Patrick L. Graham............ 47 Director
Lawrence K. Kalantari........ 37 Director
John Kissick................. 55 Director
</TABLE>
Ronald W. Burkle has been Chairman of the Board since February 1997. He
has been a Director since June 1995. He also served as Chairman of the Board
from June 1995 to January 1996. Mr. Burkle was a Director, Chairman of the Board
and Chief Executive Officer of F4L Supermarkets from its inception in 1989 until
the Merger. Mr. Burkle co-founded The Yucaipa Companies 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.
("Smitty's") from June 1994 until its merger in May 1996 with Smith's Food &
Drug Centers, Inc. ("Smith's"). He has been Chief Executive Officer of Smith's
since
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<PAGE> 32
May 1996. 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 F4L Supermarkets from its inception in 1989 and was
the President and Chief Operating Officer of F4L Supermarkets 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
served as a Director of Dominick's Finer Foods Inc., an affiliate of The Yucaipa
Companies, from March 1995 until October 1996.
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 F4L Supermarkets 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
since February 1997. He was Executive Vice President - Finance & Administration
and Chief Financial Officer from September 1995 to February 1997. 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 F4L Supermarkets and of Holdings from December 1992 until
the Merger. From 1991 to December 1992, Mr. Mays was President and Chief
Financial Officer of Almac's and from 1989 to 1991, he was 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.
John Standley has been Senior Vice President and Chief Financial Officer
since February 1997. He was Senior Vice President - Administration of Smith's
from May 1996 to February 1997. He was Chief Financial Officer, Vice President
and Assistant Secretary of Smitty's from December 1994 to May 1996. From 1991 to
1994, Mr. Standley was Vice President of Finance of Food 4 Less Supermarkets,
Inc. Prior to 1991, he was a manager at Arthur Andersen LLP.
Harley DeLano has been President of Cala Foods, Inc. since 1990. Mr.
DeLano was General Manager of ABC from 1980 to 1990. He serves as a Director of
Certified Grocers.
Tony Schnug has been Group Senior Vice President - Support Operations
since January 1996. He was Senior Vice President of Manufacturing and
Construction from June 1995 to January 1996. He was Senior Vice President -
Corporate Operations of F4L Supermarkets from 1990 until the Merger. Before
joining F4L Supermarkets, he was Managing Director of SAGE, a wholly-owned
subsidiary of Ogilvy & Mather, and Vice President - Management Information
Systems of The Vons Companies, Inc.
Christopher Hall has been Group Vice President - Finance, Controller,
and Chief Accounting Officer since February 1997. He was Group Vice
President/Controller from September 1995 to February 1997. He was Vice
President, Accounting from June 1995 to September 1995. Prior to that, he was
Controller at Food 4 Less Supermarkets from 1993 to June 1995, and joined
31
<PAGE> 33
Food 4 Less Supermarkets in 1992 as Director - Finance. Prior to 1992, he was a
member of the audit practice at Arthur Andersen LLP.
Robert I. Bernstein has been a Director since March 1997. He has been a
general partner of The Yucaipa Companies since joining the firm in December
1995. From 1986 to 1989 and from 1993 to 1995, Mr. Bernstein was employed by
Bankers Trust. From 1989 to 1992, he was an infantry officer in the U.S. Marine
Corps.
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 has served
as a Director of Smitty's Supermarkets, Inc. from June 1994 to May 1996 and of
Dominick's Finer Foods, Inc. since March 1995.
Lawrence K. Kalantari has been a Director since March 1997. He has been
a general partner of The Yucaipa Companies since joining the firm in December
1995. Prior to that time, he was a Managing Director for Bankers Trust during
1995. Previously he was employed by CS First Boston Corporation from July 1993
to May 1995 and Paine Webber, Inc. from March 1990 to June 1993.
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.
The Company 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.
The Company 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 the Company and its subsidiaries. The services of
Messrs. R. Burkle, Bernstein, Graham and Kalantari acting in their capacities as
directors are provided to the Company pursuant to this agreement. The consulting
32
<PAGE> 34
agreement provides for an annual management fee payable by the Company to
Yucaipa in the amount of $4 million.
Messrs. R. Burkle, Golleher, Marasca, J. Burkle, Bernstein, Beyer,
Copses, Graham, Kalantari and Kissick are directors of Ralphs.
33
<PAGE> 35
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
of the Chief Executive Officer, the four other most highly compensated executive
officers and one additional highly compensated former executive officer of the
Company (the "Named Executive Officers"), whose total salary and bonus for the
53 weeks ended February 2, 1997 exceeded $100,000 for services rendered in all
capacities to the Company and its subsidiaries for the same time period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------------
No. of Shares
Transition Underlying All Other
Period/Fiscal Salary Bonus Options Compensation(10)
Name and Principal Position Year Ended ($) (7) ($) (7) (#) ($)
- --------------------------- ------------- ---------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Byron E. Allumbaugh(1) February 2, 1997 1,155,449 - - 1,500
Chairman January 28, 1996 883,333 547,692 820,227(9) 1,848
January 29, 1995(6) - - - -
June 25, 1994 - - - -
George G. Golleher(2) February 2, 1997 770,833 - 100,000 1,500
Chief Executive Officer January 28, 1996 503,205 1,950,000(8) 200,000(9) 1,783
January 29, 1995(6) 298,100 300,000 - 3,329
June 25, 1994 500,000 500,000 - 3,937
Alfred A. Marasca(3) February 2, 1997 600,000 - - 1,500
President and January 28, 1996 466,667 333,846 300,000(9) 3,000
Chief Operating Officer January 29, 1995(6) - - - -
June 25, 1994 - - - -
Greg Mays(4) February 2, 1997 314,583 - 60,000 1,500
Executive Vice President - January 28, 1996 286,378 355,000(8) - 1,783
Finance / Administration an January 29, 1995(6) 154,300 85,000 - 2,687
Chief Financial Officer June 25, 1994 250,000 150,000 - -
Harley DeLano February 2, 1997 215,000 48,887 30,000 1,500
President, Cala Foods January 28, 1996 211,218 150,000 - 1,783
January 29, 1995(6) 115,385 50,000 - 2,247
June 25, 1994 197,404 40,000 - 3,329
Tony Schnug(5) February 2, 1997 247,500 - 35,000 1,500
Group Senior Vice President January 28, 1996 206,282 201,000 - 1,783
Support Operations January 29, 1995(6) 210,385 100,000 - 2,247
June 25, 1994 190,000 40,000 - 3,145
</TABLE>
- -------------------
(1) In January 1996, Byron E. Allumbaugh became Chairman. Mr. Allumbaugh
retired as Chairman in January 1997.
(2) In January 1996, George G. Golleher became Chief Executive Officer.
(3) In June 1995, Alfred A. Marasca became President and Chief Operating
Officer.
(4) In September 1995, Greg Mays became Executive Vice President - Finance &
Administration and Chief Financial Officer.
(5) In January 1996, Tony Schnug became Group Senior Vice President -
Support Operations.
(6) F4L Supermarkets 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.
(7) Salary and bonus payments are reflected in the period they are paid.
(8) Includes payment of a special bonus upon change of control, in
connection with the Ralphs Merger, for George Golleher and Greg Mays in
the amount of $1,750,000 and $150,000, respectively.
34
<PAGE> 36
(9) All options shown were granted in connection with the Merger. Of such
options, 220,227 and 100,000 were granted to Messrs. Allumbaugh and
Marasca, respectively, in exchange for the cancellation of certain
payments to such individuals under RGC equity appreciation rights.
(10) The amounts shown in this column represent annual payments by the
Company to the Employee Profit Sharing and Retirement Program of the
Company.
The following table sets forth information concerning options granted in
fiscal 1996 to each of the Named Executive Officers pursuant to Holdings' 1995
Stock Option Plan. All options are exercisable for shares of Holdings' Common
Stock.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
------------------------------------------------------ --------------------------
No. of % of Total Options Exercise or
Options Granted to Employees Base Price Expiration
Granted(1) in Fiscal Year ($/Sh) Date 5% ($) 10%($)
------- ---- ----- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Byron E. Allumbaugh - - - - - -
George G. Golleher 100,000 13.7% 10.00 4/29/06 628,895 1,593,742
Alfred A. Marasca - - - - - -
Greg Mays 60,000 8.2% 10.00 4/29/06 377,337 956,245
Harley DeLano 30,000 4.1% 10.00 4/29/06 188,688 478,123
Tony Schnug 35,000 4.8% 10.00 4/29/06 220,113 557,810
</TABLE>
- -----------------------
(1) Mr. Golleher's options are immediately exercisable. Options held by
Messrs. Mays, DeLano and Schnug vest over a five-year period commencing
June 14, 1996.
35
<PAGE> 37
The following tables sets forth for each of the Named Executive Officers,
as to outstanding options at February 2, 1997, 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 1996.
1996 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
Exercisable / Exercisable /
Name Unexercisable (#) Unexercisable ($)
- ------------------- --------------- -------------
<S> <C> <C>
Byron E. Allumbaugh 820,227 / 0 2,198,208 / 0
George G. Golleher 300,000 / 0 0 / 0
Alfred A. Marasca 300,000 / 0 999,000 / 0
Greg Mays 12,000 / 48,000 0 / 0
Harley DeLano 6,000 / 24,000 0 / 0
Tony Schnug 7,000 / 28,000 0 / 0
</TABLE>
36
<PAGE> 38
CONSULTING AND EMPLOYMENT AGREEMENTS
In connection with the consummation of the Merger, Food 4 Less' board of
directors authorized the payment of a special bonus of $1,750,000 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 provides for an annual
salary currently equal to $1,000,000 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 the Company's board of directors and the right to require the
Company to repurchase certain of his shares of New Holdings stock upon his
death, disability or termination without cause.
The employment agreement between Ralphs 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 Ralphs and Greg Mays provides for a
salary currently equal to $375,000 per annum and an annual bonus equal to 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 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.
Ralphs' 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 Ralphs 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
The Company does not have a board committee performing the functions of
a compensation committee. Byron E. Allumbaugh, Chairman, and George G. Golleher,
Chief Executive Officer of the Company, together with Alfred Marasca, President
and Greg Mays, Executive Vice President, made decisions with regard to the
Company's executive officer compensation for fiscal 1996.
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 service (1,000 hours). The Company
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").
37
<PAGE> 39
Non-Qualified Retirement Plans. To allow the Company's 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 the Company 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. The Company 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 the Company's
obligations under the SERP.
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, 1997 for the specified final average
salaries and years of credited service.
<TABLE>
<CAPTION>
Final
Average Years of Credited Service
-----------------------------------------------------
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, Schnug and DeLano have
completed 39, 12, 33, 9, 7 and 12 years of credited service, respectively.
Compensation covered by the Retirement Plan, the SERP and Supplement Plan
includes both salary and bonus. The calculation of retirement benefits generally
is based on average compensation for the highest five consecutive years of the
ten years preceding retirement under the Retirement Plan and the Supplement
Plan. The calculation of retirement benefits generally is based on average
compensation for the highest three years of the ten years preceding retirement
under the SERP. 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 the Company
pursuant to the insurance agreements entered into by the Company and the
executive. Benefits are not subject to any deduction for social security offset.
38
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of Common Stock and Series
A Preferred Stock and Series B Preferred Stock of the Company by each person
who, to the knowledge of the Company, owns 5% or more of the Company's
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, as of April 18, 1997.
<TABLE>
<CAPTION>
Common Series A Series B
Stock (1) Preferred Stock Preferred Stock
------------------- ------------------- -----------------
Percentage Percentage
Number Number Number of Total of all
of of of Voting Outstanding
Beneficial Owner (2) Shares % Shares % Shares % Power(1) Stock(1)(3)
---------- ---- ---------- ---- --------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yucaipa and affiliates:
The Yucaipa Companies (4) 17,566,389 65.6% - - - - 38.5% 35.8%
Ronald W. Burkle (5) 1,777,390 9.5% - - - - 4.7% 4.3%
George G. Golleher (5)(6) 562,525 2.9% - - - - 1.5% 1.4%
10000 Santa Monica Blvd
Los Angeles, CA 90067 ---------- ---- ---------- ---- --------- ---- ---- ----
Total 19,906,304 73.5% - - - - 43.3% 40.3%
Alfred A. Marasca (7) 300,000 1.6% - - - - 0.8% 0.7%
Greg Mays (8) 68,890 0.4% - - - - 0.2% 0.2%
Harley DeLano (9) 30,000 0.2% - - - - 0.1% 0.1%
Tony Schnug (9) 35,000 0.2% - - - - 0.1% 0.1%
Apollo Advisors, L.P.,
Apollo Advisors II, L.P. (10)
2 Manhattanville Road
Purchase, NY 10577 1,285,165 6.8% 10,733,244 64.3% - - 35.6% 32.6%
BT Investment Partners, Inc.(11)
130 Liberty Street
New York, NY 10006 509,812 2.7% 900,000 5.4% 3,100,000 100.0% 4.1% 12.2%
Other 1995 equity investors
as a group (12) 40,172 0.2% 5,000,000 30.3% - - 15.1% 13.8%
All directors and executive
officers as a group
(15 persons) (4)(5)(6)(7)(8)(9)(13) 20,350,194 73.9% - - - - 43.9% 40.8%
</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) 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.
(3) Assumes the conversion of all outstanding Series A Preferred Stock and
Series B Preferred Stock into Common Stock at the conversion rate
applicable as of March 15, 1997.
(4) Represents shares owned by The Yucaipa Companies, F4L Equity Partners,
L.P., FFL Partners, Yucaipa Capital Fund and Yucaipa/F4L Partners. These
entities are affiliated partnerships which are controlled, directly or
indirectly, by Ronald W. Burkle. 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.
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 sales transactions involving Holdings.
(5) 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 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 1,346,294
and 562,525 shares of Common Stock they respectively own (including in
the case of Mr. Golleher, 300,000 shares issuable upon the exercise of
options).
(6) Includes 300,000 shares issuable upon the exercise of options held by
Mr. Golleher.
39
<PAGE> 41
(7) Represents shares issuable upon the exercise of options held by Mr.
Marasca.
(8) Includes 60,000 shares issuable upon the exercise of options held by Mr.
Mays. In addition, Mr. Mays owns 8,890 of the 431,096 shares of Common
Stock that are subject to the Stockholder Voting Agreement and Proxy
described in note (4) above.
(9) Represents shares issuable upon the exercise of options held by Messrs.
DeLano and Schnug.
(10) 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.
(11) 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.
(12) 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.
(13) Includes 10,000 shares issuable upon the exercise of options held by
executive officers other than the named executive officers above.
40
<PAGE> 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company 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 the Company and its subsidiaries. The services of
Messrs. R. Burkle, Bernstein, Graham and Kalantari acting in their capacities as
directors, and the services of other Yucaipa personnel are provided to the
Company pursuant to this agreement. See "Item 10 -- Directors and Executive
Officers of the Registrant." Messrs. R. Burkle, Bernstein, Graham and Kalantari
are partners of Yucaipa. The consulting agreement provides for an annual
management fee payable by the Company to Yucaipa in the amount of $4 million. In
addition, the Company may retain Yucaipa in an advisory capacity in connection
with acquisition or sale transactions, in which case the Company will pay
Yucaipa an advisory fee, except that the retention of Yucaipa in connection with
a sale of the entire Company 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 the Company, provided that Yucaipa will be entitled to
full monthly payments under the agreement for the remaining term thereof, unless
the Company terminates for cause pursuant to the terms of the agreement. Yucaipa
may terminate the agreement if the Company fails to make a payment due
thereunder, or if there occurs a change of control (as defined in the agreement)
of the Company, and upon any such termination Yucaipa will be entitled to full
monthly payments for the remaining term of the agreement. Pursuant to the
agreement, Yucaipa earned a total of $4.0 million in management fees for fiscal
1996.
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.
FFL Partners, a partnership controlled by Ronald W. Burkle, is
obligated, pursuant to an agreement with Holdings, to repurchase shares of
Holding's common stock from certain terminated participants in an employee
benefit plan maintained by one of the Company's subsidiaries. See "Note 10 of
Notes to Consolidated Financial Statements of Ralphs Grocery Company." From time
to time, the Company advances funds to plan participants on behalf of FFL
Partners and records a receivable from FFL Partners fo the amount advanced.
During fiscal 1996, FFL Partners reimbursed the Company $2.6 million in
fulfillment of its purchase obligation. At February 2, 1997, the outstanding
receivable from FFL Partners was approximately $271,000.
On June 6, 1996, the Company issued the 1996 10.45% Senior Notes to BT
Securities Corporation ("BT Securities"), an affiliate of BT Investment
Partners, Inc. ("BTIP"), which resold the notes pursuant to Rule 144A under the
Securities Act. BT Securities received a fee in the amount of $2.3 million for
acting as initial purchaser in the offering. On March 26, 1997, the Company
issued the 1997 11% Senior Subordinated Notes to BT Securities and certain other
investment banks, which resold the Notes pursuant to Rule 144A under the
Securities Act. BT Securities received a
41
<PAGE> 43
fee of $1.6 million for acting as initial purchaser in the offering. Bankers
Trust Company, an affiliate of BTIP and BT Securities has acted as Agent under
the Credit Facility and receives customary fees for such services.
42
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules required to be filed hereunder are
indexed on page 47 hereof.
(b) Reports on Form 8-K
None.
(c) Those Exhibits, and the Index thereto, required to be filed by Item 601
of Regulation S-K are attached hereto. Certain management contracts and
other compensation plans or arrangements required to be filed are
identified on the attached Index with an asterisk.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FOOD 4 LESS HOLDINGS, INC.
By: /s/ Terrence J. Wallock
-------------------------------
Terrence J. Wallock
Secretary
Date: December 5, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ronald W. Burkle Chairman of the Board and Director December 5, 1997
- ---------------------------------
Ronald W. Burkle
/s/ George G. Golleher Chief Executive Officer and Director December 5, 1997
- --------------------------------
George G. Golleher
/s/ Alfred A. Marasca President, Chief Operating Officer December 5, 1997
- ---------------------------------
Alfred A. Marasca
/s/ Joe S. Burkle Chief Executive Officer - Falley's and December 5, 1997
- --------------------------------- Director
Joe S. Burkle
/s/ Greg Mays Executive Vice President - Finance and December 5, 1997
- --------------------------------- Administration
Greg Mays
/s/ John Standley Senior Vice President and December 5, 1997
- --------------------------------- Chief Financial Officer
John Standley
/s/ Christopher Hall Group Vice President - Finance, December 5, 1997
- --------------------------------- Controller and Chief Accounting Officer
Christopher Hall
/s/ Robert I. Bernstein Director December 5, 1997
- ---------------------------------
Robert I. Bernstein
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert Beyer Director December 5, 1997
- ---------------------------------
Robert Beyer
/s/ Peter Copses Director December 5, 1997
- ---------------------------------
Peter Copses
/s/ Patrick L. Graham Director December 5, 1997
- ---------------------------------
Patrick L. Graham
/s/ Lawrence K. Kalantari Director December 5, 1997
- -------------------------------
Lawrence K. Kalantari
/s/ John Kissick Director December 5, 1997
- ---------------------------------
John Kissick
</TABLE>
45
<PAGE> 47
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
The Registrant will furnish copies of such report or proxy material if and when
such report or proxy material is sent to security holders.
46
<PAGE> 48
FOOD 4 LESS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants ........................................... 48
Consolidated balance sheets as of January 29, 1995, January 28, 1996 and
February 2, 1997.................................................................... 49-50
Consolidated statements of operations for the 52 weeks ended June 25, 1994, the
31 weeks ended January 29, 1995, the 52 weeks ended January 28, 1996 and the
53 weeks ended February 2, 1997..................................................... 51
Consolidated statements of cash flows for the 52 weeks ended June 25, 1994, the
31 weeks ended January 29, 1995, the 52 weeks ended January 28, 1996 and the
53 weeks ended February 2, 1997..................................................... 52-53
Consolidated statements of stockholders' equity (deficit) for the 52 weeks ended
June 25, 1994, the 31 weeks ended January 29, 1995, the 52 weeks ended
January 28, 1996 and the 53 weeks ended February 2, 1997 ........................... 54
Notes to consolidated financial statements.......................................... 55-84
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants ........................................... 85
I Condensed financial information of registrant............................... 86-88
II Valuation and qualifying accounts........................................... 89
</TABLE>
All other schedules have been omitted since the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and related notes.
47
<PAGE> 49
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 January 29, 1995, January 28, 1996 and February 2, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the 52 weeks ended June 25, 1994, the 31 weeks ended January 29, 1995,
the 52 weeks ended January 28, 1996 and the 53 weeks ended February 2, 1997.
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 January 29, 1995, January 28, 1996 and
February 2, 1997, and the results of their operations and their cash flows for
the 52 weeks ended June 25, 1994, the 31 weeks ended January 29, 1995, the 52
weeks ended January 28, 1996 and the 53 weeks ended February 2, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 21, 1997 (except with respect to the
matter discussed in Note 14, as to which the
date is April 17, 1997)
48
<PAGE> 50
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
As of
------------------------------------
January 29, January 28, February 2,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,560 $ 67,983 $ 67,589
Trade receivables, less allowances of $1,192,
$1,954 and $4,057 at January 29, 1995,
January 28, 1996 and February 2, 1997, respectively 23,377 60,948 46,560
Notes and other receivables 3,985 6,452 531
Inventories 224,686 502,669 502,095
Patronage receivables from suppliers 5,173 4,557 4,433
Prepaid expenses and other 13,051 34,855 21,925
---------- ---------- ----------
Total current assets 289,832 677,464 643,133
INVESTMENTS IN AND NOTES RECEIVABLE
FROM SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 6,718 7,288 7,020
Certified Grocers of California & Other 5,686 4,926 4,945
PROPERTY AND EQUIPMENT:
Land 23,488 183,125 173,803
Buildings 24,172 196,551 188,311
Leasehold improvements 110,020 251,856 226,159
Equipment and fixtures 190,016 441,760 401,716
Construction in progress 8,042 61,296 51,117
Leased property under capital leases 82,526 189,061 200,199
Leasehold interests 96,556 114,475 112,398
---------- ---------- ----------
534,820 1,438,124 1,353,703
Less: Accumulated depreciation and amortization 154,382 226,451 301,477
---------- ---------- ----------
Net property and equipment 380,438 1,211,673 1,052,226
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of
$20,496, $6,964 and $17,615 at January 29, 1995,
January 28, 1996 and February 2, 1997, respectively 25,469 94,100 88,889
Goodwill, less accumulated amortization of $38,560,
$60,407 and $99,057 at January 29, 1995,
January 28, 1996 and February 2, 1997, respectively 263,112 1,173,445 1,310,956
Other, net 29,440 19,233 24,824
---------- ---------- ----------
$1,000,695 $3,188,129 $3,131,993
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
49
<PAGE> 51
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
As of
-----------------------------------------
January 29, January 28, February 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 190,455 $ 354,777 $ 343,704
Accrued payroll and related liabilities 42,007 94,011 106,764
Accrued interest 10,730 23,870 31,011
Other accrued liabilities 65,279 278,904 261,582
Income taxes payable 293 596 1,956
Current portion of self-insurance liabilities 28,616 21,785 48,251
Current portion of senior debt 22,263 31,735 4,465
Current portion of obligations under capital leases 4,965 22,261 28,041
---------- ---------- ----------
Total current liabilities 364,608 827,939 825,774
SENIOR DEBT, net of current portion 320,901 1,226,302 1,263,142
OBLIGATIONS UNDER CAPITAL LEASES 40,675 130,784 126,336
SENIOR SUBORDINATED DEBT 145,000 671,222 671,222
HOLDINGS DEBENTURES 65,136 247,917 283,706
DEFERRED INCOME TAXES 17,534 17,988 21,074
SELF-INSURANCE LIABILITIES 44,123 127,200 91,332
LEASE VALUATION RESERVE - 25,182 62,389
OTHER NON-CURRENT LIABILITIES 10,051 102,393 106,286
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at January 29, 1995, 16,683,244 shares issued
at January 28, 1996 and February 2, 1997 (aggregate
liquidation value of $186.9 million) - 161,831 161,831
Convertible Series B Preferred Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at January 29, 1995, 3,100,000 shares issued
at January 28, 1996 and February 2, 1997 (aggregate
liquidation value of $34.7 million) - 31,000 31,000
Common Stock, $.01 par value, 1,600,000 shares, 60,000,000 shares and
60,000,000 shares authorized at January 29, 1995, January 28, 1996 and
February 2, 1997, respectively; 1,386,169 shares, 17,207,882 shares and
17,207,882 shares issued at January 29, 1995, January 28, 1996
and February 2, 1997, respectively 14 172 172
Non-Voting Common Stock, $.01 par value, 25,000,000 shares authorized;
no shares issued at January 29, 1995, January 28, 1996 or
February 2, 1997 - - -
Additional capital 105,580 56,991 56,091
Notes receivable from stockholders (702) (602) (592)
Retained deficit (112,225) (434,643) (564,223)
---------- ---------- ----------
7,333 (185,251) (315,721)
Treasury Stock; no shares of common stock at January 29, 1995,
421,237 shares at January 28, 1996 and February 2, 1997 - (3,547) (3,547)
---------- ---------- ----------
Total stockholders' equity (deficit) 7,333 (188,798) (319,268)
---------- ---------- ----------
$1,000,695 $3,188,129 $3,131,993
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
50
<PAGE> 52
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the
------------------------------------------------------------
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 2,585,160 $ 1,556,522 $ 4,335,109 $ 5,516,259
COST OF SALES (including purchases from
related parties of $175,929, $104,407,
$141,432 and $95,341 for the 52 weeks
ended June 25, 1994, the 31 weeks ended
January 29, 1995, the 52 weeks ended
January 28, 1996 and the 53 weeks ended
February 2, 1997, respectively) 2,115,842 1,294,147 3,485,993 4,326,230
------------ ------------ ------------ ------------
GROSS PROFIT 469,318 262,375 849,116 1,190,029
SELLING, GENERAL, ADMINISTRATIVE AND
OTHER, NET 388,836 222,359 785,576 987,425
AMORTIZATION OF GOODWILL 7,691 4,615 21,847 38,650
LOSS (GAIN) ON DISPOSAL OF ASSETS 37 (455) (547) 9,317
RESTRUCTURING CHARGE - 5,134 123,083 -
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 72,754 30,722 (80,843) 154,637
INTEREST EXPENSE:
Interest expense, excluding amortization of
deferred financing costs 71,545 44,948 194,458 273,550
Amortization of deferred financing costs 5,472 3,413 8,193 10,667
------------ ------------ ------------ ------------
77,017 48,361 202,651 284,217
PROVISION FOR EARTHQUAKE LOSSES 4,504 - - -
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY CHARGE (8,767) (17,639) (283,494) (129,580)
PROVISION FOR INCOME TAXES 2,700 - 500 -
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY CHARGE (11,467) (17,639) (283,994) (129,580)
EXTRAORDINARY CHARGE - - 38,424 -
------------ ------------ ------------ ------------
NET LOSS $ (11,467) $ (17,639) $ (322,418) $ (129,580)
============ ============ ============ ============
LOSS PER COMMON SHARE:
Loss before extraordinary charge $ (0.50) $ (0.77) $ (9.02) $ (3.54)
Extraordinary charge - - (1.22) -
------------ ------------ ------------ ------------
Net loss $ (0.50) $ (0.77) $ (10.24) $ (3.54)
============ ============ ============ ============
Average Number of Common Shares Outstanding 22,933,754 22,943,656 31,476,632 36,569,889
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
51
<PAGE> 53
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
--------------------------------------------------------
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Cash received from customers $ 2,585,160 $ 1,556,522 $ 4,335,109 $ 5,516,259
Cash paid to suppliers and employees (2,441,353) (1,507,523) (4,197,875) (5,160,532)
Interest paid (56,762) (33,553) (157,441) (230,620)
Income taxes refunded (paid) (247) 1,087 256 8,344
Interest received 903 867 2,562 9,531
Loss (gain) on disposal of assets 37 455 547 (9,317)
Other, net 84 (234) - -
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 87,822 17,621 (16,842) 133,665
CASH PROVIDED (USED) BY
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 11,953 7,199 21,373 29,503
Payment for purchase of property and equipment (57,471) (49,023) (122,355) (123,622)
Payment of acquisition costs, net of cash acquired (11,050) - (403,301) (12,705)
Other, net 813 (797) (1,120) (4,311)
----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (55,755) (42,621) (505,403) (111,135)
CASH PROVIDED (USED) BY
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 28 - 1,105,500 98,946
Net increase (decrease) in revolving loan (4,900) 27,300 100,100 (28,000)
Payments of long-term debt (14,224) (13,394) (661,119) (61,589)
Proceeds from issuance of preferred stock - - 137,500 -
Proceeds from issuance of common stock - 269 - -
Purchase of treasury stock - - (3,547) -
Purchase of common stock (1,192) (57) - -
Payments of capital lease obligations (3,693) (2,278) (15,314) (25,935)
Deferred financing costs and other (179) (276) (92,452) (6,346)
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (24,160) 11,564 570,668 (22,924)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,907 (13,436) 48,423 (394)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 25,089 32,996 19,560 67,983
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 32,996 $ 19,560 $ 67,983 $ 67,589
=========== =========== =========== ===========
</TABLE>
52
<PAGE> 54
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
------------------------------------------------
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(11,467) $(17,639) $ (322,418) $(129,580)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 62,555 40,036 133,522 180,344
Non-cash interest expense 8,767 6,139 23,877 35,789
Amortization of debt discount - - - 214
Restructuring charge - 5,134 123,083 -
Non-cash extraordinary charges - - 38,424 -
Loss (gain) on sale of assets 65 (455) (547) 9,317
Change in assets and liabilities,
net of effects from acquisition of
businesses:
Accounts and notes receivable (3,220) (3,398) (74) 14,999
Inventories (17,125) (11,794) 762 574
Prepaid expenses and other (5,717) (11,239) (18,291) 2,721
Accounts payable and accrued liabilities 55,301 18,715 3,327 24,243
Self-insurance liabilities (3,790) (8,965) 737 (9,402)
Deferred income taxes 2,506 2,794 454 3,086
Income taxes payable (53) (1,707) 302 1,360
-------- -------- ----------- ---------
Total adjustments 99,289 35,260 305,576 263,245
-------- -------- ----------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 87,822 $ 17,621 $ (16,842) $ 133,665
======== ======== =========== =========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of property and equipment
through the issuance of capital lease obligation $ 2,575 $ 4,304 $ 24,008 $ 28,485
======== ======== =========== =========
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 $32,595 in fiscal year 1995 $ 11,241 $- $ 2,098,220 $-
Net cash paid in acquisition (11,050) - (403,301) -
Notes issued to seller - - (150,000) -
Notes issued to advisor - - (12,000) -
-------- -------- ----------- ---------
Liabilities assumed $ 191 $- $ 1,532,919 $-
======== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
53
<PAGE> 55
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock
------------------------ ----------------------- --------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
---------- --------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
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 - - - - - -
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
Net loss - - - - - -
Payments of Stockholders' Notes - - - - - -
Repurchase Stock Options - - - - - -
---------- --------- ---------- ----------- ----------- -----
BALANCES AT FEBRUARY 2, 1997 16,683,244 $ 161,831 3,100,000 $31,000 17,207,882 $ 172
========== ========= ========= ======= =========== =====
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
------------------
Stock-
Number Stock- Add'l holders'
of holders' Paid-In Retained Equity
Shares Amount Notes Capital Deficit (Deficit)
-------- ------- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 (421,237) (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 (421,237) (3,547) (602) 56,991 (434,643) (188,798)
Net loss - - - - (129,580) (129,580)
Payments of Stockholders' Notes - - 10 - - 10
Repurchase Stock Options - - - (900) - (900)
-------- ------- ----- --------- --------- ---------
BALANCES AT FEBRUARY 2, 1997 (421,237) $(3,547) $(592) $ 56,091 $(564,223) $(319,268)
======== ======= ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
54
<PAGE> 56
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. ("F4L
Supermarkets"). 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, F4L Supermarkets, 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, F4L Supermarkets 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. 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, 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 merger has been accounted for in accordance with the
purchase method of accounting and, accordingly, the net assets acquired
have been included in the Company's consolidated balance sheets based
upon their estimated fair values as of the effective date. 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 fiscal 1996. The Company's consolidated statements of
operations include the revenues and expenses of RSI after the effective
date of the Merger.
55
<PAGE> 57
The proceeds from the Credit Facility, the 1995 10.45% Senior
Notes and the 1995 11% Senior Subordinated Notes (all as defined below)
provided the sources of financing required to pay the Company's portion
of the purchase price and to repay outstanding bank debt of F4L
Supermarkets and RGC of $176.5 million and $228.9 million, respectively,
and to repay existing mortgage debt of $174.0 million of RGC. In
addition, the Company exchanged certain of its newly issued senior notes
and senior subordinated notes for outstanding indebtedness of RGC and
F4L Supermarkets. Proceeds from the 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 and 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 Discount Debentures in consideration for
certain Merger-related services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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.
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.
Fiscal Year
The Company operates within a conventional 52 or 53-week
accounting fiscal year. The Company, together with its subsidiaries,
changed its fiscal year-end from the last Saturday in June to 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 25, 1994 is referred to as fiscal 1994, the 31-week
period ended January 29, 1995 is referred to as the 1995 transition
period, the 52-week period ended January 28, 1996 is referred to as
fiscal 1995 and the 53-week period ended February 2, 1997 is referred to
as fiscal 1996. Information presented below concerning subsequent fiscal
years starts with fiscal year 1997, which will cover the 52 weeks ended
February 1, 1998 and will proceed sequentially forward.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
56
<PAGE> 58
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 $16.5 million, $18.7 million and $24.3 million at January
29, 1995, January 28, 1996 and February 2, 1997, respectively, and gross
profit and operating income would have been greater by $0.7 million,
$2.7 million, $2.2 million and $5.6 million for fiscal year 1994, the
1995 transition period, fiscal year 1995 and fiscal year 1996,
respectively.
Pre-opening Costs
Certain costs associated with opening new stores are deferred
and amortized over one year following the opening of each new store.
Closed Store Reserves
The Company provides a reserve for the net book value of its
property and equipment, net of salvage value, and the present value of
the remaining lease obligation, net of sublease income at the time that
management approves a plan to close a store.
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense
includes amortization of capital lease assets. Depreciation and
amortization is provided using the straight-line method over the
following estimated useful lives:
Buildings and improvements 5-40 years
Equipment and fixtures 3-10 years
Property under capital leases
and leasehold interests 3-40 years (lease term)
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.
Long-Lived Assets
Goodwill, representing 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.
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.
57
<PAGE> 59
In accordance with SFAS No. 121, long-lived assets and certain
identifiable intangibles held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of goodwill and other long-lived assets,
the recoverability test is performed using undiscounted net cash flows
for groupings of stores consistent with the past acquisitions that gave
rise to the goodwill.
Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). 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 proposed changes in the tax law or rates.
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 its workers' compensation,
general liability and vehicle 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 in the period earned.
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, 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 F4L Supermarkets'
Old Credit Facility, 10.45% Senior Notes due 2000 (the "Old F4L Senior
Notes"), 13.75% Senior Subordinated Notes due 2001 (the "Old F4L Senior
Subordinated Notes"), the repayment of Holdings' 15.25% Senior
58
<PAGE> 60
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.
Stock Option Plans
The Company applies the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25"), and related interpretations in
accounting for its employee stock options.
Derivative Financial Instruments
The Company utilizes an interest rate collar agreement to set
interest rate limits on its Term Loans to satisfy the interest rate
protection requirements under its Credit Facility. Favorable or
unfavorable movements of interest rates outside of the interest rate
limits are recorded as adjustments to interest expense in the period in
which the unfavorable movement occurs.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense
for fiscal 1996, fiscal 1995, the 31 weeks ended January 19, 1995 and
fiscal 1994 was $63.5 million, $54.8 million, $17.7 million and $30.4
million, respectively.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the fiscal year 1996
presentation.
59
<PAGE> 61
3. SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's senior debt is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
As of
-----------------------------------------
January 29, January 28, February 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Term Loans $ -- $ 590,426 $ 541,432
Old Term Loan 125,732 -- --
10.45% Senior Notes, principal due 2004 with
interest payable semi-annually in arrears -- 520,326 520,326
10.45% Senior Notes, principal due 2004 with
interest payable semi-annually in arrears,
net of unamortized debt discount of $5,161
at February 2, 1997, 11.5% yield to maturity -- -- 94,839
10.45% Senior Notes, principal due 2000 with
interest payable semi-annually in arrears 175,000 4,674 4,674
Revolving Facility -- 127,400 99,400
Old Revolving Loan 27,300 -- --
10.0% secured promissory note, collateralized
by the stock of Bell, due June 1996, interest
payable quarterly 8,000 8,000 --
Other senior debt 7,132 7,211 6,936
---------- ---------- ----------
343,164 1,258,037 1,267,607
Less--current portion 22,263 31,735 4,465
---------- ---------- ----------
$ 320,901 $1,226,302 $1,263,142
========== ========== ==========
</TABLE>
Senior Debt
As part of the Merger financing, the Company entered into a bank
credit agreement (the "Credit Facility") comprised of a $600.0 million
term loan facility (the "Term Loans") and a revolving credit facility of
$325.0 million (the "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. The
Credit Facility is collateralized by inventory, receivables, certain
fixed assets, deposit accounts, collection proceeds and certain
intangibles.
At February 2, 1997, $541.4 million was outstanding under the
Term Loans, $99.4 million was outstanding under the Revolving Facility,
and $89.1 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 Revolving Facility;
such commitment fees are due quarterly in arrears. At February 2, 1997,
the weighted average interest rate on the Term Loans was 8.99 percent
and the interest rate on the Revolving Facility was 8.68 percent.
The Company has entered into an interest rate collar agreement
with the Credit Facility Administrative Agent that effectively sets
interest rate limits on the Company's term loans. The notational
principal amount at February 2, 1997 and January 28, 1996 was $325
million. The agreement, which was entered into on October 11, 1995 and
expires on October 21, 1997, limits the interest rate fluctuation of the
3-month Adjusted Eurodollar Rate (as defined) to a range between 4.5
percent and 8.0 percent. The agreement requires quarterly cash
settlement for interest rate fluctuations outside of the limits. The
agreement satisfies the interest rate protection requirements under the
Credit Facility. As of February 2, 1997 and January 28, 1996, the
3-month Adjusted Eurodollar Rate was 5.56 percent and 5.50 percent,
respectively. No adjustments to interest expense were recorded during
fiscal year 1996 or 1995 as a result of this agreement.
60
<PAGE> 62
In November 1996, the Company amended the Term Loans to pay down
$125.0 million on one of the original tranches (Tranche A) and initiated
new tranches, Tranche E, Tranche F, and Tranche G, in the amounts of
$75.0 million, $25.0 million and $25.0 million, respectively. The
amortization of the new tranches mirrors the maturity of the initial
Tranche B, initial Tranche C and initial Tranche D.
Quarterly principal installments on the Term Loans continue to
December 2003, with amounts payable in each year as follows: $4.3
million in fiscal 1997, $4.3 million in fiscal 1998, $29.0 million in
fiscal 1999, $66.4 million in fiscal 2000, $118.2 million in fiscal 2001
and $319.2 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
Revolving Facility are not paid earlier, they are due in December 2003.
The common stock of the Company and certain of its direct and indirect
subsidiaries has been pledged as security under the Credit Facility.
F4L Supermarkets issued $350.0 million of 10.45% Senior Notes
due 2004 (the "1995 10.45% Senior Notes") and exchanged $170.3 million
principal amount of 1995 10.45% Senior Notes for an equal amount of the
10.45% F4L Senior Notes due 2000 (the "Old F4L Senior Notes") (together
with the 1995 10.45% Senior Notes, the "Senior Notes"), leaving an
outstanding balance of $4.7 million of the Old F4L Senior Notes. The Old
F4L Senior Notes are due in two equal sinking fund payments on April 15,
1999 and 2000. The Senior Notes are senior unsecured obligations of
Ralphs and rank "pari passu" in right of payment with other senior
unsecured indebtedness of Ralphs. However, the Senior Notes are
effectively subordinated to all secured indebtedness of Ralphs and its
subsidiaries, including indebtedness under the Credit Facility. Interest
on the 1995 10.45% Senior Notes is payable semiannually in arrears on
each June 15 and December 15. Interest on the Old F4L Senior Notes is
payable semiannually in arrears on each April 15 and October 15.
In June 1996, Ralphs issued $100.0 million aggregate principal
amount of 10.45% Senior Notes due 2004 (the "1996 10.45% Senior Notes").
The terms of the 1996 10.45% Senior Notes are substantially identical to
those of Ralphs' 1995 10.45% Senior Notes, which were issued in a
registered offering in June 1995 and of which $520.3 million aggregate
principal amount is outstanding. The 1996 10.45% Senior Notes were
issued with original issue discount resulting in gross proceeds to
Ralphs of $94.6 million. In July 1996, Ralphs initiated an offer to
exchange (the "Exchange Offer") $1,000 principal amount of its 1996
10.45% Senior Notes, which exchange has been registered under the
Securities Act of 1933, as amended, for each $1,000 principal amount of
its 1996 10.45% Senior Notes.
The Exchange Offer was completed in August 1996.
The $94.6 million of gross proceeds from the 1996 10.45% Senior
Notes was used to (i) repay $22.7 million of Term Loans, which was due
within the following twelve months, (ii) repay $21.7 million of
additional Term Loans, pro rata over the term thereof, (iii) repay $47.6
million in borrowings under the Revolving Facility (without any
reduction in amounts available for future borrowing thereunder) and (iv)
pay fees and expenses related to the 1996 10.45% Senior Notes of
approximately $2.6 million.
The 1995 10.45% Senior Notes and the 1996 10.45% Senior Notes
(the "New 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 105.2 percent. The redemption price
declines ratably to 100 percent in fiscal 2003. In addition, on or prior
to June 15, 1998, Ralphs may, at its option, use the net cash proceeds
of one or more public equity offerings to redeem up to an aggregate of
35 percent of the principal amount of the New Senior Notes originally
issued, at a redemption price equal to 110.4 percent, 108.9 percent, and
107.5
61
<PAGE> 63
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 Old F4L Senior Notes may be redeemed beginning
in fiscal year 1996 at 104.5 percent, declining ratably to 100 percent
in fiscal year 1999.
Scheduled maturities of principal of senior debt at February 2,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1997 $ 4,465
1998 4,571
1999 30,571
2000 71,292
2001 118,401
Later years 1,038,307
----------
$1,267,607
==========
</TABLE>
The Company's senior subordinated debt is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
As of
-----------------------------------------
January 29, January 28, February 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
11.00% Senior Subordinated Notes $ -- $ 524,005 $ 524,005
principal due 2005 with interest payable
semi-annually in arrears
13.75% Senior Subordinated Notes -- 140,184 140,184
principal due 2005 with interest payable
semi-annually in arrears
13.75% Senior Subordinated Notes 145,000 4,816 4,816
principal due 2001 with interest payable
semi-annually in arrears
Other Senior Subordinated debt -- 2,217 2,217
---------- ---------- ----------
$ 145,000 $ 671,222 $ 671,222
========== ========== ==========
</TABLE>
Senior Subordinated Debt
Concurrent with the Merger, F4LSupermarkets 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 Credit Facility and the New Senior Notes
and the Old F4L Senior Notes. Interest on the New RGC Notes is payable
semiannually in arrears on each June 15 and December 15.
62
<PAGE> 64
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 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 111.0 percent, 109.4 percent, and 107.9
percent of the principal amount thereof if redeemed during the 12 months
commencing on June 15, 1995, June 15, 1996, and June 15, 1997,
respectively, in each case plus accrued and unpaid interest, if any, to
the redemption date.
F4L Supermarkets exchanged $140.2 million 13.75% Senior
Subordinated Notes due 2005 (the "New F4L Senior Subordinated Notes")
for an equal amount of F4L 13.75% Senior Subordinated Notes due 2001
(the "Old F4L Senior Subordinated Notes," and together with the New F4L
Senior Subordinated Notes, the "13.75% Senior Subordinated Notes") of
the Company, leaving an outstanding balance of $4.8 million of the Old
F4L Senior Subordinated Notes. The 13.75% Senior Subordinated Notes are
senior subordinated unsecured obligations of Ralphs and are subordinated
in right of payment to all senior indebtedness, including Ralphs'
obligations under the Credit Facility, the New Senior Notes, and the Old
F4L Senior Notes and the 1995 11% Senior Subordinated 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 New
F4L 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.
Scheduled maturities of principal of senior subordinated debt at
February 2, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1997 $ -
1998 -
1999 -
2000 -
2001 4,816
Later years 666,406
--------
$671,222
========
</TABLE>
At the time of the Merger, Holdings issued $100.0 million of its
New Discount Debentures. At February 2, 1997, the balance of the New
Discount Debentures was $123.8 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 February 2, 1997, the balance of the Seller
Debentures was $159.9 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
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<PAGE> 65
including June 15, 2000. Secondary Securities were issued during fiscal
1996 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.
Financial Covenants
The 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 Credit Facility were amended to, among
other things, provide for the acquisition of Smith's Food and Drug
Centers, Inc. ("Smith's") Riverside distribution 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 Credit Facility and the indentures
governing the New Senior Notes, the 1995 11% Senior Subordinated Notes
and the New F4L Senior Subordinated Notes limit, among other things,
additional borrowings, dividends on, and redemption of, capital stock
and the acquisition and the disposition of assets. At February 2, 1997,
the Company was in compliance with the financial covenants of its debt
agreements. At February 2, 1997, dividends and certain other payments
are restricted based on terms in the debt agreements.
Subsidiary Guarantors
All of Ralphs' wholly-owned subsidiaries have fully and
unconditionally guaranteed, on a joint and several basis, Ralphs'
obligations under the New Senior Notes, the 1995 11% Senior Subordinated
Notes and the 1997 11% Senior Subordinated Notes (See Note 14), as
provided in the indentures related thereto. Neither Ralphs nor any of
its subsidiaries have guaranteed Holdings' New Discount Debentures and
Seller Debentures; therefore, the separate financial statements of the
subsidiary guarantors are not presented.
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 (in thousands):
<TABLE>
<CAPTION>
For the
-------------------------------------------------------
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Minimum rents $49,788 $33,458 $97,752 $146,101
Rents based on sales 3,806 1,999 3,439 3,786
</TABLE>
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<PAGE> 66
Following is a summary of future minimum lease payments under
operating leases at February 2, 1997 (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C> <C>
1997 $ 145,675
1998 138,038
1999 135,227
2000 131,243
2001 118,973
Later years 1,279,824
-----------
$ 1,948,980
===========
</TABLE>
The Company has entered into lease agreements for new supermarket
sites which were not in operation at February 2, 1997. Future minimum
lease payments under such operating leases generally begin when such
facilities open and at February 2, 1997 are: 1997 - $3.6 million; 1998 -
$6.9 million; 1999 - $6.9 million; 2000 - $6.9 million; 2001 - $6.9
million; later years - $112.5 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 as leased property under capital leases. Future minimum lease
payments for the property under capital leases at February 2, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1997 $ 42,467
1998 36,104
1999 28,207
2000 22,515
2001 14,146
Later years 101,838
--------
Total minimum lease payments 245,277
Less: amounts representing interest 90,900
--------
Present value of minimum lease payments 154,377
Less: current portion 28,041
--------
$126,336
========
</TABLE>
Accumulated depreciation related to leased property under
capital leases was $27.6 million, $42.7 million and $62.0 million at
January 29, 1995, January 28, 1996 and February 2, 1997, respectively.
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<PAGE> 67
5. INVESTMENT IN ASSOCIATED WHOLESALE GROCERS
The Company's investment in Associated Wholesale Grocers
("A.W.G.") consists of seven- and eight-year patronage certificates
received in payment of certain rebates. The instruments bear interest at
6% per annum. The Company classifies these investments as
held-to-maturity securities, which are carried at amortized cost in
accordance with SFAS No. 115.
The contractual maturities at February 2, 1997 were as follows
(in thousands):
<TABLE>
<S> <C>
Within one year $ -
After one year through five years 5,463
After five years through ten years 1,557
------
$7,020
======
</TABLE>
6. INCOME TAXES
The provision (benefit) for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ 3,251 $ (2,894) $ -- $ --
State and other 712 100 46 --
------------- ------------- ------------- -----------
3,963 (2,794) 46 --
------------- ------------- ------------- -----------
Deferred:
Federal 78 2,794 -- --
State and other (1,341) -- 454 --
------------- ------------- -------------
(1,263) 2,794 454 --
------------- ------------- ------------- -----------
$ 2,700 $ -- $ 500 $ --
============= ============= ============= ===========
</TABLE>
66
<PAGE> 68
A reconciliation of the provision (benefit) for income taxes to
amounts computed at the federal statutory rates of 35 percent for fiscal
1994, the 1995 transition period, fiscal 1995 and fiscal 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal income taxes at statutory
rate on loss before provision
for income taxes and
extraordinary charges $ (3,068) $ (6,173) $ (112,670) $ (45,353)
State and other taxes,
net of federal tax benefit (1) 65 (18,057) (2,321)
Effect of permanent differences
resulting primarily from:
Amortization of goodwill 2,820 1,701 (1,665) 9,802
Original issue discount 526 387 306 404
Tax credits and other -- -- 3,769 (4,851)
Accounting limitation of
deferred tax benefit 2,423 4,020 128,817 42,319
------------- ------------- ------------- -------------
$ 2,700 $ -- $ 500 $ --
============= ============= ============= =============
</TABLE>
The provision (benefit) for deferred taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
52 Weeks 31 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Property and equipment $ (1,687) $ 992 $ (460) $ 20,606
Inventory (2,415) (2,627) (8,479) 40
Original issue discount (2,981) (2,069) (1,217) (10,966)
Capital lease obligation 2,792 527 (502) (5,253)
Self-insurance reserves (535) 5,523 2,104 2,276
Accrued expense (2,136) (3,807) (26,304) (1,435)
Accrued payroll and related liabilities 1,721 (3,879) (6,206) (2,916)
Damaged inventory reimbursement -- -- -- --
Tax intangibles -- -- 6,234 10,182
State taxes -- -- (21,902) (6,848)
Net operating losses 5,782 (6,963) (73,406) (50,069)
Tax credits (4,477) 1,711 3,601 --
Accounting limitation (recognition)
of deferred tax benefit 1,896 12,563 128,817 42,319
Other, net 777 823 (1,826) 2,064
------------- ------------- ------------- -------------
$ (1,263) $ 2,794 $ 454 $ --
============= ============= ============= =============
</TABLE>
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<PAGE> 69
The significant components of the Company's deferred tax assets
(liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
January 29, January 28, February 2,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related liabilities $ 6,248 $ 27,579 $ 30,495
Other accrued liabilities 18,467 71,955 73,389
Obligations under capital leases -- 37,584 42,837
Original issue discount -- 7,604 18,571
Self-insurance liabilities 25,204 49,773 47,497
Loss carryforwards 27,638 166,390 216,459
Tax credit carryforwards 4,157 913 913
State taxes -- 31,473 38,321
Other 570 18,024 16,075
------------ ------------ ------------
Gross deferred tax assets 82,284 411,295 484,557
Valuation allowance (48,030) (306,560) (348,879)
------------ ------------ ------------
Net deferred tax assets $ 34,254 $ 104,735 $ 135,678
------------ ------------ ------------
Deferred tax liabilities:
Inventories $ (11,690) $ (9,762) $ (9,802)
Property and equipment (28,527) (106,116) (129,808)
Obligations under capital leases (9,261) -- --
Other (2,310) (611) (725)
Tax intangibles -- (6,234) (16,416)
------------ ------------ ------------
Gross deferred tax liability (51,788) (122,723) (156,751)
------------ ------------ ------------
Net deferred tax liability $ (17,534) $ (17,988) $ (21,073)
============ ============ ============
</TABLE>
The Company recorded a valuation allowance to reserve a portion
of its gross deferred tax assets at February 2, 1997 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 February 2, 1997, approximately $139.0 million of the
valuation allowance for deferred tax assets will reduce goodwill when
the allowance is no longer required.
At February 2, 1997, the Company has net operating loss
carryforwards for federal income tax purposes of $618.0 million, which
expire from 2007 through 2012. 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
pre- Merger F4L Supermarkets and pre-Merger RSI changed in excess of 50
percent. As a result, Holdings' utilization of approximately $78.0
million of F4L Supermarkets' 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 F4L Supermarkets' and
RSI's net operating losses are approximately $15.6 million and $15.0
million, respectively. Furthermore, all of Holdings' pre-Merger RSI net
tax assets will reduce goodwill when utilized in future federal income
tax returns.
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<PAGE> 70
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.
Holdings currently has Internal Revenue Service examinations 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 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
transactions if the affiliated company is retained by the Company.
Management services expenses were $2.3 million during fiscal
year 1994, $1.2 million during the 1995 transition period, $3.6 million
during fiscal year 1995 and $4.0 million during fiscal year 1996.
Advisory fees were $0.2 million during fiscal year 1994, $21.5 million
during fiscal year 1995 and $1.7 million during fiscal year 1996. 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.
The Company is a member of a supplier cooperative with Certified
Grocers, which is used for certain purchases of inventory. Members
purchase shares in the cooperative and receive patronage dividends at
the end of the year. During fiscal 1996, fiscal 1995, the 1995
transition period and fiscal 1994, the Company purchased $95.3 million,
$141.4 million, $104.4 million and $175.9 million, respectively, in
inventory from the cooperative.
On December 29, 1995, the Company consummated an agreement with
Smith's Food and Drug Centers ("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. Annual rent is approximately $8.8 million. Pursuant to the
agreement, the Company also purchased certain operating assets and
inventory at the facility and nine stores for approximately $20.2
million.
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
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<PAGE> 71
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 has entered into lease agreements with the
developers of several new sites in which the Company has agreed to
provide construction financing. At February 2, 1997, the Company had
capitalized construction costs of $20.3 million on total commitments of
$24.0 million.
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. A class has been certified consisting of all purchasers of
milk in Los Angeles County from December 7, 1988. The plaintiffs seek
unspecified damages. 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. The Company is
continuing to actively defend itself in these class action suits.
On September 13, 1996 a class action lawsuit titled McCampbell,
et al. v. Ralphs Grocery Company, et al. was filed in the Superior Court
of the State of California, County of San Diego, against the Company and
two other grocery store chains operating in the Southern California
area. The complaint alleges, among other things, that the Company and
others conspired to fix the retail price of eggs in Southern California.
The plaintiffs' claim that the defendants' actions violate provisions of
the California Cartwright Act and constitute unfair competition.
Plaintiffs seek unspecified damages they purport to have sustained as a
result of the defendants' alleged actions, which damages may be trebled
under the applicable statute, and an injunction from future actions in
restraint of trade and unfair competition. Discovery has commenced and
the action has been certified as a class. Management of the Company
intends to defend this action vigorously and the Company has filed an
answer to the complaint denying the plaintiffs' allegations and setting
forth several defenses.
On December 20, 1996, a lawsuit titled Bundy, et al. v. Ralphs
Grocery Company, et al. was filed in the Los Angeles Superior Court
against the Company. The complaint was filed by eight individual
plaintiffs who were terminated in conjunction with the Company's
restructuring. The plaintiffs claim that they were wrongfully terminated
for discriminatory reasons and that the Company engaged in various
fraudulent practices. The plaintiffs seek compensatory damages in excess
of $15 million, special and punitive damages. Management of the Company
believes that the plaintiff's claims are without merit and intends to
defend this action vigorously.
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<PAGE> 72
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 1994, the 1995 transition period, fiscal year
1995 and fiscal year 1996, the self-insurance loss provisions were $19.9
million, $6.3 million, $32.6 million and $29.2 million, respectively.
During 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. In fiscal
1996, the Company changed the discount rate to 7.5 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 (in thousands):
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------
June 25, January 29, January 28, February 2,
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Self-insurance liability $ 90,898 $ 84,286 $ 161,391 $ 151,465
Less: Discount (9,194) (11,547) (12,406) (11,882)
----------- ----------- ----------- -----------
Net self-insurance liability $ 81,704 $ 72,739 $ 148,985 $ 139,583
=========== =========== =========== ===========
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $52.6 million, $37.5 million, $23.9 million, $14.5 million
and $8.7 million for the fiscal year 1997, the fiscal year 1998, the
fiscal year 1999, the fiscal year 2000 and the fiscal year 2001,
respectively.
Environmental Matters
In January 1991, the California Regional Water Quality Control
Board for the Los Angeles Region (the "Regional Board") requested that
the Company conduct a subsurface characterization of its Glendale
Facility property located in the Atwater District of Los Angeles, near
Glendale, California. 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 Glendale Facility 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 Company's Glendale Facility. Since that time,
the Regional Board has requested further investigation by the Company.
The Company 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 Glendale Facility. 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
71
<PAGE> 73
operator of the Glendale Facility property, naming them as potentially
responsible parties ("PRPs"). On November 26, 1996, the EPA issued an
Administrative Order for Remedial Action (EPA Docket No. 97-06) against
more than 60 respondents, including the Company, in connection with the
Superfund site. Under the order, these PRP's are required to take
certain actions, over an approximately 270-day period, in connection
with the implementation of interim remedies for the treatment of
groundwater.
Pursuant to the terms of the EPA's order, the PRPs have
submitted a plan for construction of an interim remedy to extract and
remediate groundwater over the next fourteen years. The PRPs have also
submitted an offer to the EPA for the reimbursement of a portion of the
EPA's past costs. Estimates given to the PRPs by environmental
consultants and attorneys are that the total costs for the remedy,
including construction, operation and reimbursement to the government,
will most likely range between $55 million and $75 million in present
value 1997 dollars.
In April 1997, an arbitration award allocation of 58.8% of such
costs to Lockheed Martin Corporation ("Lockheed") was confirmed by the
Superior Court, Los Angeles County. That judgment is now on appeal to
California Court of Appeal, seeking to reduce the Lockheed allocation.
The remaining 26 current Glendale PRPs have been engaged in Alternative
Dispute Resolution ("ADR") efforts. The Company believes that taking
into account the Lockheed appeal, the range of remediation costs and the
results of the ADR allocation process, the Company's allocable share of
remedy costs, in present value 1997 dollars, will likely fall within a
range of $0.5 million to $2.0 million, with the likely range from $0.5
million to $0.8 million.
It is anticipated that the EPA will issue a further
administrative order to PRPs for the construction of the remedy some
time in 1997, to be followed by negotiation of a consent decree with the
PRPs. Such a consent decree would provide contribution protection from
lawsuits by other non-signatory PRPs. Although responsibilities for
compliance under federal CERCLA law are joint and several, the Glendale
PRPs include many very substantial companies as members, such that the
Company anticipates that the results of the PRPs' ADR allocation process
will be enforceable to limit the Company's exposure.
The Company removed underground storage tanks and remediated
soil contamination at the Glendale Facility property. In some instances,
the removals and the contamination were associated with grocery business
operations; in others, they were associated with prior property users.
The Company has received correspondence from the Regional Board
confirming the successful completion of the remediation.
Apart from the Glendale Facility, 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
72
<PAGE> 74
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
service during which 1,000 hours have been worked. Employees who were
employed by F4L Supermarkets 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 certain
participants under this plan. Under certain circumstances, the cash
surrender value of the split dollar life insurance policies will offset
the Company's obligations under the SERP.
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 pension expense for the above plans for fiscal years 1996 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Service cost $ 6,187 $ 2,841
Interest cost on projected benefit obligation 5,293 2,543
Actual return on assets (5,684) (3,223)
Net amortization and deferral 1,907 1,365
------- -------
Net pension expense $ 7,703 $ 3,526
======= =======
</TABLE>
Following are the assumptions used in determining the net
pension expense:
Discount rate 7.00% 7.50%
Expected long term rate of return on plan assets 9.00% 9.00%
Rate of pay increase 5.00% 5.00%
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<PAGE> 75
The funded status of the Pension Plan (based on December 1996
and December 1995 asset values) is as follows (dollars in thousands):
<TABLE>
<CAPTION>
As of As of
February 2, January 28,
1997 1996
------------ ------------
<S> <C> <C>
Assets Exceed Accumulated Benefits:
Actuarial present value of benefit obligations:
Vested benefit obligation $ (45,965) $ 42,446
Accumulated benefit obligation (46,351) 43,256
Projected benefit obligation (66,858) 63,913
Plan assets at fair value 50,189 44,552
------------ ------------
Projected benefit obligation in excess of Plan Assets (16,669) (19,361)
Unrecognized net (gain)/loss (3,376) 4,136
Unrecognized prior service cost 1,023 1,100
------------ ------------
Accrued pension cost $ (19,022) $ (14,125)
============ ============
</TABLE>
The funded status of the SERP and Retirement Supplement Plan
(based on December 1996 and December 1995 asset values) is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
As of As of
February 2, January 28,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated Benefits Exceed Assets:
Actuarial present value of benefit obligations:
Vested benefit obligation $ (5,006) $ (4,863)
Accumulated benefit obligation (5,236) 4,908
Projected benefit obligation (10,033) (11,778)
Plan assets at fair value -- --
------------ ------------
Projected benefit obligation in excess of Plan Assets (10,033) (11,778)
Unrecognized net loss 607 544
Unrecognized prior service cost 1,725 1,846
Adjustment required to recognize minimum liability (2) --
------------ ------------
Accrued pension cost $ (7,703) $ (9,388)
============ ============
</TABLE>
Following are the assumptions used in determining the funded
status:
Discount rate 7.50% 7.50%
Rate of pay increase 5.00% 5.00%
The assets of the Pension Plan 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.
74
<PAGE> 76
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 1996, the Company did not purchase any of the Holdings shares. As
of February 2, 1997, the fair value of the shares allocated which are
subject to repurchase obligation by the partnership referred to above
was approximately $10.9 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 or February 2, 1997.
Defined Contribution Plan
The Company sponsors the Ralphs Grocery Company Savings Plan
Plus - Primary, the Ralphs Grocery Company Savings Plan Plus - Basic and
the Ralphs Grocery Company Savings Plan Plus - ESOP (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 service during which 1,000 hours has been worked. 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 eligible compensation. Expenses under the 401(k) Plan for
fiscal year 1994, 1995 and 1996 were $0.7 million, $0.7 million and $0.8
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 the Company at January 28, 1996
is not available. The Company contributed $57.2 million, $21.6 million,
$102.1 million and $138.8 million to these plans for fiscal year 1994,
the 1995 transition period, fiscal year 1995 and fiscal year 1996,
respectively. Management is not aware of any plans to terminate such
plans.
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<PAGE> 77
The United Food and Commercial Workers health and welfare plans
were over-funded 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. As part of the
renewal of the Southern California UFCW contract in October 1995,
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. The Company's share of the excess
reserves recognized in fiscal 1996 was $17.8 million. Offsetting the
reduction was a $3.5 million union bonus in fiscal year 1996.
Post-Retirement Medical Benefit Plans
The Company adopted postretirement medical benefit plans
("Postretirement Medical Plans"), previously sponsored by RGC, which
cover substantially all employees who are not members of a collective
bargaining agreement and who retire under certain age and service
requirements. The Postretirement Medical Plans are insured plans and
provide outpatient, inpatient and various other covered services. The
Company's policy is to fund the Plans as insurance premiums are
incurred. For persons who are less than age 65 at retirement and for
certain executives, the calendar 1996 year deductible is $1,000 per
individual, indexed to the medical care component of the Consumer Price
Index.
The net postretirement benefit cost of the Postretirement
Medical Plans include the following components for fiscal years 1996 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Service cost $ 909 $ 468
Interest cost 989 561
Return on plan assets -- --
Net amortization and deferral (281) (116)
------- -------
Net postretirement benefit cost $ 1,617 $ 913
======= =======
</TABLE>
Following are the assumptions used in determining the net
postretirement benefit cost:
Discount rate 7.00% 7.50%
Expected long term rate of return on plan assets N/A N/A
Medical cost trend 9.00%* 10.50%
* 1997 percentage decreases by 0.50% per year until 6.00% in 2002 and
all future years.
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<PAGE> 78
The funded status of the postretirement benefit plan (based on
December 31, 1996 and December 31, 1995 asset values) is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (2,242) $ 2,208
Fully eligible plan participants (1,777) 1,483
Other active plan participants (10,126) 10,862
Plan assets at fair value -- --
-------- --------
Accumulated postretirement obligations
in excess of plan assets (14,145) (14,553)
Unrecognized (gain)/loss (1,580) 562
Unrecognized prior service cost (2,965) (3,246)
-------- --------
Accrued post retirement benefit obligation $(18,690) $(17,237)
======== ========
Following are the assumptions used in determining the funded
status:
Discount rate 7.50% 7.50%
Expected long term rate of return on plan assets N/A N/A
Medical cost trend 8.50%* 10.50%
</TABLE>
* 1997 percentage decreases by 0.50% per year until 6.00% in 2002 and
all future years
The effect of a 1.00 percent increase in the medical cost trend
would increase the fiscal 1996 service and interest cost by $0.7 million. The
accumulated postretirement benefit obligation at February 2, 1997 would also
increase by $5.1 million.
Stock Plans
Holdings has one employee stock option plan, the Food 4 Less
Holdings, Inc. 1995 Stock Option Plan (the "Plan"). The Plan provides for an
aggregate of 3,000,000 shares of the Holdings' common stock to be available for
grants to officers and other key employees of Holdings or its subsidiaries.
Grants may be at the fair market value at the date of grant or at a price
determined by a committee consisting of two or more non-employee directors of
Holdings (the "Committee"). If a grantee owns 10 percent or more of the total
combined voting power of all classes of capital stock of Holdings, the option
exercise price shall be at least 110 percent of the Fair Market Value of Common
Stock on the date of grant. The Committee determines the fair market value of
Holdings' Common Stock using historical valuations, an analysis of Holdings'
financial performance and recent information concerning private purchases and
sales of Holdings' Common Stock. Options expire ten years from the date of grant
and become exercisable at the rate of 20 percent per year, or over a vesting
period determined by the Committee. To date, options issued under the Plan have
been granted exclusively to employees of the Company.
77
<PAGE> 79
The following table summarizes stock options available for
grant:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks
Ended Ended
January 28, February 2,
1996 1997
---------- ----------
<S> <C> <C>
Beginning balance -- 715,000
Authorized 3,000,000 --
Granted (2,415,000) (727,500)
Canceled 130,000 210,250
---------- ----------
Available for future grant 715,000 197,750
========== ==========
</TABLE>
A summary of the status of the Plan as of fiscal year 1996 and
fiscal year 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996
----------------------- -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 2,285,000 $ 5.78
Granted 2,415,000 5.86 727,500 10.00
Exercised -- -- -- --
Canceled (130,000) 5.39 (210,250) 5.72
---------- ----- ---------- ------
Outstanding at end of year 2,285,000 5.89 2,802,250 6.97
========== ===== ========== ======
Exercisable at end of year 2,225,000 5.78 2,254,000 6.23
========== ===== ========== ======
Weighted-average fair value of
options granted during the year $3.35 $ 3.55
===== ======
</TABLE>
The following table summarizes information about stock options
outstanding at February 2, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 02/02/97 Contractual Life Price at 02/02/97 Price
--------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.79 to $1.09 224,357 8.2 years $ 0.84 224,357 $ 0.84
$1.58 to $2.31 172,083 8.2 1.82 172,083 1.82
$2.73 to $4.00 172,500 8.2 3.04 172,500 3.04
$4.29 to $6.00 120,833 8.2 4.76 120,833 4.76
$6.67 to $7.32 1,120,227 8.2 7.15 1,120,227 7.15
$10.00 992,250 8.9 10.00 444,500 10.00
--------- --- ----- --------- ------
$0.79 to $10.00 2,802,250 8.5 years $ 6.97 2,254,500 $ 6.23
========= === ====== ========= ======
</TABLE>
At February 2, 1997, 3.0 million shares of Holdings' Common
Stock were reserved for issuance under Holdings' stock option plan.
78
<PAGE> 80
The Company applies APB Opinion 25 and related Interpretations
in accounting for the Plan and, accordingly, no compensation cost has
been recognized. Pro forma information regarding net income and earnings
per share is required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), and has
been determined as if the Company had accounted for employee stock
options under the fair value method of SFAS No. 123. The fair value for
stock options was estimated at the date of grant using the minimum value
method with the following assumptions for fiscal 1995 and 1996,
respectively: weighted average risk-free interest rates of 6.01 percent
and 6.46 percent and a weighted average expected life of the options of
7.0 years and 7.0 years.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
At the time of Merger, 2.3 million Stock Options were granted, 2.2
million of which became immediately vested. As a result, the effects of
applying SFAS 123 for providing pro forma disclosures in fiscal year
1996 and 1995 are not likely to be representative of the effects on
reported net income for future years. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
Ended Ended
January 28, February 2,
1996 1997
----------- -----------
<S> <C> <C>
(in thousands, except per share amounts)
NET LOSS:
As reported:
Loss before extraordinary charge $(283,994) $(129,580)
Extraordinary charge 38,424 -
Net loss (322,418) (129,580)
Pro forma:
Loss before extraordinary charge $(288,401) $(130,088)
Extraordinary charge 38,424 -
Net loss (326,825) (130,088)
LOSS PER COMMON SHARE:
As reported:
Loss before extraordinary charge $(9.16) $ (3.54)
Extraordinary charge (1.22) -
Net loss (10.38) (3.54)
Pro forma:
Loss before extraordinary charge $(9.48) $(3.56)
Extraordinary charge (1.22) -
Net loss (10.70) (3.56)
</TABLE>
At the time of the Merger, in connection with the extinguishment
of a $10 million Equity Appreciation Rights ("EAR") liability, Holdings
issued approximately 2.0 million options to former RGC executives at
prices ranging from $0.79 to $7.32. The options were immediately vested.
The exercise price was determined based upon a formula that incorporated
the EAR liability extinguished, number of options issued and the
estimated market price of Holdings' stock. All other options issued in
fiscal 1995 were at the estimated market price of $10.
79
<PAGE> 81
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 ranks pari passu in right of payment upon
liquidation. A total of 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 year 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.
80
<PAGE> 82
Holdings has reserved an additional 585,000 shares of its Common
Stock for future stock option grants.
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.
Interest Rate Derivatives
The carrying amount of the interest rate collar agreement, which
represents favorable or unfavorable movements of interest rates outside
of the interest rate limits, approximates fair value.
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 non-current notes 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 6.
Long-Term Debt
The fair value of the New Senior Notes, the 1995 11% Senior
Subordinated Notes and the 13.75% Senior Subordinated Notes is based on
quoted market prices. The Term Loans and the 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.
81
<PAGE> 83
The estimated fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
As of
February 2, 1997
---------------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 67,589 $ 67,589
Short-term notes and other receivables 531 531
Interest rate collar - -
Investments in and notes receivable from
supplier cooperatives (not practicable) 11,965 -
Long-term debt for which it is:
- Practicable to estimate fair values 2,044,007 2,133,193
- Not practicable 178,528 -
</TABLE>
12. RESTRUCTURING CHARGE
During fiscal 1995, the Company approved and implemented a
restructuring plan designed to restructure its operations in connection
with the Merger. A total of 58 stores were planned to be closed, 27 of
which were required to be sold pursuant to a settlement agreement with
the State of California in connection with the Merger. The remaining 31
stores were under- performing stores. In addition, the Company closed
two duplicate warehouse facilities no longer required by the merged
entity. In accordance with this plan, the Company recorded a
restructuring charge of $75.2 million, consisting of write-downs of
property and equipment (net of estimated proceeds); provisions for lease
obligations; write-downs of other assets and miscellaneous expenses.
Approximately $28.4 million is expected to involve cash disbursements
and $46.8 million is expected to involve non-cash write-downs. The
Company's planned method of disposition is to sell or sublease the
disposed stores/warehouse facilities. Stores closed as part of this
restructuring plan contributed $91.7 million and $33.9 million in sales,
and recognized operating losses of $0.6 million and $2.3 million, for
fiscal 1995 and fiscal 1996, respectively. During fiscal 1995, the
Company incurred cash expenditures of $2.5 million and non-cash charges
of $32.2 million, related primarily to write-downs of property and
equipment and other assets and payments of lease obligations. During
fiscal 1996, the Company incurred cash expenditures of $6.5 million and
non-cash expenditures of $11.6 million, consisting primarily of
write-downs of property and equipment and payments of lease obligations.
At February 2, 1997, approximately $22.4 million of the restructuring
accrual remained accrued on the Company's balance sheet, consisting
primarily of provisions for lease obligations. As of February 2, 1997,
the Company has completed a majority of the restructuring actions,
although certain lease obligations will continue through 2010.
On December 29, 1995, the Company consummated an agreement with
Smith's Food and Drug Centers ("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. The Company also acquired nine of Smith's Southern California
stores. As a result of this agreement, the Company approved and
implemented a restructuring plan designed to restructure its
distribution operations by closing its existing La Habra distribution
center and nine of its smaller and less efficient stores that were
located near the stores acquired from Smith's. In accordance with this
plan, the Company recorded a restructuring charge of $47.9 million,
consisting of write-downs of property and equipment and provisions for
lease obligations. Approximately $29.6 million is expected to involve
cash disbursements and $18.3 million is expected to involve non-cash
write-downs. The Company's planned
82
<PAGE> 84
method of disposition is to sell or sublease the disposed
stores/distribution facility. Stores closed as part of this
restructuring plan contributed $40.1 million and $23.2 million in sales,
and contributed operating income of $2.0 million and $0.3 million, for
fiscal 1995 and fiscal 1996, respectively. The Company completed the
closure of its La Habra distribution facility in the first quarter of
fiscal 1996. No charges were incurred against the restructuring accrual
in fiscal 1995. During fiscal 1996, the Company incurred cash
expenditures of $15.6 million and non-cash charges of $15.3 million,
consisting primarily of write-downs of property and equipment and
payments of lease obligations. At February 2, 1997, approximately $17.0
million of the restructuring accrual remained accrued on the Company's
balance sheet, consisting primarily of provisions for lease obligations
and provisions for property and equipment. As of February 2, 1997, the
Company has completed a majority of the restructuring actions, with
remaining actions expected to be completed by the end of fiscal 1997,
although certain lease obligations will continue through 2000.
13. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The tables below set forth the selected quarterly financial
information for fiscal year 1995 and fiscal year 1996 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
Fiscal Year 1995 04/23/95 07/16/95 10/08/95 01/28/96
---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 623,598 $ 857,344 $ 1,207,093 $ 1,647,074
Gross Profit 107,168 161,617 241,117 339,214
Loss Before Extraordinary Items (5,188) (110,003) (56,910) (111,893)
Net Loss (5,188) (145,361) (56,910) (114,959)
Loss Applicable to Common Shares (5,188) (145,361) (56,910) (114,959)
Loss Per Common Share:
Loss Before Extraordinary Items $ (0.23) $ (5.33) $ (1.56) $ (3.02)
Loss Per Common Share $ (0.23) $ (7.05) $ (1.56) $ (3.11)
</TABLE>
<TABLE>
<CAPTION>
12 Weeks 12 Weeks 12 Weeks 17 Weeks
Ended Ended Ended Ended
Fiscal Year 1996 04/21/96 07/14/96 10/06/96 02/02/97
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $1,230,808 $1,243,768 $1,221,018 $1,820,665
Gross Profit 248,637 262,247 276,079 403,066
Net Loss (39,834) (29,577) (20,267) (39,902)
Loss Per Common Share $ (1.08) $ (0.80) $ (0.55) $ (1.09)
</TABLE>
14. SUBSEQUENT EVENT
On March 26, 1997, Ralphs issued $155 million of 11% Senior
Subordinated Notes due 2005 (the "1997 11% Senior Subordinated Notes")
and called all of the 13.75% Senior Subordinated Notes. The terms of the
1997 11% Senior Subordinated Notes are substantially identical to those
of Ralphs' 11% Senior Subordinated Notes due 2005 issued in 1995. The
1997 11% Senior Subordinated Notes were issued at a premium price of
105.5, resulting in gross proceeds of $163.5 million. The proceeds were
used to (i) redeem an aggregate of $145.0 million of its outstanding
13.75% Senior Subordinated Notes and (ii)
83
<PAGE> 85
pay accrued interest, call premiums, fees and expenses related to the
1997 11% Senior Subordinated Notes. The redemption price was 106.1
percent of the principal amount outstanding.
On April 17, 1997, the Company replaced its existing credit
facilities (the "Refinanced Credit Facility") with a facility with lower
interest rates and a longer average life. The refinancing was structured
as an amendment and restatement of the existing Credit Facility and the
amended facility consists of a $325.0 million Revolving Credit Facility,
a $200.0 million Term Loan A Facility and a $350.0 million Term Loan B
Facility. The new Term Loan A and Term Loan B facilities replaced the
existing term loan facilities with an outstanding principal balance of
$540.4 million at the time of refinancing.
Borrowings under the Refinanced Credit Facility bear interest at
the bank's Base Rate (as defined) plus a margin ranging from 0.25
percent to 1.25 percent for the Revolving Credit Facility and the Term
Loan A Facility and the bank's Base Rate (as defined) plus a margin
ranging from 0.75 percent to 1.75 percent for the Term Loan B Facility
or the Eurodollar Rate (as defined) plus a margin ranging from 1.25
percent to 2.25 percent for the Revolving Credit Facility and the Term
Loan A Facility and the Eurodollar Rate (as defined) plus a margin
ranging from 1.75 percent to 2.75 percent for the Term Loan B Facility.
The interest rate for the Revolving Credit Facility and the Term Loan A
Facility currently is the bank's Base Rate (as defined) plus a margin of
0.75 percent or the Eurodollar Rate (as defined) plus a margin of 1.75
percent. The interest rate for the Term Loan B Facility currently is the
bank's Base Rate (as defined) plus a margin of 1.25 percent or the
Eurodollar rate ( as defined) plus a margin of 2.25 percent.
Quarterly principal installments on the Refinanced Credit
Facility continue to 2004, with amounts payable in each year as follows:
$2.6 million in fiscal 1997, $3.5 million in fiscal 1998, $25.5 million
in fiscal 1999, $62.6 million in fiscal 2000, $87.5 million in fiscal
2001 and $368.3 million thereafter.
Certain other terms and provisions of the previous Credit
Facility were also changed including, but not limited to, application of
proceeds from selected asset sales and stock offerings and permitted
capital expenditures. Management believes that this refinancing provides
increased operational and financial flexibility through lower interest
costs and lower short-term loan amortization.
As a result of the refinancings described above, the Company
will incur an extraordinary loss in the first quarter of fiscal 1997 of
approximately $48.9 million, consisting of the call premium on the
13.75% Senior Subordinated Notes and write-off of deferred financing
costs.
84
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Food 4 Less Holdings, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Food 4 Less Holdings, Inc. and
subsidiaries as of January 29, 1995, January 28, 1996 and February 2, 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the 52 weeks ended June 25, 1994, the 31 weeks
ended January 29, 1995, the 52 weeks ended January 28, 1996 and the 53 weeks
ended February 2, 1997, and have issued our report thereon dated March 21, 1997
(except with respect to the matter discussed in Note 14, as to which the date is
April 17, 1997). Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules included on pages
86 through 89 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 21, 1997 (except with respect to the
matter discussed in Note 14, as to which the
date is April 17, 1997)
85
<PAGE> 87
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF, AND FOR, THE 53 WEEKS ENDED FEBRUARY 2, 1997
(IN THOUSANDS)
The following condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
February 2,
1997
-----------
<S> <C>
ASSETS
Investment in subsidiary $ (35,562)
---------
Total Assets $ (35,562)
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
New Discount Notes $ 123,821
Seller Debentures 159,885
Convertible Series A Preferred Stock, $.01 par value, 25,000,000 shares
authorized and 16,683,244 outstanding
(aggregate liquidation value of $186.9 million) 143,600
Convertible Series B Preferred Stock, $.01 par value,
25,000,000 shares authorized and 3,100,000 outstanding
(aggregate liquidation value of $34.7 million) 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized
and 17,207,882 outstanding 172
Additional paid-in capital --
Retained deficit (494,040)
---------
$ (35,562)
=========
</TABLE>
CONDENSED STATEMENT OF LOSS
<TABLE>
<CAPTION>
53 Weeks
Ended
February 2,
1997
----------
<S> <C>
Net loss of subsidiary $ (93,791)
Interest expense (35,789)
----------
Net loss $(129,580)
==========
</TABLE>
86
<PAGE> 88
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF, AND FOR, THE 53 WEEKS ENDED FEBRUARY 2, 1997
(IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<S> <C>
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
Net loss $(129,580)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Net loss of subsidiary 93,791
Non-cash interest charge 35,789
---------
NET CASH USED BY OPERATING ACTIVITIES --
NET INCREASE IN CASH AND CASH EQUIVALENTS --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD --
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ --
=========
</TABLE>
87
<PAGE> 89
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Food 4 Less Holdings, Inc. (the "Company") is a non-operating
holding company. The above financial statements have been prepared on a
parent company stand-alone basis. They do not contain all disclosures
necessary to be in conformity with generally accepted accounting
principles. They should be read in conjunction with the consolidated
financial statements of Food 4 Less Holdings, Inc. contained elsewhere
in this report.
2. The debt agreements of the Company's subsidiary, Ralphs Grocery
Company ("Ralphs"), among other things, require Ralphs to maintain
minimum levels of net worth (as defined), to maintain minimum levels of
earnings (as defined) and to comply with certain ratios related to
interest expense (as defined), fixed charges (as defined), working
capital and indebtedness. In addition, the debt agreements limit, among
other things, additional borrowings, dividends on, and redemption of,
capital stock, capital expenditures, incurrence of lease obligations,
and the acquisition and disposition of assets. At February 2, 1997,
dividends and certain other payments are restricted based on terms of
the debt agreements.
88
<PAGE> 90
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
53 WEEKS ENDED FEBRUARY 2, 1997, 52 WEEKS ENDED JANUARY 28, 1996,
31 WEEKS ENDED JANUARY 29,1995 AND 52 WEEKS ENDED JUNE 25, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Provisions Charged
Balance at charged to Balance
beginning to interest Other at end
of period expense expense(a) Payments changes(b) of period
---------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Self-insurance liabilities
53 weeks ended February 2, 1997 $148,985 $ 29,184 $ 10,818 $ 49,404 $ -- $139,583
======== ======== ======== ======== ======== ========
52 weeks ended January 28, 1996 $ 72,739 $ 32,603 $ 10,287 $ 42,153 $ 75,509 $148,985
======== ======== ======== ======== ======== ========
31 weeks ended January 29, 1995 $ 81,704 $ 6,304 $ 3,453 $ 18,722 $ -- $ 72,739
======== ======== ======== ======== ======== ========
52 weeks ended June 25, 1994 $ 85,494 $ 19,880 $ 5,836 $ 29,506 $ -- $ 81,704
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Amortization of discount on self-insurance reserves charged to interest
expense.
(b) Reflects self-insurance reserve of Ralphs Grocery Company which was acquired
on June 14, 1995.
89
<PAGE> 91
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation, as amended, of Ralphs
Grocery Company (incorporated herein by reference to Exhibit 3.1
of Ralphs Grocery Company's Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
3.2 Restated bylaws of Ralphs Grocery Company (incorporated herein by
reference to Exhibit 3.2 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.)
4.1.1 Credit Agreement, dated as of June 14, 1995, by and among Food 4
Less Holdings, Inc., Food 4 Less Supermarkets, Inc., the Lenders,
Co-Agents, and Co-Arrangers named therein and Bankers Trust
Company (incorporated herein by reference to Exhibit 4.1 of Food
4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
4.1.2 First Amendment to Credit Agreement, dated as of August 18, 1995,
among Food 4 Less Holdings, Inc., Ralphs Grocery Company and the
financial institutions listed therein (incorporated herein by
reference to Exhibit 4.1.2 of Ralphs Grocery Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).
4.1.3 Second Amendment to Credit Agreement, dated as of December 11,
1995, among Food 4 Less Holdings, Inc., Ralphs Grocery Company
and the financial institutions listed therein (incorporated
herein by reference to Exhibit 4.1.3 of Ralphs Grocery Company's
Annual Report on Form 10-K for the fiscal year ended January 28,
1996).
4.1.4 Third Amendment, Consent and Waiver to Credit Agreement, dated as
of March 8, 1996, among Food 4 Less Holdings, Inc., Ralphs
Grocery Company and the financial institutions listed therein
(incorporated herein by reference to Exhibit 4.1.4 of Ralphs
Grocery Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996).
4.1.5 Fourth Amendment to Credit Agreement, dated as of November 7,
1996, among Food 4 Less Holdings, Inc., Ralphs Grocery Company
and the financial institutions listed therein (incorporated
herein by reference to Exhibit 4.1.5 of Ralphs Grocery Company's
Annual Report on Form 10-K for the fiscal year ended February 2,
1997).
4.2.1 Indenture for the 10.45% Senior Notes due 2004, dated as of June
1, 1995, by and among Food 4 Less Supermarkets, Inc., the
subsidiary guarantors identified therein and Norwest Bank
Minnesota, National Association, as trustee (incorporated herein
by reference to Exhibit 4.4.1 of Food 4 Less Holdings, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 16,
1995).
E-1
<PAGE> 92
Exhibit
Number Description
- ------- -----------
4.2.2 First Supplemental Indenture for the 10.45% Senior Notes due
2004, dated as of June 14, 1995, by and among Ralphs Grocery
Company (as successor by merger to Food 4 Less Supermarkets,
Inc.), the subsidiary guarantors identified therein, Crawford
Stores, Inc. and Norwest Bank Minnesota, National Association, as
trustee (incorporated herein by reference to Exhibit 4.4.2 of
Food 4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended July 16, 1995).
4.2.3 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).
4.3.1 Indenture for the 13.75% Senior Subordinated Notes due 2005,
dated as of June 1, 1995, by and among Food 4 Less Supermarkets,
Inc., the subsidiary guarantors identified herein and United
States Trust Company of New York, as trustee (incorporated herein
by reference to Exhibit 4.5.1 of Food 4 Less Holdings, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 16,
1995).
4.3.2 First Supplemental Indenture for the 13.75% Senior Subordinated
Notes due 2005, dated as of June 14, 1995, by and among Ralphs
Grocery Company (as successor by merger to Food 4 Less
Supermarkets, Inc.), the subsidiary guarantors identified
therein, Crawford Stores, Inc. and United States Trust Company of
New York, as trustee (incorporated herein by reference to Exhibit
4.5.2 of Food 4 Less Holdings, Inc.'s Quarterly Report on Form
10-Q for the quarter ended July 16, 1995).
4.4.1 Indenture for the 11% Senior Subordinated Notes due 2005, dated
as of June 1, 1995, by and among Food 4 Less Supermarkets, Inc.,
the subsidiary guarantors identified therein and United States
Trust Company of New York, as trustee (incorporated herein by
reference to Exhibit 4.6.1 of Food 4 Less Holdings, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 16,
1995).
4.4.2 First Supplemental Indenture for the 11% Senior Subordinated
Notes due 2005, dated as of June 14, 1995, by and among Ralphs
Grocery Company (as successor by merger to Food 4 Less
Supermarkets, Inc.), the subsidiary guarantors identified
therein, Crawford Stores, Inc. and United States Trust Company of
New York, as trustee (incorporated herein by reference to Exhibit
4.6.2 of Food 4 Less Holdings, Inc.'s Quarterly Report on Form
10-Q for the quarter ended July 16, 1995).
4.5.1 Indenture for the 10-1/4% Senior Subordinated Notes due 2002,
dated as of July 29, 1992, by and between Ralphs Grocery Company
and United States Trust Company of New York, as trustee
(incorporated herein by reference to Exhibit 4.3 of Ralphs
Grocery Company's Quarterly Report on Form 10-Q for the quarter
ended July 19, 1992).
E-2
<PAGE> 93
Exhibit
Number Description
- ------- -----------
4.5.2 First Supplemental Indenture for the 10-1/4% Senior Subordinated
Notes due 2002, dated as of May 30, 1995, by and between Ralphs
Grocery Company and United States Trust Company of New York, as
trustee (incorporated herein by reference to Exhibit 4.1 of
Ralphs Grocery Company's Quarterly Report on Form 10-Q for the
quarter ended April 23, 1995).
4.5.3 Second Supplemental Indenture for the 10-1/4% Senior Subordinated
Notes due 2002, dated as of June 14, 1995, by and between Ralphs
Grocery Company (as successor) and United States Trust Company of
New York, as trustee (incorporated herein by reference to Exhibit
4.7.3 of Food 4 Less Holdings, Inc.'s Quarterly Report on Form
10-Q for the quarter ended July 16, 1995).
4.6.1 Indenture for the 9% Senior Subordinated Notes due 2003, dated as
of March 30, 1993, by and between Ralphs Grocery Company and
United States Trust Company of New York, as trustee (incorporated
herein by reference to Exhibit 4.1 of Ralphs Grocery Company's
Registration Statement on Form S-4, No. 33-61812).
4.6.2 First Supplemental Indenture for the 9% Senior Subordinated Notes
due 2003, dated as of June 23, 1993, by and between Ralphs
Grocery Company and United States Trust Company of New York, as
trustee (incorporated herein by reference to Exhibit 4.2 of
Ralphs Grocery Company's Registration Statement on Form S-4, No.
33- 61812).
4.6.3 Second Supplemental Indenture for the 9% Senior Subordinated
Notes due 2003, dated as of May 30, 1995, by and between Ralphs
Grocery Company and United States Trust Company of New York, as
trustee (incorporated herein by reference to Exhibit 4.2 of
Ralphs Grocery Company's Quarterly Report on Form 10-Q for the
quarter ended April 23, 1995).
4.6.4 Third Supplemental Indenture for the 9% Senior Subordinated Notes
due 2003, dated as of June 14, 1995, by and between Ralphs
Grocery Company (as successor) and United States Trust Company of
New York, as trustee (incorporated herein by reference to Exhibit
4.8.4 of Food 4 Less Holdings, Inc.'s Quarterly Report on Form
10-Q for the quarter ended July 16, 1995).
4.7.1 Senior Note Indenture, dated as of April 15, 1992, by and among
Food 4 Less Supermarkets, Inc., the subsidiary guarantors
identified therein and Norwest Bank Minnesota, National
Association, as trustee (incorporated herein by reference to
Exhibit 4.1 to Food 4 Less Supermarkets, Inc.'s Registration
Statement on Form S-1, No. 33-46750).
4.7.2 First Supplemental Indenture, dated as of July 24, 1992, by and
among Food 4 Less Supermarkets, Inc., the subsidiary guarantors
identified therein and Norwest Bank Minnesota, National
Association, as trustee (incorporated herein by reference to
Exhibit 4.1.1 to Food 4 Less Supermarkets, Inc.'s Annual Report
on Form 10-K for the fiscal year ended June 27, 1992).
E-3
<PAGE> 94
Exhibit
Number Description
- ------- -----------
4.7.3 Second Supplemental Indenture for the 10.45% Senior Notes due
2000, dated as of June 14, 1995, by and among Food 4 Less
Supermarkets, Inc., the subsidiary guarantors identified therein
and Norwest Bank Minnesota, National Association, as trustee
(incorporated herein by reference to Exhibit 4.9.3 of Food 4 Less
Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended July 16, 1995).
4.7.4 Third Supplemental Indenture for the 10.45% Senior Notes due
2000, dated as of June 14, 1995, by and among Ralphs Grocery
Company (as successor by merger to Food 4 Less Supermarkets,
Inc.), the subsidiary guarantors identified therein and Norwest
Bank Minnesota, National Association, as trustee (incorporated
herein by reference to Exhibit 4.9.4 of Food 4 Less Holdings,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended July
16, 1995).
4.8.1 Senior Subordinated Note Indenture, dated as of June 15, 1991, by
and among Food 4 Less Supermarkets, Inc., the subsidiary
guarantors identified therein and United States Trust Company of
New York, as trustee (incorporated herein by reference to Exhibit
4.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form
10-K for the fiscal year ended June 29, 1991).
4.8.2 First Supplemental Indenture, dated as of April 8, 1992, by and
among Food 4 Less Supermarkets, Inc., the subsidiary guarantors
identified therein and United States Trust Company of New York,
as trustee (incorporated herein by reference to Exhibit 4.2.1 to
Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for
the fiscal year ended June 27, 1992).
4.8.3 Second Supplemental Indenture, dated as of May 18, 1992, by and
among Food 4 Less Supermarkets, Inc., the subsidiary guarantors
identified therein and United States Trust Company of New York,
as trustee (incorporated herein by reference to Exhibit 4.2.2 of
Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for
the fiscal year ended June 27, 1992).
4.8.4 Third Supplemental Indenture, dated as of July 24, 1992, by and
among Food 4 Less Supermarkets, Inc., the subsidiary guarantors
identified therein and United States Trust Company of New York,
as trustee (incorporated herein by reference to Exhibit 4.2.3 to
Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for
the fiscal year ended June 27, 1992).
4.8.5 Fourth Supplemental Indenture for the 13.75% Senior Subordinated
Notes due 2001, dated as of May 30, 1995, by and among Food 4
Less Supermarkets, Inc., the subsidiary guarantors identified
therein and United States Trust Company of New York, as trustee
(incorporated herein by reference to Exhibit 4.10.5 of Food 4
Less Holdings, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
E-4
<PAGE> 95
Exhibit
Number Description
- ------- -----------
4.8.6 Fifth Supplemental Indenture for the 13.75% Senior Subordinated
Notes due 2001, dated as of June 14, 1995, by and among Ralphs
Grocery Company (as successor by merger to Food 4 Less
Supermarkets, Inc.), the subsidiary guarantors identified therein
and United States Trust Company of New York, as trustee
(incorporated herein by reference to Exhibit 4.10.6 of Food 4
Less Holdings, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
10.1 Second Amended and Restated Tax Sharing Agreement, dated as of
June 14, 1995, by and among Food 4 Less Holdings, Inc., Ralphs
Grocery Company and the subsidiaries of Ralphs Grocery Company
(incorporated herein by reference to Exhibit 10.1 of Food 4 Less
Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended July 16, 1995).
10.2 Stockholders Agreement of Food 4 Less Holdings, Inc., dated as of
June 14, 1995, by and among Food 4 Less Holdings, Inc., Ralphs
Grocery Company and the investors listed on the signature pages
thereto (incorporated herein by reference to Exhibit 10.2 of Food
4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
10.3 Consulting Agreement, dated as of June 14, 1995, by and among The
Yucaipa Companies, Food 4 Less Holdings, Inc. and Ralphs Grocery
Company (incorporated herein by reference to Exhibit 10.4 of Food
4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended July 16, 1995).
10.4* Employment Agreement dated as of June 14, 1995 between Food 4
Less Holdings, Inc., Ralphs Grocery Company and George G.
Golleher (incorporated herein by reference to Exhibit 10.11 of
Food 4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended July 16, 1995).
10.5* Employment Agreement dated as of June 14, 1995 between Ralphs
Grocery Company and Alfred A. Marasca (incorporated herein by
reference to Exhibit 10.9 of Ralphs Grocery Company's Quarterly
Report on Form 10-Q for the quarter ended July 16, 1995).
10.6* Employment Agreement dated as of June 14, 1995 between Ralphs
Grocery Company and Greg Mays (incorporated herein by reference
to Exhibit 10.10 of Ralphs Grocery Company's Quarterly Report on
Form 10-Q for the quarter ended July 16, 1995).
10.7* Employment Agreement, dated as of June 14, 1995, between Ralphs
Grocery Company and Harley DeLano (incorporated herein by
reference to Exhibit 10.8 of Ralphs Grocery Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).
10.8* Employment Agreement, dated as of June 14, 1995, between Ralphs
Grocery Company and Tony Schnug (incorporated herein by reference
to Exhibit 10.10 of Ralphs Grocery Company's Annual Report on
Form 10-K for the fiscal year ended January 28, 1996).
E-5
<PAGE> 96
Exhibit
Number Description
- ------- -----------
10.9* Management Stockholders Agreement, dated as of June 14, 1995,
between Food 4 Less Holdings, Inc. and the management employees
listed on the signature page thereto (incorporated herein by
reference to Exhibit 10.12 of Food 4 Less Holdings, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 16,
1995).
10.10* Consulting Agreement, dated as of June 27, 1988, by and between
Falley's, Inc. and Joe S. Burkle (incorporated herein by
reference to Exhibit 10.38 to Food 4 Less Supermarkets, Inc.'s
Registration Statement on Form S-1, No. 33-31152).
10.11* Letter Agreement, dated as of December 10, 1990, amending the
Consulting Agreement by and between Falley's, Inc. and Joe S.
Burkle (incorporated herein by reference to Exhibit 10.17.1 to
Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for
the fiscal year ended June 29, 1991).
10.12 Distribution Center Transfer Agreement, dated as of November 1,
1995, by and between Smith's Food & Drug Centers, Inc., a
Delaware corporation, and Ralphs Grocery Company relating to the
Riverside, California property (incorporated herein by reference
to Exhibit 10.1 to Ralphs Grocery Company's Quarterly Report on
Form 10-Q for the quarter ended October 8, 1995).
10.13.1* Ralphs Grocery Company Retirement Supplement Plan, effective as
of January 1, 1994 (incorporated herein by reference to Exhibit
10.15.1 of Ralphs Grocery Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996).
10.13.2* Amendment to the Retirement Supplement Plan, effective as of
January 1, 1995 (incorporated herein by reference to Exhibit
10.15.2 of Ralphs Grocery Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996).
10.13.3* Second Amendment to the Retirement Supplement Plan, effective as
of June 14, 1995, by and between Ralphs Grocery Company and
Ralphs Grocery Company Retirement Supplement Plan (incorporated
herein by reference to Exhibit 10.15.3 of Ralphs Grocery
Company's Annual Report on Form 10-K for the fiscal year ended
January 28, 1996).
10.14.1* Ralphs Grocery Company Supplemental Executive Retirement Plan,
amended and restated as of April 9, 1994 (incorporated herein by
reference to Exhibit 10.16.1 of Ralphs Grocery Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).
10.14.2* Amendment to the Amended and Restated Supplemental Executive
Retirement Plan, effective as of January 1, 1995 (incorporated
herein by reference to Exhibit 10.16.2 of Ralphs Grocery
Company's Annual Report on Form 10-K for the fiscal year ended
January 28, 1996).
10.14.3* Second Amendment to the Supplemental Executive Retirement Plan,
dated as of June 14, 1995, by and between Ralphs Grocery Company
and Ralphs Grocery Company Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10.16.3 of Ralphs
Grocery Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996).
E-6
<PAGE> 97
Exhibit
Number Description
- ------- -----------
10.14.4* Third Amendment to the Ralphs Grocery Company Supplemental
Executive Plan, effective as of July 1, 1995 (incorporated herein
by reference to Exhibit 10.16.4 of Ralphs Grocery Company's
Annual Report on Form 10-K for the fiscal year ended January 28,
1996).
21# Subsidiaries
27# Financial Data Schedule
- ------------------------
# Filed herewith.
* Management contract, or compensatory plan or arrangement.
E-7
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FOOD 4 LESS HOLDINGS, INC.
Alpha Beta Company
Bay Area Warehouse Stores, Inc.
Bell Markets, Inc.
Cala Co.
Cala Foods, Inc.
Crawford Stores, Inc.
Falley's Inc.
Food 4 Less GM, Inc.
Food 4 Less Merchandising, Inc.
Food 4 Less of California, Inc.
Food 4 Less of Southern California, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEETS AND AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 53 WEEKS ENDED FEBRUARY 2,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-END> FEB-02-1997
<CASH> 67,589
<SECURITIES> 0
<RECEIVABLES> 51,148
<ALLOWANCES> (4,057)
<INVENTORY> 502,095
<CURRENT-ASSETS> 643,133
<PP&E> 1,353,703
<DEPRECIATION> (301,477)
<TOTAL-ASSETS> 3,131,993
<CURRENT-LIABILITIES> 825,774
<BONDS> 2,344,406
0
192,831
<COMMON> 56,263
<OTHER-SE> (568,362)
<TOTAL-LIABILITY-AND-EQUITY> 3,131,993
<SALES> 5,516,259
<TOTAL-REVENUES> 5,516,259
<CGS> 4,326,230
<TOTAL-COSTS> 4,326,230
<OTHER-EXPENSES> 1,035,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,217
<INCOME-PRETAX> (129,580)
<INCOME-TAX> 0
<INCOME-CONTINUING> (129,580)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129,580)
<EPS-PRIMARY> (3.54)
<EPS-DILUTED> (3.54)
</TABLE>
