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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
For Fiscal Year Ended Commission File Number
November 2, 1996 33-92700
DOMINICK'S FINER FOODS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3168270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Railroad Avenue 60164
Northlake, Illinois (Zip code)
(Address of principal executive offices)
(708) 562-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
-- --
At January 24, 1997 there were 1,000 shares of Common Stock outstanding.
As of such date, all of the outstanding shares of Common Stock were held by
Dominick's Supermarkets, Inc. and there was no public market for the Common
Stock.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Dominick's Finer Foods, Inc. (together with its subsidiaries, the
"Company") is the second largest supermarket operator in the greater Chicago
metropolitan area with 100 stores. Through its 71 years of operation, the
Company has developed a valuable and strategically located store base, strong
name recognition, customer loyalty and a reputation as a quality and service
leader among Chicago-area supermarket chains. The Company operates 83
full-service supermarkets under the Dominick's(R) name, including 22 Fresh
Stores, and 17 price impact supermarkets under the Omni name. The Company is
the only Chicago-area supermarket chain to operate both full-service and price
impact formats, which allows it to serve a broader customer base and to tailor
its stores to the demographic characteristics of individual store locations.
The Company has a well-maintained and modern store base, with approximately 75%
of its stores new or remodeled since 1989. While the Company's total number of
stores has remained relatively constant since 1989, the Company's average
selling square feet per store has increased by approximately 27%. The Company
also owns and operates two primary distribution facilities totaling
approximately 1.4 million square feet, a satellite facility of approximately
285,000 square feet and a dairy processing plant. In addition, the Company's
management team has proven experience in successfully developing and operating
both full-service and price impact supermarkets. The Company believes these
factors have helped it to increase its market share among Chicago-area
supermarkets from 19.0% in 1989 to 25.4% in 1995.
The Company was incorporated in Delaware in 1981 and its principal
executive offices are located at 505 Railroad Avenue, Northlake, Illinois
60164, telephone (708) 562-1000.
ACQUISITION
The Company was acquired by Dominick's Supermarkets, Inc. ("Supermarkets")
on March 22, 1995 for total consideration of approximately $693 million,
excluding fees and expenses of approximately $41 million (the "Acquisition").
Supermarkets effected the Acquisition by acquiring 100% of the capital stock of
the Company's parent, DFF Supermarkets, Inc. ("DFF"), for $346.6 million in
cash and $40 million of Supermarkets' 15% Redeemable Exchangeable Cumulative
Preferred Stock ("Redeemable Preferred Stock"). DFF was subsequently merged
into the Company. In addition, Supermarkets repaid $34.3 million of secured
promissory notes issued by the Company prior to the Acquisition to discharge
all obligations under its stock appreciation rights ("SARs") plan and to
repurchase shares of the Company's restricted stock held by certain management
employees. In connection with the Acquisition, Supermarkets refinanced $135.7
million of the Company's existing indebtedness, assumed $124.5 million of
existing capital leases and other indebtedness and paid $11.8 million of
employment termination, seller advisory and other seller fees and expenses. For
purposes of financial presentation, the Predecessor Company refers to the
Company prior to the Acquisition.
STORE FORMATS
DOMINICK'S. The Company's Dominick's format stores are full-service
supermarkets that emphasize quality, freshness and service. The Company
classifies its Dominick's stores into three categories:
Conventional Supermarkets. Dominick's 23 conventional supermarkets
are typically located in higher density population areas, average
approximately 43,100 square feet in size (including approximately 28,900
square feet of selling space) and offer approximately 35,000 SKUs. All of
the Company's conventional supermarkets include a variety of service
departments typically found in full-service supermarkets such as
delicatessen, bakery, meat and seafood departments and a limited selection
of health and beauty care products. In addition, many stores also offer
salad bars, prepared foods, floral departments, film processing and
liquor. In fiscal 1991, the Company began to rationalize its base of 53
conventional supermarkets. Since then, in addition to the Fresh Store
conversions, the Company closed certain under-performing conventional
supermarkets. The Company's 23 remaining conventional supermarkets are
stores which are primarily in locations where either replacement sites are
not available or the demographics of the area do not justify a conversion
to a different format.
Combination Food and Drug Stores. Dominick's 38 combination food and
drug stores average approximately 57,600 square feet (including
approximately 40,300 square feet of selling space) and offer approximately
60,000 SKUs. The combination food and drug stores offer all products and
services typically found in a conventional supermarket and, by virtue of
their large size, include a full-service drug store complete with a
pharmacy, a broader line of health and beauty care products and an
expanded selection of seasonal merchandise.
Fresh Stores. Dominick's 22 Fresh Stores are enhanced combination
food and drug stores designed to create a European-style fresh market
atmosphere and emphasize the store's visual appeal and quality merchandise
perception. The Company's Fresh Stores feature significant upgrades in
store design and fixtures in order to emphasize an expanded assortment of
high quality fresh produce and other perishables, a large selection of
restaurant-quality prepared foods for carry-out and in-store dining and a
superior line of freshly baked goods and pastry items. Fresh Stores also
typically offer expanded delicatessen, bakery, meat, seafood and floral
departments and additional service departments such as a gourmet coffee
cafe. The first Fresh Store was introduced in 1993 through the conversion
of an existing conventional supermarket. A total of 14 stores have been
converted to date, resulting in an average increase in customer counts,
sales per square foot and store contribution margins for the converted
stores over pre-conversion levels. Converted Fresh Stores average
approximately 53,000 square feet in
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size (including approximately 39,300 square feet of selling space) while
new Fresh Stores are expected to average approximately 70,000 square feet
(including approximately 55,000 square feet of selling space). In
addition to the 14 converted stores, eight new Fresh Stores have been
opened and more than 20 additional Fresh Stores are expected to be opened
or converted by the end of fiscal 1998.
OMNI. The Company's 17 Omni stores are high-volume, price impact
combination food and drug stores emphasizing low prices and a broad selection
of products while offering less extensive service departments than traditional
full-service supermarkets. Omni stores average approximately 92,300 square
feet (including approximately 65,300 square feet of selling space). The Omni
format has enabled the Company to expand its overall share of the market, as it
attracts the price-conscious shopper who typically would choose a
price-oriented food store over a traditional full-service supermarket. Omni
stores have an approximate 7.2% market share, giving Omni the third largest
market share among Chicago-area supermarkets on a stand-alone basis.
Introduced in 1987 as a response to the entrance of warehouse stores into
the Chicago area, Omni stores offer modified everyday low prices and compete
effectively with warehouse formats and other discount retailers in the Chicago
area. The Company believes that Omni's prices are approximately 10% below
those offered by traditional full-service supermarkets. Omni's marketing
program emphasizes its low prices and reinforces its image with merchandising
presentations such as a "Wall of Values" located near the entrance of the store
which presents the customer with a selection of specially priced merchandise.
To support its low prices, Omni is managed with a strict focus on cost control.
This is achieved through labor efficiencies created by the implementation of
time and cost saving measures such as presenting selected merchandise on
pallets, offering a limited number of service departments and eliminating
certain services such as bagging and customer pickup. The Omni stores also
eliminate certain capital improvements such as more expensive in-store graphics
and fixtures.
All of the Omni stores include service departments in deli, bakery and
seafood, in addition to self-service meat, produce, liquor, bulk foods and club
merchandise departments and a pharmacy. Each Omni store also offers a large
selection of high-turnover general merchandise items typically found in drug
and discount stores, including seasonal items for holiday and back-to-school
seasons. The expanded general merchandise selection is utilized to increase
variety for higher customer draw. All Omni stores also include in-store
banking. Unlike the Dominick's format, the Omni format does not offer salad
bars, special promotions or extensive front-end services.
STORE DEVELOPMENT
The Company's 71 years of operation in the Chicago area have allowed it to
build its store locations selectively, and management believes that the
Company's current locations include many prime store sites in developed urban
and suburban areas which would be difficult to replicate. In addition to
upgrading its store base through capital expenditures, the Company began to
focus on rationalizing its conventional supermarket base in fiscal 1991.
Between November 1990 and October 1995, 15 conventional supermarkets were
closed. This store rationalization program also included an evaluation of the
Company's perishable departments. In order to maximize the effectiveness of
the remaining conventional supermarkets, the Company began to focus on
upgrading their perishable departments and developing new prototypes to convey
a stronger image of quality, selection and freshness to the customer. Capital
investment was directed toward selectively adding improvements such as
European-style bakeries and enhanced deli departments to existing Dominick's
stores. These efforts led to the introduction of the Fresh Store concept at
the beginning of fiscal 1994. In addition to its remodeling and store
rationalization initiatives, the Company continued to build new stores on a
selective basis. From the start of fiscal 1992 through the end of fiscal 1996
the Company opened ten combination food and drug stores and five Omni stores.
The Company introduced its first Fresh Store in November 1993. To date,
the Company has converted 14 stores to Fresh Stores at a total capital cost of
approximately $72 million and has opened eight new Fresh Stores. The Fresh
Store conversions were very extensive, as these stores required complete
overhauls and expansion of selling space. The results of the Company's 14
conversions of existing stores to Fresh Stores have been highly favorable and
have resulted in an average increase in annualized sales of approximately 27%
compared to such stores prior to their conversion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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The following table sets forth additional information concerning changes
in the Company's store base.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period ........ 98 101 101 101 97
Opened .................... 5 1 1 0 8
Closed .................... (2) (1) (1) (4) (5)
---- ---- ---- ---- ----
End of period ............. 101 101 101 97 100
==== ==== ==== ==== ====
REMODELS AND CONVERSIONS:
Major remodels ............. 4 1 1 4 9
Fresh Store conversions .... 0 0 6 8 0
STORES BY FORMAT
(END OF PERIOD):
Dominick's:
Conventional .............. 47 45 38 27 23
Combination food and drug . 39 40 40 39 38
Fresh Stores .............. 0 0 6 14 22
---- ---- ---- ---- ----
Subtotal ............. 86 85 84 80 83
Omni ....................... 15 16 17 17 17
---- ---- ---- ---- ----
Total ................ 101 101 101 97 100
==== ==== ==== ==== ====
</TABLE>
MARKET AREA
Chicago is the nation's third largest metropolitan area, with a population
of approximately 7.7 million people and approximately 2.8 million households.
Chicago has a stable and diverse economic base which includes major
manufacturing, transportation, finance and other business centers. The
population base of Chicago is relatively young and affluent compared to the
national average and compared with other leading population centers. In
addition to its attractive demographics, the Chicago metropolitan area has had
a relatively stable economic environment with more stable inflation and
unemployment rates than many other major urban markets. According to the U.S.
Bureau of the Census, the population of suburban Chicago, where nearly 80% of
the Company's stores are located, has grown by approximately 12% since 1986.
According to a report issued by the U.S. Department of Commerce, by the year
2005 the Chicago area is also expected to have a population of 8.3 million
residents and the largest increase in jobs of all of the nation's major
metropolitan areas. The Company believes that its existing market share and
its plans to add new stores will allow it to benefit from the continuing growth
of the Chicago area.
WAREHOUSING, DISTRIBUTION AND PURCHASING
The Company currently owns and operates two primary distribution
facilities with an aggregate of approximately 1.4 million square feet and a
satellite facility of approximately 285,000 square feet for storage of forward
buy inventory. Each store submits orders to the distribution facilities
through a centralized processing system, and merchandise ordered from the
warehouses is normally received at the stores the next day.
The Company's primary warehouse facility is located in Northlake, Illinois
and handles dry grocery, produce, dairy, delicatessen, meat and frozen foods.
In addition, goods prepared at the on-site commissary are cross-docked for
delivery to the stores. The Company's other primary distribution facility, a
general merchandise facility located on the south side of Chicago approximately
15 miles from the Company's Northlake facility, handles health and beauty care
products and other general merchandise. The Company also owns and operates
Ludwig Dairy, a dairy processing plant in Dixon, Illinois (approximately 100
miles west of Chicago) that manufactures cultured dairy products and ice cream.
A satellite facility also located in Northlake is currently used only for the
storage of forward buy products and operates at less than 10% of capacity.
The stores receive prepared foods, such as salads and cooked meats, from
the Company's commissary. The commissary also distributes "Chef's Collection"
products, which offer customers restaurant-quality, fully prepared entrees for
carry-out. The commissary is operated as a profit center and charges
individual stores for its services. Management believes that the Company is
the only Chicago-area supermarket chain to operate its own commissary, which
gives it certain competitive advantages, such as higher margins on prepared
food, increased quality control and the ability to develop "signature items"
not found in other supermarkets.
Distribution is accomplished through a Company-operated fleet of tractors
and trailers. Stores are located an average of 15 miles from the principal
distribution center, with the furthest store located approximately 35 miles
away. Management believes this close proximity of the stores to the
distribution facilities results in lower distribution costs and enables the
Company to maintain lower levels of inventory and achieve more efficient
warehousing than would otherwise be possible.
The Company has historically purchased merchandise from a large number of
third party suppliers, none of which supplies a material portion of the
Company's goods and services. The Company is a party to certain exclusivity
contracts for the purchase of products from vendors. While these contracts
have become common in the food retailing industry, the Company has not
historically emphasized such contracts. The Company has begun to focus on such
agreements more aggressively since the Acquisition and is also coordinating its
purchasing efforts with other supermarket chains managed by The Yucaipa
Companies ("Yucaipa"), a private investment group specializing in the
acquisition and management of
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supermarket chains, in an effort to reduce its product costs. The Company also
is pursuing forward buying and secondary sourcing opportunities. The Company
actively participates in a Best Practices program with all other
Yucaipa-managed supermarket chains that is intended to reduce costs and improve
business processes. The Company believes that additional procurement savings
may be realized in the future.
ADVERTISING AND PROMOTION
The Company advertises primarily through direct mail circulars distributed
every Thursday, in addition to Sunday newspaper and radio advertisements.
Television advertising is employed around holidays and other seasonal events to
reaffirm the Company's reputation for high-quality perishables.
The Company's advertising and promotion strategy for its Dominick's stores
stresses their quality, assortment of products, customer service and
competitive prices. Since 1990, the Company has focused its Dominick's print
media advertising on direct mail, which permits highly targeted marketing and
supports the Company's store-specific merchandising goals. On average, the
Company circulates approximately 11 different versions of its Dominick's
circular each week, including two to three versions for stores which
incorporate the Fresh Store concept. While all store departments share
portions of the weekly circular, the Company tailors its advertisements to a
particular store's trade area and store type. Management believes direct mail
allows for distribution of the weekly advertising circular at a lower cost and
provides more complete coverage than newspaper inserts. The Dominick's stores
also utilize both television and radio advertising.
The Company also employs point-of-sale couponing whereby the Company
provides coupons which are printed with the customer's receipt upon purchase of
certain selected items. Manufacturers pay the Company to print a coupon for
one product when another product is purchased in order to promote complementary
or substitute products. The Company's stores also utilize this type of
targeted marketing to promote items of its choice and to obtain information
about purchasing behavior. To better facilitate the Company's target marketing
programs for its Dominick's stores, the Company has also developed the "Fresh
Values" frequent shopper card program, introduced to its Dominick's stores in
December 1996.
The Company utilizes direct mail circulars as its primary form of
advertising for the Omni stores. By distributing multiple versions of an
advertisement, management believes the Omni stores have been successful in
targeting multiple specific demographic zones from which customers for a
particular store are drawn. Weekly circulars focus on Omni's everyday low
prices and include a variety of weekly specials to draw customers into the
store. The Company circulates approximately four different versions of the
Omni circular each week. The Omni stores also utilize radio advertising.
PRIVATE LABEL PROGRAM
The Company's private label program represented 12.5% of fiscal 1996 sales
(excluding meats, service delicatessen and produce items), which is
significantly below the national average. One component of management's
operating strategy is to increase private label sales to a level closer to the
national average, which management believes will have a favorable impact on
future gross margins. Gross margins on private label goods are generally eight
to ten percent higher than on national brands, while offering comparable
quality at prices that are approximately 25% lower. Through its private label
program, the Company currently offers approximately 1,750 private label items
at Dominick's stores and approximately 800 private label items at Omni stores.
Commencing in fiscal 1997, the Company will offer the "Private Selection" label
as the premium private label at Dominick's stores. The "Private Selection"
label is owned and licensed by Ralphs Grocery Company, a Yucaipa-managed
supermarket chain. The Company procures grocery, deli, meat and health and
beauty private label products through Topco Associates, Inc. ("Topco"), a
large, national food buying cooperative. In addition to its "Dominick's" and
"Omni" brand names, the Company features Topco-branded products under the
"Valutime" brand name at its Dominick's stores, under the "Kingston" and "Mega"
brand names at its Omni stores and under the "Top Care" brand name at all of
its stores.
MANAGEMENT INFORMATION AND TRAINING SYSTEMS
In 1989, the Company began modernizing its management information systems
by adopting a "multi-platform" strategy. This entailed upgrading or moving
certain applications from the mainframe to a mid-range or a micro format. The
upgrade of the Company's financial software is substantially complete, while
the upgrade of purchasing software is expected to be completed in approximately
one year. The Company has also initiated an upgrade of its warehousing system
and plans to install radio frequency technology, which will enhance warehouse
space utilization, manpower planning and store service levels. At the store
level, all point-of-sale equipment has been upgraded in the past three years at
a cost in excess of $4 million. Pharmacy terminals that keep detailed patient
records and handle third party billing adjudication have been installed and
direct store delivery receiving and time-and-attendance systems have been
largely implemented at the store level. In addition, new PC-based store-level
training systems have been configured in the Company's stores.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. Supermarket chains generally compete on the basis of location,
quality of products, service, price, product variety and store condition. The
Company's competitors include national and regional supermarket chains,
independent and specialty grocers, drug and convenience stores, warehouse club
stores, deep discount drug stores and supercenters. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing strategy
as management deems appropriate in light of existing conditions.
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In 1995, the Company had a market share of approximately 25.4% among
Chicago-area supermarkets, compared to Jewel Food Stores, a subsidiary of
American Stores, Inc., which had a market share of approximately 35.6%. The
majority of the Company's other supermarket competitors are regional
supermarket chains or small independent operators, none of which has greater
than a 5% market share. Through its efforts to establish the Omni format and
upgrade its Dominick's format stores, the Company has increased its market
share from approximately 19.0% in 1989 to approximately 25.4% in 1995. A
combination of the strength of Dominick's franchise in the region and the
expansion and successful format differentiation of Omni has helped the Company
increase its market share despite the fact that a substantial number of
competitive store openings occurred in the Chicago metropolitan area between
1989 and 1995.
Beginning in the late 1980's and peaking in the early 1990's, a number of
non-traditional competitors opened locations in the Chicago metropolitan area.
These competitors introduced a number of new formats to the Chicago consumer,
including warehouse club stores, mass merchants and supercenters. Though the
Company has traditionally competed primarily with other supermarket chains, the
Company's business strategy has been to compete with these new entrants through
the introduction of its Omni format and continued growth of the Dominick's
combination food and drug stores.
EMPLOYEES AND LABOR RELATIONS
As of November 2, 1996, the Company employed 17,982 people, of whom
approximately 27% were full-time and 73% were part-time. The following table
sets forth additional information concerning the Company's employees.
<TABLE>
<CAPTION>
UNION NON-UNION TOTAL
------ ---------- ------
<S> <C> <C> <C>
Salaried ......................................... 137 855 992
Hourly:
Full-time ........................................ 3,324 529 3,853
Part-time ........................................ 12,961 176 13,137
------ --------- ------
Total ............................................ 16,422 1,560 17,982
====== ========= ======
</TABLE>
Substantially all of the Company's store employees are unionized.
Employees covered by union contracts are represented by six major unions: (i)
United Food and Commercial Workers Union ("UFCW"), (ii) UFCW Union, Meat
Division, (iii) International Brotherhood of Teamsters, (iv) International
Brotherhood of Electrical Workers, (v) Automobile Mechanics Union
(International Association of Machinists and Aerospace Workers) and (vi)
Chicago and Northeast Illinois District Council of Carpenters.
The Company's contract with the Dominick's meatcutters (covering
approximately 2,300 employees) expires in July 1997.
The Company has never experienced a work stoppage and considers its
relations with its employees to be good. Pursuant to their collective
bargaining agreements, the Company contributes to various union-sponsored,
multi-employer pension plans.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and trademarks.
The Company believes that its more significant trade names, service marks and
trademarks include "Dominick's," "Dominick's Finer Foods," "Omni Superstores,"
"Fresh Values" and "Omni."
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental
agencies, including but not limited to, the U.S. Food & Drug Administration,
the U.S. Department of Agriculture, the Illinois Department of Alcoholic
Beverage Control, the Illinois Department of Agriculture, the Illinois
Department of Professional Regulation and state and local health departments
and other agencies. At present, local regulations prevent the Company from
selling liquor, or certain types of liquor, at certain of its stores.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental laws that
(i) govern activities or operations that may have adverse environmental
effects, such as discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes and (ii) impose liability for the
costs of cleaning up certain damages resulting from sites of past spills,
disposals or other releases of hazardous materials. The Company believes that
it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws. From
time to time, operations of the Company have resulted, or may result, in
noncompliance with or liability for cleanup pursuant to environmental laws.
However, the Company believes that any such noncompliance or liability under
current environmental laws would not have a material adverse effect on its
results of operations and financial condition. The Company has not incurred
material capital expenditures for environmental controls during the previous
three years.
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In connection with the Acquisition, the Company and Supermarkets conducted
certain investigations (including in some cases, reviewing environmental
reports prepared by others) of the Company's operations and its compliance with
applicable environmental laws. The investigations, which included Phase I and
Phase II assessments and subsequent studies by independent consultants, found
that certain facilities have had or may have had releases of hazardous
materials associated with the Company's operations or those of other current
and prior occupants that may require remediation, particularly due to releases
of hazardous materials from underground storage tanks and hydraulic equipment.
The costs to remediate such environmental contamination are currently estimated
to range from approximately $4.1 million to $5.7 million. Pursuant to the
stock purchase agreement related to the Acquisition, the prior owners of the
Company have agreed to pay one-half of such remediation costs up to $10 million
and 75% of such remediation costs between $10 million and $20 million. Based
in part on the investigations conducted and the cost-sharing provisions of such
stock purchase agreement with respect to environmental matters, the Company
believes that its liabilities relating to these environmental matters will not
have a material adverse effect on its future financial position or results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RISK FACTORS
LEVERAGE; POTENTIAL INABILITY TO SERVICE OR REFINANCE DEBT
At November 2, 1996, the Company's consolidated total indebtedness and
total stockholders' equity was approximately $541 million and $179 million,
respectively. In addition, the Company's balance sheet at November 2, 1996,
reflected goodwill of approximately $420 million. As of November 2, 1996, the
Company had approximately $113 million available for borrowing under the
Company's revolving credit facility (the "New Revolving Facility"). The
Company's ability to make scheduled payments of the principal of, or interest
on, or to refinance, its indebtedness and to make scheduled payments under its
operating leases depends on its future performance, which to a certain extent
is subject to economic, financial, competitive and other factors beyond its
control. Based upon the current level of operations, management believes that
available cash flow, with available borrowings under the New Credit Facility
(as defined below) and other sources of liquidity, including proceeds from
sale-leaseback transactions, will be adequate to meet the Company's anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments under the New Credit Facility and the Company's
other indebtedness. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels or that
anticipated growth will materialize. If the Company is unable to meet its
obligations from such sources, the Company may be required to refinance all or
a portion of its existing indebtedness, sell assets or obtain additional
financing. There can be no assurance that any such refinancing would be
possible or that any such sales of assets or additional financing could be
completed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
POTENTIAL ADVERSE EFFECTS OF PENDING LITIGATION
On March 16, 1995, a lawsuit was filed in the United States District
Court for the Northern District of Illinois against the Company by two
employees of the Company.. The plaintiff's original complaint asserted
allegations of gender discrimination and sought compensatory and punitive
damages in an unspecified amount. The plaintiffs filed an amended complaint on
May 1, 1995. The amended complaint added four additional plaintiffs and
asserted allegations of gender and national origin discrimination. The
plaintiffs filed a second amended complaint on August 16, 1996 adding three
additional plaintiffs. The plaintiffs' motion for class certification is
currently pending before the court. The parties are conducting discovery with
respect to the pending motion for class certification. The Company plans to
vigorously defend this lawsuit. Due to the numerous legal and factual issues
which must be resolved during the course of this litigation, the Company is
unable to predict the ultimate outcome of this lawsuit. If the Company were
held liable for the alleged discrimination (or otherwise concludes that it is
in the Company's best interest to settle the matter), it could be required to
pay monetary damages (or settlement payments) which, depending on the outcome
of the class certification motion (and the size of any class certified), the
theory of recovery or the resolution of the plaintiffs' claims for compensatory
and punitive damages, could be substantial and could have a material adverse
effect on the Company. See "Legal Proceedings."
HIGHLY COMPETITIVE INDUSTRY
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, warehouse club stores, deep discount drug stores and supercenters.
Supermarket chains generally compete on the basis of location, quality of
products, service, price, product variety and store condition. The Company
regularly monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate in light of existing conditions.
There can be no assurance that new competitors will not enter the supermarket
industry or that the Company can maintain its current market share. See
"Business--Competition."
EXPOSURE TO REGIONAL ECONOMIC TRENDS DUE TO THE COMPANY'S GEOGRAPHIC
CONCENTRATION
All of the Company's stores are located in the greater Chicago
metropolitan area and thus the performance of the Company will be particularly
influenced by developments in this area. A significant economic downturn in
the Chicago metropolitan area could have a material adverse effect on the
Company's business, financial condition or results of operations.
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COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials (together,
"Environmental Laws"). From time to time, operations of the Company have
resulted or may result in noncompliance with or liability for cleanup pursuant
to Environmental Laws. Certain investigations conducted in connection with the
Acquisition found that certain of the Company's facilities have had or may have
had releases of hazardous materials associated with the Company's operations or
those of other current and prior occupants that may require remediation. The
costs to remediate such environmental contamination are currently estimated to
range from approximately $4.1 million to $5.7 million. Pursuant to the terms
of the stock purchase agreement associated with the Acquisition, the prior
owners of the Company have agreed to pay one-half of such remediation costs up
to $10 million and 75% of such remediation costs between $10 million and $20
million. Giving effect to such contribution, the Company's net share of such
remediation costs is currently estimated at approximately $4.3 million. To the
extent that the prior owners of the Company fail to reimburse the Company for
such remediation costs as they have agreed, the Company would be required to
bear this entire expense and pursue its remedies against such former owners.
See "Business--Environmental Matters."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends, in part, upon the services of Ronald W.
Burkle, the Company's Chairman of the Board of Directors, Robert A. Mariano,
the Company's President and Chief Executive Officer, and other key personnel.
The loss of the services of Mr. Burkle, Mr. Mariano or other key management
personnel could have an adverse effect upon the Company's business, results of
operations or financial condition. The Company has entered into employment
agreements with Mr. Mariano and certain of its other key management personnel.
There can be no assurance that the Company will be able to retain its existing
management personnel.
FORWARD-LOOKING STATEMENTS
When used in this report, the words "estimate," "expect," "project," and
similar expressions are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are subject to certain risks and uncertainties, including, but not
limited to those discussed above, that could cause actual results to differ
materially from those projected. These forward-looking statements speak only
as of the date hereof. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company, which although
believed to be reasonable, are inherently uncertain and difficult to predict;
therefore, undue reliance should not be placed upon such estimates. There can
be no assurance that the growth, savings or other benefits anticipated in these
forward-looking statements will be achieved. In addition, there can be no
assurance that unforeseen costs and expenses or other factors will not offset
or adversely affect the expected growth, cost savings or other benefits in
whole or in part.
ITEM 2. PROPERTIES
The Company operates a total of 100 stores in the Chicago metropolitan
area, as described in the following table:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF STORES SQUARE FOOTAGE
-------------------- ---------------
OWNED LEASED TOTAL TOTAL SELLING
----- ------ ----- ------ --------
<S> <C> <C> <C> <C> <C>
Dominick's:
Conventional ............... 1 22 23 43,100 28,900
Combination food and drug .. 8 30 38 57,600 40,300
Fresh Stores ............... 0 22 22 56,600 42,400
----- ------ ----- ------ ------
Dominick's total ......... 9 74 83 53,300 37,700
Omni ........................ 3 14 17 92,300 65,300
----- ------ ----- ------ ------
Company total ............ 12 88 100 60,000 42,400
===== ====== ===== ====== ======
</TABLE>
At its leased stores, the Company generally enters into long-term net
leases which obligate the Company to pay its proportionate share of real estate
taxes, common area maintenance charges and insurance costs. In addition, such
leases generally provide for contingent rent based upon a percentage of sales
when sales from the store exceed a certain dollar amount. The average
remaining term (including renewal options with increasing rents) of the
Company's supermarket leases is approximately 30 years. Two of the three Omni
stores owned by the Company are subject to long-term ground leases. There are
mortgages on the Company's owned stores totaling approximately $3.7 million at
November 2, 1996.
7
<PAGE> 9
The Company's administrative offices currently occupy a small portion of
an approximately 285,000 square foot facility at 505 Railroad Avenue (which
also includes a satellite distribution facility) and approximately 171,300
square feet of space at 333 N. Northwest Avenue in Northlake, Illinois. The
Company also owns and operates two primary warehouse and distribution
facilities totaling approximately 1.4 million square feet and the Ludwig Dairy
plant. See "Business--Warehousing, Distribution and Purchasing."
ITEM 3. LEGAL PROCEEDINGS
On March 16, 1995, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company by two employees of
the Company. The plaintiffs' original complaint asserted allegations of gender
discrimination and sought compensatory and punitive damages in an unspecified
amount. The plaintiffs filed an amended complaint on May 1, 1995. The amended
complaint added four additional plaintiffs and asserted allegations of gender
and national origin discrimination. The plaintiffs filed a second amended
complaint on August 16, 1996 adding three additional plaintiffs. The
plaintiffs' motion for class certification is currently pending before the
court. The parties are conducting discovery with respect to the pending motion
for class certification. The Company plans to vigorously defend this lawsuit.
Due to the numerous legal and factual issues which must be resolved during the
course of this litigation, the Company is unable to predict the ultimate
outcome of this lawsuit. If the Company was held liable for the alleged
discrimination (or otherwise concludes that it is in the Company's best
interest to settle the matter), it could be required to pay monetary damages
(or settlement payments) which, depending on the outcome of the class
certification motion (and the size of any class certified), the theory of
recovery or the resolution of the plaintiffs' claims for compensatory and
punitive damages, could be substantial and could have a material adverse effect
on the Company. Based upon the current state of the proceedings, the Company's
assessment to date of the underlying facts and circumstances and the other
information currently available, and although no assurances can be given, the
Company does not believe that the resolution of this litigation will have a
material adverse effect on the Company's overall liquidity. As additional
information is gathered and the litigation proceeds, the Company will continue
to assess its potential impact.
The Company, in its ordinary course of business, is party to various other
legal actions. Management believes these are routine in nature and incidental
to its operations. Management believes that the outcome of any such other
proceedings to which the Company currently is a party will not have a material
adverse effect upon its business, financial condition or results of operations.
However, adverse developments with respect to any pending or future litigation
could adversely affect the market price of the Company's Common Stock (defined
below).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's common stock, $ .01
par value per share (the "Common Stock"). As of November 1, 1996, there was
one holder of record of the Common Stock which is Dominick's Supermarkets, Inc.
The Company has not paid any dividends on its Common Stock since the
Acquisition and does not expect to pay any dividends on its Common Stock in the
foreseeable future. The Company's principal debt instruments contain certain
restrictions on the payment of cash dividends with respect to the Company's
Common Stock. The Predecessor Company paid dividends on its common stock
totaling $793,000 and $791,000 for fiscal 1994 and the 20 weeks ended March 21,
1995, respectively.
8
<PAGE> 10
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company as of and for the 52 weeks ended October 31, 1992, the 52 weeks ended
October 30, 1993, the 52 weeks ended October 29, 1994, the 20 weeks ended March
21, 1995 (Predecessor Company), the 32 weeks ended October 28, 1995, and the 53
weeks ended November 2, 1996, together with the operating and other financial
data which have been derived from the financial statements audited by Ernst &
Young LLP, independent auditors. The pro forma information set forth below for
the 52 weeks ended October 28, 1995 gives effect to the Acquisition and certain
related events as though they had occurred on October 30, 1994. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of the Company and the Predecessor Company,
together with the related notes thereto.
The Company was acquired by Supermarkets on March 22, 1995. The
historical financial statements for the 20 weeks ended March 21, 1995 and all
prior periods reflect the Predecessor Company results of operations. The
historical results of operations for the 32 weeks ended October 28, 1995 and
the 53 weeks ended November 2, 1996 are those of the Company following the
Acquisition.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------------------------- --------------------------------------
PRO FORMA
20 WEEKS 32 WEEKS 52 WEEKS 53 WEEKS
52 WEEKS ENDED ENDED ENDED ENDED ENDED
----------------------------
OCT. 31, OCT. 30, OCT. 29, MAR. 21, OCT. 28, OCT. 28, NOV. 2,
1992 1993 1994 1995 1995 1995 1996
--------- -------- --------- -------- -------- -------- -------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND STORE DATA)
OPERATING RESULTS:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales ................................ $2,285.7 $2,330.2 $2,409.9 $958.8 $1,475.0 $2,433.8 $2,512.0
Cost of sales ........................ 1,789.0 1,815.0 1,871.5 747.6 1,136.6 1,881.7 1,933.0
-------- -------- -------- ------- -------- --------- --------
Gross profit ......................... 496.7 515.2 538.4 211.2 338.4 552.1 579.0
Selling, general and
administrative expenses ............. 448.6 469.4 484.3 191.9 293.9 482.2 491.4
SARs termination costs(a) ............ -- -- -- 26.2 -- -- --
Termination of consulting
agreement(b) ........................ -- -- -- -- -- -- 10.5
-------- -------- -------- ------- -------- --------- --------
Operating income (loss) .............. 48.1 45.8 54.1 (6.9) 44.5 69.9 77.1
Interest expense ..................... 36.0 34.1 30.0 11.3 46.0 72.4 70.3
Income tax expense (benefit) ......... 4.5 4.1 9.3 (7.1) 1.9 3.5 7.4
Extraordinary item(c) ................ -- -- 6.3 -- 4.6 4.6 6.3
Cumulative effect of
accounting change ................... -- -- 1.0 -- -- -- --
-------- -------- -------- ------- -------- ---------- --------
Net income (loss) .................... $7.6 $7.6 $7.5 $ (11.1) $(8.0) $(10.6) $ (6.9)
======== ======== ======== ======= ======== ========== ========
OTHER FINANCIAL DATA:
Depreciation and amortization ........ $49.2 $51.1 $52.9 $20.5 $25.4 $45.9
Capital expenditures ................. 39.3 31.1 60.1 22.4 23.1 49.6
EBITDA (as adjusted)(d) .............. 98.5 98.3 112.0 43.2 71.6 134.9
Cash flow from operating activities .. 47.9 89.9 73.2 20.0 61.8 41.1
Cash flow from investing activities .. (34.3) (27.9) (55.5) (14.6) (464.6) (48.6)
Cash flow from financing activities .. (9.2) (50.6) (29.4) (6.2) 441.1 (15.4)
STORE DATA:
Fresh Store conversions .............. 0 0 6 5 3 0
Stores opened during the period ...... 5 1 1 0 0 8
Stores closed during the period ...... (2) (1) (1) (4) 0 (5)
Stores open at end of period ......... 101 101 101 97 97 100
Comparable store sales growth ........ (3.4)% (1.6)% 2.9% 2.4% 1.5% 1.2%
Average weekly sales per store (000's) $446 $448 $466 $484 $480 $491
Average sales per selling
square foot ......................... $611 $601 $610 $627 $606 $614
Total selling square feet (at
end of period, in thousands) ........ 3,788 3,969 4,039 3,976 4,008 4,244
BALANCE SHEET DATA (END OF PERIOD):
Working capital surplus (deficit) .... $24.0 $2.0 $(22.3) $(21.5) $(34.2) $(33.7)
Total assets ......................... 693.3 676.6 669.0 653.2 1,100.1 1,102.2
Total goodwill ....................... -- -- -- -- 419.3 420.2
Total debt ........................... 329.6 283.6 255.7 250.3 599.4 540.7
Stockholders' equity ................. 103.5 110.2 116.7 104.7 139.9 179.1
</TABLE>
9
<PAGE> 11
(a) In connection with the Acquisition, the Company discharged certain
obligations under its SARs plan by making payments to plan participants.
(b) On November 1, 1996, the Company terminated a consulting agreement dated
March 22, 1995 with Yucaipa. The termination fee of $10.5 million was
paid to Yucaipa on November 1, 1996.
(c) Net income for the 52 weeks ended October 29, 1994 reflects an
extraordinary loss of $6.3 million, net of applicable income tax benefit
of $3.9 million, resulting from the retirement of $60 million principal
amount of the Company's 11.78% Senior Notes. Net income for the 32 weeks
ended October 28, 1995 reflects an extraordinary loss of $4.6 million, net
of applicable income tax benefit of $2.8 million, resulting from the
repayment of $150 million principal amount under a senior subordinated
credit facility and the partial repayment of $50 million under the
Company's then existing credit facility (the "Old Credit Facility"). Net
loss for the 53 weeks ended November 2, 1996 reflects an extraordinary
loss of $6.3 million, net of applicable tax benefit of $4.2 million,
resulting from the refinancing of the Old Credit Facility in connection
with the initial public offering of Supermarkets.
(d) EBITDA (as adjusted) represents income (loss) before interest expense,
income taxes, depreciation and amortization, seller transaction expenses,
SARs expenses and termination costs, net equipment write-offs related to
closed stores and remodels, LIFO charge, termination of consulting
agreement charge, extraordinary loss on extinguishment of debt and
cumulative effect of accounting change. The Company believes that EBITDA
(as adjusted) provides meaningful information regarding the Company's
ability to service debt by eliminating certain non-cash and unusual
charges. However, EBITDA (as adjusted) should not be construed as an
alternative to operating income, net income or cash flow from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of the Company's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The computation of EBITDA (as adjusted) for the periods presented is as
follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
--------------------------------------------------- -------------------------------
PRO FORMA
20 WEEKS 32 WEEKS 52 WEEKS 53 WEEKS
52 WEEKS ENDED ENDED ENDED ENDED ENDED
--------------------------------------
OCT. 31, OCT. 30, OCT. 29, MAR. 21, OCT. 28, OCT. 28, NOV. 2,
1992 1993 1994 1995 1995 1995 1996
------------------ -------- -------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net income (loss) .............. $7.6 $7.6 $7.5 $(11.1) $(8.0) $(10.6) $(6.9)
Interest expense ............... 36.0 34.1 30.0 11.3 46.0 72.4 70.3
Income tax expense (benefit) ... 4.5 4.1 9.3 (7.1) 1.9 3.5 7.4
Depreciation and amortization .. 49.2 51.1 52.9 20.5 25.4 41.3 45.9
SARs expenses .................. 0.3 0.4 2.0 0.6 -- -- --
SARs termination costs ......... -- -- -- 26.2 -- -- --
Seller transaction expenses .... -- -- 0.2 0.8 -- -- --
Net equipment write-offs ....... 0.3 0.6 1.7 1.3 -- 1.3 --
LIFO charge .................... 0.6 0.4 1.1 0.7 1.7 2.4 1.4
Termination of consulting
agreement charge .............. -- -- -- -- -- -- 10.5
Extraordinary loss on extinguishment
of debt ....................... -- -- 6.3 -- 4.6 4.6 6.3
Cumulative effect of accounting
change ........................ -- -- 1.0 -- -- -- --
------------------ -------- -------- ----------- ----------- -------- --------
EBITDA (as adjusted) ........... $98.5 $98.3 $112.0 $43.2 $71.6 $114.9 $134.9
================== ======== ======== =========== =========== ======== ========
</TABLE>
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the past five fiscal years, the Company's sales increased
approximately 9.9% from $2.3 billion in fiscal 1992 to $2.5 billion in fiscal
1996. This growth occurred despite the fact that the total number of stores
operated by the Company decreased slightly, from 101 at the end of fiscal 1992
to 100 at the end of fiscal 1996. Management believes that this sales growth
has resulted in large measure from the substantial steps the Company has taken
to strengthen its store base over this period by remodeling existing stores,
closing certain under-performing stores and selectively adding new stores.
Through fiscal 1991, the Company's capital expenditure program focused on
developing combination food and drug stores, adding pharmacies and expanded
health and beauty care product lines to many stores which were previously
classified as conventional supermarkets and creating a critical mass of Omni
stores. In addition to upgrading its store base through capital expenditures,
the Company began to focus on "rationalizing" its conventional store base
(closing, converting or replacing under-performing stores). Seven
under-performing stores were closed in fiscal 1991 and an additional 13 were
closed through the end of fiscal 1996. In order to maximize the effectiveness
of the remaining conventional supermarkets, the Company began to focus on
upgrading their perishable departments and developed new prototypes to convey a
stronger image of quality, selection and freshness to the customer. These
efforts led to the introduction of the Fresh Store concept at the beginning of
fiscal 1994. During the five-year period ended November 2, 1996, the Company
completed 33 major remodels (including the 14 Fresh Store conversions). In
addition to its remodeling and store rationalization initiatives, the Company
continued to build new stores on a selective basis. From the beginning of
fiscal 1992 through the end of fiscal 1996, the Company opened 10 Dominick's
combination food and drug stores and five Omni stores.
Store Mix. As a result of its store rationalization and capital
expenditure program, the Company's store mix (by number of stores) changed from
47% conventional, 38% combination food and drug and 15% Omni at the end of
fiscal 1992 to 23% conventional, 60% combination food and drug (including 22%
Fresh Stores), and 17% Omni at November 2, 1996. This store mix change, along
with the remodels and departmental improvements discussed above, resulted in a
significant increase in total sales despite the reduction of one store, as
average weekly sales per store increased from $446,000 in fiscal 1992 to
$491,000 in fiscal 1996. In addition, gross margins improved slightly from
fiscal 1992 to fiscal 1996 due to an improvement in gross margin at the Omni
stores as the Omni store base matured and an increase in the number of
combination food and drug stores (which generally have higher margins than
conventional stores due to their product mix and increased offerings of
higher-margin perishables). This margin increase was realized in spite of both
the increase in the number of Omni stores as a percentage of total Company
stores, as these stores generally have lower margins than either conventional
supermarkets or combination food and drug stores, and the negative impact on
gross margins resulting from the store disruptions during the Fresh Store
conversions in fiscal 1994 and 1995. Management believes that as a result of
its store rationalization and capital expenditure programs and its continued
emphasis on opening new Fresh Stores and Omni stores, the Company is well
positioned for future growth.
Fresh Store Conversions. One key aspect of the Company's store
rationalization and capital expenditure programs has been the implementation of
the Fresh Store concept. Dominick's 22 Fresh Stores are enhanced combination
food and drug stores which are designed to create a European-style fresh market
atmosphere and emphasize the store's visual appeal and quality merchandise
perception. The Company's Fresh Stores feature significant upgrades in store
design and offer an expanded assortment of high quality fresh produce and other
perishables, a large selection of restaurant-quality prepared foods for
carry-out and in-store dining and a superior line of freshly baked goods and
pastry items. Fresh Stores also typically offer expanded delicatessen, bakery,
meat, seafood and floral departments, and additional service departments such
as a gourmet coffee cafe. The first Fresh Store was introduced in 1993 through
the conversion of an existing conventional supermarket. A total of 14 stores
have now been converted, resulting in an average increase in customer counts,
sales per square foot and store contribution margins for the converted stores
over pre-conversion levels. In addition, by focusing customers on the
increased offerings of higher-margin perishables and prepared products, the
Fresh Store concept has produced a more favorable margin mix. The conversions
completed in fiscal 1994 and fiscal 1995 generally required complete renovation
of the stores (at an estimated average capital expenditure of approximately
$5.2 million per store conversion) and created significant disruptions to
normal retail operations during the construction period. The Company estimates
that the cost of future Fresh Store conversions will be comparable to such
historical costs. The capital expenditures associated with the opening of
eight new Fresh Stores in fiscal 1996 were approximately $2.7 million per
store. The capital expenditures for opening new Fresh Stores are lower than
the historical cost of conversion due to the fact that store construction is
the responsibility of the site developer and such construction costs are
amortized over the life of the associated lease. In addition, although the
converted stores have generally achieved increased sales levels relatively
quickly following their grand openings as Fresh Stores, their profitability has
been adversely affected during the six-month ramp-up period following such
grand openings as a result of increased promotional costs and other
non-recurring start-up expenses. The Company held grand openings for six Fresh
Stores in fiscal 1994, eight Fresh Stores in fiscal 1995 and eight Fresh Stores
in fiscal 1996. The Company's current expansion plan calls for the
construction of nine new Fresh Stores in fiscal 1997 and the conversion of five
additional stores to the Fresh Store concept in fiscal 1997.
11
<PAGE> 13
Acquisition Accounting. The Company was acquired by Supermarkets on March
22, 1995 in a transaction that was accounted for as a purchase of the Company
by Supermarkets. As a result, all financial statements for periods subsequent
to March 22, 1995 reflect the Company's assets and liabilities at their
estimated fair market values as of March 22, 1995. The purchase price in
excess of the fair market value of the Company's assets was recorded as
goodwill and is being amortized over a 40-year period. The Company's purchase
price allocation resulted in a reduction in the carrying value of the
Company's fixed assets of approximately $83 million and in goodwill of
approximately $438 million. The Company's total debt also increased
substantially from approximately $250 million at March 21, 1995 to
approximately $603 million on the date of the Acquisition. As a result of
these changes, the Company's results of operations in periods subsequent to the
Acquisition reflect reduced levels of depreciation and significantly increased
levels of amortization and interest expense. In connection with the
Acquisition, the Company established a closed store reserve in the amount of
approximately $26.4 million to cover costs of stores closed, or expected to be
closed, at the time of the Acquisition. For a discussion of certain fees and
expenses and other amounts paid in connection with the Acquisition (which were
accounted for as part of the purchase price), see the Notes to Consolidated
Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth the historical operating results of the
Predecessor Company for fiscal 1994, the pro forma operating results of the
Company for the 52 weeks ended October 28, 1995 which give effect to the
Acquisition and certain related transactions, and the historical operating
results of the Company for the 53 weeks ended November 2, 1996, expressed in
millions of dollars and as a percentage of sales:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------- ----------------------------------------------
PRO FORMA
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
OCT. 29, 1994 OCT. 28, 1995 NOV. 2, 1996
----------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Sales ......................................... $2,409.9 100.0% $2,433.8 100.0% $2,512.0 100.0%
Gross profit .................................. 538.4 22.3 552.1 22.6 579.0 23.0
Selling, general and
administrative expenses ...................... 484.3 20.1 482.2 19.8 491.4 19.5
Termination of consulting agreement ........... -- -- -- -- 10.5 0.4
Operating income .............................. 54.1 2.2 69.9 2.8 77.1 3.1
Interest expense .............................. 30.0 1.2 72.4 2.9 70.3 2.8
Income tax expense ............................ 9.3 0.4 3.5 0.1 7.4 0.3
Extraordinary loss on
extinguishment of debt ....................... 6.3 0.3 4.6 0.2 6.3 0.3
Cumulative effect of
accounting change ............................ 1.0 -- -- -- -- --
Net income (loss) ............................. $ 7.5 0.3 $ (10.6) (0.4) $ (6.9) (0.3)
</TABLE>
The following discussion of the Company's results of operations should be
read in conjunction with the consolidated financial statements of the Company
together with the related notes thereto and other information included
elsewhere herein.
COMPARISON OF RESULTS OF OPERATIONS FOR THE 53 WEEKS ENDED NOVEMBER 2, 1996
(HISTORICAL) WITH THE 52 WEEKS ENDED OCTOBER 28, 1995 (PRO FORMA)
Sales: Sales increased $78.2 million, or 3.2%, from $2,433.8 million in
the 52 weeks ended October 28, 1995 to $2,512.0 million in the 53 weeks ended
November 2, 1996. The increase in sales in fiscal 1996 was primarily
attributable to a 1.2% increase in comparable store sales, the opening of four
new Dominick's Fresh Stores and the additional week in fiscal 1996, partially
offset by the impact of the closure of four stores during fiscal 1995 and one
store in fiscal 1996. Four replacement stores were opened in fiscal 1996,
which are included in comparable store sales.
Gross Profit: Gross profit increased $26.9 million, or 4.9%, from $552.1
million in the 52 weeks ended October 28, 1995 to $579.0 million in the 53
weeks ended November 2, 1996. Gross profit as a percentage of sales increased
from 22.6% in the 52 weeks ended October 28, 1995 to 23.0% in the 53 weeks
ended November 2, 1996, due primarily to the reduction of product costs
resulting from purchasing improvements and improved perishable and drug
department gross profit. The increase in gross profit from perishables
reflects the maturing of the converted Fresh Stores.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses ("SG&A") increased $9.2 million, or 1.9%, from $482.2
million in the 52 weeks ended October 28, 1995 to $491.4 million in the 53
weeks ended November 2, 1996. SG&A decreased from 19.8% of sales in the 52
weeks ended October 28, 1995 to 19.5% of sales in the 53 weeks ended November
2, 1996. The decrease in SG&A as a percentage of sales reflects improved labor
productivity and reduced overhead costs.
Termination of Consulting Agreement: On November 1, 1996, the Company
terminated a previous consulting agreement with Yucaipa resulting in the
payment of a termination fee of $10.5 million.
Operating Income: Operating income for the 53 weeks ended November 2,
1996 increased $7.2 million, or 10.3%, from $69.9 million in the 52 weeks ended
October 28, 1995 to $77.1 million as a result of the factors discussed above.
12
<PAGE> 14
Interest Expense: Interest expense decreased from $72.4 million in the 52
weeks ended October 28, 1995 to $70.3 million in the 53 weeks ended November 2,
1996 primarily due to slightly lower interest rates and borrowing levels.
Net Income (Loss): Net loss decreased $3.7 million from a net loss of
$10.6 million in the 52 weeks ended October 28, 1995 to a net loss of $6.9
million in the 53 weeks ended November 2, 1996 as a result of the factors
discussed above.
COMPARISON OF RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED OCTOBER 28, 1995
(PRO FORMA) WITH THE 52 WEEKS ENDED OCTOBER 29, 1994 (PREDECESSOR COMPANY)
Sales: Sales increased $23.9 million, or 1.0%, from $2,409.9 million in
fiscal 1994 to $2,433.8 million in fiscal 1995. The increase in sales in
fiscal 1995 was primarily attributable to a 1.8% increase in comparable store
sales and additional sales due to the opening of one new Omni store in May 1994
partially offset by the impact of the closure of four conventional stores in
fiscal 1995. The growth in comparable store sales primarily reflects strong
sales results at the 14 Fresh Stores opened prior to the end of fiscal 1995.
Gross Profit: Gross profit increased $13.7 million, or 2.5%, from $538.4
million in fiscal 1994 to $552.1 million in fiscal 1995. Gross profit as a
percentage of sales increased from 22.3% in fiscal 1994 to 22.6% in fiscal
1995. The increase in gross margin was due primarily to the increased gross
profit contribution from the perishable departments resulting from the Fresh
Stores opened prior to the beginning of fiscal 1995 which more than offset the
continuing effects of the Fresh Store conversion program in fiscal 1995.
Selling, General and Administrative Expenses: SG&A decreased $2.1
million, or 0.4%, from $484.3 million in fiscal 1994 to $482.2 million in
fiscal 1995. SG&A decreased from 20.1% of sales in fiscal 1994 to 19.8% of
sales in fiscal 1995. The decrease in SG&A as a percentage of sales is due
primarily to reduced depreciation and amortization expenses resulting from
purchase accounting adjustments which reduced the net carrying value of the
Company's fixed assets, offset somewhat by the elimination of certain
non-recurring regulatory-ordered utility refunds which lowered utility costs in
fiscal 1994.
Operating Income: Operating income increased $15.8 million, or 29.2%,
from $54.1 million in fiscal 1994 to $69.9 million in fiscal 1995 as a result
of the factors discussed above.
Interest Expense: Interest expense increased from $30.0 million in fiscal
1994 to $72.4 million in fiscal 1995 primarily due to the increased
indebtedness outstanding following the Acquisition.
Net Income (Loss): Net income decreased from $7.5 million in fiscal 1994
to a net loss of $10.6 million in fiscal 1995. Pro forma net income in fiscal
1995 was adversely affected by an extraordinary charge of $4.6 million
associated with the repayment of $150 million principal amount of the Company's
senior subordinated credit facility and the prepayment of $50 million principal
amount of the Company's term loan facilities. Net income in fiscal 1994 was
adversely affected by an extraordinary charge of $6.3 million associated with
the prepayment of $60 million principal amount of the Company's 11.78% Senior
Notes and a $1.0 million charge to reflect the cumulative effect on prior years
of the change in the Company's accounting for income taxes. Other factors
affecting net income (loss) are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from
operations, borrowings under its New Credit Facility (described below) and
capital and operating leases. The Company's principal uses of liquidity are to
provide working capital, finance capital expenditures and meet debt service
requirements.
On November 1, 1996, $35.9 million of the proceeds of Supermarkets'
initial public offering, together with $45.0 million of available cash and
$193.6 million of proceeds under the New Credit Facility was used to repay all
of the outstanding borrowings under the Company's then existing credit facility
(the "Old Credit Facility"). The remaining proceeds were used to terminate a
consulting agreement with Yucaipa. See "Certain Relationships and Related
Transactions."
On November 1, 1996, the Company entered into a credit facility with a
syndicate of financial institutions (the "New Credit Facility"). The New
Credit Facility provides for a $100 million amortizing term loan (the "New Term
Loan"), a $105 million revolving term facility (the "New Revolving Term
Facility") and a $120 million revolving facility (the "New Revolving
Facility," and together with the New Revolving Term Facility, the "New
Revolving Facilities"), each of which has a six and one-half year term. The
New Revolving Facility is available for working capital and general corporate
purposes, including up to $50 million to support letters of credit. The
Company utilizes letters of credit to cover workers' compensation
self-insurance liabilities and for other general purposes. Letters of credit
for approximately $17.2 million were issued under the New Credit Facility at
November 2, 1996. Up to $20 million of the New Revolving Facility is available
as a swingline facility (i.e., a facility which permits same-day borrowings
directly from the agent under the New Credit Facility). The Company is not
required to reduce borrowings under the New Revolving Facilities by a specified
amount each year. The New Term Loan requires quarterly amortization payments
commencing in fiscal 1998 in amounts ranging from $2.5 million to $7.5 million
per quarter. The Company will also be required to make prepayments under the
New Credit Facility, subject to certain exceptions, with a percentage of its
consolidated excess cash flow and with the proceeds from certain asset sales,
issuances of debt securities and any pension plan reversions.
13
<PAGE> 15
The Company generated approximately $41.1 million of cash from operating
activities during the 53-week period ended November 2, 1996 compared to $81.8
million during the 52-week period ended October 28, 1995. The reduction in
cash generated from operating activities is attributable to higher interest
expense resulting from the Acquisition, the consulting agreement termination
fee paid to Yucaipa during fiscal 1996 and the effect of a decrease in working
capital in fiscal 1995 resulting from increased trade leverage subsequent to
the Acquisition. One of the principal uses of cash in the Company's operating
activities is inventory purchases. However, supermarket operators typically
require small amounts of working capital since inventory is generally sold
prior to the time that payments to suppliers are due. This reduces the need
for short-term borrowings and allows cash from operations to be used for
non-current purposes such as financing capital expenditures and other investing
activities. Consistent with this pattern, the Company had a working capital
deficit of $34.2 million at October 28, 1995 and $33.7 million at November 2,
1996.
The Company used $48.6 million in investing activities for the 53 weeks
ended November 2, 1996. Investing activities consisted primarily of capital
expenditures of $49.6 million offset somewhat by sales of assets. Capital
expenditures were made for store remodels, new store openings and, to a lesser
extent, expenditures for warehousing, distribution, and manufacturing
facilities and equipment, including data processing and computer systems.
The Company plans to make gross capital expenditures of approximately $84
million (or $55 million net of expected capital leases) in fiscal 1997. Such
expenditures consist of approximately $54 million related to remodels and new
stores, as well as ongoing store expenditures for equipment and maintenance,
and approximately $30 million related to warehousing, distribution and
manufacturing facilities and equipment, including data processing and computer
equipment. Management expects that these capital expenditures will be financed
primarily through cash flow from operations and capital leases. The capital
expenditure budget for fiscal 1997 does not include certain environmental
remediation costs which are expected to be incurred over the next several years
in the range of approximately $4.1 million to $5.7 million (the Company's net
share of which is currently estimated at approximately $4.3 million, after
contributions by the prior owners of the Predecessor Company pursuant to the
terms of the stock purchase agreement associated with the Acquisition, and for
which an accrual has been provided in the Company's financial statements). See
"Business--Environmental Matters." During fiscal 1996, the Company sold and
leased back under capital leases approximately $37.3 million of certain
existing owned equipment.
The Company has historically utilized leasing facilities to finance the
cost of new store equipment and fixtures. At November 2, 1996, the Company had
a $5.4 million lease facility available which it anticipates will be
substantially utilized in connection with its new store program in the first
quarter of fiscal 1997. The Company will seek additional lease facilities as
required to support its capital expenditure program. As such lease facilities
are utilized, the Company's capital lease indebtedness will increase by a
comparable amount.
The capital expenditure plans discussed above do not include potential
acquisitions which the Company could make to expand within its existing market
or contiguous markets. The Company may consider such acquisition opportunities
from time to time. Any such future acquisition may require the Company to seek
additional debt or equity financing.
The Company is a wholly owned subsidiary of Supermarkets. The Company's
principal debt instruments generally restrict the Company from paying dividends
or otherwise distributing cash to Supermarkets, except under certain limited
circumstances, including for the payment of taxes and, subject to limitations,
for general administration purposes..
The Company, in the ordinary course of its business, is party to various
legal actions. One case currently pending alleges gender discrimination by the
Company and seeks compensatory and punitive damages in an unspecified amount.
The plaintiffs' motion for class certification is currently pending before the
court. Due to the numerous legal and factual issues which must be resolved
during the course of this litigation, the Company is unable to predict the
ultimate outcome of this lawsuit. If the Company were held liable for the
alleged discrimination (or otherwise concludes that it is in the Company's best
interest to settle the matter), it could be required to pay monetary damages
(or settlement payments) which, depending on the outcome of the class
certification motion (and the size of any class certified), the theory of
recovery or the resolution of the plaintiffs' claims for compensatory and
punitive damages, could be substantial and could have a material adverse effect
on the Company. Based upon the current state of the proceedings, the Company's
assessment to date of the underlying facts and circumstances and the other
information currently available, and although no assurances can be given, the
Company does not believe that the resolution of this litigation will have a
material adverse effect on the Company's overall liquidity. As additional
information is gathered and the litigation proceeds, the Company will continue
to assess its potential impact. See "Legal Proceedings."
The Company is highly leveraged. Based upon current levels of operations
and anticipated cost savings and future growth, the Company believes that its
cash flow from operations, together with available borrowings under the New
Revolving Facilities and its other sources of liquidity (including leases) will
be adequate to meet its anticipated requirements for working capital, debt
service and capital expenditures over the next few years.
EFFECTS OF INFLATION
The Company does not believe that inflation has had any significant impact
on the Company's operations. The Company's primary costs, inventory and labor,
are affected by a number of factors that are beyond its control, including, in
addition to inflation, the availability and price of merchandise, the
competitive climate and general and regional economic conditions. As is
typical of the supermarket industry, the Company has generally been able to
maintain gross profit margins by adjusting its retail prices, but competitive
conditions may from time to time render it unable to do so while maintaining
its market share.
14
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page 27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company.
Executive officers of the Company are chosen by the Board of Directors and
serve at its discretion.
<TABLE>
<CAPTION>
NAME TITLE AGE
- ---------------------- --------------------------------------------------- ---
<S> <C> <C>
Ronald W. Burkle Chairman of the Board (l) 44
Robert A. Mariano President, Chief Executive Officer and Director (l) 46
Darren W. Karst Executive Vice President, Finance and
Administration, Chief Financial Officer, Secretary
and Director 37
Robert E. McCoy Executive Vice President of Operations 49
John W. Boyle Group Vice President, Information Technology and
Store Development 38
Robert R. DiPiazza Group Vice President, Perishable Merchandising 45
Donald G. Fitzgerald Group Vice President, Non-Perishable Merchandising
and Logistics 35
Donald S. Rosanova Group Vice President, Omni Division 47
Alice F. Smedstad Group Vice President, Human Resources 47
Herbert R. Young Group Vice President, Sales, Marketing and 55
Advertising
Peter P. Copses Director 38
Linda McLoughlin Figel Director 32
Patrick L. Graham Director (1) 47
David B. Kaplan Director 29
Mark A. Resnik Director 49
Antony P. Ressler Director 36
</TABLE>
(1) Member of the Executive Committee of the Board of Directors.
The Board of Directors has an Executive Committee. There are no family
relationships among the executive officers or directors of the Company.
Pursuant to the Amended and Restated Stockholders Agreement dated as of
November 1, 1996 (the "Stockholders Agreement"), among the Company,
Supermarkets, certain affiliates of Yucaipa and Apollo Advisors, L.P.
("Apollo") and certain other stockholders of Supermarkets, six of the Company's
current directors were selected by Yucaipa and three were selected by Apollo.
Yucaipa and Apollo will continue to be able to nominate six and three
directors, respectively, provided that certain beneficial ownership
requirements set forth in the Stockholders Agreement continue to be met.
The Company does not pay any compensation to its directors for serving on
the Board of Directors, but reimburses such persons for their out-of-pocket
expenses incurred in connection with attending meetings of the Board of
Directors.
Ronald W. Burkle--Mr. Burkle has been the Chairman of the Company since
March 1995 and served as Chief Executive Officer from March 1995 to January
1996. Mr. Burkle co-founded Yucaipa in 1986 and has served as director and
Chairman of the Board of Food 4 Less Holdings, Inc. ("Food 4 Less") whose
principal operating subsidiary is Ralphs Grocery Company ("Ralphs"), and
Chairman of the Board and Chief Executive Officer of its predecessor, Food 4
Less Supermarkets, Inc. since 1987. Mr. Burkle has been a director and the
Chief Executive Officer of Smith's Food & Drug Centers, Inc. ("Smith's") since
May 1996 and was Chairman of the Board of Smitty's Supermarkets, Inc.
("Smitty's") from 1994 until its merger into Smith's in May 1996. Mr. Burkle
also serves as a director of Kaufman and Broad Home Corporation. Before
founding Yucaipa, Mr. Burkle held a number of supermarket executive positions
and was a private investor in Southern California.
Robert A. Mariano--Mr. Mariano has been the President and a director of
the Company since March 1995 and Chief Executive Officer since January 1996.
Mr. Mariano also served as Chief Operating Officer from March 1995 until
January 1996. Mr. Mariano joined the Company in 1972 and was Senior Vice
President of Marketing and Merchandising from 1994 to 1995, Senior Vice
President of Perishable Merchandising from 1989 to 1994, Senior Vice President
of Operations from 1987 to 1989, and held a number of managerial positions
prior to 1987.
Darren W. Karst--Mr. Karst joined the Company in March 1995 as Senior Vice
President, Chief Financial Officer, Secretary and a director and was appointed
Executive Vice President, Finance and Administration in March 1996. Mr. Karst
joined Yucaipa in 1988 and has been a general partner since 1991. Prior to
1988, he was a manager at Ernst & Young LLP.
16
<PAGE> 18
Robert E. McCoy--Mr. McCoy has been Executive Vice President of Operations
of the Company since 1996 and served as Senior Vice President of Operations
from 1989 to 1996. Prior to that time, he was Vice President of Operations at
Jewel Food Stores, where he began his career in 1969.
John W. Boyle--Mr. Boyle has been Group Vice President, Information
Technology and Store Development of the Company since March 1996. Mr. Boyle
joined the Company in January 1995 as Vice President, Management Information
Systems and became Vice President, Administration in March 1995. Prior to
joining the Company, Mr. Boyle had been employed as Vice President--Information
Systems at Food 4 Less Supermarkets, Inc. since 1993, and, before that, had
been employed as a Senior Vice President at Thrifty Drugstores.
Robert R. DiPiazza--Mr. DiPiazza has been Group Vice President, Perishable
Merchandising since March 1996, and, prior to that, had served as Vice
President, Produce Operations since 1990. Before 1990, Mr. DiPiazza held a
number of other managerial positions at the Company.
Donald G. Fitzgerald--Mr. Fitzgerald has been Group Vice President,
Non-Perishable Merchandising and Logistics since March 1996. Prior to that
time Mr. Fitzgerald had served as Vice President, Grocery Merchandising since
1994, as director of grocery merchandising from 1993 to 1994 and as director of
grocery purchasing since 1990. Before 1990 Mr. Fitzgerald held several other
managerial positions at the Company.
Donald S. Rosanova--Mr. Rosanova has been Group Vice President, Omni since
March 1996, and, prior to that, had been Vice President, Distribution and
Transportation since 1992. Before 1992 Mr. Rosanova held several other
managerial positions at the Company.
Alice F. Smedstad--Mrs. Smedstad has been Group Vice President, Human
Resources since December 1996. Mrs. Smedstad joined the Company in October 1995
as Vice President of Human Resources. Prior to that time she held several
senior human resource positions at The Dial Corporation from 1980 to 1995. She
began her professional career in manufacturing with the Proctor & Gamble
Company in 1973.
Herbert R. Young--Mr. Young has been Group Vice President, Sales,
Marketing and Advertising of the Company since March 1996 and served as Senior
Vice President of Marketing from March 1995 to 1996. Prior to that time, Mr.
Young was Senior Vice President and General Manager of Omni from 1994 to 1995
and was Senior Vice President of Marketing and Non-Perishable Merchandising
from 1990 to 1994. Before joining the Company, he was Executive Vice President
of Topco from 1986 to 1990.
Peter P. Copses--Mr. Copses has served as a director of the Company since
March 1995. Mr. Copses also has served as a director of Food 4 Less and Ralphs
since 1995. Since 1990, Mr. Copses has been a limited partner of Apollo
Advisors, L.P. which, together with an affiliate, serves as the managing
general partner of Apollo Investment Fund, L.P., AIF II, L.P., and Apollo
Investment Fund III, L.P., which are private securities investment funds, and
of Lion Advisors, L.P., which acts as financial advisor to and representative
for certain institutional investors with respect to securities investments.
From March to September 1990, Mr. Copses was a Vice President in the investment
banking department of Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to 1990, he was employed by Drexel Burnham Lambert Incorporated. Mr.
Copses is a director of Food 4 Less and Family Restaurants, Inc.
Linda McLoughlin Figel--Ms. Figel has been a director of the Company
since August 1996. Ms. Figel also has served as a director of Smith's since
May 1996. She joined Yucaipa in 1989 and became a general partner in 1991.
Prior to 1989, she was employed by Bankers Trust Company in its Structured
Finance Group.
Patrick L. Graham--Mr. Graham has served as a director of the Company
since March 1995. Mr. Graham has served as a director of Food 4 Less and
Ralphs since 1995 and served as Vice President and a director of Smitty's from
June 1994 until its merger with Smith's in May 1996. Mr. Graham joined Yucaipa
as a general partner in 1993. Prior to that time he was a Managing Director in
the corporate finance department of Libra Investments, Inc. from 1992 to 1993
and PaineWebber Inc. from 1990 to 1992. Prior to 1990, he was a Managing
Director in the corporate finance department of Drexel Burnham Lambert
Incorporated.
David B. Kaplan--Mr. Kaplan has served as a director of the Company since
March 1995. Since 1991, Mr. Kaplan has been associated with and is a limited
partner of Apollo Advisors, L.P. and Lion Advisors, L.P. Prior to 1991, Mr.
Kaplan was a member of the corporate finance department of Donaldson, Lufkin &
Jenrette Securities Corporation. Mr. Kaplan also serves as a director of PRI
Holdings, Inc. and BDK Holdings, Inc.
Mark A. Resnik--Mr. Resnik has served as a director of the Company since
March 1995. Mr. Resnik co-founded Yucaipa in 1986, and has served as a
director of Food 4 Less and Ralphs since 1995 and as a director and Vice
President of its predecessor, Food 4 Less Supermarkets, Inc., since 1987. Mr.
Resnik served as Vice President and a director of Smitty's from June 1994 until
its merger with Smith's in May 1996. From 1986 until 1988, Mr. Resnik served
as a director and Vice President of Jurgensen's.
Antony P. Ressler--Mr. Ressler has served as a director of the Company
since March 1995. In 1990, Mr. Ressler was one of the founding principals of
Apollo Advisors, L.P. and Lion Advisors, L.P. Prior to 1990, Mr. Ressler was
a Senior Vice President in the high yield bond department of Drexel Burnham
Lambert Incorporated. Mr. Ressler is a director of Family Restaurants, Inc.,
United International Holdings, Vail Resorts, Inc. and PRI Holdings, Inc.
All of the directors named above also serve on the board of directors of
Supermarkets.
17
<PAGE> 19
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information concerning
the compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company (the "Named Executive Officers"),
whose total annual salary and bonus for the 53 weeks ended November 2, 1996
exceeded $100,000 for services rendered in all capacities to the Company and
its subsidiaries for the same period.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION(1)
---------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------------
FISCAL YEAR OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS SARS(#) COMPENSATION
- ---------------------------------------------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Ronald W. Burkle(2) November 2, 1996 $-- $-- -- $--
Chairman October 28, 1995 -- -- -- --
October 29, 1994 -- -- -- --
Robert A. Mariano(3) November 2, 1996 $482,700 $463,500 -- $14,700(4)
President and October 28, 1995 334,200 216,000 146,379 3,463,700(4)(5)
Chief Executive Officer October 29, 1994 216,000 216,000 -- 22,400(4)
Darren W. Karst(6) November 2, 1996 $289,700 $255,000 -- $7,100(4)
Executive Vice President, October 28, 1995 151,600 -- 73,189 1,700(4)
Finance and Administration, October 29, 1994 -- -- -- --
and Secretary
Robert E. McCoy November 2, 1996 $289,400 $250,000 -- $878,600(4)(7)
Executive Vice President, October 28, 1995 236,900 216,000 146,379 2,916,300(4)(5)
Operations October 29, 1994 216,000 216,000 -- 14,500(6)
Herbert R. Young November 2, 1996 $229,300 $225,000 -- $865,100(4)(7)
Group Vice President, October 28, 1995 225,600 210,900 146,379 2,923,000(4)(5)
Sales, Marketing and October 29, 1994 210,900 210,900 -- 21,000(4)
Administration
John W. Boyle (8) November 2, 1996 $182,500 $51,400 -- $4,300(4)
Group Vice President, October 28, 1995 122,400 -- 36,594 300(4)
Information Technology October 29, 1994 -- -- -- --
</TABLE>
and Store Development
(1) Information for Messrs. Mariano, McCoy and Young excludes equity-based
compensation of the Predecessor Company which was extinguished in
connection with the Acquisition.
(2) Mr. Burkle served as Chairman of the Board and Chief Executive Officer
from March 1995 to January 1996, and continues to serve as Chairman of the
Board. Mr. Burkle provides services to the Company (other than as
Chairman of the Board) pursuant to a Management Agreement (the "Management
Agreement") between Yucaipa and the Company. Pursuant a Consulting
Agreement between Yucaipa and the Company, the Company paid Yucaipa $2.6
million in the fiscal year ended November 2, 1996 and $1.5 in the 32 weeks
ended October 28, 1995 for the services (other than Chairman of the Board
or as directors) of Messrs. Burkle, Resnik and Graham and Ms. Figel and
other Yucaipa personnel (other than Mr. Karst). Such payments to Yucaipa
are not reflected in the table set forth above. See "Certain
Relationships and Related Transactions - Yucaipa Management Agreement" and
"Certain Relationships and Related Transactions - Yucaipa Consulting
Agreement."
(3) Mr. Mariano was appointed President and Chief Operating Officer in March
1995 and was subsequently appointed Chief Executive Officer in January
1996.
(4) Includes (i) insurance premiums paid under senior management benefit
plans, (ii) benefits paid under a senior management financial planning
plan, (iii) profit sharing plan contributions made by the Company, (iv)
other employee benefits and (v) for Mr. Mariano, interest forgiven on a
promissory note. Such other compensation amounted to aggregate annual
amounts of less than $50,000 for each Named Executive Officer.
(5) Includes the redemption for cash of all Predecessor Company's stock
appreciation rights held by Messrs. Mariano, McCoy and Young at the time
of the Acquisition in the amounts of $3,450,100, $2,901,500, and
$2,901,500, respectively.
18
<PAGE> 20
(6) Mr. Karst joined the Company as Senior Vice President, Chief Financial
Officer and Secretary in March 1995 and was appointed Executive Vice
President, Finance and Administration in March 1996. Mr. Karst is a
general partner of Yucaipa, which provides services to the Company
pursuant to the Management Agreement. See "Certain Relationships and
Related Transactions - Yucaipa Management Agreement."
(7) Includes $864,000 and $843,700 for Messrs. McCoy and Young, respectively,
paid during fiscal 1996 in connection with their respective employment
agreements. See "Employment Agreements."
(8) Mr. Boyle was appointed Group Vice President, Information Technology and
Store Development in March 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a board committee performing the functions of a
compensation committee. Ronald W. Burkle, the Chairman of the Board of the
Company and Robert A. Mariano, the President and Chief Executive Officer of the
Company, made decisions with regard to executive officer compensation for
fiscal 1996.
EMPLOYMENT AGREEMENTS
Concurrently with the consummation of the Acquisition, the Company entered
into new employment agreements with certain executive officers as described
below:
Mariano Employment Agreement. The Company and Mr. Mariano entered into a
three-year employment agreement dated March 22, 1995 pursuant to which Mr.
Mariano was employed as President and Chief Operating Officer (or such other
offices as the Company's board of directors may designate) at an annual base
salary of $400,000 (subject to increases at the discretion of the board). In
January 1996, the board of directors appointed Mr. Mariano to the office of
Chief Executive Officer and raised his annual base salary to $500,000. If the
Company meets certain financial targets determined by its board of directors,
Mr. Mariano will also be entitled to receive an annual incentive bonus not to
exceed 200% of his annual base salary. Mr. Mariano is eligible to participate
in employee benefit plans generally made available by the Company to its
executive officers. At the closing of the Acquisition, Mr. Mariano received a
payment of $864,000 in consideration of the cancellation of certain rights
under his prior employment agreement. Concurrently with the closing of the
Acquisition, Mr. Mariano exchanged 1,200 shares of the Company common stock for
190,293 shares of Common Stock of Supermarkets in a tax-deferred transaction.
The employment agreement may be terminated by either party upon 30 days' notice
for any reason, or immediately by the Company for cause. If during the term of
the employment contract, Mr. Mariano resigns or his employment is terminated by
the Company for any reason other than for cause, he will be entitled to receive
a cash payment equal to three times his annual base salary, less $864,000, and
maintenance at the Company expense of medical, dental and other benefits for 24
months following such employment termination.
McCoy Employment Agreement. The Company and Mr. McCoy entered into a
three-year employment agreement dated March 22, 1995 pursuant to which Mr.
McCoy was employed at an annual base salary of $250,000. In March 1996, the
board of directors appointed Mr. McCoy to Executive Vice President of
Operations and raised his annual base salary to $300,000. Mr. McCoy is also
entitled to receive an annual incentive bonus, not to exceed 100% of base
salary, if the Company meets certain financial targets determined by its board
of directors. Mr. McCoy is entitled to participate in employee benefit plans
generally made available by the Company to its executive officers. The
employment agreement may be terminated by either the Company or Mr. McCoy upon
30 days' notice for any reason, or immediately by the Company for cause. In
consideration of the cancellation of certain rights under his prior employment
agreement, Mr. McCoy received a payment of $864,000 on March 22, 1996. If Mr.
McCoy resigns or his employment is terminated by the Company other than for
cause, he is entitled to receive the discounted present value of the aggregate
base salary for the remaining term of the employment agreement less $864,000,
plus the maximum bonus payable in the year of termination. Unless terminated
for cause, Mr. McCoy is also entitled to continue to receive medical, dental
and other employee benefits for the full three-year term of the employment
agreement.
Young Employment Agreement. The Company and Mr. Young entered into a
three-year employment agreement dated March 22, 1995 pursuant to which Mr.
Young is employed at an annual base salary of $225,000. Mr. Young is also
entitled to receive an annual incentive bonus, not to exceed 100% of base
salary, if the Company meets certain financial targets determined by its board
of directors. Mr. Young is also entitled to participate in employee benefit
plans generally made available by the Company to its executive officers. The
employment agreement may be terminated by the Company or Mr. Young upon 30
days' notice for any reason, or immediately by the Company for cause. In
consideration of the cancellation of certain rights under his prior employment
agreement, Mr. Young received a payment of $843,708 on March 22, 1996. In the
event Mr. Young resigns or is terminated other than for cause, he is entitled
to receive the discounted present value of the aggregate base salary for the
remaining term of the employment agreement less $843,708, plus the maximum
bonus payable in the year of termination. Unless terminated for cause, Mr.
Young will also continue to receive medical, dental and other employee benefits
for the full three-year term of the employment agreement.
FORMER SENIOR MANAGEMENT LONG TERM INCENTIVE PLAN
Prior to the consummation of the Acquisition, the Predecessor Company
maintained a Senior Management Long Term Incentive Plan which awarded SARs to
certain senior executives based upon the individual's length of tenure at the
Predecessor Company and the annual performance of both the individual and the
Predecessor Company. Prior to the consummation of the Acquisition, the
Predecessor Company had approximately 20,800 SARs outstanding, which were held
by 18 current and former officers of the Predecessor Company, including Messrs.
Mariano, McCoy and Young.
19
<PAGE> 21
Concurrently with the consummation of the Acquisition, approximately $29.5
million of outstanding SARs were redeemed for cash. An additional $2.6 million
of SARs payments that would otherwise have been payable upon consummation of
the Acquisition were canceled in exchange for the issuance of the Reinvestment
Options (as defined). See "--1995 Stock Option Plan."
1995 STOCK OPTION PLAN
On March 19, 1995, Supermarkets adopted the 1995 Stock Option Plan (as
amended, the "1995 Stock Option Plan"), designed to motivate certain executives
to remain in the employ of the Company and to focus their efforts on long-term
financial objectives. Under the 1995 Stock Option Plan, Supermarkets may, from
time to time, grant incentive stock options or nonqualifying options to
officers and other key employees of Supermarkets, the Company or its
subsidiaries upon the terms, conditions and provisions of the 1995 Stock Option
Plan. Options to purchase a total of 966,835 shares of Common Stock have been
granted under the 1995 Stock Option Plan and Supermarkets does not intend to
grant any additional options thereunder. Concurrently with the consummation of
the Acquisition, Supermarkets granted each of Messrs. Mariano, McCoy and Young
options with a term of ten years, exercisable for 146,379 shares of
Supermarkets' Common Stock representing an aggregate of 1% of Supermarkets'
Common Stock and Class B Common Stock outstanding as of the consummation of the
Acquisition. In the case of Mr. Mariano, such options vest 20% per year over
five years beginning one year from the date of grant, with an exercise price
equal to $6.83 per share. Messrs. McCoy and Young each received Reinvestment
Options (as defined below) to purchase 97,591 shares of Supermarkets' Common
Stock at an exercise price of $1.71 per share which were fully vested and
exercisable on the date of grant, and additional options to purchase 48,788
shares of Supermarkets' Common Stock at an exercise price of $6.83 per share
which vest 25% per year over four years beginning two years from the date of
grant. Together, such options entitle each of Messrs. McCoy and Young to
purchase 146,379 shares of Supermarkets' Common Stock for an aggregate purchase
price of $500,000.
Upon the consummation of the Acquisition, options representing an
aggregate of 2.6% of the total equity of Supermarkets outstanding at such time
were issued to holders of SARs in exchange for the cancellation of
approximately $2.6 million of the SARs payments which would otherwise have been
payable upon consummation of the Acquisition (the "Reinvestment Options"). The
value of the SARs payments canceled were credited against the exercise price
for each Reinvestment Option. The Reinvestment Options were fully vested upon
issuance and are immediately exercisable.
1996 EQUITY PARTICIPATION PLAN
On October 28, 1996, Supermarkets adopted the 1996 Equity Participation
Plan (the "1996 Equity Participation Plan") to enable key executive officers,
other key employees, independent directors and consultants of Supermarkets to
participate in the ownership of the Company. The 1996 Equity Participation
Plan provides for the award to executive officers, other key employees,
independent directors and consultants of Supermarkets, and the Company of a
broad variety of stock-based compensation alternatives such as nonqualified
stock options, incentive stock options, restricted stock, stock appreciation
rights, performance awards, dividend equivalents and stock payments and
provides for the grant to executive officers, other key employees, independent
directors and consultants of nonqualified stock options. Awards under the 1996
Equity Participation Plan may provide participants with rights to acquire
shares of Supermarkets' Common Stock.
The 1996 Equity Participation Plan is administered by the Board of
Directors of Supermarkets, which is authorized to select from among the
eligible participants the individuals to whom options, restricted stock
purchase rights, stock appreciation rights, performance awards, dividend
equivalents and stock payments are to be granted and to determine the number of
shares to be subject thereto and the terms and conditions thereof. The Board
of Directors of Supermarkets is also authorized to adopt, amend and rescind
rules relating to the administration of the 1996 Stock Option Plan.
Nonqualified Stock Options will provide for the right to purchase
Supermarkets' Common Stock at a specified price which may be less than fair
market value on the date of grant (but not less than par value), and usually
will become exercisable in installments after the grant date. Nonqualified
stock options may be granted for any reasonable term.
Incentive Stock Options will be designed to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and will be subject
to restrictions contained in the Code, including exercise prices equal to at
least 100% of the fair market value of Supermarkets' Common Stock on the grant
date and a ten-year restriction on their term, but may be subsequently modified
to disqualify them from treatment as an incentive stock option.
Restricted Stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Board of Directors of Supermarkets. Restricted stock, typically, may be
repurchased by Supermarkets at the original purchase price if the conditions or
restrictions are not met. In general, restricted stock may not be sold, or
otherwise transferred or hypothecated, until restrictions are removed or
expire. Purchasers of restricted stock, unlike recipients of options, will
have voting rights and will receive dividends prior to the time when the
restrictions lapse.
Stock Appreciation Rights may be granted in connection with stock options
or other awards, or separately. SARs granted by the Board of Directors of
Supermarkets in connection with stock options or other awards typically will
provide for payments to the holder based upon increases in the price of
Supermarkets' Common Stock over the exercise price of the related option or
other awards, but alternatively may be based upon criteria such as book value.
Except as required by Section 162(m) of the Code with respect to any SAR
intended to qualify as performance-based compensation as described in
20
<PAGE> 22
Section 162(m)(4)(C) of the Code, there are no restrictions specified in the
1996 Equity Participation Plan on the exercise of SARs or the amount of gain
realizable therefrom, although restrictions may be imposed by the Board of
Directors of Supermarkets in the SAR agreements. The Board of Directors of
Supermarkets may elect to pay SARs in cash or in Supermarkets' Common Stock or
in a combination of both.
Performance Awards may be granted by the Board of Directors of
Supermarkets on an individual or group basis. Generally, these awards will be
based upon specific agreements and may be paid in cash or in Supermarkets'
Common Stock. Performance awards may include "phantom" stock awards that
provide for payments based upon increases in the price of the Supermarkets'
Common Stock over a predetermined period. Performance awards may also include
bonuses which may be granted by the Board of Directors of Supermarkets on an
individual or group basis and which my be payable in cash or in Supermarkets'
Common Stock or in a combination of cash and Supermarkets' Common Stock.
Dividend Equivalents represent the value of the dividends per share paid
by Supermarkets, calculated with reference to the number of shares covered by
the stock options, SARs or other awards held by the participant.
Stock Payments may be authorized by the Board of Directors of Supermarkets
in the form of shares of Supermarkets' Common Stock or an option or other right
to purchase Supermarkets' Common Stock as part of a deferred compensation
arrangement in lieu of all or any part of compensation, including bonuses, that
would otherwise be payable in cash to the key employee or consultant.
A maximum of 1,000,000 shares have been reserved for issuance under the
1996 Equity Participation Plan.
YEAR-END OPTION VALUE TABLE
No Named Executive Officer was granted stock options during the fiscal
year ended November 2, 1996 and no Named Executive Officer exercised stock
options during the fiscal year ended November 2, 1996. The following table
sets forth certain information concerning the number of stock options held by
the Named Executive Officers as of November 2, 1996, and the value (based on
the fair market value of a share of stock at fiscal year-end) of in-the-money
options outstanding as of such date.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT NOVEMBER 2, 1996 AT NOVEMBER 2, 1996
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald W. Burkle -- -- -- --
Robert A. Mariano 29,276 117,104 370,927 1,483,708
Darren W. Karst 14,638 58,552 185,463 741,854
Robert E. McCoy 97,591 48,788 1,736,144 618,144
Herbert R. Young 97,591 48,788 1,736,144 618,144
John W. Boyle 7,318 29,276 92,719 370,927
</TABLE>
MANAGEMENT INCENTIVE PLAN
The Company's Management Incentive Plan (the "MIP program") covers all
executive officers and other key managers. Its purpose is to provide a direct
financial incentive in the form of an annual bonus to achieve or exceed
pre-determined financial and individual objectives. The MIP program provides
for varying levels of payout to participants depending on the individuals level
within the organization. The Chief Executive Officer may receive a bonus
ranging from 0% to 200% of base salary. Executive Vice Presidents may receive
a bonus of up to 100% of base salary, and Group Vice Presidents may receive a
bonus of up to 75% of base salary, except for Herbert R, Young, who is eligible
to receive a bonus of up to 100% of base salary pursuant to his employment
agreement.
SENIOR MANAGEMENT DISABILITY PLANS
The Company maintains a Short Term Disability Plan ("STD Plan") for its
senior management. Under the STD Plan, an eligible employee who is disabled
will receive payments equal to either 66.67% or 100% of base salary, depending
upon the length of service with the Company, for a period of up to 26 weeks.
An eligible employee is considered disabled if, as a result of injury, covered
illness or pregnancy, the employee is unable to perform the duties of the
officer's regular occupation.
The Company also maintains a Long Term Disability Plan ("LTD Plan") for
its senior management, which is designed to provide salary continuation beyond
the coverage extended through the STD Plan. Under the LTD Plan, an eligible
employee who is disabled for 180 days will receive monthly payments equal to
60% of the employee's monthly earnings (base salary plus bonus), not to exceed
a maximum of $30,000 per month, for the benefit duration specified in the LTD
Plan. An eligible employee is considered disabled if, as a result of injury or
illness for which the employee is under a doctor's care, the employee cannot
perform all of the material and substantial duties of the employee's regular
occupation.
21
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SUMMARY OWNERSHIP
All of the capital stock of the Company is owned by Supermarkets. For a
description of the security ownership of Supermarkets, please refer to
Supermarkets' definitive proxy statement for its 1997 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain Beneficial Owners
and Management."
DESCRIPTION OF CAPITAL STOCK
THE COMPANY
The authorized capital stock of the Company consists of 1,000 shares of
Common Stock, $.01 par value per share, all of which are outstanding and are
owned by Supermarkets. There is no public trading market for the common stock
of the Company. The indenture governing the Senior Subordinated Notes (the
"Indenture") and the New Credit Facilities contain certain restrictions on the
payment of cash dividends with respect to the Company's Common Stock. Subject
to the limitations contained in such Indenture and the New Credit Facilities,
Supermarkets will be entitled to dividends when and as declared by the Board
of Directors of the Company from funds legally available therefor.
STOCKHOLDERS AGREEMENTS
Under the terms of the Stockholders Agreement entered into by the Company,
Supermarkets, certain affiliates of Yucaipa and Apollo Advisors, L.P.
("Apollo") and certain other stockholders of Supermarkets, Yucaipa is entitled
to nominate six directors to the Board of Directors and the board of directors
of Supermarkets. Yucaipa's right to nominate members to such boards of
directors will be reduced by three if Mr. Burkle ceases for any reason to
beneficially own at least 33 1/3% of the shares of Supermarkets Common Stock
beneficially owned by Yucaipa on the date of the Acquisition and shall
terminate if Mr. Burkle ceases for any reason (including death) to beneficially
own at least 25% of the shares of Supermarkets Common Stock beneficially owned
by Yucaipa on such date. The Stockholders Agreement entitles Apollo to
nominate three directors to the Board of Directors and the board of directors
of Supermarkets. Apollo's right to nominate members to such boards of
directors will be reduced by one if Apollo ceases to beneficially own at least
33 1/3% of the shares of Supermarkets Common Stock beneficially owned by Apollo
on the date of the Acquisition and shall terminate if Apollo ceases to
beneficially own at least 25% of the shares of Supermarkets Common Stock
beneficially owned by Apollo on such date. If Apollo ceases to own at least
25% of the shares of Supermarkets Common Stock beneficially owned by Apollo on
the date of the Acquisition and the parties to the Stockholders Agreement other
than Apollo beneficially own at least 33 1/3% of the shares of Supermarkets
Common Stock beneficially owned by such stockholders on the date of the
Acquisition, Yucaipa will be entitled to nominate an additional member to the
Board of Directors and the board of directors of Supermarkets. Notwithstanding
the foregoing, however, Apollo may assign its rights to nominate two directors
to a transferee (other than an affiliate of Yucaipa) acquiring at least 66 2/3%
of the shares held by Apollo nominees. The Yucaipa nominees to such boards are
Messrs. Burkle, Resnik, Karst, Graham and Mariano and Ms. Figel. The Apollo
nominees are Messrs. Copses, Kaplan and Ressler. In addition, Apollo and
certain other stockholders will have the right to participate in any bona fide
transfer of the pecuniary interests in Supermarkets Common Stock beneficially
owned by Yucaipa and its affiliates. In certain circumstances, Yucaipa will
have the right to compel the participation of Apollo and other stockholders in
sales of all the outstanding shares of Supermarkets stock. As of January 24,
1997, Yucaipa and its affiliates beneficially owned an aggregate of 2,924,059
shares of the Common Stock of Supermarkets and Apollo and its affiliates
beneficially owned an aggregate of 5,855,181 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
YUCAIPA CONSULTING AGREEMENT
On March 22, 1995, the Company and Supermarkets entered into a five-year
consulting agreement (the "Consulting Agreement") with Yucaipa for certain
management and financial advisory services to be provided to the Company and
its subsidiaries. During the term of the Consulting Agreement The services of
Messrs. Burkle, Resnik and Graham and Ms. Figel, and the services of other
Yucaipa personnel (other than Mr. Karst) were provided to the Company,
Supermarkets and their respective subsidiaries pursuant to the Consulting
Agreement. See "Management." Messrs. Burkle, Resnik and Graham and Ms. Figel,
together with Mr. Karst, are general partners of Yucaipa. The Consulting
Agreement provided for the payment to Yucaipa of annual management fees in an
amount equal to two percent (2.0%) of the Company's EBITDA (defined in the
Consulting Agreement as net income (or loss) of the Company and its
subsidiaries on a consolidated basis, determined in accordance with generally
accepted accounting principles, excluding (i) all net extraordinary gains or
losses, (ii) total interest expense of the Company and its subsidiaries on a
consolidated basis, (iii) provisions for taxes based on income, (iv) total
depreciation expense, (v) total amortization expense, (vi) LIFO provision, and
(vii) other non-cash items reducing net income and other non-cash items
increasing net income), plus reimbursement of out-of-pocket expenses. In
connection with the its initial public offering, Supermarkets paid $10.5
million to Yucaipa to terminate its obligations under the Consulting Agreement.
Pursuant to the Consulting Agreement, Yucaipa received a fee of $14.0 million
for consulting and other services provided in connection with the Acquisition.
Fees paid or accrued under the Consulting Agreement in connection with
management services were approximately $1.5 million during the 32 weeks ended
October 28, 1995 and $2.6 million during the 53 weeks ended November 2, 1996.
22
<PAGE> 24
MANAGEMENT AGREEMENT
In order to obtain future services from Yucaipa, the Company and
Supermarkets entered into a five-year management agreement (the "Management
Agreement") with Yucaipa in connection with the initial public offering of
Supermarkets' Common Stock. The Management Agreement provides for the payment
of an annual fee to Yucaipa in the amount of $1.0 million per year. In
addition, Supermarkets may retain Yucaipa in an advisory capacity in connection
with certain acquisition or sale transactions, in which case the Company will
pay Yucaipa an advisory fee equal to one percent (1.0%) of the transaction
value. The term of the agreement will be automatically renewed on April 1 of
each year for a five-year term unless 90 days' notice is given by either party.
The Management Agreement may be terminated at any time by Supermarkets upon 90
days' written notice, provided that Yucaipa will be entitled to full payment of
the annual fee under the agreement for the remaining term thereof, unless
Supermarkets terminates for cause pursuant to the terms of the agreement.
Yucaipa may terminate the agreement if Supermarkets fails to make a payment due
thereunder, or upon a Change of Control (as generally defined in the Management
Agreement to include certain mergers and asset sales, and acquisitions of
beneficial ownership of greater than 51% of the Company's outstanding voting
securities by persons other than Yucaipa). Upon any such termination, Yucaipa
will be entitled to full payment of the annual fee for the remaining term of
the agreement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Financial Statements required to be filed hereunder are indexed on page
27.
2. Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or
notes thereto.
3. Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company.
3.2 Restated Bylaws of the Company.
4.1 Indenture, dated as of May 4, 1995, by and among the Company, Dodi
Hazelcrest, Inc. Dominick's Finer Foods, Inc. of Illinois,
Jerry's Deep Discount Centers, Inc., Kohl's of Bloomingdale, Inc., and
Save-It Discount Foods Corporation, as Subsidiary Guarantors, and
United States Trust Company of New York, as Trustee, with respect to
the 10 7/8 % Senior Subordinated Notes due 2005 of the Company.
(Incorporated by reference to Exhibit 10.11 to Dominick's Supermarkets,
Inc. Registration Statement on Form S-1, Number 333-14995).
10.1 Credit Agreement dated as of November 1, 1996 by and among
Dominick's Finer Foods, Inc., as Borrower, Dominick's Supermarkets,
Inc., as Guarantor, the lenders listed therein, Bankers Trust Company
and The Chase Manhattan Bank, as Co-Arrangers, and Bankers Trust
Company, as Administrative Agent. (Incorporated by reference to Exhibit
10.1 to Dominick's Supermarkets, Inc. Annual Report on Form 10-K for
the fiscal year ended November 2, 1996).
10.2 Stock Purchase Agreement dated as of January 17, 1995 by and
among DFF Holdings, Inc., DFF Sub, Inc., Dodi L.L.C., Dodi Family
L.L.C. and Dodi Developments L.L.C. (Incorporated by reference to
Exhibit 10.2 to Dominick's Supermarkets, Inc. Registration Statement on
Form S-1, Number 333-14995).
23
<PAGE> 25
10.3 Tax Matters Agreement dated as of March 22, 1995 by and among
Dominick's Supermarkets, Inc., DFF Supermarkets, Inc., Dominick's Finer
Foods, Inc., Dodi L.L.C., Dodi Family L.L.C., Dodi Developments L.L.C.,
Dodi, Inc., Blackhawk Developments, Inc., Blackhawk Properties, Inc.,
Dominick's Finer Foods, Inc., of Illinois, Dodi Hazelcrest, Inc., Kohl's
of Bloomingdale, Inc., Jerry's Deep Discount Centers, Inc. and Save-It
Discount Foods Corporation. (Incorporated by reference to Exhibit 10.3 to
Dominick's Supermarkets, Inc. Registration Statement on Form S-1, Number
333-14995).
10.4 Employment Agreement dated as of March 22, 1995 between the Company and
Robert A. Mariano. (Incorporated by reference to Exhibit 10.4 to
Dominick's Supermarkets, Inc. Registration Statement on Form S-1, Number
333-14995).
10.5 Employment Agreement dated as of March 22, 1995 between the Company and
Robert E. McCoy. (Incorporated by reference to Exhibit 10.5 to Dominick's
Supermarkets, Inc. Registration Statement on Form S-1, Number 333-14995).
10.6 Employment Agreement dated as of March 22, 1995 between the Company and
Herbert R. Young. (Incorporated by reference to Exhibit 10.6 to
Dominick's Supermarkets, Inc. Registration Statement on Form S-1, Number
333-14995).
10.7 Management Agreement dated as of November 1, 1996 among The Yucaipa
Companies, the Company and Dominick's Supermarkets, Inc. (Incorporated by
reference to Exhibit 10.7 to Dominick's Supermarkets, Inc. Annual Report
on Form 10-K for the fiscal year ended November 2, 1996).
10.8 Amended and Restated Stockholders Agreement dated as of November 1,
1996 by and among the Dominick's Supermarkets, Inc., DFF Supermarkets,
Inc., Dominick's Finer Foods, Inc. and the stockholders of Dominick's
Supermarkets, Inc. named therein. (Incorporated by reference to Exhibit
10.8 to Dominick's Supermarkets, Inc. Annual Report on Form 10-K for the
fiscal year ended November 2, 1996).
10.9 Dominick's Supermarkets, Inc. Restated 1995 Stock Option
Plan. (Incorporated by reference to Exhibit 10.12 to Dominick's
Supermarkets, Inc. Annual Report on Form 10-K for the fiscal year ended
November 2, 1996).
10.10 Dominick's Supermarkets, Inc. 1996 Equity Participation Plan.
(Incorporated by reference to Exhibit 10.13 to Dominick's Supermarkets,
Inc. Annual Report on Form 10-K for the fiscal year ended November 2,
1996).
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8K filed by the Company during the fourth
quarter of fiscal 1996.
24
<PAGE> 26
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders. The
Registrant will furnish copies of such report or proxy material if and when
such report or proxy material is sent to security holders.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Dominick's Finer Foods Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Northlake, State of Illinois, on January 28, 1997.
DOMINICK'S FINER FOODS, INC.
By:
/s/ DARREN W. KARST
------------------------------
Darren W. Karst
Executive Vice President, Finance
and Administration, and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ RONALD W. BURKLE
- ----------------------------
Ronald W. Burkle Chairman of the Board January 28, 1997
/s/ ROBERT A. MARIANO
- ----------------------------
Robert A. Mariano President, Chief Executive
Officer, Director January 28, 1997
/s/ DARREN W. KARST
- ----------------------------
Darren W. Karst Executive Vice President,
Finance and Administration,
Chief Financial Officer
(Principal Accounting Officer),
Secretary, Director January 28, 1997
/s/ LINDA McLOUGHLIN FIGEL
- ----------------------------
Linda McLoughlin Figel Director January 28, 1997
/s/ PATRICK L. GRAHAM
- ----------------------------
Patrick L. Graham Director January 28, 1997
/s/ PETER P. COPSES
- ----------------------------
Peter P. Copses Director January 28, 1997
/s/ DAVID B. KAPLAN
- ----------------------------
David B. Kaplan Director January 28, 1997
/s/ ANTONY P. RESSLER
- ----------------------------
Antony P. Ressler Director January 28, 1997
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Report of Independent Auditors .................................................28
Consolidated Balance Sheets as of October 28, 1995 and November 2, 1996 ....... 29
Consolidated Statements of Operations for the 52 weeks ended October 29, 1994,
the 20 weeks ended March 21, 1995 (Predecessor Company), the 32 weeks ended
October 28, 1995, and the 53 weeks ended November 2, 1996...................... 30
Consolidated Statements of Stockholder's Equity for the 52 weeks ended
October 29, 1994, the 20 weeks ended March 21, 1995 (Predecessor Company),
the 32 weeks ended October 28, 1995 and the 53 weeks ended November 2, 1996 ... 31
Consolidated Statements of Cash Flows for the 52 weeks ended October 29, 1994,
the 20 weeks ended March 21, 1995 (Predecessor Company), the 32 weeks ended
October 28, 1995, and the 53 weeks ended November 2, 1996 ..................... 32
Notes to Consolidated Financial Statements...................................... 33
</TABLE>
27
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Dominick's Finer Foods, Inc.
We have audited the accompanying consolidated balance sheets of Dominick's
Finer Foods, Inc. as of November 2, 1996 and October 28, 1995, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the fiscal year ended October 29, 1994, the period October 30, 1994 through
March 21, 1995 (Predecessor Company), the period March 22, 1995 through October
28, 1995, and for the fiscal year ended November 2, 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 consolidated financial position of Dominick's
Finer Foods, Inc. at November 2, 1996 and October 28, 1995, and the results of
its operations and its cash flows for the fiscal year ended October 29, 1994,
the period October 30, 1994 through March 21, 1995 (Predecessor Company), the
period March 22, 1995 through October 28, 1995, and for the fiscal year ended
November 2, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994,
the Predecessor Company changed its method of accounting for income taxes.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
28
<PAGE> 30
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCT. 28, NOV. 2,
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $55,551 $32,735
Receivables, net ............................................ 25,314 16,723
Inventories ................................................. 182,880 203,411
Prepaid expenses & other .................................... 10,573 21,860
---------- ----------
Total current assets ................................... 274,318 274,729
Property and equipment, net ................................. 353,015 368,224
Other assets:
Deferred financing costs, net ............................... 22,567 11,524
Goodwill, net ............................................... 419,298 420,182
Other, net .................................................. 30,916 27,546
---------- ----------
Total other assets ..................................... 472,781 459,252
---------- ----------
Total assets ................................................. $1,100,114 $1,102,205
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ............................................ $171,209 $187,787
Accrued payroll and related liabilities ..................... 31,579 30,896
Taxes payable ............................................... 7,958 18,234
Other accrued liabilities ................................... 83,422 61,465
Current portion of long-term debt ........................... 9,771 376
Current portion of capital lease obligations ................ 4,565 9,676
---------- ----------
Total current liabilities .............................. 308,504 308,434
Long-term debt:
Bank Credit Facilities and other ............................ 281,109 200,644
Senior Subordinated Notes ................................... 200,000 200,000
Capital lease obligations .................................... 103,921 130,052
Deferred income taxes and other liabilities .................. 66,730 84,004
Common Stock, $.01 par value 1,000 shares authorized, issued
and outstanding at October 28, 1995 and November 2, 1996 .. -- --
Additional paid-in capital ................................... 147,798 193,951
Retained deficit ............................................. (7,948) (14,880)
---------- ----------
Total stockholder's equity ............................ 139,850 179,071
---------- ----------
Total liabilities and stockholder's equity ................... $1,100,114 $1,102,205
========== ==========
</TABLE>
See accompanying notes.
29
<PAGE> 31
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
---------------------- --------------------------
52 WEEKS 20 WEEKS 32 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
OCT. 29, MARCH 21, OCT. 28, NOV. 2,
1994 1995 1995 1996
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $2,409,911 $ 958,742 $ 1,474,982 $ 2,511,962
Cost of sales 1,871,535 747,561 1,136,600 1,932,994
---------- ---------- ------------ ------------
Gross profit 538,376 211,181 338,382 578,968
Selling, general and administrative
expenses 484,288 191,999 293,872 491,359
SARs termination costs -- 26,152 -- --
Termination of consulting agreement -- -- -- 10,500
---------- ---------- ------------ ------------
Operating income (loss) 54,088 (6,970) 44,510 77,109
Interest expense:
Interest expense 29,857 11,238 44,480 67,555
Amortization of deferred financing costs 135 69 1,460 2,741
---------- ---------- ------------ ------------
29,992 11,307 45,940 70,296
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of accounting change 24,096 (18,277) (1,430) 6,813
Income tax expense (benefit) 9,236 (7,135) 1,933 7,385
Income (loss) before extraordinary ---------- ---------- ------------ -------------
loss and cumulative effect of
accounting change 14,860 (11,142) (3,363) (572)
Extraordinary loss on extinguishment of
debt, net of applicable tax benefit of
$3,896 in fiscal 1994, $2,824 in the
32 weeks ended October 28, 1995
and $4,195 in fiscal 1996 (6,324) -- (4,585) (6,360)
Cumulative effect of accounting change (1,019) -- -- --
---------- --------- ------------ -------------
Net income (loss) $ 7,517 $ (11,142) $ (7,948) $ (6,932)
========== ======== ============ =============
</TABLE>
See accompanying notes.
30
<PAGE> 32
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------- PAID-IN EARNINGS
PREDECESSOR COMPANY SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 30, 1993 264,300 $26 $396 $109,822 $110,244
Net income .......................... -- -- -- 7,517 7,517
Cash dividend--$3.00 per share ...... -- -- -- (793) (793)
Common stock purchased and retired .. (700) -- (62) (233) (295)
------- ------ ------- -------- --------
BALANCE AT OCTOBER 29, 1994 263,600 26 334 116,313 116,673
Net loss ............................ -- -- -- (11,142) (11,142)
Cash dividend--$3.00 per share ...... -- -- -- (791) (791)
------- ------ ------- -------- --------
BALANCE AT MARCH 21, 1995 263,600 $26 $334 $104,380 $104,740
======= ====== ======= ======== ========
===============================================================================================
COMPANY
BALANCE AT MARCH 22, 1995 -- $-- $ -- $ -- $ --
Issuance of common stock ............ 1,000 -- 145,000 -- 145,000
Net loss ............................ -- -- -- (7,948) (7,948)
Contribution of capital, other -- -- 2,798 -- 2,798
------- --- -------- ------- --------
BALANCE AT OCTOBER 28, 1995 1,000 -- 147,798 (7,948) 139,850
Net loss ............................ -- -- -- (6,932) (6,932)
Contribution of capital, other ...... -- -- 46,153 -- 46,153
------- --- -------- ------- --------
BALANCE AT NOVEMBER 2, 1996 1,000 $-- $193,951 $(14,880) $179,071
======= === ======== ======== ========
</TABLE>
See accompanying notes.
31
<PAGE> 33
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------ -----------------
52 WEEKS 20 WEEKS 32 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
OCT. 29, MARCH 21, OCT. 28, NOV. 2,
1994 1995 1995 1996
------- -------- --------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $7,517 $ (11,142) $(7,948) $(6,932)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss on debt extinguishment -- -- 7,409 10,555
Depreciation and amortization 52,862 20,499 25,364 45,924
Amortization of deferred financing costs 135 69 1,460 2,741
Stock appreciation rights 1,966 26,825 -- --
Deferred income taxes (645) (3,890) 7,625 4,315
Cumulative effect of accounting change 1,019 -- -- --
Loss (gain) on disposal of capital assets 74 1,149 (25) (1,224)
Changes in operating assets and
liabilities, net of acquisition:
Receivables 6,794 2,546 (5,218) 8,491
Inventories (10,780) 7,209 (683) (20,531)
Prepaid expenses 1,072 (1,890) 2,783 (6,952)
Accounts payable 10,296 (10,217) 31,246 16,464
Accrued liabilities and taxes payable 2,848 (11,147) (241) (11,731)
-------- --------- --------- ---------
Total adjustments 65,641 31,153 69,720 48,052
-------- --------- --------- ---------
Net cash provided BY operating activities 73,158 20,011 61,772 41,120
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of capital assets 3,995 380 1,317 1,287
Capital expenditures (60,056) (22,423) (23,125) (49,588)
Proceeds from sale of investments -- 7,300 -- --
Business acquisition cost, net of
cash acquired -- -- (442,777) --
Other--net 543 116 (31) (260)
-------- --------- --------- ---------
Net cash used in investing activities (55,518) (14,627) (464,616) (48,561)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments for long-term debt
and capital lease obligations (68,303) (5,363) (131,145) (291,517)
Proceeds from sale-leaseback of assets -- -- -- 37,307
Proceeds from debt issuances 40,214 -- 480,000 195,000
Proceeds from issuance of capital stock -- -- 100,000 --
Contribution of capital -- -- -- 46,153
Debt issuance costs and other (1,329) (791) (7,784) (2,318)
Net cash provided by (used in) ------- ------ ------- -------
financing activities (29,418) (6,154) 441,071 (15,375)
Net increase (decrease) in cash and ------- ------ ------- -------
cash equivalents (11,778) (770) 38,227 (22,816)
Cash and cash equivalents at beginning
of period 29,872 18,094 17,324 55,551
Cash and cash equivalents at end ------- ------ ------- ------
of period $18,094 $17,324 $55,551 $32,735
======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of business:
Fair value of assets acquired, net
of cash required $1,056,627
Net cash paid in acquisition (442,777)
Exchange of capital stock (40,000)
Management equity investment (5,000)
----------
Liabilities assumed $ 568,850
==========
Contribution of capital in exchange
for debt financing fees $ 2,647
==========
</TABLE>
See accompanying notes.
32
<PAGE> 34
DOMINICK'S FINER FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Dominick's Finer Foods, Inc. (together with its subsidiaries, the
"Company") was acquired by Dominick's Supermarkets, Inc. ("Supermarkets") on
March 22, 1995 for total consideration of approximately $692.9 million,
excluding fees and expenses of approximately $41.2 million (the "Acquisition").
Supermarkets effected the Acquisition by acquiring 100% of the capital stock
of the Company's parent, DFF Supermarkets, Inc. ("DFF"), formerly known as Dodi
Inc. ("Dodi") for $346.6 million in cash and $40 million of Supermarkets' 15%
Redeemable Exchangeable Cumulative Preferred Stock ("Redeemable Preferred
Stock"). DFF was subsequently merged into the Company. In addition,
Supermarkets repaid $34.3 million of secured promissory notes issued by the
Company prior to the Acquisition to discharge all obligations under its stock
appreciation rights ("SARs") plan and to repurchase shares of the Company's
restricted stock held by certain management employees. In connection with the
Acquisition, Supermarkets' refinanced $135.7 million of the Company's existing
indebtedness, assumed $124.5 million of existing capital leases and other
indebtedness and paid $11.8 million of employment termination, seller advisory
and other seller fees and expenses. The Acquisition was accounted for as a
purchase of the Company by Supermarkets. As a result, the Company's assets and
liabilities were recorded at their estimated fair market values as of March 22,
1995. The purchase price in excess of the fair market value of the Company's
assets was recorded as goodwill and is being amortized over 40 years. For
purposes of financial statement presentation, the Predecessor Company refers to
the Company prior to the Acquisition.
A summary of the assets acquired and liabilities assumed as of March 22,
1995 is as follows (dollars in thousands):
<TABLE>
<S> <C>
Assets
Inventory ............................. $182,439
Other current assets .................. 37,632
Property and equipment, net ........... 345,303
Goodwill .............................. 438,150
Deferred financing costs .............. 22,722
Other intangible assets ............... 30,381
----------
Total Assets ....................... $1,056,627
==========
Liabilities
Accounts payable and accrued expenses.. $299,198
Long-term debt ........................ 237,511
Other liabilities ..................... 32,141
----------
Total Liabilities .................. $568,850
==========
</TABLE>
The following unaudited pro forma information presents the results of the
Company's operations adjusted primarily to reflect interest expense and
depreciation and amortization, as though the Acquisition had been made at the
beginning of each period (dollars in millions):
<TABLE> 52 WEEKS ENDED
<CAPTION> ------------------------
OCTOBER 29, OCTOBER 28,
1994 1995
----------- -----------
<S> <C> <C>
Sales .............................................. $2,409.9 $2,433.7
Loss before extraordinary loss and cumulative effect
of accounting change .............................. (8.9) (6.0)
Net loss ........................................... (16.2) (10.6)
</TABLE>
The Company uses a 52-53 week fiscal year ending on the Saturday closest
to October 31. Fiscal 1994 and fiscal 1995 were 52-week periods while fiscal
1996 was a 53-week period. Fiscal 1995 consists of a 20-week Predecessor
Company period ending March 21, 1995 and a 32-week Company period ending
October 28, 1995 (collectively "fiscal 1995"). The Company operates
supermarkets in Chicago, Illinois, and its suburbs. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. The Company is a wholly owned subsidiary of Supermarkets.
Supermarkets has no operations and its only asset at November 2, 1996 was $50.8
million of cash which was used to repurchase all of the Redeemable Preferred
Stock on January 2, 1997.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
33
<PAGE> 35
Inventories
Inventories are stated at the lower of cost, primarily using the last-in,
first-out (LIFO) method, or market. If inventories had been valued using
replacement cost, inventories would have been higher by $1,937,000 at October
28, 1995 and $3,355,000 at November 2, 1996 and gross profit and operating
income would have been greater by $1,089,000, $750,000, $1,694,000 and
$1,418,000 for fiscal 1994, the 20 weeks ended March 21, 1995, the 32 weeks
ended October 28, 1995 and fiscal 1996, respectively.
Pre-Opening Costs
The costs associated with opening new and remodeled stores are deferred
and amortized over one year following the opening of each store.
Property and Equipment
Property and equipment, including buildings capitalized under capital
leases, are recorded at cost. Depreciation and amortization are computed on
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements 10-33 years
Fixtures and equipment 3-12 years
Property under capital leases and lease rights 5-25 years
</TABLE>
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are amortized over
the term of the related debt using the effective interest method.
Goodwill and Trademarks
The excess of the purchase price over the fair value of the net assets
acquired is amortized on a straight-line basis over 40 years beginning at the
date of acquisition. Current and undiscounted future operating cash flows are
compared to current and undiscounted future goodwill amortization on a periodic
basis (not less than annually) to determine if an impairment of goodwill has
occurred. Trademarks, which are included in other assets, are amortized on a
straight-line basis over 40 years. Accumulated amortization related to
goodwill and trademarks at October 28, 1995 and November 2, 1996 was $6,865,000
and $18,587,000, respectively.
Income Taxes
The Predecessor Company changed its method of accounting for income taxes
from the deferred method to the liability method as required by the Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes. As
permitted by Statement 109, prior-year financial statements have not been
restated to reflect the change in accounting method. The cumulative effect on
prior years of adopting Statement 109 as of October 31, 1993 was to decrease
fiscal 1994 net income by $1,019,000. Under Statement 109, deferred income
taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities used for financial reporting purposes and the
amounts used for income tax purposes.
Closed Store Reserves
The Company provides a reserve for the net book value of any store assets,
net of salvage value, and the net present value of the remaining lease
obligation, net of estimated sublease income for stores that have closed or are
planned to be closed. Included in liabilities assumed in the purchase price
allocation are certain closed store reserves. Total closed store reserves were
$25.6 million at November 2, 1996.
Self-Insurance Reserves
The Company is self-insured for its workers' compensation and general
liability claims. The Company establishes reserves based on an independent
actuary's review of claims filed and an estimate of claims incurred but not yet
filed.
Discounts and Promotional Allowances
Promotional allowances and vendor discounts are recorded as a reduction of
cost of sales in the accompanying Consolidated Statements of Operations.
Allowance proceeds received in advance are deferred and recognized over the
period earned.
34
<PAGE> 36
Extraordinary Loss
During fiscal 1994, the Predecessor Company retired $60 million of its
11.78% Senior Notes, which resulted in an extraordinary loss on early
extinguishment of debt of $6,324,000, net of applicable tax benefit of
$3,896,000. During fiscal 1995, the Company used the proceeds from the
offering of $200 million of Senior Subordinated Notes due 2005 (the "Senior
Subordinated Notes") to repay in full the $150 million senior subordinated
credit facility and to prepay $50 million of its then existing credit facility
which resulted in an extraordinary loss on early extinguishment of debt of
$4,585,000, net of tax benefit of $2,824,000. On November 1, 1996, the Company
repaid its Old Credit Facility (see Note 3) which resulted in an extraordinary
loss on early extinguishment of debt of $6,360,000, net of tax benefit of
$4,195,000. The accompanying financial statements reflect these charges as
extraordinary items.
Advertising
The Company expenses its advertising costs as incurred. Advertising
expenses were $30,086,000, $11,472,000, $16,540,000 and $29,864,000 for fiscal
1994, the 20 weeks ended March 21, 1995, the 32 weeks ended October 28, 1995
and fiscal 1996, respectively.
Supplemental Cash Flow Disclosure
Cash paid for income taxes was $5,555,000, $3,115,000, $4,230,000 and
$110,000 for fiscal 1994, the 20 weeks ended March 21, 1995, the 32 weeks ended
October 28, 1995 and fiscal 1996, respectively. Cash paid for interest was
$37,704,000, $15,835,000, $35,638,000 and $76,563,000 for fiscal 1994, the 20
weeks ended March 21, 1995, the 32 weeks ended October 28, 1995, and fiscal
1996, respectively. Capital lease obligations of $235,000 and $37,900,000 were
entered into during fiscal 1994 and fiscal 1996, respectively. None were
entered into in fiscal 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts in the financial statements have been
reclassified to conform with the November 2, 1996 presentation.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in fiscal 1997 and, based on current
circumstances, does not believe the effect of the adoption will be material.
The Financial Accounting Standards Board issued Statement No. 123,
Accounting for Stock Based Compensation, which allows the adoption of a fair
value based method of expense recognition for stock-based compensation awards
granted to employees or allows companies to continue to apply Accounting
Principles Board Opinion No. 25, Accounting for Stock issued to Employees ("APB
25"), and disclose pro forma net income and earnings per share calculated as if
Statement 123 had been adopted. Under APB 25, when the exercise price of
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Company
intends to continue to apply APB 25 and make the appropriate pro forma
disclosure beginning in fiscal 1997.
35
<PAGE> 37
2. PROPERTY, EQUIPMENT AND CAPITAL LEASES
Property, equipment and capital leases consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
OCT. 28, NOV. 2,
1995 1996
-------- --------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Land .......................................... $37,795 $35,952
Buildings and leasehold improvements .......... 72,518 76,387
Fixtures and equipment ........................ 113,293 104,391
Construction in progress ...................... 2,471 20,667
Lease rights .................................. 50,229 46,465
-------- --------
CAPITAL LEASES
Buildings ..................................... 94,501 94,501
Fixtures and equipment ........................ 440 38,340
-------- --------
Total ..................................... 371,247 416,703
Less Accumulated depreciation and amortization:
Property and equipment (13,159) (32,734)
Capital leases ............................... (5,073) (15,745)
-------- --------
$353,015 $368,224
======== ========
</TABLE>
3. LONG-TERM DEBT
Long-term senior debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
OCT. 28, NOV. 2,
1995 1996
---------- --------
<S> <C> <C>
Revolving Credit Facility ............................................. $ -- $ 95,000
Term Loan ............................................................. -- 100,000
Old Credit Facility.................................................... 279,129 --
Other ................................................................. 11,751 6,020
-------- --------
290,880 201,020
Less: Current portion ................................................. 9,771 376
-------- --------
$281,109 $200,644
======== ========
</TABLE>
On November 1, 1996, the Company entered into a credit facility with a
syndicate of financial institutions (the "New Credit Facility"). The New
Credit Facility provides for a $100 million amortizing term loan (the "New Term
Loan"), a $105 million revolving term facility (the "New Revolving Term
Facility") and a $120 million revolving facility (the "New Revolving Facility"
and together with the New Revolving Term Facility the "New Revolving
Facilities"), each of which has a six and one-half year term. The New
Revolving Facility is available for working capital and general corporate
purposes, including up to $50 million to support letters of credit. The
Company utilizes letters of credit to cover workers' compensation
self-insurance liabilities and for other general purposes. Letters of credit
for approximately $17.2 million were issued under the New Credit Facility at
November 2, 1996. Up to $20 million of the New Revolving Facility is available
as a swingline facility (i.e., a facility which permits same-day borrowings
directly from the agent under the New Credit Facility). The Company is not
required to reduce borrowings under the New Revolving Facilities by a specified
amount each year. The New Term Loan requires quarterly amortization payments
commencing in fiscal 1998 in amounts ranging from $2.5 million to $7.5 million
per quarter. The Company will also be required to make prepayments under the
New Credit Facility, subject to certain exceptions, with a percentage of its
consolidated excess cash flow and with the proceeds from certain asset sales,
issuances of debt securities and any pension plan reversions. The New Credit
Facility is guaranteed by Supermarkets.
Borrowings under the New Credit Facility bear interest at a rate equal to,
at the option of the Company, the Base Rate (as defined) plus a maximum .50%
per annum or the reserve adjusted Euro-Dollar Rate (as defined) plus a maximum
1.5% per annum (subject to reduction). Up to $20 million of the Revolving
Facility is available as a swingline facility and loans outstanding under the
swingline facility shall bear interest at the Base Rate plus .125% per annum
(subject to reduction as certain financial tests are satisfied). The Company
will pay the issuing bank a fee of .25% per annum on each standby letter of
credit and a fee to be negotiated with the issuing bank on each commercial
letter of credit and will pay the lenders under the New Revolving Facility a
letter of credit fee for standby letters of credit and commercial letters of
credit equal to the applicable margin for Euro-Dollar loans under the Revolving
Facility. In addition, the Company will pay a commitment fee on the unused
portions of the Revolving Term Facility and Revolving Facility. The New Credit
Facility may be prepaid in whole or in part without premium or penalty.
36
<PAGE> 38
In connection with the Acquisition, the Company and its subsidiaries
entered into a credit facility with a syndicate of financial institutions (the
"Old Credit Facility"). The Old Credit Facility initially provided for (i)
term loans in the aggregate amount of $330 million, comprised of $140 million
Tranche A Loans, $60 million Tranche B Loans, $65 million Tranche C Loans, and
$65 million Tranche D Loans; and (ii) a $100 million Revolving Credit Facility.
The Old Credit Facility was repaid on November 1, 1996.
The New Credit Facility, among other things, requires the Company to
maintain minimum levels of Consolidated Net Worth (as defined), and to comply
with certain ratios related to Fixed Charges (as defined) and Indebtedness (as
defined). In addition, the New Credit Facility limits, among other things,
additional borrowings, dividends on, and redemption of capital stock, certain
other payments from the Company to Supermarkets, capital expenditures,
incurrence of lease obligations, and the acquisition and disposition of assets.
At November 2, 1996, the Company and its subsidiaries were in compliance with
the financial covenants of its debt agreements.
Substantially all of the assets of the Company and its subsidiaries are
pledged as security under the New Credit Facility or other long-term debt.
On May 4, 1995, the Company issued $200 million principal amount of Senior
Subordinated Notes in connection with the Acquisition. The Senior Subordinated
Notes bear interest, payable semi-annually on May 1 and November 1, at an
annual rate of 10.875%. The Senior Subordinated Notes, which are due on May 1,
2005, are subordinated to all Senior Indebtedness (as defined) of the Company,
and may be redeemed beginning in fiscal year 2000 at a redemption price of
104.833%. The redemption price declines ratably to 100% in fiscal 2004. In
addition, on or prior to May 1, 1998, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined) to redeem
up to an aggregate of $66.7 million principal amount of the Senior
Subordinated Notes at redemption prices of 109.667% in 1996, declining to
108.458% in 1997.
Aggregate maturities of long-term debt as of November 2, 1996, excluding
capital lease obligations, for each of the next five fiscal years are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1997 .................................................... $376
1998 .................................................... 7,877
1999 .................................................... 10,318
2000 .................................................... 14,097
2001 .................................................... 19,113
During fiscal 1996 the Company's effective interest rate was 9.2%.
</TABLE>
4. LEASES
The Company leases land, retail stores, and equipment. Many of the
property leases obligate the Company to pay real estate taxes, insurance, and
maintenance costs and contain multiple renewal options generally covering
additional periods ranging from 15 to 30 years. Many of the leases require
contingent rental payments, which are based primarily upon sales at the various
retail stores, adjusted for certain expenses paid by the Company. Rent expense
totaled $17,704,000 including $275,000 for contingent rentals for fiscal 1994,
$6,511,000 and $167,000, respectively, for the 20 weeks ended March 21, 1995,
$10,419,000 and $271,000, respectively for the 32 weeks ended October 28, 1995
and $17,710,000 and $525,000, respectively for fiscal 1996.
The future minimum lease payments under noncancelable operating and
capital leases as of November 2, 1996 for each of the next five fiscal years
and thereafter are as follows (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ---------
<S> <C> <C>
1997 $ 21,265 $ 25,704
1998 21,282 25,582
1999 21,265 25,529
2000 21,625 25,086
2001 21,215 24,308
Thereafter 190,919 119,643
-------- --------
Total minimum lease payments $297,571 245,852
========
Less: Amount representing interest (106,124)
--------
Present value of net minimum lease payments $139,728
========
The present value of net minimum capital lease payments includes $28,173,000 due to related parties.
</TABLE>
During fiscal 1996, the Company entered into certain sale and leaseback
agreements whereby certain fixtures and equipment were sold for approximately
$37.3 million and then leased back. A gain of $3.7 million was realized on the
sales which has been deferred and is being amortized over the lives of the
leases.
37
<PAGE> 39
5. CAPITAL STOCK
The authorized capital stock of the Company consists of 1,000 shares of
common stock, $.01 par value per share, all of which are outstanding and are
owned by Supermarkets. There is no public trading market for the common stock
of the Company. The Company's principal debt instruments contain certain
restrictions on the payment of cash dividends with respect to the Company's
common stock. Subject to the limitations contained in such principal debt
instruments, Supermarkets will be entitled to dividends when and as declared by
the Board of Directors of the Company from funds legally available therefor.
Supermarkets' Redeemable Preferred Stock has been pushed-down for
accounting purposes and is included in additional paid-in-capital on the
accompanying financial statements.
On November 1, 1996, Supermarkets contributed $46.1 million of capital to
the Company in connection with its initial public offering.
Stock Appreciation Rights Plan (Predecessor Company)
The Predecessor Company had a Stock Appreciation Rights ("SARs") plan for
certain officers and key management employees. The plan provided for
additional compensation to be accrued on the difference between the book value
per share of common stock at the end of each fiscal year and the book value per
share at the later of the grant date or the last day of the prior fiscal year.
As a result of the Acquisition, the SARs became fully vested and were valued at
market value. Compensation expense incurred related to all SARs outstanding
was $1,966,000 in fiscal 1994 and $673,000 during the 20 weeks ended March 21,
1995. In connection with the Acquisition, all obligations under the Company's
stock appreciation rights plan were discharged and the plan was terminated. As
a result of the Acquisition, the Predecessor Company recorded a charge of
$26,152,000, reflecting the difference in fair market value and book value of
the SARs at March 21, 1995.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------- -------
52 WEEKS 20 WEEKS 32 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
OCT. 29, MARCH 21, OCT. 28, NOV. 2,
1994 1995 1995 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal .. $8,296 $(2,543) $ (4,539) $2,238
State .... 1,585 (702) (1,153) 833
-------- --------- -------- --------
9,881 (3,245) (5,692) 3,071
Deferred:
Federal .. (300) (3,027) 6,214 3,573
State .... (345) (863) 1,411 741
-------- --------- -------- --------
(645) (3,890) 7,625 4,314
-------- --------- -------- --------
$9,236 $(7,135) $1,933 $7,385
======== ========= ======== ========
</TABLE>
A reconciliation of the provision for income taxes to amounts computed at the
federal statutory rate of 35% is as follows (dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------- -------
52 WEEKS 20 WEEKS 32 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
OCT. 29, MARCH 21, OCT. 28, NOV. 2,
1994 1995 1995 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Federal income taxes at statutory
rate on income before provision for
income taxes, extraordinary loss
and cumulative effect of
accounting change ........................ $8,434 $(6,397) $ (501) $2,385
Non-tax deductible goodwill amortization .. -- -- 2,417 4,450
State income taxes, net of federal
income tax benefit ....................... 805 (828) 10 324
Other, net ................................ (3) 90 7 226
-------- --------- -------- --------
$9,236 $(7,135) $1,933 $7,385
======== ========= ======== =========
</TABLE>
38
<PAGE> 40
Significant components of the Company's deferred income tax liabilities
and assets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred income tax liabilities:
Inventory .............................. $10,773 $10,688
Property and equipment ................. 25,972 27,031
State income taxes ..................... 1,989 1,696
Trademarks ............................. 8,917 8,733
Other .................................. 3,521 2,462
------- -------
Total deferred income tax liabilities .. 51,172 50,610
Deferred income tax assets:
Accrued vacation ....................... 2,830 3,079
Capital leases ......................... 3,937 5,305
Alternative minimum tax ................ 6,386 6,385
Accrued self-insurance ................. 16,665 16,864
Capitalized inventory .................. 2,111 2,377
Other accrued liabilities .............. 21,567 19,958
Other .................................. 2,751 5,897
------- -------
Total deferred income tax assets ....... 56,247 59,865
------- -------
Net deferred income tax assets ......... (5,075) (9,255)
Less: Valuation allowance 11,120 11,120
------- -------
Net deferred income tax liabilities .... $6,045 $1,865
======= =======
</TABLE>
On March 22, 1995, Supermarkets entered into an income tax sharing
agreement with the Company and certain of its subsidiaries (the "Tax Sharing
Agreement"). The Tax Sharing Agreement provides that in any year in which the
Company is included in any consolidated tax return of Supermarkets and has
taxable income, the Company will pay to Supermarkets the amount of the tax
liability that the Company would have had on such date if it had been filing a
separate return, taking into account carry forwards (but not carry backs) of
tax losses and credits. In the event any state and local income taxes are
determined on a combined or consolidated basis, the Tax Sharing Agreement
provides for a similar allocation between Supermarkets and the Company of such
state and local taxes.
7. PROFIT-SHARING AND RETIREMENT PLANS
The Company has trusteed, contributory profit-sharing plans (the "Plans")
covering substantially all full-time employees. Plan participants are allowed
to contribute a specified percentage of their compensation into the Plans. The
amount of the Company's contribution is at the discretion of the Board of
Directors, subject to limitations of the Plans.
Under the provisions of several collective bargaining agreements covering
hourly paid employees, the Company is required to make pension contributions to
multi-employer retirement plans based primarily on hours worked by such
employees.
Retirement and profit-sharing plan expenses included in the Consolidated
Statements of Operations were $14,572,000 for fiscal 1994, and $5,950,000 for
the 20 weeks ended March 21, 1995, $8,638,000 for the 32 weeks ended October
28, 1995, and $14,408,000 for fiscal 1996.
8. RELATED PARTY TRANSACTIONS
The Company has a five-year management agreement with Yucaipa effective
November 1, 1996 for management and financial services. The agreement is
automatically renewed on April 1 of each year for a five-year term unless 90
days notice is given by either party. The agreement provides for annual
management fees equal to $1.0 million. In addition, the Company may retain
Yucaipa in an advisory capacity in connection with certain acquisition or sale
transactions and in such case will pay an advisory fee equal to 1% of the
transaction value.
On November 1, 1996, the Company terminated a previous consulting
agreement with Yucaipa, which agreement called for fees equal to 2% of EBITDA
(as defined). A fee of $10.5 million related to such termination was paid to
Yucaipa on November 1, 1996. In addition, pursuant to the old consulting
agreement, Yucaipa received a fee of $14 million for advisory and other
services provided in connection with the Acquisition. Fees paid or accrued
associated with management services were $1,490,000 during the 32 weeks ended
October 28, 1995 and $2,636,000 during fiscal 1996.
39
<PAGE> 41
9. COMMITMENTS AND CONTINGENCIES
On March 16, 1995, a lawsuit was filed against the Company by two former
employees of the Company. The plaintiffs' original complaint asserted
allegations of gender discrimination and sought compensatory and punitive
damages in an unspecified amount. The plaintiffs subsequently filed two
amendments to the original complaint which have added seven additional
plaintiffs and asserted allegations of national origin discrimination. The
plaintiffs' motion for class certification is currently pending before the
court. The Company plans to vigorously defend this lawsuit. Based upon the
current state of the proceedings, the Company's assessment to date of the
underlying facts and circumstances and the other information currently
available, and although no assurances can be given, the Company does not
believe that the resolution of this litigation will have a material adverse
effect on the Company's overall liquidity. As additional information is
gathered and the litigation proceeds, the Company will continue to assess its
potential impact.
The Company is also a defendant in other cases currently in litigation or
potential claims encountered in the normal course of business which are being
vigorously defended. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Certain of the Company's facilities have had or may have had releases of
hazardous materials associated with Dominick's operations or those of current
or prior occupants that may require remediation. The costs to remediate such
environmental contamination are currently estimated to range from approximately
$4.1 million to $5.7 million. Pursuant to the stock purchase agreement in
connection with the Acquisition, one-half of such remediation costs up to $10
million and 75% of such remediation costs between $10 million and $20 million
will be paid by the prior owners the Company Accordingly, the Company has
accrued $4.3 million to reflect its estimated liability for environmental
remediation. The Company does not believe that the ultimate liability related
to remediation will have a material adverse affect on the Company's financial
position or results of operations.
The Company self-insures workers' compensation and general liability
claims. During fiscal 1994 and the 20 weeks ended March 21, 1995, the
Predecessor Company discounted its workers' compensation liability using a 7.5%
discount rate. During the 32 weeks ended October 28, 1995 and fiscal 1996, all
self-insurance liabilities were discounted using a 7.5% discount rate.
Management believes that this rate approximates the time value of money over
the anticipated payout period (approximately 12 years) for essentially
risk-free investments.
The historical self-insurance liability information is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
OCT. 28, NOV. 2,
1995 1996
-------- -------
<S> <C> <C>
Self-insurance liability ...... $55,898 $57,157
Less: Discount ................ (8,231) (8,727)
-------- -------
Net self-insurance liability .. $47,667 $48,430
======== =======
</TABLE>
The estimated cash payments for claims will aggregate approximately $17
million, $12 million, $9 million, $7 million and $5 million for fiscal years
1997, 1998, 1999, 2000 and 2001, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
NOVEMBER 2, 1996
--------------------
CARRYING
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents ............... $32,735 $32,735
Short-term notes and other receivables .. 16,723 16,723
Senior Subordinated Notes ............... 200,000 224,000
Bank Credit Facility .................... 195,000 195,731
Other ................................... 6,020 6,020
</TABLE>
The fair value of the Senior Subordinated Notes and the New Credit
Facility are based on quoted market prices. Market quotes for the fair value
of the remainder of the Company's debt are not available.
40
<PAGE> 42
11. QUARTERLY DATA (UNAUDITED) (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL 1996
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
12 WEEKS 12 WEEKS 16 WEEKS 13 WEEKS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales ........................................ $584,362 $556,880 $759,309 $611,411
Gross profit ................................. 131,954 129,008 176,074 141,932
Operating income ............................. 19,330 18,886 26,443 12,450
Net income (loss) before extraordinary loss .. 669 728 1,716 (3,685)
Extraordinary loss ........................... -- -- -- (6,360)
Net income (loss) ............................ 669 728 1,716 (10,045)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
12 WEEKS 12 WEEKS 16 WEEKS 12 WEEKS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales ................................. -- -- $739,037 $544,630
Gross profit .......................... -- -- 168,112 127,676
Operating income ...................... -- -- 21,114 19,049
Net income before extraordinary loss .. -- -- (1,081) (1,301)
Extraordinary loss .................... -- -- (4,585) --
Net loss .............................. -- -- (5,666) (1,301)
</TABLE>
Comments on Quarterly Data:
Quarterly data for the first and second quarter of fiscal 1995 have not
been provided as such periods are pre-acquisition periods and are not
meaningful for comparative purposes.
The termination of the Company's consulting agreement with Yucaipa during
the fourth quarter of 1996 resulted in a $10.5 million charge (or $6.3
million net of tax benefit of $4.2 million).
41
<PAGE> 1
EXHIBIT 3.1
AGREEMENT OF MERGER
OF
DFF ACQUISITION SUB TWO, INC.
AND
DOMINICK'S FINER FOODS, INC.
This Agreement of Merger (this "Agreement") is entered into as of the
22nd day of March, 1995, between DFF Acquisition Sub Two, Inc., a Delaware
corporation ("DFF Sub Two"), and Dominick's Finer Foods, Inc., a Delaware
corporation ("Dominick's").
RECITALS
WHEREAS, the Boards of Directors of Dominick's and of DFF Sub Two each
have determined that it is in the best interests of their respective
stockholders for DFF Sub Two to be merged with and into Dominick's (the
"Merger"), upon the terms and conditions set forth herein and in accordance
with the General Corporation Law of the State of Delaware (the "Delaware
General Corporation Law").
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements set forth herein, the parties hereto agree as follows:
SECTION 1. The Merger. At the Effective Time (as defined below), DFF
Sub Two shall be merged with and into Dominick's, pursuant to the provisions of
Section 251 of the Delaware General Corporation Law, and the separate corporate
existence of DFF Sub Two shall cease and Dominick's shall succeed and continue
as the surviving corporation ("Surviving Corporation"), without other transfer,
to all the rights and property of DFF Sub Two and shall assume all of the
liabilities and obligations of DFF Sub Two.
SECTION. 2. Effective Time of the Merger. The Merger shall become
effective immediately upon the filing of this Agreement or a Certificate of
Merger relating to the Merger with the Secretary of State of the State of
Delaware (the time of such filing being the "Effective Time").
SECTION 3. Certificate of Incorporation. At the Effective Time, the
Certificate of Incorporation of Dominick's, as in effect immediately prior to
the Effective Time, shall be amended, pursuant to Section 251(e) of the
Delaware General Corporation Law, in its entirety to read as follows:
CERTIFICATE OF INCORPORATION
OF
DOMINICK'S FINER FOODS, INC.
1. The name of the corporation is:
Dominick's Finer Foods, Inc.
<PAGE> 2
2. The address of its registered office in the
State of Delaware is 32 Loockerman Square, Suite
L-100, in the City of Dover, County of Kent, 19904.
The name of its registered agent at such address is
The Prentice-Hall Corporation System, Inc.
3. The nature of the business or purposes to be
conducted or promoted is to engage in any lawful act
or activity for which corporations may be organized
under the General Corporation Law of Delaware.
4. The total number of shares of stock which the
corporation shall have authority to issue is One
Thousand (1,000), all of which shall be Common Stock;
and the par value of each share shall be one cent
($.01).
5. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is
expressly authorized to adopt, amend or repeal the
bylaws of the corporation.
6. Election of directors need not be by written
ballot unless the bylaws of the corporation shall so
provide.
7. No director of the corporation shall be
personally liable to the corporation or its
stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve
intentional misconduct or a knowing violation of the
law, (iii) under Section 174 of the General
Corporation Law of Delaware, or (iv) for any
transaction from which the director derived an
improper personal benefit.
SECTION 4. Bylaws. At the Effective Time, the Bylaws of DFF Sub Two,
as in effect immediately prior to the Effective Time, shall become the Bylaws
of Surviving Corporation pursuant to a resolution adopted by the Board of
Directors of Surviving Corporation dated as of the date hereof.
SECTION 5. Capital Stock. At the Effective Time, each share of common
stock of DFF Sub Two issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into one issued and outstanding, fully paid and
nonassessable share of common stock, par value $.01, of Surviving Corporation.
Upon surrender of the certificates formerly representing shares of the stock of
DFF Sub Two to the Surviving Corporation, the holder of such certificates shall
be entitled to receive in exchange for such certificates new certificates
representing shares of the common stock of Surviving Corporation. At the
Effective Time, each share of capital stock of Dominick's, whether issued and
outstanding or held in the treasury, immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be cancelled and no consideration shall be issued in respect thereof.
2
<PAGE> 3
SECTION 6. Authorizations. The officers of Dominick's and of DFF Sub
Two are hereby authorized to execute and deliver all such documents and
instruments and take all such action which they deem necessary or desirable in
order to carry out or put into effect the Merger.
SECTION 7. Miscellaneous.
(a) Entire Agreement; Amendments. This Agreement contains all of the
terms and conditions agreed upon by the parties hereto in connection with the
subject matter hereof. This Agreement may not be amended, modified or changed
except by written instrument signed by all of the parties hereto and consistent
with the provisions of the Stock Purchase Agreement dated as of January 17,
1995 by and among DFF Holdings, Inc., DFF Acquisition Sub, Inc., Dodi L.L.C.,
Dodi Family L.L.C. and Dodi Developments L.L.C. (the "Stock Purchase
Agreement").
(b) Termination. Prior to the Effective Time, this Agreement shall
automatically terminate if the Stock Purchase Agreement is validly terminated.
The filing of this Agreement with the Secretary of State of the State of
Delaware shall constitute certification that this Agreement has not theretofore
been terminated. If terminated as provided in this Section 7(b), this
Agreement shall forthwith become wholly void and of no further force or effect.
(c) Captions. All captions and headings are inserted for the
convenience of the parties, and shall not be used in any way to modify, limit,
construe or otherwise affect this Agreement.
(d) Severability. If any term, provision or condition of this
Agreement is determined by a court or other judicial or administrative tribunal
to be illegal, void or otherwise ineffective or not in accordance with public
policy, the remainder of this Agreement shall not be affected thereby and shall
remain in full force and effect.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but which
together shall constitute a single agreement.
(f) Governing Law. This Agreement shall be governed by and construed
in accordance with the internal domestic laws of the State of Delaware, without
reference to the choice of law principles thereof.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of
Merger as of the day first above written by their respective officers thereunto
duly authorized.
DFF ACQUISITION SUB TWO, INC.
By: /s/ Mark A. Resnik
-----------------------------
Name: Mark A. Resnik
Title: Vice President
DOMINICK'S FINER FOODS, INC.
By: /s/ Darren W. Karst
-------------------------------
Name: Darren W. Karst
Title: Senior Vice President
<PAGE> 5
CERTIFICATE OF SECRETARY
OF
DFF ACQUISITION SUB TWO, INC.
The undersigned, Mark A. Resnik, Secretary of DFF Acquisition Sub Two,
Inc., a Delaware corporation, does hereby certify that the foregoing Agreement
of Merger was duly approved by resolutions adopted by unanimous written consent
of the sole stockholder of said corporation, pursuant to Sections 228 and 251
of the Delaware General Corporation Law, as of March 22, 1995.
/s/ Mark A. Resnik
------------------------------
Mark A. Resnik
Secretary
<PAGE> 6
CERTIFICATE OF SECRETARY
OF
DOMINICK'S FINER FOODS, INC.
The undersigned, Darren W. Karst, Secretary of Dominick's Finer Foods,
Inc., a Delaware corporation, does hereby certify that the foregoing Agreement
of Merger was duly approved by resolutions adopted by unanimous written consent
of the sole stockholder of said corporation, pursuant to Sections 228 and 251
of the Delaware General Corporation Law, as of March 22, 1995.
/s/ Darren W. Karst
-----------------------------------
Darren W. Karst
Secretary
<PAGE> 1
EXHIBIT 3.2
RESTATED BYLAWS
OF
DOMINICK'S FINER FOODS, INC.
<PAGE> 2
RESTATED BYLAWS
OF
DOMINICK'S FINER FOODS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - OFFICES................................................ 1
Section 1. Registered offices ................................. 1
Section 2. Other offices ...................................... 1
ARTICLE II - Meetings of Stockholders ............................. 1
Section 1. Place of Meetings .................................. 1
Section 2. Annual Meeting of Stockholders ..................... 1
Section 3. Quorum; Adjourned Meetings and Notice Thereof ...... 1
Section 4. Voting ............................................. 1
Section 5. Proxies............................................. 2
Section 6. Special Meetings ................................... 2
Section 7. Notice of Stockholders' Meetings ................... 2
Section 8. Maintenance and Inspection of Stockholder List ..... 2
Section 9. Stockholder Action by Written Consent
Without a Meeting .................................. 2
ARTICLE III - DIRECTORS............................................ 3
Section 1. The Number of Directors............................ 3
Section 2. Vacancies.......................................... 3
Section 3. Powers ............................................ 3
Section 4. Place of Directors' Meetings....................... 4
Section 5. Regular Meetings................................... 4
Section 6. Special Meetings................................... 4
Section 7. Quorum............................................. 4
Section 8. Action Without Meeting ............................ 4
Section 9. Telephonic Meetings................................ 4
Section 10. Committees of Directors ........................... 4
Section 11. Minutes of Committee Meetings...................... 5
Section 12. Compensation of Directors ......................... 5
ARTICLE IV - OFFICERS.............................................. 5
Section 1. Officers............................................ 5
Section 2. Election of Officers ............................... 5
Section 3. Subordinate Officers ............................... 5
Section 4. Compensation of Officers ........................... 6
Section 5. Term of Office; Removal and Vacancies............... 6
Section 6. Chairman of the Board............................... 6
Section 7. President........................................... 6
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
Section 8. Vice Presidents ................................... 6
Section 9. Secretary ......................................... 6
Section 10. Assistant Secretary ............................... 7
Section 11. Treasurer ......................................... 7
Section 12. Assistant Treasurer ............................... 7
ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS.............. 7
ARTICLE VI - INDEMNIFICATION OF EMPLOYEES AND AGENTS............... 9
ARTICLE VII - CERTIFICATES OF STOCK................................ 10
Section 1. Certificates ....................................... 10
Section 2. Signatures on Certificates ......................... 10
Section 3. Statement of Stock Rights, Preferences, Privileges.. 10
Section 4. Lost Certificates................................... 10
Section 5. Transfers of Stock.................................. 10
Section 6. Fixed Record Date................................... 11
Section 7. Registered Stockholders............................. 11
ARTICLE VIII - GENERAL PROVISIONS 11
Section 1. Dividends .......................................... 11
Section 2. Payment of Dividends; Directors' Duties ............ 11
Section 3. Checks.............................................. 11
Section 4. Fiscal Year ........................................ 11
Section 5. Corporate Seal ..................................... 11
Section 6. Manner of Giving Notice ............................ 12
Section 7. Waiver of Notice.................................... 12
Section 8. Annual Statement.................................... 12
ARTICLE IX - AMENDMENTS ........................................... 12
</TABLE>
ii
<PAGE> 4
RESTATED BYLAWS
OF
DOMINICK'S FINER FOODS, INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICES. The registered office shall be in the
City of Dover, County of Kent, State of Delaware.
Section 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held
at any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors. At each annual meeting directors shall be elected and any
other proper business may be transacted.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority
of the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these
Bylaws. A quorum, once established, shall not be broken by the withdrawal of
enough votes to leave less than a quorum and the votes present may continue to
transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
voting stock represented in person or by proxy may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote thereat.
Section 4. VOTING. When a quorum is present at any meeting, in all
matters other than the election of directors, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting,
<PAGE> 5
unless thequestion is one upon which by express provision of the
statutes, or the Certificate of Incorporation, or these Bylaws, a different
vote is required in which case such express provision shall govern and control
the decision of such question. Directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of directors.
Section 5. PROXIES. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize
another person or persons to act for him by proxy appointed by an instrument in
writing subscribed by such stockholder and bearing a date not more than three
years prior to said meeting, unless said instrument provides for a longer
period. All proxies must be filed with the Secretary of the corporation at the
beginning of each meeting in order to be counted in any vote at the meeting.
Each stockholder shall have one vote for each share of stock having voting
power, registered in his name on the books of the corporation on the record
date set by the Board of Directors as provided in Article VII, Section 6
hereof.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be
called by the President or the Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of
stockholders owning a majority in amount of the entire capital stock of the
corporation issued and outstanding, and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting. Business transacted at
any special meeting of stockholders shall be limited to the purposes stated in
the notice.
Section 7. NOTICE OF STOCKHOLDERS' MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given which notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting. If mailed, notice is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The officer
who has charge of the stock ledger of the corporation shall prepare and make,
at least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise provided in the Certificate of Incorporation, any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which
2
<PAGE> 6
may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in Delaware,
its principal place of business, or to an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty days of the
earliest dated consent delivered in the manner required by this Section 9 to
the corporation, written consents signed by a sufficient number of holders to
take action are delivered to the corporation by delivery to its registered
office in Delaware, its principal place of business or to an officer or agent
of the corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to a corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. THE NUMBER OF DIRECTORS. The number of directors which
shall constitute the whole Board shall be nine (9). The directors need not be
stockholders. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 2 of this Article, and each
director elected shall hold office until his successor is elected and
qualified; provided, however, that unless otherwise restricted by the
Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed, either with or without cause, from the Board of
Directors at any meeting of stockholders by a majority of the stock represented
and entitled to vote thereat.
Section 2. VACANCIES. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
The directors so chosen shall hold office until the next annual election of
directors and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. POWERS. The property and business of the corporation shall
be managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by
3
<PAGE> 7
these Bylaws expressly conferred upon them, the Board may exercise all
such powers of the corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 4. POWERS. The property and business of the corporation shall
be managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by4. PLACE OF DIRECTORS' MEETINGS. The directors
may hold their meetings and have one or more offices, and keep the books of the
corporation outside of the State of Delaware.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the President on forty-eight hours' notice to each
director, either personally or by mail or by telegram; special meetings shall
be called by the President or the Secretary in like manner and on like notice
on the written request of two directors unless the Board consists of only one
director; in which case special meetings shall be called by the President or
Secretary in like manner or on like notice on the written request of the sole
director.
Section 7. QUORUM. At all meetings of the Board of Directors a
majority of the authorized number of directors shall be necessary and
sufficient to constitute a quorum for the transaction of business, and the vote
of a majority of the directors present at any meeting at which there is a
quorum, shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these Bylaws. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. If only one director is authorized, such sole director shall
constitute a quorum.
Section 8. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 9. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 10. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from
4
<PAGE> 8
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the Bylaws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 11. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
Section 12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of this corporation shall be chosen
by the Board of Directors and shall include a Chairman of the Board of
Directors or a President, or both, and a Secretary. The corporation may also
have at the discretion of the Board of Directors such other officers as are
desired, including a Vice-Chairman of the Board of Directors, a Chief Executive
Officer, a Treasurer, one or more Vice Presidents, one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 hereof. In the event
there are two or more Vice Presidents, then one or more may be designated as
Executive Vice President, Senior Vice President, or other similar or dissimilar
title. At the time of the election of officers, the directors may by
resolution determine the order of their rank. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these
Bylaws otherwise provide.
Section 2. ELECTION OF OFFICERS. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the corporation.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and
5
<PAGE> 9
shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4. COMPENSATION OF OFFICERS. The salaries of all officers and
agents of the corporation shall be fixed by the Board of Directors.
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the
corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, shall, if present, preside at all meetings of the Board
of Directors and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws. If there is no President, the Chairman of the Board shall in
addition be the Chief Executive Officer of the corporation and shall have the
powers and duties prescribed in Section 7 of this Article IV.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there
be such an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to
time may be prescribed for them, respectively, by the Board of Directors.
Section 9. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose; and
shall perform like duties for the standing committees when required by the
Board of Directors. He shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or these
Bylaws. He shall keep in safe custody the seal of the corporation, and when
authorized by the Board, affix the same to any instrument requiring it, and
when so affixed it shall be attested by his signature or by the signature of an
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing
by his signature.
6
<PAGE> 10
Section 10. ASSISTANT SECRETARY. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Secretary designated by the Board of Directors, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys, and other valuable effects in the name and to the credit of
the corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 12. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The corporation shall indemnify to the maximum extent permitted by
law any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
7
<PAGE> 11
(b) The corporation shall indemnify to the maximum extent permitted by
law any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no such indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which such Court of Chancery or such other court shall deem proper.
(c) To the extent that a director or officer of the corporation shall
be successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b), or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered
by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in paragraphs (a) and (b). Such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders. The corporation, acting through
its Board of Directors or otherwise, shall cause such determination to be made
if so requested by any person who is indemnifiable under this Article V.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this Article V.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article V shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of
8
<PAGE> 12
the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article V.
(h) For the purposes of this Article V, references to "the
corporation" shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors or
officers so that any person who is or was a director or officer of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article V with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include service
as a director or officer of the corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation"
as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article V shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The corporation shall be required to indemnify a person in
connection with an action, suit or proceeding (or part thereof) initiated by
such person only if the action, suit or proceeding (or part thereof) was
authorized by the Board of Directors of the corporation.
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may indemnify every person who was or is a party or is or
was threatened to be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was an employee or agent of the corporation or, while an employee or
agent of the corporation, is or was serving at the request of the corporation
as an employee or agent or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including counsel fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, to the extent permitted by applicable law.
9
<PAGE> 13
ARTICLE VII
CERTIFICATES OF STOCK
Section 1. CERTIFICATES. Every holder of stock of the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer of the corporation, certifying the
number of shares represented by the certificate owned by such stockholder in
the corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the
date of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the
corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualification, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the corporation shall issue to represent
such class or series of stock, provided that, except as otherwise provided in
section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class or series
of stock, a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. TRANSFERS OF STOCK. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
10
<PAGE> 14
Section 6. FIXED RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting. In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date which shall not be more
than ten days after the date upon which the resolution fixing the record date
is adopted by the Board of Directors.
Section 8. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly
provided by the laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before payment of
any dividend there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve fund to
meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interests of the corporation, and the
directors may abolish any such reserve.
Section 3. CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
11
<PAGE> 15
Section 6. MANNER OF GIVING NOTICE. Whenever, under the provisions of
the statutes or of the Certificate of Incorporation or of these Bylaws, notice
is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears
on the records of the corporation, with postage thereon prepaid, and such
notice shall be deemed to be given at the time when the same shall be deposited
in the United States mail. Notice to directors may also be given by telegram.
Section 7. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Section 8. ANNUAL STATEMENT. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders when called
for by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
ARTICLE IX
AMENDMENTS
These Bylaws may be altered, amended or repealed or new Bylaws may be
adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new Bylaws be contained in
the notice of such special meeting. If the power to adopt, amend or repeal
Bylaws is conferred upon the Board of Directors by the Certificate of
Incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal Bylaws.
12
<PAGE> 1
DOMINICK'S FINER FOODS, INC.
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Blackhawk Developments, Inc.
Blackhawk Properties, Inc.
Dominick's Finer Foods Inc. of Illinois
Save-It-Discount Foods, Inc.
Kohl's of Bloomingdale, Inc.
DFF Equipment Leasing Company
Dodi Hazelcrest, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000945800
<NAME> DOMINICK'S FINER FOODS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> NOV-02-1996
<CASH> 32,735
<SECURITIES> 0
<RECEIVABLES> 16,723
<ALLOWANCES> 0
<INVENTORY> 203,411
<CURRENT-ASSETS> 274,729
<PP&E> 416,703
<DEPRECIATION> 48,479
<TOTAL-ASSETS> 1,102,205
<CURRENT-LIABILITIES> 308,434
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 179,071
<TOTAL-LIABILITY-AND-EQUITY> 1,102,205
<SALES> 2,511,962
<TOTAL-REVENUES> 2,511,962
<CGS> 1,932,994
<TOTAL-COSTS> 1,932,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,296
<INCOME-PRETAX> 6,813
<INCOME-TAX> 7,385
<INCOME-CONTINUING> (572)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,360)
<CHANGES> 0
<NET-INCOME> (6,932)
<EPS-PRIMARY> (6,932)
<EPS-DILUTED> (6,932)
</TABLE>
