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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For Fiscal Year Ended Commission File Number
February 1, 1998 33-59212
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0642810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1100 West Artesia Boulevard. 90220
Compton, California (Zip code)
(Address of principal executive offices)
(310) 884-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
Food 4 Less Holdings, Inc. meets the conditions set forth in General
Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form
10-K with the reduced disclosure format specified in General Instruction (I)(2)
to such Form 10-K.
At March 9, 1998, there were 18,640,913 shares of Common Stock
outstanding. As of such date, none of the outstanding shares of Common Stock
were held by persons other than affiliates and employees of the registrant, and
there was no public market for the Common Stock.
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CONTENTS
<TABLE>
<CAPTION>
Page
PART I
<S> <C>
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 5
Item 3. Legal Proceedings and Environmental Matters...................... 5
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 8
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition............................ 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................................... 14
Item 8. Financial Statements and Supplementary Data...................... 14
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 15
</TABLE>
NOTE:
Items 4, 6, 10, 11, 12 and 13 are omitted pursuant to General Instruction (I)(2)
of Form 10-K.
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PART I
ITEM 1. BUSINESS
Food 4 Less Holdings, Inc. ("Holdings," or together with its
subsidiaries, the "Company") and an indirect, wholly-owned subsidiary of Fred
Meyer, Inc., a Delaware corporation ("Fred Meyer"), was incorporated in
California in 1992 and reincorporated in Delaware in June 1995. On June 14,
1995, Holdings acquired all of the common stock of Ralphs Supermarkets, Inc.
("RSI") in a transaction accounted for as a purchase by Food 4 Less
Supermarkets, Inc. ("F4L Supermarkets"). F4L Supermarkets, RSI and RSI's
wholly-owned subsidiary, Ralphs Grocery Company ("RGC"), combined through
mergers (the "Ralphs Merger") in which RSI remained as the surviving entity and
changed its name to Ralphs Grocery Company ("Ralphs"). The Company does not have
any business operations of its own and its assets consist solely of all the
outstanding capital stock of Ralphs.
The Company is a retail supermarket company with a total of 409 stores
which are located in Southern California (344) , Northern California (27) and
certain areas of the Midwest (38). The Company is the largest supermarket
operator in Southern California, with an estimated market share of 25 percent in
Los Angeles and Orange Counties. The Company operates the second largest
conventional supermarket chain in the region under the "Ralphs" name and the
largest warehouse supermarket chain in the region under the "Food 4 Less" name.
The Company has achieved strong competitive positions in each of its marketing
areas by successfully tailoring its merchandising strategy to the particular
needs of the individual communities it serves. In addition, the Company is a
vertically integrated supermarket company with major manufacturing facilities,
including a bakery and creamery operations, and full-line warehouse and
distribution facilities servicing its Southern California operations.
On February 10, 1998, Fred Meyer, Quality Food Centers, Inc. ("QFC") and
Holdings entered into a settlement agreement (the "Settlement Agreement") with
the State of California to settle potential antitrust and unfair competition
claims that the State of California asserted against Fred Meyer, QFC and
Holdings relating to the effects of the proposed Fred Meyer and QFC Mergers on
supermarket competition in Southern California (the 'State Claims"). Without
admitting any liability in connection with the State Claims, Fred Meyer, QFC and
Holdings agreed in the Settlement Agreement to divest 19 specific stores in
Southern California, including 16 Ralphs stores. Under the Settlement Agreement,
Fred Meyer must divest 13 stores by September 10, 1998 and the balance of six
stores by December 10, 1998. Fred Meyer also agreed not to acquire new stores
from third parties in the Southern California areas specified in the Settlement
Agreement (covering substantially all of the Los Angeles metropolitan area) for
five years following the date of the Settlement Agreement without providing
prior notice to the State of California. If Fred Meyer fails to divest the
required stores by the two dates set forth in the Settlement Agreement, Fred
Meyer has agreed not to object to the appointment of a trustee to effect the
required sales.
On November 6, 1997, Holdings, 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 "Fred Meyer Merger
Agreement"). Pursuant to the terms of the Fred Meyer Merger Agreement, Holdings
was merged with Acquisition on March 10, 1998, thereby becoming a wholly-owned
subsidiary of Fred Meyer (the "Fred Meyer Merger"). The Fred Meyer Merger was
approved by the stockholders of Holdings through a consent solicitation. The QFC
Merger was completed on March 9, 1998.
On March 11, 1998, Fred Meyer completed certain refinancing transactions
related to the Fred Meyer Merger. As part of the refinancing, Holdings made
offers to purchase and consent solicitations with respect to the following debt
securities: (i) Food 4 Less Holdings 13-5/8% Senior Discount Debentures due
2005, (ii) Food 4 Less Holdings 13-5/8% Senior Subordinated Pay-In-Kind
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Debentures due 2007, (iii) Ralphs Grocery Company 10.45% Senior Notes due 2004
(issued 6/95), (iv) Ralphs Grocery Company 10.45% Senior Notes due 2004 (issued
in 6/95), (v) Ralphs Grocery Company 11% Senior Subordinated Notes due 2005
(issued 6/95) and (vi) Ralphs Grocery Company 11% Senior Subordinated Notes due
2005 (issued 3/97). Payment to the note holders included tendered amounts,
interest and consent fees, which were $1,612.7 million, $37.7 million and $209.9
million, respectively.
The Ralphs Grocery Company 10.45% Senior Notes due 2004 (issued in June
1995) and the Ralphs Grocery Company 11% Senior Subordinated Notes due 2005
(issued in June 1995) were not fully tendered and $20,344,000 and $42,565,000
principal amount of each issue are still outstanding, respectively.
In connection with the Fred Meyer Merger, the stockholders and
warrantholders of Holdings received an aggregate of 21,670,503 shares of Fred
Meyer Common Stock in exchange for their Holdings shares and warrants, and cash
payments of $33.6 million to terminate and satisfy Holdings' obligations under
existing stock options and warrants.
On June 14, 1995, Holdings and its subsidiary, Food 4 Less Supermarkets,
Inc. ("F4L Supermarkets") completed their acquisition (the "Ralphs Merger") of
Ralphs Supermarkets, Inc. ("RSI") and its wholly-owned subsidiary, Ralphs
Grocery Company ("RGC"). Concurrently with the consummation of the Ralphs
Merger, the Company refinanced a substantial portion of the existing
indebtedness of F4L Supermarkets and RGC.
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The Company operates both conventional and warehouse format stores
utilizing a retail strategy tailored to the particular needs of the individual
communities it serves. The Company operates in three geographic areas: Southern
California, Northern California and certain areas of the Midwest, under six
different retail formats. The following table sets forth by retail format the
number of stores operated by each of the Company's three divisions at February
1, 1998 (unless otherwise indicated, all references to numbers of stores and
other store data in this Annual Report on Form 10-K are as of February 1, 1998):
<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>
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ITEM 2. PROPERTIES
At February 1, 1998, the Company operated 409 supermarkets, as set forth
in the table below:
<TABLE>
<CAPTION>
Number of Average
Supermarkets Total Square Feet/
Division Owned Leased Square Feet Facility
-------- ----- ------ ----------- --------
<S> <C> <C> <C> <C>
Southern California 59(a) 285 13,914,000 40,400
Northern California -- 27 654,000 24,200
Midwestern 2 (b) 36 1,423,000 37,400
</TABLE>
----------
(a) Includes thirteen stores located on real property subject to
ground leases.
(b) Includes one store that is partially owned and partially leased.
Most of the Southern California Division's store locations are held
pursuant to long-term leases, many of which, in the opinion of management, have
below-market rental rates or other favorable lease terms. The average remaining
term (including all renewal options) of the Company's supermarket leases is
approximately 30 years.
In addition to the supermarkets, the Company operates three main
warehouse and distribution centers in Southern California. The newly-acquired
90-acre Riverside Facility has more than one million square feet of warehousing
and manufacturing space consisting of a creamery and several warehouses for dry
grocery, dairy/deli and frozen food storage. The Riverside Facility sublease
runs for approximately 23 years, with renewal options through 2043, and provides
for annual rent of approximately $8.8 million. The Glendale Facility, consisting
of a 170,000 square foot high-rise automated storage and retrieval system
warehouse and adjacent "picking" warehouse located in the Atwater District of
Los Angeles near Glendale, California, was opened in 1987 and handles
non-perishable items. It is ten stories high and has a capacity of approximately
50,000 pallets. The Compton facility was opened in 1992 and is a 5.4 million
cubic foot facility designed to process and store all perishable products.
The Company also has manufacturing operations located in Compton that
produce a variety of dairy and other products, including fluid milk, ice cream,
yogurt and bottled waters and juices, as well as packaged ice, cheese and
packaged salads. The bakery operation is located at the La Habra complex and
measures 316,000 square feet.
ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
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. All defendants in the
actions, including the Company, have reached tentative settlement
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agreements, and certain of the settlements have been approved by the trial
court. The Company is in the process of finalizing a settlement agreement in the
case.
On September 13, 1996 a class action lawsuit titled McCampbell, et al.
v. Ralphs Grocery Company, et al. was filed in the Superior Court of the State
of California, County of San Diego, against the Company and two other grocery
store chains operating in the Southern California area. The complaint alleges,
among other things, that the Company and others conspired to fix the retail
price of eggs in Southern California. The plaintiffs claim that the defendants'
actions violate provisions of the California Cartwright Act and constitute
unfair competition. Plaintiffs seek unspecified damages they purport to have
sustained as a result of the defendants' alleged actions, which damages may be
trebled under the applicable statute, and an injunction from future actions in
restraint of trade and unfair competition. Discovery has commenced and the
action has been certified as a class. Management of the Company intends to
defend this action vigorously and the Company has filed an answer to the
complaint denying the plaintiffs' allegations and setting forth several
defenses.
On December 20, 1996, a lawsuit titled Bundy, et al. v. Ralphs Grocery
Company, et al. was filed in the Los Angeles Superior Court against the Company.
The complaint was filed by eight individual plaintiffs who were terminated in
conjunction with the Company's restructuring. The plaintiffs claim that they
were wrongfully terminated for discriminatory reasons and that the Company
engaged in various fraudulent practices. The plaintiffs seek compensatory
damages in excess of $15 million, special and punitive damages. Management of
the Company intends to defend this action vigorously.
In August 1996, a lawsuit entitled Dianne Gober, et al. v. Ralphs was
filed alleging sexual harassment by a Ralphs store manager in San Diego County
against six female store employees. None of the plaintiffs suffered any loss of
earnings nor incurred any medical expenses or expenses for psychotherapy, but
the Company has recently been advised that the plaintiffs are, nevertheless,
seeking substantial compensatory and punitive damages. Plaintiffs have dismissed
the store manager as a defendant. The trial began in April 1998. The Company
intends to defend the action vigorously.
In addition, the Company or its subsidiaries are defendants in a number
of other cases currently in litigation or are the subject of potential claims
encountered in the normal course of business which are being vigorously
defended. In the opinion of management, the resolutions of these matters will
not have a material effect on the Company's financial position or results of
operations.
ENVIRONMENTAL MATTERS
Beginning in 1991, the California Regional Water Quality Control Board
for the Los Angeles Region (the "Regional Board") requested that the Company
conduct certain subsurface characterizations of the Glendale facility property
located near Glendale. 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 ("CERCLA"), because
of regional groundwater contamination. The Company conducted the requested
investigations and reported the results to the Regional Board, and no further
investigations have been requested.
Beginning in 1991, EPA has made requests for information and issued
orders directing more than 60 potentially responsible parties ("PRPs") to
investigate and remediate the groundwater contamination in the San Fernando
Valley. The Company is one of those PRPs. Among those actions, on November 26,
1996, the EPA issued an Administrative Order for Remedial Action (EPA
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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 in connection with the implementation of interim remedies
for the treatment of groundwater.
The Company's best estimate of its likely costs is based on a 1996
engineering estimate to construct the groundwater extraction and treatment
system that was approved by EPA, adjusted by the Company's likely allocable
share of those costs. As of 1996, construction and capital costs were estimated
at $46,150,000. Operation and maintenance was estimated at $3,620,000 per year.
In addition, the PRPs have agreed to EPA's demand that the PRPs reimburse it for
its adjusted response costs. As of January 1997, EPA estimated those costs at
$12 million. Thus, the Company has estimated that the total costs to be paid by
all PRPs will be approximately $106 million stated in 1998 dollars. The
Company's best estimate of its allocable share is based on a settlement entered
into by Glendale members of the PRP group in or about November 1997. Based on
that settlement, the Company expects to pay 1.02 percent of the total costs.
Thus, the Company's current best estimate of its likely exposure is
approximately $1 million.
Actual costs may end up being higher or lower than this estimate for a
number of reasons including, but not limited to: (1) one PRP has filed an appeal
that, if successful, could result in an increase in the Company's allocable
percentage; (2) the PRPs and EPA are currently negotiating the terms of a
Consent Decree, the terms of which may affect the total cost estimate; and (3)
EPA has now issued a Stop Work Order under its prior administrative order
requiring construction of the groundwater extraction and treatment system
because of current uncertainty whether the City of Glendale will be able to use
the treated water as a potable water supply.
Although responsibilities for compliance under federal CERCLA law are
joint and several, the Glendale PRPs include substantial companies as members,
such that the Company anticipates that the results of the PRPs' allocation
process will be enforceable to limit its 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's $.01 par value
common stock (the "Common Stock").
The Company has never paid and does not expect in the foreseeable future
to pay any dividends on its Common Stock. The indentures governing the Company's
outstanding debt securities contain certain restrictions on the payment of cash
dividends with respect to Ralphs' Common Stock, and Fred Meyer's bank credit
facility also restricts such payments.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
On June 14, 1995, Holdings and its subsidiary Food 4 Less Supermarkets,
Inc. ("F4L Supermarkets") completed their acquisition (the "Ralphs Merger") of
Ralphs Supermarkets, Inc. ("RSI") and its wholly owned subsidiary, Ralphs
Grocery Company ("RGC"). Concurrently with the consummation of the Ralphs
Merger, the Company refinanced a substantial portion of the existing
indebtedness of F4L Supermarkets and RGC.
Since the Ralphs Merger, the Company has converted 111 former Alpha
Beta, Boys and Viva stores to the Ralphs format, converted 13 former Ralphs
format stores to the Food 4 Less warehouse store format, and opened 47 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 81 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 12 percent from 36,100 square feet at the
time of the Ralphs Merger to 40,400 square feet at the end of fiscal 1997.
During fiscal 1996, the Company implemented a labor productivity and
cost reduction program. As a result, significant reductions were made in store
and corporate headcount levels. In addition, through the sublease of Smith's
distribution center and creamery in Riverside, California, the Company
consolidated 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. These changes have contributed to the
Company's improved results in fiscal 1996 and 1997.
In fiscal 1997, the Company continued the implementation of new
marketing initiatives, begun in 1996, designed to improve its sales performance.
Comparable store sales growth was 1.1 percent for fiscal 1997. In 1997, the
Company continued its "First in Southern California" marketing campaign. The
marketing campaign highlights the Company's belief that more shoppers are
choosing Ralphs than any other supermarket in Southern California. The focus of
the campaign is on lower retail prices while emphasizing those programs that
enhance Ralphs' offerings such as selection, quality, premier perishable
departments and customer service.
During the third and fourth quarters of fiscal 1997, the Company
launched the "Ralphs Club Card" program. 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 incurred one-time costs of approximately $10 million to
develop and launch the program.
Operating results improved each quarter during fiscal 1997 from the
previous quarters in fiscal 1996, and the Company's EBITDA (defined as earnings
before interest, taxes, depreciation, amortization, provision for postretirement
benefits, gain/loss on disposal of assets, Ralphs Merger-related transition
costs and LIFO charges) margin improved from 6.4 percent in fiscal 1996 to 6.9
percent in fiscal 1997. The Company's EBITDA margin in the fourth quarter of
1997 was 7.2 percent, a 7.5 percent improvement from the comparable period in
1996. The Company's improved EBITDA margin reflects the various initiatives
which management has implemented. Gross margin improvements reflect a reduction
in warehousing and distribution costs as a result of the consolidation of the
Company's distribution operations, as well as a reduction in the cost of goods
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sold as the benefits of inventory management programs instituted by the Company
are realized. SG&A expenses were reduced as a percentage of sales as a result of
tighter expense and labor controls at store level and administrative cost
reductions, partially offset by the start-up costs associated with the launch of
the "Ralphs Club Card" program in Southern California.
As a result of the operating improvements which occurred during fiscal
1996, the Company refinanced its existing bank credit agreement (the "Old Credit
Facility") in order to reduce interest expense. The refinancing of the Credit
Facility was completed on April 17, 1997. The refinancing was structured as an
amendment and restatement of the existing credit facility and the amended
facility consists of a $325.0 million Revolving Credit Facility, a $200.0
million Term Loan A Facility and a $350.0 million Term Loan B Facility. Prior to
the refinancing of the Old Credit Facility, on March 26, 1997, the Company
issued $155.0 million of 11% Senior Subordinated Notes due 2005 at a price of
105.5 percent of their principal amount and issued a redemption notice for
$140.2 million aggregate principal amount of the Company's outstanding 13.75%
Senior Subordinated Notes due 2005 (the "1995 13.75% Senior Subordinated Notes")
and $4.8 million aggregate principal amount of the Company's outstanding 13.75%
Senior Subordinated Notes due 2001 (the "1991 13.75% Senior Subordinated Notes,"
and together with the 1995 13.75% Senior Subordinated Notes, the "13.75% Senior
Subordinated Notes"). The 13.75% Senior Subordinated Notes were redeemed on
April 28, 1997.
As discussed previously, on March 9, 1998 and March 10, 1998, Fred Meyer
completed its mergers with Holdings and QFC. Following the mergers, Fred Meyer
has commenced the integration of the operations of the Company with those of
Fred Meyer and QFC. As a result of similar store formats and customer bases, the
stores operating under the Hughes Family Market banner will be operated by the
Company and will eventually be converted to the Ralphs banner. Such integration
will include a restructuring charge and capital expenditures including charges
relating to integration of labor forces, elimination of distribution,
manufacturing, store and administrative facilities and discontinuing certain
product lines.
On March 11, 1998, Fred Meyer completed certain refinancing transactions
related to the Fred Meyer Merger. As part of the refinancing, Holdings made
offers to purchase and consent solicitations with respect to the following debt
securities: (i) Food 4 Less Holdings 13-5/8% Senior Discount Debentures due
2005, (ii) Food 4 Less Holdings 13-5/8% Senior Subordinated Pay-In-Kind
Debentures due 2007, (iii) Ralphs Grocery Company 10.45% Senior Notes due 2004
(issued 6/95), (iv) Ralphs Grocery Company 10.45% Senior Notes due 2004 (issued
6/96), (v) Ralphs Grocery Company 11% Senior Subordinated Notes due 2005 (issued
6/95) and (vi) Ralphs Grocery Company 11% Senior Subordinated Notes due 2005
(issued 3/97). Payment to the note holders included tendered amounts, interest
and consent fees, which were $1,612.7 million, $37.7 million and $209.9 million,
respectively.
The Ralphs Grocery Company 10.45% Senior Notes due 2004 (issued 6/95)
and the Ralphs Grocery Company 11% Senior Subordinated Notes due 2005 (issued
6/95) were not fully tendered completely and $20,344,000 and $42,565,000
principal amount of each issue are still outstanding, respectively.
In connection with the Fred Meyer Merger, the stockholders and
warrantholders of Holdings received an aggregate of 21,670,503 shares of Fred
Meyer Common Stock in exchange for their Holdings shares and warrants, and cash
payment of $33.6 million to terminate and satisfy Holdings' obligations under
existing stock options.
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ACCOUNTING PRESENTATION
The Company's results of operations for the 52 weeks ended February 1,
1998 and the 53 weeks ended February 2, 1997, respectively, reflect operations
for the combined Company, while the results of operations for the 52 weeks ended
January 28, 1996 reflect 20 weeks of operations of F4L Supermarkets prior to the
Ralphs 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 Ralphs 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 Ralphs Merger is attributable to several factors, including the
size of the combined Company (since the Ralphs Merger approximately doubled F4L
Supermarkets' annual sales volume), the addition of 174 conventional stores to
the Company's overall store mix and the material changes in the Company's
capital structure.
The Ralphs Merger has been accounted for as a purchase of Ralphs by
Holdings. As a result, all financial statements for periods subsequent to June
14, 1995, the date the Ralphs 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's year end is the Sunday closest to January 31. Thus,
the 52-week period ended January 28, 1996 is referred to as fiscal 1995, the
53-week period ended February 2, 1997 is referred to as fiscal 1996 and the
52-week period ended February 1, 1998 is referred to as fiscal 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of fiscal 1997, the Company adopted the provisions
of the American Institute of Certified Public Accountants' Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
provides guidance on the financial reporting of start-up cost and organization
costs and requires these costs to be expensed as incurred. The impact of
adoption of SOP 98-5 on the beginning retained deficit was $3.3 million which is
reflected as the cumulative effect of change in accounting principle. In
addition, the adoption of SOP 98-5 resulted in a pre-tax charge of approximately
$2.4 million included in selling, general and administrative expenses.
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RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth the historical operating results of the
Company for the 53 weeks ended February 2, 1997 and the 52 weeks ended February
1, 1998:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1996 1997
---------------------- ----------------------
(in millions)
<S> <C> <C> <C> <C>
Sales $ 5,516.3 100.0% $ 5,487.5 100.0%
Gross profit 1,136.0 20.6 1,139.9 20.8
Selling, general and administrative
expenses 933.4 16.9 900.0 16.4
Amortization of goodwill 38.7 0.7 35.2 0.6
Loss on disposal
of assets 9.3 0.2 0.1 0.0
Restructuring charge 0.0 0.0 0.0 0.0
Operating income 154.6 2.8 204.6 3.7
Interest expense 284.2 5.2 277.7 5.1
Provision for income taxes 0.0 0.0 0.0 0.0
Loss before extraordinary
charge and cumulative effect of
change in accounting principle (129.6) (2.3) (73.1) (1.4)
Extraordinary charge 0.0 0.0 48.0 0.9
Cumulative effect of change in
accounting principle 0.0 0.0 (3.3) (0.0)
Net loss (129.6) (2.3) (124.4) (2.3)
</TABLE>
COMPARISON OF THE COMPANY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
FEBRUARY 1, 1998 WITH THE COMPANY'S RESULTS OF OPERATIONS FOR THE 53 WEEKS ENDED
FEBRUARY 2, 1997.
Sales. Sales per week increased $1.4 million, or 1.3 percent, from
$104.1 million in the 53 weeks ended February 2, 1997 to $105.5 million in the
52 weeks ended February 1, 1998. Comparable store sales were 1.1 percent for
fiscal 1997. 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 and the "Ralphs Club
Card" program.
Gross Profit. Gross profit increased as a percentage of sales from 20.6
percent in the 53 weeks ended February 2, 1997 to 20.8 percent in the 52 weeks
ended February 1, 1998. 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 start-up costs associated with the launch of
the "Ralphs Club Card" program.
Selling, General and Administrative Expenses. Selling, general,
administrative and other expenses ("SG&A") were $933.4 million and $900.0
million for the 53 weeks ended February 2, 1997 and the 52 weeks ended February
1, 1998, respectively. SG&A decreased as a percentage of sales from 16.9 percent
to 16.4 percent for those periods. The reduction in SG&A as a percentage of
sales reflects the results of tighter expense and labor controls at the store
level and continued administrative costs reductions, partially offset by the
start-up costs associated with the launch of the "Ralphs Club Card" program. The
Company participates in multi-employer health and welfare plans for its store
employees who are members of the United Food and Commercial Workers Union
("UFCW"). As part of the renewal of the Southern California UFCW contract in
October 1995,
12
<PAGE> 14
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. In fiscal 1997, the Company recognized pension
suspension credits of $21.5 million. Offsetting the reduction was a $4.3 million
union bonus in fiscal year 1997.
Restructuring Charge. During fiscal 1997, the Company utilized $2.4
million and $5.5 million of the remaining restructuring reserve related to the
fiscal 1995 $75.2 million and $47.9 million restructuring charges, respectively.
The amounts utilized primarily include write-downs of property and equipment
($1.8 million) and payments for lease obligations ($6.1 million). At February 1,
1998, approximately $20.0 million of the restructuring accrual related to the
$75.2 million charge and $11.4 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. The Company has
completed a majority of the restructuring actions, although certain obligations
will continue through 2010.
Operating Income. Primarily as a result of the factors discussed above,
the Company's operating income increased from $154.6 million in fiscal 1996 to
$204.6 million in fiscal 1997.
Interest Expense. Interest expense (including amortization of deferred
financing costs) was $284.2 million for the 53 weeks ended February 2, 1997 and
$277.7 million for the 52 weeks ended February 1, 1998.
Loss Before Extraordinary Charge and Cumulative Effect of Change in
Accounting Principle. Primarily as a result of the factors discussed above, the
Company's loss before extraordinary charge and cumulative effect of change in
accounting principle decreased from $129.6 million in fiscal year 1996 to $73.1
million in fiscal year 1997.
Extraordinary Charges. Extraordinary charges of $48.0 million were
recorded in fiscal 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.
Cumulative Effect of Change in Accounting Principle. In the fourth
quarter of fiscal 1997, the Company adopted the provisions of the American
Institute of Certified Public Accountants' Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides
guidance on the financial reporting of start-up cost and organization costs and
requires these costs to be expensed as incurred. The impact of adoption of SOP
98-5 on the beginning retained deficit was $3.3 million which is reflected as
the cumulative effect of change in accounting principle. In addition, the
adoption of SOP 98-5 resulted in a pre-tax charge of approximately $2.4 million
included in selling, general and administrative expenses.
YEAR 2000 COMPLIANCE
The Company believes that its accounting and management information
systems and inventory control system adequately provide for its current needs.
The Company intends to continue to update and enhance its systems in order to
improve capabilities and provide for planned growth.
The Company has performed an analysis and is modifying its computer
software to address the year 2000 issues. The Company is also contacting major
suppliers to determine the extent to which the Company may be vulnerable to
third-party year 2000 issues. Based on current information, management believes
that all software modifications necessary to operate and effectively manage the
Company will be performed by the year 2000 and that related costs will not have
a material adverse impact on the results of operations, cash flow, or financial
condition of future periods.
13
<PAGE> 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on page 18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no change in independent auditors during the last two
fiscal years, and there has been no disagreement with the Company's independent
auditors on any matter of accounting principles or practices or financial
statement disclosure.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules required to be filed hereunder are
indexed on page 18 hereof.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 6, 1997 on
November 13, 1997 to report under Item 5 the Fred Meyer Merger
Agreement.
(c) Those Exhibits, and the Index thereto, required to be filed by Item 601
of Regulation S-K are attached hereto. Certain management contracts and
other compensation plans or arrangements required to be filed are
identified on the attached Index with an asterisk.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FOOD 4 LESS HOLDINGS, INC.
By: /s/ Terrence J. Wallock
-------------------------------
Terrence J. Wallock
Secretary
Date: May 4, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George G. Golleher President, Chief Executive Officer and May 4, 1998
- -------------------------------- Director
George G. Golleher
/s/ Greg Mays Executive Vice President - Finance and May 4, 1998
- --------------------------------- Administration
Greg Mays
/s/ Robert G. Miller Director May 4, 1998
- ---------------------------------
Robert G. Miller
/s/ Kenneth Thrasher Director May 4, 1998
- -------------------------------
Kenneth Thrasher
/s/ Roger A. Cooke Director May 4, 1998
- --------------------------------
Roger A. Cooke
</TABLE>
16
<PAGE> 18
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOTE REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
The Registrant will furnish copies of such report or proxy material if and when
such report or proxy material is sent to security holders.
17
<PAGE> 19
FOOD 4 LESS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants............................................ 19
Consolidated balance sheets as of February 2, 1997 and February 1, 1998............ 20-21
Consolidated statements of operations for the 52 weeks ended January 28, 1996,
the 53 weeks ended February 2, 1997 and the 52 weeks ended
February 1, 1998.................................................................... 22
Consolidated statements of cash flows for the 52 weeks ended January 28, 1996,
the 53 weeks ended February 2, 1997 and the 52 weeks ended
February 1, 1998.................................................................... 23-24
Consolidated statements of stockholder's equity (deficit) for the 52 weeks ended
January 28, 1996, the 53 weeks ended February 2, 1997 and the 52 weeks ended
February 1, 1998.................................................................... 25
Notes to consolidated financial statements.......................................... 26-53
FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants............................................ 54
I Condensed Financial Information of Registrant............................... 55-57
II Valuation and Qualifying Accounts........................................... 58
</TABLE>
All other schedules have been omitted since the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and related notes.
18
<PAGE> 20
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 February 1, 1998 and February 2, 1997 and the related consolidated statements
of operations, stockholder's equity (deficit) and cash flows for the 52 weeks
ended February 1, 1998, the 53 weeks ended February 2, 1997 and the 52 weeks
ended January 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Food 4 Less
Holdings, Inc. and subsidiaries as of and February 1, 1998 and February 2, 1997
and the results of their operations and their cash flows for the 52 weeks ended
February 1, 1998, the 53 weeks ended February 2, 1997 and the 52 weeks ended
January 28, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 9, 1998
19
<PAGE> 21
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
As of
--------------------------
February 2, February 1,
1997 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 67,589 $ 75,601
Trade receivables, less allowances of $4,057 and $3,023
at February 2, 1997 and February 1, 1998, respectively 46,560 37,629
Inventories 502,095 514,387
Patronage receivables from suppliers 4,433 4,197
Prepaid expenses and other 22,456 20,325
---------- ----------
Total current assets 643,133 652,139
INVESTMENTS IN AND NOTES RECEIVABLE
FROM SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 7,020 6,797
Certified Grocers of California 4,945 445
PROPERTY AND EQUIPMENT:
Land 173,803 171,651
Buildings 188,311 190,437
Leasehold improvements 226,159 261,047
Equipment and fixtures 401,716 472,158
Construction in progress 51,117 27,706
Leased property under capital leases 200,199 231,413
Leasehold interests 112,398 110,606
---------- ----------
1,353,703 1,465,018
Less: Accumulated depreciation and amortization 301,477 396,013
---------- ----------
Net property and equipment 1,052,226 1,069,005
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of
$17,615 and $9,913 at February 2, 1997 and
February 1, 1998, respectively 88,889 49,863
Goodwill, less accumulated amortization of $99,057
and $134,295 at February 2, 1997 and
February 1, 1998, respectively 1,310,956 1,275,718
Other, net 24,824 22,106
---------- ----------
$3,131,993 $3,076,073
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
20
<PAGE> 22
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
As of
-----------------------------
February 2, February 1,
1997 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 343,704 $ 349,585
Accrued payroll and related liabilities 106,764 105,728
Accrued interest 31,011 29,628
Other accrued liabilities 261,582 224,546
Income taxes payable 1,956 1,361
Current portion of self-insurance liabilities 48,251 48,251
Current portion of senior debt 4,465 6,274
Current portion of obligations under capital leases 28,041 35,691
----------- -----------
Total current liabilities 825,774 801,064
SENIOR DEBT, net of current portion 1,263,142 1,307,510
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 126,336 120,329
SENIOR SUBORDINATED DEBT 671,222 689,168
HOLDINGS DEBENTURES 283,706 324,664
DEFERRED INCOME TAXES 21,074 21,074
SELF-INSURANCE LIABILITIES, net of current portion 91,332 90,325
LEASE VALUATION RESERVE 62,389 53,690
OTHER NON-CURRENT LIABILITIES 106,286 109,757
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000 shares
authorized; 16,683,244 shares issued at February 2, 1997
and February 1, 1998 (aggregate liquidation value of $200.3 million) 161,831 161,831
Convertible Series B Preferred Stock, $.01 par value, 25,000,000 shares
authorized; 3,100,000 shares issued at February 2, 1997
and February 1, 1998 (aggregate liquidation value of $37.2 million) 31,000 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized at
February 2, 1997 and February 1, 1998, respectively; 17,207,882 shares
and 17,483,542 shares issued at February 2, 1997 and February 1, 1998,
respectively 172 175
Non-Voting Common Stock, $.01 par value, 25,000,000 shares authorized;
no shares issued at February 2, 1997 or February 1, 1998 -- --
Additional capital 56,091 56,602
Notes receivable from stockholders (592) (584)
Retained deficit (564,223) (688,583)
----------- -----------
(315,721) (439,559)
Treasury Stock; 421,237 shares of Common Stock at
February 2, 1997; 231,297 shares of Common Stock at February 1, 1998 (3,547) (1,949)
----------- -----------
Total stockholders' deficit (319,268) (441,508)
----------- -----------
$ 3,131,993 $ 3,076,073
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
21
<PAGE> 23
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
-----------------------------------------------
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 4,335,109 $ 5,516,259 $ 5,487,469
COST OF SALES (including purchases from
related parties of $141,432, $95,344 and $64,109
for the 52 weeks ended January 28, 1996, the
53 weeks ended February 2, 1997 and the 52 weeks
ended February 1, 1998, respectively) 3,527,120 4,380,241 4,347,549
----------- ----------- -----------
GROSS PROFIT 807,989 1,136,018 1,139,920
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 744,449 933,414 899,988
AMORTIZATION OF GOODWILL 21,847 38,650 35,238
(GAIN) LOSS ON DISPOSAL OF ASSETS (547) 9,317 93
RESTRUCTURING CHARGE 123,083 -- --
----------- ----------- -----------
OPERATING (LOSS) INCOME (80,843) 154,637 204,601
INTEREST EXPENSE:
Interest expense, excluding amortization of
deferred financing costs 194,458 273,550 271,939
Amortization of deferred financing costs 8,193 10,667 5,714
----------- ----------- -----------
202,651 284,217 277,653
LOSS BEFORE PROVISION FOR INCOME TAXES,
EXTRAORDINARY CHARGE AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (283,494) (129,580) (73,052)
PROVISION FOR INCOME TAXES 500 -- --
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (283,994) (129,580) (73,052)
EXTRAORDINARY CHARGE 38,424 -- 47,983
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (3,325)
----------- ----------- -----------
NET LOSS $ (322,418) $ (129,580) $ (124,360)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
22
<PAGE> 24
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
-----------------------------------------------
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $ 4,335,109 $ 5,516,259 $ 5,487,469
Cash paid to suppliers and employees (4,197,875) (5,160,532) (5,136,042)
Interest paid (157,441) (230,620) (232,364)
Income taxes refunded (paid) 256 8,344 (395)
Interest received 2,562 9,531 (208)
Loss (gain) on disposal of assets 547 (9,317) 93
Other, net -- -- (8,861)
----------- ----------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (16,842) 133,665 109,692
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 21,373 29,503 28,574
Payment for purchase of property and equipment (122,355) (123,622) (143,542)
Payment of acquisition costs, net of cash acquired (403,301) (12,705) (9,637)
Other, net (1,120) (4,311) (4,460)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (505,403) (111,135) (129,065)
CASH (USED) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,105,500 98,946 722,496
Net increase (decrease) in revolving loan 100,100 (28,000) 32,000
Payments of long-term debt (661,119) (61,589) (690,258)
Proceeds from issuance of preferred stock 137,500 -- --
Proceeds from issuance of common stock -- -- 1,962
Purchase of treasury stock (3,547) -- --
Sale of treasury stock -- -- 150
Payments of capital lease obligations (15,314) (25,935) (33,163)
Deferred financing costs and other (92,452) (6,346) (5,802)
----------- ----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 570,668 (22,924) 27,385
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 48,423 (394) 8,012
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 19,560 67,983 67,589
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 67,983 $ 67,589 $ 75,601
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
23
<PAGE> 25
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
-------------------------------------------
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH (USED)
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (322,418) $(129,580) $(124,360)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 133,522 180,344 178,710
Non-cash interest expense 23,877 35,789 40,958
Amortization of debt discount -- 214 464
Amortization of debt premium -- -- (579)
Restructuring charge 123,083 -- --
Non-cash extraordinary charges 38,424 -- 39,122
Loss (gain) on sale of assets (547) 9,317 93
Change in assets and liabilities,
net of effects from acquisition of businesses:
Accounts and notes receivable (74) 14,999 13,694
Inventories 762 574 (12,292)
Prepaid expenses and other (18,291) 2,721 (13,194)
Accounts payable and accrued liabilities 3,327 24,243 (11,322)
Self-insurance liabilities 737 (9,402) (1,007)
Deferred income taxes 454 3,086 (200)
Income taxes payable 302 1,360 (395)
----------- --------- ---------
Total adjustments 305,576 263,245 234,052
----------- --------- ---------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES $ (16,842) $ 133,665 $ 109,692
=========== ========= =========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of property and equipment
through the issuance of capital leases $ 24,008 $ 28,485 $ 42,276
=========== ========= =========
Retirement of capital leases $ -- $ -- $ 7,470
=========== ========= =========
Acquisition of RSI in fiscal year 1995
Fair value of assets acquired, including goodwill,
net of cash acquired of $32,595 in
fiscal year 1995 $ 2,098,220 $ -- $ --
Net cash paid in acquisition (403,301) -- --
Notes issued to seller (150,000) -- --
Notes issued to advisor (12,000) -- --
----------- --------- ---------
Liabilities assumed $ 1,532,919 $ - $ --
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
24
<PAGE> 26
FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock
------------------------- ------------------------- ----------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29, 1995 -- $ -- $ -- 1,386,169 $ 14
Net loss -- -- -- -- -- --
Payments of Stockholders' Notes -- -- -- -- -- --
Stock split of Common Stock
(16.58609143 shares to 1 share) -- -- -- -- 21,604,957 216
Purchase of Treasury Stock -- -- -- -- -- --
Issuance of Preferred Stock 10,900,000 109,000 3,100,000 31,000 -- --
Conversion of Common Stock
to Preferred Stock 5,783,244 57,831 -- -- (5,783,244) (58)
Preferred Stock Issuance Costs -- (5,000) -- -- -- --
Exchange RGC liability for
stock options -- -- -- -- -- --
Repurchase Stock Options -- -- -- -- -- --
---------- --------- --------- ------- ---------- -----
BALANCES AT JANUARY 28, 1996 16,683,244 161,831 3,100,000 31,000 17,207,882 172
Net loss -- -- -- -- -- --
Payments of Stockholders' Notes -- -- -- -- -- --
Repurchase Stock Options -- -- -- -- -- --
---------- --------- --------- ------- ---------- -----
BALANCES AT FEBRUARY 2, 1997 16,683,244 161,831 3,100,000 31,000 17,207,882 172
Net loss -- -- -- -- -- --
Payments of Stockholders' Notes -- -- -- -- -- --
Issuance of Common Stock -- -- -- -- 275,660 3
Sale of Treasury Stock -- -- -- -- -- --
---------- --------- --------- ------- ---------- -----
BALANCES AT FEBRUARY 1, 1998 16,683,244 $ 161,831 3,100,000 $31,000 17,483,542 $ 175
========== ========= ========= ======= ============ =====
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Stock-
Number Stock- Add'l holders'
of holders' Paid-In Retained Equity
Shares Amount Notes Capital Deficit (Deficit)
------ ------ -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29, 1995 -- $ -- $(702) $ 105,580 $(112,225) $ (7,333)
Net loss -- -- -- -- (322,418) (322,418)
Payments of Stockholders' Notes -- -- 100 -- -- 100
Stock split of Common Stock
(16.58609143 shares to 1 share) -- -- -- (216) -- --
Purchase of Treasury Stock (421,237) (3,547) -- -- -- (3,547)
Issuance of Preferred Stock -- -- -- -- -- 140,000
Conversion of Common Stock
to Preferred Stock -- -- -- (57,773) -- --
Preferred Stock Issuance Costs -- -- -- -- -- (5,000)
Exchange RGC liability for
stock options -- -- -- 10,000 -- 10,000
Repurchase Stock Options -- -- -- (600) -- (600)
-------- ------- ----- --------- --------- ---------
BALANCES AT JANUARY 28, 1996 (421,237) (3,547) (602) 56,991 (434,643) (188,798)
Net loss -- -- -- -- (129,580) (129,580)
Payments of Stockholders' Notes -- -- 10 -- -- 10
Repurchase Stock Options -- -- -- (900) -- (900)
-------- ------- ----- --------- --------- ---------
BALANCES AT FEBRUARY 2, 1997 (421,237) (3,547) (592) 56,091 (564,223) (319,268)
Net loss -- -- -- -- (124,360) (124,360)
Payments of Stockholders' Notes -- -- 8 -- -- 8
Issuance of Common Stock -- -- -- 1,959 -- 1,962
Sale of Treasury Stock 189,940 1,598 -- (1,448) -- 150
-------- ------- ----- --------- --------- ---------
BALANCES AT FEBRUARY 1, 1998 (231,297) $(1,949) $(584) $ 56,602 $(688,583) $(441,508)
======== ======= ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
25
<PAGE> 27
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.
On June 14, 1995, Holdings and its subsidiary, Food 4 Less
Supermarkets, Inc. ("F4L Supermarkets") completed their acquisition (the
"Ralphs Merger") of Ralphs Supermarkets, Inc., ("RSI") and its
wholly-owned subsidiary, Ralphs Grocery Company ("RGC"). Concurrently
with the consummation of the Ralphs Merger, the Company refinanced a
substantial portion of the existing indebtedness of F4L Supermarkets and
RGC.
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-Ralphs 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's year end is the Sunday closest to
January 31. Thus, the 52-week period ended January 28, 1996 is referred
to as fiscal 1995, the 53-week period ended February 2, 1997 is referred
to as fiscal 1996 and the 52-week period ended February 1, 1998 is
referred to as fiscal 1997. Information presented below concerning
subsequent fiscal years starts with fiscal year 1998, which will cover
the 52 weeks ended January 31, 1999 and will proceed sequentially
forward.
26
<PAGE> 28
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 mainly 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 $28.5 million at February 2, 1997
and February 1, 1998, respectively, and gross profit and operating
income would have been greater by $2.2 million, $5.6 million and $4.2
million for fiscal year 1995, 1996 and 1997, respectively.
Pre-opening Costs
In the fourth quarter of fiscal 1997, the Company adopted the
provisions of the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial
reporting of start-up cost and organization costs and requires these
costs to be expensed as incurred. The impact of adoption of SOP 98-5 on
the beginning retained deficit was $3.3 million which is reflected as
the cumulative effect of change in accounting principle. In addition,
the adoption of SOP 98-5 resulted in a pre-tax charge of approximately
$2.4 million included in selling, general and administrative expenses.
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense
includes amortization of capital lease assets. Depreciation and
amortization is provided using the straight-line method over the
following estimated useful lives:
Buildings and improvements 5-40 years
Equipment and fixtures 3-10 years
Property under capital leases
and leasehold interests 3-40 years (lease term)
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are
amortized over the term of the related debt using the effective interest
method.
Long-Lived Assets
Goodwill, representing the excess of the purchase price over the
fair value of the net assets of businesses acquired, is amortized on a
straight-line basis over 40 years beginning at the date of acquisition.
In 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
27
<PAGE> 29
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 fiscal
1997.
In accordance with SFAS No. 121, long-lived assets and certain
identifiable intangibles held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of goodwill and other long-lived assets,
the recoverability test is performed using undiscounted net cash flows
for groupings of stores consistent with the past acquisitions that gave
rise to the goodwill.
Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events
other than proposed changes in the tax law or rates.
Notes Receivable from Stockholders of Holdings
Notes receivable from stockholders of Holdings 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.
Extraordinary Items
For the 52 weeks ended February 1, 1998, the Company recorded an
extraordinary charge primarily relating 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.
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 Ralphs Merger and the write-off of
their related debt issuance costs.
28
<PAGE> 30
Derivative Financial Instruments
The Company utilizes an interest rate collar agreement to set
interest rate limits on its Term Loans to satisfy the interest rate
protection requirements under its Credit Facility. Favorable or
unfavorable movements of interest rates outside of the interest rate
limits are recorded as adjustments to interest expense in the period in
which the unfavorable movement occurs.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense
for fiscal 1997, fiscal 1996 and fiscal 1995 was $70.7 million, $63.7
million and $54.8 million, respectively.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the fiscal year 1997
presentation.
29
<PAGE> 31
3. SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's senior debt is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
As of
--------------------------
February 2, February 1,
1997 1998
---------- ----------
<S> <C> <C>
Term Loans $ 541,432 $ 547,375
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
and $4,697 at February 2, 1997 and February 1,
1998, respectively, 11.5% yield to maturity 94,839 95,303
10.45% Senior Notes, principal due 2000 with
interest payable semi-annually in arrears 4,674 4,674
Revolving Facility 99,400 131,400
Other senior debt 6,936 14,706
---------- ----------
1,267,607 1,313,784
Less--current portion 4,465 6,274
---------- ----------
$1,263,142 $1,307,510
========== ==========
</TABLE>
Senior Debt
As part of the Ralphs Merger financing, the Company entered into
a bank credit agreement (the "Old Credit Facility") comprised of a
$600.0 million term loan facility and a revolving credit facility of
$325.0 million under which working capital loans could be made and
commercial or standby letters of credit in the maximum aggregate amount
of up to $150.0 million could be issued. The Old Credit Facility was
collateralized by inventory, receivables, certain fixed assets, deposit
accounts, collection proceeds and certain intangibles.
During the first quarter of fiscal 1997, the Company 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 $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 Eurdollar Rate (as defined) plus a margin ranging
from 1.25 percent to 2.75 percent.
At February 1, 1998, $547.4 million was outstanding under the
Term Loans, $131.4 million was outstanding under the Revolving Facility,
including $75.5 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
1, 1998, the weighted average interest rate on the Term Loans was 7.94
percent and the interest rate on the Revolving Facility was 7.75
percent.
30
<PAGE> 32
Quarterly principal installments on the Term Loans continue to
2004, with principal amounts due as follows: $3.5 million in fiscal
1998, $25.5 million in fiscal 1999, $62.6 million in fiscal 2000, $87.5
million in fiscal 2001, $112.8 million in fiscal 2002 and $255.5 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 February 2003. The common stock of the Company
and certain of its direct and indirect subsidiaries has been pledged as
security under the Credit Facility.
The Company had 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 was $325.0 million. The agreement,
which was entered into on October 11, 1995 and expired on October 21,
1997, limited 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 required quarterly cash settlement for interest
rate fluctuations outside of the limits. The agreement satisfied the
interest rate protection requirements under the Old Credit Facility. No
adjustments to interest expense were recorded during fiscal year 1997 or
1996 as a result of this agreement.
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
31
<PAGE> 33
price declines ratably to 100 percent in fiscal 2003. In addition, on or
prior to June 15, 1998, Ralphs may, at its option, use the net cash
proceeds of one or more public equity offerings to redeem up to an
aggregate of 35 percent of the principal amount of the New Senior Notes
originally issued, at a redemption price equal to 110.4 percent, 108.9
percent, and 107.5 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 1,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 6,274
1999 7,652
2000 42,158
2001 82,802
2002 108,013
Later years 1,066,885
---------
$1,313,784
==========
</TABLE>
The Company's senior subordinated debt is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
As of
-------------------------
February 2, February 1,
1997 1998
----------- -----------
<S> <C> <C>
11.00% Senior Subordinated Notes $524,005 $524,005
principal due 2005 with interest payable
semi-annually in arrears
11.00% Senior Subordinated Notes -- 162,946
principal due 2005 with interest payable
semi-annually in arrears, net of
unamortized debt premium of $7,946
13.75% Senior Subordinated Notes 140,184 --
principal due 2005 with interest payable
semi-annually in arrears
13.75% Senior Subordinated Notes 4,816 --
principal due 2001 with interest payable
semi-annually in arrears
Other Senior Subordinated debt 2,217 2,217
-------- --------
$671,222 $689,168
======== ========
</TABLE>
Senior Subordinated Debt
Concurrent with the Ralphs Merger, F4L Supermarkets 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
32
<PAGE> 34
(iii) subsequently purchased $0.1 million principal amount of Old RGC 9%
Notes and $1.0 million principal amount of Old RGC 10.25% Notes subject
to the change of control provision, leaving an outstanding balance of
$0.1 million on the Old RGC 9% Notes and an outstanding balance of $2.1
million on the Old RGC 10.25% Notes. The 1995 11% Senior Subordinated
Notes are senior subordinated, unsecured obligations of Ralphs and are
subordinated in right of payment to all senior indebtedness, including
Ralphs' obligations under the New Credit Facility and the 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.
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 were
senior subordinated unsecured obligations of Ralphs and were
subordinated in right of payment to all senior indebtedness, including
Ralphs' obligations under the Old 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 was payable
semiannually in arrears on each June 15 and December 15 commencing on
December 15, 1995. The New F4L Senior Subordinated Notes could be
redeemed beginning in fiscal year 1996 at a redemption price of 106.111
percent. The redemption price declined ratably to 100 percent in fiscal
year 2000.
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 the 1995 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.
33
<PAGE> 35
Scheduled maturities of principal of senior subordinated debt at
February 1, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ --
1999 --
2000 --
2001 --
2002 2,072
Later years 687,096
--------
$ 689,168
=========
</TABLE>
At the time of the Ralphs Merger, Holdings issued $100.0 million
of its New Discount Debentures. At February 1, 1998, the balance of the
New Discount Debentures was $141.3 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 1, 1998, the balance of the Seller
Debentures was $183.4 million. Interest is payable semi-annually on each
June 15 and December 15 commencing on December 15, 1995. Holdings has
the option, in its sole discretion, to issue additional securities
("Secondary Securities") in lieu of a cash payment of any or all of the
interest due on each interest payment date prior to and including June
15, 2000. Secondary Securities were issued during fiscal 1997 in lieu of
a cash payment.
The Seller Debentures may be redeemed, in whole or in part at the
option of Holdings, at any time after June 15, 2000, at an initial
redemption price of 106.8125 percent. The redemption price declines
ratably to 100 percent in fiscal 2004. The Seller Debentures are senior
subordinated unsecured obligations of Holdings and are subordinate in
right of payment to all senior indebtedness of Holdings, including the
New Discount Debentures.
Financial Covenants
The New Credit Facility, among other things, requires the Company
to maintain minimum levels of net worth (as defined), to maintain
minimum levels of earnings and to comply with certain ratios related to
fixed charges and indebtedness. During fiscal 1995, certain financial
covenants and other terms of the Old 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 New Credit Facility and the indentures
governing the New Senior Notes, the 1995 11% Senior Subordinated Notes
and the 1997 11% 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 1, 1998,
the Company was in
34
<PAGE> 36
compliance with the financial covenants of its debt agreements. At
February 1, 1998, 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, as provided in the
indentures related thereto. The separate financial statements of the
subsidiary guarantors are not presented because Ralphs' management
believes that the operating results and assets of the subsidiary
guarantors are not material to the consolidated operating results and
assets of Ralphs and that, accordingly, such financial statements are
not material to investors.
Presented below is summarized financial information for the
subsidiary guarantors on a combined basis (in thousands):
<TABLE>
<CAPTION>
As of
-------------------------
February 2, February 1,
1997 1998
----------- -----------
<S> <C> <C>
Current assets $ 53,706 $ 58,597
Non-current assets 279,674 256,929
Current liabilities 47,800 49,610
Non-current liabilities 8,399 8,092
</TABLE>
<TABLE>
<CAPTION>
For the
-------------------------------------------
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales $557,316 $557,994 $536,133
Gross Profit 108,697 113,730 108,525
Net Loss (10,418) (8,083) (4,058)
</TABLE>
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 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rents $97,752 $146,101 $139,578
Rents based on sales 3,439 3,786 3,719
Sublease income 3,669 3,903 4,323
</TABLE>
35
<PAGE> 37
Following is a summary of future minimum lease payments under
operating leases at February 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 144,475
1999 147,451
2000 142,897
2001 130,964
2002 124,204
Later years 1,320,806
----------
$2,010,797
==========
</TABLE>
The Company has entered into lease agreements for new supermarket
sites which were not in operation at February 1, 1998. Future minimum
lease payments under such operating leases generally begin when such
facilities open and at February 1, 1998 are: 1998 - $3.6 million; 1999 -
$9.0 million; 2000 - $9.0 million; 2001 - $9.0 million; 2002 - $9.0
million; later years - $161.5 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 1, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 46,768
1999 38,188
2000 29,930
2001 19,540
2002 15,451
Later years 95,254
--------
Total minimum lease payments 245,131
Less: amounts representing interest 89,111
---------
Present value of minimum lease payments 156,020
Less: current portion 35,691
--------
$120,329
========
</TABLE>
Accumulated depreciation related to leased property under capital
leases was $62.0 million and $87.5 million at February 2, 1997, and
February 1, 1998, respectively.
36
<PAGE> 38
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 percent 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 investment in Certified is accounted for on the cost method.
There are certain restrictions on the sale of this investment.
The contractual maturities at February 1, 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Within one year $ -
After one year through five years 5,298
After five years through ten years 1,499
-----
$6,797
======
</TABLE>
6. INCOME TAXES
The provision (benefit) for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State and other 46 -- --
--------- --------- ---------
46 -- --
--------- --------- ---------
Deferred:
Federal $ -- $ -- $ --
State and other 454 -- --
--------- --------- ---------
454 -- --
--------- --------- ---------
$ 500 $ -- $ --
========= ========= =========
</TABLE>
37
<PAGE> 39
A reconciliation of the provision (benefit) for income taxes to
amounts computed at the federal statutory rates of 35 percent for fiscal
1995, fiscal 1996 and fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 31 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Federal income taxes at statutory
rate on loss before provision
for income taxes and
extraordinary charges $(112,670) $(45,353) $(43,538)
State and other taxes,
net of federal tax benefit (18,057) (2,321) (3,675)
Effect of permanent differences
resulting primarily from:
Amortization of goodwill (1,665) 9,802 8,344
Original issue discount 306 404 462
Tax credits and other 3,769 (4,851) (2,950)
Accounting limitation of
deferred tax benefit 128,817 42,319 41,357
--------- -------- --------
$ 500 $ -- $ --
========= ======== ========
</TABLE>
The provision (benefit) for deferred taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Property and equipment $ (460) $ 20,606 $ (8,864)
Inventory (8,479) 40 (6,558)
Original issue discount (1,217) (10,966) (13,898)
Capital lease obligation (502) (5,253) 3,337
Self-insurance reserves 2,104 2,276 78
Accrued expense (26,304) (1,435) (10,060)
Accrued payroll and related liabilities (6,206) (2,916) (2,049)
Tax intangibles 6,234 10,182 10,141
State taxes (21,902) (6,848) (7,281)
Net operating losses (73,406) (50,069) (14,190)
Tax credits 3,601 -- 93
Accounting limitation of deferred tax benefit 128,817 42,319 41,357
Other, net (1,826) 2,064 7,894
--------- -------- --------
$ 454 $ -- $ --
========= ======== ========
</TABLE>
38
<PAGE> 40
The significant components of the Company's deferred tax assets
(liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
February 2, February 1,
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued payroll and related liabilities $ 30,495 $ 32,544
Other accrued liabilities 73,389 83,449
Obligations under capital leases 42,837 39,500
Original issue discount 18,571 32,469
Self-insurance liabilities 47,497 47,419
Loss carryforwards 216,459 230,649
Tax credit carryforwards 913 820
State taxes 38,320 45,602
Other 16,075 7,543
--------- ---------
Gross deferred tax assets 484,556 519,995
Valuation allowance (348,879) (390,236)
--------- ---------
Net deferred tax assets $ 135,677 $ 129,759
--------- ---------
Deferred tax liabilities:
Inventories $ (9,802) $ (3,244)
Property and equipment (129,808) (120,944)
Tax intangibles (16,416) (26,558)
Other (725) (87)
--------- ---------
Gross deferred tax liability (156,751) (150,833)
--------- ---------
Net deferred tax liability $ (21,074) $ (21,074)
========= =========
</TABLE>
The Company recorded a valuation allowance to reserve a portion
of its gross deferred tax assets at February 1, 1998 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 1, 1998, approximately $139.0 million of the
valuation allowance for deferred tax assets will reduce goodwill when
the allowance is no longer required.
At February 1, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of $659.0 million, which
expire from 2007 through 2012. The Company has federal Alternative
Minimum Tax ("AMT") credit carryforwards of approximately $0.8 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 Ralphs Merger, the
ownership of pre-Ralphs Merger F4L Supermarkets and pre-Ralphs 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-Ralphs Merger RSI net tax assets will reduce goodwill when utilized
in future federal income tax returns.
39
<PAGE> 41
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 1992 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 $3.6 million during fiscal year
1995, $4.0 million during fiscal year 1996 and $4.0 million during
fiscal year 1997. Advisory fees were $21.5 million during fiscal year
1995, $1.7 million during fiscal year 1996 and less than $1.0 million
during fiscal year 1997. Advisory fees for financing transactions are
capitalized and amortized over the term of the related financing.
8. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to former stockholders of
certain predecessors for any prorated gains which may be realized within
ten years of the acquisition of the respective companies resulting from
the sale of certain Certified stock. Such gains are only payable if
Certified is purchased or dissolved, or if the Company sells such
Certified Stock within the period noted above.
In connection with the bankruptcy reorganization of Federated
Department Stores, Inc. ("Federated") and its affiliates, Federated
agreed to pay certain potential tax liabilities relating to RGC as a
member of the affiliated group of companies comprising Federated and its
subsidiaries. In consideration thereof, RSI and RGC agreed to pay
Federated a total of $10 million, payable $1 million on each of February
3, 1992, 1993, 1994, 1995 and 1996 and $5 million on February 3, 1997.
In the event Federated is required to pay certain tax liabilities, RSI
and RGC agreed to reimburse Federated up to an additional $10 million,
subject to certain adjustments. Pursuant to the terms of the Ralphs
Merger, the potential $10 million payment will be paid in cash.
40
<PAGE> 42
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 1, 1998, the Company had capitalized
construction costs of $15.0 million on total commitments of $15.0
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 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. All
defendants in the actions, including the Company, have reached tentative
settlement agreements, and certain of the settlements have been approved
by the trial court. The Company is in the process of finalizing a
settlement agreement in the case.
On September 13, 1996 a class action lawsuit titled McCampbell,
et al. v. Ralphs Grocery Company, et al. was filed in the Superior Court
of the State of California, County of San Diego, against the Company and
two other grocery store chains operating in the Southern California
area. The complaint alleges, among other things, that the Company and
others conspired to fix the retail price of eggs in Southern California.
The plaintiffs claim that the defendants' actions violate provisions of
the California Cartwright Act and constitute unfair competition.
Plaintiffs seek unspecified damages they purport to have sustained as a
result of the defendants' alleged actions, which damages may be trebled
under the applicable statute, and an injunction from future actions in
restraint of trade and unfair competition. Discovery has commenced and
the action has been certified as a class. Management of the Company
intends to defend this action vigorously and the Company has filed an
answer to the complaint denying the plaintiffs' allegations and setting
forth several defenses.
On December 20, 1996, a lawsuit titled Bundy, et al. v. Ralphs
Grocery Company, et al. was filed in the Los Angeles Superior Court
against the Company. The complaint was filed by eight individual
plaintiffs who were terminated in conjunction with the Company's
restructuring. The plaintiffs claim that they were wrongfully terminated
for discriminatory reasons and that the Company engaged in various
fraudulent practices. The plaintiffs seek compensatory damages in excess
of $15 million, special and punitive damages. Management of the Company
intends to defend this action vigorously.
In August 1996, a lawsuit entitled Dianne Gober, et al. v. Ralphs
was filed alleging sexual harassment by a Ralphs store manager in San
Diego County against six female store employees. None of the plaintiffs
suffered any loss of earnings nor incurred any medical expenses or
expenses for psychotherapy, but the Company has recently been advised
that the plaintiffs are, nevertheless, seeking substantial compensatory
and punitive damages. Plaintiffs have dismissed the store manager as a
defendant. The trial began in April 1998. The Company 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.
41
<PAGE> 43
The Company self-insures its workers' compensation, general
liability and auto liability. For fiscal year 1995, fiscal year 1996 and
fiscal year 1997, the self-insurance loss provisions were $32.6 million,
$29.2 million and $39.0 million, respectively. The Company discounted
its self-insurance liability using a 7.5 percent discount rate.
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 two most recent fiscal years is as follows (in thousands):
<TABLE>
<CAPTION>
As of
---------------------------
February 2, February 1,
1997 1998
--------- -----------
<S> <C> <C>
Self-insurance liability $ 151,465 $ 153,832
Less: Discount (11,882) (15,256)
--------- ---------
Net self-insurance liability $ 139,583 $ 138,576
========= =========
</TABLE>
The Company expects that cash payments for claims will aggregate
approximately $51.7 million, $36.2 million, $23.6 million, $14.8 million
and $9.0 million for the fiscal year 1998, the fiscal year 1999, the
fiscal year 2000, the fiscal year 2001 and the fiscal year 2002,
respectively.
Environmental Matters
Beginning in 1991, the California Regional Water Quality Control
Board for the Los Angeles Region (the "Regional Board") requested that
the Company conduct certain subsurface characterizations of the Glendale
facility property located near Glendale. 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 ("CERCLA"), because of regional
groundwater contamination. The Company conducted the requested
investigations and reported the results to the Regional Board, and no
further investigations have been requested.
Beginning in 1991, EPA has made requests for information and
issued orders directing more than 60 potentially responsible parties
("PRPs") to investigate and remediate the groundwater contamination in
the San Fernando Valley. The Company is one of those PRPs. Among those
actions, 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
in connection with the implementation of interim remedies for the
treatment of groundwater.
The Company's best estimate of its likely costs is based on a
1996 engineering estimate to construct the groundwater extraction and
treatment system that was approved by EPA, adjusted by the Company's
likely allocable share of those costs. As of 1996, construction and
capital costs were estimated at $46,150,000. Operation and maintenance
was estimated at $3,620,000 per year. In addition, the PRPs have agreed
to EPA's demand that the PRPs reimburse it for its adjusted response
costs. As of January 1997, EPA estimated those costs at $12 million.
Thus, the Company has estimated that the total costs to be paid by all
PRPs will be approximately $106 million stated in 1998 dollars. The
Company's best estimate of its allocable share is based on a settlement
entered into by
42
<PAGE> 44
Glendale members of the PRP group in or about November 1997. Based on
that settlement, the Company expects to pay 1.02 percent of the total
costs. Thus, the Company's current best estimate of its likely exposure
is approximately $1 million.
Actual costs may end up being higher or lower than this estimate
for a number of reasons including, but not limited to: (1) one PRP has
filed an appeal that, if successful, could result in an increase in the
Company's allocable percentage; (2) the PRPs and EPA are currently
negotiating the terms of a Consent Decree, the terms of which may affect
the total cost estimate; and (3) EPA has now issued a Stop Work Order
under its prior administrative order requiring construction of the
groundwater extraction and treatment system because of current
uncertainty whether the City of Glendale will be able to use the treated
water as a potable water supply.
Although responsibilities for compliance under federal CERCLA law
are joint and several, the Glendale PRPs include substantial companies
as members, such that the Company anticipates that the results of the
PRPs' allocation process will be enforceable to limit its 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.
9. EMPLOYEE BENEFIT PLANS
As a result of the Ralphs 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.
43
<PAGE> 45
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.
44
<PAGE> 46
The following actuarially determined components were included in
the net pension expense for the above plans for fiscal years 1995, 1996
and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 2,841 $ 6,187 $ 5,231
Interest cost on projected benefit obligation 2,543 5,293 5,449
Actual return on assets (3,223) (5,684) (9,203)
Net amortization and deferral 1,365 1,907 4,853
------- ------- -------
Net pension expense $ 3,526 $ 7,703 $ 6,330
======= ======= =======
</TABLE>
Following are the assumptions used in determining the net pension
expense:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50%
Expected long term rate of return
on plan assets 9.00% 9.00% 9.00%
Rate of pay increase 5.00% 5.00% 5.00%
</TABLE>
The funded status of the Pension Plan (based on December 1996 and
December 1997 asset values) is as follows (dollars in thousands):
<TABLE>
<CAPTION>
As of As of
February 2, February 1,
1997 1998
-------- --------
<S> <C> <C>
Assets Exceed Accumulated Benefits:
Actuarial present value of benefit obligations:
Vested benefit obligation $(45,965) $(49,879)
Nonvested benefit obligation (386) (317)
-------- --------
Accumulated benefit obligation (46,351) (50,196)
Projected benefit obligation (66,858) (70,421)
Plan assets at fair value 50,189 61,879
-------- --------
Projected benefit obligation in excess
of Plan Assets (16,669) (8,542)
Unrecognized net gain (3,376) (11,998)
Unrecognized prior service cost 1,023 946
-------- --------
Accrued pension cost $(19,022) $(19,594)
======== ========
</TABLE>
45
<PAGE> 47
The funded status of the SERP and Retirement Supplement Plan
(based on December 1996 and December 1997 asset values) is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
As of As of
February 2, February 1,
1997 1998
----------- -----------
<S> <C> <C>
Accumulated Benefits Exceed Assets:
Actuarial present value of benefit obligations:
Vested benefit obligation $ (5,006) $ (7,096)
Nonvested benefit obligation (230) (16)
-------- --------
Accumulated benefit obligation (5,236) (7,112)
Projected benefit obligation (10,033) (10,918)
Plan assets at fair value -- --
-------- --------
Projected benefit obligation in excess
of Plan Assets (10,033) (10,918)
Unrecognized net (gain)/loss 607 (1,171)
Unrecognized prior service cost 1,725 3,043
Adjustment required to recognize
minimum liability (2) (866)
-------- --------
Accrued pension cost $ (7,703) $ (9,912)
======== ========
</TABLE>
Following are the assumptions used in determining the funded
status:
<TABLE>
<CAPTION>
1996 1997
---- ----
<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 accounts for its employee stock ownership plans in
accordance with Statement of Position No. 93-6 (the "SOP"), "Employer
Accounting for Employee Stock Ownership Plans," effective June 26, 1994.
The full-time employees of Falley's who are not members of a
collective bargaining agreement are covered under a 401(k) plan, a
portion of which is invested in Holdings stock (the "Falley's ESOP"). As
is required pursuant to IRS and ERISA requirements, any participant who
receives stock from the Falley's ESOP has the right to put that stock to
Falley's or an affiliate of Falley's. However, as part of the original
stock sale agreement among the then stockholders of Falley's, FFL and
the Falley's ESOP, which has been amended from time to time, a
partnership which owns stock of Holdings entered into an agreement with
Falley's and Holdings to assume the obligation to purchase any Holdings
shares as to which terminated plan participants exercise a put option
under the terms of Falley's ESOP. As a result, neither Falley's nor the
Company is required to make cash payments to redeem the shares. As part
of that agreement, the Company may elect, after providing a right of
first refusal to the partnership, to purchase Holdings shares put under
the provisions of the plan. However, the partnership's obligation to
purchase such Holdings
46
<PAGE> 48
shares is unconditional, and any repurchase of shares by the Company is
at the Company's sole election. During fiscal year 1997, the Company did
not purchase any of the Holdings shares. As of February 1, 1998, the
fair value of the shares allocated which are subject to repurchase
obligation by the partnership referred to above was approximately $9.3
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, the Company recorded a charge against operations of approximately
$0.8 million for benefits under the Union ESOPs. There were no shares
issued to the Union ESOPs or to the Company's profit sharing plan at
February 2, 1997 or February 1, 1998.
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 1995, 1996 and 1997 were $0.7 million, $0.8 million and $0.7
million, respectively.
Multi-Employer Benefit Plans
The Company contributes to multi-employer benefit plans
administered by various trustees. Contributions to these plans are based
upon negotiated wage contracts. These plans may be deemed to be defined
benefit plans. The Company contributed $102.1 million, $138.8 million
and $138.0 million to these plans for fiscal year 1995, fiscal year 1996
and fiscal year 1997, 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 $1.8 million was recognized in
fiscal year 1995. 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 year 1996
and 1997 were $17.8 million and $21.5 million, respectively. Offsetting
the reduction was a $4.3 million union bonus in fiscal year 1997.
Post-Retirement Medical Benefit Plans
The Company adopted postretirement medical benefit plans
("Postretirement Medical Plans"), previously sponsored by RGC, which
cover substantially all employees who are not
47
<PAGE> 49
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 1997 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 1995, 1996 and
1997 (dollars in thousands):
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 28, February 2, February 1,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 468 $ 909 $ 805
Interest cost 561 989 981
Net amortization and deferral (116) (281) (351)
----- ------- -------
Net postretirement benefit cost $ 913 $ 1,617 $ 1,435
===== ======= =======
</TABLE>
Following are the assumptions used in determining the net
postretirement benefit cost:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50%
Medical cost trend 10.50% 9.00% 8.50%
</TABLE>
The funded status of the postretirement benefit plan (based on
December 31, 1996 and December 31, 1997 asset values) is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
As of As of
February 2, February 1,
1997 1998
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (2,242) $ (2,074)
Fully eligible plan participants (1,777) (1,730)
Other active plan participants (10,126) (10,987)
Plan assets at fair value -- --
-------- --------
Accumulated postretirement obligations
in excess of plan assets (14,145) (14,791)
Unrecognized gain (1,580) (2,502)
Unrecognized prior service cost (2,965) (2,684)
-------- --------
Accrued post retirement benefit obligation $(18,690) $(19,977)
======== ========
</TABLE>
Following are the assumptions used in determining the funded
status:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Discount rate 7.50% 7.50%
Medical cost trend 8.50% 8.50%
</TABLE>
48
<PAGE> 50
The effect of a 1.00 percent increase in the medical cost trend
would increase the fiscal 1997 service and interest cost by $0.6
million. The accumulated postretirement benefit obligation at February
1, 1998 would also increase by $4.9 million.
10. CAPITAL STOCK
Preferred Stock
As part of the financing of the Ralphs Merger, Holdings issued
shares of its newly authorized Series A and Series B Preferred Stock,
par value $0.01. The Series A Preferred Stockholders have voting rights
identical to those of the Common Stockholders. The Series B Preferred
Stockholders have no voting rights. The Series A and Series B Preferred
Stock has a liquidation preference which was initially equal to $10.00
per share. The liquidation preference increases 7.0 percent per annum,
compounded quarterly until the later of June 2000 or the date the
Company first reports EBDIT (as defined) of at least $500.0 million for
any four consecutive quarters. In addition, the liquidation preference
will increase by 2.0 percent per annum if the Company fails to reach
EBDIT (as defined) of at least $400.0 million for four consecutive
quarters prior to July 1998; this EBDIT (as defined) threshold increases
to $425.0 million in July 1999 and $450.0 million in July 2000. The
Series A and Series B Preferred Stock ranks pari passu in right of
payment upon liquidation. A total of 5,783,244 shares of Holdings Common
Stock were exchanged for an equal number of Series A Preferred Shares at
the Ralphs 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 Ralphs 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 Ralphs 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 Ralphs 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.
49
<PAGE> 51
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.
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 5.
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.
50
<PAGE> 52
The estimated fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
As of
February 1, 1998
-------------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 75,601 $ 75,601
Short-term notes and other receivables 504 504
Investments in and notes receivable from
supplier cooperatives (not practicable) 7,242 --
Long-term debt for which it is:
- Practicable to estimate fair values 1,981,355 2,173,299
- Not practicable 21,597 --
</TABLE>
12. RESTRUCTURING CHARGE
During fiscal 1995, the Company recorded a $75.2 million charge
associated with the closure of 58 former F4L Supermarkets stores and one
former F4L Supermarkets warehouse facility. The stores were closed to
comply with a settlement agreement with the State of California in
connection with the Ralphs Merger or to improve the Company's future
operating results. Three RGC stores were also required to be sold to
comply with the settlement agreement. During fiscal year 1995, the
Company utilized $34.7 million of the reserve for restructuring costs
($50.0 million of costs partially offset by $15.3 million of proceeds
from the divestiture of stores). During fiscal year 1996, the Company
utilized $15.1 million of the reserve for restructuring costs,
consisting mainly of write-downs of property and equipment, expenditures
associated with the closed stores and the warehouse facility and lease
termination expenses ($15.2 million) partially offset by proceeds from
the sale of certain related assets.
On December 29, 1995, the Company consummated an agreement with
Smith's to sublease its one million square foot distribution center and
creamery facility in Riverside, California for approximately 23 years,
with renewal options through 2043, and to acquire certain operating
assets and inventory at that facility. In addition, the Company also
acquired nine of Smith's Southern California stores which became
available when Smith's withdrew from the California market. As a result
of the acquisition of the Riverside distribution center and creamery,
the Company closed its La Habra distribution center in the first quarter
of fiscal year 1996. Also, the Company closed nine of its smaller and
less efficient stores which were near the stores acquired from Smith's.
During the fourth quarter of fiscal year 1995, the Company recorded a
$47.9 million restructuring charge to recognize the cost of closing
these facilities. During fiscal year 1996, the Company utilized $33.9
million of the reserve for restructuring costs, consisting mainly of
write-downs of property and equipment ($18.3 million) and lease
termination expenses ($15.6 million).
During fiscal 1997, the Company utilized $2.4 million and $5.5
million of the remaining restructuring reserve related to the fiscal
1995 $75.2 million and $47.9 million restructuring charges,
respectively. The amounts utilized primarily include write-downs of
property and equipment ($1.8 million) and payments for lease obligations
($6.1 million). At February 1, 1998, approximately $20.0 million of the
restructuring accrual related to the $75.2 million charge and $11.4
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
51
<PAGE> 53
lease obligations. The Company has completed a majority of the
restructuring actions, although certain lease obligations will continue
through 2010.
13. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The tables below set forth the selected quarterly financial
information for fiscal year 1996 and fiscal 1997 (in thousands):
<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 237,925 252,544 263,765 381,784
Net Loss (39,834) (29,577) (20,267) (39,902)
</TABLE>
<TABLE>
<CAPTION>
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
Fiscal Year 1997 04/27/97 07/20/97 10/12/97 02/01/98
---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $1,276,222 $1,271,726 $1,230,522 $1,708,999
Gross Profit 262,953 261,126 253,860 361,981
Net Loss (68,967) (14,626) (18,308) (22,459)
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On March 10, 1998, Food 4 Less Holdings, Inc. ("Holdings"), which
is the parent of Ralphs Grocery Company (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"), merged pursuant to an Agreement and Plan of Merger (the
"Fred Meyer Merger Agreement") entered into on November 6, 1997 and
amended on January 20, 1998. Pursuant to the terms of the Fred Meyer
Merger Agreement, Acquisition merged 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 received an aggregate of 21,670,503 shares of Fred Meyer Common
Stock. In addition, Fred Meyer refinanced the debt of Holdings and the
Company. Conditions to the consummation of the Fred Meyer Merger
included 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 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
became a wholly-owned subsidiary of Fred Meyer (the "QFC Merger"). QFC
operates retail supermarkets in the State of Washington and in Southern
California. The Fred Meyer Merger was an independent transaction and was
not conditioned on the consummation of Fred Meyer's merger with QFC.
On March 11, 1998, Fred Meyer purchased tendered offers from note
holders for the following issues: (i) Food 4 Less Holdings 13-5/8%
Senior Discount Debentures due 2005, (ii) Food 4 Less Holdings 13-5/8%
Senior Subordinated Pay-In-Kind Debentures due 2007, (iii) Ralphs
Grocery Company 10.45% Senior Notes due 2004 (issued 6/95), (iv) Ralphs
52
<PAGE> 54
Grocery Company 10.45% Senior Notes due 2004 (issued 6/96), (v) Ralphs
Grocery Company 11% Senior Subordinated Notes due 2005 (issued 6/95) and
(vi) Ralphs Grocery Company 11% Senior Subordinated Notes due 2005
(issued 3/97). Payment to the note holders included tendered amounts,
interest and consent fees, which were $1,612.7 million, $37.7 million
and $209.9 million, respectively.
The Ralphs Grocery Company 10.45% Senior Notes due 2004 (issued
in June 1995) and the Ralphs Grocery Company 11% Senior Subordinated
Notes due 2005 (issued in June 1995) were not fully tendered and
$20,344,000 and $42,565,000 principal amount of each issue are still
outstanding, respectively.
In addition to the above issues, as part of the Fred Meyer Merger
financing, the New Credit Facility was replaced by New Senior Credit
Facilities in aggregate principal amount not to exceed $3.5 billion,
consisting of a $1.875 billion five-year revolving credit facility and a
$1.625 billion five-year term loan facility (the "Term Loan Facility")
entered into by Fred Meyer. Fred Meyer also entered into a $500 million
lease facility (the "New Lease Facility") that will be used to refinance
a portion of Fred Meyer's existing lease facilities. The New Senior
Credit Facilities and the New Lease Facility will be unconditionally
guaranteed, on a joint and several basis by, and will be secured by a
pledge of the outstanding capital stock of, all of Fred Meyer's direct
and indirect subsidiaries (except for certain inactive or immaterial
subsidiaries), including Holdings.
In conjunction with the Fred Meyer Merger, Fred Meyer also issued
(i) $250.0 million aggregate principal amount of 7.15% Notes due 2003,
(ii) $750.0 million aggregate principal amount of $7.375% Notes due 2005
and (iii) $750.0 million aggregate principal amount of 7.45% Notes due
2008.
53
<PAGE> 55
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 Ralphs Grocery Company (formerly
Food 4 Less Supermarkets, Inc. -- See Note 1 in the accompanying Notes to
Consolidated Financial Statements) and subsidiaries as of February 1, 1998 and
February 2, 1997 and the related consolidated statements of operations,
stockholder's equity (deficit) and cash flows for the 52 weeks ended February 1,
1998, the 53 weeks ended February 2, 1997 and the 52 weeks ended January 28,
1996 and have issued our report thereon dated March 9, 1998. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedules included on pages 55 through 58 are the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is 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 states 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 9, 1998
54
<PAGE> 56
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF, AND FOR, THE 52 WEEKS ENDED FEBRUARY 1, 1998
(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 1,
1998
---------
<S> <C>
ASSETS
Investment in subsidiary $(116,844)
---------
Total Assets $(116,844)
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
New Discount Notes $ 141,266
Seller Debentures 183,398
Convertible Series A Preferred Stock, $.01 par value,
25,000,000 shares authorized and 16,683,244 outstanding
(aggregate liquidation value of $200.3 million) 161,831
Convertible Series B Preferred Stock, $.01 par value,
25,000,000 shares authorized and 3,100,000 outstanding
(aggregate liquidation value of $37.2 million) 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized
and 17,483,542 outstanding 175
Additional paid-in capital 54,069
Retained deficit (688,583)
---------
$(116,844)
=========
</TABLE>
CONDENSED STATEMENT OF LOSS
<TABLE>
<CAPTION>
52 Weeks
Ended
February 1,
1998
---------
<S> <C>
Loss before extraordinary charge of subsidiary $ (35,419)
Extraordinary charge of subsidiary (47,983)
---------
Net loss of subsidiary (83,402)
Interest Expense (40,958)
---------
Net loss $(124,360)
=========
</TABLE>
55
<PAGE> 57
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF, AND FOR, THE 52 WEEKS ENDED FEBRUARY 1, 1998
(IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<S> <C>
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
Net loss $(124,360)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Net loss of subsidiary 83,402
Non-cash interest charge 40,958
---------
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>
56
<PAGE> 58
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 1, 1998,
dividends and certain other payments are restricted based on terms of
the debt agreements.
57
<PAGE> 59
FOOD 4 LESS HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED FEBRUARY 1, 1998, 53 WEEKS ENDED
FEBRUARY 2, 1997 AND 52 WEEKS ENDED JANUARY
28, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Provisions Charged
Balance at charged to Balance
beginning to interest Other at end
of period expense expense(a) Payments changes(b) of period
--------- ------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Self-insurance liabilities
52 weeks ended February 1, 1998 $139,583 $39,021 $10,324 $50,352 $ -- $138,576
======== ======= ======= ======= ======= ========
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
======== ======= ======= ======= ======= ========
</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.
58
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended, of Ralphs
Grocery Company.
3.2 Restated bylaws of Ralphs Grocery Company.
4.2.1 Indenture for the 10.45% Senior Notes due 2004, dated as of June
1, 1995, by and among Food 4 Less Supermarkets, Inc., the
subsidiary guarantors identified therein and Norwest Bank
Minnesota, National Association, as trustee (incorporated herein
by reference to Exhibit 4.4.1 of Food 4 Less Holdings, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended July 16,
1995).
4.2.2 First Supplemental Indenture for the 10.45% Senior Notes due
2004, dated as of June 14, 1995, by and among Ralphs Grocery
Company (as successor by merger to Food 4 Less Supermarkets,
Inc.), the subsidiary guarantors identified therein, Crawford
Stores, Inc. and Norwest Bank Minnesota, National Association, as
trustee (incorporated herein by reference to Exhibit 4.4.2 of
Food 4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended July 16, 1995).
4.3.1 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).
4.3.2 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).
4.4.1 Guarantee, dated as of March 11, 1998, made by the Guarantors
referred to therein (including the Company) in favor of Bankers
Trust Company, as Administrative Agent and Collateral Agent, The
Chase Manhattan Bank, as Syndication Agent, The Various Financial
Institutions Identified as Lenders in the Participation
Agreement, as Lenders, and The Various Financial Institutions
Identified as Investors in the Participation Agreement, as
Investors (incorporated herein by reference to Exhibit 4B-1 of
Fred Meyer Inc.'s Annual Report on Form 10-K for the fiscal year
ended January 31, 1998).
</TABLE>
E-1
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
4.4.2 Participation Agreement among Fred Meyer, Inc., as Lessee and as
Construction Agent, FMS Trust 1997-1, a Delaware business trust,
as Lessor, Wilmington Trust Company, not in its individual
capacity, except as expressly specified therein, but solely as
Owner Trustee under the FMS Trust 1997-1, the Investors party to
the Trust Agreement, Bankers Trust Company, as Administrative
Agent, The Chase Manhattan Bank, as Syndication Agent, and the
Lenders Parties thereto, dated as of March 11, 1998; Chase
Securities, Inc. and BT Alex.Brown, as Arrangers (incorporated
herein by reference to Exhibit 4B-2 of Fred Meyer Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 31, 1998).
4.4.3 Lease, Security Agreement and Financing Statement between
Wilmington Trust Company, not in its individual capacity, but
solely as Owner Trustee under the FMS Trust 1997-1, as Lessor,
and Fred Meyer, Inc., dated as of March 11, 1998 (incorporated
herein by reference to Exhibit 4B-3 of Fred Meyer Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 31, 1998).
4.4.4 Construction Agency Agreement, dated as of March 11, 1998,
between FMS Trust 1997-1, a Delaware business trust, and Fred
Meyer, Inc., a Delaware corporation (incorporated herein by
reference to Exhibit 4B-4 of Fred Meyer Inc.'s Annual Report on
Form 10-K for the fiscal year ended January 31, 1998).
4.4.5 Credit Agreement among FMS Trust 1997-1, as Borrower, The Several
Lenders from Time to Time Parties Thereto, Bankers Trust Company,
as Administrative Agent, and The Chase Manhattan Bank, as
Syndication Agent dated as of March 11, 1998 (incorporated herein
by reference to Exhibit 4B-5 of Fred Meyer Inc.'s Annual Report
on Form 10-K for the fiscal year ended January 31, 1998).
4.4.6 Lessee Guarantee, dated as of March 11, 1998, made by Fred Meyer,
Inc., as Lessee Guarantor in favor of FMS Trust 1997-1, as
Lessor, Bankers Trust Company, as Administrative Agent, The Chase
Manhattan Bank, as Syndication Agent, The Various Financial
Institutions Identified as Lenders in the Participation
Agreement, as Lenders, and the The Various Financial Institutions
Identified as Investors in the Participation Agreement Therein,
as Investors (incorporated herein by reference to Exhibit 4B-6
of Fred Meyer Inc.'s Annual Report on Form 10-K for the fiscal
year ended January 31, 1998).
4.4.7 Pledge Agreement, dated as of March 11, 1998, entered into by
Fred Meyer, Inc., a Delaware corporation, and each of the
undersigned subsidiaries of Fred Meyer, Inc. (including the
Company) in favor of Bankers Trust Company, as administrative
agent and collateral agent, for the Beneficiaries (incorporated
herein by reference to Exhibit 4B-7 of Fred Meyer Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 31, 1998).
4.4.8 Intercreditor and Collateral Agency Agreement, dated as of March
11, 1998, among Bankers Trust Company, as Administrative Agent
under the Loan Agreement, as Administrative Agent under the
Synthetic Lease Facility, and as Collateral Agent, Fred Meyer,
Inc. and the Subsidiary Pledgors (incorporated herein by
reference to Exhibit 4B-8 of Fred Meyer Inc.'s Annual Report on
Form 10-K for the fiscal year ended January 31, 1998).
</TABLE>
E-2
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
4.4.9 Subsidiary Guarantee, dated as of March 11, 1998, executed by
each of the Guarantors listed on the signature page thereof
(including the Company) for the benefit of Bankers Trust Company,
as Administrative Agent under the Loan Agreement, and each Lender
named therein (incorporated herein by reference to Exhibit 4B-9
of Fred Meyer Inc.'s Annual Report on Form 10-K for the fiscal
year ended January 31, 1998).
4.4.10 $3,500,000,000 Loan Agreement, dated as of March 11, 1998, among
Fred Meyer, Inc., as Borrower, and The Lenders Party Thereto;
Bankers Trust Company, as Administrative Agent, and The Chase
Manhattan Bank, as Syndication Agent; Chase Securities, Inc. and
BT Alex.Brown, as Arrangers (incorporated herein by reference to
Exhibit 4B-10 of Fred Meyer Inc.'s Annual Report on Form 10-K for
the fiscal year ended January 31, 1998).
4.6.4 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).
10.4* Employment Agreement dated as of June 14, 1995 between Food 4
Less Holdings, Inc., Ralphs Grocery Company and George G.
Golleher (incorporated herein by reference to Exhibit 10.11 of
Food 4 Less Holdings, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended July 16, 1995).
10.5* Employment Agreement dated as of June 14, 1995 between Ralphs
Grocery Company and 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).
10.6* Employment Agreement, dated as of June 14, 1995, between Ralphs
Grocery Company and Harley DeLano (incorporated herein by
reference to Exhibit 10.8 of Ralphs Grocery Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).
10.7* Employment Agreement, dated as of June 14, 1995, between Ralphs
Grocery Company and Tony Schnug (incorporated herein by reference
to Exhibit 10.10 of Ralphs Grocery Company's Annual Report on
Form 10-K for the fiscal year ended January 28, 1996).
10.9* 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).
10.10* Letter Agreement, dated as of December 10, 1990, amending the
Consulting Agreement by and between Falley's, Inc. and Joe S.
Burkle (incorporated herein by reference to Exhibit 10.17.1 to
Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for
the fiscal year ended June 29, 1991).
</TABLE>
E-3
<PAGE> 63
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.11 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).
10.12.1* Ralphs Grocery Company Retirement Supplement Plan, effective as
of January 1, 1994 (incorporated herein by reference to Exhibit
10.15.1 of Ralphs Grocery Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996).
10.12.2* Amendment to the Retirement Supplement Plan, effective as of
January 1, 1995 (incorporated herein by reference to Exhibit
10.15.2 of Ralphs Grocery Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996).
10.12.3* Second Amendment to the Retirement Supplement Plan, effective as
of June 14, 1995, by and between Ralphs Grocery Company and
Ralphs Grocery Company Retirement Supplement Plan (incorporated
herein by reference to Exhibit 10.15.3 of Ralphs Grocery
Company's Annual Report on Form 10-K for the fiscal year ended
January 28, 1996).
10.13.1* Ralphs Grocery Company Supplemental Executive Retirement Plan,
amended and restated as of April 9, 1994 (incorporated herein by
reference to Exhibit 10.16.1 of Ralphs Grocery Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 1996).
10.13.2* Amendment to the Amended and Restated Supplemental Executive
Retirement Plan, effective as of January 1, 1995 (incorporated
herein by reference to Exhibit 10.16.2 of Ralphs Grocery
Company's Annual Report on Form 10-K for the fiscal year ended
January 28, 1996).
10.13.3* Second Amendment to the Supplemental Executive Retirement Plan,
dated as of June 14, 1995, by and between Ralphs Grocery Company
and Ralphs Grocery Company Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10.16.3 of Ralphs
Grocery Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996).
10.13.4* Third Amendment to the Ralphs Grocery Company Supplemental
Executive Plan, effective as of July 1, 1995 (incorporated herein
by reference to Exhibit 10.16.4 of Ralphs Grocery Company's
Annual Report on Form 10-K for the fiscal year ended January 28,
1996).
27# Financial Data Schedule
</TABLE>
- ------------------------
# Filed herewith.
* Management contract, or compensatory plan or arrangement.
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEETS AND AUDITED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 52 WEEKS ENDED FEBRUARY 1, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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0
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