<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 33-88896
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FOOD 4 LESS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5411 33-0642810
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1100 WEST ARTESIA BOULEVARD
COMPTON, CALIFORNIA 90220
(310) 884-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TERRENCE J. WALLOCK, ESQ.
SECRETARY
FOOD 4 LESS HOLDINGS, INC.
1100 WEST ARTESIA BOULEVARD
COMPTON, CALIFORNIA 90220
(310) 884-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
THOMAS C. SADLER, ESQ.
LATHAM & WATKINS
633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
FOOD 4 LESS HOLDINGS, INC.
[FOOD 4 LESS LOGO] [RALPHS LOGO]
13 5/8% SENIOR SUBORDINATED
PAY-IN-KIND DEBENTURES DUE 2007
------------------------------
The 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller
Debentures") of Food 4 Less Holdings, Inc., a Delaware corporation ("Holdings"
and, together with its subsidiaries, the "Company"), may be offered hereby from
time to time by certain holders thereof named herein (the "Selling
Debentureholders"). The Seller Debentures were originally issued on June 14,
1995 in an aggregate principal amount of $131.5 million and will mature on June
15, 2007. Interest on the Seller Debentures is payable semi-annually on each
June 15 and December 15, at the rate of 13 5/8% per annum. Holdings has the
option, in its sole discretion, to issue additional securities ("Secondary
Securities") in lieu of a cash payment of any or all of the interest due on each
interest payment date on or prior to June 15, 2000. The Secondary Securities,
which may be issued from time to time and as of December 15, 1997 were
outstanding in an aggregate principal amount of approximately $51.4 million, are
included in the Seller Debentures offered by this Prospectus. See "Description
of the Seller Debentures."
The Seller Debentures may be redeemed, in whole or in part at the option of
Holdings, at any time after June 15, 2000, at the redemption prices set forth
herein, plus accrued and unpaid interest to the redemption date. In addition,
prior to June 15, 1998, Holdings may, at its option, use the Net Proceeds (as
defined) of a Public Equity Offering (as defined) to redeem up to an aggregate
of 35% of the principal amount of the Seller Debentures originally issued at a
redemption price equal to 110% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date. Upon a Change of Control (as defined),
each holder of Seller Debentures will have a right to require Holdings to
repurchase such holder's Seller Debentures at a price equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of repurchase.
The Seller Debentures are senior subordinated unsecured obligations of Holdings
and rank subordinate in right of payment to all Senior Indebtedness (as defined)
of Holdings. At October 12, 1997, the aggregate outstanding amount of Senior
Indebtedness of Holdings (excluding guarantees by Holdings of certain Senior
Indebtedness of Ralphs Grocery Company ("Ralphs"), a wholly-owned subsidiary of
Holdings, included in the total liabilities of Ralphs set forth below) was
approximately $135.7 million of accreted value of New Discount Debentures (as
defined) that will accrete to approximately $193.4 million at June 15, 2000. In
addition, the Seller Debentures are effectively subordinated to all liabilities
(including trade payables) of Ralphs which at October 12, 1997, were
approximately $3,186.3 million (excluding letters of credit). Holdings will
receive no part of the proceeds of the sale of the Seller Debentures offered
pursuant to this Prospectus but will incur certain expenses in connection with
the offering. See "Description of the Seller Debentures" and "Selling
Debentureholders."
On November 6, 1997, Holdings, Fred Meyer, Inc. ("Fred Meyer") and FFL
Acquisition Corp., a wholly owned subsidiary of Fred Meyer, entered into an
Agreement and Plan of Merger, pursuant to which, among other things, (i)
Holdings will become a wholly owned subsidiary of Fred Meyer and (ii) each
outstanding share of Holdings stock will be converted into Fred Meyer common
stock. In connection with the foregoing, Holdings has offered to purchase any
and all outstanding Seller Debentures, subject to certain conditions including
consummation of the merger. See "Summary -- Pending Merger" and "Risk
Factors -- Effect of Pending Fred Meyer Merger on Holders of Seller Debentures."
------------------------------
SEE "RISK FACTORS" AT PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SELLER DEBENTURES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
This Prospectus relates to the public resale of the Seller Debentures by the
Selling Debentureholders identified herein. See "Selling Debentureholders." The
Selling Debentureholders directly, through agents designated from time to time,
or through dealers or underwriters also to be designated, may sell the Seller
Debentures from time to time on terms to be determined at the time of sale. To
the extent required, the specific Seller Debentures to be sold, the names of the
Selling Debentureholders, the respective purchase prices and public offering
prices, the aggregate principal amount of Seller Debentures being offered, the
terms of the offering, the names of any such agent, dealer or underwriter, and
any discounts, commissions or other items constituting compensation from the
Selling Debentureholders, and any discounts, commissions or concessions allowed
or reallowed or paid to dealers, with respect to a particular offer will be set
forth in an accompanying prospectus supplement. See "Plan of Distribution."
The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Seller Debentures may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the Seller Debentures purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act.
------------------------------
The date of this Prospectus is February 2, 1998
<PAGE> 3
(cover page continued)
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS" WITHIN
THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS, SAVINGS
AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH
SUCH CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL
STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY
OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE
FOREGOING, (3) ANY CORPORATION, PARTNERSHIP OR ORGANIZATION (OTHER THAN A
CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED FOR THE SOLE PURPOSE OF
PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO PURCHASES AT LEAST
$1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY, OR (4) ANY NATURAL
PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A
NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS AND
PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE SECURITIES
OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN
ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR OTHERWISE
TRANSFER SUCH SECURITY TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES
WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE
TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED
TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
ii
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, appearing elsewhere in this
Prospectus. On June 14, 1995 Food 4 Less Supermarkets, Inc. ("Food 4 Less"),
Ralphs Supermarkets, Inc. ("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.
Unless the context otherwise requires, as used in this Prospectus (i) all
references to the "Company" refer to Holdings and its subsidiaries subsequent to
the Merger on June 14, 1995 and refer to Food 4 Less prior to such date, and
(ii) all references to "RSI" refer to Ralphs Supermarkets, Inc. and all
references to "RGC" refer to Ralphs Grocery Company, a wholly owned subsidiary
of RSI, in each case prior to the consummation of the Merger. As used herein,
references to "fiscal 1996" refer to the 53-week period ended February 2, 1997,
which included a 17-week fourth quarter, and references to "fiscal 1995" refer
to the 52-week period ended January 28, 1996, which included a 16-week fourth
quarter and for the period prior to the date of the Merger reflects only the
operations of Food 4 Less. All references to market share and demographic data
in this Prospectus are based on the most recent industry publications and,
unless otherwise indicated, all references to numbers of stores are as of
December 10, 1997. As used herein, "Southern California" means Los Angeles,
Orange, Ventura, San Bernardino, Riverside, San Diego, Kern and Santa Barbara
counties.
THE COMPANY
The Company is the largest supermarket operator in Southern California with
344 stores and an estimated market share of 26 percent in Los Angeles and Orange
Counties. The Company operates the second largest conventional supermarket chain
in Southern California under the "Ralphs" name (264 stores) and the largest
warehouse supermarket chain in the region under the "Food 4 Less" name (80
stores). The Company also operates in Northern California (27 stores) and the
Midwest (38 stores).
In Southern California, the Company's two complementary formats allow it to
serve a broad customer base and tailor its stores to the market characteristics
of individual store locations. The Company's conventional Ralphs stores
emphasize a broad selection of merchandise, high quality fresh produce, meat and
seafood and service departments, including bakery and delicatessen departments
in most stores. The Company's conventional stores also benefit from Ralphs'
strong private label program and its strengths in merchandising, store
operations and systems. By passing on format-related efficiencies, the Food 4
Less price impact warehouse format stores offer consumers the lowest overall
prices while providing product selections comparable to conventional
supermarkets.
At the beginning of fiscal 1996, the Company streamlined its management
structure and implemented several strategic initiatives which have contributed
to improving operating trends at the Company. These initiatives resulted in
several notable achievements during fiscal 1996, including: (i) positive
comparable store sales for three consecutive quarters, including a 3.5% increase
in Southern California comparable store sales in the fourth quarter of fiscal
1996, (ii) an improvement of the Company's EBITDA margin to 6.7% in the fourth
quarter of fiscal 1996 from 5.5% in the comparable prior-year period, (iii) the
opening of 26 new stores and the remodeling of 20 stores, (iv) the acquisition
and integration of a one million square foot, state-of-the-art distribution
center, and (v) the launching of a major new marketing program designed to
increase sales and market share under the "First in Southern California" theme.
In fiscal 1996, the Company reported total sales of approximately $5.5
billion, operating income of $154.6 million, net loss of $129.6 million and
EBITDA (as defined) of $354.6 million. For the 36-week period ending October 12,
1997, the Company had sales of approximately $3.8 billion, operating income of
$137.6 million, net loss of $101.9 million and EBITDA (as defined) of $257.7
million (or 6.8 percent of sales).
The Company is controlled by The Yucaipa Companies LLC ("Yucaipa"), a
private investment group which specializes in the supermarket industry. See
"Certain Relationships and Related Transactions." The principals of Yucaipa have
significant expertise in acquiring and managing companies in the supermarket
industry, having completed 14 transactions. Yucaipa is also affiliated with
Dominick's Finer Foods, Inc.
1
<PAGE> 5
(NYSE: DFF), a supermarket chain in the Chicago area, and has a management
agreement with Fred Meyer, Inc. ("Fred Meyer") (NYSE: FMY), a retailer of a wide
range of food and drug products and general merchandise in the Pacific Northwest
and in the Intermountain and Southwest regions of the United States. These
companies, together with Holdings, operate a total of 785 stores and had
aggregate combined sales of approximately $14.6 billion in their most recent
fiscal years.
PENDING MERGER
On November 6, 1997, Holdings, Fred Meyer and FFL Acquisitions Corp., a
wholly owned subsidiary of Fred Meyer ("Acquisition"), entered into an Agreement
and Plan of Merger (the "Fred Meyer Merger Agreement"). Pursuant to the terms of
the Fred Meyer Merger Agreement, Acquisition will merge with and into Holdings
(the "Fred Meyer Merger"), subject to certain conditions being satisfied or
waived. Pursuant to the Fred Meyer Merger Agreement, the stockholders of
Holdings would receive an aggregate of the greater of (i) 22.5 million shares of
Fred Meyer common stock or (ii) the lesser of (A) the number of shares of Fred
Meyer common stock equal to $600 million divided by the average closing price of
the Fred Meyer common stock on the New York Stock Exchange for 15 out of the 35
trading days ending on the second trading day preceding the effective date of
the Fred Meyer Merger or (B) 24 million shares of Fred Meyer common stock;
provided, however, that such aggregate number of shares of Fred Meyer common
stock will be reduced (i) to the extent necessary to terminate or otherwise
satisfy Holdings' obligations under existing stock options and warrants and (ii)
upon the occurrence of certain other events, in each case, as specified in the
Fred Meyer Merger Agreement. In addition, Fred Meyer will assume or refinance
the debt of Holdings and the Company. Conditions to the consummation of the Fred
Meyer Merger include the receipt of regulatory approvals and approval by the
stockholders of Fred Meyer and Holdings. Certain shareholders of Holdings
holding approximately 66.0% of the aggregate voting power of Holdings have
entered into agreements to vote their Holdings shares in favor of the Fred Meyer
Merger. Concurrently with the execution of the Fred Meyer Merger Agreement, Fred
Meyer executed an agreement and plan of merger with Quality Food Centers, Inc.
("QFC") pursuant to which QFC will become a wholly-owned subsidiary of Fred
Meyer. QFC operates retail supermarkets in the State of Washington and in
Southern California. The Fred Meyer Merger is an independent transaction and is
not conditioned on the consummation of Fred Meyer's merger with QFC.
In connection with the Fred Meyer Merger, Fred Meyer intends to refinance
and consolidate a majority of the indebtedness of the combined company,
including the Seller Debentures. As part of the refinancing, Holdings has
offered to purchase (the "Offer to Purchase") any and all outstanding Seller
Debentures, subject to the consummation of the Fred Meyer Merger. In connection
with such Offer to Purchase, Holdings is soliciting consents from the holders of
the Seller Debentures to eliminate substantially all of the restrictive
covenants contained in the indenture governing the Seller Debentures (the
"Seller Debenture Indenture"). The price and other terms and conditions of the
Offer to Purchase are set forth in the Company's Offer to Purchase and Consent
Solicitation Statement dated January 22, 1998, copies of which are available
from the Company on request, as the same may be amended from time to time. If
consummated, the Offer to Purchase is expected to close concurrently with the
Fred Meyer Merger. THERE CAN BE NO ASSURANCE THAT SUCH OFFER TO PURCHASE WILL BE
CONSUMMATED. In addition, the Fred Meyer Merger may constitute a Change of
Control of Holdings. Pursuant to the Seller Debenture Indenture, upon a Change
of Control, each holder of Seller Debentures has a right to require Holdings to
repurchase such holder's Seller Debentures at a price equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of repurchase.
The consummation of the Offer to Purchase is not a condition to the closing of
the Fred Meyer Merger, and any Seller Debentures which remain outstanding after
the expiration of the Offer to Purchase will not be assumed by Fred Meyer.
2
<PAGE> 6
REFINANCING OF CREDIT FACILITY AND OLD SENIOR SUBORDINATED NOTES
On April 17, 1997, the Company amended and restated (the "Refinanced Credit
Facility") its existing credit facilities (the "1995 Credit Facility"). The
Refinanced Credit Facility has lower interest rates and a longer average life
than the 1995 Credit Facility. The Refinanced Credit Facility consists of a
$325.0 million revolving facility (the "Revolving Facility"), a $200.0 million
Term Loan A Facility and a $350.0 million Term Loan B Facility. On April 17,
1997 immediately prior to the effectiveness of the amendment and restatement,
the outstanding term loans under the 1995 Credit Facility were $540.4 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On March 26, 1997 the Company issued $155 million aggregate principal
amount of 11% Senior Subordinated Notes due 2005 (the "1997 Senior Subordinated
Notes") at a premium price of 105.5% resulting in gross proceeds of $163.5
million (the "Private Placement"). The 1997 Senior Subordinated Notes were sold
by the Company to BT Securities Corporation ("BT Securities"), CIBC Wood Gundy
Securities Corp. ("CIBC Wood Gundy"), Credit Suisse First Boston ("CS First
Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as
Initial Purchasers in a transaction exempt from registration requirements of the
Securities Act. The net proceeds of the 1997 Senior Subordinated Notes were used
to (i) redeem, on April 28, 1997, $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") at a price of 106.111%, plus accrued interest
to the date of redemption 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") at a price of
106.111%, plus accrued interest to the date of redemption and (ii) pay fees and
expenses related to the Private Placement.
RISK FACTORS
Before deciding whether to purchase Seller Debentures, prospective
investors should review and take into account the considerations set forth under
"Risk Factors"; in particular those factors set forth under "-- Effect of
Pending Fred Meyer Merger on Holders of Seller Debentures"; "-- Leverage and
Debt Service"; "-- Holding Company Structure"; "-- Competition," "-- Risk that
Additional Cost Savings May Not be Achieved," "-- Risk of Geographic
Concentration," and "-- Net Losses" and the information contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3
<PAGE> 7
THE OFFERING
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ISSUER................... Food 4 Less Holdings, Inc., a Delaware corporation.
SECURITIES OFFERED....... $131.5 million initial aggregate principal amount of 13 5/8%
Senior Subordinated Pay-In-Kind Debentures due 2007 (together with
all Secondary Securities issued from time to time in payment of
interest thereon).
MATURITY DATE............ June 15, 2007.
INTEREST RATE............ The Seller Debentures bear interest at the rate of 13 5/8% per
annum.
INTEREST PAYMENTS........ Interest is paid semiannually on each June 15 and December 15.
Holdings has the option, in its sole discretion, to issue
Secondary Securities in lieu of a cash payment of any or all of
the interest due on each interest payment date prior to and
including June 15, 2000.
ORIGINAL ISSUE
DISCOUNT............... Because interest on the Seller Debentures can, at the option of
Holdings, be paid in cash or in Secondary Securities up to June
15, 2000, the Seller Debentures were issued with original issue
discount equal to the difference between their issue price and
their stated redemption price at maturity. As a result, holders of
Seller Debentures may be required to include amounts in gross
income before receiving cash payments attributable to such gross
income. See "Certain Federal Income Tax Considerations."
OPTIONAL REDEMPTION...... The Seller Debentures will be redeemable at the option of
Holdings, in whole or in part, at any time on or after June 15,
2000, at the redemption prices set forth below plus accrued and
unpaid interest to the redemption date, if redeemed during the
12-month period beginning June 15 of the years indicated:
</TABLE>
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<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------------------ ----------
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2000.................................................. 106.8125%
2001.................................................. 105.1094%
2002.................................................. 103.4063%
2003.................................................. 101.7031%
2004 and thereafter................................... 100.0000%
In addition, prior to June 15, 1998, Holdings may at its option
use the Net Proceeds from a Public Equity Offering to redeem up to
an aggregate of 35% of the principal amount of the Seller
Debentures originally issued, at a redemption price equal to 110%
of the principal amount thereof plus accrued and unpaid interest
to the redemption date.
RANKING.................. The Seller Debentures are senior subordinated unsecured
obligations of Holdings and rank subordinate in right of payment
to all Senior Indebtedness of Holdings. At October 12, 1997,
Holdings had outstanding $135.7 million (in accreted value) of
Senior Indebtedness (excluding guarantees by Holdings of certain
Senior Indebtedness of the Company included in the total
liabilities of the Company set forth below). In addition, the
Seller Debentures are effectively subordinated to all liabilities
(including trade payables) of the Company which at October 12,
1997 was approximately $3,186.3 million (excluding letters of
credit).
CHANGE OF CONTROL........ Upon the occurrence of a Change of Control (as defined), each
holder will have the right to require Holdings to repurchase such
holder's Seller Debentures at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to
the date of repurchase.
CERTAIN COVENANTS........ The Seller Debenture Indenture contains certain covenants,
including, but not limited to, covenants with respect to the
following: (i) limitation on restricted payments; (ii) limitation
on incurrences of additional indebtedness;
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4
<PAGE> 8
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(iii) limitation on senior subordinated indebtedness; (iv)
limitation on liens; (v) limitation on asset sales; (vi)
limitation on dividend and other payment restrictions affecting
subsidiaries; (vii) limitation on transactions with affiliates;
(viii) limitation on mergers and certain other transactions; and
(ix) limitations on preferred stock of subsidiaries.
USE OF PROCEEDS.......... Holdings will not receive any of the proceeds from the sale of the
Seller Debentures by the Selling Debentureholders. See "Selling
Debentureholders."
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5
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL DATA OF HOLDINGS
The following table sets forth summary historical financial data of
Holdings and its predecessor Food 4 Less as of and 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
which have been derived from the financial statements of Holdings and Food 4
Less audited by Arthur Andersen LLP, independent public accountants. Certain
prior period amounts in the financial data presented below have been
reclassified to conform to the fiscal 1997 presentation. The summary historical
financial data of Holdings presented below as of and for the 36 weeks ended
October 6, 1996 and October 12, 1997 have been derived from unaudited financial
statements of Holdings which, in the opinion of management, reflect all material
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such data. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial statements
of Holdings and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS 53 WEEKS 36 WEEKS 36 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 6, OCTOBER 12,
1992 1993 1994(A) 1995(B) 1996(C) 1997 1996 1997
-------- -------- -------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT STORE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.............. $2,913.5 $2,742.0 $2,585.2 $ 1,556.5 $ 4,335.1 $ 5,516.3 $ 3,695.6 $ 3,778.5
Gross profit(d).... 483.8 468.9 458.9 259.7 808.0 1,136.0 754.2 777.9
Selling, general
and
administrative
expenses......... 432.7 419.6 378.4 219.7 744.4 933.4 626.8 615.9
Interest
expense(e)....... 70.2 73.6 77.0 48.4 202.7 284.2 192.7 191.5
Net loss(f)........ (33.8) (31.2) (11.5) (17.6) (322.4) (129.6) (89.7) (101.9)
Ratio of earnings
to fixed
charges(g)....... --(g) --(g) --(g) --(g) --(g) --(g) --(g) --(g)
BALANCE SHEET DATA
(end of period)(h):
Working capital
deficit.......... $ (66.3) $ (19.2) $ (54.9) $ (74.8) $ (150.5) $ (182.6) $ (240.3) $ (150.1)
Total assets....... 998.5 957.8 980.1 1,000.7 3,188.1 3,132.0 3,146.9 3,076.8
Total debt(i)...... 525.3 588.3 576.9 598.9 2,330.2 2,376.9 2,316.8 2,486.5
Stockholders'
equity
(deficit)........ 50.8 22.6 10.0 (7.3) (188.8) (319.3) (278.5) (421.0)
CASH FLOW DATA:
Net cash provided
(used) by
operating
activities....... $ 106.2 $ (16.5) $ 87.8 $ 17.6 $ (16.8) $ 133.7 $ 124.8 $ 44.7
Net cash used by
investing
activities....... (62.9) (37.8) (55.8) (42.6) (505.4) (111.1) (58.7) (94.2)
Net cash provided
(used) by
financing
activities....... (40.2) 54.9 (24.2) 11.6 570.7 (22.9) (67.0) 45.4
OTHER DATA:
Depreciation and
amortization(j)... $ 54.9 $ 57.6 $ 57.1 $ 36.6 $ 125.3 169.7 $ 111.6 $ 116.6
Capital
expenditures..... 60.3 53.5 57.7 49.0 122.4 123.6 74.3 111.2
Stores open at end
of period........ 249 248 258 267 408 405 406 406
EBITDA (as
defined)(k)...... $ 101.7 $ 103.8 $ 130.6 $ 76.9 $ 245.1 $ 354.6 $ 233.5 $ 257.7
EBITDA margin(l)... 3.5% 3.8% 5.1% 4.9% 5.7% 6.4% 6.3% 6.8%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 25, 1994 include the results of
10 Food Barn stores, which were not material, from March 29, 1994, the date
of the Food Barn acquisition.
(b) Food 4 Less changed its fiscal year end from the 52 or 53-week period which
ends on the last Saturday in June to the 52 or 53-week period which ends on
the Sunday closest to January 31, resulting in a 31-week transition period.
(c) Operating data for the 52 weeks ended January 28, 1996 reflects the
acquisition of RSI on June 14, 1995.
6
<PAGE> 10
(d) Cost of sales has been principally determined using the last-in, first-out
("LIFO") method of valuing inventory. If cost of sales had been determined
using the first-in, first-out ("FIFO") method, gross profit would have been
greater by $3.6 million, $4.4 million, $0.7 million, $2.7 million, $2.2
million, $5.6 million, $3.7 million (unaudited) and $2.2 million (unaudited)
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, the 53
weeks ended February 2, 1997 and the 36 weeks ended October 6, 1996 and
October 12, 1997, respectively.
(e) Interest expense includes non-cash charges related to the amortization of
deferred financing costs and self-insurance discount of $11.3 million for
the 52 weeks ended June 27, 1992, $10.8 million for the 52 weeks ended June
26, 1993, $11.3 million for the 52 weeks ended June 25, 1994, $6.9 million
for the 31 weeks ended January 29, 1995, $18.5 million for the 52 weeks
ended January 28, 1996, $21.5 million for the 53 weeks ended February 2,
1997, $13.8 million for the 36 weeks ended October 6, 1996 and $10.5 million
for the 36 weeks ended October 12, 1997.
(f) 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, $29.2 million, $31.4 million and $24.9 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, the 53
weeks ended February 2, 1997 and the 36 weeks ended October 6, 1996 and
October 12, 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 pension and health and welfare
benefit plans. Included in the 53 weeks ended February 2, 1997, the 36 weeks
ended October 6, 1996 and the 36 weeks ended October 12, 1997 are reduced
employer contributions of $17.8 million, $11.5 million and $11.8 million,
respectively, related to union pension and health and welfare benefit plans.
The multi-employer 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.
(g) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of loss before provision for income taxes and extraordinary charges
plus fixed charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt financing costs and one-third of rental
expense (the portion deemed representative of the interest factor). Earnings
were insufficient to cover fixed charges for the 52 weeks ended June 27,
1992, June 26, 1993 and June 25, 1994, the 31 weeks ended January 29, 1995,
the 52 weeks ended January 28, 1996, the 53 weeks ended February 2, 1997 and
the 36 weeks ended October 6, 1996 and October 12, 1997, by approximately
$25.6 million, $29.8 million, $8.8 million, $17.6 million, $283.5 million,
$129.6 million, $89.7 million and $53.9 million, respectively. However, such
earnings included non-cash charges of $61.2 million for the 52 weeks ended
June 27, 1992, $66.4 million for the 52 weeks ended June 26, 1993, $71.3
million for the 52 weeks ended June 25, 1994, $46.2 million for the 31 weeks
ended January 29, 1995, $226.6 million for the 52 weeks ended January 28,
1996, $216.3 million for the 53 weeks ended February 2, 1997, $143.9 million
for the 36 weeks ended October 6, 1996 and $148.8 million for the 36 weeks
ended October 12, 1997, primarily consisting of depreciation and
amortization and the write-off of property and equipment associated with
stores closed as a result of the Merger, stores closed due to
under-performance, stores closed in connection with the acquisition of the
nine stores from Smith's Food & Drug Center, Inc. ("Smith's"), and
warehouses to be closed as a result of the acquisition of the Riverside
Facility (as defined). In addition, earnings for the 52 weeks ended January
28, 1996 were reduced by cash restructuring charges of $54.1 million.
(h) Balance sheet data as of June 25, 1994 relate to Food 4 Less and reflect the
acquisition of 10 Food Barn stores. Balance sheet data as of January 28,
1996 relate to the Company and reflect the Merger and the financings
associated therewith.
(i) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(j) 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, the 53
weeks ended February 2, 1997 and the 36 weeks ended October 6, 1996 and
October 12, 1997, depreciation and amortization includes amortization of
goodwill of $7.8 million, $7.6 million, $7.7 million, $4.6 million, $21.8
million, $38.7 million, $24.4 million and $24.4 million, respectively.
(k) "EBITDA (as defined)," as presented historically by the Company, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for income taxes, provision for earthquake losses,
provision for restructuring, a one-time charge in the 1995 transition period
for Teamsters Union sick pay benefits, $75.0 million of one-time costs
incurred in connection with the Merger in fiscal 1995 and $13.5 million of
one-time costs incurred in connection with the acquisition of the Riverside
Facility and nine former Smith's stores in fiscal 1996. EBITDA is a widely
accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity. EBITDA as presented may not be comparable to EBITDA of
other companies that do not calculate EBITDA in the same manner as the
Company. The Company believes that its definition of EBITDA (as defined) is
the measure most useful to investors as it is consistent with the
definitions used in the Company's debt covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(l) EBITDA margin represents EBITDA (as defined) as a percentage of sales. The
Company believes that EBITDA margin, which highlights changes in EBITDA
performance unrelated to fluctuations in sales, is useful to investors as an
indication of changes in operating efficiency.
7
<PAGE> 11
SUMMARY HISTORICAL FINANCIAL DATA OF RSI
The following table sets forth summary historical financial data of RSI as
of and for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, which have been derived from the financial statements of RSI and audited
by KPMG Peat Marwick LLP, independent certified public accountants. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements of RSI and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT STORE
DATA)
<S> <C> <C> <C>
OPERATING DATA:
Sales........................................................... $ 2,843.8 $ 2,730.2 $ 2,724.6
Gross profit.................................................... 626.6 636.5 623.6
Selling, general and administrative expenses(a)................. 470.0 471.0 467.0
Interest expense(b)............................................. 125.6 108.8 112.7
Net earnings (loss)(c).......................................... (76.1) 138.4(i) 32.1
Ratio of earnings to fixed charges(d)........................... 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit)............................... $ (122.0) $ (73.0) $ (119.5)
Total assets.................................................... 1,388.5 1,483.7 1,509.9
Total debt(e)................................................... 1,029.8 998.9 1,018.5
Stockholders' equity (deficit).................................. (133.3) 5.1 27.2
CASH FLOW DATA:
Net cash provided by operating activities....................... $ 53.7 $ 104.0 $ 55.4
Net cash used in investing activities........................... (102.5) (45.5) (50.8)
Net cash provided by (used in) financing activities............. 58.2 (49.6) (24.6)
OTHER DATA:
Depreciation and amortization(f)................................ $ 76.9 $ 74.5 $ 76.0
Capital expenditures............................................ 102.7 62.2 64.0
Stores open at end of period.................................... 159 165 173
EBITDA (as defined)(g).......................................... $ 227.3 $ 230.2 $ 230.2
EBITDA margin(h)................................................ 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $3.3
million, $3.4 million and $2.6 million for the 52 weeks ended January 31,
1993, January 30, 1994 and January 29, 1995, respectively.
(b) Interest expense includes non-cash charges related to the amortization of
deferred debt issuance costs of $5.5 million for the 52 weeks ended January
31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1
million for the 52 weeks ended January 29, 1995, respectively.
(c) Net earnings (loss) includes the extraordinary item relating to debt
refinancing, loss on disposal of assets, provisions for postretirement and
pension benefits and provision for earthquake losses. Net earnings (loss)
includes a pre-tax provision for self insurance, which is classified in cost
of sales, selling, general and administrative expenses and interest expense
of $36.9 million, $36.3 million, and $20.0 million, for the 52 weeks ended
January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks ended
January 29, 1995, respectively. Included in the 52 weeks ended January 30,
1994 and the 52 weeks ended January 29, 1995 are reduced employer
contributions of $11.8 million and $12.7 million, respectively, related to
union health and welfare benefit plans.
(d) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of earnings before income taxes, extraordinary item and fixed
charges before capitalized interest. "Fixed charges" consist of interest
expense (including amortization of self-insurance reserves discount),
capitalized interest, amortization of deferred debt issuance costs and
one-third of rental expense (the portion deemed representative of the
interest factor).
(e) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
(f) For the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, depreciation and amortization includes amortization of the excess of
cost over net assets acquired of $11.0 million, $11.0 million and $11.0
million, respectively.
(g) "EBITDA," as defined and presented historically by RSI, represents earnings
before interest expense, income tax expense (benefit), depreciation and
amortization expense, provision for postretirement benefits, the LIFO
charge, extraordinary item relating to debt refinancing, provision for legal
settlement, provision for restructuring, provision for earthquake losses, a
one-time charge for Teamsters Union sick pay benefits, transition expense
and gains and losses on disposal of assets. EBITDA is a widely accepted
financial indicator of a company's ability to service debt. However, EBITDA
should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of Ralphs' operating performance or as a measure of liquidity. The Company
believes that its definition of EBITDA (as defined) is the measure most
useful to investors as it is consistent with the definitions used in the
Company's debt covenants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(h) EBITDA margin represents EBITDA (as defined) as a percentage of sales. The
Company believes that EBITDA margin, which highlights changes in EBITDA
performance unrelated to fluctuations in sales, is useful to investors as an
indication of changes in operating efficiency.
(i) Includes recognition of $109.1 million of deferred income tax benefit and
$1.1 million current income tax expense for the 52 weeks ended January 30,
1994 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs
Supermarkets, Inc.).
8
<PAGE> 12
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
Seller Debentures.
EFFECT OF PENDING FRED MEYER MERGER ON HOLDERS OF SELLER DEBENTURES
In connection with the Fred Meyer Merger, Fred Meyer intends to refinance
and consolidate a majority of the indebtedness of the combined company,
including the Seller Debentures. As part of the refinancing, Holdings has
offered to purchase any and all outstanding Seller Debentures, subject to the
consummation of the Fred Meyer Merger. In connection with such Offer to
Purchase, Holdings is soliciting consents from the holders of the Seller
Debentures to eliminate substantially all of the restrictive covenants contained
in the Seller Debenture Indenture. The price and other terms and conditions of
the Offer to Purchase are set forth in the Company's Offer to Purchase and
Consent Solicitation Statement dated January 22, 1998, copies of which are
available from the Company on request, as the same may be amended from time to
time. If consummated, the Offer to Purchase is expected to close concurrently
with the Fred Meyer Merger. THERE CAN BE NO ASSURANCE THAT SUCH OFFER TO
PURCHASE WILL BE CONSUMMATED. In addition, the Fred Meyer Merger may constitute
a Change of Control of Holdings. Pursuant to the Seller Debenture Indenture,
upon a Change of Control, each holder of Seller Debentures has a right to
require Holdings to repurchase such holder's Seller Debentures at a price equal
to 101% of their principal amount, plus accrued and unpaid interest to the date
of repurchase. The consummation of the Offer to Purchase is not a condition to
the closing of the Fred Meyer Merger, and any Seller Debentures which remain
outstanding after the expiration of the Offer to Purchase will not be assumed by
Fred Meyer.
LEVERAGE AND DEBT SERVICE
Holdings is highly leveraged. At October 12, 1997, Holdings' total
indebtedness (including current maturities) and stockholders' deficit were
$2,486.5 million and $421.0 million, respectively, and the Company had an
additional $112.6 million available to be borrowed under the Revolving Facility.
In addition, as of February 2, 1997, scheduled payments under operating leases
of the Company and its subsidiaries for the twelve months following such date
were $145.7 million. For the 53 weeks ended February 2, 1997, after giving pro
forma effect to (i) the issuance of $155 million aggregate principal amount of
1997 Senior Subordinated Notes on March 26, 1997 and the application of the net
proceeds therefrom and (ii) the issuance of $100 million aggregate principal
amount of 10.45% Senior Notes due 2004 on June 6, 1996 (the "1996 Senior Notes")
and the application of the net proceeds therefrom, Holdings' earnings before
fixed charges were inadequate to cover fixed charges by $126.5 million. However,
such earnings included non-cash charges of $216.1 million primarily consisting
of depreciation and amortization. For the 36 weeks ended October 12, 1997,
Holdings' earnings before fixed charges were inadequate to cover fixed charges
by $53.9 million. However, such earnings included non-cash charges of $148.8
million primarily consisting of depreciation and amortization. Holdings will be
required to make semi-annual cash payments of interest on the New Discount
Debentures and the Seller Debentures commencing in June 2000 in the amount of
approximately $61 million per annum. Holdings' ability to make scheduled
payments of the principal of, or interest on, or to refinance its Indebtedness
(including the Seller Debentures) and to make scheduled payments under its
operating leases depends on its future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control.
Based upon the current level of operations, anticipated cost savings from
the Merger and future growth, Holdings believes that the Company's cash flow
from operations, together with available borrowings under the Revolving Facility
and its other sources of liquidity (including leases), will be adequate to meet
its anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments over the next several years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that future cost savings and growth can be achieved. If
the Company is unable to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures, or if its
future earnings growth is insufficient to
9
<PAGE> 13
amortize all required principal payments out of internally generated funds, the
Company may be required to refinance all or a portion of its existing debt, sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly in view of the Company's high level of debt and
the fact that substantially all of its assets are pledged to secure the
borrowings under the Refinanced Credit Facility and other secured obligations.
Holdings' high level of debt will have several important effects on its
future operations, including the following: (a) Holdings will have significant
cash requirements to service debt, reducing funds available for operations and
future business opportunities of the Company and increasing the Company's
vulnerability to adverse general economic and industry conditions; (b) the
financial covenants and other restrictions contained in the Refinanced Credit
Facility and other agreements relating to the indebtedness of Holdings and the
Company will require the Company to meet certain financial tests and will
restrict its ability to borrow additional funds, to dispose of assets or to pay
cash dividends; and (c) because of the Holdings' debt service requirements,
funds available for working capital, capital expenditures, acquisitions and
general corporate purposes, may be limited. Holdings' leveraged position may
increase the Company's vulnerability to competitive pressures. The Company's
continued growth depends, in part, on its ability to continue its expansion and
store conversion efforts, and, therefore, its inability to finance capital
expenditures through borrowed funds could have a material adverse effect on the
Company's future operations. Moreover, any default under the documents governing
the indebtedness of Holdings could have a significant adverse effect on the
market value of the Seller Debentures.
HOLDING COMPANY STRUCTURE
Holdings is a holding company and the assets of Holdings consist solely of
100% of the outstanding shares of capital stock of Ralphs, which are pledged to
secure Holdings' guarantee obligations under the Refinanced Credit Facility.
Holdings is the sole obligor on the Seller Debentures, and the Seller Debentures
are not guaranteed by any subsidiary of Holdings. Therefore, the Seller
Debentures are effectively subordinated to all indebtedness and other
liabilities of Ralphs and its subsidiaries. Holdings must rely on dividends and
other advances and transfers of funds from Ralphs to provide the funds necessary
to meet its debt service obligations under the Seller Debentures. The ability of
Ralphs to pay such dividends and make such advances and transfers is subject to
applicable state laws regulating the payment of dividends and to restrictions in
the Refinanced Credit Facility, the indentures governing the 1996 Senior Notes
and the 1995 Senior Notes, the 1997 Senior Subordinated Notes and the 1995
Senior Subordinated Notes (each as defined), and other agreements governing
indebtedness of Ralphs and its subsidiaries. Claims of creditors of Ralphs and
subsidiaries, including general trade creditors, will generally have priority as
to the assets of Ralphs and its subsidiaries over the claims of Holdings and the
holders of the Seller Debentures. At October 12, 1997, the aggregate outstanding
amount of Senior Indebtedness of Holdings (excluding guarantees by Holdings of
certain Senior Indebtedness of Ralphs) was approximately $135.7 million in
accreted value of New Discount Debentures. The Seller Debentures are effectively
subordinated to all liabilities (including trade payables) of Ralphs which were
approximately $3,186.3 million (excluding letters of credit) at such date. In
addition, at October 12, 1997, Ralphs and its subsidiaries had significant
commitments under operating leases. See "-- Leverage and Debt Service."
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's
ability to compete depends in part on its ability to successfully develop new
stores in advantageous locations or to successfully convert or remodel
additional stores. No assurance can be given that sources of funds for the
opening of new stores and for remodels will be available or sufficient to
finance the Company's capital expenditure requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company regularly monitors
10
<PAGE> 14
its competitors' prices and adjusts its prices and marketing strategy as
management deems appropriate in light of existing conditions. Some of the
Company's competitors have greater financial resources than the Company and
could use these resources to take steps which could adversely affect the
Company's competitive position. One of the Company's primary competitors in
Southern California was recently acquired by a major multi-regional supermarket
chain which may increase competitive pressures for the Company. Increased
competitive pressures from existing competitors and new entrants, including
price-cutting strategies, new store openings and remodels of competitors' stores
may have an adverse impact on the Company's results of operations. See
"Business -- Competition."
RISK THAT ADDITIONAL COST SAVINGS MAY NOT BE ACHIEVED
At the time of the Merger, management of the Company estimated that
approximately $90 million of annualized net cost savings (as compared to such
costs for the pro forma combined fiscal year ended June 25, 1994) could be
achieved over a four-year period as a result of integrating the operations of
RSI and Food 4 Less. The cost savings estimates were prepared solely by members
of the management of the Company. The estimates necessarily made numerous
assumptions as to future sales levels and other operating results, the
availability of funds for capital expenditures as well as general industry and
business conditions and other matters, many of which are beyond the control of
the Company. Several of the cost savings estimates were premised on the
assumption that certain levels of efficiency formerly maintained by either Food
4 Less or RSI could continue to be achieved by the combined Company for all
periods following the Merger. Other estimates were based on a management
consensus as to what levels of purchasing and similar efficiencies should be
achievable by an entity the size of the Company. Estimates of potential cost
savings are forward-looking statements that are inherently uncertain. Except for
savings already realized, actual cost savings, if any, could differ materially
from those projected. All of these forward-looking statements are based on
estimates and assumptions made by management of 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. There can be
no assurance that the savings anticipated in these forward-looking statements
will be achieved. The following important factors, among others, could cause the
Company not to achieve the cost savings contemplated herein or otherwise cause
the Company's results of operations to be adversely affected in future periods:
(i) increased competitive pressures from existing competitors and new entrants,
including price-cutting strategies, store openings and remodels; (ii) inability
to negotiate more favorable terms with suppliers;(iii) inability to achieve
future sales levels or other operating results that support the cost savings;
(iv) increases in labor costs or prolonged labor disruption; (v) inability to
control inventory levels; (vi) loss or retirement of key members of management;
and (vii) operational inefficiencies in distribution or other Company systems.
Many of such factors are beyond the control of the Company. In addition, there
can be no assurance that unforeseen costs and expenses or other factors will not
offset the estimated cost savings or other components or the Company's plan in
whole or in part. Following the Merger, the Company experienced certain
unanticipated costs and delays in the realization of certain projected cost
savings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." 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.
RISK OF GEOGRAPHIC CONCENTRATION
A substantial percentage of the Company's business (representing
approximately 90% of sales) is conducted in Southern California. Southern
California began to experience a significant economic downturn in 1991. The
economy in Southern California has been affected by substantial job losses in
the defense and aerospace industries and other adverse economic trends. These
adverse regional economic conditions have resulted in declining sales levels in
recent periods. Any future economic downturn in Southern California could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
11
<PAGE> 15
CONTROL OF THE COMPANY
Affiliates of Yucaipa and Apollo Advisors, L.P. have beneficial ownership
of approximately 40.3% and 32.6%, respectively, of the outstanding capital stock
of Holdings. Pursuant to a stockholders' agreement (the "1995 Stockholders
Agreement") which was entered into by the 1995 Equity Investors (as defined
herein) and certain other stockholders and warrantholders of the Company,
Holdings and Ralphs have boards consisting of nine and ten members,
respectively, and (i) Yucaipa has the right to elect six directors to the board
of Holdings and seven directors to the board of Ralphs, (ii) Apollo has the
right to elect two directors to the board of each of Holdings and Ralphs and
(iii) the other 1995 Equity Investors have the right to elect one director to
the board of each of Holdings and Ralphs. Under the 1995 Stockholders Agreement,
unless and until Holdings has effected an initial public offering of its equity
securities meeting certain criteria, Holdings and its subsidiaries, including
Ralphs, may not take certain actions without the approval of the Holdings
directors which the 1995 Equity Investors are entitled to elect, including but
not limited to certain mergers, sale transactions, transactions with affiliates,
issuances of capital stock and payments of dividends on or repurchases of
capital stock. As a result of the ownership structure of Holdings and the
contractual rights described above, the voting and management control of
Holdings is highly concentrated. Yucaipa, acting with the consent of the
directors elected by the 1995 Equity Investors, has the ability to direct the
actions of Holdings with respect to matters such as the payment of dividends,
material acquisitions and dispositions and other extraordinary corporate
transactions. Yucaipa is a party to a consulting agreement with the Company,
pursuant to which Yucaipa renders certain management and advisory services to
the Company, and receives fees for such services. Yucaipa also received certain
fees in connection with the consummation of the Merger, including an advisory
fee of $21.5 million, of which $17.5 million was paid through the issuance of
New Discount Debentures by Holdings. See "Certain Relationships and Related
Transactions," "Principal Stockholders" and "Description of Capital Stock."
SUBORDINATION OF THE SELLER DEBENTURES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Seller Debentures is subordinated to the prior
payment in full of all existing and future Senior Indebtedness of Holdings. In
addition, the Seller Debentures are effectively subordinated to all liabilities
(including trade payables) of Ralphs. In the event of the bankruptcy,
liquidation, dissolution, reorganization or other winding up of Holdings, the
assets of Holdings will be available to pay obligations on the Seller Debentures
only after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Seller
Debentures. In addition, under certain circumstances, Holdings may not pay
principal of, premium, if any, or interest on, or any other amounts owing in
respect of, the Seller Debentures, or purchase, redeem or otherwise retire the
Seller Debentures, if a payment default or a non-payment default exists with
respect to certain Senior Indebtedness and, in the case of a non-payment
default, a payment blockage notice has been received by the Trustee (as
defined). See "Description of the Seller Debentures -- Ranking."
ABSENCE OF ESTABLISHED PUBLIC MARKET FOR THE SELLER DEBENTURES
There is no established market for the Seller Debentures and there can be
no assurance as to the liquidity of any markets that may develop for the Seller
Debentures, the ability of holders of the Seller Debentures to sell their Seller
Debentures, or the price at which holders would be able to sell their Seller
Debentures. Future trading prices of the Seller Debentures will depend on many
factors, including, among other things, prevailing interest rates, Holdings'
operating results and the market for similar securities.
NET LOSSES
Holdings has reported net losses of $101.9 million for the 36 weeks ended
October 12, 1997, $129.6 million for the 53 weeks ended February 2, 1997, $322.4
million for the 52 weeks ended January 28, 1996, $17.6 million for the 31 weeks
ended January 29, 1995, $11.5 million for the 52 weeks ended June 25, 1994,
$31.2 million for the 52 weeks ended June 26, 1993 and $33.8 million for the 52
weeks ended June 27, 1992. There can be no assurance that Holdings will not
report net losses in the future.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the cash, short-term and current portion of
long-term debt and the capitalization of Holdings at October 12, 1997. The table
should be read in conjunction with the historical consolidated financial
statements of Holdings and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT OCTOBER 12, 1997
-------------------
(DOLLARS IN
MILLIONS)
<S> <C>
Cash........................................................................ $ 63.5
========
Short-term and current portion of long-term debt:
Term Loans................................................................ $ 3.5
Other indebtedness........................................................ 3.0
Capital leases............................................................ 32.0
--------
Total short-term and current portion of long-term debt............ $ 38.5
========
Long-term debt:
New Term Loans(a)......................................................... $ 544.8
Revolving Facility(a)(b).................................................. 136.9
1996 Senior Notes(c)...................................................... 95.2
1995 Senior Notes(d)...................................................... 520.3
Other senior indebtedness(e).............................................. 16.8
Capital leases............................................................ 133.2
1997 Senior Subordinated Notes(f)......................................... 163.2
1995 Senior Subordinated Notes............................................ 524.0
Other senior subordinated indebtedness.................................... 2.2
New Discount Debentures (accreted value).................................. 135.7
Seller Debentures (net of debt discount).................................. 175.8
--------
Total long-term debt.............................................. $ 2,448.1
--------
Stockholders' equity:
Series A Preferred Stock.................................................. 161.8
Series B Preferred Stock.................................................. 31.0
Common stock, $.01 par value.............................................. 0.2
Additional paid-in capital................................................ 54.6
Notes receivable(g)....................................................... (0.6)
Retained deficit.......................................................... (666.1)
Treasury stock............................................................ (1.9)
--------
Total stockholders' deficit............................................ (421.0)
--------
Total capitalization.............................................. $ 2,027.1
========
</TABLE>
- ---------------
(a) On April 17, 1997, the Company entered into the Refinanced Credit Facility
which consists of the $325 million Revolving Facility, a $200 million Term
Loan A Facility and a $350 million Term Loan B Facility. The Refinanced
Credit Facility has lower interest rates and a longer average life than the
1995 Credit Facility.
(b) The Revolving Facility provides for a $325 million line of credit which is
available for working capital requirements and general corporate purposes.
Up to $150 million of the Revolving Facility may be used to support letters
of credit. The letters of credit will be used to cover workers' compensation
contingencies and for other purposes permitted under the Revolving Facility.
As of October 12, 1997, letters of credit for approximately $75.5 million
had been issued under the Revolving Facility, primarily to satisfy the State
of California's requirements relating to workers' compensation
self-insurance.
(c) Refers to the $100,000,000 aggregate principal amount of 10.45% Senior Notes
due 2004 issued pursuant to an indenture dated June 6, 1996 (the "1996
10.45% Senior Notes"). The 1996 10.45% Senior Notes are shown net of
unamortized discount.
(d) Refers to the $520,326,000 aggregate principal amount of 10.45% Senior Notes
due 2004 issued pursuant to an indenture dated June 1, 1995 (the "1995
10.45% Senior Notes").
(e) Includes the $175,000,000 aggregate principal amount of 10.45% Senior Notes
due 2000 issued pursuant to an indenture dated April 15, 1992 (the "1992
10.45% Senior Notes") of which $4.7 million was outstanding at October 12,
1997.
(f) Refers to the $155,000,000 aggregate principal amount of 1997 Senior
Subordinated Notes issued pursuant to an indenture dated March 26, 1997. The
1997 Senior Subordinated Notes were issued in the Private Placement at a
premium of 105.5% resulting in gross proceeds of $163.5 million. Proceeds of
the Private Placement in excess of the principal amount will be amortized
over the life of the 1997 Senior Subordinated Notes.
(g) Represents notes receivable from shareholders of Holdings with respect to
the purchase of Holdings' common stock.
13
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS
The following table sets forth certain selected consolidated historical
financial data of Holdings and its predecessor Food 4 Less. The operating and
balance sheet data of Holdings and Food 4 Less set forth in the table below as
of and 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 have been derived from the financial statements
of Holdings and Food 4 Less which have been audited by Arthur Andersen LLP,
independent public accountants. Certain prior period amounts in the financial
data presented below have been reclassified to conform to the fiscal 1997
presentation. The summary historical financial data of Holdings presented below
as of and for the 36 weeks ended October 6, 1996 and October 12, 1997 have been
derived from unaudited financial statements of Holdings which, in the opinion of
management, reflect all material adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such data. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements of the Company and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS 52 WEEKS 53 WEEKS 36 WEEKS 36 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 27, JUNE 26, JUNE 25, JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 6, OCTOBER 12,
1992 1993 1994(a) 1995(b) 1996(c) 1997 1996 1997
---------- ---------- ---------- ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT STORE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales................ $2,913,493 $2,742,027 $2,585,160 $1,556,522 $4,335,109 $5,516,259 $3,695,594 $3,778,470
Cost of sales(d)..... 2,429,711 2,273,167 2,126,302 1,296,810 3,527,120 4,380,241 2,941,360 3,000,531
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit(d)...... 483,782 468,860 458,858 259,712 807,989 1,136,018 754,234 777,939
Selling, general and
administrative
expenses........... 432,695 419,576 378,376 219,696 744,449 933,414 626,809 615,933
Amortization of
goodwill........... 7,795 7,571 7,691 4,615 21,847 38,650 24,403 24,396
Loss (gain) on
disposal of
assets............. (1,364) (2,083) 37 (455) (547) 9,317 -- --
Restructuring
charge............. -- -- -- 5,134 (e) 123,083 (f) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)(d).......... 44,656 43,796 72,754 30,722 (80,843) 154,637 103,022 137,610
Interest
expense(g)......... 70,211 73,614 77,017 48,361 202,651 284,217 192,700 191,528
Provision for
earthquake
losses............. -- -- 4,504(h) -- -- -- -- --
Provision for income
taxes.............. 3,441 1,427 2,700 -- 500 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before
extraordinary
charges............ (28,996) (31,245) (11,467) (17,639) (283,994) (129,580) (89,678) (53,918)
Extraordinary
charges............ 4,818(i) -- -- -- 38,424 (j) -- -- 47,983 (k)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss(l).......... $ (33,814) $ (31,245) $ (11,467) $ (17,639) $ (322,418) $ (129,580) $ (89,678) $ (101,901)
========== ========== ========== ========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges(m)... --(m) --(m) --(m) --(m) --(m) --(m) --(m) --(m)
NON-CASH CHARGES:
Depreciation and
amortization of
property and
equipment.......... $ 37,898 $ 37,426 $ 41,380 $ 25,966 $ 92,282 $ 129,008 $ 85,327 $ 88,261
Amortization of
goodwill and other
assets............. 16,979 20,214 15,703 10,657 33,047 40,669 26,298 28,380
Amortization of
deferred financing
costs.............. 6,304 4,901 5,472 3,413 8,193 10,667 7,862 4,406
BALANCE SHEET DATA (end
of period)(n):
Working capital
surplus
(deficit).......... $ (66,254) $ (19,222) $ (54,882) $ (74,776) $ (150,475) $ (182,641) $ (240,294) $ (150,068)
Total assets......... 998,451 957,840 980,080 1,000,695 3,188,129 3,131,993 3,146,899 3,076,768
Total debt(o)........ 525,340 588,313 576,869 598,940 2,330,221 2,376,912 2,316,764 2,486,544
Stockholder's equity
(deficit).......... 50,771 22,633 10,024 (7,333) (188,798) (319,268) (278,466) (421,011)
CASH FLOW DATA:
Net cash provided
(used) by operating
activities......... $ 106,152 $ (16,502) $ 87,822 $ 17,621 $ (16,842) $ 133,665 $ 124,815 $ 44,695
Net cash used by
investing
activities......... (62,926) (37,800) (55,755) (42,621) (505,403) (111,135) (58,751) (94,200)
Net cash provided
(used) by financing
activities......... (40,231) 54,914 (24,160) 11,564 570,668 (22,924) (67,025) 45,440
OTHER DATA:
Depreciation and
amortization(p).... $ 54,877 $ 57,640 $ 57,083 $ 36,623 $ 125,329 $ 169,677 $ 111,625 $ 116,641
Capital
expenditures....... 60,263 53,467 57,741 49,023 122,355 123,622 74,328 111,154
Stores open at end of
period............. 249 248 258 267 408 405 406 406
EBITDA (as
defined)(q)........ $ 101,723 $ 103,794 $ 130,573 $ 76,853 $ 245,146 $ 354,646 $ 233,516 $ 257,738
EBITDA margin(r)..... 3.5% 3.8% 5.1% 4.9% 5.7% 6.4% 6.3% 6.8%
</TABLE>
- ---------------
(a) Operating data for the 52 weeks ended June 25, 1994 include the results of
10 Food Barn stores, which were not material, from March 29, 1994, the date
of the Food Barn acquisition.
(b) Food 4 Less changed its fiscal year end from the 52 or 53-week period which
ends on the last Saturday in June to the 52 or 53-week period which ends on
the Sunday closest to January 31, resulting in a 31-week transition period.
(c) Operating data for the 52 weeks ended January 28, 1996 reflects the
acquisition of RSI on June 14, 1995.
14
<PAGE> 18
(d) Cost of sales has been principally determined using the last-in, first-out
("LIFO") method of valuing inventory. If cost of sales had been determined
using the first-in, first-out ("FIFO") method, gross profit and operating
income would have been greater by $3.6 million, $4.4 million, $0.7 million,
$2.7 million, $2.2 million, $5.6 million, $3.7 million (unaudited) and $2.2
million (unaudited) 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, the 53 weeks ended February 2, 1997 and the 36 weeks ended
October 6, 1996 and October 12, 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 RSI 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 Facility and 9 stores.
(g) Interest expense includes non-cash charges related to the amortization of
deferred financing costs.
(h) 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.
(i) Represents an extraordinary net charge of $4.8 million reflecting the
write-off of $6.7 million (net of related income tax benefit of $2.5
million) of deferred debt issuance costs as a result of the early redemption
of a portion of Food 4 Less' bank term loan, partially offset by a $1.9
million extraordinary gain (net of related income tax expense of $0.7
million) on the replacement of partially depreciated assets following the
civil unrest in Los Angeles.
(j) Represents an extraordinary charge of $38.4 million relating to the
refinancing of Food 4 Less' old credit facility, 10.45% Senior Notes due
2000 (the "1992 Senior Notes"), 13.75% Senior Subordinated Notes due 2001
(the "1991 Senior Subordinated Notes") and Holdings' 15.25% Senior Discount
Notes due 2004 in connection with the Merger and the write-off of their
related debt issuance costs.
(k) Represents an extraordinary charge of $48.0 million relating to the
write-off of debt issuance costs associated with the refinancing of the 1995
Credit Facility and the write-off of debt issuance costs and premium paid
relating to the redemption of the 1991 Senior Subordinated Notes and the
1995 13.75% Senior Subordinated Notes.
(l) 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, $29.2 million, $31.4 million and $24.9 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, the 53
weeks ended February 2, 1997 and the 36 weeks ended October 6, 1996 and
October 12, 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 pension and health and welfare
benefit plans. Included in the 53 weeks ended February 2, 1997 and the 36
weeks ended October 6, 1996 and October 12, 1997 are reduced employer
contributions of $17.8 million, $11.5 million and $11.8 million,
respectively, related to union pension and health and welfare benefit plans.
The multi-employer 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.
(m) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of loss before provision for income taxes and extraordinary charges
plus fixed charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt financing costs and one-third of rental
expense (the portion deemed representative of the interest factor). Earnings
were insufficient to cover fixed charges for the 52 weeks ended June 27,
1992, June 26, 1993 and June 25, 1994, the 31 weeks ended January 29, 1995,
the 52 weeks ended January 28, 1996, the 53 weeks ended February 2, 1997 and
the 36 weeks ended October 6, 1996 and October 12, 1997, by approximately
$25.6 million, $29.8 million, $8.8 million, $17.6 million, $283.5 million,
$129.6 million, $89.7 million and $53.9 million, respectively. However, such
earnings included non-cash charges of $61.2 million for the 52 weeks ended
June 27, 1992, $66.4 million for the 52 weeks ended June 26, 1993, $71.3
million for the 52 weeks ended June 25, 1994, $46.2 million for the 31 weeks
ended January 29, 1995, $226.6 million for the 52 weeks ended January 28,
1996, $216.3 million for the 53 weeks ended February 2, 1997, $143.9 million
for the 36 weeks ended October 6, 1996 and $148.8 million for the 36 weeks
ended October 12, 1997, primarily consisting of depreciation and
amortization and the write-off of property and equipment associated with
stores closed as a result of the Merger, stores closed due to
under-performance, stores closed in connection with the acquisition of the
nine stores from Smith's, and warehouses to be closed as a result of the
acquisition of the Riverside Facility. In addition, earnings for the 52
weeks ended January 28, 1996 were reduced by cash restructuring charges of
$54.1 million.
(n) Balance sheet data as of June 25, 1994 relate to Food 4 Less and reflect the
acquisition of 10 Food Barn stores. Balance sheet data as of January 28,
1996 relate to the Company and reflect the Merger and the financings
associated therewith.
(o) Total debt includes long-term debt, current maturities of long-term debt and
capital lease obligations.
(p) Depreciation and amortization includes amortization of goodwill.
(q) "EBITDA (as defined)," as presented historically by the Company, represents
income before interest expense, depreciation and amortization expense, the
LIFO provision, provision for income taxes, provision for earthquake losses,
provision for restructuring, a one-time charge in the 1995 transition period
for Teamsters Union sick pay benefits, $75.0 million of one-time costs
incurred in connection with the Merger in fiscal 1995 and $13.5 million of
one-time costs incurred in connection with the acquisition of the Riverside
Facility and nine former Smith's stores in fiscal 1996. EBITDA is a widely
accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity. EBITDA as presented may not be comparable to EBITDA of
other companies that do not calculate EBITDA in the same manner as the
Company. The Company believes that its definition of EBITDA (as defined) is
the measure most useful to investors as it is consistent with the
definitions used in the Company's debt covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(r) EBITDA margin represents EBITDA (as defined) as a percentage of sales. The
Company believes that EBITDA margin, which highlights changes in EBITDA
performance unrelated to fluctuations in sales, is useful to investors as an
indication of changes in operating efficiency.
15
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA OF RSI
The following table presents selected historical financial data of RSI as
of and for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, which have been derived from the financial statements of RSI audited by
KPMG Peat Marwick LLP, independent certified public accountants. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of RSI and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT STORE
DATA)
<S> <C> <C> <C>
OPERATING DATA:
Sales.................................................................. $2,843.8 $2,730.2 $2,724.6
Cost of sales.......................................................... 2,217.2 2,093.7 2,101.0
-------- -------- --------
Gross profit........................................................... 626.6 636.5 623.6
Selling, general and administrative expenses(a)........................ 470.0 471.0 467.0
Amortization of excess of cost over net assets acquired................ 11.0 11.0 11.0
Provisions for restructuring(b)........................................ 7.1 2.4 --
-------- -------- --------
Operating income....................................................... 138.5 152.1 145.6
Interest expense(c).................................................. 125.6 108.8 112.7
Loss on disposal of assets and provisions for legal settlement and
earthquake losses(d)................................................ 10.1 12.9 0.8
Income tax expense (benefit)........................................... 8.3 (108.0)(e) --
Extraordinary item-debt refinancing, net of tax benefits............... (70.6) -- --
-------- -------- --------
Net earnings (loss)(f)................................................. $ (76.1) $ 138.4 $ 32.1
======== ======== ========
Ratio of earnings to fixed charges(g).................................. 1.02x 1.24x 1.24x
BALANCE SHEET DATA (end of period):
Working capital surplus (deficit)...................................... $(122.0) $ (73.0) $(119.5)
Total assets........................................................... 1,388.5 1,483.7 1,509.9
Total debt(h).......................................................... 1,029.8 998.9 1,018.5
Stockholders' equity (deficit)......................................... (133.3) 5.1 27.2
CASH FLOW DATA:
Net cash provided by operating activities.............................. $ 53.7 $ 104.0 $ 55.4
Net cash used in investing activities.................................. (102.5) (45.5) (50.8)
Net cash provided by (used in) financing activities.................... 58.2 (49.6) (24.6)
OTHER DATA:
Depreciation and amortization(i)....................................... $ 76.9 $ 74.5 $ 76.0
Capital expenditures................................................... 102.7 62.2 64.0
Stores open at end of period........................................... 159 165 173
EBITDA (as defined)(j)................................................. $ 227.3 $ 230.2 $ 230.2
EBITDA margin(k)....................................................... 8.0% 8.4% 8.4%
</TABLE>
- ---------------
(a) Includes provision for post retirement benefits other than pensions of $3.3
million, $3.4 million and $2.6 million for the 52 weeks ended January 31,
1993, January 30, 1994 and January 29, 1995, respectively.
(b) Provisions for restructuring are charges for expenses relating to closing
of RSI's central bakery operation. The charge reflected the complete
write-down of the bakery building, machinery and equipment, leaseholds,
related inventory and supplies, and providing severance pay to terminated
employees. These charges were $7.1 million and $2.4 million for the 52
weeks ended January 31, 1993 and the 52 weeks ended January 30, 1994,
respectively.
(c) Interest expense includes non-cash charges related to the amortization of
deferred debt issuance costs of $5.5 million for the 52 weeks ended January
31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1
million for the 52 weeks ended January 29, 1995, respectively.
(d) Loss on disposal of assets was $2.6 million, $1.9 million and $0.8 million
for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, respectively. Provision for legal settlement was $7.5 million for the
52 weeks ended January 31, 1993. Provision for earthquake losses was $11.0
million for the 52 weeks ended January 30, 1994. This represents reserve
for losses, net of anticipated insurance recoveries, resulting from the
January 17, 1994 Southern California earthquake.
(e) Includes recognition of $109.1 million of deferred income tax benefit and
$1.1 million current income tax expense for Fiscal 1993 (see Note 11 of
Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.).
(f) Net earnings (loss) includes a pre-tax provision for self insurance, which
is classified in cost of sales, selling, general and administrative
expenses and interest expense, of $36.9 million, $36.3 million, and $20.0
million, for the 52 weeks ended January 31, 1993, the 52 weeks ended
January 30, 1994 and the 52 weeks ended January 29, 1995, respectively.
Included in the 52 weeks ended
16
<PAGE> 20
January 30, 1994 and the 52 weeks ended January 29, 1995 are reduced
employer contributions of $11.8 million and $12.7 million, respectively,
related to union health and welfare benefit plans.
(g) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, extraordinary items and
fixed charges before capitalized interest. "Fixed charges" consist of
interest expense (including amortization of self-insurance reserves
discount), capitalized interest, amortization of deferred debt issuance
costs and one-third of rental expense (the portion deemed representative of
the interest factor).
(h) Total debt includes long-term debt, current maturities of long-term debt,
short-term debt and capital lease obligations.
(i) For the 52 weeks ended January 31, 1993, January 30, 1994 and January 29,
1995, depreciation and amortization includes amortization of the excess of
cost over net assets acquired of $11.0 million, $11.0 million and $11.0
million, respectively.
(j) "EBITDA (as defined)" as presented historically by RSI, represents net
earnings before interest expense, income tax expense (benefit),
depreciation and amortization expense, provision for postretirement
benefits, the LIFO charge, extraordinary item relating to debt refinancing,
provision for legal settlement, provision for restructuring, provision for
earthquake losses, a one-time charge for Teamsters Union sick pay benefits,
transition expense and gains and losses on disposal of assets. EBITDA is a
widely accepted financial indicator of a company's ability to service debt.
However, EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of Ralphs' operating performance or as a measure
of liquidity. The Company believes that its definition of EBITDA (as
defined) is the measure most useful to investors as it is consistent with
the definitions used in the Company's debt covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(k) EBITDA margin represents EBITDA (as defined) as a percentage of sales. The
Company believes that EBITDA margin, which highlights changes in EBITDA
performance unrelated to fluctuations in sales, is an indication of changes
in operating efficiency.
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On June 14, 1995, Holdings and Food 4 Less completed their acquisition of
RSI and its wholly owned subsidiary, Ralphs Grocery Company ("Ralphs").
Concurrently with the consummation of the Merger, the Company refinanced a
substantial portion of the existing indebtedness of Food 4 Less and Ralphs. 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 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% 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 Ralphs merchandising and service standards into the
smaller conventional supermarkets formerly operated by Food 4 Less. Also, as the
Company's backstage facilities were integrated, the Company experienced higher
than expected warehouse and distribution costs resulting from, among other
things, higher than expected inventory levels, delays in the transfer of
distribution personnel from Food 4 Less to 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% for the fourth quarter, which resulted in comparable store sales
growth of 1.8% 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 regular 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 level and corporate headcount levels. In addition, through
the sublease of Smith's distribution center and creamery in Riverside,
California (the "Riverside Facility"), 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.
18
<PAGE> 22
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 Food 4
Less 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 Food 4 Less'
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 RSI by Food 4 Less. As a
result, all financial statements for periods subsequent to June 14, 1995, the
date the Merger was consummated, reflect Ralphs' net assets at their estimated
fair market values as of June 14, 1995. 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.
FORWARD-LOOKING STATEMENTS
When used in this Prospectus, the words "estimate," "expect," "project" and
similar expressions are intended to identify forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Section 27A of the Securities Act (notwithstanding the
fact that such provisions contain exclusions for forward-looking statement made
in connection with a "tender offer"). 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, including those
discussed under "Risk Factors" above, that could cause actual results to differ
materially from those projected. These factors include, but are not limited to:
(i) the factors discussed under "Risk Factors -- Competition"; (ii) the factors
discussed under "Risk Factors -- Control of the Company"; (iii) the factors
discussed under "Risk Factors -- Risk that Additional Cost Savings May Not be
Achieved"; (iv) the factors discussed under "Risk Factors -- Leverage and Debt
Service"; (v) the factors discussed under "Risk Factors -- Risk of Geographic
Concentration"; as well as (vi) adverse state or federal legislation or
regulation that increases the costs of compliance, or adverse findings by a
regulator with respect to existing operations; (vii) loss of customers or sales
weakness; and (viii) adverse determinations in connection with pending or future
litigations or other material claims against the Company. 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 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. For a discussion of
certain risks which may affect the Company, see "Risk Factors."
19
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth the historical operating results of Holdings
for the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 31
weeks ended January 29, 1995, the 52 weeks ended January 28, 1996, the 53 weeks
ended February 2, 1997, the 36 weeks ended October 6, 1996 and the 36 weeks
ended October 12, 1997:
<TABLE>
<CAPTION>
36 WEEKS
ENDED
1995 --------
FISCAL YEAR FISCAL YEAR TRANSITION FISCAL YEAR FISCAL YEAR OCTOBER
1993 1994 PERIOD 1995 1996 6, 1996
---------------- ---------------- ---------------- ---------------- ---------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................ $2,742.0 100.0% $2,585.2 100.0% $1,556.5 100.0% $4,335.1 100.0% $5,516.3 100.0% $3,695.6
Gross profit......... 468.9 17.1 458.9 17.8 259.7 16.7 808.0 18.6 1,136.0 20.6 754.2
Selling, general and
administrative
expenses............ 419.6 15.3 378.4 14.6 219.7 14.1 744.4 17.2 933.4 16.9 626.8
Amortization of
goodwill............ 7.6 0.3 7.7 0.3 4.6 0.3 21.8 0.5 38.7 0.7 24.4
Loss (gain) on
disposal of
assets.............. (2.1) (0.1) 0.0 0.0 (0.5) (0.0) (0.5) (0.0) 9.3 0.2 0.0
Restructuring
charge.............. 0.0 0.0 0.0 0.0 5.1 0.3 123.1 2.8 0.0 0.0 0.0
Operating income
(loss).............. 43.8 1.6 72.8 2.8 30.7 2.0 (80.8) (1.9) 154.6 2.8 103.0
Interest expense..... 73.6 2.7 77.0 3.0 48.4 3.1 202.7 4.7 284.2 5.2 192.7
Provision for
earthquake losses... 0.0 0.0 4.5 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Provision for income
taxes............... 1.4 0.1 2.7 0.1 0.0 0.0 0.5 0.0 0.0 0.0 0.0
Loss before
extraordinary
charge.............. (31.2) (1.1) (11.5) (0.4) (17.6) (1.1) (284.0) (6.6) (129.6) (2.3) (89.7)
Extraordinary
charge.............. 0.0 0.0 0.0 0.0 0.0 0.0 38.4 0.9 0.0 0.0 0.0
Net loss............. $ (31.2) (1.1)% $ (11.5) (0.4)% $ (17.6) (1.1)% $ (322.4) (7.4)% $ (129.6) (2.3)% $ (89.7)
<CAPTION>
OCTOBER 12, 1997
----------------
<S> <C> <C> <C>
Sales................ 100.0% $3,778.5 100.0%
Gross profit......... 20.4 777.9 20.6
Selling, general and
administrative
expenses............ 17.0 615.9 16.3
Amortization of
goodwill............ 0.7 24.4 0.6
Loss (gain) on
disposal of
assets.............. 0.0 0.0 0.0
Restructuring
charge.............. 0.0 0.0 0.0
Operating income
(loss).............. 2.8 137.6 3.6
Interest expense..... 5.2 191.5 5.1
Provision for
earthquake losses... 0.0 0.0 0.0
Provision for income
taxes............... 0.0 0.0 0.0
Loss before
extraordinary
charge.............. (2.4) (53.9) (1.4)
Extraordinary
charge.............. 0.0 48.0 1.3
Net loss............. (2.4)% $ (101.9) (2.7)%
</TABLE>
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED OCTOBER
12, 1997 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED OCTOBER
6, 1996.
Sales. Sales for the 36 weeks ended October 12, 1997 increased $82.9
million to $3,778.5 million from $3,695.6 million for the 36 weeks ended October
6, 1996. The increase in sales was primarily attributable to a 2.2 percent
increase in comparable store sales for the 36 week period ended October 12, 1997
and the continued success of new store openings, partially offset by store
closings and the recent deflationary environment. Since the beginning of fiscal
1996, 32 stores have been opened and 35 stores have been closed and a total of
58 stores have been remodeled. The third quarter of fiscal 1997 represents the
sixth consecutive quarter that the Company has achieved positive comparable
store sales. The increases in comparable store sales reflect consumers'
favorable response to the Company's "First in Southern California" marketing
program, which focuses on the Company's lower price program in conjunction with
its premier offering of quality, selection and customer service, as well as its
continuing remodeling program.
During the third quarter, the Company completed the development of the
first phase of its "Ralphs Club Card" program and launched the marketing program
shortly after the quarter ended. The "Ralphs Club Card" program is a frequent
shopper program designed to increase customer shopping frequency and transaction
size and to provide valuable information about consumer shopping habits. The
Company estimates that it will incur one-time costs of approximately $10 million
to develop and launch the program, $2 million of which was incurred in the third
quarter.
Gross Profit. Gross profit increased as a percentage of sales from 20.4
percent in the 36 weeks ended October 6, 1996 to 20.6 percent in the 36 weeks
ended October 12, 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 product procurement programs instituted by the Company
are realized, partially offset by competitive promotional activity and higher
advertising costs as the Company prepares to launch the Ralphs Club Card.
20
<PAGE> 24
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $626.8 million and $615.9 million for the
36 weeks ended October 6, 1996 and October 12, 1997, respectively. SG&A
decreased as a percentage of sales from 17.0 percent to 16.3 percent for the 36
weeks ended October 6, 1996 and October 12, 1997, respectively. The reduction in
SG&A as a percentage of sales reflects the continued results of tighter expense
and labor controls at the store level and continued administrative cost
reductions, partially offset by start-up costs associated with the launch of the
"Ralphs Club Card" program in Southern California. Additionally, 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") and
recognized pension suspension credits of $11.5 million and $11.8 million in the
36 weeks ended October 6, 1996 and the 36 weeks ended October 12, 1997,
respectively.
Operating Income. Primarily as a result of the factors discussed above, the
Company's operating income increased from $103.0 million in the 36 weeks ended
October 6, 1996 to $137.6 million in the 36 weeks ended October 12, 1997.
Loss Before Extraordinary Charges. Primarily as a result of the factors
discussed above, the Company's loss before extraordinary charges decreased from
$89.7 million in the 36 weeks ended October 6, 1996 to $53.9 million in the 36
weeks ended October 12, 1997.
Extraordinary Charges. Extraordinary charges of $48.0 million were recorded
during the 12 weeks ended April 27, 1997. These charges relate to the call
premium on the 13.75% Senior Subordinated Notes and the write-off of deferred
financing costs associated with the Old Credit Facility and the 13.75% Senior
Subordinated Notes.
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 53 WEEKS ENDED FEBRUARY
2, 1997 WITH HOLDINGS' 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, 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 18.6
percent in the 52 weeks ended January 28, 1996 to 20.6 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 that 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 Expenses. Selling, general,
administrative and other expenses ("SG&A") were $744.4 million and $933.4
million for the 52 weeks ended January 28, 1996 and the 53 weeks ended February
2, 1997, respectively. SG&A decreased as a percentage of sales from 17.2 percent
to 16.9 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
21
<PAGE> 25
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 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 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 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.
22
<PAGE> 26
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 HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY
28, 1996 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 31 WEEKS ENDED JANUARY
29, 1995.
Sales. Sales per week increased $33.2 million, or 66.1 percent, from $50.2
million in the 31 weeks ended January 29, 1995 to $83.4 million in the 52 weeks
ended January 28, 1996. The increase in sales was primarily attributable to the
addition of 174 conventional supermarkets acquired through the Merger. The sales
increase was partially offset by a pro forma comparable store sales (includes
the combined sales of Food 4 Less and Ralphs 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 16.7
percent in the 31 weeks ended January 29, 1995 to 18.6 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 Expenses. SG&A expenses were
$219.7 million and $744.4 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 14.1 percent to 17.2 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 UFCW. As part of
the renewal of the Southern California UFCW contract in October 1993, employers
contributing to UFCW health and welfare plans received a pro rata share of the
excess reserves in the plans through a reduction of current employer
contributions. 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, Holdings recorded a $75.2 million
charge associated with the closure of 58 former Food 4 Less stores and one
former Food 4 Less warehouse facility. Twenty-four of these stores were required
to be closed pursuant to a settlement agreement with the State of California in
connection with the Merger. Three RGC stores were also required to be sold.
Thirty-four of the closed stores were under-performing former Food 4 Less
stores. The $75.2 million restructuring charge consisted of 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 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
23
<PAGE> 27
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 1996. Also, the Company closed nine of its stores which
were near the acquired former Smith's stores. During the fourth quarter of
fiscal 1995, the Company recorded an additional $47.9 million restructuring
charge to recognize the cost of closing these facilities, consisting of
write-downs of property and equipment ($16.1 million), closure costs ($2.2
million), and lease termination expenses ($29.6 million).
Operating Income (Loss). In addition to the factors discussed above,
operating income includes charges of approximately $75 million for costs
associated with the conversion of stores and integration of the Company's
operations. These costs related primarily to (i) markdowns on clearance
inventory at Food 4 Less' Alpha Beta, Boys and Viva stores converted to the
Ralphs format, (ii) an advertising campaign announcing the Merger, and (iii)
incremental labor cost associated with the training of 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 Facility.
Interest Expense. Interest expense (including amortization of deferred
financing costs) was $48.4 million for the 31 weeks ended January 29, 1995 and
$202.7 million for the 52 weeks ended January 28, 1996. The increase in interest
expense was primarily due to the increased indebtedness incurred in conjunction
with the Merger. See "Liquidity and Capital Resources."
Loss Before Extraordinary Charge. Primarily as a result of the factors
discussed above, the Company's loss before extraordinary charge increased from
$17.6 million for the 1995 transition period to $284.0 million for fiscal 1995.
Extraordinary Charge. An extraordinary charge of $38.4 million was recorded
during fiscal 1995 relating to retirement of indebtedness of Food 4 Less in
connection with the Merger and the write-off of the related deferred financing
costs.
RESULTS OF OPERATIONS OF RSI
The following table sets forth the historical operating results of RSI for
the 52 weeks ended January 30, 1994 ("Fiscal 1993") and January 29, 1995
("Fiscal 1994"):
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------
JANUARY 30, 1994 JANUARY 29, 1995
------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales.................................................. $2,730.2 100.0% $2,724.6 100.0%
Cost of sales.......................................... 2,093.7 76.7 2,101.0 77.1
Selling, general and administrative expenses........... 471.0 17.2 467.0 17.2
Operating income(a).................................... 152.1 5.6 145.6 5.3
Net interest expense................................... 108.8 4.0 112.7 4.1
Provision for earthquake losses(b)..................... 11.0 0.4 -- --
Income tax expense (benefit)........................... (108.0) (4.0) -- --
Net earnings........................................... $ 138.4 5.1 $ 32.1 1.2
</TABLE>
- ---------------
(a) Operating income reflects a charge of $2.4 million in Fiscal 1993 for
expenses relating to closing of central bakery operation. The charge
reflected a portion of the write-down of the bakery building,
24
<PAGE> 28
machinery and equipment, leaseholds, related inventory and supplies, and
providing severance pay to terminated employees.
(b) Represents reserve for losses, net of expected insurance recoveries,
resulting from the January 17, 1994 Southern California earthquake.
COMPARISON OF RSI'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 29,
1995 WITH RSI'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994.
Sales
For the fifty-two weeks ended January 29, 1995, sales were $2,724.6
million, a decrease of $5.6 million or 0.2% from the fifty-two weeks ended
January 30, 1994. During Fiscal 1994, RSI opened ten new stores (four in Los
Angeles County, three in Orange County, one in San Diego County and two in
Riverside County), closed two stores (in conjunction with new stores opening in
the same areas), and completed five store remodels. Comparable store sales
decreased 3.7%, which included an increase of 0.3% for replacement store sales,
from $2,707.9 million in Fiscal 1993 to $2,606.4 million in Fiscal 1994. RSI's
sales continued to be adversely affected by the continuing softness of the
economy in Southern California, continuing competitive new store and remodeling
activity and recent pricing and promotional changes by competitors. RSI
continued to take steps to mitigate the impact of the weak retailing environment
in its markets, which included continuing its own new store and remodeling
program and initiating the RSI Savings Plan in February 1994, a new marketing
campaign specifically designed to enhance customer value. See
"Business -- Advertising and Promotion."
On January 17, 1994, an earthquake in Southern California caused
considerable damage in Los Angeles and surrounding areas. Several RSI
supermarkets suffered earthquake damage, with 54 stores closed on the morning of
January 17th. Thirty-four stores reopened within one day and an additional 17
stores reopened within three days. Three stores in the San Fernando Valley area
of Los Angeles suffered major structural damage. All three stores have since
reopened for business, with the last reopening on April 15, 1994. Management
believes that there was some negative impact on sales resulting from the
temporary disruption of business resulting from the earthquake. RSI is partially
insured for earthquake losses. The pre-tax financial impact, net of expected
insurance recoveries, is expected to be approximately $11.0 million and RSI
reserved for this loss in Fiscal 1993. The gross earthquake loss is
approximately $25.3 million and the expected insurance recovery is approximately
$14.3 million.
Cost of Sales
Cost of sales increased $7.3 million or 0.3% from $2,093.7 million in
Fiscal 1993 to $2,101.0 million in Fiscal 1994. As a percentage of sales, cost
of sales increased to 77.1% in Fiscal 1994 from 76.7% in Fiscal 1993. The
increase in cost of sales as a percentage of sales included a one-time charge
for Teamsters Union sick pay benefits pursuant to a new contract ratified in
August 1994 with the Teamsters. The total charge was $2.5 million, of which $2.1
million was included in cost of sales and $0.4 million in selling, general and
administrative expense. Increases in cost of sales were partially offset by
savings in warehousing and distribution costs, reductions in self-insurance
costs, pass-throughs of increased operating costs and increases in relative
margins where allowed by competitive conditions.
Warehousing and distribution cost savings were primarily attributable to
RSI's ASRS and PSC facilities along with the ongoing implementation of new
computer-controlled programs and labor standards that improved distribution
productivity. The ASRS facility can hold substantially more inventory and
requires fewer employees to operate than does a conventional warehouse of equal
size. This facility has reduced RSI's warehousing costs of non-perishable items
markedly, enabling it to take advantage of advance buying opportunities and
minimize "out-of-stocks." RSI engages in forward-buy purchases to take advantage
of special prices or to delay the impact of upcoming price increases by
purchasing and warehousing larger quantities of merchandise than immediately
required. The PSC facility has consolidated the operations of three existing
facilities and holds more inventory than the facilities it replaced, thereby
reducing RSI's warehouse distribution costs.
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<PAGE> 29
Over the last several years, RSI has been implementing modifications in its
workers compensation and general liability insurance programs. RSI believes that
these modifications have resulted in a significant reduction in self-insurance
costs for Fiscal 1994. Based on a review of the results of these modifications
by RSI and its actuaries, adjustments to the accruals for self-insurance costs
were made during Fiscal 1994 resulting in a reduction of approximately $18.9
million. Of the total $18.9 million reduction in self-insurance costs, $7.5
million is included in cost of sales and $11.4 million is included in selling,
general and administrative expenses.
Selling, General and Administrative Expenses
SG&A expenses decreased $4.0 million or 0.8% from $471.0 million in Fiscal
1993 to $467.0 million in Fiscal 1994. As a percentage of sales, SG&A was 17.2%
in Fiscal 1993 and 17.2% in Fiscal 1994. The decrease in SG&A was primarily due
to a reduction in contributions to the United Food and Commercial Workers Union
("UFCW") health care benefit plans, due to an excess reserve in these plans, a
reduction in self-insurance costs, as discussed above, and the results of cost
savings programs instituted by RSI. RSI is continuing its expense reduction
program. The decrease in SG&A was partially offset by several factors including
increases in union wage rates, a one-time charge for Teamsters Union sick pay
benefits, as discussed above, transition expense relating to the Merger ($1.4
million) and increased rent expense resulting from new stores, including fixture
and equipment financing.
RSI participates in multi-employer pension plans and health and welfare
plans administered by various trustees for substantially all union employees.
Contributions to these plans are based upon negotiated contractual rates. In
both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to
be overfunded based upon the collective bargaining agreement then currently in
force. During Fiscal 1993 the agreement called for pension benefits which
resulted in additional required expense. The UFCW health and welfare benefit
plans were overfunded and those employers who contributed to these plans
received a pro rata share of excess reserve in these health care benefit plans
through a reduction in current maintenance payments. RSI's share of the excess
reserve was approximately $24.5 million of which $11.8 million was recognized in
Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994.
Since employers are required to make contributions to the benefit funds at
whatever level is necessary to maintain plan benefits, there can be no assurance
that plan maintenance payments will remain at current levels.
Operating Income
Operating income in Fiscal 1994 decreased 4.3% to $145.6 million from
$152.1 million in Fiscal 1993. Operating margin, defined as operating income as
a percentage of sales, was 5.3% in Fiscal 1994 compared to 5.6% in Fiscal 1993.
EBITDA, defined as net earnings before interest expense, income tax expense
(benefit), depreciation and amortization expense, provision for postretirement
benefits, provision for LIFO expense, gain or loss on disposal of assets,
transition expense and a one-time charge for Teamsters Union sick pay benefits,
was 8.4% of sales or $230.2 million in Fiscal 1994 and 8.4% of sales or $230.2
million in Fiscal 1993.
Net Interest Expense
Net interest expense for Fiscal 1994 was $112.7 million versus $108.8
million for Fiscal 1993. Net interest expense increased primarily as a result of
increases in interest rates. Included as interest expense during Fiscal 1994 was
$97.4 million, representing interest expense on existing debt obligations,
capitalized leases and a swap agreement. Comparable interest expense for Fiscal
1993 was $92.8 million. Also included in net interest expense for Fiscal 1994
was $15.3 million representing certain other charges related to amortization of
debt issuance costs, self-insurance discounts, lease valuation reserves and
other miscellaneous charges (categorized by RSI as non-cash interest expense) as
compared to $16.0 million for Fiscal 1993. Investment income, which is
immaterial, has been offset against interest expense. The continuation of higher
interest rates subsequent to the end of Fiscal 1994 has continued to increase
interest expense and adversely affect Ralphs' net income.
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<PAGE> 30
Net Earnings
For Fiscal 1994, RSI reported net earnings of $32.1 million compared to net
earnings of $138.4 million for Fiscal 1993. The decrease in net earnings is
primarily the result of decreased operating income, higher interest expense due
to increased interest rates, the recognition of $109.1 million of deferred
income tax benefit in Fiscal 1993 partially offset by $11.0 million recorded for
earthquake losses in Fiscal 1993.
Other
In February 1994, the Board of Directors of RGC authorized a dividend of
$10.0 million to be paid to RSI, and the Board of Directors of RSI authorized
distribution of this dividend to its shareholders subject to certain restrictive
covenants in the instruments governing certain of RSI's indebtedness that impose
limitations on the declaration or payment of dividends. RSI's credit agreement,
entered into in 1992 (the "1992 Credit Agreement"), was amended to allow for the
payment of the dividend to RSI for distribution to RSI's shareholders. The fee
for the amendment was approximately $500,000, which was included in interest
expense for the period. The dividend was distributed to the shareholders of RSI
in the second quarter of Fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the Revolving Facility
and lease financing are the Company's principal sources of liquidity. Holdings
believes that these sources will be adequate to meet its anticipated capital
expenditure, working capital and debt service requirements for the remainder of
fiscal 1997.
At October 12, 1997, borrowings of $136.9 million under the Revolving
Facility and $75.5 million of standby letters of credit were outstanding. 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 is required to reduce loans
outstanding under the Revolving Facility to $110.0 million for a period of not
less than 30 consecutive days during the twelve consecutive month-period ended
on the last day of fiscal 1997. The Company complied with this requirement in
the second quarter of fiscal 1997. At November 14, 1997, the Company had $127.7
million available for borrowing under the Revolving Facility.
During the 36-week period ending October 12, 1997, cash provided by
operating activities was approximately $44.7 million compared to $124.8 million
in the 36-week period ending October 6, 1996. The decline in cash from operating
activities in the 36-week period ending October 12, 1997 is primarily due to the
timing of payments of accounts payable and accrued liabilities and prepaid
expenses. These reductions in cash were partially offset by an improvement in
operating income of approximately $34.6 million. The improvement in operating
income can primarily be attributed to strong comparable store sales, a reduction
in warehousing and distribution costs resulting from the consolidation of the
Company's distribution operations, and a reduction in cost of goods sold as the
benefits of product procurement programs are realized. The Company's principal
use of cash in its operating activities is inventory purchases. The Company's
high inventory turnover rate generally allows it to finance a substantial
portion of its inventory through trade payables, thereby reducing its short-term
borrowing needs.
Cash used by investing activities was $94.2 million for the 36-week period
ending October 12, 1997. Investing activities consisted primarily of capital
expenditures of $111.2 million to build 16 new stores (6 of which had been
completed at October 12, 1997) and the remodeling of 61 stores (38 of which had
been completed at October 12, 1997). The Company currently anticipates that its
aggregate capital expenditures for fiscal 1997 will be approximately $140.0
million (net of expected capital leases) and will include ten new stores and 45
remodels. Consistent with past practices, the Company intends to finance these
capital expenditures primarily with cash provided by operations, borrowings
under the Revolving Facility and through leasing transactions. At November 14,
1997, the Company had approximately $6.0 million of unused equipment leasing
facilities. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient to finance its anticipated capital
expenditure requirements; however, management believes the capital expenditure
program has substantial flexibility and is subject to revision based on various
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<PAGE> 31
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 that if these programs were substantially reduced, future
operating results, and ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include any costs
associated with the Merger or any other 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 provided by financing activities was $45.4 million for the 36-week
period ending October 12, 1997, resulting primarily from refinancing activities.
Refinancing activities consisted of the issuance of the 1997 Senior Subordinated
Notes to refinance the Company's 13.75% Senior Subordinated Notes and the
refinancing and amendment of the Old Credit Facility. In total, financing
activities consisted primarily of proceeds of $722.0 million from the issuance
of long-term debt and net borrowings of $37.5 million under the Revolving
Facility, partially offset by principal payments of long-term debt of $688.4
million and capital lease payments of $20.3 million.
During the first quarter of fiscal 1997, Ralphs issued the 1997 Senior
Subordinated Notes with terms substantially identical to Ralphs' existing 11%
Senior Subordinated Notes at a price of 105.5% of their principal amount,
resulting in gross proceeds of $163.5 million. The proceeds were used to redeem
all of Ralphs' $145 million principal amount of 13.75% Senior Subordinated Notes
at a price of 106.1% of their principal amount and to pay the related accrued
interest through the redemption date, which was April 28, 1997. The remaining
proceeds were used to pay fees and expenses associated with the issuance of the
1997 Senior Subordinated Notes.
During the first quarter, the Company also amended and restated its Old
Credit Facility to lower interest margins and allow more flexibility with
respect to application of proceeds from certain asset sales and capital
expenditures. The amended and restated credit facility (the "New Credit
Facility") consists of a $200.0 million Term Loan A Facility and a $350.0
million Term Loan B Facility (together, the "Term Loans") and a $325.0 million
Revolving Facility under which working capital loans may be made and commercial
or standby letters of credit in the maximum of $150.0 million may be issued.
Quarterly principal installments on the Term Loans continue to 2004, with
principal amounts due 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.
As a result of the refinancings described above, the Company recorded
extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0
million, consisting of the call premium on the 13.75% Senior Subordinated Notes
and write-off of deferred financing costs associated with the Old Credit
Facility and the 13.75% Senior Subordinated Notes.
Holdings has outstanding $135.7 million accreted value of Discount
Debentures and $175.8 million principal amount of Seller Debentures. Holdings is
a holding company which has no assets other than the capital stock of the
Company. Holdings will be required to commence semi-annual cash payments of
interest on the 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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The Company is highly leveraged. At October 12, 1997, the Company's total
long-term indebtedness (including current maturities) and stockholders' deficit
were $2.5 billion and $421.0 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, other long-term liabilities 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.
EFFECTS OF INFLATION AND COMPETITION
Holdings' primary costs, inventory and labor, are affected by a number of
factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, Holdings has generally
been able to maintain margins by adjusting its retail prices, but competitive
conditions may from time to time render it unable to do so while maintaining its
market share.
The supermarket industry is highly competitive and characterized by narrow
profit margins. Holdings' competitors in each of its operating divisions include
national and regional supermarket chains, independent and specialty grocers,
drug and convenience stores, and the newer "alternative format" food stores,
including warehouse club stores, deep discount drug stores and "super centers".
Supermarket chains generally compete on the basis of location, quality of
products, service, price, product variety and store condition. Holdings
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS No. 128") was issued. SFAS No. 128 is effective for
earnings per share calculations for periods ending after December 15, 1997. The
new method of calculating earnings per share will have no effect on the
Company's historical earnings per share.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. Adoption of this
statement will not have a material effect on historical results of operations.
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<PAGE> 33
BUSINESS
The Company is the largest supermarket operator in Southern California with
344 stores and an estimated market share of 26% in Los Angeles and Orange
Counties. The Company operates the second largest conventional supermarket chain
in Southern California under the "Ralphs" name (264 stores) and the largest
warehouse supermarket chain in the region under the "Food 4 Less" name (80
stores). The Company also operates in Northern California (27 stores) and the
Midwest (38 stores). 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.
The Company operates both conventional and warehouse format stores under
various names. The following table sets forth by retail format the number of
stores operated by each of the Company's three divisions at December 10, 1997:
<TABLE>
<CAPTION>
SOUTHERN NORTHERN
CALIFORNIA CALIFORNIA MIDWESTERN TOTAL
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Ralphs.............................. 264 -- -- 264
Cala................................ -- 8 -- 8
Bell................................ -- 13 -- 13
Falley's............................ -- -- 5 5
-- --
--- ---
Total Conventional............. 264 21 5 290
Food 4 Less......................... 80 -- 33 113
FoodsCo............................. -- 6 -- 6
-- --
--- ---
Total Warehouse................ 80 6 33 119
-- --
--- ---
Total Stores................... 344 27 38 409
=== == == ===
</TABLE>
In Southern California, the Company's two complementary formats allow it to
serve a broad customer base and tailor its stores to the market characteristics
of individual store locations. The Company's conventional stores emphasize a
broad selection of merchandise, high quality fresh produce, meat and seafood and
service departments, including bakery and delicatessen departments in most
stores. The Company's conventional stores also benefit from Ralphs' strong
private label program and its strengths in merchandising, store operations and
systems. By passing on format-related efficiencies, the Food 4 Less price impact
warehouse format stores offer consumers the lowest overall prices while
providing product selections comparable to conventional supermarkets.
At the beginning of fiscal 1996, the Company streamlined its management
structure and implemented several strategic initiatives which have contributed
to improving operating trends at the Company. These initiatives resulted in
several notable achievements, including: (i) positive comparable store sales for
three consecutive quarters, including a 3.5% increase in Southern California
comparable store sales in the fourth quarter of fiscal 1996, (ii) an improvement
of the Company's EBITDA margin to 6.7% in the fourth quarter of fiscal 1996 from
5.5% in the comparable prior-year period, (iii) the opening of 26 new stores and
the remodeling of 20 stores, (iv) the acquisition and integration of a new one
million square foot, state-of-the-art distribution center, and (v) the launching
of a major marketing program designed to increase sales and market share under
the "First in Southern California" theme.
In fiscal 1996, the Company reported total sales of approximately $5.5
billion and EBITDA (as defined) of $354.6 million. For the 36 week period ending
October 12, 1997, the Company had sales of approximately $3.8 billion and EBITDA
(as defined) of approximately $257.7 million (or 6.8 percent of sales) as
compared to sales of $3.7 billion and EBITDA (as defined) of $233.5 million (or
6.3 percent of sales) for the 36 week period ending October 6, 1996. Total
Company comparable store sales increased by 2.2% for the 36 week period ended
October 12, 1997 and EBITDA (as defined) increased by 10.4% over the
corresponding period in the prior year.
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The Company is controlled by The Yucaipa Companies ("Yucaipa"), a private
investment group which specializes in the supermarket industry. The principals
of Yucaipa have significant expertise in acquiring and managing companies in the
supermarket industry, having completed 14 transactions. Yucaipa also controls
Dominick's Finer Foods, Inc. (NYSE: DFF) and has a management agreement with
Fred Meyer, Inc., a retailer of a wide range of food and drug products and
general merchandise in the Pacific Northwest and the Intermountain and Southwest
regions of the United States. These companies, together with the Company,
operate a total of 785 stores and had aggregate combined sales of approximately
$14.6 billion in their most recent fiscal years.
The Company actively participates in a "best practices" program with all
other Yucaipa-managed supermarket chains that is intended to reduce costs and
improve business processes. For example, the Company coordinates its purchasing
efforts with other Yucaipa-managed supermarket chains in an effort to reduce its
product costs.
SOUTHERN CALIFORNIA DIVISION
The Southern California Division operates 344 supermarkets in eight
counties under the names "Ralphs" and "Food 4 Less." The Company's Southern
California stores account for approximately 90 percent of the Company's sales.
The combination of RGC and Food 4 Less 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 264 Ralphs stores in
Southern California. All of the Company's conventional stores in the region use
the "Ralphs" name and are operated under a single format. Each store is
merchandised to appeal to the local community it serves and offers competitive
pricing with emphasis on overall value. Ralphs' substantial supermarket product
selection is a significant aspect of its marketing efforts. Ralphs stocks
between 35,000 and 45,000 merchandise items in its stores, including
approximately 2,800 private label products. Ralphs stores offer name-brand
grocery products; quality and freshness in its produce, meat, seafood,
delicatessen and bakery products; and broad selection in all departments. Most
Ralphs stores offer service delicatessen departments, on-premises bakery
facilities and seafood departments. Ralphs emphasizes store ambiance and
cleanliness, fast and friendly service, the convenience of debit and credit card
payment (including many in-store branch banks) and 24-hour operations in most
stores.
Food 4 Less Warehouse Format. The Company operates 80 stores in Southern
California which target the price-conscious segment of the market in both urban
and suburban areas under the name "Food 4 Less." Food 4 Less is a
warehouse-style, price impact store which is positioned to offer the lowest
overall prices in its marketing areas by passing on to the consumer savings
achieved through labor efficiencies and lower overhead and advertising costs
associated with the warehouse format, while providing the product selection and
variety associated with a conventional format. In-store operations are designed
to allow customers to perform certain labor-intensive services usually offered
in conventional supermarkets; for example, merchandise is presented on warehouse
style racks in full cartons, reducing labor intensive unpacking, and customers
bag their own groceries. Labor costs are also reduced because the stores
generally do not have labor-intensive service departments such as delicatessens,
bakeries and fresh seafood departments, although they do offer a complete line
of fresh meat, fish, produce and baked goods.
The Food 4 Less format generally consists of large facilities constructed
with high ceilings to accommodate warehouse racking with overhead pallet
storage. Wide aisles accommodate forklifts and, compared to conventional
supermarkets, a higher percentage of total store space is devoted to retail
selling because the top of the warehouse-style grocery racks on the sales floor
are used to store inventory, which
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<PAGE> 35
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 Food 4 Less' prior Alpha Beta, Boys and Viva
formats. Because Ralphs' current advertising program now covers the Southern
California region, the Company will be able to expand the number of Ralphs
stores without significantly increasing advertising costs.
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 the region. 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 an increase in fiscal 1996 fourth quarter
comparable store sales in Southern California of 3.5%. 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
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.
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WAREHOUSING AND DISTRIBUTION
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. The
technologically-advanced 90-acre complex has improved the quality, service and
productivity of the Company's distribution and manufacturing operations. The
Riverside Facility has more than one million square feet of warehousing and
manufacturing space consisting of a 675,000 square foot dry grocery service
center, 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 in December 1995 allowed the
Company to eliminate certain of its smaller and less efficient warehouse
facilities and to consolidate its distribution operations into the modern,
efficient facilities located in Compton, Glendale and Riverside, California. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Riverside Facility also increases distribution capacity of the Company
by increasing storage capacity to 120,000 pallets and increasing the assortment
of items that are internally supported (increasing dry grocery from 10,000 to
14,000 SKUs and perishable and frozen items by 1,500 SKUs).
The Company also operates a 17 million cubic foot high-rise automated
storage and retrieval system ("ASRS") warehouse for non-perishable items, near
Glendale, California. The 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
warehouse, the "Glendale Facility") was damaged in the Northridge earthquake.
Its operations were transferred to the Riverside Facility while it was being
renovated. 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 enabled the Company to have the ability to deliver
perishable products to its stores on a daily basis, thereby improving the
freshness and quality of these products.
Combined shipments from the Company's Southern California warehouse
facilities accounted for approximately 75 percent of the Southern California
Division's total purchases during the 36 weeks ended October 6, 1996. Additional
purchases, consisting of mostly general merchandise, approximating 2 percent of
the division's total during this same period, were made through Certified
Grocers of California, Ltd. ("Certified"), a food distribution cooperative in
which the Company is a member.
The Company is party to a joint venture with a subsidiary of Certified
which operates a general merchandise warehouse in Fresno, California. Management
has been holding discussions with Certified concerning the possible termination
of the joint venture.
MANUFACTURING
The Riverside Facility's creamery is the production point for all fluid
milk products bound for sale in the Company's Food 4 Less warehouse stores.
Bottled water, fruit juice and ice for the entire Company will also be processed
and packaged at the Riverside 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 at the Compton Facility in Compton,
California. The Compton Facility also processes selected
33
<PAGE> 37
delicatessen items, including packaged salads and cheeses, and produces cultured
products including sour cream and yogurt.
In addition to the foregoing facilities, the Company will continue to
operate a 316,000 square foot bakery in La Habra, California to manufacture a
broad line of baked goods.
STORE OPERATIONS AND RETAIL SYSTEMS
The Company has a modern store base with 60.7% of its stores having been
either opened or remodeled in the last five years. Since the Merger, the Company
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%. In
addition, as of result of Ralphs' 124-year history in Southern California, the
Company has valuable and well established store locations, many 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.
The Southern California Division's management information systems and
optical scanning technology reduce the labor costs attributable to product
pricing and customer check-out, and provide the Company's management with
information that facilitates purchasing and receiving, inventory management,
warehouse reordering and management of accounts payable. All of the Company's
Southern California Division stores currently offer an electronic funds transfer
system which allows customers to make purchases, obtain cash or check approvals
in transactions linked to their bank accounts. In addition, the Company's stores
now offer customers the convenience of making purchases with major credit cards.
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 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 38 stores, of which 33, 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 38
stores, 34 are located in Kansas and four are located in Missouri. Management
believes the Food 4 Less warehouse format stores are the low-price leaders in
each of the markets in which they compete. The Northern California Division's
conventional store strategy is to attract customers through its convenient
locations, broad product line and emphasis on quality and service, and its
advertising and promotion strategy highlights the reduced price specials offered
in its stores. In contrast, the Company's warehouse format stores, operated
under the Food 4 Less name in the Midwestern Division and the FoodsCo name in
the Northern California Division, emphasize lowest overall
34
<PAGE> 38
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 warehouse format
stores range in size from approximately 8,800 square feet to 60,200 square feet
and average approximately 37,900 square feet.
The Northern California Division purchases merchandise from a number of
suppliers; however, approximately 36 percent of its purchases are made through
Certified Grocers of California, Ltd. ("Certified"), a food distribution
cooperative, pursuant to supply contracts. The Northern California Division does
not operate its own warehouse facilities, relying instead on direct delivery to
its stores by Certified and other vendors. Food 4 Less' Southern California
warehouse facilities supply a portion of the merchandise sold in the Northern
California Division stores.
The Midwestern Division's primary supplier is Associated Wholesale Grocers
("AWG"), a member-owned wholesale grocery cooperative based in Kansas City. The
Midwestern Division does not operate a central warehouse, but purchases
approximately 70 percent of the merchandise sold in its stores from AWG.
Management believes that, as AWG's largest single customer, the Midwestern
Division has significant buying power, allowing it to provide a broader product
line more economically than it could if it maintained its own full-line
warehouse. The Midwestern Division produces approximately 50 percent of all
case-ready fresh meat items sold in its stores at its central meat plant located
in Topeka, Kansas.
Since the beginning of fiscal 1991, the Northern California Division has
remodeled 13 stores, opened six new stores and, in fiscal 1995, acquired three
stores from Roger Wilco, now operated as Bell stores. The Northern California
Division Food 4 Less warehouse stores were renamed as FoodsCo warehouse stores
in fiscal 1994 following the sale by the Company of the exclusive rights to use
the "Food 4 Less" name in Northern California to Fleming Companies, Inc., which
previously held a non-exclusive license. See "Licensing Operations" for further
discussion of the amendment to the Fleming license.
HISTORY
On June 14, 1995, Holdings acquired all of the common stock of Ralphs
Supermarkets, Inc. ("RSI") in a transaction accounted for as a purchase by Food
4 Less. The consideration for the acquisition consisted of $388.1 million in
cash, $131.5 million principal amount of 13 5/8% Senior Subordinated Pay-In-Kind
Debentures due 2007 of Holdings (the "Seller Debentures") and $18.5 million
initial accreted value of 13 5/8% Senior Discount Debentures due 2005 of
Holdings (the "New Discount Debentures"). Food 4 Less, RSI and RSI's
wholly-owned subsidiary, Ralphs Grocery Company ("RGC"), combined through
mergers (the "Merger") in which RSI remained as the surviving entity and changed
its name to Ralphs Grocery Company.
Food 4 Less was organized by The Yucaipa Companies ("Yucaipa"), a private
investment group, in connection with the June 1989 acquisition of Breco Holding
Company, Inc. ("BHC"), which owned Boys, Viva, and Cala stores. Concurrently
with the acquisition of BHC (the "BHC Acquisition"), Food 4 Less, Inc. ("FFL"),
a corporation controlled by an affiliate of Yucaipa, contributed to Food 4 Less
all of the outstanding capital stock of Falley's, Inc. ("Falley's"), which owned
Food 4 Less' Midwestern stores and its Food 4 Less Southern California stores.
Food 4 Less added six stores to its Northern California Division by acquiring
Bell Markets, Inc. ("Bell") on June 30, 1989, and added seven stores to its
Southern California Division by acquiring certain operating assets of ABC Market
Corp. ("ABC") on January 15, 1990. On June 17, 1991, Food 4 Less acquired all of
the outstanding capital stock of Alpha Beta Company ("Alpha Beta"), which
operated 142 stores in seven Southern California counties (the "Alpha Beta
Acquisition"). On March 29, 1994, Food 4 Less added ten warehouse format stores
(formerly operated under the name "Food Barn") to its Midwestern Division which
it acquired from Associated Wholesale Grocers, Inc.
THE MERGER AND THE FINANCING
On June 14, 1995, Food 4 Less merged into RSI. Immediately following the
RSI Merger, Ralphs Grocery Company, which was a wholly-owned subsidiary of RSI,
merged with and into RSI pursuant to the
35
<PAGE> 39
RGC Merger, and RSI changed its name to Ralphs Grocery Company. The purchase
price for RSI was approximately $1.5 billion, including the assumption of debt.
The consideration paid to the stockholders of RSI consisted of $388.1 million in
cash, $131.5 million principal amount of the Seller Debentures and $18.5 million
initial accreted value of the New Discount Debentures which were issued by
Holdings.
The Merger was financed through the following principal transactions:
- Borrowings of $600 million aggregate principal amount pursuant to term
loans (the "Term Loans") under a senior bank facility (the "Credit
Facility") provided by a syndicate of banks led by Bankers Trust. The
Credit Facility also provides for a $325 million revolving credit
facility (the "Revolving Facility").
- The issuance by the Company of $350 million of 10.45% Senior Notes due
2004 (the "1995 Senior Notes") and $100 million of 11% Senior
Subordinated Notes due 2005 (the "1995 Senior Subordinated Notes").
- The issuance of preferred stock in a private placement by Holdings to a
group of investors (the "1995 Equity Investors") led by Apollo Advisors,
L.P. and Apollo Advisors II, L.P. (on behalf of one or more managed
entities) or their respective affiliates and designees ("Apollo") and
including affiliates of BT Securities Corporation ("BT Securities"), CS
First Boston Corporation ("CS First Boston") and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and other institutional
investors, yielding cash proceeds of $140 million pursuant to the 1995
Equity Investment. Concurrently with the 1995 Equity Investment, the 1995
Equity Investors purchased outstanding shares of Holdings capital stock
from a stockholder of Holdings for a purchase price of $57.8 million.
- The exchange by Food 4 Less of (a) $170.3 million aggregate principal
amount of the 10.45% Senior Notes due 2000 of Food 4 Less (the "1992
Senior Notes") for $170.3 million aggregate principal amount of the 1995
Senior Notes plus $5.00 in cash per $1,000 principal amount exchanged and
(b) $140.2 million aggregate principal amount of the 13.75% Senior
Subordinated Notes due 2001 of Food 4 Less (the "1991 Senior Subordinated
Notes") for $140.2 million aggregate principal amount of the 13.75%
Senior Subordinated Notes due 2005 of the Company (the "1995 13.75%
Senior Subordinated Notes") plus $20.00 in cash per $1,000 principal
amount exchanged, together with the solicitation of consents from the
holders of the 1992 Senior Notes and 1991 Senior Subordinated Notes to
certain amendments to the indentures governing such notes.
- The offers by Food 4 Less to (i) exchange up to $450 million aggregate
principal amount of the Old RGC Notes (as defined herein) for up to $450
million aggregate principal amount of the 1995 11% Senior Subordinated
Notes plus $20.00 in cash per $1,000 principal amount of Old RGC Notes
exchanged and (ii) purchase Old RGC Notes for $1,010.00 in cash per
$1,000 principal amount of Old RGC Notes accepted for purchase, together
with the solicitation of consents from holders of Old RGC Notes to
certain amendments to the indenture governing the Old RGC Notes.
- The placement by Holdings pursuant to the New Discount Debenture
Placement of $100 million initial accreted value of New Discount
Debentures to a partnership including Yucaipa, the selling stockholders
of Ralphs, an affiliate of George Soros, Apollo, and an affiliate of each
of BT Securities, CS First Boston and DLJ. The $100 million initial
accreted value of New Discount Debentures included (a) $18.5 million that
was issued to the RSI stockholders, (b) $17.5 million, $2.5 million and
$2.5 million that was issued to Yucaipa, BT Securities and Apollo,
respectively, in satisfaction of fees otherwise payable by the Company
and Holdings in connection with the Merger and the related financing and
(c) $59 million that was issued for cash to the partnership described
above. The $41 million initial accreted value of New Discount Debentures
issued to the RSI stockholders, Apollo, BT Securities and Yucaipa were
contributed to such partnership by the recipients thereof.
- The assumption by the Company, pursuant to the Merger, of approximately
$162.9 million of other indebtedness of RGC and Food 4 Less.
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<PAGE> 40
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors in each of its operating divisions
include national and regional supermarket chains, independent and specialty
grocers, drug and convenience stores, and the newer "alternative format" food
stores, including warehouse club stores, deep discount drug stores and "super
centers." Supermarket chains generally compete on the basis of location, quality
of products, service, price, product variety and store condition. The Company
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate.
The Southern California Division competes with several large national and
regional chains, principally Albertsons, Hughes, Lucky, Stater Bros., and Vons,
and with smaller independent supermarkets and grocery stores as well as
warehouse clubs and other "alternative format" food stores. The Company's
primary competitor in Southern California is expected to be acquired by a major
multi-regional supermarket chain in the near future 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.
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>
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>
DATE(S) OF
UNION NUMBER OF EMPLOYEES COVERED EXPIRATION
<S> <C> <C>
UFCW 14,214 Southern California October 3, 1999
Division clerks and meatcutters
Hospital and Service Employees 549 Southern California January 19, 1997(a)
Division store porters
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
UFCW 3,690 Southern California February 26, 2000
Division clerks and meatcutters
Bakery and Confectionery Workers 206 Southern California July 7, 2000
Division bakers
Hotel Employees and Restaurant Workers 839 Southern California Division September 11, 2000
Culinary Workers
</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.
37
<PAGE> 41
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 in all areas of the United States
except Arkansas, Iowa, Illinois, Minnesota, Nebraska, North Dakota, South
Dakota, Wisconsin, the upper peninsula of Michigan, certain portions of Kansas,
Missouri, and Tennessee has been granted to Fleming Companies, Inc. ("Fleming"),
a major food wholesaler and retailer. In August of 1993, the Company amended its
licensing agreement with Fleming to give Fleming exclusive use of the Food 4
Less name in Northern California and the Company exclusive use in Southern
California (the "Amendment"). With the exception of Northern California, and
subject to the Amendment and certain proximity restrictions, the Company retains
the right to open and operate its own "Food 4 Less" warehouse supermarkets
throughout the United States. As of 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, Fleming operates 7
under license, 10 are operated under sublicenses from Fleming and 52 are
operated by other licensees.
PROPERTIES
At February 2, 1997 the Company operated 405 supermarkets, as set forth in
the table below:
<TABLE>
<CAPTION>
NUMBER OF
SUPERMARKETS AVERAGE
---------------- TOTAL SQUARE FEET/
DIVISION OWNED LEASED SQUARE FEET FACILITY
------------------------------------------ ----- ------ ----------- ------------
<S> <C> <C> <C> <C>
Southern California....................... 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 is a
170,000 square foot high-rise automated storage and retrieval system warehouse.
It opened in 1987, handles non-perishable items and has a capacity of
approximately 50,000 pallets. The Compton Facility, which opened in 1992, is a
5.4 million cubic foot facility designed to process and store all perishable
products.
The Company also has manufacturing operations located in Compton that
produce a variety of dairy and other products, including fluid milk, ice cream,
yogurt and bottled waters and juices, as well as packaged ice, cheese and
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 complex in
La Habra, California had been leased from American Food & Drug Company ("AFD"),
an affiliate of American Stores, for a term ending in 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 with AFD which resulted in the termination of the Company's leases
of the La Habra facility and its leases of two stores which had also been leased
from AFD. In addition, in order to complete the Company's settlement agreement
with the State of California
38
<PAGE> 42
entered into at the date of the Merger, the Company concurrently sold a store to
AFD. In addition, the Company entered into a new lease for the bakery facility
at the La Habra facility, 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."
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 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 $15,000,000, special and punitive damages. Management of
the Company believes that the plaintiffs' 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.
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.
ENVIRONMENTAL MATTERS
In January 1991, the California Regional Water Quality Control Board for
the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a
subsurface characterization of the Glendale Facility property located near
Glendale. This request was part of an ongoing effort by the Regional Board, in
connection with the U.S. Environmental Protection Agency (the "EPA"), to
identify contributors to groundwater contamination in the San Fernando Valley.
Significant parts of the San Fernando Valley, including the area where the
Glendale Facility is located, have been designated federal Superfund sites
39
<PAGE> 43
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 Glendale Facility. Since that time, the Regional
Board has requested further investigation by Ralphs. Ralphs conducted the
requested investigations and reported the results to the Regional Board.
Approximately 25 companies have entered into a Consent Order (EPA Docket No.
94-11) with the EPA to investigate and design a remediation system for
contaminated groundwater beneath an area which includes the 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 PRPs 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 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.
40
<PAGE> 44
MANAGEMENT
The following table sets forth certain information regarding the executive
officers and directors of Holdings as of January 8, 1998. Directors serve until
the election and qualification of their successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- ------------------------------------------------
<S> <C> <C>
Ronald W. Burkle 45 Chairman of the Board and Director
George G. Golleher 49 Chief Executive Officer and Director
Joe S. Burkle 74 Executive Vice President and Director
Greg Mays 51 Executive Vice President -- Finance and
Administration
Harold McIntire 52 President -- Food 4 Less Warehouse Stores
John T. Standley 34 Senior Vice President and Chief Financial
Officer
Terrence J. Wallock 53 Senior Vice President, General Counsel and
Secretary
Patrick Barber 46 Group Vice President -- Real Estate
Christopher S. Hall 33 Group Vice President -- Finance, Controller and
Chief Accounting Officer
Wayne S. Bell 43 Assistant Secretary
Robert I. Bernstein 35 Director
Robert Beyer 37 Director
Peter Copses 39 Director
Patrick L. Graham 48 Director
Lawrence K. Kalantari 38 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 was Chairman of the Board from June 1995 to
January 1996. Mr. Burkle was a Director, Chairman of the Board and Chief
Executive Officer of Food 4 Less from its inception in 1989 until the Merger.
Mr. Burkle co-founded The Yucaipa Companies, Inc. in 1986 and served as
Director, Chairman of the Board, President and Chief Executive Officer of FFL
from 1987 and of Holdings from 1992 until the Merger, respectively. Mr. Burkle
has been Chairman of the Board of Dominick's Finer Foods, Inc. since March 1995
and served as Chief Executive Officer from March 1995 until January 1996. Mr.
Burkle also served as Chairman of the Board of Smitty's Supermarkets, Inc.
("Smitty's") from June 1994 until its merger in May 1996 with Smith's Food &
Drug Centers, Inc. ("Smith's"). He served as Chief Executive Officer of Smith's
from May 1996 until its merger with Fred Meyer, Inc. in September 1997. Mr.
Burkle has served as the Chairman of the Board of Fred Meyer, Inc. since
September 1997. He has also served as a Director of Kaufman & Broad Home
Corporation, Inc. since March 1995. Mr. Burkle is the son of Joe S. Burkle.
George G. Golleher has been Chief Executive Officer since January 1996 and
a Director since June 1995. He was Vice Chairman from June 1995 to January 1996.
He was a Director of Food 4 Less from its inception in 1989 and was the
President and Chief Operating Officer of Food 4 Less from January 1990 until the
Merger. From 1986 through 1989, Mr. Golleher served as Senior Vice
President -- Finance and Administration of The Boys Markets, Inc. Mr. Golleher
has served as a Director of Dominick's Finer Foods, Inc., an affiliate of The
Yucaipa Companies, from March 1995 until October 1996.
Joe S. Burkle has been a Director since June 1995 and Chief Executive
Officer of Falley's, Inc. since 1987. He was a Director and Executive Vice
President of Food 4 Less from its inception in 1989 until the Merger. Mr. Burkle
began his career in the supermarket industry in 1946, and served as President
and Chief Executive Officer of Stater Bros. Markets, a Southern California
supermarket chain. Prior to 1987, Mr. Burkle was a private investor in Southern
California. Mr. Burkle is the father of Ronald W. Burkle.
41
<PAGE> 45
Greg Mays has been Executive Vice President -- Finance & Administration
since February 1997. Mr. Mays was Executive Vice President -- Finance and
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 Food 4 Less and of Holdings from December 1992 until
the Merger. From 1989 to 1991, Mr. Mays was Chief Financial Officer of Almac's,
Inc. and, from 1991 to December 1992, he was President and Chief Financial
Officer of Almac's. From April 1988 to June 1989, Mr. Mays was Chief Financial
Officer of Food 4 Less of Modesto, Inc. and Cala Foods, Inc.
Harold McIntire has been President, Food 4 Less Warehouse Stores since July
1996. Prior to that, he was General Manager from 1991 to July 1996, and Senior
Vice President of Operations from 1988, when Food 4 Less first made its entry
into the Southern California market. Prior to that, he spent two years with
Jurgensens Markets, a Yucaipa-owned company, as Vice President of Operations.
Prior to that, Mr. McIntire spent 25 years with Stater Bros. Markets, a Southern
California supermarket chain, where he last held the position of Senior Vice
President of Operations.
John T. Standley has been Chief Financial Officer since February 1997. He
was Senior Vice President -- Administration at 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 for Food 4 Less Supermarkets, Inc. Prior to 1991, he
was a manager at Arthur Andersen LLP.
Terrence J. Wallock has been Senior Vice President, General Counsel and
Secretary since June 1997. Prior to joining the Company, Mr. Wallock was
Executive Vice President and General Counsel of The Vons Companies, Inc. from
September 1993 to April 1997, and was Senior Vice President and General Counsel
from March 1991 to September 1993.
Patrick Barber has been Group Vice President, Real Estate since June 1995.
He was Vice President, Real Estate at Food 4 Less Supermarkets from June 1991 to
June 1995. Prior to that he was Vice President and Secretary at The Boys
Markets, Inc. from 1984 to June 1991.
Christopher S. 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 Food 4
Less Supermarkets in 1992 as Director -- Finance. Prior to 1992, he was a member
of the audit practice at Arthur Andersen LLP.
Wayne S. Bell has been Senior Counsel and Assistant Secretary since July
1997. Mr. Bell was Senior Counsel from July 1995 to July 1997, and he was
Associate Counsel from August 1989 until July 1995. He serves as a Trustee of
the Ralphs/Food 4 Less Foundation, and has served as a Director of Programs for
the Developmentally Handicapped, Inc. and The Foodbank of Southern California.
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
42
<PAGE> 46
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.
and Zale Corporation.
Patrick L. Graham has been a Director since June 1995. He joined The
Yucaipa Companies as a general partner in January 1993. Prior to that time, he
was a Managing Director in the Corporate Finance Department of Libra
Investments, Inc. from 1992 to 1993 and Paine Webber, Inc. from 1990 to 1992.
From 1982 to 1990, he was a Managing Director of the Corporate Finance
Department of Drexel Burnham Lambert, Inc. and an Associate Director of the
Corporate Finance Department of Bear Stearns & Co., Inc. Mr. Graham served as a
Director of Smitty's Supermarkets, Inc. from June 1994 until May 1996 and of
Dominick's Finer Foods, Inc. since March 1995.
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 PaineWebber, 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 a Director of Continental Graphics
Holdings, Inc., Converse, Inc. and Florsheim Group, 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.
43
<PAGE> 47
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
Holdings (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 Holdings and its subsidiaries for the same time period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------------------------------
TRANSITION NO. OF SHARES
PERIOD/FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ENDED SALARY(7) BONUS(7) OPTIONS COMPENSATION(10)
- ------------------------------ ---------------- ---------- ---------- ------------- ---------------
<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(9) $ 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 $ -- -- $ 1,500
Executive Vice President -- January 28, 1996 $ 286,378 $ 355,000(8) 60,000 $ 1,783
Finance/Administration and 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 $ -- -- $ 1,500
Group Senior Vice January 28, 1996 $ 206,282 $ 201,000 35,000 $ 1,783
President-Support January 29, 1995 $ 210,385 $ 100,000 -- $ 2,247
Operating 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) Food 4 Less 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 Merger, for George Golleher and Greg Mays in the amount of
$1,750,000 and $150,000, respectively.
(9) All options shown were granted in connection with the Merger. Of such
options, 220,227 and 100,000 were granted to Messrs. Allumbaugh and
Marasca, respectively, in exchange for the cancellation of certain payments
to such individuals under RGC equity appreciation rights.
(10) The amounts shown in this column represent annual payments by the Company
to the Employee Profit Sharing and Retirement Program of the Company.
44
<PAGE> 48
The following table sets forth information concerning options granted in
fiscal 1996 to each of the Named Executive Officers pursuant to Holdings' 1995
Stock Option Plan. All options are exercisable for shares of Holdings' Common
Stock.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES
INDIVIDUAL GRANTS OF STOCK PRICE
------------------------------------------------------------ APPRECIATION
NO. OF % OF TOTAL OPTIONS EXERCISE OR FOR OPTION TERM
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION -------------------
GRANTED(1) IN FISCAL YEAR ($/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.
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
NAME EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/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>
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 Holdings stock upon his death,
disability or termination without cause.
45
<PAGE> 49
The employment agreement between the Company and Alfred Marasca provides
for a salary currently equal to $600,000 per annum and an annual bonus equal to
his salary if the Earnings Targets for the year are reached.
The employment agreement between the Company and Greg Mays provides for a
salary currently equal to $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.
The Company's consulting agreement with Mr. Joe Burkle provides for
compensation of $3,000 per week. Mr. Burkle provides the management and
consulting services of an executive vice president under the consulting
agreement. The agreement has a five-year term, which is automatically renewed on
January 1 of each year for a five-year term unless sixty days' notice is given
by either party; provided that if the Company terminates for reasons other than
for good cause, the payments due under the agreement continue for the balance of
the term.
In connection with the Fred Meyer Merger, it is anticipated that Holdings
will enter into employment agreements with certain executive officers (including
the Named Executive Officers employed by the Company at the time of the Fred
Meyer Merger), senior managers and other management employees.
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 credited 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").
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.
46
<PAGE> 50
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 YEARS OF CREDITED SERVICE
AVERAGE ------------------------------------------------------------
SALARY 15 20 25 30 35
- --------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 19,348 $ 25,798 $ 32,347 $ 38,697 $ 45,146
200,000 41,848 55,798 69,747 83,697 97,646
300,000 90,000 120,000 150,000 180,000 180,000
400,000 120,000 160,000 200,000 240,000 240,000
600,000 180,000 240,000 300,000 360,000 360,000
800,000 240,000 320,000 400,000 480,000 480,000
1,000,000 300,000 400,000 500,000 600,000 600,000
1,040,000 and above 312,000 416,000 520,000 624,000 624,000
</TABLE>
Messrs. Allumbaugh, Golleher, Marasca, Mays, 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 three years of the ten years
preceding retirement. The benefits earned by a participant under the SERP and
Supplement Plan are reduced by any benefits which the participant has earned
under the Retirement Plan and may be offset under certain circumstances by the
cash surrender value of life insurance policies maintained by 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.
47
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership as of April 18, 1997 of Common
Stock and Series A Preferred Stock and Series B Preferred Stock of Holdings by
each person who, to the knowledge of Holdings, owns 5 percent or more of
Holdings' outstanding voting stock, by each person who is a director or Named
Executive Officer of the Company, and by all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B
STOCK(1) 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)(10)(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 five-year warrant to purchase
8,000,000 shares of Holdings Common Stock held by Yucaipa. Such warrant
will become exercisable only upon the occurrence of an initial public
offering or certain sale transactions involving Holdings. The exercise
price of the warrant is such that the warrant has no value unless and until
the value of the Company's equity securities is greater than $1.220
billion. See "Description of Capital Stock -- Yucaipa Warrant."
(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.
(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.
48
<PAGE> 52
(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.
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,
plus reimbursement of out-of-pocket expenses. 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 (and a
predecessor agreement with Food 4 Less), Yucaipa earned a total of $3.6 million
in management fees for fiscal 1995 and $4.0 million for fiscal 1996. Pursuant to
the terms of the Fred Meyer Merger Agreement, upon consummation of the Fred
Meyer Merger, it is anicipated that the consulting agreement will be terminated
and Holdings or Fred Meyer will make a termination payment to Yucaipa or its
assignee in the amount of $20 million in lieu of all payments required
thereunder, and as consideration for advisory services rendered by Yucaipa in
connection with the Fred Meyer Merger.
Pursuant to the Yucaipa consulting agreement, upon closing of the RSI
Merger, Yucaipa received an advisory fee from Ralphs in the amount of $21.5
million, which was paid in cash and New Discount Debentures, plus reimbursement
of expenses in connection with the RSI Merger and the related transactions. Upon
closing of the RSI Merger, Yucaipa paid a cash fee of approximately $3.5 million
to Soros Fund Management in consideration for advisory services which Soros Fund
Management has rendered since 1991. Additionally, upon closing of the RSI
Merger, Yucaipa received a warrant to purchase 8,000,000 shares of Holdings
common stock exercisable under certain conditions. Pursuant to the terms of the
Fred Meyer Merger Agreement, at the effective time of the Fred Meyer Merger, the
warrant will be terminated in consideration for Fred Meyer's delivery to Yucaipa
or its assignee of shares of Fred Meyer common stock equal to the number of
shares of Fred Meyer common stock which the holder of two percent of the capital
stock of Holdings, measured on a fully diluted basis (after giving effect to
such two percent of capital stock of Holdings as though it were outstanding),
would have received in the Fred Meyer Merger. In consideration for its
commitment to purchase preferred stock as part of the 1995 Equity Investment,
Apollo received a fee of $5 million from Holdings upon closing of the RSI
Merger, which fee was paid in cash and notes.
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In connection with the execution of the definitive Agreement and Plan of
Merger ("the Merger Agreement") between Food 4 Less, Holdings, FFL and RSI,
Yucaipa entered into the Put Agreement with the majority stockholder of RSI,
pursuant to which such RSI stockholder was entitled to put up to $10 million
aggregate principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures
due 2007 (the "Seller Debentures"), issued as part of the consideration for the
RSI Merger, to Yucaipa on the closing date of the Merger. The Yucaipa consulting
agreement provided that the Company reimburse Yucaipa for any loss and expenses
incurred by Yucaipa upon the resale of such Seller Debentures to any
unaffiliated third party. Pursuant to such agreement, the Company reimbursed an
affiliate of Yucaipa, CLH Supermarkets Corp., the amount of $3.5 million upon
the closing of the Merger.
Holdings files a consolidated federal income tax return, under which the
federal income tax liability of Holdings and its subsidiaries is determined on a
consolidated basis. Holdings is a party to a federal income tax sharing
agreement with the Company and certain of its subsidiaries (the "Tax Sharing
Agreement"). The Tax Sharing Agreement provides that in any year in which the
Company is included in any consolidated tax liability of Holdings and has
taxable income, the Company will pay to Holdings the amount of the tax liability
that the Company would have had on such due date if it had been filing a
separate return. Conversely, if the Company generates losses or credits which
actually reduce the consolidated tax liability of Holdings and its other
subsidiaries, Holdings will credit to the Company the amount of such reduction
in the consolidated tax liability. These credits are passed between Holdings and
the Company in the form of cash payments. In the event any state and local
income taxes are determinable on a combined or consolidated basis, the Tax
Sharing Agreement provides for a similar allocation between Holdings and the
Company of such state and local taxes.
As part of the financing for the RSI Merger, Holdings issued $100 million
initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New
Discount Debentures"), which was acquired by a partnership, RGC Partners, L.P.,
a Delaware limited partnership ("RGC Partners") comprised of an affiliate of
Yucaipa (Yucaipa RGC, L.L.C.) and certain other investors. The $17.5 million
initial accreted value of New Discount Debentures contributed to RGC Partners by
Yucaipa RGC, L.L.C. consists of New Discount Debentures issued in partial
payment of the Yucaipa consulting fee due upon closing of the RSI Merger, as
described above. Holdings granted to RGC Partners certain registration rights
with respect to the New Discount Debentures, and paid substantially all expenses
of RGC Partners in connection with the resale of the New Discount Debentures,
including underwriting discounts and brokers' commissions (subject to certain
limitations).
On October 20, 1995, the holder of the New Discount Debentures sold all of
such New Discount Debentures at a price equal to 77 percent of the accreted
value thereof. The sale of the New Discount Debentures was effected by BT
Securities Corporation ("BT Securities" an affiliate of BT Investment Partners,
Inc. ("BTIP")). BT Securities received a fee in the amount of 2 percent ($2.1
million) of the aggregate accreted value of the New Discount Debentures.
Holdings reimbursed the selling holder for such fee and other expenses of the
sale as contemplated by a registration rights agreement executed concurrently
with the consummation of the Merger. BT Securities and its affiliates have
provided investment banking and other financing services to the Company from
time to time and have received customary fees in connection therewith. On June
6, 1996, the Company issued the 1996 10.45% Senior Notes to BT Securities, 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 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.
A contribution of $5 million was made to RGC Partners (the partnership that
purchased and subsequently sold the New Discount Debentures), by an affiliate of
the Company. This affiliate borrowed the $5 million from the Company to fund its
contribution to the partnership. Holders of RGC equity appreciation rights
("EARs"), including Messrs. Allumbaugh, Marasca and Gray, agreed to defer the
receipt of $5 million cash otherwise payable by RGC upon settlement of the EARs
at the time of the Merger, pending repayment of the $5 million loan made by the
Company as described above. When the New Discount Debentures were
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<PAGE> 54
resold by RGC Partners, and the proceeds from such resale distributed to the
partners, all of the approximately $2.1 million in total proceeds received by
the affiliate were applied to repayment of the loan, and the portion of the loan
not repaid was forgiven by the Company and the EAR holders.
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 for the amount advanced. At February 2,
1997 the outstanding receivable from FFL Partners was approximately $271,000.
Management believes that the terms of the transactions described above are
or were fair to the Company and are or were on terms at least as favorable to
the Company as those which could be obtained from unaffiliated parties (assuming
that such transactions could be effected with such parties).
DESCRIPTION OF CAPITAL STOCK
Following is a description of the authorized and outstanding capital stock
of the Company and Holdings, including the terms of the 1995 Equity Investment
to which was made in Holdings in connection with the Merger.
THE COMPANY
The authorized capital stock of the Company consists of 1,600,000 shares of
Common Stock, $.01 par value per share, of which 1,513,938 shares are
outstanding. All of such outstanding shares are owned by Holdings. There is no
public trading market for the Common Stock of the Company. The indentures that
govern outstanding debt securities of the Company contain certain restrictions
on the payment of cash dividends with respect to the Company's Common Stock. In
addition, the Credit Facility also restricts such payments. Subject to the
limitations contained in the Credit Facility and such indentures, holders of
Common Stock of the Company are entitled to dividends when and as declared by
the Board of Directors from funds legally available therefor, and upon
liquidation, are entitled to share ratably in any distribution to holders of
Common Stock. All holders of Common Stock are entitled to one vote per share on
any matter coming before the stockholders for a vote.
HOLDINGS
The authorized capital stock of Holdings consists of 60,000,000 shares of
Common Stock, $.01 par value, 25,000,000 shares of Non-Voting Common Stock, $.01
par value, 25,000,000 shares of Series A Preferred Stock, $.01 par value, and
25,000,000 shares of Series B Preferred Stock, $.01 par value. Of such
authorized shares, (i) 16,976,585 shares of Common Stock, 16,683,244 shares of
Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock are
outstanding and held by approximately 100 holders of record, (ii) 2,008,874
shares of Common Stock are reserved for issuance upon the exercise of
outstanding warrants held by institutional investors, (iii) 3,000,000 shares of
Common Stock are reserved for issuance upon the exercise of employee stock
options and (iv) 421,236 shares of Common Stock are held in treasury. An
additional 8,000,000 shares of Common Stock are reserved for issuance upon the
exercise of a warrant issued to Yucaipa upon closing of the Merger. See
"-- Yucaipa Warrant" below.
There is no public trading market for the capital stock of Holdings.
Holdings does not expect in the foreseeable future to pay any dividends on its
capital stock. Holders of Common Stock of Holdings are entitled to dividends
when and as declared by the Board of Directors of Holdings from funds legally
available therefor, and upon liquidation, are entitled to share ratably in any
distribution to holders of Common Stock. All holders of Holdings Common Stock
are entitled to one vote per share on any matter coming before the stockholders
for a vote.
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Upon issuance, the Series A Preferred Stock initially had an aggregate
liquidation preference of $166,832,440, or $10 per share, which accretes as
described below. The holders of the Series A Preferred Stock vote (on an
as-converted basis) together with the Common Stock as a single class on all
matters submitted for stockholder vote. Each share of Series A Preferred Stock
initially is convertible at the option of the holder thereof into a number of
shares of Holdings Common Stock equal to the liquidation preference of such
share of Series A Preferred Stock divided by $10. Upon consummation of an
initial public offering of Holdings equity securities which meets certain
criteria, the shares of Series A Preferred Stock will automatically convert into
shares of Common Stock of Holdings at the same rate as applicable to an optional
conversion.
Upon issuance, the Series B Preferred Stock initially had an aggregate
liquidation preference of $31,000,000, or $10 per share, which accretes as
described below. The holders of Series B Preferred Stock generally are not
entitled to vote on any matters, except as required by the Delaware General
Corporation Law. Upon the occurrence of a change of control, each share of
Series B Preferred Stock initially will be convertible at the option of the
holder thereof into a number of shares of Holdings Common Stock or Non-Voting
Common Stock equal to the liquidation preference of such share of Series B
Preferred Stock divided by $10. Upon consummation of an initial public offering
of Holdings equity securities which meets certain criteria, shares of Series B
Preferred Stock will automatically convert into shares of Non-Voting Common
Stock of Holdings at the same rate as applicable to an optional conversion.
The liquidation preference of the Series A Preferred Stock and the Series B
Preferred Stock initially accretes daily at the rate of 7% per annum, compounded
quarterly, until the later of the fifth anniversary of the date of issuance or
the date the Company first reports EBITDA (as defined) of at least $500 million
for any twelve-month period. Thereafter, the liquidation preference will remain
constant. The accretion rate of the liquidation preference will increase (a) by
2% per annum if the Company fails to report EBITDA of at least $400 million for
the four fiscal quarters ending closest to the third anniversary of the date of
issuance (or for the rolling four-quarter period ending on any of the three
subsequent quarter-ends), (b) by 2% per annum if the Company fails to report
EBITDA of at least $425 million for the four fiscal quarters ending closest to
the fourth anniversary of the date of issuance (or for the rolling four-quarter
period ending on any of the three subsequent quarter-ends) or (c) by 2% per
annum if the Company fails to report EBITDA of at least $450 million for the
four fiscal quarters ending closest to the fifth anniversary of the date of
issuance, in each case, such increase to take effect on the first day after the
last day of the fiscal quarter with respect to which such failure occurred;
provided that the accretion rate of the liquidation preference will not at any
time exceed 13% per annum. The accretion of the liquidation preference will
result in a proportional increase in the number of shares of common stock
issuable upon conversion of the Series A Preferred Stock and the Series B
Preferred Stock.
Shares of Series A Preferred Stock or Series B Preferred Stock may be
converted (subject to certain conditions) at the option of the holder into
shares of the other series. The holders of Series A Preferred Stock and Series B
Preferred Stock have no rights to any fixed dividends in respect thereof.
Subject to certain exceptions, Holdings is prohibited from declaring dividends
with respect to, or redeem, purchase or otherwise acquire, shares of its capital
stock without the consent of holders of a majority of the Series A Preferred
Stock. If dividends are declared on the Series A Preferred Stock or the Series B
Preferred Stock which are payable in voting securities of Holdings, Holdings
will make available to each holder of Series A Preferred Stock and Series B
Preferred Stock, at such holder's request, dividends consisting of non-voting
securities of Holdings which are otherwise identical to the voting securities
and which are convertible into or exchangeable for such voting securities upon a
change of control.
1995 STOCKHOLDERS AGREEMENT
Under the terms of the 1995 Stockholders Agreement (which was entered into
by Holdings, Yucaipa and its affiliates, the 1995 Equity Investors and other
stockholders), the 1995 Equity Investors holding Series A Preferred Stock are
entitled to nominate three directors to the Board of Directors of each of
Holdings and the Company (the "Series A Directors"), of which two directors are
nominees of Apollo and one director is a nominee of the other 1995 Equity
Investors holding Series A Preferred Stock. The 1995 Stockholders
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Agreement gives to Yucaipa the right to nominate six directors of Holdings and
seven directors of the Company, and the boards of Holdings and the Company
consist of a total of nine and ten directors, respectively. The numbers of
directors which may be nominated by the foregoing stockholders will be reduced
if such stockholders cease to own certain specified percentages of their initial
holdings. Unless and until Holdings has effected an initial public offering of
its equity securities meeting certain criteria, Holdings and its subsidiaries
may not take certain actions without the approval of the Series A Directors,
including but not limited to certain mergers, sale transactions, transactions
with affiliates, issuances of capital stock and payments of dividends on or
repurchases of capital stock. In addition, under the 1995 Registration Rights
Agreement the 1995 Equity Investors have certain "demand" and "piggyback"
registration rights with respect to their Series A Preferred Stock and Series B
Preferred Stock, as well as the right under the 1995 Stockholders Agreement to
participate, on a pro rata basis, in sales by Yucaipa of the Holdings stock it
holds. In certain circumstances, Yucaipa will have the right to compel the
participation of the 1995 Equity Investors and other stockholders in sales of
all the outstanding shares of Holdings stock.
YUCAIPA WARRANT
Upon closing of the Merger, Holdings issued to Yucaipa a warrant to
purchase up to 8,000,000 shares of Holdings Common Stock. The initial exercise
price of such warrant is such that the warrant has no value unless and until the
value of the shares representing Holdings' equity on the Closing Date is greater
than $1.220 billion. Such warrant will be exercisable on a cashless basis at the
election of Yucaipa in the event Holdings completes an initial public offering
of equity securities meeting certain criteria, or in connection with certain
sale transactions involving Holdings, in either case effected on or prior to the
fifth anniversary of the Merger. The expiration date of such warrant, and the
deadline for such triggering transactions, may be extended from the fifth to the
seventh anniversary of the Merger if Holdings meets certain financial
performance goals prior to such fifth anniversary. The cashless exercise
provisions of such warrant allow the holder to exercise it without the payment
of cash consideration, provided that Holdings will withhold from the shares
otherwise issuable upon such exercise a number of shares having a fair market
value as of the exercise date equal to the exercise price.
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DESCRIPTION OF THE SELLER DEBENTURES
GENERAL
The 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the
"Seller Debentures") were issued under an indenture (the "Seller Debenture
Indenture"), dated as of June 1, 1995, between Holdings and Norwest Bank
Minnesota, N.A., as trustee (the "Trustee"). The Seller Debentures were issued
to the stockholders of RSI upon the Closing Date of the Merger as part of the
consideration for the merger of Food 4 Less with and into RSI.
The following summary of certain provisions of the Seller Debentures and
the Seller Debenture Indenture does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Seller
Debentures and the Seller Debenture Indenture, including the definitions of
certain terms therein and those terms made a part of the Seller Debenture
Indenture by reference to the TIA. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions." A copy of the form of the Seller Debenture Indenture may be
obtained from Holdings.
PRINCIPAL, MATURITY AND INTEREST
The Seller Debentures initially were issued in the aggregate principal
amount of $131.5 million and will mature on June 15, 2007. The Seller Debentures
bear interest at the rate of 13 5/8% per annum and interest accrues on the
Seller Debentures beginning from the most recent date to which interest has been
paid. Interest is payable semiannually in arrears on June 15 and December 15 of
each year to the Holders of record on the immediately preceding June 1 and
December 1. The first interest payment date on the Seller Debentures was
December 15, 1995. Interest is computed on the basis of a 360-day year comprised
of twelve 30-day months and actual number of days elapsed. Holdings may, on each
interest payment date on or prior to June 15, 2000, at its option and in its
sole discretion, pay interest in additional Seller Debentures ("Secondary
Securities") in lieu of the payment in whole or in part of interest in cash on
the Seller Debentures as provided in the Seller Debenture Indenture. As of June
15, 1996, Holdings has issued an aggregate principal amount of $18.6 million of
Secondary Securities which constitute a portion of the outstanding Seller
Debentures offered hereby.
The Seller Debentures were issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof; provided,
however, that Secondary Securities issued in lieu of cash interest payments
pursuant to the Seller Debenture Indenture or Seller Debentures issued upon
registration of transfer of such Secondary Securities may be in denominations of
greater or less than $1,000. Initially, the Trustee will act as Paying Agent and
Registrar for the Seller Debentures. The Seller Debentures may be presented for
registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. Holdings may change any
Paying Agent and Registrar without notice to holders of the Seller Debentures
(the "Holders"). Holdings will pay principal, premium, if any, and interest on
the Seller Debentures at the Trustee's corporate office located in the Borough
of Manhattan, The City of New York. At Holdings' option, interest may be paid at
the Trustee's corporate trust office or by check mailed to the registered
holders of the Seller Debentures at their respective addresses set forth in the
register of Holders of Seller Debentures. Until otherwise designated by
Holdings, Holdings' office or agency in New York is the office of the Trustee
maintained for such purpose.
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OPTIONAL REDEMPTION
On or after June 15, 2000, the Seller Debentures may be redeemed, at the
option of Holdings, in whole at any time or in part from time to time, at a
redemption price equal to the applicable percentage of the principal amount
thereof set forth below, together with accrued interest to the redemption date,
if redeemed during the twelve-month period commencing on June 15 in the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
----------------------------------------------------------------- ----------
<S> <C>
2000............................................................. 106.8125%
2001............................................................. 105.1094%
2002............................................................. 103.4063%
2003............................................................. 101.7031%
2004 and thereafter.............................................. 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to June 15, 1998, Holdings may use the
net proceeds of a Public Equity Offering of Holdings or the Company to redeem up
to 35% of the Seller Debentures at a redemption price equal to 110% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption.
NOTICES AND SELECTION
In the event of a redemption of less than all of the Seller Debentures at
the option of Holdings, such Seller Debentures will be selected for redemption
by the Trustee pro rata, by lot or by any other method that the Trustee
considers fair and appropriate and in such manner as complies with applicable
legal and stock exchange requirements, if any; provided, however, that any
redemption pursuant to the provisions relating to a Public Equity Offering shall
be made on a pro rata basis unless such method is otherwise legally prohibited.
Notice of redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each Holder whose Seller Debentures are to be
redeemed at such Holder's registered address. Seller Debentures in denominations
larger than $1,000 may be redeemed in part. On and after the redemption date,
interest will cease to accrue on the Seller Debentures or portions thereof
called for redemption (unless Holdings shall default in the payment of the
redemption price or accrued interest). Seller Debentures that are redeemed by
Holdings or that are purchased by Holdings pursuant to a Net Proceeds Offer as
described under "-- Certain Covenants -- Limitation on Asset Sales" below or
pursuant to a Change of Control Offer as described under "-- Change of Control"
below or that are otherwise acquired by Holdings will be surrendered to the
Trustee for cancellation.
RANKING
The Seller Debentures are senior subordinated unsecured obligations of
Holdings and are subordinate in right of payment to all Senior Indebtedness of
Holdings including indebtedness under the New Discount Debentures. As of October
12, 1997, the aggregate outstanding amount of Senior Indebtedness of Holdings
(excluding guarantees by Holdings of certain Senior Indebtedness of the Company)
was approximately $135.7 million of accreted value of New Discount Debentures.
In addition, the Seller Debentures are effectively subordinated to all
liabilities (including trade payables) of the Company which were approximately
$3,186.3 million (excluding letters of credit) at such date.
SUBORDINATION OF THE SELLER DEBENTURES
The payment of the Obligations with respect to the Seller Debentures are
subordinated in right of payment, as set forth in the Seller Debenture
Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
incurred including, with respect to Designated Senior Indebtedness, any interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against Holdings in a bankruptcy
case under Title 11 of the United States Code.
Upon any payment of distribution of assets or securities of Holdings of any
kind or character, whether in cash, property or securities, upon any
dissolution, winding up, total or partial liquidation or reorganization of
Holdings (including, without limitation, in bankruptcy, insolvency, or
receivership proceedings or upon any
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assignment for the benefit of creditors or any other marshalling of Holdings'
assets and liabilities and whether voluntary or involuntary), the holders of
Senior Indebtedness shall first be entitled to receive payment in full in cash
or Cash Equivalents of all amounts payable under Senior Indebtedness before the
Holders of Seller Debentures will be entitled to receive any payment with
respect to the Seller Debentures (excluding Permitted Subordinated
Reorganization Securities) and until all Obligations with respect to Senior
Indebtedness are paid in full in cash or Cash Equivalents, any distribution to
which the Holders of Seller Debentures would be entitled (excluding Permitted
Subordinated Reorganization Securities) shall be made to the holders of Senior
Indebtedness.
No direct or indirect payment (other than payments previously made pursuant
to the provisions described under "-- Defeasance of Indenture" below or payments
in Secondary Securities) by or on behalf of Holdings of Obligations on the
Seller Debentures whether pursuant to the terms of the Seller Debentures or upon
acceleration or otherwise shall be made if, at the time of such payment, there
exists a default in the payment of all or any portion of principal of, premium,
if any, or interest on any Designated Senior Indebtedness or any other Senior
Indebtedness which, at the time of determination, is equal to or greater than
$50 million in aggregate principal amount ("Significant Senior Indebtedness")
(and the Trustee has received written notice thereof), and such default shall
not have been cured or waived by or on behalf of the holders of such Designated
Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or
shall have ceased to exist, until such default shall have been cured or waived
or shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been discharged
or paid in full in cash or Cash Equivalents, after which Holdings shall resume
making any and all required payments in respect of the Seller Debentures,
including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Trustee of written notice from the holders of a majority of the outstanding
principal amount of the Designated Senior Indebtedness or their representative,
or (b) if such event of default results from the acceleration of the Seller
Debentures, the date of such acceleration, no such payment (other than payments
previously made pursuant to the provisions described under "-- Defeasance of
Indenture" below or payments in Secondary Securities) may be made by Holdings
upon or in respect of the Seller Debentures for a period ("Payment Blockage
Period") commencing on the earlier of the date of receipt of such notice or the
date of such acceleration and ending 179 days thereafter (unless (x) such
Payment Blockage Period shall be terminated by written notice to the Trustee
from the holders of a majority of the outstanding principal amount of such
Designated Senior Indebtedness or their representative who delivered such notice
or (y) such default is cured or waived, or ceases to exist or such Designated
Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents),
after which Holdings shall resume making any and all required payments in
respect of the Seller Debentures, including any missed payments. Notwithstanding
anything herein to the contrary, in no event will a Payment Blockage Period
extend beyond 179 days from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be commenced with
respect to the Seller Debentures during any period of 365 consecutive days. No
event of default which existed or was continuing on the date of the commencement
of any Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be, or be made, the
basis for the commencement of a second Payment Blockage Period by the holders of
such Designated Senior Indebtedness or their representative whether or not
within a period of 365 consecutive days unless such event of default shall have
been cured or waived for a period of not less than 90 consecutive days.
If Holdings fails to make any payment on the Seller Debentures when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Seller Debenture Indenture and would enable the Holders of
Seller Debentures to accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of
Holdings, Holders of the Seller Debentures may recover less, ratably, than
holders of Senior Indebtedness.
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As of October 12, 1997, the aggregate amount of Senior Indebtedness
outstanding was approximately $135.7 million of accreted value of New Discount
Debentures that will accrete to approximately $193.4 million by June 15, 2000.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each Holder
will have the right to require the repurchase of such Holder's Seller Debentures
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest, if any, to the Change of Control Payment Date (as defined below).
Within 30 days following the date upon which the Change of Control occurred
(the "Change of Control Date"), Holdings must send, by first class mail, a
notice to each Holder, with a copy to the Trustee, which notice shall govern the
terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
40 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have a Seller
Debenture purchased pursuant to a Change of Control Offer will be required to
surrender the Seller Debenture, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Seller Debenture completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the Business Day prior to the Change of Control Payment Date.
The Seller Debenture Indenture further provides that, notwithstanding the
foregoing, prior to the mailing of the notice of a Change of Control Offer
referred to above, within 30 days following any Change of Control, Holdings will
cause the Company to either (a) repay in full and terminate all commitments
under Indebtedness under the Credit Agreement to the extent the terms thereof
require repayment upon a Change of Control (or offer to repay in full and
terminate all commitments under all such Indebtedness under the Credit Agreement
and repay the Indebtedness owed to each lender which has accepted such offer) or
(b) obtain the requisite consents under the Credit Agreement, the terms of which
require repayment upon a Change of Control, to permit the repurchase of the
Seller Debentures as provided above. Holdings shall first comply with the
covenant in the immediately preceding sentence before Holdings shall be required
to repurchase Seller Debentures pursuant to the provisions described above.
Holdings' failure to comply with the covenants described in this paragraph shall
constitute an Event of Default under the Seller Debenture Indenture.
Holdings will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other applicable provisions of the federal securities laws in
connection with a Change of Control Offer.
CERTAIN COVENANTS
The Seller Debenture Indenture contains, among other things, the following
covenants:
Limitation on Restricted Payments. The Seller Debenture Indenture provides
that Holdings shall not, and shall cause each of its Subsidiaries not to,
directly or indirectly, make any Restricted Payment if, at the time of such
proposed Restricted Payment, or after giving effect thereto, (a) a Default or an
Event of Default shall have occurred and be continuing, (b) Holdings or such
Subsidiary could not incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the covenant described under "-- Limitation
on Incurrences of Additional Indebtedness" below, or (c) the aggregate amount
expended for all Restricted Payments, including such proposed Restricted Payment
(the amount of any Restricted Payment, if other than cash, to be the fair market
value thereof at the date of payment, as determined in good faith by the Board
of Directors of Holdings, which determination shall be evidenced by a Board
Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of
the aggregate Consolidated Net Income (or if such aggregate Consolidated Net
Income is a loss, minus 100% of such loss) of Holdings earned subsequent to the
Issue Date and on or prior to the date the proposed Restricted Payment occurs
(the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by
Holdings from any person (other than a Subsidiary) from the issuance and sale
(including upon exchange or conversion for other securities of Holdings)
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any
Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from
issuances and sales financed directly or indirectly using funds borrowed from
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Holdings or any Subsidiary, until and to the extent such borrowing is repaid),
plus (iii) 100% of the aggregate net cash proceeds received by Holdings as
capital contributions to Holdings after the Issue Date, plus (iv) $25 million.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing as a consequence thereof, the provisions set forth in
the immediately preceding paragraph will not prevent (1) the payment of any
dividend within 60 days after the date of its declaration if the dividend would
have been permitted on the date of declaration, (2) the acquisition of any
shares of Capital Stock of Holdings or the repurchase, redemption, or other
repayment of any Subordinated Indebtedness in exchange for or solely out of the
proceeds of the substantially concurrent sale (other than to a Subsidiary) of
shares of Qualified Capital Stock of Holdings, (3) the repurchase, redemption or
other repayment of any Subordinated Indebtedness in exchange for or solely out
of the proceeds of the substantially concurrent sale (other than to a
Subsidiary) of Subordinated Indebtedness of Holdings with an Average Life equal
to or greater than the then remaining Average Life of the Subordinated
Indebtedness repurchased, redeemed or repaid, (4) any payments by Holdings or
any Subsidiary required to be made due to the exercise of statutory dissenters',
appraisal or similar rights by holders of common stock of FFL in connection with
the FFL Merger and (5) Permitted Payments; provided, however, that (x) the
declaration of each dividend paid in accordance with clause (1) above, each
acquisition, repurchase, redemption or other repayment made in accordance with,
or of the type set forth in, clause (2) above, and each payment described in
clause (iii) of the definition of "Permitted Payments" shall each be counted for
purposes of computing amounts expended pursuant to subclause (c) in the
immediately preceding paragraph, and (y) no amounts paid pursuant to clause (3)
or (4) above or pursuant to clause (i), (ii), (iv) or (v) of the definition of
"Permitted Payments" shall be so counted.
Limitation on Incurrences of Additional Indebtedness. The Seller Debenture
Indenture provides that Holdings shall not, and shall not permit any Subsidiary
to, directly or indirectly, incur, assume, guarantee, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
the payment of (collectively "incur") any Indebtedness other than Permitted
Indebtedness; provided, however, that if no Default with respect to payment of
principal of, or interest on, the Seller Debentures or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, (i) Holdings may incur Indebtedness if
immediately before and immediately after giving effect to the incurrence of such
Indebtedness the Operating Coverage Ratio of Holdings would be greater than 2.0
to 1.0 and (ii) the Company or any subsidiary of the Company may incur
Indebtedness if immediately before and immediately after giving effect to the
incurrence of such Indebtedness the Operating Coverage Ratio of the Company
would be greater than 2.0 to 1.0.
Limitation on Senior Subordinated Indebtedness. The Seller Debenture
Indenture provides that Holdings shall not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that by its terms is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in right of payment to the Seller Debentures.
Limitation on Liens. The Seller Debenture Indenture provides that Holdings
shall not create, incur, assume or suffer to exist any Lien of any kind securing
any Pari Passu Indebtedness, any Subordinated Indebtedness or any Affiliate
Obligation upon any property or assets of Holdings owned on the Issue Date or
acquired after the Issue Date, or any income or profits therefrom, unless the
Securities are secured equally and ratably with (or prior to in the case of
Subordinated Indebtedness) to the obligation or liability secured by such Lien,
and except for any Lien securing Acquired Indebtedness created prior to the
incurrence of such Indebtedness by Holdings; provided that any such Lien only
extends to the assets that were subject to such Lien securing such Acquired
Indebtedness prior to the related acquisition by Holdings.
Limitation on Asset Sales. The Seller Debenture Indenture provides that
neither Holdings nor any of its Subsidiaries shall consummate an Asset Sale
unless (a) Holdings or the applicable Subsidiary receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
sold; and (b) upon consummation of an Asset Sale, Holdings or the applicable
Subsidiary will, within 365 days of the receipt of the proceeds therefrom,
either: (i) apply or cause its Subsidiary to apply the Net Cash Proceeds of any
Asset Sale to (1) a Related Business Investment (2) an investment in properties
and assets that replace
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the properties and assets that are the subject of such Asset Sale, or (3) an
investment in properties and assets that will be used in the business of
Holdings and its Subsidiaries existing on the Issue Date or in a business
reasonably related thereto; (ii) in the case of a sale of a store or stores,
deem such Net Cash Proceeds to have been applied to the extent of any capital
expenditures made to acquire or construct a replacement store in the general
vicinity of the store sold within 365 days preceding the date of the Asset Sale;
(iii) apply or cause to be applied such Net Cash Proceeds to the repayment of
Senior Indebtedness or Pari Passu Indebtedness of Holdings or any Indebtedness
of any Subsidiary; (iv) use such Net Cash Proceeds to secure Letter of Credit
Obligations to the extent the related letters of credit have not been drawn upon
or returned undrawn; or (v) after such time as the accumulated Net Cash Proceeds
equals or exceeds $20 million, apply or cause to be applied such Net Cash
Proceeds to the purchase of Seller Debentures tendered to Holdings for purchase
at a price equal to 100% of the aggregate principal amount thereof, plus accrued
interest to the date of purchase pursuant to an offer to purchase made by
Holdings as set forth below (a "Net Proceeds Offer"). A Net Proceeds Offer as a
result of an Asset Sale made by Holdings or one of its Subsidiaries shall not be
required to be in excess of the Net Cash Proceeds of such Asset Sale less the
Net Cash Proceeds actually applied in accordance with clauses (b)(i), (ii),
(iii) or (iv) above; provided, however, that Holdings shall have the right to
exclude from the foregoing provisions Asset Sales subsequent to the Issue Date,
the proceeds of which are derived from the sale and substantially concurrent
lease-back of one or more supermarkets and/or related assets or equipment which
are acquired or constructed by Holdings or a Subsidiary subsequent to the date
that is six months prior to the Issue Date, provided that any such sale and
substantially concurrent lease-back occurs within 270 days following such
acquisition or the completion of such construction, as the case may be.
Each Net Proceeds Offer will be mailed to record Holders of Seller
Debentures as shown on the register of Holders not less than 325 nor more than
365 days after the relevant Asset Sale, with a copy to the Trustee, shall
specify the purchase date (which shall be no earlier than 30 days nor later than
40 days from the date such notice is mailed) and shall otherwise comply with the
procedures set forth in the Seller Debenture Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders may elect to tender the Seller Debentures in
whole or in part in integral multiples of $1,000 in exchange for cash. To the
extent Holders properly tender Seller Debentures in an amount exceeding the Net
Proceeds Offer, Seller Debentures of tendering Holders will be repurchased on a
pro rata basis (based on amounts tendered).
Holdings will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of Seller
Debentures pursuant to a Net Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Seller Debenture Indenture provides that Holdings shall not,
and shall not permit any Subsidiary to, directly or indirectly, create or suffer
to exist, or allow to become effective any consensual Payment Restriction with
respect to any of its Subsidiaries, except for (a) any such restrictions
contained in (i) the Credit Agreement as in effect on the Issue Date, as any
such Payment Restriction may apply to any present or future Subsidiary, (ii) the
New Discount Debenture Indenture, the Seller Debenture Indenture, the Holdings
Discount Note Indenture, the indentures with respect to Existing Indebtedness
and any other agreement in effect at or entered into on the Issue Date, (iii)
Indebtedness of a person existing at the time such person becomes a Subsidiary
(provided that (x) such Indebtedness is not incurred in connection with, or in
contemplation of, such person becoming a Subsidiary, (y) such restriction is not
applicable to any person, or the properties or assets of any person, other than
the person so acquired and (z) such Indebtedness is otherwise permitted to be
incurred pursuant to the provisions of the covenant described under
"-- Limitation on Incurrences of Additional Indebtedness" above), (iv) secured
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenants described under "-- Limitation on Incurrences of Additional
Indebtedness" and "-- Limitation on Liens" above that limit the right of the
debtor to dispose of the assets securing such Indebtedness; (b) customary
non-assignment provisions restricting subletting or assignment of any lease or
other agreement entered into by a Subsidiary; (c) customary net worth provisions
contained in leases and other agreements entered into by a Subsidiary in the
ordinary course of business; (d) customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary; (e) customary provisions in joint venture agreements and other
similar agreements; (f) restrictions contained in Indebtedness incurred to
refinance, refund, extend or
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renew Indebtedness referred to in clause (a) above; provided that the
restrictions contained therein are not materially more restrictive taken as a
whole than those provided for in such Indebtedness being refinanced, refunded,
extended or renewed and (g) Payment Restrictions contained in any other
Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to
the provisions of the covenant described under "-- Limitation on Incurrences of
Additional Indebtedness" above; provided that any such Payment Restrictions are
ordinary and customary with respect to the type of Indebtedness being incurred
(under the relevant circumstances) and, in any event, no more restrictive than
the most restrictive Payment Restrictions in effect on the Issue Date.
Limitation on Transactions with Affiliates. The Seller Debenture Indenture
provides that neither Holdings nor any of its Subsidiaries shall (i) sell,
lease, transfer or otherwise dispose of any of its properties or assets or issue
securities (other than equity securities which do not constitute Disqualified
Capital Stock) to, (ii) purchase any property, assets or securities (other than
equity securities which do not constitute Disqualified Capital Stock) from,
(iii) make any Investment in, or (iv) enter into or suffer to exist any contract
or agreement with or for the benefit of, an Affiliate or Significant Stockholder
(or any Affiliate of such Significant Stockholder) of Holdings or any Subsidiary
(an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted
under the following paragraph and (y) Affiliate Transactions in the ordinary
course of business that are fair to Holdings or such Subsidiary, as the case may
be, and on terms at least as favorable as might reasonably have been obtainable
at such time from an unaffiliated party; provided, that (A) with respect to
Affiliate Transactions involving aggregate payments in excess of $1 million and
less than $5 million, Holdings or such Subsidiary, as the case may be, shall
have delivered an Officers' Certificate to the Trustee certifying that such
transaction or series of transactions complies with clause (y) above (other than
the requirement set forth in such clause (y) that such Affiliate Transaction be
in the ordinary course of business), (B) with respect to Affiliate Transactions
involving aggregate payments in excess of $5 million and less than $15 million,
Holdings or such Subsidiary, as the case may be, shall have delivered an
Officers' Certificate to the Trustee certifying that such Affiliate Transaction
complies with clause (y) above (other than the requirement set forth in such
clause (y) that such Affiliate Transaction be in the ordinary course of
business) and that such Affiliate Transaction has received the approval of a
majority of the disinterested members of the Board of Directors of Holdings or
the Subsidiary, as the case may be, or, in the absence of any such approval by
the disinterested members of the Board of Directors of Holdings or the
Subsidiary, as the case may be, that an Independent Financial Advisor has
reasonably and in good faith determined that the financial terms of such
Affiliate Transaction are fair to Holdings or such Subsidiary, as the case may
be, or that the terms of such Affiliate Transaction are at least as favorable as
might reasonably have been obtained at such time from an unaffiliated party and
that such Independent Financial Advisor has provided written confirmation of
such determination to the Board of Directors and (C) with respect to Affiliate
Transactions involving aggregate payments in excess of $15 million, Holdings or
such Subsidiary, as the case may be, shall have delivered to the Trustee, a
written opinion from an Independent Financial Advisor to the effect that the
financial terms of such Affiliate Transaction are fair to Holdings or such
Subsidiary, as the case may be, or that the terms of such Affiliate Transaction
are at least as favorable as those that might reasonably have been obtained at
the time from an unaffiliated party.
The provisions of the foregoing paragraph shall not apply to (i) any
Permitted Payment, (ii) any Restricted Payment that is made in compliance with
the provisions of the covenant described under "-- Limitation on Restricted
Payments" above, (iii) reasonable and customary fees and compensation paid to,
and indemnity provided on behalf of, officers, directors, employees or
consultants of Holdings or any Subsidiary, as determined by the Board of
Directors of Holdings or any Subsidiary or the senior management thereof in good
faith, (iv) transactions exclusively between or among Holdings and any of its
wholly-owned Subsidiaries or exclusively between or among such wholly-owned
Subsidiaries, provided such transactions are not otherwise prohibited by the
Seller Debenture Indenture, (v) any agreement as in effect as of the Issue Date
or any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) so long as any such amendment is not
disadvantageous to the Holders in any material respect, (vi) the existence of,
or the performance by Holdings or any of its Subsidiaries of its obligations
under the terms of, any stockholder agreement (including any registration rights
agreement or purchase agreement related thereto) to which it is a party as of
the Issue Date and any similar agreements which it may enter into
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thereafter; provided, however, that the existence of, or the performance by
Holdings or any of its Subsidiaries of obligations under any future amendment
to, any such existing agreement or under any similar agreement entered into
after the Issue Date shall only be permitted by this clause (vi) to the extent
that the terms of any such amendment or new agreement are not otherwise
disadvantageous to the Holders of the Securities in any material respect, (vii)
transactions permitted by, and complying with, the provisions of the covenant
described under "-- Limitation on Mergers and Certain Other Transactions" below,
and (viii) transactions with suppliers or other purchases or sales of goods or
services, in each case, in the ordinary course of business (including, without
limitation, pursuant to joint venture agreements) and otherwise in compliance
with the terms of the Seller Debenture Indenture which are fair to Holdings or
any Subsidiary, in the reasonable determination of the Board of Directors or
senior management of Holdings, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party.
Limitations on Preferred Stock of Subsidiaries. The Seller Debenture
Indenture provides that Holdings shall not permit any of its Subsidiaries to
issue any Preferred Stock (other than to Holdings or a wholly-owned Subsidiary),
or permit any person (other than Holdings or a wholly-owned Subsidiary) to own
or hold an interest in any Preferred Stock of any such Subsidiary, unless such
Subsidiary would be entitled to incur Indebtedness in accordance with the
provisions described above under "-- Limitation on Incurrence of Additional
Indebtedness" in the aggregate principal amount equal to the aggregate
liquidation value of such Preferred Stock.
Limitations on Mergers and Certain Other Transactions. The Seller Debenture
Indenture provides that Holdings, in a single transaction or through a series of
related transactions, shall not (i) consolidate with or merge with or into any
other person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another person or group of affiliated persons or (ii) adopt a
Plan of Liquidation, unless, in either case, (1) either Holdings shall be the
continuing person, or the person (if other than Holdings) formed by such
consolidation or into which Holdings is merged or to which all or substantially
all of the properties and assets of Holdings as an entirety or substantially as
an entirety are transferred (or, in the case of a Plan of Liquidation, any
person to which assets are transferred) (Holdings or such other person being
hereinafter referred to as the "Surviving Person") shall be a corporation
organized and validly existing under the laws of the United States, any state
thereof or the District of Columbia, and shall expressly assume, by an indenture
supplement, all the obligations of Holdings under the Seller Debentures and the
Seller Debenture Indenture; (2) immediately after and giving effect to such
transaction and the assumption contemplated by clause (1) above and the
incurrence or anticipated incurrence of any Indebtedness to be incurred in
connection therewith, (A) the Surviving Person shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of Holdings
immediately preceding the transaction, and (B) the Surviving Person could incur
at least $1 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the provisions of the covenant described under the heading
"-- Limitation on Incurrences of Additional Indebtedness" above; and (3)
immediately before and immediately after and giving effect to such transaction
and the assumption of the obligations as set forth in clause (1) above and the
incurrence or anticipated incurrence of any Indebtedness to be incurred in
connection therewith, no Default or Event of Default shall have occurred and be
continuing.
The Seller Debenture Indenture provides that upon any consolidation or
merger or any transfer of all or substantially all of the assets of Holdings or
any adoption of a Plan of Liquidation by Holdings in accordance with the
foregoing, the surviving person formed by such consolidation or into which
Holdings is merged or to which such transfer is made (or, in the case of a Plan
of Liquidation, to which assets are transferred) shall succeed to, and be
substituted for, and may exercise every right and power of, Holdings under the
Seller Debenture Indenture with the same effect as if such surviving person had
been named as Holdings therein; provided, however, that solely for purposes of
computing amounts described in subclause (c) of the first paragraph of the
covenant described under " -- Limitation on Restricted Payments" above, any such
surviving person shall only be deemed to have succeeded to and be substituted
for Holdings with respect to periods subsequent to the effective time of such
merger, consolidation or transfer of assets. When a successor corporation
assumes all of the obligations of Holdings under the Seller Debenture Indenture
and under the Seller Debentures and agrees to be bound thereby, the predecessor
shall be released from such obligations.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more direct or indirect
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of Holdings shall be deemed to be the transfer of all
or substantially all of the properties and assets of Holdings.
EVENTS OF DEFAULT
The following events constitute "Events of Default" under the Seller
Debenture Indenture : (i) failure to make any payment of interest on the Seller
Debentures when due and the continuance of such default for a period of 30 days;
(ii) failure to pay principal of the Seller Debentures when due, whether at
maturity, upon acceleration, redemption or otherwise (including the failure to
repurchase Seller Debentures tendered pursuant to the requirements set forth in
the covenants described under the headings "-- Certain Covenants -- Change of
Control" and "-- Certain Covenants -- Limitation on Asset Sales"), whether or
not such payment shall be prohibited by the provisions set forth under the
heading "-- Subordination"; (iii) failure to comply with any other agreement or
covenant contained in, or provisions of, the Seller Debentures or the Seller
Debenture Indenture, if such failure continues unremedied for 30 days after
notice given by the Trustee or the holders of at least 25% in principal amount
of the Seller Debentures then outstanding (except in the case of a default with
respect to the covenants described under the headings "-- Certain
Covenants -- Limitation on Restricted Payments," "-- Change of Control,"
"-- Certain Covenants -- Limitation on Asset Sales" and "-- Certain
Covenants -- Limitations on Mergers and Certain Other Transactions," which shall
constitute Events of Default with notice but without passage of time); (iv) a
default under any bond, debenture, or other evidence of Indebtedness of Holdings
or of any Significant Subsidiary or under any mortgage, indenture or other
instrument under which there may be issued or by which there may be secured or
evidenced any such Indebtedness, whether such Indebtedness now exists or shall
hereafter be created, if both (A) such default either (1) results from the
failure to pay such Indebtedness at its stated final maturity or (2) relates to
an obligation (other than the obligation to pay any principal of such
Indebtedness at its stated final maturity) and results in the holder or holders
of such Indebtedness causing such Indebtedness to become due prior to its stated
final maturity and (B) the principal amount of such Indebtedness, together with
the principal amount of any other such Indebtedness in default for failure to
pay principal at stated final maturity or the maturity of which has been so
accelerated, aggregates $25 million or more at any one time outstanding; (v)
Holdings or any Significant Subsidiary (a) commences a voluntary case or
proceeding under any Bankruptcy Law with respect to itself, (b) consents to the
entry of a judgment, decree or order for relief against it in an involuntary
case or proceeding under any Bankruptcy Law, (c) consents to the appointment of
a Custodian of it or for substantially all of its property, or (d) makes a
general assignment for the benefit of its creditors; (vi) a court of competent
jurisdiction enters a judgment, decree or order for relief in respect of
Holdings or any Significant Subsidiary in an involuntary case or proceeding
under any Bankruptcy Law, which shall (a) approve as properly filed a petition
seeking reorganization, arrangement, adjustment or composition in respect of
Holdings or any Significant Subsidiary, (b) appoint a Custodian of Holdings or
any Significant Subsidiary or for all or any substantial part of their
respective properties or (c) order the winding-up or liquidation of Holdings' or
any Significant Subsidiary's affairs; and such judgment, decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; (vii) the
lenders under the Credit Agreement shall commence judicial proceedings to
foreclose upon any material portion of the assets of Holdings and its
Subsidiaries; or (viii) any final judgment or order for payment of money in
excess of $25 million shall be entered against Holdings or any Significant
Subsidiary by a court of competent jurisdiction and shall remain undischarged
for a period of 60 days after such judgment becomes final and nonappealable.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of Holdings or any
Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of
at least 25% in aggregate principal amount of the Seller Debentures then
outstanding may declare the aggregate principal amount of the Seller Debentures
outstanding due and payable by notice in writing to Holdings, the administrative
agent under the Credit Agreement and the Trustee specifying the respective Event
of Default and that it is a "notice of acceleration" (the "Acceleration
Notice"), and the same (i) shall become immediately due and payable or (ii) if
there are any amounts outstanding under the
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Credit Agreement, shall become due and payable upon the first to occur of an
acceleration under the Credit Agreement, or five business days after receipt by
Holdings and the administrative agent under the Credit Agreement of such
Acceleration Notice. If an Event of Default resulting from certain events of
bankruptcy, insolvency, receivership or reorganization shall occur with respect
to Holdings, all unpaid principal and accrued interest on the Seller Debentures
then outstanding shall ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any of the Holders of the
Seller Debentures. Subject to certain conditions, the Holders of a majority in
principal amount of the Seller Debentures then outstanding, by notice to the
Trustee, may rescind an acceleration if all existing Events of Default are
remedied. In certain cases the Holders of a majority in principal amount of
outstanding Seller Debentures may waive any past default and its consequences,
except a default in the payment of principal of or interest on any of the Seller
Debentures.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (iv) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if either (i) the
holders of the Indebtedness which is the subject of such Event of Default have
waived such failure to pay at maturity or have rescinded the acceleration in
respect of such Indebtedness within 90 days of such maturity or declaration of
acceleration, as the case may be, and no other Event of Default has occurred
during such 90-day period which has not been cured or waived, or (ii) such
Indebtedness shall have been discharged or the maturity thereof shall have been
extended such that it is not then due and payable, or the underlying default has
been cured (and any acceleration based thereon if such other Indebtedness has
been rescinded), within 90 days of such maturity or declaration of acceleration,
as the case may be.
The Seller Debenture Indenture provides that if a Default or an Event of
Default occurs and is continuing thereunder, and if it is known to the Trustee,
the Trustee shall mail to each Holder of the Seller Debentures notice of the
uncured Default or Event of Default within 90 days after such Default or Event
of Default occurs; provided, however, that, except in the case of a Default or
Event of Default in the payment of principal of, premium, if any, or interest
on, any Seller Debenture, including the failure to make payment on the Change of
Control Payment Date pursuant to a Change of Control Offer or payment when due
pursuant to a Net Proceeds Offer, the Trustee may withhold such notice if it in
good faith determines that withholding such notice is in the interest of the
Holders.
The Seller Debenture Indenture provides that no holder may pursue any
remedy thereunder unless the Trustee (i) shall have failed to act for a period
of 60 days after receiving notice of a continuing Event of Default by such
Holder and a written request to act by Holders of at least 25% in principal
amount of the Seller Debentures and (ii) has received indemnification
satisfactory to it; provided, however, that such provision does not affect the
right of any Holder to sue for enforcement of any overdue payment on the Seller
Debentures.
Under the Seller Debenture Indenture, two officers of Holdings are required
to certify to the Trustee within 120 days after the end of each fiscal year of
Holdings whether or not they know of any Default or Event of Default that
occurred during such fiscal year and, if applicable, describe such Default and
the status thereof.
DEFEASANCE OF INDENTURE
Holdings may, at its option and at any time, elect to have Holdings'
obligations discharged with respect to the outstanding Seller Debentures. Such
Legal Defeasance means that Holdings shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Seller Debentures except
for (i) the rights of Holders of outstanding Seller Debentures to receive
payments in respect of the principal of, premium, if any, and interest on such
Seller Debentures when such payments are due solely from the funds held by the
Trustee in the trust referred to below; (ii) Holdings' obligations to issue
temporary Seller Debentures, register the transfer or exchange of Seller
Debentures, replace mutilated, destroyed, lost or stolen Seller Debentures and
maintain an office or agency for payments in respect of the Seller Debentures
and money for security payments held in trust in respect of the Seller
Debentures; (iii) the rights, powers, trusts, duties and immunities of the
Trustee and Holdings' obligations in connection therewith; and (iv) the Legal
Defeasance
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provisions of the Seller Debenture Indenture. In addition, Holdings may, at its
option and at any time elect to have the obligations of Holdings released with
respect to certain covenants described above under "-- Certain Covenants"
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Seller Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Seller Debentures, (i) Holdings must have irrevocably deposited
with the Trustee, in trust, for the benefit of the Holders of the Seller
Debentures, cash in U.S. dollars, U.S. Government Obligations (as defined in the
Seller Debenture Indenture), or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding Seller Debentures to redemption or maturity provided that the
Trustee shall have been irrevocably instructed to apply such money or the
proceeds of such U.S. Government Obligations to said payments with respect to
the Seller Debentures on the Maturity Date or such redemption date, as the case
may be; (ii) in the case of Legal Defeasance, Holdings shall have delivered to
the Trustee an opinion of counsel stating that (A) Holdings has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the Issue Date, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of outstanding Seller Debentures will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, Holdings shall have delivered to the Trustee an opinion of counsel
stating that the Holders of outstanding Seller Debentures will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
clauses (v) and (vi) under the first paragraph under "-- Events of Default"
above are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the Seller
Debenture Indenture or any other material agreement or instrument to which
Holdings is a party or by which it is bound (and in that connection, the Trustee
shall have received a certificate from the Agent under the Credit Agreement to
that effect with respect to such Credit Agreement if then in effect); (vi)
Holdings shall have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) Holdings shall have
delivered to the Trustee an Officer's Certificate stating that the deposit was
not made by Holdings with the intent of preferring the Holders of the Seller
Debentures over other creditors of Holdings or with the intent of defeating,
hindering, delaying or defrauding creditors of Holdings, or others; and (viii)
Holdings shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or Covenant Defeasance, have been complied
with.
SATISFACTION AND DISCHARGE
The Seller Debenture Indenture will be discharged and will cease to be of
further effect as to all outstanding Seller Debentures when either (a) all
Seller Debentures theretofore authenticated and delivered (except lost, stolen
or destroyed Seller Debentures which have been replaced or paid and Seller
Debentures for whose payment money has theretofore been deposited in trust and
thereafter repaid to Holdings) have been delivered to the Trustee for
cancellation; or (b)(i) all Seller Debentures not theretofore delivered to the
Trustee for cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise and Holdings has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
an amount of money sufficient to pay and discharge the entire indebtedness on
the Seller Debentures not theretofore delivered to the Trustee for cancellation
for principal, premium, if any, and accrued interest to the date of maturity or
redemption; (ii) Holdings has paid all sums payable by it under the Seller
Debenture Indenture; and (iii) Holdings has delivered irrevocable instructions
to the Trustee to apply the deposited money toward the payment of the Securities
at maturity or the redemption date, as the case may
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be. In addition, Holdings must deliver an Officers' Certificate and an opinion
of counsel to the Trustee stating that all conditions precedent to satisfaction
and discharge have been complied with.
MODIFICATION OF THE SELLER DEBENTURE INDENTURE
The Seller Debenture Indenture and the Seller Debentures may be amended or
supplemented (and compliance with any provision thereof may be waived) by
Holdings, the Trustee and the Holders of at least fifty-four percent (54%) in
aggregate principal amount of the Seller Debentures then outstanding (or at
least a majority in aggregate principal amount of the outstanding Seller
Debentures in the event that The Edward J. DeBartolo Corporation, an Ohio
corporation, shall cease to beneficially own at least a majority in aggregate
principal amount of the outstanding Seller Debentures), except that (A) without
the consent of each Holder of Seller Debentures affected, no such amendment,
supplement or waiver may (1) change the principal amount of Seller Debentures
whose Holders must consent to an amendment, supplement or waiver of any
provision of the Seller Debenture Indenture or the Seller Debentures; (2) reduce
the rate or extend the time for payment of interest on any Seller Debenture; (3)
reduce the principal amount of any Seller Debenture; (4) change the Maturity
Date of any Seller Debenture, or alter the redemption provisions in a manner
adverse to any Holder; (5) make any changes in the provisions concerning waivers
of Defaults or Events of Default by Holders or the rights of Holders to recover
the principal of, interest on, or redemption payment with respect to, any Seller
Debenture, or (6) make the principal of, or the interest on, any Seller
Debenture payable with anything or in any manner other than as provided for in
the Seller Debenture Indenture and the Seller Debentures as in effect on the
date of the Seller Debenture Indenture.
Without the consent of the Holders of at least 75% in aggregate principal
amount of the Seller Debentures then outstanding, no such amendment, supplement
or waiver may change the Change of Control Payment Date or the purchase price in
connection with any repurchase of the Seller Debentures pursuant to the
requirements set forth in the covenant described under the heading "-- Change of
Control" in a manner adverse to any Holder or waive a Default or Event of
Default resulting from a failure to comply with the requirements set forth in
the covenant described under the heading "-- Change of Control".
Without the consent of the Holders of at least 66 2/3% in aggregate
principal amount of the Seller Debentures then outstanding, no change may be
made to the subordination provisions of the Seller Debenture Indenture that
adversely affects the rights of any Holder under such subordination provisions.
No amendment, supplement or waiver may make any change that adversely
affects the rights under the subordination provisions of the Seller Debenture
Indenture of any holders of Senior Indebtedness unless the holders of such
Senior Indebtedness consent to the change.
In addition, Holdings and the Trustee may amend the Seller Debenture
Indenture and the Seller Debentures (a) to cure any ambiguity, defect or
inconsistency therein; provided, that such amendment or supplement does not
adversely affect the rights of any Holder or (b) to make any other change that
does not adversely affect the rights of any Holder in any material respect.
THE TRUSTEE
The Holders of a majority in principal amount of the outstanding Seller
Debentures may remove the Trustee and appoint a successor trustee with Holdings'
consent, by so notifying the Trustee to be so removed and Holdings. In addition,
the Holders of a majority in principal amount of the outstanding Seller
Debentures have the right, subject to certain limitations, to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee.
The Seller Debenture Indenture provides that, in case a Default or an Event
of Default has occurred and is continuing, the Trustee thereunder shall exercise
such of the rights and powers vested in it by the Seller Debenture Indenture,
and use the same degree of care and skill in the exercise thereof, as a prudent
person would exercise or use under the circumstances in the conduct of his own
affairs. Subject to the latter provision, the Trustee is under no obligation to
exercise any of its rights or powers under the Seller Debenture Indenture
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at the request, order or direction of any of the Holders, unless they shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred thereby. If Holdings fails to pay
such amounts of principal of, or interest on, the Seller Debentures as shall
have become due and payable upon demand as specified in the Seller Debenture
Indenture, the Trustee thereunder, at the request of the Holders of a majority
in aggregate principal amount of the Seller Debentures at the time outstanding,
and upon being offered such reasonable indemnity as it may be required against
the costs, expenses and liabilities incurred by it, except as a result of its
negligence or bad faith, shall institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and collect in the
manner provided by law the monies adjudged or decreed to be payable.
The Seller Debenture Indenture contains limitations on the rights of the
Trustee, should it become a creditor of Holdings, to obtain payment of claims in
certain cases or to be realized on certain property received by it in respect of
any such claims, securities or otherwise. The Trustee is permitted to engage in
other transactions; however, if the Trustee acquires any "conflicting interest,"
it must eliminate such conflict or resign.
The Trustee is also the trustee for the 10.45% Senior Notes due 2004 (the
"1995 Senior Notes") of the Company and the 10.45% Senior Notes due 2000 of the
Company (the "1992 Senior Notes").
REPORTS
The Seller Debenture Indenture provides that to the extent permitted by
applicable law or regulation, whether or not Holdings is subject to the
requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file
with the SEC all quarterly and annual reports and such other information,
documents or other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) required to be filed pursuant
to such provisions of the Exchange Act. Holdings shall file with the Trustee,
within 15 days after it files the same with the SEC, copies of the quarterly and
annual reports and the information, documents, and other reports (or copies of
such portions of any of the foregoing as the SEC may by rules and regulations
prescribe) that it is required to file with the SEC pursuant to the Seller
Debenture Indenture. Holdings shall also comply with the other provisions of TIA
sec. 314(a). If Holdings is not permitted by applicable law or regulations to
file the aforementioned reports, Holdings (at its own expense) shall file with
the Trustee and mail, or cause the Trustee to mail, to Holders at their
addresses appearing in the register of Seller Debentures maintained by the
Registrar at the time of such mailing within 5 days after it would have been
required to file such information with the SEC, all information and financial
statements, including any notes thereto and with respect to annual reports, an
auditors' report by an accounting firm of established national reputation, and a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," comparable to the disclosure that Holdings would have been required
to include in annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, if
Holdings was subject to the requirements of such Section 13 or 15(d) of the
Exchange Act.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person or any of its
subsidiaries existing at the time such person becomes a Subsidiary or assumed in
connection with the acquisition of assets from such person and not incurred by
such person in connection with, or in anticipation or contemplation of, such
person becoming a Subsidiary or such acquisition.
"Affiliate" means, with respect to any person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the Seller Debenture Indenture, neither BT Securities
Corporation nor any of its Affiliates shall be deemed to be an Affiliate of
Holdings or any of its Subsidiaries.
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"Affiliate Obligation" means any contractual obligation (not constituting
Indebtedness) between Holdings and any Affiliate, other than obligations
relating to the purchase or sale of goods in the ordinary course of business
made in compliance with the covenant entitled "Limitation on Transactions with
Affiliates."
"Asset Sale" means, with respect to any person, any sale, transfer or other
disposition or series of sales, transfers or other dispositions (including,
without limitation, by merger or consolidation or by exchange of assets and
whether by operation of law or otherwise) made by such person or any of its
subsidiaries to any person other than such person or one of its wholly-owned
subsidiaries (or, in the case of a sale, transfer or other disposition by a
Subsidiary, to any person other than Holdings or a directly or indirectly
wholly-owned Subsidiary) of any assets of such person or any of its subsidiaries
including, without limitation, assets consisting of any Capital Stock or other
securities held by such person or any of its subsidiaries, and any Capital Stock
issued by any subsidiary of such person, in each case, outside of the ordinary
course of business, excluding, however, any sale, transfer or other disposition,
or series of related sales, transfers or other dispositions (i) involving only
Excluded Assets, (ii) resulting in Net Proceeds to Holdings and the Subsidiaries
of $500,000 or less, (iii) pursuant to any foreclosure of assets or other remedy
provided by applicable law to a creditor of Holdings or any Subsidiary with a
Lien on such assets, which Lien is permitted under the Seller Debenture
Indenture, provided that such foreclosure or other remedy is conducted in a
commercially reasonable manner or in accordance with any Bankruptcy Law, (iv)
involving only Cash Equivalents or inventory in the ordinary course of business
or obsolete equipment in the ordinary course of business consistent with past
practices of Holdings or its Subsidiaries, (v) involving only the lease or
sub-lease of any real or personal property in the ordinary course of business,
or (vi) the proceeds of such Asset Sale which are not applied as contemplated in
"-- Certain Covenants -- Limitation on Asset Sales" and which, together with all
other such Asset Sale proceeds, do not exceed $20 million.
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the number of years from the date of determination to the dates of each
successive scheduled principle payments of such debt security multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any person, the Board of
Directors of such person or any committee of the Board of Directors of such
person duly authorized, with respect to any particular matter, to exercise the
power of the Board of Directors of such person.
"Board Resolution" means, with respect to any person, a duly adopted
resolution of the Board of Directors of such person.
"Business Day" means a day that is not a Legal Holiday.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such person,
including Preferred Stock.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by any agency or instrumentality thereof and backed by the full faith and
credit of the United States of America, (ii) commercial paper rated the highest
grade by Moody's Investors Service, Inc and Standard & Poor's Ratings Group and
maturing not more than one year from the date of creation thereof, (iii) time
deposits with, and certificates of deposit and banker's acceptances issued by,
any bank having capital surplus and undivided profits aggregating at least $500
million and maturing not more than one year from the date of creation thereof,
(iv) repurchase agreements that are secured by a perfected security interest in
an obligation described in clause (i) and are with any bank described in
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clause (iii), (v) shares of any money market mutual fund that (a) has at least
95% of its assets invested continuously in the types of investments referred to
in clauses (i) and (ii) above, (b) has net assets of not less than $500 million,
and (c) has the highest rating obtainable from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. and (vi) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means (I) the acquisition after the Issue Date, in one
or more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any person or entity (other than any Permitted
Holder) or (ii) any group of persons or entities (excluding any Permitted
Holders) who constitute a group (within the meaning of Section 13(d)(3) of the
Exchange Act), in either case, of any securities of Holdings such that, as a
result of such acquisition, such person, entity or group beneficially owns
(within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, 40% or more of the then outstanding voting securities entitled to
vote on a regular basis for a majority of the Board of Directors of Holdings
(but only to the extent that such beneficial ownership is not shared with any
Permitted Holder who has the power to direct the vote thereof); provided,
however, that no such Change of Control shall be deemed to have occurred if (A)
the Permitted Holders beneficially own, in the aggregate, at such time, a
greater percentage of such voting securities than such other person, entity or
group or (B) at the time of such acquisition, the Permitted Holders (or any of
them) possess the ability (by contract or otherwise) to elect, or cause the
election, of a majority of the members of Holdings' Board of Directors or (II)
Holdings ceasing to own 100% of the outstanding voting securities entitled to
vote on a regular basis to elect a majority of the Board of Directors of the
Company (other than in connection with a merger of Holdings and the Company).
"Company" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and
its successors, including, without limitation, Ralphs Supermarkets, Inc. (to be
renamed Ralphs Grocery Company) following the Merger.
"Consolidated Net Income" means, with respect to any person, for any
period, the aggregate of the net income (or loss) of such person and its
subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (a) the net income of any other person in which such
person or any of its subsidiaries has an interest (which interest does not cause
the net income of such other person to be consolidated with the net income of
such person and its subsidiaries in accordance with GAAP) shall be included only
to the extent of the amount of dividends or distributions actually paid to such
person or such subsidiary by such other person in such period; (b) the net
income of any subsidiary of such person that is subject to any Payment
Restriction shall be excluded to the extent such Payment Restriction actually
prevented the payment of an amount that otherwise could have been paid to, or
received by, such person or a subsidiary of such person not subject to any
Payment Restriction; provided, however, that with respect to the net income of
Holdings, the net income of the Company and its wholly-owned subsidiaries shall
not be so excluded, notwithstanding the existence of any such Payment
Restriction, so long as the terms of any such consensual Payment Restriction
limiting the payment of dividends are not materially more restrictive at the
time of determination of Consolidated Net Income than the most restrictive
Payment Restriction limiting the payment of dividends in effect on the Issue
Date and so long as the Company continues to be a wholly-owned subsidiary of
Holdings; and (c)(i) the net income (or loss) of any other person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all
gains realized upon or in connection with or as a consequence of the issuance of
the Capital Stock of such person or any of its subsidiaries and any gains on
pension reversions received by such person or any of its subsidiaries, (iv) all
gains and losses realized on the purchase or other acquisition by such person or
any of its subsidiaries of any securities of such person or any of its
subsidiaries, (v) all gains and losses resulting from the cumulative effect of
any accounting change pursuant to the application of Accounting Principles Board
Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii)
(A) all non-cash charges, (B) up to $10 million of severance costs and (C) any
other restructuring reserves or charges (provided, however, that any cash
payments actually made with respect to the liabilities for which such
restructuring reserves or charges were created shall be deducted from
Consolidated Net Income in the period when made), in each case, incurred by
Holdings or any of its Subsidiaries in connection with the Merger,
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including, without limitation, the divestiture of the Excluded Assets, (viii)
losses incurred by Holdings and its Subsidiaries resulting from earthquakes and
(ix) with respect to Holdings and its Subsidiaries, all deferred financing costs
written off in connection with the early extinguishment of any Indebtedness,
shall each be excluded.
"Consolidated Net Worth" means, with respect to any person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
person and its subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Consulting Agreement" means that certain Consulting Agreement, dated as of
the Issue Date, between Holdings, the Company and The Yucaipa Companies, as such
Consulting Agreement may be amended or replaced, so long as any amounts paid
under any amended or replacement agreement do not exceed the amounts payable
under such Consulting Agreement as in effect on the Issue Date.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among the Company as borrower, Holdings as guarantor, certain of the
Company's subsidiaries, the Lenders referred to therein and Bankers Trust
Company, as administrative agent, as the same may be amended, extended, renewed,
restated, supplemented or otherwise modified (in each case, in whole or in part,
and without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any agreement governing Indebtedness incurred
to refund, replace or refinance any borrowings and commitments then outstanding
or permitted to be outstanding under such Credit Agreement or any such prior
agreement as the same may be amended, extended, renewed, restated, supplemented
or otherwise modified (in each case, in whole or in part, and without limitation
as to amount, terms, conditions, covenants and other provisions). The term
"Credit Agreement" shall include all related or ancillary documents, including,
without limitation, any guarantee agreements and security documents. Holdings
shall promptly notify the Trustee of any such refunding or refinancing of the
Credit Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the Credit
Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement,
any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $50 million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by Holdings. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements incurred to refund, replace or refinance the entirety of the
borrowings and commitments then outstanding or permitted to be outstanding
thereunder.
"Disqualified Capital Stock" means, (i) with respect to any person, any
Capital Stock of such person or its subsidiaries that, by its terms, by the
terms of any agreement related thereto or by the terms of any security into
which it is convertible, putable or exchangeable, is, or upon the happening of
an event or the passage of time would be, required to be redeemed or repurchased
by such person or its subsidiaries, including at the option of the holder, in
whole or in part, or has, or upon the happening of an event or passage of time
would have, a redemption or similar payment due, on or prior to the Maturity
Date or any other Capital Stock of such person or its subsidiaries designated as
Disqualified Capital Stock by such person at the time of issuance; provided,
however, that if such Capital Stock is either (a) redeemable or repurchasable
solely at the option of such person or (b) issued to employees of Holdings or
its Subsidiaries or to any plan for the benefit of such employees, such Capital
Stock shall not constitute Disqualified Capital Stock unless so designated; and
(ii) with respect to any Subsidiary of Holdings, any Preferred Stock issued by a
Subsidiary of Holdings other than Preferred Stock issued to Holdings.
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"EBDIT" means, with respect to any person, for any period, the Consolidated
Net Income of such person for such period, plus, in each case to the extent
deducted in computing Consolidated Net Income of such person for such period
(without duplication) (i) provisions for income taxes or similar charges
recognized by such person and its consolidated subsidiaries accrued during such
period, (ii) depreciation and amortization expense of such person and its
consolidated subsidiaries accrued during such period (but only to the extent not
included in Fixed Charges), (iii) Fixed Charges of such person and its
consolidated subsidiaries for such period, (iv) LIFO charges (credit) of such
person and its consolidated subsidiaries for such period, (v) the amount of any
restructuring reserve or charge recorded during such period in accordance with
GAAP, including any such reserve or charge related to the Merger, and (vi) any
other non-cash charges reducing Consolidated Net Income for such period
(excluding any such charge which requires an accrual of or a cash reserve for
cash charges for any future period), less, without duplication, (i) non-cash
items increasing Consolidated Net Income of such person for such period
(excluding any such items which represent the reversal of any accrual of, or
cash reserve for, anticipated cash charges in any prior period) in each case
determined in accordance with GAAP and (ii) the amount of all cash payments made
by such person or its subsidiaries during such period to the extent that such
cash payment has been provided for in a restructuring reserve or charge referred
to in clause (v) above (and was not otherwise deducted in the computation of
Consolidated Net Income of such person for such period).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Excluded Assets" means assets of Holdings or any Subsidiary required to be
disposed of by applicable regulatory authorities in connection with the Merger.
"Existing Indebtedness" means the following indebtedness of the Company to
the extent outstanding on the Issue Date after giving effect to the Merger: (a)
the 10.45% Senior Notes due 2004 issued pursuant to an indenture dated as of the
Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture
dated as of April 15, 1992; (c) the 11% Senior Subordinated Notes due 2005
issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior
Subordinated Notes due 2003 issued pursuant to an indenture dated as of March
30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to
an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes
due 2005 issued pursuant to an indenture dated as of the Issue Date; and (g) the
13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated
as of June 15, 1991.
"FFL" means Food 4 Less, Inc., a Delaware corporation and its successors,
including, without limitation, Holdings following the FFL Merger and Holdings
following the Reincorporation Merger.
"FFL Merger" means the merger, prior to the Merger and the Reincorporation
Merger, of FFL and Holdings.
"Fixed Charges" means, with respect to any person, for any period, the
aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued
or scheduled to be paid or accrued during such period (except to the extent
accrued in a prior period) in respect of all Indebtedness of such person and its
consolidated subsidiaries (including (a) original issue discount on any
Indebtedness (including (without duplication), in the case of Holdings, any
original issue discount on the New Discount Debentures, the Holdings Discount
Notes and the Seller Debentures but excluding amortization of debt issuance
costs and (b) the interest portion of all deferred payment obligations,
calculated in accordance with the effective interest method, in each case to the
extent attributable to such period, but excluding the amortization of debt
issuance costs) and (ii) dividend requirements on Preferred Stock of such person
and its consolidated subsidiaries (whether in cash or otherwise (except
dividends payable in shares of Qualified Capital Stock)) declared or paid or
required to be declared or paid, during such period (except to the extent
accrued in a prior period), and excluding items eliminated in consolidation. For
purposes of this definition, (a) interest on a Capitalized Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by the Board
of Directors of such person (as evidenced by a Board Resolution) to be the rate
of interest implicit in such Capitalized Lease Obligation in accordance with
GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest of such
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Indebtedness in effect on the date Fixed Charges are being calculated, (c)
interest on Indebtedness that may optionally be determined at an interest rate
based upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rate, shall be deemed to have been based upon the rate actually
chosen, or, if none, then based upon such optional rate chosen as Holdings may
designate, and (d) Fixed Charges shall be increased or reduced by the net cost
(including amortization of discount) or benefit associated with Interest Swap
Obligations attributable to such period. For purposes of clause (ii) above,
dividend requirements shall be increased to an amount representing the pretax
earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator of
which is the amount of such dividend requirements and the denominator of which
is one (1) minus the applicable actual combined federal, state, local and
foreign income tax rate of such person and its subsidiaries (expressed as a
decimal), on a consolidated basis, for the fiscal year immediately preceding the
date of the transaction giving rise to the need to calculate Fixed Charges.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of the Issue Date.
"Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation, and
its successors.
"Holdings Discount Notes" means the 15.25% Senior Discount Notes due 2004
of Food 4 Less Holdings, Inc., a California corporation, issued pursuant to the
Holdings Discount Note Indenture, as such Holdings Discount Notes may be
modified or amended from time to time and refinancings thereof, to the extent
such refinancing indebtedness is permitted to be incurred under the New Discount
Debenture Indenture.
"Holdings Discount Note Indenture" means the indenture between Food 4 Less
Holdings, Inc., a California corporation, and United States Trust Company of New
York, as trustee, dated as of December 15, 1992, pursuant to which the Holdings
Discount Notes were issued, as amended or supplemented from time to time in
accordance with the terms thereof.
"Indebtedness" means with respect to any person, without duplication, (i)
all liabilities, contingent or otherwise, of such person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof), (b) evidenced by bonds, notes, debentures,
drafts accepted or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property (other than
any such balance that represents an account payable or any other monetary
obligation to a trade creditor (whether or not an Affiliate) created, incurred,
assumed or guaranteed by such person in the ordinary course of business of such
person in connection with obtaining goods, materials or services and due within
twelve months (or such longer period for payment as is customarily extended by
such trade creditor) of the incurrence thereof, which account is not overdue by
more than 90 days, according to the original terms of sale, unless such account
payable is being contested in good faith), or (c) for the payment of money
relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase
price of all Disqualified Capital Stock of such person; (iii) reimbursement
obligations of such person with respect to letters of credit; (iv) obligations
of such person with respect to Interest Swap Obligations and Foreign Exchange
Agreements; (v) all liabilities of others of the kind described in the preceding
clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is
otherwise its legal liability, and (vi) all obligations of others secured by a
Lien to which any of the properties or assets (including, without limitation,
leasehold interests and any other tangible or intangible property rights) of
such person are subject, whether or not the obligations secured thereby shall
have been assumed by such person or shall otherwise be such person's legal
liability (provided that if the obligations so secured have not been assumed by
such person or are not otherwise such person's legal liability, such obligations
shall be deemed to be in an amount equal to the fair market value of such
properties or assets, as determined in good faith by the Board of Directors of
such person, which determination shall be evidenced by a Board Resolution). For
purposes of the preceding sentence, the "maximum fixed repurchase price" of any
Disqualified Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be
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determined pursuant to the Seller Debenture Indenture, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock (or any equity security for which it may be exchanged or converted), such
fair market value shall be determined in good faith by the Board of Directors of
such person, which determination shall be evidenced by a Board Resolution. For
purposes of the Seller Debenture Indenture, Indebtedness incurred by any person
that is a general partnership (other than non-recourse Indebtedness) shall be
deemed to have been incurred by the general partners of such partnership pro
rata in accordance with their respective interests in the liabilities of such
partnership unless any such general partner shall, in the reasonable
determination of the Board of Directors of Holdings, be unable to satisfy its
pro rata share of the liabilities of the partnership, in which case the pro rata
share of any Indebtedness attributable to such partner shall be deemed to be
incurred at such time by the remaining general partners on a pro rata basis in
accordance with their interests.
"Independent Financial Advisor" means a reputable accounting, appraisal or
a nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board of Directors of Holdings, qualified to perform
the task for which such firm has been engaged and disinterested and independent
with respect to Holdings and its Affiliates.
"Interest Swap Obligation" means any obligation of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a fixed or floating rate of interest on a stated notional amount
in exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount; provided that
the term "Interest Swap Obligation" shall also include interest rate exchange,
collar, cap, swap option or similar agreements providing interest rate
protection.
"Investment" by any person in any other person means any investment by such
person in such other person, whether by share purchase, capital contribution,
loan, advance (other than reasonable loans and advances to employees for moving
and travel expenses, as salary advances, or to permit the purchase of Qualified
Capital Stock of Holdings or any of its Subsidiaries and other similar customary
expenses incurred, in each case in the ordinary course of business consistent
with past practice) or similar credit extension constituting Indebtedness of
such other person, and any guarantee of Indebtedness of any other person.
"Issue Date" means the date of first issuance of the Seller Debentures
pursuant to the Seller Debenture Indenture.
"Letter of Credit Obligations" means Indebtedness of the Subsidiaries with
respect to letters of credit issued pursuant to the Credit Agreement, and for
purposes of the provisions of the Seller Debenture Indenture summarized under
the heading "Limitations on Incurrences of Additional Indebtedness," the
aggregate principal amount of Indebtedness outstanding at any time with respect
thereto, shall be deemed to consist of (a) the aggregate maximum amount then
available to be drawn under all such letters of credit (the determination of
such maximum amount to assume compliance with all conditions for drawing), and
(b) the aggregate amount that has then been paid by, and not reimbursed to, the
issuers under such letters of credit.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property, or a security interest of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof, any option or
other agreement to sell which is intended to constitute or create a security
interest, mortgage, pledge or lien, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction); provided that in no event shall an operating lease be
deemed to constitute a Lien hereunder.
"Loan Documents" means the Credit Agreement and all promissory notes,
guarantees, security agreements, pledge agreements, deeds of trust, mortgages,
letters of credit and other instruments, agreements and documents executed
pursuant thereto or in connection therewith, including all amendments,
supplements, extensions, renewals, restatements, replacements or refinancings
thereof, or other modifications (in whole or in part, and without limitation as
to amount, terms, conditions, covenants or other provisions) thereof from time
to time.
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"Maturity Date" means June 15, 2007.
"Merger" means (i) the merger of Food 4 Less Supermarkets, Inc. into Ralphs
Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger)
pursuant to the Merger Agreement and (ii) immediately following the merger
described in clause (i) of this definition, the merger of Ralphs Grocery Company
into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such
merger and changing its name to "Ralphs Grocery Company" in connection with such
merger).
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
September 14, 1994, by and among Holdings, FFL, Food 4 Less Supermarkets, Inc.,
RSI and the stockholders of RSI, as such agreement is in effect on the Issue
Date.
"Net Cash Proceeds" means Net Proceeds of any Asset Sale received in the
form of cash or Cash Equivalents.
"Net Proceeds" means (a) in the case of any Asset Sale or any issuance and
sale by any person of Qualified Capital Stock, the aggregate net proceeds
received by such person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any Asset Sale, net
of the amount of cash applied to repay Indebtedness secured by the asset
involved in such Asset Sale), whether such proceeds are in cash or in property
(valued at the fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million
in good faith by the Board of Directors of such person, which determination
shall be evidenced by a Board Resolution) and (b) in the case of any conversion
or exchange of any outstanding Indebtedness or Disqualified Capital Stock of
such person for or into shares of Qualified Capital Stock of Holdings, the sum
of (i) the fair market value of the proceeds received by Holdings in connection
with the issuance of such Indebtedness or Disqualified Capital Stock on the date
of such issuance and (ii) any additional amount paid by the holder to Holdings
upon such conversion or exchange.
"New Discount Debentures" means the 13 5/8% Senior Discount Debentures due
2005 of Holdings issued pursuant to the New Discount Debenture Indenture, as
such New Discount Debentures may be modified or amended from time to time and
refinancings thereof, to the extent such refinancing indebtedness is permitted
to be incurred under the New Discount Debenture Indenture.
"New Discount Debenture Indenture" means the indenture between Holdings and
United States Trust Company of New York, as trustee, dated as of the Issue Date,
pursuant to which the New Discount Debentures were issued, as amended or
supplemented from time to time in accordance with the terms thereof.
"New Discount Debenture Registration Rights Agreement" means that certain
Registration Rights Agreement by and among Holdings, the Company and RGC
Partners, L.P. as such Registration Rights Agreement may be amended or replaced,
so long as any amounts paid under any amended or replacement agreement do not
exceed the amounts payable under such Registration Rights Agreement as in effect
on the Issue Date.
"Obligations" means all obligations of every nature whether for principal,
reimbursements, interest, fees, expenses, indemnities or otherwise, and whether
primary, secondary, direct, indirect, contingent, fixed or otherwise (including
obligations of performance) under the documentation governing any Indebtedness.
"Operating Coverage Ratio" means, with respect to any person, the ratio of
(1) EBDIT of such person for the period (the "Pro Forma Period") consisting of
the most recent four full fiscal quarters for which financial information in
respect thereof is available immediately prior to the date of the transaction
giving rise to the need to calculate the Operating Coverage Ratio (the
"Transaction Date") to (2) the aggregate Fixed Charges of such person for the
fiscal quarter in which the Transaction Date occurs and the three fiscal
quarters immediately subsequent to such fiscal quarter (the "Forward Period")
reasonably anticipated by the Board of Directors of such person to become due
from time to time during such period. For purposes of this definition, if the
Transaction Date occurs prior to the first anniversary of the Merger, EBDIT for
the Pro Forma Period shall be calculated, in the case of Holdings, after giving
effect on a pro forma basis to the Merger as if it had occurred on the first day
of the Pro Forma Period. In addition to, but without duplication of, the
foregoing, for
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purposes of this definition, EBDIT shall be calculated after giving effect
(without duplication), on a pro forma basis for the Pro Forma Period (but no
longer), to (a) any Investment, during the period commencing on the first day of
the Pro Forma Period to and including the Transaction Date (the "Reference
Period"), in any other person that, as a result of such Investment, becomes a
subsidiary of such person, (b) the acquisition, during the Reference Period (by
merger, consolidation or purchase of stock or assets) of any business or assets,
which acquisition is not prohibited by the Indenture, and (c) any sales or other
dispositions of assets (other than sales of inventory in the ordinary course of
business) occurring during the Reference Period, in each case as if such
incurrence, Investment, repayment, acquisition or asset sale had occurred on the
first day of the Reference Period. In addition, for purposes of this definition,
Fixed Charges shall be calculated after giving effect (without duplication), on
a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid
on or after the first day of the Forward Period and prior to the Transaction
Date. If such person or any of its subsidiaries directly or indirectly
guarantees any Indebtedness of a third person, the Operating Coverage Ratio
shall give effect to the incurrence of such Indebtedness as if such person or
subsidiary had directly incurred such guaranteed Indebtedness.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Pari Passu Indebtedness" means, with respect to Holdings, Indebtedness
that ranks pari passu in right of payment to the Seller Debentures (whether or
not secured by any Lien).
"Payment Restriction" means, with respect to a subsidiary of any person,
any encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation, on the ability of (i) such subsidiary
to (a) pay dividends or make other distributions on its Capital Stock or make
payments on any obligation, liability or Indebtedness owed to such person or any
other subsidiary of such person, (b) make loans or advances to such person or
any other subsidiary of such person, or (c) transfer any of its properties or
assets to such person or any other subsidiary of such person, or (ii) such
person or any other subsidiary of such person to receive or retain any such (a)
dividends, distributions or payments, (b) loans or advances, or (c) transfer of
properties or assets.
"Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa
Companies or any entity controlled thereby or any of the partners thereof, (ii)
Apollo Advisors, L.P., Lion Advisors, L.P., or any entity controlled thereby or
any of the partners thereof, (iii) an employee benefit plan of Holdings or any
Subsidiary, or any participant therein, (iv) a trustee or other fiduciary
holding securities under an employee benefit plan of Holdings or any Subsidiary
or (v) any Permitted Transferee of any of the foregoing persons.
"Permitted Indebtedness" means (a) Indebtedness of the Company and its
subsidiaries (and the Company and each subsidiary (to the extent it is not an
obligor) may guarantee such Indebtedness) pursuant to (i) the Term Loans in an
aggregate principal amount at any time outstanding not to exceed $600 million
less the aggregate amount of all principal repayments thereunder pursuant to and
in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" above subsequent to the Issue Date, (ii)
the revolving credit facility under the Credit Agreement (including the Letter
of Credit Obligations) in an aggregate principal amount at any time outstanding
not to exceed $325 million, less all permanent reductions thereunder pursuant to
and in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" above and (iii) any Indebtedness
incurred under the Credit Agreement pursuant to and in compliance with (A)
clause (o) of this definition and (B) the covenant described above under the
caption "-- Limitation on Incurrence of Additional Indebtedness" (other than
Permitted Indebtedness that is not incurred pursuant to clause (o) or this
clause (a) of this definition); (b) any guarantee by Holdings of the
Indebtedness referred to in the foregoing clause (a); (c) Indebtedness of
Holdings or a Subsidiary owed to and held by Holdings or a Subsidiary; (d)
Indebtedness incurred by Holdings or any Subsidiary in connection with the
purchase or improvement of property (real or personal) or equipment or other
capital expenditures in the ordinary course of business (including for the
purchase of assets or stock of any retail grocery store or business) or
consisting of Capitalized Lease Obligations, provided that (i) at the time of
the incurrence thereof, such Indebtedness, together with any other Indebtedness
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incurred during the most recently completed four fiscal quarter period in
reliance upon this clause (d) does not exceed, in the aggregate, 3% of net sales
of Holdings and its Subsidiaries during the most recently completed four fiscal
quarter period on a consolidated basis (calculated on a pro forma basis if the
date of incurrence is prior to the first anniversary of the Merger) and (ii)
such Indebtedness, together with all then outstanding Indebtedness incurred in
reliance upon this clause (d) does not exceed, in the aggregate, 3% of the
aggregate net sales of Holdings and its Subsidiaries during the most recently
completed twelve fiscal quarter period on a consolidated basis (calculated on a
pro forma basis if the date of incurrence is prior to the third anniversary of
the Merger); (e) Indebtedness incurred by Holdings or any Subsidiary in
connection with capital expenditures in an aggregate principal amount not
exceeding $150 million, provided that such capital expenditures relate solely to
the integration of the operations of RSI, Food 4 Less Supermarkets, Inc. and
their respective subsidiaries as described in this Prospectus; (f) Indebtedness
of Holdings or any Subsidiary incurred under Foreign Exchange Agreements and
Interest Swap Obligations; (g) guarantees incurred in the ordinary course of
business, by Holdings or a Subsidiary, of Indebtedness of any other person in
the aggregate not to exceed $25 million at any time outstanding; (h) guarantees
by Holdings or a Subsidiary of Indebtedness incurred by a wholly-owned
Subsidiary so long as the incurrence of such Indebtedness incurred by such
wholly-owned Subsidiary is permitted under the terms of the Seller Debenture
Indenture; (i) Refinancing Indebtedness; (j) Indebtedness for letters of credit
relating to workers' compensation claims and self-insurance or similar
requirements in the ordinary course of business; (k) Existing Indebtedness and
other Indebtedness outstanding on the Issue Date (after giving effect to the
Merger); (l) Indebtedness arising from guarantees of Indebtedness of Holdings or
any Subsidiary or other agreements of Holdings or a Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or Subsidiary, other than guarantees of Indebtedness incurred by any
person acquiring all or any portion of such business, assets or Subsidiary for
the purpose of financing such acquisition; provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by Holdings and its Subsidiaries in connection with
such disposition; (m) obligations in respect of performance bonds and completion
guarantees provided by Holdings or any Subsidiary in the ordinary course of
business; (n) Indebtedness of Holdings with respect to the Holdings Discount
Notes, if any, the New Discount Debentures (including the accretion of the
Holdings Discount Notes and the New Discount Debentures up to their respective
stated principal amount at maturity) and the Seller Debentures (including the
issuance of additional Secondary Securities in lieu of cash interest payments
pursuant to the terms of the Seller Debenture Indenture); and (o) additional
Indebtedness of Holdings or any Subsidiary in an amount not to exceed $175
million at any time outstanding.
"Permitted Investment" by any person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale or any other
disposition of assets not constituting an Asset Sale by reason of the $500,000
threshold contained in the definition thereof, (iii) cash and Cash Equivalents,
(iv) Investments existing on the Issue Date, (v) Investments specifically
permitted by and made in accordance with the provisions of the Seller Debenture
Indenture summarized under "Limitation on Transactions with Affiliates," (vi)
Investments in any Subsidiary or by any Subsidiary in Holdings or by any
Subsidiary in other Subsidiaries, and (vii) additional Investments in an
aggregate amount not exceeding $15 million.
"Permitted Payments" means (i) any payment by Holdings or any Subsidiary to
The Yucaipa Companies or the principals or any Affiliate thereof for consulting,
management, investment banking or similar services, or for reimbursement of
losses, costs and expenses pursuant to the Consulting Agreement, (ii) any
payment by Holdings or any Subsidiary to Apollo Advisors, L.P. or the principals
or any Affiliates thereof in an aggregate amount not to exceed $5 million as a
commitment fee in connection with the purchase of equity securities of Holdings
on the Issue Date, (iii) any payment by Holdings or any Subsidiary (a) in
connection with repurchases of outstanding shares of Holdings common stock
following the death, disability or termination of employment of management
stockholders, and (b) of amounts required to be paid by Holdings or any
Subsidiaries to participants or former participants in employee benefit plans
upon any termination of employment by such participants, as provided in the
documents related thereto, in an aggregate amount (for both clauses (a) and (b))
not to exceed $10 million in any Yearly Period (provided that any unused amounts
may be carried over to any subsequent Yearly Period subject to a maximum amount
of $20 million in any
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Yearly Period), (iv) the loan by Holdings or any Subsidiary on the Issue Date to
RGC Investment Co. of not more than $5 million and (v) for so long as the sole
business activity of such partnership is to acquire, hold, sell, exchange,
transfer or otherwise dispose of all or any portion of the New Discount
Debentures and to manage its investment in the New Discount Debentures, any
payment by Holdings or any Subsidiary to fund ongoing costs and expenses of RGC
Partners, L.P. pursuant to the Subscription Agreement and the New Discount
Debenture Registration Rights Agreement.
"Permitted Subordinated Reorganization Securities" means securities of
Holdings issued in a plan of reorganization in a case under the Bankruptcy Law
relating to Holdings which constitutes either (y) Capital Stock (other than
Disqualified Capital Stock with the reference to "Maturity Date" in the
definition of such term modified to relate to the final stated maturity of any
debt securities issued in such plan of reorganization to the holders of
Designated Senior Indebtedness ("Senior Reorganization Securities")) and (z)
debt securities of Holdings which are (i) unsecured, (ii) have no scheduled
mandatory amortization thereon prior to the final stated maturity of the Senior
Reorganization Securities and (iii) are subordinated in right of payment to the
Senior Reorganization Securities to at least the same extent as the Seller
Debentures are subordinated to Designated Senior Indebtedness.
"Permitted Transferees" means, with respect to any person, (i) any
Affiliate of such person, (ii) the heirs, executors, administrators,
testamentary trustees, legatees or beneficiaries of any such person, (iii) a
trust, the beneficiaries of which, or a corporation or partnership, the
stockholders or general or limited partners of which, include only such person
or his or her spouse or lineal descendants, in each case to whom such person has
transferred the beneficial ownership of any securities of Holdings, (iv) any
investment account whose investment managers and investment advisors consist
solely of such person and/or Permitted Transferees of such person and (v) any
investment fund or investment entity that is a subsidiary of such person or a
Permitted Transferee of such person.
"Plan of Liquidation" means, with respect to any person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such person to holders of
Capital Stock of such person.
"Preferred Stock" means, with respect to any person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over shares
of Capital Stock of any other class of such person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Seller Debenture Indenture, a calculation in
accordance with Article 11 of Regulation S-X under the Securities Act as
interpreted by Holdings' chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of common
stock of Holdings or the Company pursuant to a registration statement filed with
the SEC in accordance with the Securities Act which public equity offering
results in gross proceeds to Holdings or the Company of not less than $20
million.
"Qualified Capital Stock" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means, with respect to any person, Indebtedness
of such person issued in exchange for, or the proceeds from the issuance and
sale or disbursement of which are used to substantially concurrently repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole or
in part (collectively, "repay"), or constituting an amendment, modification or
supplement to, or a deferral or renewal of (collectively, an "amendment"), any
Indebtedness of such person existing on the Issue Date or Indebtedness (other
than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to
clauses (b), (d), (e), (i), (k) and (n) of the definition thereof) incurred in
accordance with the Seller
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Debenture Indenture (a) in a principal amount (or, if such Refinancing
Indebtedness provides for an amount less than the principal amount thereof to be
due and payable upon the acceleration thereof, with an original issue price) not
in excess of (without duplication) (i) the principal amount or the original
issue price, as the case may be, of the Indebtedness so refinanced (or, if such
Refinancing Indebtedness refinances Indebtedness under a revolving credit
facility or other agreement providing a commitment for subsequent borrowings,
with a maximum commitment not to exceed the maximum commitment under such
revolving credit facility or other agreement) plus (ii) unpaid accrued interest
on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually
incurred by such person in connection with the repayment or amendment thereof
and (b) with respect to Refinancing Indebtedness that repays or constitutes an
amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall
not have any fixed mandatory redemption or sinking fund requirement in an amount
greater than or at a time prior to the amounts and times specified in such
repaid or amended Subordinated Indebtedness, except to the extent that any such
requirement applies on a date after the Maturity Date and (y) shall contain
subordination and default provisions no less favorable in any material respect
to Holders than those contained in such repaid or amended Subordinated
Indebtedness.
"Reincorporation Merger" means the merger, prior to the Merger, of Food 4
Less Holdings, Inc., a California corporation, with and into Food 4 Less
Holdings, a Delaware corporation.
"Related Business Investment" means (i) any Investment by a person in any
other person a majority of whose revenues are derived from the operation of one
or more retail grocery stores or supermarkets or any other line of business
engaged in by Holdings or any of its Subsidiaries as of the Issue Date; (ii) any
Investment by such person in any cooperative or other supplier, including,
without limitation, any joint venture which is intended to supply any product or
service useful to the business of Holdings and any of its Subsidiaries as it is
conducted as of the Issue Date and as such business may thereafter evolve or
change; and (iii) any capital expenditure or Investment, in each case reasonably
related to the business of Holdings and any of its Subsidiaries as it is
conducted as of the Issue Date and as such business may thereafter evolve or
change.
"Restricted Debt Prepayment" means any purchase, redemption, defeasance
(including, but not limited to in-substance or legal defeasance) or other
acquisition or retirement for value directly or indirectly by New Holdings or a
Subsidiary, prior to the scheduled maturity or prior to any scheduled repayment
of principal or any sinking fund payment, as the case may be, in respect of any
Subordinated Indebtedness.
"Restricted Payment" means any (i) Stock Payment or (ii) Investment (other
than a Permitted Investment) or (iii) Restricted Debt Prepayment.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Seller Debentures" means the 13 5/8% Senior Subordinated Pay-in-Kind
Debentures due 2007 of Holdings, including any Secondary Securities issued as
interest thereon, in each case issued pursuant to the Seller Debenture
Indenture, as the same may be modified or amended from time to time and
refinancings thereof, to the extent such refinancing indebtedness is permitted
to be incurred under the New Discount Debenture Indenture.
"Seller Debenture Indenture" means the indenture between Holdings and
Norwest Bank Minnesota, N.A., as trustee, dated as of the Issue Date, pursuant
to which the Seller Debentures were issued, as amended or supplemented from time
to time and refinancings thereof.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on (such Senior Indebtedness being deemed to include for all purposes of the
Article of the Seller Debenture Indenture entitled "Subordination" the amount
required to fully secure in cash undrawn Letter of Credit Obligations under the
Credit Agreement and such interest on Senior Indebtedness being deemed to
include for all purposes of such Article interest accruing after the filing of a
petition initiating any proceeding pursuant to any Bankruptcy Law in accordance
with and at the rate (including any rate applicable upon any default, to the
extent lawful) specified in any document evidencing the Senior Indebtedness,
whether or not the claim for such interest is allowed as a claim after such
filing in any proceeding under such Bankruptcy Law), and all other obligations
with respect to, any Indebtedness of Holdings (and, in the case of the Credit
Agreement, all obligations of
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<PAGE> 81
Holdings for fees, expenses, indemnities and other amounts payable thereunder or
in connection therewith), whether outstanding on the Issue Date or thereafter
created, incurred, assumed or guaranteed or in effect guaranteed by Holdings
(including, without limitation, Indebtedness under the Credit Agreement),
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing such Indebtedness expressly provides that such Indebtedness shall not
be senior in right of payment to the Securities. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall include the principal of, premium,
if any, and interest on all obligations of every nature of Holdings from time to
time owed or guaranteed by Holdings with respect to the Credit Agreement, the
New Discount Debentures and the Holdings Discount Notes, if any. Notwithstanding
the foregoing, "Senior Indebtedness" shall not include (i) any Pari Passu
Indebtedness or any Subordinated Indebtedness, (ii) any Indebtedness
constituting Disqualified Capital Stock, (iii) Indebtedness of Holdings to any
Subsidiary, (iv) that portion of any Indebtedness which is incurred in violation
of the covenant of the Seller Debenture Indenture entitled "Limitation on
Additional Indebtedness", (v) Indebtedness to, or guaranteed on behalf of, any
shareholder, director, officer or employee of Holdings or of any Subsidiary
(including, without limitation, amounts owed for compensation), (vi)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, and (vii) any liability for federal,
state, local or other taxes owed or owing by Holdings.
"Significant Stockholder" means, with respect to any person, any other
person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such person
that are entitled to vote on a regular basis for the election of directors of
such person.
"Significant Subsidiary" means each subsidiary of Holdings that is either
(a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X
under the Securities Act and the Exchange Act (as such regulation is in effect
on the Issue Date) or (b) material to the financial condition or results of
operations of Holdings and its Subsidiaries taken as a whole.
"Stock Payment" means, with respect to any person, (a) the declaration or
payment by such person, either in cash or in property, of any dividend on
(except, in the case of Holdings, dividends payable solely in Qualified Capital
Stock of Holdings), or the making by such person or any of its subsidiaries of
any other distribution in respect of, such person's Qualified Capital Stock or
any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (other than exchangeable or convertible Indebtedness of such
person), or (b) the redemption, repurchase, retirement or other acquisition for
value by such person or any of its subsidiaries, directly or indirectly, of such
person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified
Capital Stock of Holdings) or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock (other than exchangeable or
convertible Indebtedness of such person), other than, in the case of Holdings,
through the issuance in exchange therefor solely of Qualified Capital Stock of
Holdings; provided however, that in the case of a Subsidiary, the term "Stock
Payment" shall not include any such payment with respect to its Capital Stock or
warrants, rights or options to purchase or acquire shares of any class of its
Capital Stock that are owned solely by Holdings or a wholly owned Subsidiary.
"Subordinated Indebtedness" means Indebtedness of Holdings that is
subordinated in right of payment to the Seller Debentures.
"Subscription Agreement" means that certain Subscription Agreement between
RGC Partners, L.P., Holdings, the Company and the partnership investors listed
on Exhibit A thereto, as such Subscription Agreement may be amended or replaced,
so long as any amounts paid by Holdings and the Company under any amended or
replacement agreement do not exceed the amounts payable by Holdings and the
Company under such Subscription Agreement as in effect on the Issue Date.
"subsidiary" of any person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such person, by one or more subsidiaries of such person or by such person and
one or more subsidiaries of such person or (ii) a partnership in which such
person or a subsidiary of such person is, at the date of determination, a
general partner of such partnership, but only if such person or its subsidiary
is entitled to receive more than 50% of the assets of such partnership upon its
dissolution, or (iii) any other person (other
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<PAGE> 82
than a corporation or a partnership) in which such person, a subsidiary of such
person or such person and one or more subsidiaries of such person, directly or
indirectly, at the date of determination, has (x) at least a majority ownership
interest or (y) the power to elect or direct the election of a majority of the
directors or other governing body of such person.
"Subsidiary" means any subsidiary of Holdings.
"Term Loans" means the term loan facility under the Credit Agreement and
any agreement governing Indebtedness incurred to refund, replace or refinance
any borrowings outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions).
"The Yucaipa Companies" means The Yucaipa Companies, a California general
partnership, or any successor thereto which is an Affiliate of Ronald W. Burkle
or his Permitted Transferees and which has been established for the sole purpose
of changing the form of The Yucaipa Companies from that of a partnership to that
of a limited liability company or any other form of entity which is not
materially adverse to the rights of the Holders under the Seller Debenture
Indenture.
"wholly-owned Subsidiary" means any Subsidiary all of the shares of Capital
Stock of which (other than directors' qualifying shares) are at the time
directly or indirectly owned by Holdings.
"Yearly Period" means each fiscal year of Holdings; provided that the first
Yearly Period shall begin on the Issue Date and shall end on January 28, 1996.
DESCRIPTION OF THE CREDIT FACILITY
Set forth below is a summary of the material terms and conditions of the
Amended and Restated Credit Facility dated as of April 17, 1997 among the
Company, the Subsidiary Guarantors, Bankers Trust as Agent and the other lenders
party thereto (the "Refinanced Credit Facility"). This summary does not purport
to be a complete description of the Refinanced Credit Facility and is subject to
the detailed provisions of the loan agreement (the "Loan Agreement") and various
related documents entered into in connection with the Refinanced Credit
Facility. A copy of the Loan Agreement is available upon request from the
Company.
SUMMARY OF REFINANCED CREDIT FACILITY
General. The Refinanced Credit Facility was effective as of April 17, 1997
and is an amendment and restatement of the 1995 Credit Facility. The Refinanced
Credit Facility provides for (i) term loans in the aggregate amount of $550
million, currently comprised of a $200 million tranche which matures on February
15, 2003 (the "Tranche A Loan") and a $350 million tranche which matures on
February 15, 2004 (the "Tranche B Loan," and together with the Tranche A Loan,
the "Term Loans"); and (ii) the $325 million Revolving Facility (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 million
may be issued, under which approximately $75.5 million of letters of credit were
outstanding as of October 12, 1997. As of October 12, 1997, the outstanding
principal amount of the Term Loans was $548.3 million and there was $136.9
million outstanding under the Revolving Facility.
Proceeds of the term loans under the 1995 Credit Facility and initial
revolving loans under the 1995 Credit Facility, together with proceeds from the
other debt and equity financing transactions completed concurrently, were used
to fund the cash requirements for the acquisition of RSI, refinance existing
indebtedness of Ralphs and Food 4 Less, and pay various fees, expenses and other
costs associated with the Merger and the related financing. Upon the
effectiveness of the Refinanced Credit Facility, term loans and revolving loans
under the 1995 Credit Facility were converted into the Term Loans and revolving
loans under the Revolving Facility. Proceeds of loans under the Revolving
Facility were also used to pay fees, expenses and other costs associated with
such refinancing. The Revolving Facility is used to provide for the working
capital requirements and general corporate purposes of the Company and to issue
commercial and standby letters of credit to support workers' compensation
contingencies and for other corporate purposes.
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<PAGE> 83
Interest Rate; Fees. Borrowings under (i) the Revolving Facility and the
Tranche A Loan bear interest at a rate per annum equal to the Base Rate (as
defined in the Refinanced Credit Facility) plus a margin ranging from 0.25% to
1.25% or the Adjusted Eurodollar Rate (as defined in the Refinanced Credit
Facility) plus a margin ranging from 1.25% to 2.25%. The current margins for the
Revolving Facility and the Tranche A Loan are 0.75% for Base Rate Loans (as
defined in the Refinanced Credit Facility) and 1.75% for Eurodollar Rate Loans
(as defined in the Refinanced Credit Facility). Borrowings under the Tranche B
Loan bears interest at a rate per annum equal to the Base Rate plus a margin
ranging from 0.75% to 1.75% or the Adjusted Eurodollar Rate plus a margin
ranging from 1.75% to 2.75%. The current margins for the Tranche B Loan are
1.25% for Base Rate Loans and 2.25% for Eurodollar Rate Loans. Up to $30 million
of the Revolving Facility is available as a swingline facility and loans
outstanding under the swingline facility bear interest at a rate per annum equal
to the Base Rate plus a margin which ranges from 0.25% to 1.25% minus the
Commitment Fee Percentage (as defined in the Refinanced Credit Facility). After
the occurrence of a default under the Refinanced Credit Facility, interest will
accrue at the rate equal to the rate otherwise applicable under the Refinanced
Credit Facility plus an additional 2.00% per annum. The Company pays the issuing
bank a fee of 0.25% on each standby letter of credit and each commercial letter
of credit and pays the lenders under the Refinanced Credit Facility a fee equal
to the margin on Eurodollar Rate Loans under the Revolving Facility (the
"Eurodollar Margin") minus the Commitment Fee Percentage for standby letters of
credit and a fee equal to the Eurodollar Margin minus 1% minus the Commitment
Fee Percentage for commercial letters of credit. Each of these fees is
calculated based on the amount available to be drawn under a letter of credit.
In addition, the Company will pay a commitment fee which ranges from 0.325% to
0.500% per annum on the unused portions of the Revolving Facility and for
purposes of calculating this fee, loans under the swingline facility shall not
be deemed to be outstanding. The current commitment fee is 0.500%. The 1995
Credit Facility required the Company to enter into hedging agreements to limit
its exposure to increases in interest rates for a period of not less than two
years from the date of the closing on the 1995 Credit Facility in an aggregate
notional amount of not less than $300 million. The Refinanced Credit Facility
continues this requirement. The Refinanced Credit Facility may be prepaid in
whole or in part without premium or penalty.
Amortization; Prepayments. The Tranche A Loan will mature on February 15,
2003, and the Tranche B Loan will mature on February 15, 2004. The Refinanced
Credit Facility provides for quarterly amortizations of the Term Loans in each
year as follows: $2.625 million in fiscal 1997, $3.5 million in fiscal 1998,
$25.5 million in fiscal 1999, $62.625 million in fiscal 2000, $87.5 million in
fiscal 2001, $112.75 million in fiscal 2002, $118.25 million in fiscal 2003 and
$137.25 million in fiscal 2004. Prepayments of Term Loans would reduce these
amortizations. The Revolving Facility will mature on February 15, 2003. The
Company is required to reduce loans outstanding under the Revolving Facility to
(i) $110 million for a period of not less than 30 consecutive days during each
period of twelve consecutive months through the end of Fiscal Year 1997 (as
defined in the Refinanced Credit Facility), and (ii) $100 million ($75 million
if the Company sells Cala for $25 million or more) for a period of not less than
30 consecutive days during each period of twelve consecutive months thereafter.
The Company is required to make certain prepayments, subject to certain
exceptions, on the Refinanced Credit Facility with 75% (100% for fiscal year
1997) of Consolidated Excess Cash Flow (as defined in the Refinanced Credit
Facility) and with the proceeds from certain asset sales, issuances of debt and
equity securities and any pension plan reversion. Such prepayments will be
allocated pro rata between the Tranche A Loans and Tranche B Loans and to
scheduled amortization payments of the Tranche A Loans and Tranche B Loans pro
rata. Mandatory prepayments on the Tranche B Loans will be used to make an offer
to repay such Loans and to the extent not accepted 50% of such amount will be
applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may
be retained by the Company.
Guarantees and Collateral. Holdings and all active subsidiaries of the
Company (including the Subsidiary Guarantors) have guaranteed the Company's
obligations under the Refinanced Credit Facility. The Company's obligations and
the guarantees of its subsidiaries are secured by substantially all personal
property of the Company and its subsidiaries, including a pledge of the stock of
all subsidiaries of the Company. Holdings' guarantee is secured by a pledge of
the stock of the Company. The Company's obligations also are secured by first
priority liens on certain real property fee interests of the Company and its
subsidiaries and on certain unencumbered leasehold interests of the Company and
its subsidiaries.
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Covenants. The obligation of the lenders under the Refinanced Credit
Facility to advance funds is subject to the satisfaction of certain conditions
customary in agreements of this type. In addition, the Company is subject to
certain customary affirmative and negative covenants contained in the Refinanced
Credit Facility, including, without limitation, covenants that restrict, subject
to specified exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) mergers or acquisitions, (iii) asset sales, (iv) the granting
of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in
transactions with affiliates, or (vii) cash capital expenditures. Certain of
these covenants are more restrictive than those in favor of holders of the Notes
as described herein and as set forth in the Indenture. In addition, the
Refinanced Credit Facility requires that the Company maintain certain specified
financial covenants, including a minimum fixed charge coverage, a maximum ratio
of total debt to EBITDA and a minimum net worth.
Events of Default. The Refinanced Credit Facility also provides for
customary events of default. The occurrence of any of such events of default
could result in acceleration of the Company's obligations under the Refinanced
Credit Facility and foreclosure on the collateral securing such obligations,
which could have material adverse results to holders of the Notes.
DESCRIPTION OF OTHER HOLDINGS INDEBTEDNESS
THE NEW DISCOUNT DEBENTURES
The New Discount Debentures were issued in the New Discount Debenture
Placement upon consummation of the Merger. The New Discount Debentures will have
an aggregate principal amount of $193,363,570 at maturity and will mature on
July 15, 2005. The New Discount Debentures are senior unsecured obligations of
Holdings and rank senior in right of payment to all subordinated indebtedness of
Holdings, including the Seller Debentures. Until June 15, 2000, no interest will
accrue on the New Discount Debentures, but the Accreted Value (as defined in the
indenture governing the New Discount Debentures (the "New Debenture Indenture"))
will accrete at a rate of 13 5/8% (representing the amortization of the original
issue discount) from the date of original issuance until June 15, 2000, on a
semi-annual bond equivalent basis using a 360 day year comprised of twelve
30-day months, such that the Accreted Value shall be equal to the full principal
amount of the New Discount Debentures on June 15, 2000. The initial Accreted
Value per $1,000 principal amount of New Discount Debentures was $519.92
(representing the original purchase price). Beginning on June 15, 2000, cash
interest on the New Discount Debentures will accrue at a rate of 13 5/8% per
annum and will be payable semi-annually in arrears on each June 15 and December
15 of each year, commencing December 15, 2000, to the holders of record on the
immediately preceding June 1 and December 1.
On or after June 15, 2000, the New Discount Debentures may be redeemed, at
the option of Holdings, in whole at any time or in part from time to time, at a
redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest, to the redemption
date, if redeemed during the twelve-month period commencing on June 15 in the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------------ ----------------
<S> <C>
2000...................................... 106.8125%
2001...................................... 105.1094%
2002...................................... 103.4063%
2003...................................... 101.7031%
2004 and thereafter....................... 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to June 15, 1998, Holdings may use the
net proceeds of a Public Equity Offering (as defined in the New Debenture
Indenture) of Holdings or the Company to redeem up to 35% of the New Discount
Debentures at a redemption price equal to 110% of the Accreted Value thereof on
the date of redemption.
In the event of a Change of Control (as defined in the New Debenture
Indenture), each holder has the right to require the repurchase of such holder's
New Discount Debentures at a purchase price equal to 101% of
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<PAGE> 85
the Accreted Value thereof on the Change of Control Payment Date (as defined in
the New Debenture Indenture) (if such date is prior to June 15, 2000) or 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
Change of Control Payment Date (if such date is on or after June 15, 2000).
The New Debenture Indenture contains covenants that, among other things,
limit the ability of Holdings to enter into certain mergers or consolidations or
incur certain liens or of Holdings or its subsidiaries to incur additional
indebtedness, pay dividends or make certain other Restricted Payments (as
defined in the New Debenture Indenture), or engage in certain transactions with
affiliates. Under certain circumstances, Holdings will be required to make an
offer to purchase New Discount Debentures at a price equal to 100% of the
Accreted Value thereof on the date of purchase, if such date is prior to June
15, 2000, or 100% of the principal amount thereof, plus accrued interest to the
date of purchase, if such date is on or after June 15, 2000, with the proceeds
of certain Asset Sales (as defined in the New Debenture Indenture). The New
Debenture Indenture will contain certain customary events of defaults, which
will include the failure to pay interest and principal, the failure to comply
with certain covenants in the New Discount Debentures or the New Debenture
Indenture, a default under certain indebtedness, the imposition of certain final
judgments or warrants of attachment and certain events occurring under
bankruptcy laws.
Pursuant to the terms of a registration rights agreement entered into by
Holdings, Holdings filed a shelf registration statement with the Commission with
respect to the New Discount Debentures and paid the expenses related thereto.
Pursuant to such registration statement, the initial holder of the New Discount
Debentures sold its entire interest in the New Discount Debentures.
DESCRIPTION OF COMPANY INDEBTEDNESS
The 1995 Senior Notes. The 1995 Senior Notes were issued upon consummation
of the Merger in an aggregate principal amount of $520.3 million. The 1995
Senior Notes are senior unsecured obligations of the Company and are guaranteed
on a senior basis by the Company's wholly-owned subsidiaries. The 1995 Senior
Notes rank senior in right of payment to all subordinated indebtedness of the
Company, including the 1995 11% Senior Subordinated Notes, the Old RGC Notes,
the 1995 13.75% Senior Subordinated Notes and the 1991 Senior Subordinated
Notes. However, the 1995 Senior Notes are effectively subordinated to all
secured indebtedness of the Company and its subsidiaries, including indebtedness
under the New Credit Facility. The 1995 Senior Notes bear interest at the rate
of 10.45% per annum, payable on each June 15 and December 15. The 1995 Senior
Notes will mature on June 15, 2004.
The 1995 Senior Notes will be redeemable, at the option of the Company, in
whole at any time or in part from time to time, on and after June 15, 2000, at
the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on June 15 of the
year set forth below, plus, in each case, accrued and unpaid interest to the
date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------ ----------
<S> <C>
2000...................................... 105.225%
2001...................................... 103.483%
2002...................................... 101.742%
2003 and thereafter....................... 100.000%
</TABLE>
In addition, on or prior to June 15, 1998, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the 1995 Senior Notes originally
issued, at a redemption price equal to 108.957% of the principal amount thereof
if redeemed during the 12 months commencing on June 15, 1996 and 107.464% of the
principal amount thereof if redeemed during the 12 months commencing on June 15,
1997, in each case plus accrued and unpaid interest, if any, to the redemption
date. In order to effect the foregoing redemption with the proceeds of a Public
Equity Offering, the Company shall send the redemption notice not later than 60
days after the consummation of such Public Equity Offering.
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<PAGE> 86
The 1995 Senior Note Indenture provides that if a Change of Control (as
defined therein) occurs, each holder will have the right to require the Company
to repurchase such holder's 1995 Senior Notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
The 1995 Senior Note Indenture contains certain covenants, including, but
not limited to, covenants with respect to the following: (i) limitation on
dividends and other restricted payments; (ii) limitation on incurrences of
additional indebtedness; (iii) limitation on liens; (iv) limitation on asset
sales; (v) limitation on dividend and other payment restrictions affecting
subsidiaries; (vi) limitation on guarantees of certain indebtedness; (vii)
limitation on transactions with affiliates; (viii) limitation on mergers and
certain other transactions; and (ix) limitations on preferred stock of
subsidiaries.
A portion of the 1995 Senior Notes were issued in exchange for 1992 Senior
Notes outstanding at the time of the Merger. A total of $4.7 million aggregate
principal amount of 1992 Senior Notes that were not exchanged at the time of the
Merger remain outstanding. The 1992 Senior Notes mature on April 15, 2000. In
connection with the Merger, the indenture governing the 1992 Senior Notes was
amended to eliminate substantially all of the restrictive covenants contained
therein.
The 1996 Senior Notes. The 1996 Senior Notes were issued on June 6, 1996
in an aggregate principal amount of $100 million. The 1996 Senior Notes are
senior unsecured obligations of the Company and are guaranteed on a senior basis
by the Company's wholly-owned subsidiaries. The 1996 Senior Notes rank senior in
right of payment to all subordinated indebtedness of the Company, including the
1995 11% Senior Subordinated Notes, the Old RGC Notes, the 1995 13.75% Senior
Subordinated Notes and the 1991 Senior Subordinated Notes. However, the 1996
Senior Notes are effectively subordinated to all secured indebtedness of the
Company and its subsidiaries, including indebtedness under the New Credit
Facility. The 1996 Senior Notes bear interest at the rate of 10.45% per annum,
payable on each June 15 and December 15. The 1996 Senior Notes will mature on
June 15, 2004. The terms of the 1996 Senior Notes were designed to mirror the
terms of the 1995 Senior Notes. Accordingly, the indenture governing the 1996
Senior Notes contains terms, covenants and conditions which are substantially
identical in all material respects to the terms contained in the indenture
governing the 1995 Senior Notes.
The 1995 Senior Subordinated Notes. The 1995 Senior Subordinated Notes
were issued upon consummation of the Merger in an aggregate principal amount of
$524.0 million. The 1995 Senior Subordinated Notes are subordinated to the prior
payment when due of all Senior Indebtedness (as defined in the indenture (the
"1995 Senior Subordinated Note Indenture") governing the 1995 Senior
Subordinated Notes) and are guaranteed on a senior subordinated basis by the
Company's wholly-owned subsidiaries. The 1995 Senior Subordinated Notes bear
interest at a rate of 11% per annum, payable on each June 15 and December 15.
The 1995 Senior Subordinated Notes will mature on June 15, 2005. On or after
June 15, 2000, the 1995 Senior Subordinated Notes may be redeemed in whole at
any time or in part from time to time, at the option of the Company, at a
redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest to the redemption
date, if redeemed during the 12 months commencing on June 15 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
2000...................................................... 104.125%
2001...................................................... 102.750%
2002...................................................... 101.375%
2003 and thereafter....................................... 100.000%
</TABLE>
In addition, on or prior to June 15, 1998 the Company may, at its option,
use the net cash proceeds from one or more Public Equity Offerings to redeem up
to an aggregate of 35% of the principal amount of the 1995 Senior Subordinated
Notes originally issued, at a redemption price equal to 111% of the principal
amount thereof if redeemed during the 12 months commencing on June 15, 1995,
109.625% of the principal amount thereof if redeemed during the 12 months
commencing on June 15, 1996 and 108.25% of the principal amount
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<PAGE> 87
thereof if redeemed during the 12 months commencing on June 15, 1997, in each
case plus accrued and unpaid interest, if any, to the redemption date.
The 1995 Senior Subordinated Note Indenture provides that if a Change of
Control (as defined therein) occurs, each holder will have the right to require
the Company to repurchase such holder's 1995 11% Senior Subordinated Notes
pursuant to a Change of Control Offer (as defined therein) at 101% of the
principal amount thereof plus accrued interest, if any, to the date of
repurchase.
The 1995 Senior Subordinated Note Indenture contains certain covenants,
including, but not limited to, covenants with respect to the following matters:
(i) limitation on dividends and other restricted payments; (ii) limitation on
incurrences of additional indebtedness; (iii) limitation on liens; (iv)
limitation on asset sales; (v) limitation on dividend and other payment
restrictions affecting subsidiaries; (vi) limitation on transactions with
affiliates; (vii) limitation on preferred stock of subsidiaries; (viii)
limitation on mergers and certain other transactions; (ix) limitation on other
senior subordinated indebtedness; and (x) limitation on guarantees of certain
indebtedness.
A portion of the 1995 Senior Subordinated Notes were issued in exchange for
Old RGC Notes outstanding at the time of the Merger. A total of $2.1 million
aggregate principal amount of Old RGC 10 1/4% Notes, and $0.1 million aggregate
principal amount of Old RGC 9% Notes, that were not exchanged at the time of the
Merger remain outstanding. The Old RGC 10 1/4% Notes mature on July 15, 2002 and
the Old RGC 9% Notes mature on April 1, 2003. The Old RGC Notes, like the 1995
Senior Subordinated Notes, are subordinated to the prior payment when due of the
Senior Indebtedness of the Company. In connection with the Merger, the
indentures governing the Old RGC Notes were amended to eliminate substantially
all of the restrictive covenants contained therein.
The 1997 Senior Subordinated Notes. The 1997 Senior Subordinated Notes were
issued on March 16, 1997 in an aggregate principal amount of $155.0 million. The
1997 Senior Subordinated Notes are subordinated to the prior payment when due of
all Senior Indebtedness (as defined in the indenture (the "1997 Senior
Subordinated Note Indenture") governing the 1997 Senior Subordinated Notes) and
are guaranteed on a senior subordinated basis by the Company's wholly-owned
subsidiaries. The 1997 Senior Subordinated Notes bear interest at a rate of 11%
per annum, payable on each June 15 and December 15. The 1997 Senior Subordinated
Notes will mature on June 15, 2005. The terms of the 1997 Senior Subordinated
Notes were designed to mirror the terms of the 1995 Senior Subordinated Notes.
Accordingly, the 1997 Senior Subordinated Note Indenture contains terms,
covenants and conditions which are substantially identical in all material
respects to the terms contained in the 1995 Senior Subordinated Note Indenture.
SELLING DEBENTUREHOLDERS
This Prospectus relates to the sale by the Selling Debentureholders from
time to time of (i) up to $131.5 million initial aggregate principal amount of
the Seller Debentures that were issued to the stockholders of RSI as part of the
consideration they received upon consummation of the Merger and (ii) additional
Seller Debentures that may from time to time be issued by Holdings in payment of
interest thereon. As of the date of this Prospectus, the aggregate principal
amount of outstanding Seller Debentures was approximately $186.1 million.
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<PAGE> 88
The following table provides certain information with respect to the
Selling Debentureholders and the amount of Seller Debentures owned, offered and
to be owned after the offering by each Selling Debentureholder:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT
PRINCIPAL OF SELLER PRINCIPAL
AMOUNT OF DEBENTURES TO AMOUNT OF
SELLER DEBENTURES BE SELLER DEBENTURES
OWNED BEFORE SOLD IN THE TO BE OWNED
SELLING DEBENTUREHOLDERS OFFERING(1) OFFERING(1) AFTER OFFERING(2)
- -------------------------------------------- ----------------- -------------- -----------------
<S> <C> <C> <C>
Long Term Capital Portfolio L.P. $40,000,000 $ 40,000,000 $ 0
1 East Weaver Street
Greenwich, Connecticut 06830
Quantum Partners LDC 32,000,000 32,000,000 0
Kaya Flamboyan 9
Curacao
Netherlands Antilles
Quasar International Partners CV 8,000,000 8,000,000 0
De Ruyterkade 62
Curacao
Netherlands Antilles
Wells Fargo Bank, National Association 25,000,000 25,000,000 0
555 Montgomery Street, 10th Floor
San Francisco, CA 94111
BT Alex.Brown Incorporated(3) 4,725,890 4,725,890 0
130 Liberty Street
New York, NY 10006
</TABLE>
- ---------------
(1) In addition to the principal amount of Seller Debentures set forth in the
table, the Seller Debentures that may be offered for sale by the Selling
Debentureholders pursuant to this Prospectus include the Seller Debentures
that may be issued from time to time in lieu of cash interest payments
thereon. See "Description of the Seller Debentures."
(2) There is no assurance that the Selling Debentureholders will sell any or all
of the Seller Debentures offered by them.
(3) BT Securities Corporation, the predecessor of BT Alex.Brown Incorporated
("BT"), acted as lead underwriter with respect to the public offering of
debt securities issued by the Company to finance the Merger, for which it
received a customary underwriting discount. BT also acted as placement agent
for the issuance of the 1996 Senior Notes and the 1997 Senior Subordinated
Notes. Bankers Trust Company, an affiliate of BT, is administrative agent
and a lender under the New Credit Facility. See "Description of the Credit
Facility." BT has provided services to Food 4 Less in connection with the
procurement of financing and in consideration therefor Food 4 Less paid to
BT a fee of $2.5 million upon closing of the Merger. Such fee was satisfied
through the issuance by Holdings to BT of $2.5 million initial accreted
value of New Discount Debentures. BT also served as a dealer manager and
solicitation agent in connection with the debt exchange offers undertaken by
the Company in connection with the Merger, and received customary fees in
connection with such services. In addition, affiliates of BT invested in the
capital stock of Holdings pursuant to the New Equity Investment. After the
Merger, such affiliates owned in the aggregate approximately 900,000 shares
of Series A Preferred Stock and approximately 3,100,000 shares of Series B
Preferred Stock. See "Principal Stockholders" and "Description of Capital
Stock." BT has from time to time provided investment banking and financial
advisory services to one or more of Food 4 Less, Holdings, and the Company
and/or their respective affiliates and may continue to do so in the future.
BT has received customary fees for such services.
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<PAGE> 89
Holdings will pay all costs and expenses incurred in connection with the
registration under the Securities Act of the Seller Debentures offered by the
Selling Debentureholders including, without limitation, all registration and
filing fees, fees and expenses of compliance with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the Selling
Debentureholders in connection with blue sky qualifications of the Seller
Debentures), printing and duplicating expenses, messengers and delivery
expenses, fees and disbursements of counsel for Holdings and all independent
certified public accountants (including the expenses of any annual audit,
special audit or "cold comfort" letters in connection with the registration),
securities acts liability insurance (if the registrant elects to obtain such
insurance), the reasonable fees and expenses of any special experts retained in
connection with the registration and fees and expenses of other persons retained
by the registrant. Holdings will not receive any of the proceeds from the sale
of the Seller Debentures by the Selling Debentureholders.
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<PAGE> 90
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to Holdings, has advised Holdings that the
following discussion expresses their opinion as to the material federal income
tax consequences expected to result to holders from the purchase, ownership and
disposition of the Seller Debentures. Such opinion is based on current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations, judicial authority and current administrative
rulings and pronouncements of the Internal Revenue Service (the "Service").
There can be no assurance that the Service will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
The tax treatment of a holder of the Seller Debentures may vary depending
upon such holder's particular situation. Certain holders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH PURCHASER
SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF THE SELLER DEBENTURES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
STATED INTEREST
Holders of Seller Debentures will be required to include stated interest in
gross income in accordance with their method of accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT
General Original Issue Discount Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception. The "issue price" of a
debt instrument issued in exchange for stock, such as a Seller Debenture,
depends on whether the debt instrument or the stock is treated as "traded on an
established securities market." If the debt instrument is "traded on an
established securities market," its issue price will be its trading price
immediately following issuance. If the stock is so traded (but the debt
instrument received in exchange therefor is not), the issue price of the debt
instrument received will generally be equal to the fair market value of the
stock exchanged therefor.
If neither the debt instrument nor the stock is traded on an established
securities market, the issue price of the debt instrument will be equal to its
stated principal amount, assuming the debt instrument provides for "adequate
stated interest" (i.e., interest at least equal to the applicable federal rate),
and will be equal to its "imputed principal amount" (the sum of the present
values of all payments due under the debt instrument, using a discount rate
equal to the applicable federal rate) if either the debt instrument does not
provide for "adequate stated interest" or in the case of any "potentially
abusive situation" (including certain recent sales transactions).
The "stated redemption price at maturity" of a debt instrument is the sum
of its principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest" (defined generally as stated interest
that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
In general, the amount of original issue discount that a holder of a debt
instrument with original issue discount must include in gross income for federal
income tax purposes will be the sum of the daily portions of original issue
discount with respect to such debt instrument for each day during the taxable
year or portion of a taxable year on which such holder holds the debt
instrument. The daily portion is determined by allocating to each day of an
accrual period (generally, a period corresponding to the interval between
payment dates) a pro
87
<PAGE> 91
rata portion of an amount equal to the "adjusted issue price" of the debt
instrument at the beginning of the accrual period multiplied by the yield to
maturity of the debt instrument. The "adjusted issue price" is the issue price
of the debt instrument increased by the accrued original issue discount for all
prior accrual periods (and decreased by the amount of cash payments made in all
prior accrual periods and on the first day of the current accrual period, other
than qualified stated interest payments). The tax basis of the debt instrument
in the hands of the holder will be increased by the amount of original issue
discount, if any, on the debt instrument that is included in the holder's gross
income and will be decreased by the amount of any cash payments (other than
qualified stated interest payments) received with respect to the debt
instrument, whether such payments are denominated as principal or interest.
Notwithstanding the original issue discount rules described in the
preceding paragraphs, a holder of a debt instrument would not be required to
include original issue discount in income if such holder's tax basis in the debt
instrument were to exceed the debt instrument's stated principal amount. In
addition, a holder would be permitted to offset any original issue discount
income by an amount equal to the excess of such holder's tax basis (if less than
or equal to the stated principal amount) over the issue price of the debt
instrument.
Seller Debentures
Because interest on the Seller Debentures can, at the option of Holdings,
be paid in cash or in Secondary Securities, no payments made on the Seller
Debentures will be treated as qualified stated interest. In addition, assuming
that the issue price of the Seller Debentures is at least equal to their stated
principal amount (i.e., the Seller Debentures are not issued at a discount), it
will be presumed for purposes of computing original issue discount on the Seller
Debentures that Holdings will not exercise its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures. As a
result, the Seller Debentures will initially be treated as having been issued
with original issue discount equal to the excess of their stated redemption
price at maturity (which will be equal to the sum of the principal amount plus
all payments of stated interest) over their issue price. If, in fact, Holdings
exercises its option to issue Secondary Securities in lieu of paying cash
interest on the Seller Debentures, the Secondary Securities will not be treated
as payments of interest on the Seller Debentures. In this event, the Seller
Debentures and the Secondary Securities will be treated as a single original
issue discount obligation which will be deemed to be reissued for an issue price
equal to the original issue price of the Seller Debentures plus the principal
amount of the Secondary Securities issued with respect thereto, and will have
original issue discount equal to the excess of the stated redemption price at
maturity of such obligation (which will be equal to the sum of the principal
amounts of the Seller Debentures and the Secondary Securities plus all payments
of stated interest on such debt instruments) over the newly determined issue
price. The Seller Debentures will similarly be deemed to be reissued with a new
issue price each time Holdings exercises its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures.
If the issue price of the Seller Debentures is less than their stated
principal amount (i.e., if the Seller Debentures are issued at a discount), then
it will be presumed for purposes of computing original issue discount on the
Seller Debentures that Holdings will exercise its option to issue Secondary
Securities in lieu of paying cash interest on the Seller Debentures. In this
case, the Seller Debentures will be treated as having been issued with original
issue discount equal to the excess of their stated redemption price at maturity
(which will be equal to the sum of the principal amounts of the Seller
Debentures and the Secondary Securities plus all payments of stated interest)
over their issue price. If, in fact, Holdings pays cash interest on the Seller
Debentures instead of issuing Secondary Securities, such cash payments will be
treated as retiring a pro rata portion of the Seller Debentures (including any
Secondary Securities), and will result in taxable gain or loss to holders equal
to the difference between the amount of such cash payments and the holders'
allocable adjusted tax basis in the portion of the Seller Debentures (including
any Secondary Securities) so retired.
Because of the complexity of the application of the original issue discount
rules to the Seller Debentures, holders of Seller Debentures are strongly urged
to consult their tax advisors regarding the treatment of the Seller Debentures
under these rules.
88
<PAGE> 92
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
Generally, under Section 163(e)(5) of the Code, original issue discount is
not deductible until paid with respect to any debt instrument issued by a
corporation which (i) has a maturity date which is more than five years from the
date of issue, (ii) has a yield to maturity which equals or exceeds five
percentage points over the applicable federal rate for the calendar month in
which the obligation is issued and (iii) has "significant original issue
discount." A debt instrument is treated as having "significant original issue
discount" if the aggregate amount that would be includible in gross income with
respect to such debt instrument for periods before the close any accrual period
ending after the date five years after the date of issue exceeds the sum of (i)
the aggregate amount of interest to be paid in cash under the debt instrument
before the close of such accrual period and (ii) the product of the initial
issue price of such debt instrument and its yield to maturity. Moreover, if the
debt instrument's yield to maturity exceeds the applicable federal rate plus six
percentage points, a ratable portion of the issuing corporation's deduction for
original issue discount (the "Disqualified OID") will be denied. For purposes of
the dividends-received deduction under Section 243 of the Code, the Disqualified
OID will be treated as a dividend to the extent it would have been so treated if
it had been distributed by the issuing corporation with respect to its stock.
Due to their maturity date, yield to maturity and amount of original issue
discount, the Seller Debentures may be subject to the high yield discount
obligation rules described above, depending on the applicable federal rate in
effect on the date the Seller Debentures are issued. If such rules were
applicable to the Seller Debentures, Holdings would not be permitted to deduct
any original issue discount on such Seller Debentures until such original issue
discount were paid. In addition, the Disqualified OID would be treated as a
dividend for purposes of the dividends-received deduction under Section 243 of
the Code to the extent of Holdings' current and accumulated earnings and profits
and would not be deductible by Holdings.
MARKET DISCOUNT
The Code generally requires holders of "market discount bonds" to treat as
ordinary income any gain realized on the disposition (or gift) of such bonds to
the extent of the market discount accrued during the holder's period of
ownership. A "market discount bond" is a debt obligation purchased at a market
discount, subject to a statutory de minimis exception. For this purpose, a
purchase at a market discount includes a purchase at or after the original issue
at a price below the stated redemption price at maturity, or, in the case of a
debt instrument issued with original issue discount, at a price below (a) its
"issue price," plus (b) the amount of original issue discount includible in
income by all prior holders of the debt instrument, minus (c) all cash payments
(other than payments constituting qualified stated interest) received by such
previous holders. The accrued market discount generally equals a ratable portion
of the bond's market discount, based on the number of days the taxpayer has held
the bond at the time of such disposition, as a percentage of the number of days
from the date the taxpayer acquired the bond to its date of maturity.
AMORTIZABLE BOND PREMIUM
Generally, if the tax basis of an obligation held as a capital asset
exceeds the amount payable at maturity of the obligation, such excess will
constitute amortizable bond premium that the holder may elect to amortize under
the constant interest rate method and deduct over the period from his
acquisition date to the obligation's maturity date (or an earlier call date, if
the use of such date produces a smaller amount of amortizable bond premium). A
holder who elects to amortize bond premium must reduce his tax basis in the
related obligation by the amount of the aggregate deductions allowable for
amortizable bond premium. Amortizable bond premium will be treated under the
Code as an offset to interest income on the related debt instrument for federal
income tax purposes, subject to the promulgation of Treasury Regulations
altering such treatment.
DISPOSITION
In general, a holder of Seller Debentures will recognize gain or loss upon
the sale, exchange, redemption or other taxable disposition of such Seller
Debentures measured by the difference between (i) the amount of cash and the
fair market value of property received (except to the extent attributable to
accrued interest on the Seller Debentures) and (ii) the holder's tax basis in
the Seller Debentures (as increased by any original issue discount and market
discount previously included in income by the holder and decreased by any
amortizable
89
<PAGE> 93
bond premium, if any, deducted over the term of the Seller Debentures). Under
the recently enacted Taxpayer Relief Act of 1997, net capital gain (i.e.,
generally, capital gain in excess of capital loss) recognized by an individual
from the sale of a capital asset that has been held for more than 18 months will
be subject to tax at a rate not to exceed 20%, capital gain from the sale of an
asset held for more than 12 months but not more than 18 months will continue to
be subject to tax at a rate not to exceed 28%, and capital gain recognized from
the sale of a capital asset that has been held for 12 months or less will
continue to be subject to tax at ordinary income tax rates. In addition, capital
gain recognized by a corporate taxpayer will continue to be subject to tax at
the ordinary income tax rates applicable to corporations.
ELECTION
A holder of Seller Debentures, subject to certain limitations, may elect to
include all interest and discount on the Seller Debentures in gross income under
the constant yield method. For this purpose, interest includes stated and
unstated interest, acquisition discount, original issue discount, de minimis
market discount and market discount, as adjusted by any acquisition premium.
Such election, if made in respect of a market discount bond, will constitute an
election to include market discount in income currently on all market discount
bonds acquired by such holder on or after the first day of the first taxable
year to which the election applies. See "-- Market Discount."
BACKUP WITHHOLDING
A holder of Seller Debentures may be subject to backup withholding at the
rate of 31% with respect to interest paid on, original issue discount accrued on
and gross proceeds from the sale of, the Seller Debentures unless (i) such
holder is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of Seller Debentures who does not provide Holdings
with his or her correct taxpayer identification number may be subject to
penalties imposed by the Service.
Holdings will report to holders of the Seller Debentures and the Service
the amount of any "reportable payments" (including any interest paid and any
original issue discount accrued on the Seller Debentures) and any amount
withheld with respect to the Seller Debentures during the calendar year.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF SELLER DEBENTURES IN
LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH
HOLDER OF SELLER DEBENTURES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER FROM THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SELLER DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
The Seller Debentures may be sold from time to time to purchasers directly
by any of the Selling Debentureholders. Alternatively, the Selling
Debentureholders may from time to time offer the Seller Debentures through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Debentureholders and/or the purchasers of Seller Debentures for whom they may
act as agents. The Selling Debentureholders and any underwriters, dealers or
agents that participate in the distribution of Seller Debentures may be deemed
to be underwriters, and any profit on the sale of Seller Debentures by them and
any discounts, commissions or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. At the time a particular offer of Seller Debentures is
made, to the extent required, a prospectus supplement will be distributed which
will set forth the aggregate amount of Seller Debentures being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, any
90
<PAGE> 94
discounts, commissions and other items constituting compensation from the
Selling Debentureholders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers.
The distribution of the Seller Debentures may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If underwriters are used in an offering of Seller Debentures, the name of
each managing underwriter, if any, and any other underwriters and terms of the
transaction, including any underwriting discounts and other items constituting
compensation of the underwriters and dealers, if any, will be set forth in the
prospectus supplement relating to such offering and the Seller Debentures will
be acquired by the underwriters for their own accounts and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. Any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time. It is
anticipated that any underwriting agreement pertaining to any Seller Debentures
will (1) entitle the underwriters to indemnification by Holdings against certain
civil liabilities under the Securities Act, or to contribution with respect to
payments which the underwriters may be required to make in respect thereof, (2)
provide that the obligations of the underwriters will be subject to certain
conditions precedent and (3) provide that the underwriters will be obligated to
purchase all Seller Debentures offered in a particular offering if any such
Seller Debentures are purchased.
Under applicable rules and regulations of the Exchange Act, any person
engaged in the distribution of the Seller Debentures may not simultaneously
engage in certain market making activities with respect to such Seller
Debentures for a period of nine business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, each Selling
Debentureholder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rules 10b-2,
10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of
any of the Seller Debentures by Selling Debentureholders.
LEGAL MATTERS
The validity of the Seller Debentures to be offered hereby were passed upon
for Holdings by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated balance sheets of Food 4 Less Holdings, Inc., as of
February 2, 1997, January 28, 1996 and January 29, 1995 and the related
consolidated statements of operations, cash flows and stockholders' equity for
the 53 weeks ended February 2, 1997, the 52 weeks ended January 28, 1996, the 31
weeks ended January 29, 1995 and the 52 weeks ended June 25, 1994 and the
related financial statement schedules included in this Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated statements of operations of Ralphs Supermarkets, Inc. for
the years ended January 30, 1994 and January 29, 1995 have been included in this
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Holdings is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by Holdings with the Commission may be inspected and copies at
the Commission's public reference room located at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C.
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<PAGE> 95
20549, and at the public reference facilities in the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661.
Copies of such material may be obtained at prescribed rates by writing to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. Certain of such reports, proxy statements and other information are also
available from the Commission over the Internet at http://www.sec.gov.
This Prospectus is included as part of a registration statement on Form S-1
(together with all amendments and exhibits thereto, including documents and
information incorporated by reference, the "Registration Statement") filed with
the Commission by Holdings, relating to the registration under the Securities
Act of the Seller Debentures offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission, to which reference is hereby made for further information with
respect to Holdings and the Seller Debentures offered hereby. Statements
contained herein concerning the provisions of documents filed with, or
incorporated by reference in, the Registration Statement as exhibits are
necessarily summaries of such provisions and documents and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
92
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FOOD 4 LESS HOLDINGS, INC.:
Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-2
Consolidated balance sheets as of January 29, 1995, January 28, 1996 and February 2,
1997................................................................................ F-3
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.................................................................... F-5
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.................................................................... F-6
Consolidated statements of stockholder's 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............................................. F-8
Notes to consolidated financial statements............................................ F-9
Consolidated balance sheet as of October 12, 1997 (unaudited)......................... F-36
Consolidated statement of operations for the 36 weeks ended October 12, 1997
(unaudited)......................................................................... F-38
Consolidated statement of cash flows for the 36 weeks ended October 12, 1997
(unaudited)......................................................................... F-39
Consolidated statement of stockholders' deficit for the 36 weeks ended October 12,
1997 (unaudited).................................................................... F-40
Notes to consolidated financial statements (unaudited)................................ F-41
RALPHS SUPERMARKETS, INC.:
Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-44
Consolidated statements of operations for the years ended January 30, 1994 and January
29, 1995............................................................................ F-45
Notes to consolidated financial statements............................................ F-46
</TABLE>
F-1
<PAGE> 97
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)
F-2
<PAGE> 98
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.
F-3
<PAGE> 99
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
-------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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.
F-4
<PAGE> 100
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
-------------------------------------------------------
31 WEEKS 52 WEEKS 53 WEEKS
52 WEEKS ENDED ENDED ENDED
ENDED JANUARY JANUARY FEBRUARY
JUNE 25, 29, 28, 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)......... 2,126,302 1,296,810 3,527,120 4,380,241
---------- ---------- ---------- ----------
GROSS PROFIT.............................. 458,858 259,712 807,989 1,136,018
SELLING, GENERAL, ADMINISTRATIVE AND
OTHER, NET.............................. 378,376 219,696 744,449 933,414
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.
F-5
<PAGE> 101
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
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-6
<PAGE> 102
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(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.
F-7
<PAGE> 103
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 TREASURY STOCK
--------------------- ------------------- ------------------- ------------------
NUMBER NUMBER NUMBER NUMBER
OF OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- --------- ------- ---------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 26, 1993.................. -- $ -- -- $ -- 1,385,265 $ 14 -- $ --
Net loss................................. -- -- -- -- -- -- -- --
Purchase of Common Stock................. -- -- -- -- (3,483) -- -- --
Payments of Stockholders' Notes.......... -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- ---- -------- -------
BALANCES AT JUNE 25, 1994.................. -- -- -- -- 1,381,782 14 -- --
Net loss................................. -- -- -- -- -- -- -- --
Issuance of Common Stock................. -- -- -- -- 5,504 -- -- --
Purchase of Common Stock................. -- -- -- -- (1,117) -- -- --
Payments of Stockholders' Notes.......... -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- ---- -------- -------
BALANCES AT JANUARY 29, 1995............... -- -- -- -- 1,386,169 14 -- --
Net loss................................. -- -- -- -- -- -- -- --
Payments of Stockholders' Notes.......... -- -- -- -- -- -- -- --
Stock split of Common Stock (16.58609143
shares to 1 share)..................... -- -- -- -- 21,604,957 216 -- --
Purchase of Treasury Stock............... -- -- -- -- -- -- (421,237) (3,547)
Issuance of Preferred Stock.............. 10,900,000 109,000 3,100,000 31,000 -- -- -- --
Conversion of Common Stock to Preferred
Stock.................................. 5,783,244 57,831 -- -- (5,783,244) (58) -- --
Preferred Stock Issuance Costs........... -- (5,000) -- -- -- -- -- --
Exchange RGC liability for stock
options................................ -- -- -- -- -- -- -- --
Repurchase Stock Options................. -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- ---- -------- -------
BALANCES AT JANUARY 28, 1996............... 16,683,244 161,831 3,100,000 31,000 17,207,882 172 (421,237) (3,547)
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 (421,237) $(3,547)
========== ======== ========= ======= ========== ==== ======== =======
<CAPTION>
STOCK-
STOCK- ADD'L HOLDERS'
HOLDERS' PAID-IN RETAINED EQUITY
NOTES CAPITAL DEFICIT (DEFICIT)
-------- -------- --------- ---------
<S> <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............... -- -- -- (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............... (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............... $ (592) $ 56,091 $(564,223) $(319,268)
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 104
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.
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
F-9
<PAGE> 105
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-10
<PAGE> 106
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
Buildings and improvements.................................... 5-40 years
Equipment and fixtures........................................ 3-10 years
Property under capital leases and leasehold interests......... 3-40 years (lease term)
</TABLE>
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are amortized over
the term of the related debt using the effective interest method.
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.
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.
F-11
<PAGE> 107
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-12
<PAGE> 108
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-13
<PAGE> 109
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-14
<PAGE> 110
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 principal due 2005 with
interest payable semi-annually in arrears................... $ -- $ 524,005 $ 524,005
13.75% Senior Subordinated Notes principal due 2005 with
interest payable semi-annually in arrears................... -- 140,184 140,184
13.75% Senior Subordinated Notes principal due 2001 with
interest payable semi-annually in arrears................... 145,000 4,816 4,816
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.
F-15
<PAGE> 111
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-16
<PAGE> 112
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
Following is a summary of future minimum lease payments under operating
leases at February 2, 1997 (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------
<S> <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>
F-17
<PAGE> 113
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-18
<PAGE> 114
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-19
<PAGE> 115
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-20
<PAGE> 116
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-21
<PAGE> 117
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-22
<PAGE> 118
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-23
<PAGE> 119
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
At the time that Food 4 Less acquired Alpha Beta in 1991, it learned that
certain underground storage tanks located on the site of the La Habra facility
may have previously released hydrocarbons. In connection with the acquisition of
Alpha Beta, the seller (who is also the lessor of the La Habra facility) agreed
to retain responsibility, subject to certain limitations, for remediation of the
release.
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other companies
in the same or similar business. The Company believes it is in substantial
compliance with such laws, rules and regulations. These laws, rules, regulations
and agency activities change from time to time, and such changes may affect the
ongoing business and operations of the Company.
F-24
<PAGE> 120
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C> <C>
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%
</TABLE>
F-25
<PAGE> 121
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 JANUARY
2, 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 JANUARY
2, 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:
<TABLE>
<S> <C> <C>
Discount rate..................................... 7.50% 7.50%
Rate of pay increase.............................. 5.00% 5.00%
</TABLE>
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.
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
F-26
<PAGE> 122
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-27
<PAGE> 123
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Postretirement 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:
<TABLE>
<S> <C> <C>
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%
</TABLE>
- ---------------
* 1997 percentage decreases by 0.50% per year until 6.00% in 2002 and all future
years.
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)
======= =======
</TABLE>
F-28
<PAGE> 124
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following are the assumptions used in determining the funded status:
<TABLE>
<S> <C> <C>
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.
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>
F-29
<PAGE> 125
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 02/02/97 LIFE PRICE AT 02/02/97 PRICE
- ---------------- ----------- ----------- --------- ----------- ---------
<S> <C> <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.
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.
F-30
<PAGE> 126
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
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.
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
F-31
<PAGE> 127
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-32
<PAGE> 128
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-33
<PAGE> 129
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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 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>
F-34
<PAGE> 130
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 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.
F-35
<PAGE> 131
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 12,
1997
-----------
(UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 63,524
Trade receivables, less allowance of $3,630 at October 12, 1997.............. 42,078
Notes and other receivables.................................................. 520
Inventories.................................................................. 492,894
Patronage receivables from suppliers......................................... 3,532
Prepaid expenses and other................................................... 23,713
----------
Total current assets................................................. 626,261
INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES:
Associated Wholesale Grocers................................................. 6,797
Certified Grocers of California and others................................... 4,945
PROPERTY AND EQUIPMENT:
Land......................................................................... 173,878
Buildings.................................................................... 193,947
Leasehold improvements....................................................... 257,383
Fixtures and equipment....................................................... 448,970
Construction in progress..................................................... 37,686
Leased property under capital leases......................................... 225,322
Leasehold interests.......................................................... 110,673
----------
1,447,859
Less: Accumulated depreciation and amortization.............................. 367,171
----------
Net property and equipment........................................... 1,080,688
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of $8,605 at October
12, 1997.................................................................. 50,764
Goodwill, less accumulated amortization of $123,453 at October 12, 1997...... 1,286,560
Other, net................................................................... 20,753
----------
$ 3,076,768
==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-36
<PAGE> 132
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
OCTOBER 12,
1997
-----------
(UNAUDITED)
<S> <C>
CURRENT LIABILITIES:
Accounts payable............................................................. $ 302,081
Accrued payroll and related liabilities...................................... 110,476
Accrued interest............................................................. 58,247
Other accrued liabilities.................................................... 216,889
Income taxes payable......................................................... 1,929
Current portion of self-insurance liabilities................................ 48,251
Current portion of long-term debt............................................ 6,409
Current portion of obligations under capital leases.......................... 32,047
----------
Total current liabilities............................................ 776,329
SENIOR DEBT, net of current portion............................................ 1,314,024
OBLIGATIONS UNDER CAPITAL LEASES............................................... 133,177
SENIOR SUBORDINATED DEBT....................................................... 689,379
HOLDINGS DEBENTURES............................................................ 311,508
DEFERRED INCOME TAXES.......................................................... 20,874
SELF-INSURANCE LIABILITIES..................................................... 87,758
LEASE VALUATION RESERVE........................................................ 56,314
OTHER NON-CURRENT LIABILITIES.................................................. 108,416
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000 shares
authorized; 16,683,244 shares issued at October 12, 1997 (aggregate
liquidation value of $196.1 million at October 12, 1997).................. 161,831
Convertible Series B Preferred Stock, $.01 par value, 25,000,000 shares
authorized; 3,100,000 shares issued at October 12, 1997 (aggregate
liquidation value of $36.4 million at October 12, 1997)................... 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized; 17,207,882 shares
issued at October 12, 1997................................................ 172
Non-Voting Common Stock, $.01 par value, 25,000,000 shares authorized; no
shares issued at October 12, 1997......................................... --
Additional capital........................................................... 54,643
Notes receivable from stockholders........................................... (584)
Retained deficit............................................................. (666,124)
----------
(419,062)
Treasury stock: 231,297 shares of common stock at October 12, 1997........... (1,949)
----------
Total stockholders' deficit.................................................. (421,011)
----------
$ 3,076,768
==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-37
<PAGE> 133
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS
ENDED
OCTOBER 12,
1997
-----------
<S> <C>
SALES......................................................................... $ 3,778,470
COST OF SALES (including purchases from related parties of $48,958 for the 36
weeks ended October 12, 1997)............................................... 3,000,531
-----------
GROSS PROFIT.................................................................. 777,939
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................. 615,933
AMORTIZATION OF GOODWILL...................................................... 24,396
-----------
OPERATING INCOME.............................................................. 137,610
INTEREST EXPENSE:
Interest expense, excluding amortization of deferred financing costs........ 187,122
Amortization of deferred financing costs.................................... 4,406
-----------
191,528
LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES.............. (53,918)
PROVISION FOR INCOME TAXES.................................................... --
-----------
LOSS BEFORE EXTRAORDINARY CHARGES............................................. (53,918)
EXTRAORDINARY CHARGES......................................................... 47,983
-----------
NET LOSS...................................................................... $ (101,901)
===========
LOSS PER COMMON SHARE:
Loss before extraordinary charges........................................... $ (1.47)
Extraordinary charges....................................................... (1.31)
-----------
Net loss.................................................................... $ (2.78)
===========
Average Number of Common Shares and Equivalents Outstanding.............. 36,682,949
===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-38
<PAGE> 134
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS
ENDED
OCTOBER 12,
1997
-----------
<S> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers.......................................................... $ 3,778,470
Cash paid to suppliers and employees.................................................. (3,592,757)
Interest paid......................................................................... (132,452)
Income taxes paid..................................................................... (27)
Interest received..................................................................... 322
Other, net............................................................................ (8,861)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... 44,695
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.......................................... 25,736
Payment for purchase of property and equipment........................................ (111,154)
Payment of acquisition costs, net of cash acquired.................................... (6,823)
Other, net............................................................................ (1,959)
-----------
NET CASH USED BY INVESTING ACTIVITIES................................................... (94,200)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt.......................................... 721,961
Payments of long-term debt............................................................ (688,432)
Payments of capital lease obligations................................................. (20,344)
Increase (decrease) in revolving loan, net............................................ 37,500
Sale of treasury stock................................................................ 150
Deferred financing costs and other.................................................... (5,395)
-----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........................................ 45,440
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (4,065)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................ 67,589
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $ 63,524
===========
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net loss.............................................................................. $ (101,901)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization....................................................... 121,047
Non-cash extraordinary charges...................................................... 39,122
Non-cash interest expense........................................................... 27,802
Amortization of debt discount....................................................... 322
Amortization of debt premium........................................................ (368)
Loss (gain) on sale of assets....................................................... (10)
Change in assets and liabilities, net of effects from acquisition of business:
Accounts and notes receivable....................................................... 5,394
Inventories......................................................................... 9,201
Prepaid expenses and other.......................................................... (9,482)
Accounts payable and accrued liabilities............................................ (42,630)
Self-insurance liabilities.......................................................... (3,575)
Deferred income taxes............................................................... (200)
Income taxes payable................................................................ (27)
-----------
Total adjustments................................................................... 146,794
-----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES........................................ $ 44,695
===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Fixed assets acquired through the issuance of capital leases.......................... $ 36,084
===========
Retirement of capital leases.......................................................... $ 4,893
===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-39
<PAGE> 135
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK TREASURY STOCK
--------------------- --------------------- --------------------- ---------------------
NUMBER NUMBER NUMBER NUMBER
OF OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 2, 1997........ 16,683,244 $161,831 3,100,000 $ 31,000 17,207,882 $ 172 (421,237) $ (3,547)
Payments on Stockholder's Notes... -- -- -- -- -- -- -- --
Sale of Treasury Stock............ -- -- -- -- -- -- 189,940 1,598
Net loss (unaudited).............. -- -- -- -- -- -- -- --
---------- -------- --------- -------- ---------- -------- -------- --------
BALANCES AT OCTOBER 12, 1997
(UNAUDITED)....................... 16,683,244 $161,831 3,100,000 $ 31,000 17,207,882 $ 172 (231,297) $ (1,949)
========== ======== ========= ======== ========== ======== ======== ========
<CAPTION>
TOTAL
STOCK- STOCK-
HOLDERS' ADDITIONAL RETAINED HOLDERS'
NOTES CAPITAL DEFICIT DEFICIT
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCES AT FEBRUARY 2, 1997......... $ (592) $ 56,091 $(564,223) $(319,268)
Payments on Stockholder's Notes.... 8 -- -- 8
Sale of Treasury Stock............. -- (1,448) -- 150
Net loss (unaudited)............... -- -- (101,901) (101,901)
------ -------- --------- ---------
BALANCES AT OCTOBER 12, 1997
(UNAUDITED)........................ $ (584) $ 54,643 $(666,124) $(421,011)
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-40
<PAGE> 136
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 12, 1997
(UNAUDITED)
1. ORGANIZATION AND ACQUISITION
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, a Delaware corporation ("Ralphs"). Ralphs is a
retail supermarket company with a total of 406 stores which are located in
Southern California (342), Northern California (27) and certain areas of the
Midwest (37). The Company is the largest supermarket operator in Southern
California. The Company operates the second largest conventional supermarket
chain in the region under the "Ralphs" name and the largest warehouse
supermarket chain in the region under the "Food 4 Less" name.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet and statement of stockholder's
deficit of the Company as of October 12, 1997 and the consolidated statements of
operations and cash flows for the interim periods ended October 6, 1996 and
October 12, 1997 are unaudited, but include all adjustments (consisting of only
normal recurring accruals) which the Company considers necessary for a fair
presentation of its consolidated financial position, results of operations and
cash flows for these periods. These interim financial statements do not include
all disclosures required by generally accepted accounting principles and,
therefore, should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 1997. The results of operations for the interim
periods are not necessarily indicative of the results for a full fiscal year.
Inventories
Inventories, which consist primarily of grocery products, are stated at the
lower of cost or market. Cost has been principally determined using the last-in,
first-out ("LIFO") method. If inventories had been valued using the first-in,
first-out ("FIFO") method, inventories would have been higher by $24.3 million
and $26.6 million at February 2, 1997 and October 12, 1997, respectively, and
gross profit and operating income would have been greater by $3.7 million and
$2.2 million for the 36 weeks ended October 6, 1996 and October 12, 1997,
respectively.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. Deferred taxes
result from the future tax consequences associated with temporary differences
between the amount of assets and liabilities recorded for tax and financial
accounting purposes. A valuation allowance for deferred tax assets is recorded
to the extent the Company cannot determine, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," that the ultimate realization of net deferred tax assets is more likely
than not.
For the period ended October 12, 1997, the estimated effective income tax
rate is less than the U.S. statutory rate primarily due to a 100% valuation
allowance provided against the additional deferred tax assets that arose from
the current operating loss.
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.
F-41
<PAGE> 137
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 12, 1997
(UNAUDITED)
Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the October 12, 1997 presentation.
New Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS No. 128") was issued. SFAS No. 128 is effective for
earnings per share calculations for periods ending after December 15, 1997. The
new method of calculating earnings per share will have no effect on the
Company's historical earnings per share.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. Adoption of this
statement will not have a material effect on historical results of operations.
3. RESTRUCTURING CHARGE
During the 36 weeks ended October 12, 1997, the Company utilized $2.8
million and $2.9 million of the remaining restructuring reserve related to the
fiscal 1995 $75.2 and $47.9 million restructuring charges, respectively. The
amounts utilized primarily include write-downs of property and equipment ($1.6
million) and payments for lease obligations ($3.6 million). At October 12, 1997
approximately $19.6 million of the restructuring accrual related to the $75.2
million charge and $14.1 million of the restructuring accrual related to the
$47.9 million charge 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.
4. DEBT
During the first quarter of fiscal 1997, Ralphs issued $155 million
principal amount of 11% Senior Subordinated Notes due 2005 (the "1997 11% Senior
Subordinated Notes"), with terms substantially identical to Ralphs' existing 11%
Senior Subordinated Notes, at a price of 105.5% of their principal amount,
resulting in gross proceeds of $163.5 million. The proceeds were used to redeem
all of Ralphs' $145 million principal amount of 13.75% Senior Subordinated Notes
at a price of 106.1% of their principal amount and to pay the related accrued
interest through the redemption date, which was April 28, 1997. The remaining
proceeds were used to pay fees and expenses associated with the issuance of the
1997 11% Senior Subordinated Notes.
During the first quarter of fiscal 1997, the Company also amended and
restated its existing credit facility ("Old Credit Facility") to lower interest
margins and allow more flexibility with respect to application of proceeds from
certain assets sales and capital expenditures. The amended and restated credit
facility (the "New Credit Facility") consists of a $200.0 million Term Loan A
Facility and a $350.0 million Term Loan B Facility (together, the "Term Loans")
and a $325.0 million Revolving Credit Facility ("Revolving Facility") under
which working capital loans may be made and commercial or standby letters of
credit in the maximum of $150.0 million may be issued.
Borrowings under the New Credit Facility bear interest at the bank's Base
Rate (as defined) plus a margin ranging from 0.25 percent to 1.75 percent or the
Eurodollar Rate (as defined) plus a margin ranging from 1.25 percent to 2.75
percent. At October 12, 1997, $548.3 million was outstanding under the Term
Loans, $136.9 was outstanding under the Revolving Facility, and $75.5 million of
standby Letters of Credit had been issued on behalf of the Company. At October
12, 1997, the weighted average interest rates on the
F-42
<PAGE> 138
FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 12, 1997
(UNAUDITED)
Term Loans and on the Revolving Facility were 7.82 percent and 7.83 percent,
respectively. Quarterly principal installments on the Term Loans continue to
2004, with principal amounts due 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.
As a result of the refinancings described above, the Company recorded
extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0
million, consisting of the call premium on the 13.75% Senior Subordinated Notes
and the write-off of deferred financing costs associated with the Old Credit
Facility and the 13.75% Senior Subordinated Notes.
5. RELATED PARTY TRANSACTIONS
During the 12 weeks ended October 12, 1997 and October 6, 1996, the Company
purchased $16.5 million and $19.8 million, respectively, in inventory from
Certified Grocers. During the 36 weeks ended October 12, 1997 and October 6,
1996, the Company purchased $49.0 million and $67.7 million, respectively, in
inventory from Certified Grocers.
6. SUBSEQUENT EVENT
On November 6, 1997, the Company, Fred Meyer, Inc., a Delaware corporation
("Fred Meyer"), and FFL Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Fred Meyer ("Acquisition"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement, Acquisition would merge with and into the Company (the "Merger"),
subject to certain conditions being satisfied or waived. Pursuant to the Merger
Agreement, the stockholders of the Company would receive an aggregate of the
greater of (i) 22.5 million shares of Fred Meyer Common Stock or (ii) the lesser
of (A) the number of shares of Fred Meyer Common Stock equal to $600 million
divided by the average closing price of the Fred Meyer Common Stock on the New
York Stock Exchange for 15 out of the 35 trading days ending on the second
trading day preceding the effective date of the Merger or (B) 24 million shares
of Fred Meyer Common Stock; provided, however, that such aggregate number of
shares of Fred Meyer Common Stock will be reduced (i) to the extent necessary to
terminate or otherwise satisfy the Company's obligations under existing stock
options and warrants and (ii) upon the occurrence of certain other events, in
each case, as specified in the Merger Agreement. In addition, Fred Meyer would
assume or refinance the debt of the Company. Conditions to the consummation of
the Merger include the receipt of regulatory approvals and approval by the
stockholders of Fred Meyer and the Company. Certain shareholders of the Company
holding approximately 64.3% of the aggregate voting power of the Company have
entered into agreements to vote their Company shares in favor of the Merger.
F-43
<PAGE> 139
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ralphs Supermarkets, Inc.:
We have audited the accompanying consolidated statements of operations of
Ralphs Supermarkets, Inc. and subsidiaries for the years ended January 30, 1994
and January 29, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of Ralphs
Supermarkets, Inc. and subsidiaries for the years ended January 30, 1994 and
January 29, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 9, 1995
F-44
<PAGE> 140
RALPHS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 30, 1994 JANUARY 29, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Sales................................................ $2,730,157 100.0% $2,724,604 100.0%
Cost of sales........................................ 2,093,727 76.7 2,101,033 77.1
---------- ----- ---------- -----
Gross profit....................................... 636,430 23.3 623,571 22.9
Selling, general and administrative expenses....... 471,000 17.2 467,022 17.2
Amortization of excess cost over net assets
acquired........................................ 10,996 0.4 10,996 0.4
Provision for restructuring........................ 2,374 0.1 -- --
---------- ----- ---------- -----
Operating income................................... 152,060 5.6 145,553 5.3
Other expenses:
Interest expense, net.............................. 108,755 4.0 112,651 4.1
Loss on disposal of assets......................... 1,940 0.1 784 0.0
Provision for legal settlement..................... -- -- -- --
Provision for earthquake losses.................... 11,048 0.4 -- --
---------- ----- ---------- -----
Earnings before income taxes......................... 30,317 1.1 32,118 1.2
Income tax benefit................................... (108,049) (4.0) -- --
---------- ----- ---------- -----
Net earnings......................................... $ 138,366 5.1% $ 32,118 1.2%
========= ===== ========= =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 141
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
At February 2, 1992, Ralphs Grocery Company was an indirect wholly owned
subsidiary of Federated Stores, Inc. ("Federated"). Two wholly owned
subsidiaries of Federated, Federated Holdings III, Inc. ("Holdings III") and
Allied Stores Corporation ("Allied") directly owned the common stock of Ralphs
Grocery Company approximately 84% and 16% respectively. In January 1990 Holdings
III and Allied, and certain other subsidiaries of Federated, each filed
petitions for relief under Chapter 11, Title 11 of the United States Code
("Chapter 11"). In March 1990, Federated filed a petition for relief under
Chapter 11. Pursuant to the plans of reorganization for Federated and certain of
its subsidiaries, Ralphs Supermarkets, Inc. was formed to hold the outstanding
shares of common stock of Ralphs Grocery Company. On February 3, 1992, Holdings
III and Allied contributed their shares of Ralphs Grocery Company to Ralphs
Supermarkets, Inc. in exchange for the issuance by Ralphs Supermarkets, Inc. of
Ralphs Supermarkets, Inc. shares in the same proportion in Ralphs Grocery
Company shares were owned ("Internal Reorganization"). For financial reporting
purposes, this transaction was recorded at predecessor cost. For Federal tax
purposes, a new basis was established at Ralphs Supermarket, Inc. as more fully
described in Note 11.
Under the plans of reorganization for Federated, Holdings III and certain
other subsidiaries of Federated (the "FSI Plan"), all Ralphs Supermarkets, Inc.
shares of common stock held by Holdings III were to be distributed to certain
creditors of Federated and Holdings III, including The Edward J. DeBartolo
Corporation ("EJDC"), Bank of Montreal ("BMO"), Banque Paribas ("BP") and Camdev
Properties Inc. ("Camdev"), and Federated. The FSI Plan was confirmed by the
Bankruptcy Court in January 1992 and was consummated on February 3, 1992. Under
the plan of reorganization of Allied and certain affiliates including Federated
Department Stores, Inc. (the "Allied-Federated Plan"), a portion of Allied's
Holding Company shares were to be distributed to BMO and BP. The
Allied-Federated Plan was confirmed by the Bankruptcy Court in January 1992 and
was consummated shortly after the FSI Plan.
Thus, following consummation of both the FSI Plan and the Allied-Federated
Plan and the transfer on July 19, 1993 of the shares of common stock in Ralphs
Supermarkets, Inc. held by Federated Stores, Inc. to Camdev, the approximate
ownership of Ralphs Supermarkets, Inc. is as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENT
OWNERSHIP OF RALPHS
SUPERMARKETS, INC.
COMMON STOCK
AS OF JULY 19, 1993
----------------------------
<S> <C>
EJDC................................................ 60.4%
BMO................................................. 10.1%
BP.................................................. 10.1%
Camdev.............................................. 12.8%
Federated Department Stores, Inc. (as successor by
merger to Allied)................................. 6.6%
</TABLE>
Pursuant to certain agreements entered into contemporaneously with the
effectiveness of the FSI Plan and the Allied-Federated Plan, certain income tax
liabilities of Ralphs Grocery Company, Federated, Allied, Federated Department
Stores, Inc. and other affiliates have been settled with the Internal Revenue
Service. In addition, Ralphs Grocery Company and certain affiliates including
Federated Department Stores, Inc., Allied and Federated (the "Affiliated Group")
entered into an agreement (the "Tax Indemnity Agreement") pursuant to which
Federated Department Stores, Inc. agreed to pay certain tax liabilities, if any,
relating to Ralphs Grocery Company being a member of the Affiliated Group. The
Tax Indemnity Agreement provides a formula to determine the amount of additional
tax liabilities through February 3, 1992 that Ralphs Grocery Company would be
obligated to pay the Affiliated Group. However, such additional liability, if
any, is limited to $10 million subject to certain adjustments.
F-46
<PAGE> 142
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Tax Indemnity agreement, both Ralphs Supermarkets, Inc. and
Ralphs Grocery Company have agreed to pay Federated Department Stores, Inc. $1
million annually for each of five years starting on February 3, 1992, and an
additional $5 million on February 3, 1997. These total payments of $10 million
have been recorded in the consolidated financial statements at February 2, 1992.
The five $1 million installments are to be paid by Ralphs Grocery Company and
the $5 million is the joint obligation of both Ralphs Supermarkets, Inc. and
Ralphs Grocery Company. Also, in the event Federated Department Stores, Inc. is
required to pay certain tax liabilities on behalf of Ralphs Grocery Company,
both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to
reimburse Federated Department Stores, Inc. up to an additional $10 million,
subject to certain adjustments. This additional obligation is the joint and
several obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company.
The $5 million payment and the potential $10 million payment may be paid, at the
option of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company, in cash or
newly issued Ralphs Supermarkets, Inc. Common Stock.
In connection with the consummation of the FSI Plan and the
Allied-Federated Plan, Ralphs Grocery Company and certain parties entered into
an agreement (the "Comprehensive Settlement Agreement") pursuant to which the
parties thereto, among other things, agreed to deliver releases to the various
parties to the Comprehensive Settlement Agreement as well as certain additional
parties. Under the Comprehensive Settlement Agreement, Ralphs Grocery Company
received general releases from Allied, Federated, Federated Department Stores,
Inc. and certain other affiliates which released it from any and all claims
which could have been asserted by the parties thereto prior to the effective
dates of FSI Plan and the Allied-Federated Plan other than for claims arising
under the Comprehensive Settlement Agreement, the FSI Plan, the Allied-Federated
Plan and the Tax Indemnity Agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
These consolidated financial statements present the results of operations
for Ralphs Supermarkets, Inc. and subsidiaries ("Ralphs") for the years ended
January 30, 1994 and January 29, 1995.
(b) Reporting Period
Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal
year-ends are as follows:
January 30, 1994 (Fiscal 1993)
January 29, 1995 (Fiscal 1994)
(c) Depreciation and Capitalized Interest
Depreciation of plant and equipment is calculated using the straight-line
method over the estimated useful lives of assets. Plant and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset. Useful lives range from 10 to 40 years for buildings and improvements and
3 to 20 years for fixtures and equipment.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. Interest
cost capitalized during fiscal 1993 and 1994 was $.740 million and $.324
million, respectively.
(d) Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized over the terms of the applicable debt agreements using the
effective interest method.
F-47
<PAGE> 143
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Pre-opening Costs
Pre-opening costs of new stores are deferred and expensed at the time the
store opens. If a new store is ultimately not opened, the costs are expensed
directly to selling, general and administrative expense at the time it is
determined that the store will not be opened.
(f) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired, resulting from the May 3, 1988
acquisition of Ralphs is being amortized using the straight-line method over 40
years. Ralphs assesses the recoverability of this intangible asset by
determining whether the amortization of the asset balance over its remaining
life can be recovered through projected undiscounted operating income (including
interest, depreciation and all amortization expense except amortization of
excess of cost over net assets acquired) over the remaining amortization period
of the excess of cost over net assets acquired. The amount of excess of cost
over net assets acquired impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting Ralphs' average cost
of funds.
(g) Acquired Leases
Beneficial lease rights and lease valuation reserves are recorded as the
net present value of the differences between contractual rents under existing
lease agreements and fair value of entering such lease agreements as of the May
3, 1988 acquisition of Ralphs. All beneficial lease rights and lease valuation
reserves arose solely as a result of the May 3, 1988 acquisition. Adjustments to
the carrying value of these assets would typically occur only through additional
business combinations or in the event of early lease termination. Beneficial
lease rights are amortized using the straight-line method over the terms of the
leases. Lease valuation reserves are amortized using the interest method over
the terms of the leases.
(h) Discounts and Promotional Allowances
Promotional allowances and vendor discounts are recorded as a reduction of
cost of sales in the accompanying statements of operations. Allowance proceeds
received in advance are deferred and recognized over the period earned.
(i) Income Taxes
Effective for the fiscal year ended February 2, 1992, Ralphs adopted
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." At the date of adoption such change had no impact on the
consolidated financial results.
(j) Reclassification
Certain amounts in the accompanying financial statements have been
reclassified to conform to the current year's presentation.
(k) Consolidation Policy
The consolidated financial statements include the accounts of Ralphs
Supermarkets, Inc., and its wholly owned subsidiary, Ralphs Grocery Company, and
its wholly owned subsidiary, collectively referred to as the Company. All
material intercompany balances and transactions are eliminated in consolidation.
F-48
<PAGE> 144
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(l) Advertising
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was $16.4 million and $18.2 million
in fiscal 1993 and 1994, respectively.
(m) Transaction Costs
In connection with the proposed merger, Ralphs has capitalized in other
assets approximately $2.3 million of transaction costs, principally attorney and
accounting fees. Upon completion of the merger these amounts will be
reclassified to excess of cost of net assets acquired and amortized accordingly.
(3) LEASES
Ralphs has leases for retail store facilities, warehouses and manufacturing
plants for periods up to 30 years. Generally, the lease agreements include
renewal options for five years each. Under most leases, Ralphs is responsible
for property taxes, insurance, maintenance and expense related to the lease
property. Certain store leases require excess rentals based on a percentage of
sales at that location. Certain equipment is leased by Ralphs under agreements
ranging from 3 to 15 years. The agreements usually do not include renewal option
provisions.
Minimum rental payments due under capital leases and operating leases
subsequent to fiscal 1994 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1995............................................... $ 21,640 $ 61,324 $ 82,964
1996............................................... 19,093 60,847 79,940
1997............................................... 18,288 58,182 76,470
1998............................................... 15,901 53,321 69,222
1999............................................... 11,784 52,839 64,623
2000 and thereafter................................ 53,959 373,021 426,980
-------- -------- --------
Total minimum lease payments....................... $140,665 $659,534 $800,199
======== ========
Less amounts representing interest................. (51,581)
--------
Present value of net minimum lease payments........ 89,084
Less current portion of lease obligations.......... (13,151)
--------
Long-term capital lease obligations................ $ 75,933
========
</TABLE>
F-49
<PAGE> 145
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense is summarized as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 31, JANUARY 30, JANUARY 29,
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Capital Leases
Contingent rental............................. $ 2,443 $ 2,241 $ 2,256
Rentals from subleases........................ (2,144) (2,048) (1,734)
Operating Leases
Minimum rentals............................... 49,001 54,965 55,906
Contingent rentals............................ 5,058 3,645 3,763
Rentals from subleases........................ (1,123) (1,150) (1,791)
------- ------- -------
$53,235 $57,653 $58,400
======= ======= =======
</TABLE>
(4) SELF-INSURANCE
Ralphs is a qualified self-insurer in the State of California for worker's
compensation and for automobile liability. For fiscal 1993 and 1994 self
insurance loss provisions amounted to (in thousands) $30,323 and $14,003,
respectively. Ralphs discounts self-insurance liabilities using an 8% discount
rate for all years presented. Management believes that this rate approximates
the time value of money over the anticipated payout period (approximately 8
years) for essentially risk free investments.
Based on a review of modifications in its workers compensation and general
liability insurance programs, Ralphs adjusted its self-insurance costs during
Fiscal 1994, resulting in a reduction in the loss provision in Fiscal 1994 of
approximately $18.9 million.
The Company expects that cash payments for claims over the next five years
will aggregate approximately $28 million in fiscal year 1995, $19 million in
fiscal year 1996, $13 million in fiscal year 1997, $8 million in fiscal year
1998 and $7 million in fiscal year 1999.
(5) COMMITMENTS AND CONTINGENCIES
In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against Ralphs and other major
supermarket chains located in Southern California, alleging that they conspired
to refrain from competing in the retail market for fluid milk and to fix the
retail price of fluid milk above competitive prices. Specifically, class actions
were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle
on December 7, December 14, and December 23, 1992, respectively. The Court has
yet to certify any of these classes. A demurrer to the complaints was denied.
Notwithstanding that it believes there is no merit to these cases, Ralphs had
reached an agreement in principle to settle them. However, no settlement
agreement has been signed. The Company does not believe that the resolution of
these cases will have a material adverse effect on its future financial
condition. Any settlement would be subject to court approval.
On March 25, 1991, George A. Koteen Associates, In. ("Koteen Associates")
commenced an action in San Diego Superior Court alleging that Ralphs breached an
alleged utility rate consulting agreement. In December 1992, a jury returned a
verdict of approximately $4.9 million in favor of Koteen Associates and in March
1993, attorney's fees and certain other costs were awarded to the plaintiff.
Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an
adverse ruling by the appellate courts.
In April 1994, Ralphs was served with a complaint filed by over 240 former
employees at Ralphs' bakery in the Atwater district of Los Angeles (the "Bakery
Plaintiffs"). The action was commenced in the United
F-50
<PAGE> 146
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
States District Court for the Central District of California, and, among other
claims, the Bakery Plaintiffs alleged that Ralphs breached its collective
bargaining agreement and violated the Workers Adjustment Retraining Notification
Act (the "WARN Act") when it downsized and subsequently closed the bakery. In
their complaint, the Bakery Plaintiffs are seeking damages for lost wages and
benefits as well as punitive damages. The Bakery Plaintiffs also named Ralphs
and two of its management employees in fraud, conspiracy and emotional distress
causes of action. In addition, the Bakery Plaintiffs sued their union local for
breach of its duty of fair representation and other alleged misconduct,
including fraud and conspiracy. The defendants have answered the complaint and
discovery is ongoing. Trial is set for February, 1996, and Ralphs is vigorously
defending this suit. Management believes, based on its assessment of the facts,
that the resolution of this case will not have a material effect on the
Company's financial position or results of operations.
In addition, Ralphs is a defendant in a number of other cases currently in
litigation or potential claims encountered in the normal course of business
which are being vigorously defended. In the opinion of management, the
resolutions of these matters will not have a material effect on Ralphs'
financial position or results of operations.
Environmental Matters
In January 1991, the California Regional Water Quality Control Board for
the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a
subsurface characterization of Ralphs' Atwater property. This request was part
of an ongoing effort by the Regional Board, in connection with the U.S.
Environmental Protection Agency (the "EPA"), to identify contributors to
groundwater contamination in the San Fernando Valley. Significant parts of the
San Fernando Valley, including the area where Ralphs' Atwater property is
located, have been designated federal Superfund sites requiring response actions
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, because of regional groundwater contamination. On June 18,
1991, the EPA made its own request for information concerning the Atwater
property. Since that time, the Regional Board has requested further
investigation by Ralphs. Ralphs has conducted the requested investigations and
has reported the results to the Regional Board. Approximately 25 companies have
entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate
and design a remediation system for contaminated groundwater beneath an area
which includes the Atwater property. Ralphs is not a party to the Consent Order,
but is cooperating with requests of the subject companies to allow installation
of monitoring or recovery wells on Ralphs' property. Based upon available
information, management does not believe this matter will have a material
adverse effect on the Company's financial condition or results of operations.
Ralphs has removed underground storage tanks and remediated soil
contamination at the Atwater property. In some instances the removals and the
contamination were associated with grocery business operations, in others they
were associated with prior property users. Although the possibility of other
contamination from prior operations or adjacent properties exists at the Atwater
property, management does not believe that the costs of remediating such
contamination will be material to the Company.
Apart from the Atwater property, the Company has recently had environmental
assessments performed on a significant portion of its facilities, including
warehouse and distribution facilities. The Company believes that any responsive
actions required at the examined properties as a result of such assessments will
not have a material adverse effect on its financial condition or results of
operations.
Ralphs has incurred approximately $4.5 million in non-recurring capital
expenditures for conversion of refrigerants during 1994. Other than these
expenditures, Ralphs has not incurred material capital expenditures for
environmental controls during the previous three years, nor does management
anticipate incurring such expenditures during the current fiscal year or the
succeeding fiscal year.
F-51
<PAGE> 147
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ralphs is subject to a variety of environmental laws, rules, regulations
and investigative or enforcement activities, as are other companies in the same
or similar business. The Company believes it is in substantial compliance with
such laws, rules and regulations. These laws, rules, regulations and agency
activities change from time to time, and such changes may affect the ongoing
business and operations of the Company.
(6) EQUITY APPRECIATION RIGHTS PLANS
Effective August 26, 1988, Ralphs adopted an Equity Appreciation Plan
("1988 Plan"), whereby certain officers received equity rights representing, in
aggregate, the right to receive 15% of the increase in the appraised value (as
defined in the 1988 Plan) of the Ralphs' equity over an initial value of $120.0
million. The 1988 Plan was amended in January 1992 by agreement among Ralphs and
the Equity Rights holders ("Amended Plan"). Ralphs accrued for the increase in
equity appreciation rights over the contractually defined vesting period (fully
accrued in fiscal 1991), based upon the maximum allowable contractual amount
which approximated ending appraised value.
Under the Amended Plan, all outstanding Equity Rights vested in full are no
longer subject to forfeiture by the holders, except in the event a holder's
employment is terminated for cause within the meaning of the Amended Plan. The
appraised value of Ralphs' equity is to be determined as of May 1 each year by
an investment banking company engaged for this purpose utilizing the methodology
specified in the Amended Plan (which is unchanged from that specified in the
1988 Plan); however, under the Amended Plan the appraised value of Ralphs'
equity for purposes of the plan may not be less than $400.0 million nor exceed
$517.0 million. The amount of equity rights redeemable at any given time is
defined in each holders' separate agreement. On exercise of an equity right, the
holder will be entitled to receive a pro rata percentage of any such increase in
appraised value. In addition, the Amended Plan provides for the possible
additional further payment to the holder of each exercised Equity Right of an
amount equal to the "Deferred Value" of such Equity Right as defined in the
Amended Plan. Ralphs did not incur any expense under the Equity Appreciation
Rights Plan in fiscal 1993 or fiscal 1994.
The amount of Equity Rights redeemable for each of the four years
subsequent to fiscal 1994 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1995...................................................... $ 6,669
1996...................................................... 12,389
1997...................................................... 3,636
1998...................................................... 10,150
-----------
$32,844
========
</TABLE>
F-52
<PAGE> 148
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current
Federal.................................................... $ (2,424) $ 713
State...................................................... 3,500 2,653
----------- -----------
$ 1,076 $ 3,366
----------- -----------
Deferred
Federal.................................................... $ (109,125) $(3,366)
State...................................................... -- --
----------- -----------
$ (109,125) $(3,366)
----------- -----------
Total income tax benefit................................... $ (108,049) $ --
========= ========
</TABLE>
The differences between income tax expense and income taxes computed using
the top marginal U.S. Federal income tax rate of 35% for fiscal 1993 and fiscal
1994 applied to earnings before income taxes were as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amount of expected expense (benefit) computed using the
statutory Federal rate..................................... $ 10,611 $ 11,241
Utilization of financial operating loss.................... (10,611) (11,241)
State income taxes, net of Federal income tax benefit...... 3,500 2,653
Accounting limitation (recognition) of deferred tax
benefit................................................. (109,125) (3,366)
Alternative minimum tax.................................... 625 --
Other, net................................................. (3,049) 713
----------- -----------
Total income tax benefit........................... $ (108,049) $ --
========= ========
</TABLE>
On October 15, 1992, Ralphs filed an election with the Internal Revenue
Service under Section 338(h)(10). Under this Section, Ralphs is required to
restate, for Federal tax purposes, its assets and liabilities to fair market
value as of February 3, 1992. The effect of this transaction is to record a new
Federal tax basis to reflect a change of control for Federal tax purposes
resulting from the Internal Reorganization. No change of control for financial
reporting purposes was affected.
In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act")
was enacted. The Act increased the Federal income tax rate from 34 to 35 percent
for filers whose taxable income exceeded $10.0 million. In the current year, the
effect of the Federal income tax rate change was to increase the net deferred
tax assets. In addition, the Act also provided for the deductibility of certain
intangibles, including costs in excess gross assets acquired.
During the year ended January 30, 1994, Ralphs recorded the incremental
impact of the Act on deductible temporary differences and increased its deferred
income tax assets by a net amount of $109.1 million. The decision to reduce the
valuation allowance was based upon several factors. Specific among them, was the
Company's completion of its restructuring plan which effectively reduced
estimated interest expense by
F-53
<PAGE> 149
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $9.0 as compared to the year ended January 31, 1993. In addition,
the January 31, 1993 operating results were negatively effected by several
charges including provisions for restructuring, legal settlements and a loss on
retirement of debt all aggregating approximately $90 million on a pre-tax basis.
Although there can be no assurance as to future taxable income, the Company
believes that, based upon the above mentioned events, as well as the Company's
expectation of future taxable income, it is more likely than not that the
recorded deferred tax asset will be realized. In order to realize the net
deferred tax asset currently recorded, Ralphs will need to generate sufficient
future taxable income, assuming current tax rates, of approximately $320.0
million.
At January 29, 1995, the Company has Federal net operating loss (NOL)
carryforwards of approximately $162.0 million and Federal and state Alternative
Minimum Tax Credit carryforwards of approximately $2.1 million which can be used
to offset Federal taxable income and regular taxes payable, respectively. The
NOL carryforwards begin expiring in 2008.
During the past three fiscal years, the Company has generated Federal
taxable losses of approximately $162.0 million versus financial pre-tax earnings
of approximately $65.2 million for the same periods. These differences result
principally from excess tax versus financial amortization on certain intangible
assets (excess of cost over net assets acquired), as well as several other
originating temporary differences.
(8) EMPLOYEE BENEFIT PLANS
Ralphs has a defined benefit pension plan covering substantially all
employees not already covered by collective bargaining agreements with at least
one year of credit service (defined at 1,000 hours). Ralphs' policy is to fund
pension costs at or above the minimum annual requirement.
On February 23, 1990, the Company adopted a Supplemental Executive
Retirement Plan covering certain key officers of Ralphs. The Company has
purchased split dollar life insurance policies for participants under this plan.
Under certain circumstances, the cash surrender value of certain split dollar
life insurance policies will offset Ralphs obligations under the Supplemental
Executive Retirement Plan.
During the second quarter of 1994, the Company approved and adopted a new
non-qualified retirement plan, the Ralphs Grocery Company Retirement
Supplemental Plan ("Retirement Supplement Plan") effective January 1, 1994 and
amended the existing Supplemental Executive Retirement Plan effective April 9,
1994. These changes to the retirement plans were made pursuant to the enactment
of the 1993 Omnibus Budget Reconciliation Act.
At January 29, 1995, the Company recorded a $4.0 million additional minimum
liability in offsetting intangible asset to reflect the changes in the new and
amended plans.
Under the provisions of the Retirement Supplement Plan, participants are
entitled to receive benefits based on earnings over the indexed amount of
$150,000.
F-54
<PAGE> 150
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following actuarially determined components were included in the net
pension expense:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost................................................ $ 2,228 $ 2,901
Interest cost on projected benefit obligation............... 2,838 3,821
Actual return on assets..................................... (2,695) (1,447)
Net amortization and deferral............................... (46) (1,100)
----------- -----------
Net pension expense....................................... $ 2,325 $ 4,175
======== ========
</TABLE>
Service costs for fiscal 1993 was calculated using a discount rate of 8.5%
and a rate of increase in future compensation levels of 6%. The 1994 discount
rate and the rate of increase in future compensation levels were reduced to
7.75% and 5.0%, respectively, to reflect the decline in interest rates in 1994.
The discount rate will be increased to 8.25% in 1995 in order to reflect the
increase in the current long-term interest rate. A long-term rate of return on
assets of 9% was used for fiscal 1993 and 1994.
The pension plan assets consist primarily of common stocks, bonds, debt
securities, and a money market fund. Plan benefits are based primarily on years
of service and on average compensation during the last years of employment.
Ralphs participates in multi-employer pension plans and health and welfare
plans administered by various trustees for substantially all union employees.
Contributions to these plans are based upon negotiated contractual rates. In
Fiscal 1993 the multi-employer pension plan was deemed to be overfunded based
upon the collective bargaining agreement then currently in force. During Fiscal
1993 the agreement called for pension benefits which resulted in additional
required expense. The UFCW health and welfare benefit plans were overfunded and
those employers who contributed to these plans received a prorata share of
excess reserve in these health care benefit plans through a reduction in current
maintenance payments. Ralphs' share of the excess reserve was approximately
$24.5 million of which $11.8 million was recognized in Fiscal 1993 and the
remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are
required to make contributions to the benefit funds at whatever level is
necessary to maintain plan benefits, there can be no assurance that plan
maintenance payments will remain at current levels.
The expense related to these plans is summarized as follows:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Multi-employer pension plans........................ $17,687 $ 8,897
======== ========
Multi-employer health and welfare................... $45,235 $66,351
======== ========
</TABLE>
Ralphs maintains the Ralphs Grocery Company Savings Plan Plus--Prime and
the Ralphs Grocery Savings Plan Plus -- Basic (collectively referred to as the
"401(k) Plan") covering substantially all employees who are not covered by
collective bargaining agreements and who have at least one year of credited
service (defined at 1,000 hours). The 401(k) Plan provided for both pre-tax and
after-tax contributions by participating employees. With certain limitations,
participants may elect to contribute from 1% to 12% of their annual compensation
on a pre-tax basis to the Plan. Ralphs has committed to match a minimum of 20%
of an employee's contribution to the 401(k) Plan that do not exceed 5% of the
employee's compensation. Expenses under the 401(k) Plan for fiscal 1993 and 1994
were $431,774 and $446,826, respectively.
F-55
<PAGE> 151
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ralphs has an executive incentive compensation plan which covers
approximately 39 key employees. Benefits to participants are earned based on a
percentage of base compensation upon attainment of a targeted formula of
earnings. Expense under this plan for fiscal 1993 and 1994 was $2.6 million and
$2.4 million, respectively. Ralphs has also adopted an incentive plan for
certain members of management. Benefits to participants are earned based on a
percentage of base compensation upon attainment of a targeted formula of
earnings. Expense under this plan for fiscal 1993 and 1994 was $3.0 million and
$3.1 million, respectively.
The aforementioned incentive plans may be cancelled by the Board of
Directors at any time.
Ralphs sponsors a postretirement medical benefit plan (Postretirement
Medical Plan) covering substantially all employees who are not members of a
collective bargaining agreement and who retire under certain age and service
requirements.
The Postretirement Medical Plan is a traditional type medical plan
providing outpatient, inpatient and various other covered services. Such
benefits are funded from Ralphs' general assets. The calendar year deductible is
$1,270 per individual, indexed to the Medical Consumer Price Index.
The net periodic cost of the Postretirement Medical Plan includes the
following components:
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 30, JANUARY 29,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost.......................................... $ 1,767 $ 1,396
Interest cost......................................... 1,603 1,387
Return on plan assets................................. -- --
Net amortization and deferral......................... -- (228)
----------- -----------
Net postretirement benefit cost..................... $ 3,370 $ 2,555
======== ========
</TABLE>
Service cost was calculated using a medical cost trend of 10.5% and a
decreasing medical cost trend rate of 14%-8% for 1993 and 1994 respectively. The
discount rate for 1993 was 8.5% and was reduced to 7.75% in 1994 to reflect the
decline in interest rates in 1994. In 1995, the discount rate will increase to
8.25% in order to reflect the increase in the current long-term interest rate.
The long-term rate of return of plan assets is not applicable as the plan is not
funded.
The effect of a one-percent increase in the medical cost trend would
increase the fiscal 1994 service and interest cost to 18%. The accumulated
postretirement benefit obligation at January 29, 1995 would also increase by
27%.
F-56
<PAGE> 152
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) QUARTERLY RESULTS (UNAUDITED)
Quarterly results for fiscal 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
GROSS OPERATING INCOME NET
SALES PROFIT INCOME TAXES EARNINGS
------- ------ --------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FY 1993 Quarters
12 weeks ended 04/25/93......................... $ 632.4 $142.4 $ 31.4 $ 1.0 $ 3.9
12 weeks ended 07/18/93......................... 629.0 145.2 36.8 (1.0) 12.9
12 weeks ended 10/10/93......................... 612.8 141.5 31.7 -- 7.0
16 weeks ended 01/30/94......................... 856.0 207.4 52.2 (108.0) 114.6
------- ------ --------- ------- --------
Total................................... $2,730.2 $636.5 $ 152.1 $(108.0) $138.4
======= ====== ======= ======= ======
FY 1994 Quarters
12 weeks ended 04/24/94......................... $ 616.0 $141.7 $ 34.1 $ -- $ 8.4
12 weeks ended 07/17/94......................... 625.0 142.9 32.9 -- 7.2
12 weeks ended 10/09/94......................... 615.4 138.8 30.8 -- 4.3
16 weeks ended 01/29/95......................... 868.2 200.2 47.8 -- 12.2
------- ------ --------- ------- --------
Total................................... $2,724.6 $623.6 $ 145.6 $ -- $ 32.1
======= ====== ======= ======= ======
</TABLE>
(10) STOCK OPTION PLAN
On February 3, 1992, 3,162,235 options for Common Stock of the Company were
granted under the Ralphs Non-qualified Stock Option Plan. All options were
vested, but not exercisable, on the date of the grant. Options granted to
certain officers become exercisable at the rate of 20% on each September 30 of
calendar years 1992 through 1996. Options granted to other officers become
exercisable as to 10% of the grant on each of September 30, 1992 and 1993, 15%
on each of September 30, 1994 through September 30, 1997, and 20% on September
20, 1998.
F-57
<PAGE> 153
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Ralphs Non-qualified Stock Option Plan.
<TABLE>
<CAPTION>
NUMBER OF PRICE
OPTIONS RANGE
--------- ------
<S> <C> <C>
Options Outstanding at January 30, 1994:
Beginning of year............................................. 3,162,235 $20.21
Granted....................................................... -- --
Exercised..................................................... -- --
Cancelled..................................................... -- --
Expired....................................................... -- --
End of year................................................ 3,162,235 $20.21
--------- ------
Exercisable at end of year...................................... 811,760 --
--------- ------
Available for grant at end of year.............................. -- --
--------- ------
Options Outstanding at January 29, 1995:
Beginning of year............................................. 3,162,235 $20.21
Granted....................................................... -- --
Exercised..................................................... -- --
Cancelled..................................................... -- --
Expired....................................................... -- --
End of year................................................ 3,162,235 $20.21
--------- ------
Exercisable at end of year...................................... 1,330,924 --
--------- ------
Available for grant at end of year.............................. -- --
--------- ------
</TABLE>
The option price for outstanding options at January 29, 1995 assumes a
grant date fair market value of Common Stock of the Company equal to $20.21 per
share, which represents the high end of a range of estimated values of the
Common Stock of the Company on February 3, 1992, the date of the grant.
(11) THE MERGER (UNAUDITED)
On September 14, 1994, Food 4 Less Supermarkets, Inc. ("Food 4 Less"), Food
4 Less Holdings, Inc. ("Holdings"), and the parent company of Holdings, Food 4
Less, Inc. ("FFL"), entered into a definitive Agreement and Plan of Merger (as
amended from time to time, the "Merger Agreement") with Ralphs Supermarkets,
Inc. (the "Holding Company") and its stockholders. Pursuant to the terms of the
Merger Agreement, Food 4 Less will be merged with and into Holding Company (the
"RSI Merger") and Holding Company will continue as the surviving corporation.
Food 4 Less is a multiple format supermarket operator that operates in three
geographic areas: Southern California, Northern California and certain areas of
the Midwest.
Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), which
is currently a wholly-owned subsidiary of Holding Company, will merge with and
into Holding Company (the "RGC Merger," and together with the RSI Merger, the
"Merger"), and Holding Company will change its name to Ralphs Grocery Company
(the "New Company"). Prior to the Merger, FFL will merge with and into Holdings,
which will be the surviving corporation (the "FFL Merger"). Immediately
following the FFL Merger, Holdings will change its jurisdiction of incorporation
by merging with a newly-formed, wholly-owned subsidiary ("New Holdings"),
incorporated in Delaware (the "Reincorporation Merger"). As a result of the
F-58
<PAGE> 154
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merger, the FFL Merger and the Reincorporation Merger, the New Company will
become a wholly-owned subsidiary of New Holdings. Agreement has been reached
with each of the California Attorney General and the Federal Trade Commission
for approval of the Merger. Food 4 Less and Ralphs have agreed in a settlement
agreement with the Attorney General to divest 27 specific stores in Southern
California. Under the agreement, the Company must divest 14 stores by June 30,
1995, and the balance of 13 stores by December 31, 1995.
In order to consummate the Merger, Food 4 Less has made an Offer to
Exchange and Offer to Purchase and Solicit Consents with respect to the holders
of the 9% Senior Subordinated Notes (the "Old RGC 9% Notes") due April 1, 2003
of Ralphs and the 10 1/4% Senior Subordinated Notes due July 15, 2002 of RGC
(the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old
RGC Notes") (i) to exchange (as so amended and restated, the "Exchange Offers")
such Old RGC Notes for New Senior Subordinated Notes due 2005 (the "New Notes")
plus a cash payment of $20.00 in cash for each $1,000 principal amount of Old
RGC Notes tendered for exchange or (ii) to purchase (the "Cash Offers," and
together with the Exchange Offers, the "Offers") Old RGC Notes for $1,010 in
cash per $1,000 principal amount of Old RGC Notes accepted for purchase, in each
case, plus accrued and unpaid interest to the date of exchange or purchase. The
Offers are subject to the terms and conditions set forth in an Amended and
Restated Prospectus and Solicitation Statement, filed by Food 4 Less with the
Securities and Exchange Commission and which is subject to further change (the
"Prospectus"), including: (1) satisfaction of a minimum tender amount (i.e., at
least a majority of the aggregate principal amount of the outstanding Old RGC
Notes being validly tendered for exchange for New Notes and not withdrawn
pursuant to the Offers prior to the date of expiration); (2) the receipt of the
requisite consents to certain amendments to the indentures (the "Indentures")
under which the Old RGC Notes were issued (i.e., consents from holders of Old
RGC Notes representing at least a majority in aggregate principal amount of each
issue of Old RGC Notes held by persons other than Ralphs and its affiliates) on
or prior to the date of expiration; (3) the satisfaction or waiver, in Food 4
Less' sole discretion, of all conditions precedent to the Merger; (4) the prior
or contemporaneous consummation of other exchange offers, consent solicitations
and public offerings contemplated by the Prospectus; and (5) the prior or
contemporaneous consummation of the bank financing and the equity investment
described in the Prospectus. As a result of the RSI Merger and the RGC Merger,
the New Notes and any outstanding Old RGC Notes not tendered in the Offers will
be the obligations of the New Company.
Conditions to the consummation of the RSI Merger include the receipt of
necessary consents and the completion of financing of the transaction. The
purchase price for Holding Company is approximately $1.5 billion, including the
assumption or repayment of debt. The consideration payable to the stockholders
of Holding Company consists of $375 million in cash, $131.5 million principal
amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 to be
issued to the selling shareholders of Holding Company (the "Seller Debentures")
by New Holdings and $18.5 million initial accreted value of 13 5/8% Senior
Discount Debentures due 2005 (the "New Discount Debentures"). New Holdings will
use $100 million of the cash received from a new equity investment (the "New
Equity Investment"), together with the Seller Debentures and the New Discount
Debentures, to acquire approximately 48% of the capital stock of Holding Company
immediately prior to consummation of the RSI Merger. New Holdings will then
contribute the $250 million of purchased shares of Holding Company stock to Food
4 Less, and pursuant to the RSI Merger the remaining shares of Holding Company
stock will be acquired for $275 million in cash.
Standard & Poor's has publicly announced that, upon consummation of the
Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating
assignment, if implemented, would constitute a Rating Decline pursuant to the
Indentures. The consummation of the Merger and the resulting change in
composition of the Board of Directors of RGC, together with the anticipated
Rating Decline, would constitute a Change of Control Triggering Event under the
Indentures. Although RGC does not anticipate that there will be a
F-59
<PAGE> 155
RALPHS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significant amount of Old RGC Notes outstanding following consummation of the
Exchange Offers, upon such a Change of Control Triggering Event, the New Company
would be obligated to make the Change of Control Offer following the Merger for
all outstanding Old RGC Notes at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase.
Due to the increased size, dual format strategy and integration related
costs, after giving effect to or in connection with the Merger, RGC believes
that its future operating results will not be directly comparable to the
historical operating results of RGC. Upon consummation of the Merger, the
operations and activities of RGC will be significantly impacted due to
conversions of some existing stores to Food 4 Less warehouse stores as well as
the consolidation of various operating functions and departments. This
consolidation is expected to result in a restructuring charge for the New
Company. The restructuring charge may be material in relation to the
stockholders' equity and financial position of RGC and the New Company.
Following the consummation of the Merger, the New Company will be highly
leveraged.
F-60
<PAGE> 156
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SELLER DEBENTURES
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SELLER DEBENTURES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................... 1
Risk Factors............................... 9
Capitalization............................. 13
Selected Historical Financial Data of
Holdings................................. 14
Selected Historical Financial Data of
RSI...................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 30
Management................................. 41
Executive Compensation..................... 44
Principal Stockholders..................... 48
Certain Relationships and Related
Transactions............................. 49
Description of Capital Stock............... 51
Description of the Seller Debentures....... 54
Description of the Credit Facility......... 79
Description of Other Holdings
Indebtedness............................. 81
Description of Company Indebtedness........ 82
Selling Debentureholders................... 84
Certain Federal Income Tax
Considerations........................... 87
Plan of Distribution....................... 90
Legal Matters.............................. 91
Experts.................................... 91
Available Information...................... 91
Index to Financial Statements.............. F-1
=================================================
</TABLE>
======================================================
-------------------------
PROSPECTUS
-------------------------
[FOOD 4 LESS LOGO] [RALPHS LOGO]
FOOD 4 LESS
HOLDINGS, INC.
13 5/8% SENIOR SUBORDINATED
PAY-IN-KIND DEBENTURES
DUE 2007
FEBRUARY 2, 1998
======================================================
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Seller Debentures.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 64,725
Blue Sky fees and expenses........................................ 2,500
Accounting fees and expenses...................................... 200,000
Legal fees and expenses........................................... 400,000
Printing and engraving expenses................................... 200,000
Trustee fees...................................................... 5,000
Miscellaneous..................................................... 20,000
--------
Total................................................... $892,225
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Food 4 Less Holdings, Inc. is a Delaware corporation and its Certificate of
Incorporation and Bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by law. Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL") eliminates the liability of a
corporation's directors to a corporation or its stockholders, except for
liabilities related to breach of duty of loyalty, actions not in good faith, and
certain other liabilities.
Section 145 of the DGCL provides for the indemnification by a Delaware
corporation of its directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against liabilities and expenses
incurred in any such action, suit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon its formation on December 14, 1994, Food 4 Less Holdings, Inc., a
Delaware corporation ("Holdings") issued 1,000 shares of its Common Stock, $.01
par value, to Food 4 Less Holdings, Inc., a California corporation. On June 14,
1995, in connection with the Merger, Holdings issued 16,683,244 shares of its
Series A Preferred Stock, $.01 par value, and 3,100,000 shares of its Series B
Preferred Stock, $.01 par value, to the 1995 Equity Investors for an aggregate
consideration of $140 million plus the contribution to Holdings of 5,783,244
shares of Common Stock, par value $.01, of Holdings. In addition, Holdings
issued (i) $131.5 million principal amount of Seller Debentures which along with
$100 million cash and $18.5 million initial accreted value of the New Discount
Debentures comprised the aggregate consideration for the purchase by Holdings of
48% of the outstanding common stock of RSI and (ii) $100 million initial
accreted value of New Discount Debentures which includes (a) $18.5 million
issued to the RSI stockholders, (b) $17.5 million, $2.5 million and $2.5 million
issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of
fees otherwise payable by the Company and Holdings in connection with the Merger
and the Financing and (c) $59 million issued for cash to a partnership including
Yucaipa, the selling stockholders of Ralphs, an affiliate of George Soros,
Apollo, and an affiliate of each of BT Securities, CS First Boston and DLJ. All
of the above described securities were issued by Holdings in reliance upon an
exemption from the registration requirements of the Securities Act provided by
Section 4(2) of the Securities Act.
II-1
<PAGE> 158
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-1 is
set forth in the Index to Exhibits on page E-1, and is incorporated herein by
reference.
(b) Financial Statement Schedules
<TABLE>
<S> <C> <C> <C>
(i) Holdings
Schedule I -- Condensed Financial Information of the Registrant
Schedule II -- Valuation and Qualifying Accounts
(ii) Ralphs
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act and Rule 3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the
II-2
<PAGE> 159
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Form F-3.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Post-effective Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on January 30,
1998.
FOOD 4 LESS HOLDINGS, INC.
By: /s/ JOHN T. STANDLEY
------------------------------------
John T. Standley
Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Post-effective Amendment No. 2 to Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------------------------- -----------------
<S> <C> <C>
/s/ RONALD W. BURKLE* Chairman and Director January 30, 1998
- ------------------------------
Ronald W. Burkle
/s/ GEORGE G. GOLLEHER* Chief Executive Officer and Director January 30, 1998
- ------------------------------
George G. Golleher
/s/ JOE S. BURKLE* Chief Executive Officer - Falley's and January 30, 1998
- ------------------------------ Director
Joe S. Burkle
/s/ JOHN T. STANDLEY* Senior Vice President and January 30, 1998
- ------------------------------ Chief Financial Officer
John T. Standley
/s/ ROBERT I. BERNSTEIN* Director January 30, 1998
- ------------------------------
Robert I. Bernstein
/s/ ROBERT BEYER* Director January 30, 1998
- ------------------------------
Robert Beyer
/s/ PETER COPSES* Director January 30, 1998
- ------------------------------
Peter Copses
/s/ PATRICK GRAHAM* Director January 30, 1998
- ------------------------------
Patrick Graham
</TABLE>
II-4
<PAGE> 161
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------------------------- -----------------
<S> <C> <C>
/s/ LAWRENCE K. KALANTARI* Director January 30, 1998
- ------------------------------
Lawrence K. Kalantari
/s/ JOHN KISSICK* Director January 30, 1998
- ------------------------------
John Kissick
</TABLE>
*By: /s/ GEORGE G. GOLLEHER
---------------------------------
George G. Golleher
Individually and as
Attorney-in-fact
II-5
<PAGE> 162
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, 1995). Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules included herein 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, 1995)
S-1
<PAGE> 163
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF, AND FOR, THE 53 WEEKS ENDED FEBRUARY 2, 1997
(DOLLARS 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 Debentures.......................................................... $ 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>
S-2
<PAGE> 164
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
AS OF, AND FOR, THE 53 WEEKS ENDED FEBRUARY 2, 1997
(DOLLARS IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
53 WEEKS
ENDED
FEBRUARY 2,
1997
-----------
<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>
S-3
<PAGE> 165
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.
S-4
<PAGE> 166
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
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT PROVISIONS CHARGED TO BALANCE
BEGINNING CHARGED 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.
S-5
<PAGE> 167
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Stockholders
Ralphs Supermarkets, Inc.:
The audits referred to in our report dated March 9, 1995, included the related
financial statement schedule for the two years ended January 29, 1995, included
in the registration statement. This financial statement schedule is the
responsibility of Ralphs management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Historical Financial Data of RSI," "Summary
Historical Financial Data of RSI" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 28, 1998
S-6
<PAGE> 168
RALPHS SUPERMARKETS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED JANUARY 29, 1995 AND 52 WEEKS ENDED JANUARY 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND CHARGED TO DEDUCTIONS AT END
OF PERIOD EXPENSES OTHER ACCOUNTS(B) (PAYMENTS) OF PERIOD
--------- ---------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
JANUARY 29, 1995:
Self-Insurance Reserves(a)............. $ 80,010 $ 14,003 $ 5,976 $(27,483) $ 72,506
Store Closure Reserves................. $ 9,514 $ -- $ -- $ (764) $ 8,750
JANUARY 30, 1994:
Self-Insurance Reserves(a)............. $ 72,979 $ 30,323 $ 5,953 $(29,245) $ 80,010
Store Closure Reserves................. $ 10,277 $ -- $ -- $ (763) $ 9,514
</TABLE>
- ---------------
(a) Includes short-term portion.
(b) Amortization of discount on self-insurance reserves to interest expense.
S-7
<PAGE> 169
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ---------------------------------------------------------------------- ----
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of November 6, 1997 by and among
Food 4 Less Holdings, Inc., Fred Meyer, Inc., and FFL Acquisition
Corp. (incorporated herein by reference to Exhibit 99.1 of Food 4 Less
Holdings, Inc.'s Current Report on Form 8-K dated November 6, 1997)...
3.1 Restated Certificate of Incorporation of Food 4 Less Holdings, Inc.
(incorporated herein by reference to Exhibit 3.1 of Food 4 Less
Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
July 16, 1995)........................................................
3.2 Amended and Restated Bylaws of Food 4 Less Holdings, Inc.
(incorporated by reference to Exhibit 3.4.1 to Post-effective
Amendment No. 1 to Holdings' Registration Statement on Form S-4, No.
33-86356).............................................................
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 on the signature pages thereto (incorporated
herein by reference to Exhibit 4.1.2 of Ralphs Grocery Company's
Annual Report on Form 10-K for the 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 on the signature pages thereto
(incorporated herein by reference to Exhibit 4.1.3 of Ralphs Grocery
Company's Annual Report on Form 10-K for the 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 on the signature pages thereto
(incorporated herein by reference to Exhibit 4.1.4 of Ralphs Grocery
Company's Annual Report on Form 10-K for the year ended January 28,
1996).................................................................
4.2 Indenture for the 13 5/8% Senior Discount Debentures due 2005, dated
as of June 1, 1995, by and among Food 4 Less Holdings, Inc. and United
States Trust Company of New York, as trustee (incorporated herein by
reference to Exhibit 4.2 of Food 4 Less Holdings, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended July 16, 1995)..............
4.3 Indenture for the 13 5/8% Senior Subordinated Pay-in-Kind Debentures
due 2007, dated as of June 1, 1995, by and among Food 4 Less Holdings,
Inc. and Norwest Bank Minnesota, National Association, as trustee
(incorporated herein by reference to Exhibit 4.3 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 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)..................................
</TABLE>
E-1
<PAGE> 170
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ---------------------------------------------------------------------- ----
<S> <C> <C>
4.4.2 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, 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)..............
4.5.1 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 therein 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).............................
4.5.2 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)....
4.6.1 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).............................
4.6.2 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)....
4.7.1 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).....................
4.7.2 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).............................................................
4.7.3 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)..........................................
4.8.1 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)..................................
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4.8.2 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).....................
4.8.3 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)...
4.8.4 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)........................................................
4.9.1 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).............................................................
4.9.2 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)..................................................
4.9.3 Second Supplemental Indenture for the 10.45% Senior Notes due 2000,
dated as of May 30, 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)..............
4.9.4 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)..................................
4.10.1 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).............................................
4.10.2 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)..................................................
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4.10.3 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 to Food 4 Less
Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year
ended June 27, 1992)..................................................
4.10.4 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)..................................................
4.10.5 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)....
4.10.6 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)........................
4.11.1 Indenture for the 10.45% Senior Notes due 2004, dated as of June 6,
1996, by and among Ralphs Grocery Company, the subsidiary guarantors
identified therein and Norwest Bank Minnesota, National Association,
as trustee (incorporated herein by reference to Exhibit 4.9 of Ralphs
Grocery Company's Registration Statement on Form S-4, No.
333-07005)............................................................
5.1 Opinion of Latham & Watkins regarding the legality of the Seller
Debentures, including consent+........................................
8.1 Opinion of Latham & Watkins regarding certain tax matters with respect
to the Seller Debentures, including consent+..........................
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)..................................................
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10.4 Common Stock Purchase Warrant of Food 4 Less Holdings, Inc. dated June
14, 1995 issued to The Yucaipa Companies (incorporated herein by
reference to Exhibit 10.5 of Food 4 Less Holdings, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended July 16, 1995)..............
10.5 Food 4 Less Holdings, Inc. 1995 Stock Option Plan (incorporated herein
by reference to Exhibit 10.6 of Food 4 Less Holdings, Inc.'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 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)........................................................
10.7 Employment Agreement dated as of June 14, 1995 between Ralphs Grocery
Company and Byron E. Allumbaugh (incorporated herein by reference to
Exhibit 10.8 of Ralphs Grocery Company's Quarterly Report on Form 10-Q
for the quarter ended July 16, 1995)..................................
10.8 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)..................................
10.9 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)......................................
10.10 Employment Agreement dated as of June 14, 1995 between Ralphs Grocery
Company and Jan Charles Gray (incorporated herein by reference to
Exhibit 10.12 of Ralphs Grocery Company's Quarterly Report on Form
10-Q for the quarter ended July 16, 1995).............................
10.11 Management Stockholders Agreement dated as of June 14, 1995 by and
between Food 4 Less Holdings, Inc. and the management employees listed
on the signature pages 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).............................
10.12 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)..................................
10.13 Letter Agreement dated as of December 10, 1990 amending 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)..................................................
10.14 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)........................................
10.15.1 Ralphs Grocery Company Retirement Supplement Plan, effective as of
January 1, 1994 (incorporated herein by reference to Exhibit 10.15.1
of Food 4 Less Holdings, Inc.'s Annual Report on Form 10-K for the
fiscal year ended January 28, 1996)...................................
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10.15.2 Amendment to the Retirement Supplement Plan, effective as of January
1, 1995 (incorporated herein by reference to Exhibit 10.15.2 of Food 4
Less Holdings, Inc.'s Annual Report on Form 10-K for the fiscal year
ended January 28, 1996)...............................................
10.15.3 Second Amendment to the Retirement Supplement Plan, effective as of
June 14, 1995, by and between Ralphs Grocery Company Retirement
Supplement Plan (incorporated herein by reference to Exhibit 10.15.3
of Food 4 Less Holdings, Inc.'s Annual Report on Form 10-K for the
fiscal year ended January 28, 1996)...................................
10.16.1 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 Food 4 Less Holdings, Inc.'s Annual Report on Form
10-K for the fiscal year ended January 28, 1996)......................
10.16.2 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 Food 4 Less Holdings, Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).......
10.16.3 Second Amendment to the Supplement Executive Retirement Plan,
effective 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 Food 4 Less
Holdings, Inc.'s Annual Report on Form 10-K for the fiscal year ended
January 28, 1996).....................................................
10.16.4 Third Amendment to Ralphs Grocery Company Supplemental Executive
Retirement Plan, effective as of July 1, 1995 (incorporated herein by
reference to Exhibit 10.16.4 of Food 4 Less Holdings, Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).......
12.1 Statements regarding computations of ratios of earnings to fixed
charges+..............................................................
21.1 Subsidiaries of Food 4 Less Holdings, Inc. (incorporated herein by
reference to Exhibit 21 to Food 4 Less Holdings, Inc.'s Annual Report
on Form 10-K dated January 28, 1996)..................................
23.1 Consent of Arthur Andersen LLP, independent public accountants........
23.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants...........................................................
23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit
8.1 to this Registration Statement)...................................
24 Power of Attorney of certain directors and officers of Food 4 Less
Holdings, Inc. (included in the signature pages in Part II of the
Registration Statement)+..............................................
24.1 Power of Attorney of certain directors and officers of Food 4 Less
Holdings, Inc. (included in the signature pages in Part II of the
Registration Statement)...............................................
25.1 Statement of Eligibility and Qualification on Form T-1 of Norwest Bank
Minnesota, N.A., as trustee, under the indenture for the 13 5/8%
Senior Subordinated Pay-In-Kind Debentures due 2007+..................
</TABLE>
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+ Previously filed.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 28, 1998
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Stockholders
Ralphs Supermarkets, Inc.:
The audits referred to in our report dated March 9, 1995, included the related
financial statement schedule for the two years ended January 29, 1995, included
in the registration statement. This financial statement schedule is the
responsibility of Ralphs management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Historical Financial Data of RSI," "Summary
Historical Financial Data of RSI" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 28, 1998
