-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, DQ6QG7V4+pOcIe5fBtgcJh9TObeCAcAghaPj6/esOiTHgleg8wF2HJalGL+SAO1d nmRu6z2PCmrL0OIuUmrJMw== 0000950150-95-000327.txt : 19950517 0000950150-95-000327.hdr.sgml : 19950517 ACCESSION NUMBER: 0000950150-95-000327 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950516 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS SUPERMARKETS INC CENTRAL INDEX KEY: 0000835676 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954222386 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451 FILM NUMBER: 95540064 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7147382000 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BOULEVARD CITY: LAHABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALLEYS INC /KS/ CENTRAL INDEX KEY: 0000835678 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 480605992 STATE OF INCORPORATION: KS FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-01 FILM NUMBER: 95540065 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 2132671501 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALA FOODS INC CENTRAL INDEX KEY: 0000838196 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 941342664 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-02 FILM NUMBER: 95540066 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA BETA COMPANY CENTRAL INDEX KEY: 0000880800 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 951456805 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-03 FILM NUMBER: 95540067 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL MARKETS INC CENTRAL INDEX KEY: 0000880801 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 941569281 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-04 FILM NUMBER: 95540068 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALA CO CENTRAL INDEX KEY: 0000880803 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954200005 STATE OF INCORPORATION: DE FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-05 FILM NUMBER: 95540069 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA H\SRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS OF CALIFORNIA INC CENTRAL INDEX KEY: 0000880823 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 330293011 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-06 FILM NUMBER: 95540070 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LAHABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS MERCHANDISING INC CENTRAL INDEX KEY: 0000880824 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 330483193 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-07 FILM NUMBER: 95540071 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS OF SOUTHERN CALIFORNIA INC CENTRAL INDEX KEY: 0000880825 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 330483203 STATE OF INCORPORATION: DE FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-08 FILM NUMBER: 95540072 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS GM INC CENTRAL INDEX KEY: 0000886141 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954390407 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-09 FILM NUMBER: 95540073 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7146268776 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY AREA WAREHOUSE STORES INC CENTRAL INDEX KEY: 0000932721 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 931087199 STATE OF INCORPORATION: CA FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-10 FILM NUMBER: 95540074 BUSINESS ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD CITY: LA HARSERA STATE: CA ZIP: 90631 BUSINESS PHONE: 7147382000 MAIL ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 424B3 1 424(B)(3) PROSPECTUS 1 This filing is made pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration No. 33-56451 AMENDED AND RESTATED PROSPECTUS AND SOLICITATION STATEMENT [Food 4 Less logo] FOOD 4 LESS SUPERMARKETS, INC. [Ralphs logo] TO BE COMBINED THROUGH MERGER WITH RALPHS GROCERY COMPANY OFFERS TO EXCHANGE UP TO $175,000,000 OF ITS SENIOR NOTES DUE JUNE 1, 2004 FOR ITS 10.45% SENIOR NOTES DUE APRIL 15, 2000 AND UP TO $145,000,000 OF ITS 13.75% SENIOR SUBORDINATED NOTES DUE JUNE 1, 2005 FOR ITS 13.75% SENIOR SUBORDINATED NOTES DUE JUNE 15, 2001 AND SOLICITATION OF CONSENTS ------------------------ Food 4 Less Supermarkets, Inc. ("Food 4 Less") hereby amends and restates its Prospectus and Solicitation Statement dated January 25, 1995 (the "Old Prospectus") relating to its offers (as so amended and restated, the "Exchange Offers") (i) to holders of its 10.45% Senior Notes due 2000 (the "Old F4L Senior Notes") to exchange (the "F4L Senior Notes Exchange Offer") such Old F4L Senior Notes for new Senior Notes due 2004 (the "New F4L Senior Notes") plus $5.00 in cash for each $1,000 principal amount tendered for exchange (the "Senior Notes Exchange Payment") and (ii) to holders of its 13.75% Senior Subordinated Notes due 2001 (the "Old F4L Senior Subordinated Notes," and together with the Old F4L Senior Notes, the "Old F4L Notes") to exchange (the "F4L Senior Subordinated Notes Exchange Offer") such Old F4L Senior Subordinated Notes for new 13.75% Senior Subordinated Notes due 2005 (the "New F4L Senior Subordinated Notes," and together with the New F4L Senior Notes, the "New F4L Notes") plus $20.00 in cash for each $1,000 principal amount tendered for exchange (the "Senior Subordinated Notes Exchange Payment," and together with the Senior Notes Exchange Payment, the "Exchange Payment"), in each case as more fully described below. The Exchange Offers are subject to the terms and conditions set forth in this Amended and Restated Prospectus and Solicitation Statement and in the accompanying Consent and Letter of Transmittal (the "Letter of Transmittal").
FOR EACH $1,000 THE TENDERING HOLDER PRINCIPAL AMOUNT OF: WILL RECEIVE - ---------------------------------- ---------------------------------------------------------------------------- Old F4L Senior Notes $1,000 principal amount of New F4L Senior Notes and $5.00 in cash, plus accrued and unpaid interest to the date of exchange. Old F4L Senior Subordinated Notes $1,000 principal amount of New F4L Senior Subordinated Notes and $20.00 in cash, plus accrued and unpaid interest to the date of exchange.
Concurrently with the Exchange Offers and the other financing transactions described herein, Food 4 Less is offering up to $295 million principal amount of New F4L Senior Notes (the "Senior Note Public Offering") and up to $200 million principal amount of New RGC Notes (as defined) (the "Subordinated Note Public Offering," and together with the Senior Note Public Offering, the "Public Offerings") pursuant to registration under the Securities Act of 1933, as amended (the "Securities Act"). The Senior Note Public Offering is expected to price ten business days preceding the final Expiration Date (as defined) of the Exchange Offers. The New F4L Senior Notes offered pursuant to the F4L Senior Notes Exchange Offer will be part of the same issue as the New F4L Senior Notes offered pursuant to the Senior Note Public Offering and will bear interest at a fixed rate per annum equal to the greater of (a) 10.45% and (b) the Applicable Treasury Rate (as defined) plus 350 basis points (3.50 percentage points); provided, however, that in no event will the New F4L Senior Notes offered for exchange hereby bear interest at a rate per annum that is less than the interest rate on the New F4L Senior Notes offered pursuant to the Senior Note Public Offering. THE EXCHANGE OFFERS AND THE SOLICITATION (AS DEFINED) HAVE BEEN EXTENDED UNTIL AND WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 25, 1995, UNLESS FURTHER EXTENDED (THE "EXPIRATION DATE"). CONSENTS MAY BE REVOKED AND TENDERS MAY BE WITHDRAWN AT ANY TIME UNTIL SUCH TIME AS THE REQUISITE CONSENTS (AS DEFINED) WITH RESPECT TO THE APPLICABLE ISSUE OF OLD F4L NOTES HAVE BEEN RECEIVED AND THE SUPPLEMENTAL INDENTURE (AS DEFINED) FOR SUCH ISSUE HAS BEEN EXECUTED. FOOD 4 LESS DOES NOT EXPECT TO COMMENCE THE PUBLIC OFFERINGS UNTIL SUCH TIME AS THE MINIMUM EXCHANGE (AS DEFINED) HAS BEEN SATISFIED AND REQUISITE CONSENTS HAVE BEEN RECEIVED. FOLLOWING THE PRICING OF THE SENIOR NOTE PUBLIC OFFERING, FOOD 4 LESS INTENDS TO FURTHER EXTEND THE EXPIRATION DATE TO A DATE THAT IS TEN BUSINESS DAYS FOLLOWING THE PRICING THEREOF. ------------------------ SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFERS AND THE SOLICITATION. ------------------------ The Dealer Managers for the Exchange Offers and the Solicitation are: BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ------------------------ The date of this Amended and Restated Prospectus and Solicitation Statement is May 12, 1995 2 (cover page continued) The Exchange Offers and the Solicitation are part of the financing required to consummate the proposed merger (the "RSI Merger") of Food 4 Less with and into Ralphs Supermarkets, Inc. ("RSI"). Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), a wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger") and RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). As a result of the Merger, the New F4L Notes and any Old F4L Notes not exchanged in the Exchange Offers will be the obligations of the Company. Food 4 Less and its parent corporation Food 4 Less Holdings, Inc. ("Holdings") have revised certain terms and conditions of certain elements of the financing required for the Merger since the date of the Old Prospectus. As set forth in more detail in this Amended and Restated Prospectus and Solicitation Statement, Food 4 Less and Holdings have: (i) amended the terms of the offers to the holders of Old RGC Notes (as defined) to (A) increase the exchange payment from $10.00 to $20.00 for each $1,000 principal amount of Old RGC Notes accepted in exchange for New RGC Notes, (B) change the consideration offered by providing holders of Old RGC Notes the option to tender all or any part of such Old RGC Notes for $1,010.00 in cash for each $1,000 principal amount accepted for purchase, (C) revise the formula for establishing the interest rate on the New RGC Notes as set forth herein under "The RGC Offers and the Public Offerings" and (D) amend certain conditions of the RGC Offers (as defined) to decrease the amount of Old RGC Notes required to be tendered for exchange from 80% to a majority in principal amount of the Old RGC Notes; (ii) amended the consent solicitation with respect to the Discount Notes (as defined) and commenced (A) Holdings' offer to purchase Discount Notes for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (as defined) for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase and (B) the solicitation of consents to eliminate substantially all of the restrictive covenants in the Discount Note Indenture (as defined); (iii) amended the Merger Agreement (as defined) with respect to the RSI Merger to (A) decrease the cash consideration to be paid to the stockholders of RSI from $425 million to $375 million, (B) increase the amount of 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller Debentures") to be issued as part of the consideration to be paid to the stockholders of RSI from $100 million principal amount to $131.5 million principal amount, (C) increase the interest rate on the Seller Debentures from 13% per annum to 13 5/8% per annum and (D) provide for the issuance of $18.5 million in initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures") of New Holdings (as defined) as Merger consideration to the stockholders of RSI; (iv) increased the size of Food 4 Less' public debt offering for cash proceeds from an offering of $400 million principal amount of New F4L Senior Notes to a total offering of $495 million principal amount of debt securities consisting of $295 million principal amount of New F4L Senior Notes and $200 million principal amount of New RGC Notes; (v) amended the terms of the New Equity Investment (as defined) to decrease the aggregate investment from $150 million to $140 million and to provide that the liquidation preference and conversion ratio of the convertible preferred stock issued pursuant to the New Equity Investment will accrete at the rate of 7% per annum, compounded quarterly (and subject to increase upon certain events), until the later of the fifth anniversary of the issue date or the date the Company satisfies certain performance criteria; and (vi) committed to effect a placement (the "New Discount Debenture Placement") of up to $100 million in initial accreted value of New Discount Debentures, which includes the $18.5 million of New Discount Debentures to be issued to the RSI stockholders, $22.5 million of New Discount Debentures to ii 3 (cover page continued) be issued in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing and $59 million of New Discount Debentures to be issued for cash. In addition, since the date of the Old Prospectus, Food 4 Less has filed with the Securities and Exchange Commission (the "Commission") its quarterly report on Form 10-Q for the 28 weeks ended January 7, 1995 and RGC has filed with the Commission its annual report on Form 10-K for the 52 weeks ended January 29, 1995. Consequently, Food 4 Less is amending and restating the Old Prospectus to revise the description of the terms and conditions of the Exchange Offers and the other financing transactions described above and to set forth updated quarterly financial information of Food 4 Less, updated year-end financial information of RGC and updated pro forma combined financial information. Concurrently with the Exchange Offers, Food 4 Less is soliciting (the "Solicitation") consents ("Consents") from holders of each of the Old F4L Senior Notes (the "Old F4L Senior Noteholders") and the Old F4L Senior Subordinated Notes (the "Old F4L Senior Subordinated Noteholders," and together with the Old F4L Senior Noteholders, the "Old F4L Noteholders") representing not less than a majority in aggregate principal amount of each of the outstanding Old F4L Senior Notes and the Old F4L Senior Subordinated Notes held by persons other than Food 4 Less and its affiliates (the "Requisite Consents") to certain amendments described herein (the "Proposed Amendments") to the indentures under which the Old F4L Notes were issued (collectively, the "Old F4L Indentures"). As of May 1, 1995, there were issued and outstanding $175 million aggregate principal amount of the Old F4L Senior Notes and $145 million aggregate principal amount of the Old F4L Senior Subordinated Notes. HOLDERS OF OLD F4L NOTES WHO DESIRE TO ACCEPT THE APPLICABLE EXCHANGE OFFER MUST CONSENT TO THE PROPOSED AMENDMENTS. The Proposed Amendments will only become operative upon consummation of the Exchange Offers. The primary purpose of the Proposed Amendments is to permit the Merger and to eliminate substantially all of the restrictive covenants in the Old F4L Indentures. As of the close of business on May 10, 1995, tenders and Consents for $60,942,000 aggregate principal amount of Old F4L Senior Notes, representing over 34.8% of the aggregate outstanding principal amount of the Old F4L Senior Notes, and tenders and Consents for $99,284,000 aggregate principal amount of Old F4L Senior Subordinated Notes, representing over 68.4% of the aggregate outstanding principal amount of Old F4L Senior Subordinated Notes (collectively representing over 50% of the aggregate outstanding principal amount of all Old F4L Notes), had been received. Interest on the New F4L Senior Notes will be payable semiannually on each June 1 and December 1, commencing on December 1, 1995, at the rate set forth above. The New F4L Senior Notes will mature on June 1, 2004. Interest on the New F4L Senior Subordinated Notes will be payable semiannually on each June 1 and December 1, commencing December 1, 1995, at the rate of 13.75% per annum. The New F4L Senior Subordinated Notes will mature on June 1, 2005. The New F4L Senior Notes will be redeemable, in whole or in part, at the option of the Company, at any time on and after June 1, 2000 and the New F4L Senior Subordinated Notes will be redeemable, in whole or in part, at the option of the Company, at any time on and after June 15, 1996, each at the respective redemption prices set forth herein, plus accrued and unpaid interest to the redemption date. In addition, on or prior to June 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 35% of the New F4L Senior Notes originally issued, at a redemption price equal to 110.45% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 107.8375% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the foregoing redemption prices will be correspondingly adjusted. Upon a Change of Control (as defined) each holder of New F4L Notes will have the right to require the Company to repurchase such holders' New F4L Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. In addition, subject to certain conditions, the Company will be iii 4 (cover page continued) obligated to make an offer to repurchase the New F4L Notes at 100% of their principal amount, plus accrued and unpaid interest to the date of repurchase, with the net cash proceeds of certain sales or other dispositions of assets. The New F4L Senior Notes will be senior unsecured obligations of the Company and will rank pari passu in right of payment with other senior and unsecured indebtedness of the Company. However, the New F4L Senior Notes will be effectively subordinated to all secured indebtedness of the Company and its subsidiaries, including indebtedness under the New Credit Facility (as defined). See "Risk Factors -- Corporate Structure" and "-- Effects of Asset Encumbrances." The New F4L Senior Notes will rank senior in right of payment to all subordinated indebtedness of the Company, including the New F4L Senior Subordinated Notes, the Old F4L Senior Subordinated Notes that remain outstanding following the F4L Senior Subordinated Notes Exchange Offer (collectively, the "F4L Senior Subordinated Notes") and the RGC Senior Subordinated Notes (as defined). At January 7, 1995, on a pro forma basis after giving effect to the Merger and the Financing (and certain related assumptions), the Company and its subsidiaries would have had outstanding $1,057.9 million aggregate principal amount of secured indebtedness. The New F4L Senior Subordinated Notes will be senior subordinated unsecured obligations of the Company and will be subordinated in right of payment to all Senior Indebtedness (as defined) of the Company, including the Company's obligations under the New Credit Facility, the New F4L Senior Notes and any Old F4L Senior Notes that remain outstanding following the F4L Senior Notes Exchange Offer (collectively, the "F4L Senior Notes"). The New F4L Senior Notes will be unconditionally guaranteed on a senior unsecured basis by each of the Company's wholly-owned subsidiaries (the "Subsidiary Guarantors") and the New F4L Senior Subordinated Notes will be unconditionally guaranteed (together, the "Guarantees") on a senior subordinated unsecured basis by each of the Subsidiary Guarantors. At the time the New F4L Notes are issued, the Subsidiary Guarantors will be Alpha Beta Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Cala Co., Cala Foods, Inc., Falley's Inc., Food 4 Less of California, Inc., Food 4 Less GM, Inc., Food 4 Less Merchandising, Inc. and Food 4 Less of Southern California, Inc. The Guarantees of the New F4L Notes will be released upon the occurrence of certain events. See "Description of the New F4L Notes -- Guarantees." At January 7, 1995, on a pro forma basis after giving effect to the Merger and the Financing (and certain related assumptions), the aggregate outstanding amount of Senior Indebtedness of the Company (excluding Company guarantees of certain Guarantor Senior Indebtedness (as defined)) would have been approximately $1,512.7 million and the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.5 million and the Company would have had $169.4 million available to be borrowed under the New Revolving Facility (as defined). Tendering holders will receive accrued and unpaid interest on Old F4L Notes accepted for exchange, up to, but not including, the date of such exchange. Interest on the New F4L Notes will accrue from, and including, the date of such exchange, which will be the date of issuance of the New F4L Notes. If Food 4 Less shall decide to decrease the amount of Old F4L Notes being sought in either Exchange Offer or to increase or decrease the consideration offered to holders of Old F4L Notes, and if, at the time that notice of such increase or decrease is first published, sent or given to holders of Old F4L Notes in the manner specified in this Amended and Restated Prospectus and Solicitation Statement, such Exchange Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth Business Day from and including the date that such notice is first so published, sent or given, then such Exchange Offer will be extended for such purposes until the expiration of such period of ten Business Days. As used in this Amended and Restated Prospectus and Solicitation Statement, "Business Day" has the meaning set forth in Rule 14d-1 (and applicable to Regulation 14E) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the Exchange Offers and the Solicitation, (i) Food 4 Less is (A) offering up to $200 million principal amount of New Senior Subordinated Notes due 2005 (the "New RGC Notes") pursuant to the Subordinated Note Public Offering (which will be part of the same issue as the New RGC Notes offered for exchange pursuant to the RGC Offers (as defined)), (B) offering up to $295 million principal amount of iv 5 (cover page continued) New F4L Senior Notes pursuant to the Senior Note Public Offering (which will be part of the same issue as the New F4L Senior Notes offered for exchange pursuant to the Exchange Offers), (C) offering (the "RGC Offers") to holders of RGC's 9% Senior Subordinated Notes due 2003 (the "Old RGC 9% Notes") and to holders of RGC's 10 1/4% Senior Subordinated Notes due 2002 (the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes") (i) to exchange such Old RGC Notes for New RGC Notes plus $20.00 in cash for each $1,000 principal amount of Old RGC Notes exchanged and (ii) to purchase any or all of such holders' Old RGC Notes for $1,010.00 cash per $1,000 principal amount accepted for purchase, plus accrued and unpaid interest thereon, and (D) soliciting consents from the holders of each of the Old RGC 9% Notes and the Old RGC 10 1/4% Notes to certain amendments to the indentures (collectively, the "Old RGC Indentures") under which the Old RGC Notes were issued (the RGC Offers and the solicitation of consents being referred to herein collectively as the "RGC Offers"), and (ii) Holdings, which currently owns 100% of the outstanding stock of Food 4 Less, is (A) offering to holders of its 15.25% Senior Discount Notes due 2004 (the "Discount Notes") to purchase such Discount Notes for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase and (B) soliciting consents from the holders of Discount Notes to certain amendments to the indenture (the "Discount Note Indenture") under which the Discount Notes were issued (such transactions being referred to herein collectively as the "Holdings Offer to Purchase"). Prior to the Merger, Holdings' parent corporation, Food 4 Less, Inc. ("FFL"), will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware. See "The Merger and the Financing," "Description of Holding Company Indebtedness" and "The RGC Offers and the Public Offerings." The RGC Offers, the Public Offerings, the Holdings Offer to Purchase and the New Discount Debenture Placement are sometimes hereinafter referred to as the "Other Debt Financing Transactions." The New RGC Notes and any Old RGC Notes not exchanged in the RGC Offers are collectively referred to herein as the "RGC Senior Subordinated Notes." Concurrently with the consummation of the Exchange Offers and the Other Debt Financing Transactions, Food 4 Less and RGC intend to obtain new senior financing (the "Bank Financing") pursuant to a senior bank facility of up to $1,075 million (the "New Credit Facility") and to obtain $140 million in cash equity financing (the "New Equity Investment"). In addition, New Holdings will issue as part of the consideration for the RSI Merger $131.5 million aggregate principal amount of the Seller Debentures and will issue $100 million in initial accreted value of the New Discount Debentures pursuant to the New Discount Debenture Placement. See "The Merger and the Financing." Notwithstanding any other provision of the Exchange Offers or the Solicitation, the obligation of Food 4 Less to accept for exchange any validly tendered Old F4L Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) at least 80% of the aggregate principal amount of the outstanding Old F4L Notes being validly tendered and not withdrawn pursuant to the Exchange Offers prior to the Expiration Date (the "Minimum Exchange"), (ii) the receipt of the Requisite Consents with respect to each of the Old F4L Senior Notes and Old F4L Senior Subordinated Notes on or prior to the Expiration Date, (iii) the satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the RSI Merger, (iv) the prior or contemporaneous successful completion of the Other Debt Financing Transactions and (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. There can be no assurance that such conditions will be satisfied or waived. For additional information regarding other conditions to the consummation of the Exchange Offers, see "The Exchange Offers and Solicitation -- Conditions." Standard & Poor's Ratings Group ("Standard & Poor's") has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline (as defined) under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the Exchange Offers, the Other Debt Financing Transactions, the New Equity Investment and the Bank v 6 (cover page continued) Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline would constitute a Change of Control Triggering Event (as defined) under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make a change of control purchase offer following the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase (the "Change of Control Offer"). The Merger will not constitute a change of control under the Old F4L Indentures or the Discount Note Indenture and no change of control purchase offer will be made with respect to the Old F4L Notes or the Discount Notes. Although it has no obligation to do so, the Company reserves the right in the future to seek to acquire Old F4L Notes not tendered in the Exchange Offers by means of open market purchases, privately negotiated acquisitions, subsequent exchange or tender offers, redemptions or otherwise, at prices or on terms which may be higher or lower or more or less favorable than those in the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS AMENDED AND RESTATED PROSPECTUS AND SOLICITATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE EXCHANGE OFFERS ARE NOT BEING MADE TO, AND NO CONSENTS ARE BEING SOLICITED FROM, HOLDERS OF OLD F4L NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFERS OR THE ISSUANCE OF ANY SECURITY UPON ACCEPTANCE OF TENDERS WOULD NOT BE IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. Investors in the New F4L Notes in California will be able to transfer their New F4L Notes in California only to institutional investors (as defined under applicable California securities laws, and subject to any conditions set forth therein) or pursuant to another exemption under California securities laws. Such investors will be able to transfer their New F4L Notes to persons outside California, provided the transaction is effected through a broker-dealer registered in California and complies with the securities laws of the state in which the New F4L Notes will be offered and sold. The New F4L Notes have not been registered under the securities laws of all states. In certain jurisdictions in which the New F4L Notes have been registered, permits and orders issued in connection with such registrations typically expire after a period of time and the securities may not be offered and sold by certain holders without registration under the securities laws of such jurisdictions unless an exemption is available under such securities laws. vi 7 (cover page continued) Another form of the Letter of Transmittal is being circulated to holders of Old F4L Notes with this Amended and Restated Prospectus and Solicitation Statement. Holders may use such form or the form previously circulated to effect valid tenders of Old F4L Notes and valid deliveries of Consents. Any holder who previously has validly tendered any Old F4L Notes or has delivered a valid Consent need not take any further action to receive, subject to the terms and conditions of the Exchange Offers, the New F4L Notes and the Exchange Payment. Any Old F4L Noteholder desiring to accept the applicable Exchange Offer should either (i) complete and sign the Letter of Transmittal or facsimile thereof, have his signature thereon guaranteed and forward the Letter of Transmittal with the certificate(s) evidencing his Old F4L Notes and any other required documents to the Exchange Agent (as defined), (ii) comply with the guaranteed delivery procedures, (iii) tender such Old F4L Notes pursuant to the procedure for book-entry transfer or (iv) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him, in each case on or prior to the Expiration Date. Old F4L Noteholders having Old F4L Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person if they desire to tender such Old F4L Notes. HOLDERS OF OLD F4L NOTES WHO DESIRE TO ACCEPT THE APPLICABLE EXCHANGE OFFER MUST CONSENT TO THE PROPOSED AMENDMENTS. A HOLDER OF OLD F4L NOTES WHO DESIRES TO TENDER INTO THE APPLICABLE EXCHANGE OFFER WITH RESPECT TO ANY OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES MUST TENDER ALL OF SUCH HOLDERS' OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES, AS THE CASE MAY BE. See "The Exchange Offers and Solicitation -- Procedures for Tendering and Consenting." Questions and requests for assistance or for additional copies of this Amended and Restated Prospectus and Solicitation Statement or the accompanying Letter of Transmittal or any other required documents may be directed to the Dealer Managers or the Information Agent at the addresses and telephone numbers set forth on the back cover hereof. This Amended and Restated Prospectus and Solicitation Statement, together with the accompanying Letter of Transmittal, is being sent to holders of Old F4L Notes who are registered holders as of May 10, 1995. vii 8 AVAILABLE INFORMATION Food 4 Less has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Commission under the Securities Act with respect to the New F4L Notes. Each of Food 4 Less and RGC is subject to the reporting and other informational requirements of the Exchange Act, and the rules and regulations promulgated thereunder, and in accordance therewith files reports and other information with the Commission. Such reports and other information filed by Food 4 Less or RGC with the Commission can be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60601. Copies of such materials can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, whether or not it is required to do so by the rules and regulations of the Commission, the Company will be obligated under the indenture governing the New F4L Senior Notes (the "New F4L Senior Note Indenture") and the indenture governing the New F4L Senior Subordinated Notes (the "New F4L Senior Subordinated Note Indenture," and together with the New F4L Senior Note Indenture, the "New F4L Indentures") to file with the Commission (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's independent certified public accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K. The Company intends to furnish to each holder of New F4L Notes, upon their request, annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. Any such request should be directed to Jan Charles Gray, Senior Vice President, General Counsel and Secretary of Ralphs Grocery Company at 1100 West Artesia Boulevard, Compton, California 90220, telephone number (310) 884-4000. This Amended and Restated Prospectus and Solicitation Statement summarizes the contents and terms of documents not included herewith. These documents are available upon request from, as applicable, Food 4 Less at 777 South Harbor Blvd., La Habra, California 90631, telephone number (714) 738-2000, Attn: Linda McLoughlin Figel, Investor Relations; RGC at 1100 West Artesia Blvd., Compton, California 90220, telephone number (310) 884-4000, Attn: Jan Charles Gray, Esq., Senior Vice President, General Counsel and Secretary; or D.F. King & Co., Inc., at the address and telephone number set forth on the back cover hereof. In order to ensure timely delivery of the documents, any request for such documents should be made at least five business days prior to the Expiration Date. viii 9 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................................. viii SUMMARY............................................................................... 1 COMPARISON OF OLD F4L SENIOR NOTES AND NEW F4L SENIOR NOTES........................... 10 COMPARISON OF OLD F4L SENIOR SUBORDINATED NOTES AND NEW F4L SENIOR SUBORDINATED NOTES............................................................................... 12 RISK FACTORS.......................................................................... 23 THE MERGER AND THE FINANCING.......................................................... 29 PRO FORMA CAPITALIZATION.............................................................. 33 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 34 SELECTED HISTORICAL FINANCIAL DATA OF RALPHS.......................................... 42 SELECTED HISTORICAL FINANCIAL DATA OF FOOD 4 LESS..................................... 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 46 BUSINESS.............................................................................. 60 MANAGEMENT............................................................................ 75 EXECUTIVE COMPENSATION................................................................ 77 PRINCIPAL STOCKHOLDERS................................................................ 83 DESCRIPTION OF CAPITAL STOCK.......................................................... 84 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 87 THE EXCHANGE OFFERS AND SOLICITATION.................................................. 91 DESCRIPTION OF THE NEW F4L NOTES...................................................... 106 MARKET PRICES OF THE OLD F4L NOTES.................................................... 137 THE PROPOSED AMENDMENTS............................................................... 137 THE RGC OFFERS AND THE PUBLIC OFFERINGS............................................... 139 DESCRIPTION OF THE NEW CREDIT FACILITY................................................ 142 DESCRIPTION OF HOLDING COMPANY INDEBTEDNESS........................................... 144 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................. 148 LEGAL MATTERS......................................................................... 153 EXPERTS............................................................................... 153 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 COMPARISON OF OLD F4L SENIOR NOTES AND NEW F4L SENIOR NOTES........................... A-1 COMPARISON OF OLD F4L SENIOR SUBORDINATED NOTES AND NEW F4L SENIOR SUBORDINATED NOTES............................................................................... B-1
ix 10 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Financial Statements and notes thereto, appearing elsewhere in this Amended and Restated Prospectus and Solicitation Statement. Unless the context otherwise requires, the terms "Food 4 Less" and "Ralphs," as used herein, refer to Food 4 Less and RSI and their consolidated subsidiaries, respectively, prior to the consummation of the Merger. The "Company" refers to Ralphs Grocery Company as the surviving and renamed corporation following the consummation of the Merger and includes, unless the context otherwise requires, all of its consolidated subsidiaries. As used herein, "Southern California" means Los Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego counties. Except as otherwise stated, references in this Amended and Restated Prospectus and Solicitation Statement to numbers of stores prior to the consummation of the Merger are as of October 1, 1994. References to the "pro forma" number of stores to be operated by the Company following the consummation of the Merger are based on October 1, 1994 totals, but give effect to certain anticipated store conversions, divestitures and closings. THE COMPANY The combination of Ralphs Grocery Company and Food 4 Less Supermarkets, Inc. will create the largest food retailer in Southern California. Pro forma for the Merger, the Company will operate approximately 332 Southern California stores with an estimated 26% market share among the area's supermarkets. The Company will operate the second largest conventional supermarket chain in the region under the "Ralphs" name and the largest warehouse supermarket chain under the "Food 4 Less" name. In addition, the Company will operate approximately 24 conventional format stores and 39 warehouse format stores in Northern California and the Midwest. Management believes that by the end of the fourth full year of combined operations, approximately $90 million in net annual cost savings will be achieved as a result of the Merger. Pro forma for the Merger, the Company would have had sales of approximately $5.1 billion and $2.8 billion, operating income of approximately $183 million and $90 million and EBITDA (as defined) of approximately $343 million and $189 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. Management believes the Merger will enhance the growth and profitability of Ralphs and Food 4 Less by providing the Company with the following benefits: - - TWO LEADING COMPLEMENTARY FORMATS. The Company will operate its conventional supermarkets in Southern California under the "Ralphs" name and all of its price impact warehouse format stores in Southern California under the "Food 4 Less" name. Pro forma for the Merger and certain planned store conversions, the Company will operate 264 Ralphs conventional format stores and 68 Food 4 Less warehouse format stores in the region. The Ralphs stores will continue to emphasize a broad selection of merchandise, high quality fresh produce, meat and seafood and service departments, including bakery and delicatessen departments in most stores. The Company's conventional stores will also benefit from Ralphs' strong private label program and its strengths in merchandising, store operations and systems. Passing on format-related efficiencies, the price impact warehouse format stores will continue to offer consumers the lowest overall prices while providing product selections comparable to conventional supermarkets. Management believes the Food 4 Less warehouse format has demonstrated its appeal to a wide range of demographic groups in Southern California and offers a significant opportunity for future growth. The Company plans to open nine new Food 4 Less warehouse stores and 21 new Ralphs stores over the next two years. - - SUBSTANTIAL COST SAVINGS OPPORTUNITIES. Management believes that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. 1 11 The following anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. There can be no assurance that such savings will be achieved. The sum of the components of the estimated annual cost savings exceeds $90 million; however, management's estimate of $90 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. See "Risk Factors -- Ability to Achieve Anticipated Cost Savings." -- REDUCED ADVERTISING EXPENSES. Consolidating the conventional format stores in Southern California under the "Ralphs" name will eliminate most of the separate advertising associated with Food 4 Less' existing Alpha Beta, Boys and Viva formats. Since Ralphs' current advertising program covers the Southern California region, the Company will be able to advertise for all of its Southern California stores under the existing Ralphs program. Management estimates that there will be annual advertising cost savings of approximately $28 million as compared to such costs for the pro forma combined fiscal year ended June 25, 1994. Because of reductions in certain advertising expenses that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are presently expected to be $19 million in the first full year of combined operations following the Merger as compared to the current annualized costs. -- REDUCED STORE OPERATIONS EXPENSE. Management expects to reduce store operations costs as a result of both reduced labor and benefit costs and reduced non-labor expenses. Store-level labor savings will be achieved when Ralphs' labor scheduling, computerized record keeping and other advanced store systems are applied to the Food 4 Less store base. In addition, management believes that the adoption of Ralphs' store systems in non-labor areas, such as energy management, safety programs and pooled supply purchasing, will produce further annual cost savings. Management estimates that annual store operations cost savings of approximately $21 million will be achieved by the fourth full year of combined operations after certain required capital expenditures are made. -- INCREASED VOLUME PURCHASING EFFICIENCIES. The combined volume requirements and leading market position of the Company should generally allow the Company to obtain improved terms from vendors, including suppliers of products carried on an exclusive or promoted basis, and to convert some less-than-truckload shipping quantities to full truckload quantities. Management estimates that annual purchasing cost savings of approximately $19 million will be achieved by the second full year of combined operations. -- WAREHOUSING AND DISTRIBUTION EFFICIENCIES. Consolidating the Company's warehousing and distribution operations into Ralphs' two primary facilities located in Compton, California and in the Atwater district of Los Angeles and Food 4 Less' primary facility located in La Habra, California will result in lower outside storage, transportation and labor costs. In addition, occupancy costs will be reduced as a result of the closure of certain existing facilities. Management estimates that annual warehousing and distribution cost savings of approximately $16 million will be achieved by the third full year of combined operations after certain capital expenditures on existing facilities are completed. -- CONSOLIDATED MANUFACTURING. Ralphs and Food 4 Less operate manufacturing facilities that produce similar products or have excess capacity. Management believes that consolidating meat, bakery, dairy, and other manufacturing and processing operations, and discontinuing external purchases of certain goods that can be manufactured internally, will achieve annual cost savings of approximately $10 million by the second full year of combined operations. -- CONSOLIDATED ADMINISTRATIVE FUNCTIONS. The Company expects to achieve savings from the elimination of redundant administrative staff, the consolidation of management information systems and a decreased reliance on certain outside services and consultants. Management estimates that annual savings of approximately $15 million associated with consolidating administrative functions will be achieved by the second full year of combined operations. - - TECHNOLOGICALLY ADVANCED WAREHOUSING AND DISTRIBUTION. The Company will utilize Ralphs' technologically advanced warehousing and distribution systems, which include a 17 million cubic foot high-rise 2 12 automated storage and retrieval system warehouse (the "ASRS") for non-perishable items and a 5.4 million cubic foot perishable service center (the "PSC") designed for processing, storing and distributing all perishable items. These facilities will provide the Company with substantial operating benefits, including: (i) enhanced turnover to further improve the freshness and quality of in-store products, (ii) added opportunities in forward buying programs and (iii) an increased percentage of inventory supplied by the Company's own warehousing and distribution system. Management believes the utilization of these facilities and Food 4 Less' La Habra warehouse will enable the Company to meet the combined inventory requirements of all stores with fewer employees and lower operating and occupancy-related expenses. - - STORE LOCATIONS. As a result of Ralphs' 122-year history and Alpha Beta Company's ("Alpha Beta") 91-year history in Southern California, the Company will have valuable and well established store locations, many of which are in densely populated metropolitan areas. - - RECENTLY REMODELED AND NEW STORE BASE. The Company will have a modern, technologically advanced store base. During the five years ended June 25, 1994, on a combined basis, Ralphs and Food 4 Less opened 74 new stores and remodeled 211 stores. Approximately 84% of the Company's stores have been opened or remodeled during the last five years. - - EXPERIENCED MANAGEMENT TEAM. The executive officers of the Company have extensive experience in the supermarket industry. The strength of Ralphs management expertise is evidenced by Ralphs' reputation for quality and service, technologically advanced systems, strong store operations and high historical EBITDA margins. The Food 4 Less management team will provide valuable experience in operating warehouse supermarkets and in effectively integrating companies into a combined operation. Following the acquisition of Alpha Beta in 1991, Food 4 Less management successfully integrated Alpha Beta with its existing Southern California operations and (within three years) achieved annual cost savings in excess of $40 million (compared to a pre-acquisition estimate of approximately $33 million). THE YUCAIPA COMPANIES Food 4 Less was organized in 1989 by its sponsor, The Yucaipa Companies ("Yucaipa"), a private investment group which specializes in the supermarket industry. Yucaipa has a successful track record in acquiring, integrating and improving the cash flow of supermarket companies. Since 1986, Yucaipa and its affiliated companies have completed eleven acquisition transactions, including five acquisitions by Food 4 Less and its subsidiaries. Following completion of the Merger, Yucaipa and its affiliates will control the Board of Directors of New Holdings and the Company. THE MERGER AND THE FINANCING On September 14, 1994, Food 4 Less Supermarkets, Inc. ("Food 4 Less"), Food 4 Less Holdings, Inc. ("Holdings"), and the parent company of Holdings, Food 4 Less, Inc. ("FFL"), entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Ralphs Supermarkets, Inc. ("RSI") and its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less will be merged with and into RSI (the "RSI Merger"). Immediately following the RSI Merger, RGC, which is currently a wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger"), and RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger the Company will become a wholly-owned subsidiary of New Holdings. See "-- Corporate Structure." As a result of the RSI Merger and the RGC Merger, the New F4L Notes and any outstanding Old F4L Notes not tendered in the Exchange Offers will be the obligations of the Company. Conditions to the consummation of the RSI Merger include the receipt of regulatory approvals and other necessary consents and the completion of financing. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $375 million in cash, $131.5 million principal amount of the Seller Debentures and $18.5 million initial 3 13 accreted value of the New Discount Debentures to be issued by New Holdings. New Holdings will use $100 million of the cash received from the New Equity Investment, together with the Seller Debentures and such New Discount Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of RSI stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. As currently contemplated, the Merger will be financed through the following transactions (collectively, the "Financing"): - Borrowings of up to $750 million aggregate principal amount pursuant to the New Term Loans (as defined) under the New Credit Facility to be provided by a syndicate of banks led by Bankers Trust Company ("Bankers Trust"). The New Credit Facility will also provide for a $325 million revolving credit facility (the "New Revolving Facility"), $16.4 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors (the "New Equity Investors") led by Apollo Advisors, L.P. (on behalf of one or more managed entities) or its affiliates and designees ("Apollo") and including affiliates of BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently with the New Equity Investment, the New Equity Investors will purchase outstanding shares of New Holdings capital stock from a stockholder of New Holdings for a purchase price of $57.8 million. See "Description of Capital Stock -- New Equity Investment." - The RGC Offers by Food 4 Less to (i) exchange up to $450 million aggregate principal amount of the Old RGC Notes for up to $450 million aggregate principal amount of the New RGC Notes plus $20.00 in cash per $1,000 principal amount exchanged and (ii) purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, together with the solicitation of consents from the holders of the Old RGC Notes to certain amendments to the Old RGC Indentures. It is a condition to the RGC Offers that at least a majority of the outstanding principal amount of the Old RGC Notes are exchanged for New RGC Notes pursuant to the RGC Offers (the "RGC Minimum Exchange"). - The Exchange Offers made hereunder to holders of Old F4L Notes to tender for exchange such Old F4L Notes for New F4L Notes and the Exchange Payment, together with the solicitation of consents from such holders to the Proposed Amendments to the Old F4L Indentures. - The purchase by New Holdings of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of $100 million of the cash proceeds from the New Equity Investment, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures, followed by the contribution of such common stock of RSI to Food 4 Less. Pursuant to the RSI Merger, the remaining shares of RSI stock will be acquired for $275 million in cash. - The placement by New Holdings pursuant to the New Discount Debenture Placement of $100 million initial accreted value of New Discount Debentures to a partnership including Yucaipa, the selling stockholders of Ralphs, an affiliate of George Soros, Apollo and an affiliate of each of BT Securities, CS First Boston and DLJ. The $100 million initial accreted value of New Discount Debentures includes (a) $18.5 million that will be issued to the RSI stockholders, (b) $15 million, $5 million and $2.5 million that will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the 4 14 Financing and (c) $59 million that will be issued for cash to the partnership described above. The $41 million initial accreted value of New Discount Debentures to be issued to the RSI stockholders, Apollo, BT Securities and Yucaipa will be contributed to such partnership by the recipients thereof. - The assumption by the Company, pursuant to the Merger, of approximately $166.8 million of other indebtedness of RGC and Food 4 Less. - The purchase by Holdings pursuant to the Holdings Offer to Purchase of Discount Notes for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for each $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase, together with the solicitation of consents from the holders of the Discount Notes to certain amendments to the Discount Note Indenture. 5 15 The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of May 30, 1995. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1% of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash (representing 49.9% of the outstanding aggregate principal amount of Old RGC Notes), $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers (representing 80% of the outstanding aggregate principal amount of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Holdings Offer to Purchase (representing 100% of the outstanding aggregate principal amount (at maturity) of Discount Notes). This presentation assumes the use of the maximum amount of cash proceeds that could be necessary to consummate the Merger (if holders representing more than 49.9% of the outstanding principal amount of Old RGC Notes tender into the RGC Offers in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum Exchange is exceeded), the non-cash sources and cash uses would be correspondingly adjusted). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the RGC Offers, the Exchange Offers and the Holdings Offer to Purchase. For additional information regarding the Financing, see "The Merger and the Financing." SOURCES AND USES (in millions)
CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a)................ $ 750.0 Purchase RSI Common Stock(j)....... $ 375.9 New Revolving Facility(b)........ 16.4 Purchase Old RGC Notes(k).......... 226.8 New F4L Senior Notes(c).......... 295.0 Purchase Discount Notes............ 83.9 Repay Ralphs 1992 Credit New RGC Notes(d)................. 200.0 Agreement.......................... 255.1 New Equity Investment(e)......... 140.0 Repay F4L Credit Agreement......... 161.5 New Discount Debentures(f)....... 59.0 Pay Accrued Interest(l)............ 29.3 EAR Related Payments(m)............ 22.8 Repay Mortgage Indebtedness(n)..... 191.5 Purchase New Holdings Common Stock(o)......................... 3.7 Fees and Expenses(p)............... 109.9 -------- -------- Total Cash Sources............ $1,460.4 Total Cash Uses.................... $1,460.4 ======== ======== NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g).......... $ 140.0 Old F4L Senior Notes Exchanged..... $ 140.0 Assumed Old F4L Senior Notes..... 35.0 Assumed Old F4L Senior Notes....... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes......................... 116.0 Exchanged.......................... 116.0 Assumed Old F4L Senior Assumed Old F4L Senior Subordinated Subordinated Notes............ 29.0 Notes.............................. 29.0 New RGC Notes(h)................. 225.5 Old RGC Notes Exchanged............ 225.5 New Discount Debentures(f)....... 41.0 Fees and Expenses(p)............... 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt.......................... 166.8 Debt............................... 166.8 Seller Debentures(i)............. 131.5 Purchase RSI Common Stock(i)....... 150.0 -------- -------- Total Non-Cash Sources........ $ 884.8 Total Non-Cash Uses................ $ 884.8 ======== ========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) term loans in the aggregate amount of up to $750 million, comprised of a $375 million tranche with a six year term (the "Tranche A Loan"), a $125 million tranche with a seven year term (the "Tranche B Loan"), a $125 million tranche with an eight year term (the "Tranche C Loan"), and a $125 million tranche with a nine year term (the "Tranche D Loan," and, together with the Tranche A Loan, Tranche B Loan and Tranche C Loan, the "New Term Loans"); and (ii) a $325 million revolving credit facility (the "New Revolving Facility"). The New Term Loans and the New Revolving Facility are referred to collectively as the "New Credit Facility." The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." 6 16 (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH Supermarket Corp. ("CLH"), a corporation owned by certain Yucaipa partners, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L Senior Notes Exchange Offer, which will be part of the same issue as the New F4L Senior Notes issued pursuant to the Senior Note Public Offering. (h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering. (i) In connection with the RSI Merger, New Holdings will issue $131.5 million principal amount of the Seller Debentures as part of the purchase price for the RSI common stock, up to $10 million of which may be put to Yucaipa on the closing date of the Merger at a purchase price equal to their principal amount pursuant to the Put Agreement (as defined). In addition, Yucaipa will be reimbursed by the Company for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. See "The Merger and the Financing" and "Description of Holding Company Indebtedness -- The Seller Debentures." (j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9 million to be paid in cash to holders of RSI management stock options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding following consummation of the RGC Offers, a portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. See "The RGC Offers and the Public Offerings." (l) Represents accrued interest payable on all debt securities assumed to be tendered pursuant to the Exchange Offers and the RGC Offers. (m) Represents payments to or for the benefit of Ralphs management with respect to outstanding equity appreciation rights (the "EARs" or "Equity Appreciation Rights") in connection with the Merger. Ralphs management will receive New Holdings stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships and Related Transactions -- Food 4 Less." (n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in the principal amount of $174.1 million, plus the estimated amount of the prepayment fees payable with respect thereto. (o) Represents the purchase of shares of New Holdings common stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo, upon closing of the Merger. Of such amounts, $15 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $5 million fee will be paid through the issuance of New Discount Debentures in lieu of cash. Such New Discount Debentures will be contributed by them to the partnership that will acquire all of the New Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. See "Certain Relationships and Related Transactions -- Food 4 Less." 7 17 CORPORATE STRUCTURE The following tables illustrate (i) the corporate structures of Food 4 Less and Ralphs immediately prior to the RSI Merger, the RGC Merger, the Reincorporation Merger and the FFL Merger and (ii) the corporate structure of the Company and its parent, New Holdings, and the anticipated outstanding indebtedness of the Company and New Holdings immediately after such mergers. Pursuant to the terms of the Merger Agreement, Food 4 Less will merge with and into RSI and RSI will be the surviving corporation in the RSI Merger. Immediately following the RSI Merger, RGC will merge with and into RSI and RSI will be the surviving corporation in the RGC Merger and will change its name to Ralphs Grocery Company. Prior to these transactions, FFL will merge with and into Holdings, and Holdings (which will be the surviving corporation) will reincorporate in Delaware as New Holdings. BEFORE MERGER [SEE EDGAR APPENDIX] 8 18 AFTER MERGER, FFL MERGER AND REINCORPORATION MERGER [SEE EDGAR APPENDIX] 9 19 COMPARISON OF OLD F4L SENIOR NOTES AND NEW F4L SENIOR NOTES The following is a brief comparison of the principal features of the Old F4L Senior Notes and the New F4L Senior Notes. The terms of the New F4L Senior Notes differ from the current (unamended) terms of the Old F4L Senior Notes in certain significant respects, including those described below. The summary comparisons set forth below do not purport to be complete and are qualified in their entirety by reference to "Description of the New F4L Notes" and to the "Comparison of Old F4L Senior Notes and New F4L Senior Notes" set forth in Appendix A hereto, and the related definitions contained therein.
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES -------------------------------------------- -------------------------------------------- ISSUER Food 4 Less. The Company, as successor by merger to Food 4 Less. PRINCIPAL AMOUNT As of May 1, 1995, $175 million. The up to $175 million principal amount of OUTSTANDING New F4L Senior Notes offered hereby will be part of an issue of up to $470 million aggregate principal amount of New F4L Senior Notes, up to $295 million principal amount of which will be issued pursuant to the Senior Note Public Offering. INTEREST RATE The Old F4L Senior Notes bear interest at Concurrently with the Exchange Offers, Food the rate of 10.45% per annum. 4 Less is offering up to $295 million principal amount of the New F4L Senior Notes pursuant to the Senior Note Public Offering. The Senior Note Public Offering is expected to price ten business days preceding the final Expiration Date of the Exchange Offers. The New F4L Senior Notes offered pursuant to the Exchange Offers will bear interest at a fixed rate per annum equal to the greater of (a) 10.45% and (b) the Applicable Treasury Rate (as defined) plus 350 basis points (3.50 percentage points); provided, however, that in no event will the New F4L Senior Notes offered for exchange hereby bear interest at a rate per annum that is less than the interest rate on the New F4L Senior Notes offered pursuant to the Senior Note Public Offering. INTEREST PAYMENT April 15 and October 15. June 1 and December 1, commencing on Decem- DATES ber 1, 1995. FINAL MATURITY DATE April 15, 2000. June 1, 2004. OPTIONAL REDEMPTION The Old F4L Senior Notes are subject to The New F4L Senior Notes are subject to redemption in whole or in part, at the redemption in whole or in part, at the option of Food 4 Less, at any time on or option of the Company, at any time on or after April 15, 1996, at the following after June 1, 2000, at the following redemption prices if redeemed during the redemption prices if redeemed during the twelve-month period commencing on April 15 twelve-month period commencing on June 1 of of the year set forth below: the years set forth below: 1996.................................104.48% 2000...............................103.9188% 1997.................................102.99% 2001...............................102.6125% 1998.................................101.49% 2002...............................101.3063% 1999 and thereafter..................100.00% 2003 and thereafter................100.0000% in each case plus accrued and unpaid in each case plus accrued and unpaid interest to the date of redemption. interest to the date of redemption. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be corre- spondingly adjusted. In addition, on or prior to June 1, 1998, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the New F4L Senior Notes originally issued, at a redemption price equal to 110.45% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 107.8375% of the principal amount
10 20
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES -------------------------------------------- -------------------------------------------- thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest to the redemption date. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. MANDATORY Under the Old F4L Senior Note Indenture, The New F4L Senior Notes are not subject to REDEMPTION Food 4 Less is required to make a mandatory a mandatory sinking fund requirement. sinking fund payment of $87.5 million on April 15, 1999, sufficient to retire 50% of the Old F4L Senior Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. FOOD 4 LESS INTENDS TO CREDIT EXCHANGES OF OLD F4L SENIOR NOTES ACCEPTED PURSUANT TO THE EXCHANGE OFFERS HEREUNDER AGAINST ITS SINKING FUND OBLIGATIONS. RANKING The Old F4L Senior Notes are senior The New F4L Senior Notes will be senior unsecured obligations of Food 4 Less and are unsecured obligations of the Company and senior to all subordinated indebtedness of will rank senior in right of payment to all Food 4 Less, including the Old F4L Senior subordinated indebtedness of the Company Subordinated Notes. The Old F4L Senior Notes including the F4L Senior Subordinated Notes rank pari passu in right of payment with all and the RGC Senior Subordinated Notes. The borrowings and other obligations of Food 4 New F4L Senior Notes will rank pari passu in Less and its subsidiaries under the Credit right of payment with other senior and Agreement. Such borrowings and obligations unsecured indebtedness of the Company. under the Credit Agreement and related However, the New F4L Senior Notes will be guarantees are secured by substantially all effectively subordinated to all secured of the assets of Food 4 Less and its indebtedness of the Company and its subsidiaries, whereas the Old F4L Senior subsidiaries, including indebtedness under Notes are senior unsecured obligations of the New Credit Facility. At January 7, 1995, Food 4 Less and its subsidiaries. on a pro forma basis after giving effect to the Merger and the Financing (and certain related assumptions) the Company would have had outstanding $1,057.9 million in secured indebtedness. GUARANTEES Each Subsidiary Guarantor has Each Subsidiary Guarantor (including the unconditionally guaranteed, jointly and Subsidiaries of RGC) will unconditionally severally, the full and prompt performance guarantee, jointly and severally, the full of Food 4 Less's obligations under the Old and prompt performance of the Company's F4L Senior Note Indenture and Old F4L Senior obligations under the New F4L Senior Note Notes. Indenture and the New F4L Senior Notes. CHANGE OF CONTROL Upon the occurrence of a Change of Control Upon the occurrence of a Change of Control (as defined), each holder will have the (as defined), each holder will have the right to require the repurchase of such right to require the Company to repurchase holder's Old F4L Senior Notes at a purchase such holder's New F4L Senior Notes at a price equal to 101% of the principal amount purchase price equal to 101% of the thereof plus accrued and unpaid interest to principal amount thereof plus accrued and the date of repurchase. The consummation of unpaid interest to the date of repurchase. the Merger will not constitute a Change of Control under the Old F4L Senior Note Indenture. CERTAIN COVENANTS The Old F4L Senior Notes Indenture contains The New F4L Senior Notes Indenture contains certain covenants, including, but not certain covenants, including, but not limited to, covenants with respect to the limited to, covenants with respect to the following: (i) limitation on restricted following: (i) limitation on restricted payments; (ii) limitation on incurrences of payments; (ii) limitation on incurrences of additional indebtedness; (iii) limitation on additional indebtedness; (iii) limitation on liens; (iv) limitation on disposition of liens; (iv) limitation on asset sales; (v) assets; (v) limitation on dividend payment limitation on dividend and other payment restrictions affecting subsidiaries; (vi) restrictions affecting subsidiaries; (vi) guarantees of certain indebtedness; (vii) guarantees of certain indebtedness; (vii) limitation on transactions with affiliates; limitation on transactions with affiliates; (viii) limitation on mergers and certain (viii) limitation on mergers and certain other transactions; and (ix) maintenance of other transactions; and (ix) limitations on Net Worth. preferred stock of subsidiaries.
11 21 COMPARISON OF OLD F4L SENIOR SUBORDINATED NOTES AND NEW F4L SENIOR SUBORDINATED NOTES The following is a brief comparison of the principal features of the Old F4L Senior Subordinated Notes to the New F4L Senior Subordinated Notes. The terms of the New F4L Senior Subordinated Notes differ from the current (unamended) terms of the Old F4L Senior Subordinated Notes in certain significant respects, including those discussed below. The summary comparisons set forth below do not purport to be complete and are qualified in their entirety by reference to "Description of New F4L Notes" and to the "Comparison of Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes" set forth in Appendix B hereto, and the related definitions contained therein.
OLD F4L SENIOR NEW F4L SENIOR SUBORDINATED NOTES SUBORDINATED NOTES -------------------------------------------- -------------------------------------------- ISSUER Food 4 Less. The Company, as successor by merger to Food 4 Less. PRINCIPAL AMOUNT As of May 1, 1995, $145 million. Up to $145 million. OUTSTANDING INTEREST RATE The Old F4L Senior Subordinated Notes bear The New F4L Senior Subordinated Notes will interest at the rate of 13.75% per annum. bear interest at the rate of 13.75% per annum. INTEREST PAYMENT June 15 and December 15. June 1, and December 1, commencing on DATES December 1, 1995. FINAL MATURITY DATE June 15, 2001. June 1, 2005. OPTIONAL REDEMPTION The Old F4L Senior Subordinated Notes are The New F4L Senior Subordinated Notes are subject to redemption in whole or in part, subject to redemption in whole or in part, at the option of Food 4 Less, at any time on at the option of the Company, at any time on or after June 15, 1996, at the following or after June 15, 1996, at the following redemption prices if redeemed during the redemption prices if redeemed during the twelve-month period commencing on June 15 of twelve-month period commencing on June 15 of the year set forth below: the years set forth below: 1996................................106.111% 1996................................106.111% 1997................................104.583% 1997................................104.583% 1998................................103.056% 1998................................103.056% 1999................................101.528% 1999................................101.528% And thereafter......................100.000% And thereafter......................100.000% in each case plus accrued and unpaid in each case plus accrued and unpaid interest to the date of redemption. interest to the date of redemption. In the event of a Change of Control, the Old F4L Senior Subordinated Notes may be redeemed on or after June 15, 1994 and prior to June 15, 1996, at the option of Food 4 Less, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, together with accrued and unpaid interest to the date of redemption, if redeemed during the 12 months commencing on June 15 in the years set forth below: Year Percentage 1994................................109.167% 1995................................107.639% MANDATORY REDEMPTION Under the Old F4L Senior Subordinated Note The New F4L Senior Subordinated Notes are Indenture, Food 4 Less is required to make a not subject to a mandatory sinking fund mandatory sinking fund payment on June 15, requirement. 2000, sufficient to retire 50% of the Old F4L Senior Subordinated Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. FOOD 4 LESS INTENDS TO CREDIT EXCHANGES OF OLD F4L SENIOR SUBORDINATED NOTES ACCEPTED PURSUANT TO THE EXCHANGE OFFERS HEREUNDER AGAINST ITS SINKING FUND OBLIGATIONS.
12 22
OLD F4L SENIOR NEW F4L SENIOR SUBORDINATED NOTES SUBORDINATED NOTES -------------------------------------------- -------------------------------------------- RANKING The Old F4L Senior Subordinated Notes are The New F4L Senior Subordinated Notes will unsecured general obligations of Food 4 Less be senior subordinated unsecured obligations and are subordinated to all Senior of the Company and will be subordinated in Indebtedness of Food 4 Less, including the right of payment to all Senior Indebtedness Old F4L Senior Notes and the borrowings and (as defined) of the Company, including the other obligations under the Credit Company's obligations under the New Credit Agreement. As of January 7, 1995, the Facility and the F4L Senior Notes. At aggregate outstanding amount of Senior January 7, 1995, on a pro forma basis after Indebtedness of Food 4 Less (excluding Food giving effect to the Merger and the 4 Less guarantees of certain Guarantor Financing (and certain related assumptions), Senior Indebtedness) would have been the aggregate outstanding amount of Senior approximately $395.5 million and the Indebtedness of the Company (excluding aggregate outstanding amount of Guarantor Company guarantees of certain Guarantor Senior Indebtedness of the Subsidiary Senior Indebtedness) would have been Guarantors (excluding guarantees by approximately $1,512.7 million and the Subsidiary Guarantors of certain Senior aggregate outstanding amount of Guarantor Indebtedness of Food 4 Less) would have been Senior Indebtedness of the Subsidiary approximately $16.5 million. Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.5 million and the Company would have had $169.4 million available to be borrowed under the New Revolving Facility. GUARANTEES Each Subsidiary Guarantor has Each Subsidiary Guarantor will unconditionally guaranteed, jointly and unconditionally guarantee, jointly and severally, the full and prompt performance severally, the full and prompt performance of Food 4 Less's obligations under the Old of the Company's obligations under the New F4L Senior Subordinated Note Indenture and F4L Senior Subordinated Note Indenture and the Old F4L Senior Subordinated Notes. the New F4L Senior Subordinated Notes. CHANGE OF CONTROL Upon the occurrence of a Change of Control Upon the occurrence of a Change of Control (as defined), each holder will have the (as defined) each holder will have the right right to require the repurchase of such to require the repurchase of such holder's holder's Old F4L Senior Subordinated Notes New F4L Senior Subordinated Notes at a at a purchase price equal to 101% of the purchase price equal to 101% of the principal amount thereof plus accrued and principal amount thereof plus accrued and unpaid interest to the date of repurchase. unpaid interest to the date of repurchase. The consummation of the Merger will not constitute a Change of Control under the Old F4L Senior Subordinated Note Indenture. CERTAIN COVENANTS The Old F4L Senior Subordinated Notes The New F4L Senior Subordinated Notes Indenture contains certain covenants, Indenture contains certain covenants, including, but not limited to, covenants including, but not limited to, covenants with respect to the following: (i) with respect to the following: (i) limitation on restricted payments; (ii) limitation on restricted payments; (ii) limitation on incurrences of additional limitation on incurrences of additional indebtedness; (iii) limitation on liens; indebtedness; (iii) limitations on liens; (iv) limitation on asset sales; (v) (iv) limitation on asset sales; (v) limitation on payment restrictions affecting limitation on dividends and other payment subsidiaries; (vi) guarantees of certain restrictions affecting subsidiaries; (vi) indebtedness; (vii) limitation on guarantees of certain indebtedness; (vii) transactions with affiliates; (viii) limitation on transactions with affiliates; limitations on merger and certain other (viii) limitation on mergers and certain transactions and (ix) maintenance of Net other transactions; and (ix) limitation on Worth. preferred stock of subsidiaries.
13 23 PURPOSES OF THE EXCHANGE OFFERS AND CONSENT SOLICITATION The Exchange Offers and the Solicitation, together with the other financing and solicitation transactions described under "The Merger and the Financing," are part of the transactions required to consummate the merger of Food 4 Less with and into RSI. Immediately following the RSI Merger, RGC, a wholly-owned subsidiary of RSI, will merge with and into RSI and RSI will change its name to Ralphs Grocery Company. As a result of the Merger, the New F4L Notes and any Old F4L Notes not tendered for exchange pursuant to the Exchange Offers, the New RGC Notes and the Old RGC Notes not tendered pursuant to the RGC Offers, and the indebtedness incurred pursuant to the New Credit Facility will become the obligations of the Company. In connection with the consummation of the Merger, Food 4 Less is making the Exchange Offers and the RGC Offers to (i) extend the maturities of the existing debt securities of Food 4 Less and RGC by exchanging such securities for new longer-term securities and (ii) establish uniform covenants in the New F4L Notes and the New RGC Notes in order to simplify the capital structure of the Company. The Exchange Offers afford Old F4L Noteholders an opportunity to elect to participate in the long-term capitalization of the Company. Food 4 Less is also seeking Consents to the Proposed Amendments in the Solicitation. The primary purpose of the Proposed Amendments is to permit the consummation of the Merger and to eliminate substantially all of the restrictive covenants in the Old F4L Indentures. See "The Proposed Amendments." If adopted by the holders of not less than a majority in aggregate principal amount of each of the outstanding Old F4L Senior Notes and the outstanding Old F4L Senior Subordinated Notes held by persons other than Food 4 Less and its affiliates, the Proposed Amendments will become effective immediately prior to the consummation of the Merger, upon Food 4 Less' acceptance of properly tendered Old F4L Notes for exchange pursuant to the Exchange Offers. THE EXCHANGE OFFERS AND THE SOLICITATION The Exchange Offers........... Food 4 Less is offering (i) to holders of the Old F4L Senior Notes to exchange for each $1,000 principal amount of Old F4L Senior Notes exchanged, $1,000 principal amount of New F4L Senior Notes plus $5.00 in cash and (ii) to holders of the Old F4L Senior Subordinated Notes to exchange for each $1,000 principal amount of Old F4L Senior Subordinated Notes exchanged, $1,000 principal amount of New F4L Senior Subordinated Notes plus $20.00 in cash, in each case plus accrued and unpaid interest to the date of exchange. Each Exchange Offer constitutes a separate exchange offer by Food 4 Less. See "The Exchange Offers and Solicitation -- Terms of the Exchange Offers." Holders of the Old F4L Notes may choose to participate in the applicable Exchange Offer by completing the appropriate boxes on the Letter of Transmittal. See "The Exchange Offers and Solicitation -- Procedures for Tendering and Consenting." Accrued Interest on the Old F4L Notes............... Tendering holders will receive accrued interest on Old F4L Notes accepted for exchange up to, but not including, the date of such exchange. Interest on the New F4L Notes will accrue from, and including, the date of such exchange, which shall be the date of issuance of the New F4L Notes. Accrued interest on tendered Old F4L Notes will be paid in cash to such tendering holders promptly after consummation of the Exchange Offers. See "The Exchange 14 24 Offers and Solicitation -- Acceptance of Old F4L Notes for Exchange; Delivery of New F4L Notes and Payment of Exchange Payment." The Solicitation.............. Concurrently with the Exchange Offers, Food 4 Less is soliciting Consents from each of the Old F4L Senior Noteholders and the Old F4L Senior Subordinated Noteholders representing not less than a majority in aggregate principal amount of each of the outstanding Old F4L Senior Notes and Old F4L Senior Subordinated Notes held by persons other than Food 4 Less and its affiliates to the Proposed Amendments to the Old F4L Indentures. See "The Proposed Amendments." HOLDERS OF OLD F4L NOTES WHO DESIRE TO ACCEPT THE APPLICABLE EXCHANGE OFFER MUST CONSENT TO THE PROPOSED AMENDMENTS. HOLDERS DO NOT HAVE THE OPTION TO CONSENT TO THE PROPOSED AMENDMENTS WITHOUT TENDERING INTO THE APPLICABLE EXCHANGE OFFER. See "The Exchange Offers and Solicitation -- Procedures for Tendering and Consenting." The Company and each of the Old Trustees (as defined) will execute the Supplemental Indentures implementing the Proposed Amendments to the Old F4L Note Indentures after certification to each of the Old F4L Note Trustees that Food 4 Less has received the Requisite Consents. The Proposed Amendments will only become operative upon execution of the Supplemental Indentures and consummation of the Exchange Offers. If the Proposed Amendments become operative, the non-tendering holders of Old F4L Notes will be bound thereby regardless of whether they consented to the Proposed Amendments. All references herein to the Exchange Offers shall be deemed to include the Solicitation. As of May 1, 1995, there was issued and outstanding $175 million aggregate principal amount of Old F4L Senior Notes and $145 million aggregate principal amount of Old F4L Senior Subordinated Notes. See "The Exchange Offers and Solicitation -- The Consent Solicitation." Expiration Date............... Each Exchange Offer and the Solicitation have been extended until and will expire at 12:00 Midnight, New York City time, on May 25, 1995, unless further extended by Food 4 Less. Food 4 Less reserves the right to further extend either Exchange Offer or the Solicitation at its discretion, in which event the term "Expiration Date" shall mean the latest time and date at which such Exchange Offer or the Solicitation, as the case may be, as so further extended by Food 4 Less, shall expire. Food 4 Less does not expect to commence the Public Offerings until such time as the Minimum Exchange has been satisfied and Requisite Consents have been received. Following the pricing of the Senior Note Public Offering, Food 4 Less intends to further extend the Expiration Date to a date that is ten Business Days following the pricing of the Public Offerings. See "The Exchange Offers and Solicitation -- Expiration Date; Extensions; Termination; Amendments." 15 25 Withdrawal Rights and Revocation of Consents............... Tenders of Old F4L Notes pursuant to the Exchange Offers may be withdrawn and Consents may be revoked at any time until the Requisite Consents with respect to the applicable issue of Old F4L Notes have been received and the Supplemental Indenture for such issue has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Exchange Offer with respect to such Old F4L Notes is terminated without any Old F4L Notes being accepted for exchange thereunder. Any valid revocation of Consents will automatically constitute a withdrawal of the Old F4L Notes to which such Consents relate. See "The Exchange Offers and Solicitation -- Withdrawal of Tenders and Revocation of Consents." Conditions.................... Notwithstanding any other provision of the Exchange Offers or the Solicitation, the obligation of Food 4 Less to accept for exchange any validly tendered Old F4L Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) satisfaction of the Minimum Exchange (i.e., at least 80% of the aggregate principal amount of the outstanding Old F4L Notes being validly tendered and not withdrawn pursuant to the Exchange Offers prior to the Expiration Date), (ii) the receipt of the Requisite Consents (i.e., Consents from Old F4L Noteholders representing at least a majority in aggregate principal amount of each of the outstanding Old F4L Senior Notes and Old F4L Senior Subordinated Notes held by persons other than Food 4 Less and its affiliates) on or prior to the Expiration Date, (iii) satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the RSI Merger, (iv) the prior or contemporaneous consummation of the Other Debt Financing Transactions and (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. In addition, consummation of each Exchange Offer is subject to the consummation of the other Exchange Offer. There can be no assurance that such conditions will be satisfied or waived. Food 4 Less reserves the right to waive certain of the conditions to either Exchange Offer and, subject to certain limitations, to extend, terminate, cancel or otherwise modify or amend either Exchange Offer in any respect. See "The Exchange Offers and Solicitation -- Conditions." Procedures for Tendering and Consenting.................. Another form of the Letter of Transmittal is being circulated to holders of Old F4L Notes with this Amended and Restated Prospectus and Solicitation Statement. Holders may use such form or the form previously circulated to effect valid tenders of Old F4L Notes and valid deliveries of Consents. Any holder who previously has validly tendered any Old F4L Notes or has delivered a valid Consent need not take any further action to receive, subject to the terms and conditions of the Exchange Offers, the New F4L Notes and the Exchange Payment. Any Old F4L Noteholder desiring to 16 26 accept the applicable Exchange Offer should either (i) complete and sign the Letter of Transmittal or facsimile thereof, have his signature thereon guaranteed and forward the Letter of Transmittal, together with the certificate(s) evidencing his Old F4L Notes and any other required documents, to the Exchange Agent, (ii) comply with the guaranteed delivery procedure described under the heading "The Exchange Offers and Solicitation -- Guaranteed Delivery Procedure," (iii) tender such Old F4L Notes pursuant to the procedure for book-entry transfer, or (iv) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him, in each case prior to the Expiration Date. Old F4L Noteholders having Old F4L Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person if such holder desires to tender such Old F4L Notes. HOLDERS OF OLD F4L NOTES WHO DESIRE TO ACCEPT THE APPLICABLE EXCHANGE OFFER MUST CONSENT TO THE PROPOSED AMENDMENTS. A HOLDER OF OLD F4L NOTES WHO DESIRES TO TENDER INTO THE APPLICABLE EXCHANGE OFFER WITH RESPECT TO ANY OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES MUST TENDER ALL OF SUCH HOLDERS' OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES, AS THE CASE MAY BE. See "The Exchange Offers and Solicitation -- Procedures for Tendering and Consenting." Delivery of New F4L Notes and Payment of the Exchange Payment..................... Upon satisfaction or waiver of the conditions to each of the Exchange Offers, Food 4 Less will accept all Old F4L Notes which are properly tendered and not withdrawn, and promptly following such acceptance, the Company will issue, or cause to be issued, the New F4L Notes and will pay, or cause to be paid, the applicable Exchange Payment in accordance with the instructions of the tendering Old F4L Noteholder. See "The Exchange Offers and Solicitation -- Acceptance of Old F4L Notes for Exchange; Delivery of New F4L Notes and Payment of the Exchange Payment." Certain Consequences to Non- Tendering Old F4L Noteholders................. Consummation of the Exchange Offers and the effectiveness of the Proposed Amendments may have adverse consequences to non-tendering Old F4L Noteholders, including that non-tendering holders of Old F4L Notes will no longer be entitled to the benefit of certain of the restrictive covenants currently contained in the Old F4L Indentures and that the reduced amount of outstanding Old F4L Notes as a result of the Exchange Offers may adversely affect the trading market, liquidity and market price of the Old 17 27 F4L Notes. If the Requisite Consents are received and accepted, the Proposed Amendments will be binding on all non-tendering Old F4L Noteholders. See "Risk Factors -- Potential Adverse Effects of the Exchange Offers and the Solicitation on Holders of Untendered Old F4L Notes" and "-- Effect of the Proposed Amendments on Holders That Do Not Exchange." No Appraisal Rights........... No appraisal rights are available to holders of Old F4L Notes in connection with the Exchange Offers. Certain Federal Income Tax Considerations.............. Holders of Old F4L Notes who exchange Old F4L Notes for New F4L Notes and cash should recognize gain, but not loss, for federal income tax purposes equal to the lesser of (i) the amount of cash received (other than that portion, if any, attributable to accrued but unpaid interest on the Old F4L Notes) or (ii) the amount of any gain realized on the exchange of Old F4L Notes for New F4L Notes and cash. See "Certain Federal Income Tax Considerations." Risk Factors.................. See "Risk Factors" for a discussion of certain factors that should be considered in evaluating the Exchange Offers and the Solicitation. Dealer Managers............... BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") are serving as Dealer Managers in connection with the Exchange Offers and the Solicitation. Their telephone numbers are (212) 775-2166, (212) 909-2873 and (212) 504-4753, respectively. Exchange Agent................ Bankers Trust, an affiliate of BT Securities, is serving as Exchange Agent in connection with the Exchange Offers and the Solicitation. Its telephone number is (212) 250-6270. Information Agent............. D.F. King & Co., Inc. is serving as Information Agent in connection with the Exchange Offers and the Solicitation. Requests for additional copies of this Amended and Restated Prospectus and Solicitation Statement, the Letter of Transmittal and any other required documents should be directed to the Information Agent or any Dealer Manager at one of its addresses set forth on the back cover page of this Amended and Restated Prospectus and Solicitation Statement. The telephone number of the Information Agent is (800) 669-5550. 18 28 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth summary unaudited pro forma combined financial data for the 52 weeks ended June 25, 1994 and for the 28 weeks ended January 7, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), as if such transactions had occurred on June 27, 1993 with respect to the pro forma operating and other data, and as of January 7, 1995, with respect to the pro forma balance sheet data. Such pro forma information combines the results of operations of Food 4 Less for the 52 weeks ended June 25, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 7, 1995, with the results of operations of Ralphs for the 52 weeks ended July 17, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 29, 1995, respectively. See "The Merger and the Financing." The pro forma financial data set forth below is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of the dates indicated, or that may be achieved in the future. The following pro forma financial data should be read in conjunction with the "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Food 4 Less and Ralphs and related notes thereto, included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
52 WEEKS ENDED 28 WEEKS ENDED JUNE 25, 1994 JANUARY 7, 1995 ---------------------- ---------------- (DOLLARS IN MILLIONS) OPERATING DATA: Sales...................................................... $5,053.5 $2,767.6 Gross profit............................................... 1,048.2 553.0 Selling, general and administrative expenses............... 833.1 442.1 Interest expense: Cash.................................................... 224.3 122.5 Non-cash................................................ 15.2 7.9 Amortization of debt issuance costs..................... 13.4 6.9 ---------- ---------------- Total interest expense..................................... 252.9 137.3 Net loss(a)................................................ (86.9) (47.7) Ratio of earnings to fixed charges(b)...................... -- -- BALANCE SHEET DATA (END OF PERIOD): Working capital.................................................................... $ 18.4 Total assets....................................................................... 3,096.2 Total debt......................................................................... 1,997.3 Stockholder's equity............................................................... 284.0 OTHER DATA: Depreciation and amortization.............................. $ 150.8 $ 76.4 Capital expenditures(c).................................... 123.2 78.1 Stores open at end of period(d)............................ -- 395 EBITDA (as defined)(a)(e)(f)............................... $ 342.5 $ 189.3 EBITDA margin(g)........................................... 6.8% 6.8%
- --------------- (a) The summary unaudited pro forma combined financial data and the results of operations and EBITDA (as defined) for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 do not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totaling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations, which are estimated to be $50.0 million over a three-year period, (iii) $1.8 million in costs related to the cancellation of an employment agreement, and (iv) other costs related to warehouse closures, which costs are not presently determinable. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary items and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). The Company's pro forma earnings were insufficient to cover pro forma fixed charges by approximately $86.9 million and $47.7 million for the 52 weeks ended 19 29 June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. However, such pro forma earnings included non-cash charges of $189.0 million and $99.9 million, respectively, primarily consisting of depreciation and amortization. (c) Does not include Merger-related capital expenditures of $55.0 million and $37.5 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. It is estimated that the gross capital expenditures to be made by the Company in the first fiscal year following the closing will be approximately $153 million (or $106 million net of expected capital leases), of which approximately $98 million relate to ongoing expenditures for new stores, equipment and maintenance and approximately $55 million relate to store conversions and other Merger-related and non-recurring items. (d) The pro forma number of stores is based on October 1, 1994 totals, but gives effect to the closing or divestiture of 32 stores (29 Food 4 Less conventional supermarkets or warehouse stores and 3 Ralphs stores) in connection with the Merger and the closure of 2 additional Food 4 Less conventional stores open at October 1, 1994 which were subsequently closed. The pro forma financial information presented herein has been based upon the actual number of stores open as of the beginning of each period presented, adjusted for the closing or divestiture of the 32 stores which have yet to be consummated and does not include any pro forma adjustment attributable to the 2 stores closed subsequent to October 1, 1994. (e) "EBITDA", as defined and presented historically by RGC, represents net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for Equity Appreciation Rights, provision for tax indemnification payments to Federated Department Stores, Inc. ("Federated"), provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (f) Pro forma EBITDA does not give any effect to $90 million of anticipated net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) which management believes are achievable by the end of the fourth full year of combined operations. It is anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. As shown below, the sum of the components of the estimated annual cost savings exceeds $90 million; however, management's estimate of $90 million net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. These anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. As a result, there can be no assurance that such savings will be achieved. See "Business -- The Merger" and "Risk Factors -- Ability to Achieve Anticipated Cost Savings." The components of the estimated cost savings are as follows:
(IN MILLIONS) Pro forma EBITDA for the 52 weeks ended June 25, 1994........................ $ 342.5 Estimated net annual cost savings: Reduced advertising expenses............................................... 28.0 Reduced store operations expense........................................... 21.0 Increased volume purchasing efficiencies................................... 19.0 Warehousing and distribution efficiencies.................................. 16.0 Consolidated manufacturing................................................. 10.0 Consolidated administrative functions...................................... 15.0 Less: Annual reinvestment of cost savings.................................. (19.0) ------ Total estimated net annual cost savings...................................... $ 90.0 ------ Sum of EBITDA (as defined) and full amount of estimated annual cost savings to be realized over four years............................................. $ 432.5 ===========
Because of reductions in certain advertising expenses that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are expected to be approximately $19 million in the first full year following the Merger as compared to the current annualized costs. (g) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 20 30 SUMMARY HISTORICAL FINANCIAL DATA OF RALPHS The following table sets forth summary historical financial data of RGC (as the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992, and summary historical financial data of RSI as of and for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29, 1995, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of RSI and RGC and related notes thereto included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, 1991 1992 1993 1994 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS) OPERATING DATA: Sales..................................................... $ 2,799.1 $ 2,889.2 $ 2,843.8 $ 2,730.2 $ 2,724.6 Gross profit.............................................. 573.7 614.0 626.6 636.5 623.6 Selling, general and administrative expenses(a)........... 438.0 459.2 470.0 471.0 467.0 Interest expense(b)....................................... 128.5 130.2 125.6 108.8 112.7 Net earnings (loss)(c).................................... (51.4) (41.2) (76.1) 138.4(i) 32.1 Ratio of earnings to fixed charges(d)..................... --(d) --(d) 1.02x 1.24x 1.24x BALANCE SHEET DATA (end of period): Working capital surplus (deficit)......................... $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5) Total assets.............................................. 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9 Total debt(e)............................................. 986.1 941.9 1,029.8 998.9 1,018.5 Redeemable stock.......................................... 3.0 3.0 -- -- -- Stockholders' equity (deficit)............................ (16.0) (57.2) (133.3) 5.1 27.2 OTHER DATA: Depreciation and amortization(f).......................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0 Capital expenditures...................................... 87.6 50.4 102.7 62.2 64.0 Stores open at end of period.............................. 150 158 159 165 173 EBITDA (as defined)(g).................................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2 EBITDA margin(h).......................................... 7.4% 7.8% 8.0% 8.4% 8.4%
- --------------- (a) Includes provision for post retirement benefits other than pensions of $2.2 million, $2.6 million, $3.3 million, $3.4 million and $2.6 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. (b) Interest expense includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 53 weeks ended February 3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995, respectively. (c) Net earnings (loss) includes expenses relating to provisions for Equity Appreciation Rights and for tax indemnification payments to Federated, extraordinary item relating to debt refinancing, loss on disposal of assets, provisions for postretirement and pension benefits and provision for earthquake losses. Net earnings (loss) includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses and interest expense, of $29.2 million, $31.2 million, $36.9 million, $36.3 million, and $20.0 million, for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, the 52 weeks ended January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995, respectively. Included in the 52 weeks ended January 31, 1994 and the 52 weeks ended January 29, 1995 are reduced employer contributions of $11.8 million and $12.7 million, respectively, related to union health and welfare benefit plans. (d) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by approximately $25.5 million and $27.7 million, respectively. (e) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (f) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million, respectively. (g) "EBITDA," as defined and presented historically by RGC, represents earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provisions for Equity Appreciation Rights, provision for tax indemnification payments to Federated, provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Ralphs' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (h) EBITDA margin represents EBITDA (as defined) as a percentage of sales. (i) Includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.). 21 31 SUMMARY HISTORICAL FINANCIAL DATA OF FOOD 4 LESS The following table sets forth summary historical financial data of Food 4 Less as of and for the 53 weeks ended June 30, 1990 and the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 which have been derived from the financial statements of Food 4 Less audited by Arthur Andersen LLP, independent public accountants. The summary historical financial data of Food 4 Less presented below as of and for the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from unaudited interim financial statements of Food 4 Less which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Food 4 Less and related notes thereto included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 28 WEEKS 28 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1990 1991(A) 1992 1993 1994(B) 1994 1995 -------- -------- -------- -------- -------- ---------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales.......................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,416.2 $1,404.7 Gross profit................................... 204.8 265.7 520.8 484.2 469.3 262.2 237.5 Selling, general, administrative and other expenses..................................... 157.8 213.1 469.7 434.9 388.8 221.5 199.2 Interest expense(c)............................ 50.8 50.1 70.2 69.8 68.3 36.8 37.7 Net loss(d).................................... (10.1) (9.6) (33.8) (27.4) (2.7) (1.0) (8.7) Ratio of earnings to fixed charges(e).......... --(e) --(e) --(e) --(e) 1.0 x --(e) --(e) BALANCE SHEET DATA (end of period)(f): Working capital surplus (deficit).............. $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8) Total assets................................... 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(g).................................. 360.7 558.9 525.3 538.1 517.9 521.3 551.4 Redeemable stock............................... 5.1 -- -- -- -- -- -- Stockholder's equity........................... 20.6 84.6 50.8 72.9 69.0 71.2 60.4 OTHER DATA: Depreciation and amortization(h)............... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures........................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period................... 115 259 249 248 258 249 266 EBITDA (as defined)(i)......................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(j)............................... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material from March 29, 1994, the date of the Food Barn acquisition. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) Net loss includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses, and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9 million, $25.7 million, $24.8 million, and $14.9 million for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended, June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, respectively. Included in the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995 are reduced employer contributions of $8.1 million, $2.8 million and $13.7 million, respectively, related to union health and welfare benefit plans. (e) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt financing costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992 and June 26, 1993 and the 28 weeks ended January 8, 1994 and January 7, 1995, by approximately $9.1 million, $3.4 million, $25.6 million, $25.9 million, $0.3 million and $8.2 million respectively. However, such earnings included non-cash charges of $29.9 million for the 53 weeks ended June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2 million for the 52 weeks ended June 27, 1992, $62.5 million for the 52 weeks ended June 26, 1993, $33.3 million for the 28 weeks ended January 8, 1994 and $39.0 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation and amortization. (f) Balance sheet data as of June 30, 1990 relate to Food 4 Less and include the effect of the acquisition of Breco Holding Company (the "BHC Acquisition"), as well as the acquisitions of Bell Markets, Inc. and certain assets of ABC Market Corp. Balance sheet data as of June 29, 1991, June 27, 1992, June 26, 1993 and January 8, 1994 relate to Food 4 Less and reflect the Alpha Beta acquisition and the financings and refinancings associated therewith. Balance sheet data as of June 25, 1994 and January 7, 1995 relate to Food 4 Less and reflect the acquisition of the Food Barn stores. (g) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (h) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and for the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (i) "EBITDA," as defined and presented historically by Food 4 Less, represents income before interest expense, depreciation and amortization expense, the LIFO provision, provision for income taxes, provision for earthquake losses and a one-time charge for Teamsters Union sick pay benefits. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Food 4 Less' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (j) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 22 32 RISK FACTORS Before deciding whether to participate in the applicable Exchange Offer and the Solicitation, each holder of Old F4L Notes should carefully consider the following factors, in addition to the other matters described in this Amended and Restated Prospectus and Solicitation Statement. LEVERAGE AND DEBT SERVICE Following the consummation of the Merger and the Financing, the Company will be highly leveraged. At January 7, 1995, pro forma for the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), the Company's total indebtedness (including current maturities) and stockholder's equity would have been $1,997.3 million and $284.0 million, respectively, and the Company would have had an additional $169.4 million available to be borrowed under the New Revolving Facility. In addition, as of January 7, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $125.0 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, the Company's earnings before fixed charges would have been inadequate to cover fixed charges by $86.9 million and $47.7 million, respectively. However, such earnings include non-cash charges of $189.0 million and $99.9 million, respectively, primarily consisting of depreciation and amortization. New Holdings will be required to make semi-annual cash payments of interest on the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of $61.0 million per annum. In addition, New Holdings will be required to commence semi-annual cash payments of interest on any Discount Notes that remain outstanding following the Merger commencing June 15, 1998. The New F4L Indentures permit the Company (in the absence of a default or event of default thereunder) to pay cash dividends to New Holdings in an amount sufficient to allow New Holdings to pay interest on such Indebtedness when due. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its Indebtedness (including the New F4L Notes) 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. The pro forma financial information presented in this Amended and Restated Prospectus and Solicitation Statement is based on, among other things, the assumption that the interest rate borne by the New F4L Senior Notes and the New RGC Notes will be 11% and 11.50%, respectively. In the event that the interest rates on the New F4L Senior Notes and the New RGC Notes are higher than the respective assumed interest rates, the Company's interest expense and deficiency of earnings to fixed charges would increase over the amounts reflected in such pro forma financial information. For a description of the effects on the pro forma financial information of varying acceptance levels in the Exchange Offers and the RGC Offers and of varying interest rates, see Note (l) to the Notes to Unaudited Pro Forma Combined Statement of Operations. Based upon the current level of operations and anticipated cost savings, the Company believes that its cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments over the next several years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Merger and the fact that substantially all of its assets will be pledged to secure the borrowings under the New Credit Facility and other secured obligations. 23 33 The Company's high level of debt will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions; (b) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the Company's indebtedness and in the New F4L Indentures will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends; and (c) because of the Company's debt service requirements, funds available for working capital, capital expenditures, acquisitions and general corporate purposes, may be limited. The Company's leveraged position may increase its vulnerability to competitive pressures. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and, therefore, its inability to finance capital expenditures through borrowed funds could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of the Company could have a significant adverse effect on the market value of the New F4L Notes. ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS Management of the Company has estimated that approximately $90 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) can be achieved over a four year period as a result of integrating the operations of Ralphs and Food 4 Less. See "Business -- The Merger." The cost savings estimates have been prepared solely by members of the management of each company. The estimates necessarily make numerous assumptions as to future sales levels and other operating results, the availability of funds for capital expenditures as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Several of the cost savings estimates are premised on the assumption that certain levels of efficiency presently maintained by either Food 4 Less or Ralphs can be achieved by the combined Company following the Merger. Other estimates are based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. Certain of the estimates relating to the consolidation of warehousing and distribution facilities assume the completion of certain capital expenditures to expand the capacity of the continuing facilities. It is anticipated that $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the four year period following the Merger, without which the estimated cost savings may not be fully achievable. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. Because the assumptions underlying the cost savings estimates are numerous and detailed, management believes that it would be impractical to specify all such assumptions in this Amended and Restated Prospectus and Solicitation Statement. However, management also believes that all such assumptions are reasonable in light of existing business conditions and prospects. Investors are cautioned that the actual cost savings realized by the Company may vary considerably from the estimates contained herein and that undue reliance should not be placed upon such estimates. There also can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. REGIONAL ECONOMIC CONDITIONS Following the consummation of the Merger, a substantial percentage of the Company's business (representing approximately 90% of pro forma sales) will be conducted in Southern California. Southern California began to experience a significant economic downturn in 1991 and has only recently begun a mild recovery. The economy in Southern California has been affected by substantial job losses in the defense and aerospace industries and other adverse economic trends. These adverse regional economic conditions have resulted in declining sales levels at Ralphs and Food 4 Less in recent periods. For the 52 weeks ended June 25, 1994, and the 52 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 6.9% and 3.7% declines, respectively, in comparable store sales as compared with the comparable period in the prior year, primarily reflecting the weak economy in Southern California, lower levels of price inflation in certain food product categories, and increased competitive store openings in Southern California. For the 28 weeks ended 24 34 January 7, 1995 and the 28 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 4.5% and 3.4% declines, respectively, in comparable store sales. However, both Food 4 Less' and Ralphs' comparable store sales declines have begun to moderate in recent months. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that improvement will occur or that substantial future declines in same store sales will not occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. See "Business -- Competition." CORPORATE STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES Following the consummation of the Merger, a significant portion of the Company's operating income will be generated by its subsidiaries. As a result, the Company will rely on distributions or advances from its subsidiaries to provide a portion of the funds necessary to meet its debt service obligations, including the payment of principal and interest on the New F4L Notes. Should the Company fail to satisfy any payment obligation under the New F4L Notes, the holders would have a direct claim therefor against the Subsidiary Guarantors pursuant to their Guarantees. However, the capital stock of, and substantially all of the assets of, the Subsidiary Guarantors will be pledged to secure the obligations of the Company and such subsidiaries under the New Credit Facility and other secured obligations. The New F4L Indentures will limit, but not prohibit, the ability of the Company and its subsidiaries to incur additional secured indebtedness. In the event of a default under the New Credit Facility (or any other secured indebtedness), the lenders thereunder would be entitled to a claim on the assets securing such indebtedness which is prior to any claim of the holders of the New F4L Notes. Accordingly, there may be insufficient assets remaining after payment of prior secured claims (including claims of lenders under the New Credit Facility) to pay amounts due on the New F4L Notes. In addition, if a court were to avoid the Guarantees under fraudulent conveyance laws or other legal principles or, by the terms of such Guarantees, the obligations thereunder were reduced as necessary to prevent such avoidance, or the Guarantees were released, the claims of other creditors of the Subsidiary Guarantors, including trade creditors, would to such extent have priority as to the assets of such Subsidiary Guarantors over the claims of the holders of the New F4L Notes. The Guarantees of the New F4L Notes by any Subsidiary Guarantor will be released upon the sale of such Subsidiary Guarantor or upon the release by the lenders under the New Credit Facility of such Subsidiary Guarantor's Guarantee of the Company's obligation under the New Credit Facility. The New F4L Indentures limit the ability of the Company and its subsidiaries to incur additional indebtedness and to enter into agreements that would restrict the ability of any subsidiary to make distributions, loans or other payments to the Company. However, these limitations are subject to certain exceptions. See "-- Fraudulent Conveyance Risks" and "Description of the New F4L Notes." CONTROL OF THE COMPANY Following completion of the Merger, the FFL Merger and the Reincorporation Merger, all of the Company's outstanding common stock will be held by New Holdings. Pro forma for such mergers and certain related events, affiliates of Yucaipa and Apollo will have beneficial ownership of approximately 41.8% and 33.9%, respectively, of the outstanding capital stock of New Holdings. Pursuant to a new stockholders' 25 35 agreement (the "1995 Stockholders Agreement") which will be entered into by the New Equity Investors and certain current FFL stockholders and Holdings warrantholders, upon completion of the Merger, New Holdings and the Company will have boards consisting of nine and ten members, respectively, and (i) Yucaipa will have the right to elect six directors to the board of New Holdings and seven directors to the board of the Company, (ii) Apollo will have the right to elect two directors to the board of each of New Holdings and the Company, and (iii) the other New Equity Investors will have the right to elect one director to the board of each of New Holdings and the Company. Under the 1995 Stockholders Agreement, unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries, including the Company, may not take certain actions without the approval of the New Holdings directors which the New Equity Investors are entitled to elect, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company is highly concentrated. Yucaipa, acting with the consent of the directors elected by the New Equity Investors, has the ability to direct the actions of the Company with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. Yucaipa will be a party to a consulting agreement with the Company, pursuant to which Yucaipa will render certain management and advisory services to the Company, and will receive fees for such services. Yucaipa will also receive certain fees in connection with the consummation of the Merger, including an advisory fee of $19 million, of which $15 million will be paid through the issuance of New Discount Debentures. In addition, as a result of the Merger, certain officers and former officers of Ralphs will redeem the EARs for $17.8 million in cash and a deferred payment of up to $5 million and will cancel certain options to purchase common stock of RSI for $880,000. An additional $10 million of the EARs, however, will be reinvested in New Holdings by such officers and former officers. Yucaipa also will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a one-time consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions," "Principal Stockholders" and "Description of Capital Stock." SUBORDINATION OF THE NEW F4L SENIOR SUBORDINATED NOTES The payment of principal, premium, if any, and interest on, and any other amounts owing in respect of, the New F4L Senior Subordinated Notes will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness under the New Credit Facility and the F4L Senior Notes. Each Subsidiary Guarantor's Guarantee will also be subordinated in right of payment to Senior Indebtedness of the Subsidiary Guarantors ("Guarantor Senior Indebtedness"). Guarantor Senior Indebtedness will include all existing and future indebtedness not expressly subordinated to other indebtedness, including indebtedness represented by the guarantee of each Subsidiary Guarantor under the New Credit Facility and the F4L Senior Notes. As of January 7, 1995, on a pro forma basis, after giving effect to the Merger and the Financing (and certain related assumptions), the aggregate outstanding amount of Senior Indebtedness of the Company (excluding Company guarantees of certain Guarantor Senior Indebtedness) would have been approximately $1,512.7 million and the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.5 million and the Company would have had $169.4 million available to be borrowed under the New Revolving Facility. The New F4L Senior Subordinated Note Indenture will limit, but not prohibit, the issuance by the Subsidiary Guarantors of additional indebtedness which is Guarantor Senior Indebtedness. See "Description of the New F4L Notes -- Guarantees." In the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company, the assets of the Company will be available to pay obligations on the New F4L Senior Subordinated Notes only 26 36 after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the New F4L Senior Subordinated Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the New F4L Senior Subordinated Notes, or purchase, redeem or otherwise retire the New F4L Senior Subordinated Notes, if a payment default or a non-payment default exists with respect to certain Senior Indebtedness and, in the case of a non-payment default, a payment blockage notice has been received by the New F4L Senior Subordinated Note Trustee (as defined). See "Description of the New F4L Notes -- Subordination of the New F4L Senior Subordinated Notes." FRAUDULENT CONVEYANCE RISKS Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the New F4L Notes or any Guarantee in favor of other existing or future creditors of the Company or a Subsidiary Guarantor. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company issued the New F4L Senior Notes or the New F4L Senior Subordinated Notes, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration or reasonably equivalent value for issuing such New F4L Notes and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such distribution, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void such New F4L Notes and void such transactions. Alternatively, in such event, claims of the holders of such New F4L Notes could be subordinated to claims of the other creditors of the Company. The Company's obligations under the New F4L Notes will be guaranteed by the Subsidiary Guarantors. To the extent that a court were to find that (x) a Guarantee was incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any present or future creditor or the Subsidiary Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) such Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the issuance of such Guarantee, (iii) was engaged or about to engage in a business or transaction for which the remaining assets of such Subsidiary Guarantor constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could void or subordinate such Guarantee in favor of the Subsidiary Guarantor's creditors. Among other things, a legal challenge of a Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Subsidiary Guarantor as a result of the issuance by the Company of the applicable New F4L Notes. To the extent any Guarantees were avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the New F4L Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Guarantee was not avoided or held unenforceable. In such event, the claims of the holders of the applicable New F4L Notes against the issuer of an invalid Guarantee would be subject to the prior payment of all liabilities and preferred stock claims of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of the holders of the applicable New F4L Notes relating to any voided portions of any of the Guarantees. Based upon financial and other information currently available to it, management of the Company believes that the New F4L Notes and the Guarantees are being incurred for proper purposes and in good faith and that the Company and each Subsidiary Guarantor (i) is solvent and will continue to be solvent after issuing the New F4L Notes or its Guarantees, as the case may be, (ii) will have sufficient capital for carrying on its business after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's 27 37 Discussions and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ABSENCE OF ESTABLISHED MARKET FOR THE NEW F4L NOTES There are no established markets for the New F4L Notes and there can be no assurance as to the liquidity of any markets that may develop for the New F4L Notes, the ability of holders of the New F4L Notes to sell their New F4L Notes, or the price at which holders would be able to sell their New F4L Notes. Future trading prices of the New F4L Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Dealer Managers have advised the Company that they currently intend to make a market in the New F4L Notes. However, the Dealer Managers are not obligated to do so and any market-making may be discontinued at any time without notice. POTENTIAL ADVERSE EFFECTS OF THE EXCHANGE OFFERS AND THE SOLICITATION DUE TO REDUCED TRADING MARKET FOR UNTENDERED OLD F4L NOTES There currently is a limited trading market for the Old F4L Notes, which from time to time trade in the over-the-counter market. See "Market Prices of the Old F4L Notes." To the extent that Old F4L Notes are tendered and accepted for exchange in the Exchange Offers the trading market for the remaining Old F4L Notes may become even more limited. A debt security with a smaller outstanding principal amount available for trading (a smaller "float") may command a lower price than would a comparable debt security with a greater float. Therefore, the market price for the Old F4L Notes not exchanged may be adversely affected to the extent that the principal amount of the Old F4L Notes tendered pursuant to the Exchange Offers reduces the float. The reduced float may also tend to make the trading price more volatile. Holders of unexchanged Old F4L Notes may attempt to obtain quotations for the Old F4L Notes from their brokers; however, there can be no assurance that any trading market will exist for the Old F4L Notes following consummation of the Exchange Offers. The extent of the public market for the Old F4L Notes following consummation of the Exchange Offers will depend upon, among other things, the remaining outstanding principal amount of the Old F4L Notes after the Exchange Offers, the number of holders remaining at such time and the interest in maintaining a market in the Old F4L Notes on the part of securities firms. EFFECT OF THE PROPOSED AMENDMENTS ON HOLDERS THAT DO NOT EXCHANGE If the Exchange Offers are consummated and the Proposed Amendments become operative, holders of Old F4L Notes that are not exchanged pursuant to the Exchange Offers for any reason will no longer be entitled to the benefits of certain of the restrictive covenants contained in the Old F4L Indentures after they have been modified by the Proposed Amendments. The modification of the restrictive covenants would permit the Company to take actions that could increase the credit risks with respect to the Company faced by such holders or that could otherwise be adverse to the interest of such holders. See "The Proposed Amendments." NET LOSSES Food 4 Less has reported a net loss of $2.7 million for the 52 weeks ended June 25, 1994, $27.4 million for the 52 weeks ended June 26, 1993, $33.8 million for the 52 weeks ended June 27, 1992, $9.6 million for the 52 weeks ended June 29, 1991 and $10.1 million for the 53 weeks ended June 30, 1990. Ralphs has reported net earnings of $32.1 million for the 52 weeks ended January 29, 1995, $138.4 million for the 52 weeks ended January 30, 1994, a net loss of $76.1 million for the 52 weeks ended January 31, 1993, a net loss of $41.2 million for the 52 weeks ended February 2, 1992 and a net loss of $51.4 million for the 53 weeks ended February 3, 1991. On a pro forma basis for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, after giving effect to the Merger and the Financing (and certain related assumptions), the Company would have reported a net loss of approximately $86.9 million and $47.7 million, respectively. There can be no assurance that the Company will not continue to report net losses in the future. 28 38 THE MERGER AND THE FINANCING On September 14, 1994, Food 4 Less, Holdings and FFL entered into the Merger Agreement with RSI and the stockholders of RSI. Pursuant to the terms of the Merger Agreement, Food 4 Less will, subject to certain conditions being satisfied or waived, be merged with and into RSI pursuant to the RSI Merger. Immediately following the RSI Merger, RGC, which is currently a wholly-owned subsidiary of RSI, will merge with and into RSI pursuant to the RGC Merger, and RSI will change its name to Ralphs Grocery Company. Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation in the FFL Merger. Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary, New Holdings, incorporated in Delaware, pursuant to the Reincorporation Merger. As a result of the Merger, the FFL Merger and the Reincorporation Merger, the Company will become a wholly-owned subsidiary of New Holdings. Upon consummation of the RSI Merger and RGC Merger, the New F4L Notes and any outstanding Old F4L Notes not tendered into the Exchange Offers will be the obligations of the Company. Conditions to the consummation of the RSI Merger include the receipt of regulatory approvals and other necessary consents and completion of financing. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $375 million in cash, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures to be issued by New Holdings. New Holdings will use $100 million of the cash received from the New Equity Investment, together with the Seller Debentures and such New Discount Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of RSI stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. Pursuant to an agreement (the "Put Agreement") entered into in connection with the execution of the Merger Agreement, the Edward J. DeBartolo Corporation, an Ohio corporation ("EJDC"), which currently owns approximately 60.3% of the outstanding common stock of RSI, will have the right to put to Yucaipa, which controls Food 4 Less, on the closing date of the Merger (the "Closing Date"), up to $10 million aggregate principal amount of Seller Debentures acquired by EJDC in connection with the Merger, at a purchase price equal to their principal amount. Yucaipa will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions -- Food 4 Less." The Merger Agreement, as amended, provides that Food 4 Less will pay the stockholders of RSI interest on the aggregate purchase price of $525 million at a rate equal to the prime rate plus 1% from and after March 16, 1995 through the Closing Date. The Merger Agreement may be terminated by the parties if the Merger has not been consummated on or prior to June 6, 1995. As currently contemplated, the Merger will be financed through the following transactions: - Borrowings of up to $750 million aggregate principal amount pursuant to the New Term Loans under the New Credit Facility to be provided by a syndicate of banks led by Bankers Trust. The New Credit Facility will also provide for the $325 million New Revolving Facility, $16.4 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors led by Apollo and including affiliates of BT Securities, CS First Boston and DLJ and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently 29 39 with the New Equity Investment, the New Equity Investors will purchase outstanding shares of New Holdings capital stock from a stockholder of New Holdings for a purchase price of $57.8 million. See "Description of Capital Stock -- New Equity Investment." - The RGC Offers by Food 4 Less to (i) exchange up to $450 million aggregate principal amount of the Old RGC Notes for up to $450 million aggregate principal amount of New RGC Notes plus $20.00 in cash per $1,000 principal amount exchanged and (ii) purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, together with the solicitation of consents from holders of Old RGC Notes to certain amendments to the Old RGC Indentures. The RGC Minimum Exchange condition to the RGC Offers provides that at least a majority of the outstanding principal amount of the Old RGC Notes are exchanged for New Notes pursuant to the RGC Offers. - The Exchange Offers made hereunder to holders of Old F4L Notes to tender for exchange such Old F4L Notes for New F4L Notes and the Exchange Payment, together with the solicitation of consents from such holders to the Proposed Amendments to the Old F4L Indentures. - The purchase by New Holdings of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of $100 million of the cash proceeds from the New Equity Investment, and $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures, followed by the contribution of such common stock of RSI to Food 4 Less. Pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. - The placement by New Holdings pursuant to the New Discount Debenture Placement of $100 million initial accreted value of New Discount Debentures to a partnership including Yucaipa, the selling stockholders of Ralphs, an affiliate of George Soros, Apollo and an affiliate of each of BT Securities, CS First Boston and DLJ. The $100 million initial accreted value of New Discount Debentures includes (a) $18.5 million that will be issued to the RSI stockholders, (b) $15 million, $5 million and $2.5 million that will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing and (c) $59 million that will be issued for cash to the partnership described above. The $41 million initial accreted value of New Discount Debentures to be issued to the RSI stockholders, Apollo, BT Securities and Yucaipa will be contributed to such partnership by the recipients thereof. - The assumption by the Company, pursuant to the RGC Merger, of approximately $166.8 million of other indebtedness of RGC and Food 4 Less. - The purchase of Holdings pursuant to the Holdings Offer to Purchase of Discount Notes for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for every $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase, together with the solicitation of consents from the holders of the Discount Notes to certain amendments to the Discount Note Indenture. 30 40 The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of May 30, 1995. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1% of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash (representing 49.9% of the outstanding aggregate principal amount of Old RGC Notes), $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers (representing 80% of the outstanding aggregate principal amount of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Holdings Offer to Purchase (representing 100% of the outstanding aggregate principal amount (at maturity) of Discount Notes). This presentation assumes the use of the maximum amount of cash proceeds that could be necessary to consummate the Merger (if holders representing more than 49.9% of the outstanding principal amount of Old RGC Notes tender into the RGC Offers in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum Exchange is exceeded), the non-cash sources and cash uses would be correspondingly adjusted). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the RGC Offers, the Exchange Offers and the Holdings Offer to Purchase. SOURCES AND USES (in millions) CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a).................. $ 750.0 Purchase RSI Common Stock(j)....... $ 375.9 New Revolving Facility(b).......... 16.4 Purchase Old RGC Notes(k).......... 226.8 New F4L Senior Notes(c)............ 295.0 Purchase Discount Notes............ 83.9 Repay Ralphs 1992 Credit New RGC Notes(d)................... 200.0 Agreement.......................... 255.1 New Equity Investment(e) 140.0 Repay F4L Credit Agreement......... 161.5 New Discount Debentures(f)......... 59.0 Pay Accrued Interest(l)............ 29.3 EAR Related Payments(m)............ 22.8 Repay Mortgage Indebtedness(n)..... 191.5 Purchase New Holdings Common Stock(o)......................... 3.7 Fees and Expenses(p)............... 109.9 -------- -------- Total Cash Sources............ $1,460.4 Total Cash Uses.................... $1,460.4 ======= ======= NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)............ $ 140.0 Old F4L Senior Notes Exchanged..... $ 140.0 Assumed Old F4L Senior Notes....... 35.0 Assumed Old F4L Senior Notes....... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes............................ 116.0 Exchanged.......................... 116.0 Assumed Old F4L Senior Subordinated Assumed Old F4L Senior Subordinated Notes............................ 29.0 Notes............................ 29.0 New RGC Notes(h)................... 225.5 Old RGC Notes Exchanged............ 225.5 New Discount Debentures(f)......... 41.0 Fees and Expenses(p)............... 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt............................. 166.8 Debt............................... 166.8 Seller Debentures(i)............... 131.5 Purchase RSI Common Stock(i)....... 150.0 -------- -------- Total Non-Cash Sources........ $ 884.8 Total Non-Cash Uses................ $ 884.8 ======= =======
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of up to $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not be fully 31 41 funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued, preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L Senior Notes Exchange Offer, which will be part of the same issue as the New F4L Senior Notes issued pursuant to the Senior Note Public Offering. (h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering. (i) In connection with the RSI Merger, New Holdings will issue $131.5 million principal amount of the Seller Debentures as part of the purchase price for the RSI common stock, up to $10 million of which may be put to Yucaipa on the Closing Date at a purchase price equal to their principal amount pursuant to the Put Agreement. In addition, Yucaipa will be reimbursed by the Company for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. See "Certain Relationships and Related Transactions -- Food 4 Less." (j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9 million to be paid in cash to holders of RSI management stock options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (k) Represents purchase of Old RGC Notes tendered for cash pursuant to the RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding following consummation of the RGC Offers, portion of the proceeds of the Tranche A Loan not funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. (l) Represents accrued interest payable on all debt securities assumed to be tendered pursuant to the RGC Offers and the Exchange Offers. (m) Represents payments to or for the benefit of Ralphs management with respect to outstanding EARs in connection with the Merger. Ralphs management will receive New Holdings stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships and Related Transactions -- Food 4 Less." (n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in the principal amount of $174.1 million, plus the estimated amount of the prepayment fees payable with respect thereto. (o) Represents the purchase of shares of New Holdings comon stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo, upon the closing of the Merger. Of such amounts, $15 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $5 million fee will be paid through the issuance of New Discount Debentures in lieu of cash. Such New Discount Debentures will be contributed by them to the partnership that will acquire all of the New Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. See "Certain Relationships and Related Transactions -- Food 4 Less." For additional information, see "Description of the New Credit Facility," "The RGC Offers and the Public Offerings" and "Description of Holding Company Indebtedness." 32 42 PRO FORMA CAPITALIZATION The following table sets forth the pro forma combined capitalization of the Company as of January 7, 1995, adjusted to give effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions) and the application of the proceeds therefrom. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New Notes, $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash, $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Holdings Offer to Purchase. This presentation also assumes that any Old RGC Notes not tendered into the RGC Offers are repurchased after the Closing Date pursuant to the Change of Control Offer. The table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of Ralphs and Food 4 Less and related notes thereto included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
PRO FORMA CAPITALIZATION -------------- (IN MILLIONS) Cash..................................................................................... $ 50.9 ============ Short-term and current portion of long-term debt: New Term Loans......................................................................... $ 3.8 Other indebtedness..................................................................... 23.0 -------------- Total short-term and current portion of long-term debt.......................... $ 26.8 ============ Long-term debt: New Term Loans(a)...................................................................... $ 746.2 New Revolving Facility(b).............................................................. 54.5 Other indebtedness..................................................................... 129.3 New F4L Senior Notes(c)................................................................ 435.0 Old F4L Senior Notes................................................................... 35.0 New RGC Notes(d)....................................................................... 425.5 New F4L Senior Subordinated Notes...................................................... 116.0 Old F4L Senior Subordinated Notes...................................................... 29.0 -------------- Total long-term debt............................................................ 1,970.5 -------------- Stockholder's equity: Common stock, $.01 par value........................................................... 0.0 Additional paid-in capital............................................................. 464.3 Notes receivable(e).................................................................... (0.7) Retained deficit....................................................................... (173.7) Treasury stock......................................................................... (5.9) -------------- Total stockholder's equity........................................................... 284.0 -------------- Total capitalization............................................................ $2,254.5 ============
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of up to $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan and the $125 million Tranche D Loan and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers' compensation self-insurance. (c) Includes New F4L Senior Notes issued pursuant to both the Senior Note Public Offering and the F4L Senior Notes Exchange Offer. (d) Includes New RGC Notes issued pursuant to both the Subordinated Note Public Offering and the RGC Offers. In accordance with the terms of the Old RGC Indentures, holders of Old RGC Notes not exchanged for New RGC Notes pursuant to the RGC Offers will be entitled to have such Old RGC Notes repurchased by the Company pursuant to the Change of Control Offer, which will occur up to 91 days following the Merger. A portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. (e) Represents notes receivable from shareholders of Holdings with respect to the purchase of Holdings' common stock. See "Executive Compensation -- Food 4 Less Stock Plan." 33 43 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements of the Company for the 52 weeks ended June 25, 1994 and as of and for the 28 weeks ended January 7, 1995, give effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions set forth below) and the application of the proceeds therefrom as if such transactions occurred on June 27, 1993, with respect to the pro forma operating and other data, and as of January 7, 1995, with respect to the pro forma balance sheet data. Such pro forma information combines the results of operations of Food 4 Less for the 52 weeks ended June 25, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 7, 1995, with the results of operations of Ralphs for the 52 weeks ended July 17, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 29, 1995, respectively. For information regarding the Merger and the Financing, see "The Merger and the Financing." The pro forma adjustments are based upon the following assumptions: (i) $225.5 million principal amount of Old RGC Notes are tendered into the RGC Offers in exchange for New Notes, (ii) $224.5 million principal amount of Old RGC Notes are tendered into the RGC Offers for cash, (iii) $256 million principal amount of Old F4L Notes are tendered into the Exchange Offers and (iv) $103.6 million principal amount (at maturity) of Discount Notes are tendered into the Holdings Offer to Purchase. The presentation also assumes that $200 million principal amount of New RGC Notes are issued pursuant to the Subordinated Note Public Offering and that $295 million principal amount of New F4L Senior Notes are issued pursuant to the Senior Note Public Offering. In addition, the unaudited pro forma combined financial statements have been prepared based upon the assumption that upon consummation of the Merger, the Company will divest or close 32 stores. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable. The Merger will be accounted for by the Company as a purchase of Ralphs by Food 4 Less and Ralphs' assets and liabilities will be recorded at their estimated fair market values at the date of the Merger. The adjustments included in the unaudited pro forma combined financial statements represent the Company's preliminary determination of these adjustments based upon available information. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the pro forma financial information. The unaudited pro forma combined financial statements are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements of Food 4 Less and Ralphs, together with the related notes thereto, included elsewhere in this Amended and Restated Prospectus and Solicitation Statement. 34 44 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS)
52 WEEKS ENDED -------------------------- RALPHS FOOD 4 LESS (HISTORICAL) (HISTORICAL) (UNAUDITED) (AUDITED) JULY 17, JUNE 25, PRO FORMA PRO FORMA 1994 1994 ADJUSTMENTS COMBINED ----------- ------------ ----------- --------- Sales........................................... $ 2,709.7 $2,585.2 $(241.4)(a) $5,053.5 Cost of sales................................... 2,076.3 2,115.9 (194.7)(a) 4,005.3 4.2(b) 2.8(c) 0.8(d) ----------- ------------ ----------- --------- Gross profit............................... 633.4 469.3 (54.5) 1,048.2 Selling, general and administrative expenses(n)................................... 469.1 388.8 (36.4)(a) 833.1 8.1(b) 1.4(d) 1.6(e) 0.5(f) Amortization of excess cost over net assets acquired...................................... 11.0 7.7 10.7(g) 29.4 Provision for restructuring..................... 2.4 0.0 -- 2.4 ----------- ------------ ----------- --------- Operating income........................... 150.9 72.8 (40.4) 183.3 Other expenses: Interest expense -- cash(l)................... 93.2 57.0 74.1(h) 224.3 Interest expense -- non-cash(l)............... 9.4 5.8 -- 15.2 Amortization of debt issuance costs(l)........ 6.4 5.5 1.5(h) 13.4 Loss on disposal of assets.................... 1.8 -- -- 1.8 Provision for earthquake loss................. 11.0 4.5 -- 15.5 ----------- ------------ ----------- --------- Earnings (loss) before income tax provision(o)............................. 29.1 (0.0) (116.0) (86.9 ) Income tax expense (benefit).................... (108.0) 2.7 105.3(i) -- ----------- ------------ ----------- --------- Net earnings (loss)(m)..................... $ 137.1 $ (2.7) $(221.3) $ (86.9 ) ========= ========= ========= ======== Preferred stock accretion....................... -- 8.8 (8.8)(j) -- Earnings (loss) applicable to common shares................................... $ 137.1 $ (11.5) $(212.5) $ (86.9 ) ========= ========= ========= ======== Ratio of earnings to fixed charges(k)(l)... 1.2x 1.0x -- ========= ========= ========
See Notes to Unaudited Pro Forma Combined Statement of Operations. 35 45 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED (DOLLARS IN MILLIONS)
28 WEEKS ENDED -------------------------- RALPHS FOOD 4 LESS (HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED) JANUARY 29, JANUARY 7, PRO FORMA PRO FORMA 1995 1995 ADJUSTMENTS COMBINED ----------- ------------ ----------- --------- Sales........................................... $ 1,483.6 $1,404.7 $(120.7)(a) $2,767.6 Cost of sales................................... 1,144.5 1,167.2 (99.3)(a) 2,214.6 2.3(b) (0.8)(c) 0.7(d) ----------- ------------ ----------- --------- Gross profit............................... 339.1 237.5 (23.6) 553.0 Selling, general and administrative expenses(n)................................... 254.7 199.2 (18.7)(a) 442.1 4.4(b) 1.3(d) 0.9(e) 0.3(f) Amortization of excess cost over net assets acquired...................................... 5.9 4.2 5.8(g) 15.9 Provision for restructuring..................... 0.0 5.1 -- 5.1 ----------- ------------ ----------- --------- Operating income........................... 78.5 29.0 (17.6) 89.9 Other expenses: Interest expense -- cash(l)................... 53.2 31.6 37.7(h) 122.5 Interest expense -- non-cash(l)............... 4.9 3.0 -- 7.9 Amortization of debt issuance costs(l)........ 3.2 3.1 0.6(h) 6.9 Loss (gain) on disposal of assets............. 0.8 (0.5) -- 0.3 ----------- ------------ ----------- --------- Earnings (loss) before income tax provision(o)............................. 16.4 (8.2) (55.9) (47.7 ) Income tax expense (benefit).................... 0.0 0.5 (0.5)(i) 0.0 ----------- ------------ ----------- --------- Net earnings (loss)(m)..................... $ 16.4 $ (8.7) $ (55.4) $ (47.7 ) ========= ========== ========= ======== Preferred stock accretion....................... -- 5.6 (5.5)(j) -- Earnings (loss) applicable to common shares................................... $ 16.4 $ (14.3) $ (49.8) $ (47.7 ) ========= ========== ========= ======== Ratio of earnings to fixed charges(k)(l)... 1.2x -- -- ========= ========== ========
See Notes to Unaudited Pro Forma Combined Statement of Operations. 36 46 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (a) Reflects the anticipated closing or divestiture of 32 stores. Does not give effect to the closure of 2 Food 4 Less stores open at October 1, 1994 which were subsequently closed. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projection of future undiscounted cash flows. (b) Represents the additional depreciation expense associated with the purchase price allocation to property, plant and equipment of $160.0 million based on the current estimate of fair market value. Property, plant and equipment is being depreciated over an average useful life of 13 years. Depreciation expense has been allocated among cost of sales and selling, general and administrative expenses. (c) Reflects the elimination of Ralphs historical LIFO provision. (d) Reflects depreciation expense associated with approximately $36.8 million of additional fixed assets required for the conversion of 23 Ralphs stores to the Food 4 Less warehouse format and 122 Alpha Beta, Boys and Viva stores to the Ralphs format. (e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks ended June 25, 1994 and $1.1 million for the 28 weeks ended January 7, 1995) and the elimination of an annual guarantee fee ($0.4 million for the 52 weeks ended June 25, 1994 and $0.2 million for the 28 weeks ended January 7, 1995) paid by Ralphs to EJDC. (f) Reflects increased compensation resulting from new employment agreements with certain of the current executive officers of Ralphs. (g) Reflects the amortization of the excess of cost over net assets acquired in the Merger ($21.7 million for the 52 weeks ended June 25, 1994 and $11.7 million for the 28 weeks ended January 7, 1995) and elimination of Ralphs' historical amortization ($11.0 million for the 52 weeks ended June 25, 1994 and $5.9 million for the 28 weeks ended January 7, 1995). Amortization has been calculated on the straight line basis over a period of 40 years. (h) The following table presents a reconciliation of pro forma interest expense and amortization of deferred financing costs:
52 WEEKS 28 WEEKS ENDED ENDED JUNE 25, JANUARY 7, 1994 1995 -------- ---------- Historical interest expense -- cash............................................ $150.2 $ 84.8 -------- ---------- Plus: Interest on borrowings under: New Credit Facility........................................................ 79.8 42.9 New F4L Senior Notes....................................................... 33.2 17.9 New RGC Notes.............................................................. 48.9 26.4 Other bank fees............................................................ 3.5 1.9 Other debt................................................................. 2.0 1.8 Less: Interest on borrowings under: Old bank term loans: Ralphs................................................................... (21.3) (13.7) Food 4 Less.............................................................. (11.5) (6.9) Old RGC Notes.............................................................. (43.9) (23.6) Other debt................................................................. (16.6) (9.0) -------- ---------- Pro forma adjustment......................................................... 74.1 37.7 -------- ---------- Pro forma interest expense -- cash............................................. $224.3 $122.5 ========= ========= Historical amortization of debt issuance costs................................. $ 11.9 $ 6.3 Plus: Financing and exchange/consent fees........................................ 9.0 4.8 Other fees and expenses.................................................... 3.9 2.1 Less: Historical financing costs: Ralphs..................................................................... (6.1) (3.2) Food 4 Less................................................................ (5.3) (3.1) -------- ---------- Pro forma adjustment......................................................... 1.5 0.6 -------- ---------- Pro forma amortization of debt issuance costs.................................. $ 13.4 $ 6.9 ========= =========
(i) Represents the elimination of the historical income tax benefit of Ralphs ($108.0 million for the 52 weeks ended June 25, 1994) and Food 4 Less income tax expense ($2.7 million for the 52 weeks ended June 25, 1994 and $0.5 million for the 28 weeks ended January 7, 1995) given expected pro forma losses. The Company's ability to recognize income tax benefits may be limited in accordance with Financial Accounting Standard No. 109 "Accounting for Income Taxes." As such, no income tax benefit has been reflected in these pro forma financial statements. See "Certain Federal Income Tax Considerations." (j) Reflects cancellation of cumulative convertible preferred stock of Food 4 Less held by Holdings. (k) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). The Company's pro forma earnings were inadequate to cover pro forma fixed charges for the 52 weeks ended June 25, 1994 and for the 28 weeks ended January 7, 1995 by approximately $86.9 million and $47.7 million, respectively. However, such pro forma earnings included non-cash charges of $189.0 million for the 52 weeks ended June 25, 1994 and $99.9 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation and amortization. 37 47 (l) Supplemental Pro Forma Adjustments: The table below shows the variations that would occur in the pro forma cash and non-cash interest expense, the amortization of debt issuance costs and the amount of the deficiency of earnings to fixed charges at different participation levels of Old RGC Notes tendered in exchange for New RGC Notes in the RGC Offers (50.1%, 55.1%, 60.1% and 65.1%) and Old F4L Notes tendered into the Exchange Offers (80%, 85%, 90% and 95%). The table also indicates the changes in the foregoing items (at each participation level) that would result from each 25 basis point increase in the interest rate on the New F4L Senior Notes over the assumed rate of 11% and each 25 basis point increase in the interest rate on the New RGC Notes over the assumed rate of 11.50%.
52 WEEK PERIOD 28 WEEK PERIOD ----------------------------------------- ----------------------------------------- PARTICIPATION LEVEL(1) PARTICIPATION LEVEL(1) ----------------------------------------- ----------------------------------------- 50.1/80% 55.1/85% 60.1/90% 65.1/95% 50.1/80% 55.1/85% 60.1/90% 65.1/95% -------- -------- -------- -------- -------- -------- -------- -------- Interest expense -- cash.......... $224.3 $224.9 $225.4 $226.0 $122.5 $122.8 $123.1 $123.4 Interest expense -- non-cash...... 15.2 15.2 15.2 15.2 7.9 7.9 7.9 7.9 Amortization of debt issuance costs........................... 13.4 13.5 13.6 13.7 6.9 7.0 7.0 7.1 Deficiency of earnings to fixed charges(2)...................... 86.9 87.6 88.2 88.9 47.7 48.1 48.4 48.8 EFFECT OF EACH 25 BASIS POINT INCREASE IN THE INTEREST RATE ON THE NEW F4L SENIOR NOTES AND NEW RGC NOTES Additional interest expense -- cash................. $ 2.2 $ 2.2 $ 2.3 $ 2.4 $ 1.2 $ 1.2 $ 1.2 $ 1.3 Additional interest expense -- non-cash............. -- -- -- -- -- -- -- -- Additional amortization of debt issuance costs.................. -- -- -- -- -- -- -- -- Additional deficiency of earnings to fixed charges(2)............. 2.2 2.2 2.3 2.4 1.2 1.2 1.2 1.3
- --------------- (1) If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering and/or decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (2) "Earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). (m) The unaudited pro forma results of operations for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 do not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totalling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations which are estimated to be $50.0 million over a three-year period, (iii) $1.8 million in costs related to the cancellation of an employment agreement, or (iv) other costs related to warehouse closures, which costs are not presently determinable. (n) Pro forma combined selling, general and administrative expenses for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 include reduced employer contributions of $25.8 million and $20.5 million, respectively, related to union health and welfare benefit plans. (o) The pro forma combined loss before income tax provision for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 includes reductions in self insurance reserves of $26.4 million and $21.5 million, respectively. (p) "EBITDA," as defined and presented historically by RGC, represents net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, post-retirement benefits, the LIFO charge, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of 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 following table presents a reconciliation of pro forma EBITDA (as defined):
28 WEEKS ENDED 52 WEEKS ENDED JANUARY 7, JUNE 25, 1994 1995 -------------- -------------- Historical EBITDA: Ralphs EBITDA...................................................... $228.1 $126.0 EBITDA margin(1)................................................. 8.4% 8.5% Food 4 Less EBITDA................................................. $130.5 $ 69.4 EBITDA margin.................................................... 5.0% 4.9% Less: Pro Forma Adjustments(2)....................................... $(61.1) $ (6.1) Pro Forma EBITDA..................................................... $342.5 $189.3 Pro Forma EBITDA margin............................................ 6.8% 6.8%
- --------------- (1) EBITDA margin represents EBITDA (as defined) as a percentage of sales. (2) Reflects primarily EBITDA (as defined) associated with closed or divested stores and the adjustments referred to in notes (e) and (f) above. 38 48 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
RALPHS FOOD 4 LESS (HISTORICAL) (HISTORICAL) (AUDITED) (UNAUDITED) JANUARY 29, JANUARY 7, PRO FORMA 1995 1995 ADJUSTMENTS PRO FORMA ----------- ----------- ----------- --------- ASSETS Current assets: Cash and cash equivalents..................... $ 35.1 $ 15.8 $ 0.0(a) $ 50.9 Accounts receivable........................... 43.6 26.8 -- 70.4 Inventories................................... 221.4 223.2 39.9(b) 484.5 Prepaid expense and other current assets...... 19.8 17.6 -- 37.4 ----------- ----------- ----------- --------- Total current assets.................. 319.9 283.4 39.9 643.2 Investments..................................... 0.0 12.4 -- 12.4 Property, plant and equipment................... 624.7 370.2 160.0(c) 1,130.1 (22.8)(d) (2.0)(e) Excess of cost over net assets acquired, net.... 365.4 263.7 501.4(f) 1,130.5 Beneficial lease rights......................... 49.2 0.0 -- 49.2 Deferred debt issuance costs, net............... 23.0 25.5 88.4(g) 94.1 (42.8)(h) Deferred income taxes........................... 112.5 0.0 (112.5)(i) 0.0 Other assets.................................... 15.2 29.4 (12.9)(d) 36.7 5.0(j) ----------- ----------- ----------- --------- Total assets.......................... $ 1,509.9 $ 984.6 $ 601.7 $3,096.2 ======== ========= ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt.......... $ 84.0 $ 25.9 $ (83.1)(k) $ 26.8 Short-term debt............................... 51.5 0.0 (51.5)(l) 0.0 Accounts payable.............................. 176.6 165.0 -- 341.6 Accrued expenses.............................. 99.8 108.8 (14.8)(m) 200.3 4.7(d) 1.8(n) Current portion of self-insurance reserves.... 27.5 28.6 -- 56.1 ----------- ----------- ----------- --------- Total current liabilities............. 439.4 328.3 (142.9) 624.8 Long-term debt.................................. 883.0 525.5 562.0(o) 1,970.5 Self-insurance reserves......................... 44.9 50.7 -- 95.6 Deferred income taxes........................... 0.0 14.7 -- 14.7 Lease valuation reserve......................... 29.0 0.0 -- 29.0 Other non-current liabilities................... 86.4 5.0 (27.8)(p) 77.6 11.0(q) 3.0(e) ----------- ----------- ----------- --------- Total liabilities..................... 1,482.7 924.2 405.3 2,812.2 ----------- ----------- ----------- --------- Stockholder's equity: Preferred Stock............................... 0.0 64.5 (64.5)(r) 0.0 Common Stock.................................. 0.3 0.0 (0.3)(s) 0.0 Additional paid-in capital.................... 175.2 107.7 64.5(r) 464.3 10.0(p) 100.0(t) 32.1(u) 150.0(s) (175.2)(v) Notes receivable from shareholders of parent..................................... 0.0 (0.7) -- (0.7 ) Retained deficit.............................. (148.3) (108.9) (22.6)(w) (173.7 ) 148.3(v) (40.4)(d) (1.8)(n) Treasury stock................................ 0.0 (2.2) (3.7)(x) (5.9 ) ----------- ----------- ----------- --------- Total stockholder's equity(y)......... 27.2 60.4 196.4 284.0 ----------- ----------- ----------- --------- Total liabilities and stockholder's equity.............................. $ 1,509.9 $ 984.6 $ 601.7 $3,096.2 ======== ========= ========= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 39 49 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects gross proceeds received from (i) the New Term Loans, (ii) the New Revolving Facility, (iii) the New Equity Investment and (iv) the Public Offerings used to retire certain debt and liabilities and to pay financing costs and other related fees as set forth in the following table: New Term Loans............................................................................ $ 750.0 New Revolving Facility.................................................................... 54.5 New F4L Senior Notes...................................................................... 295.0 New RGC Notes............................................................................. 200.0 New Equity Investment..................................................................... 140.0 New Discount Debentures................................................................... 59.0 Purchase Discount Notes................................................................... (83.9) Purchase RSI Common Stock................................................................. (375.9) Repay Ralphs 1992 Credit Agreement........................................................ (297.4) Repay F4L Credit Agreement................................................................ (174.4) Purchase Old RGC Notes.................................................................... (226.8) Pay EAR liability......................................................................... (17.8) Loan to affiliate......................................................................... (5.0) Repay other Ralphs debt................................................................... (188.9) Purchase New Holdings Common Stock........................................................ (3.7) Accrued Interest.......................................................................... (14.8) Fees and Expenses......................................................................... (109.9) ------- Pro forma adjustment.............................................................. $ 0.0 =======
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million) and the write-up of merchandise inventory ($22.5 million); both to reflect current estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort of the acquiring company. (c) Reflects the estimated write-up to fair value of Ralphs property, plant and equipment as of the date of the Merger. (d) Reflects estimated restructuring charge associated with closing 29 Food 4 Less conventional supermarkets or warehouse stores and converting 5 Food 4 Less conventional supermarkets to warehouse stores. Pursuant to the settlement agreement with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs stores) must be closed by December 31, 1995. See "Business -- California Settlement Agreement." Although not required by such settlement agreement, an additional 5 under-performing stores selected by the Company also are scheduled to be closed by December 31, 1995. The restructuring charge consists of write-downs of property, plant and equipment ($22.8 million), write-off of the Alpha Beta trademark ($8.6 million), write-off of other assets ($4.3 million), lease termination expenses ($3.1 million), and miscellaneous expense accruals ($1.6 million). The expected cash payments to be made in connection with the restructuring charge total $7.1 million. It is expected that such cash payments will be made by December 31, 1995. The estimated restructuring charge will be recorded as an expense once the Merger is completed. No additional expenses are expected to be incurred in future periods in connection with these closings. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. (e) Reflects the anticipated closing of 3 Ralphs stores. (f) Reflects the excess of costs over the fair value of the net assets of Ralphs acquired in connection with the Merger ($866.8 million) and the elimination of Ralphs historical excess of costs over the fair value of the net assets acquired ($365.4 million). The purchase price and preliminary calculation of the excess of cost over the net book value of assets acquired is as follows: Purchase price: Purchase of outstanding common equity.................................................. $ 525.9 Fees and expenses...................................................................... 55.8 -------- Total purchase price................................................................... $ 581.7 -------- Purchase price is financed by: Seller Debentures...................................................................... $ 131.5 New Discount Debentures................................................................ 18.5 New Equity Investment.................................................................. 140.0 New borrowings......................................................................... 291.7 -------- $ 581.7 ======= Preliminary calculation of purchase price allocated to assets and liabilities based on management's estimate of fair values as of January 29, 1995: Cash................................................................................... $ 35.1 Receivables............................................................................ 43.6 Inventories............................................................................ 261.3 Other current assets................................................................... 19.8 Property, fixtures and equipment....................................................... 782.7 Beneficial lease rights................................................................ 49.2 Goodwill............................................................................... 866.8 Other assets........................................................................... 18.0 Current liabilities.................................................................... (424.8) Obligations under capital leases....................................................... (89.1) Long-term debt......................................................................... (806.6) Other non-current liabilities.......................................................... (174.3) -------- $ 581.7 =======
40 50 Pro forma book value of historical assets acquired: Historical net book value at January 29, 1995:......................................... $ 27.2 Less book value of historical assets with no value at the acquisition date: Historical deferred tax asset.................................................112.5 Historical goodwill...........................................................365.4 Historical deferred debt costs.................................................20.2 (498.1) -------- Negative pro forma book value of net assets acquired............................... 470.9 Purchase Price......................................................................... 581.7 -------- Excess of purchase price to be allocated............................................... $1,052.6 ======= Excess allocated to: Inventories............................................................................ $ 39.9 Property, fixtures and equipment....................................................... 160.0 Goodwill............................................................................... 866.8 Other non-current liabilities.......................................................... (14.1) -------- $1,052.6 =======
(g) Reflects the debt issuance costs associated with the New Credit Facility, ($33.4 million), the RGC Offers ($2.2 million), the F4L Exchange Offers ($2.6 million), the Senior Note Public Offering ($8.9 million) and the Subordinated Note Public Offering ($6.0 million), the cash exchange payments associated with the RGC Offers ($4.5 million) and the Exchange Offers ($3.0 million) and other financing costs ($27.8 million). These amounts have been capitalized as deferred financing costs. (h) Reflects the elimination of deferred debt issuance costs associated with the Ralphs 1992 Credit Agreement (as defined) ($6.3 million), the F4L Credit Agreement (as defined) ($9.2 million), the Old RGC Notes ($10.4 million) and the Old F4L Notes ($13.4 million) and other indebtedness of RGC and Food 4 Less ($3.5 million) to be repaid in connection with the Merger. (i) Reflects the elimination of Ralphs deferred tax asset associated with changes in the financial reporting basis of assets. The combined Company may be required to record a valuation allowance on all or some deferred tax assets in compliance with Financial Accounting Standard No. 109 "Accounting for Income Taxes." This determination may be based, in part, on historical or expected earnings. For purposes of these pro forma financial statements it has been assumed that all deferred net tax assets have been fully reserved. (j) Represents a loan to a corporation owned by Yucaipa affiliates. The corporation will invest the proceeds in a partnership that will purchase New Discount Debentures. All proceeds received by the Company from the repayment of the loan will be paid to former holders of Ralphs EARs in satisfaction of the deferred EAR liability. See "Certain Relationships and Related Transactions -- Food 4 Less." (k) Reflects the repayment and cancellation of the current maturities of Ralphs 1992 Credit Agreement ($65.0 million), the F4L Credit Agreement ($19.8 million), certain other Ralphs debt ($2.1 million) and the recording of the current maturities of the New Credit Facility ($3.8 million). (l) Reflects the repayment of Ralphs' old revolving credit facility. (m) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement ($1.5 million), the F4L Credit Agreement ($1.7 million), the Old RGC Notes ($5.5 million), the Old F4L Notes ($4.5 million) and other indebtedness of RGC and Food 4 Less ($1.6 million) to be repaid in connection with the Merger. (n) Represents the liability to an executive under his employment contract due to a change of control provision. (o) Reflects the repayment and cancellation of the Ralphs 1992 Credit Agreement and the F4L Credit Agreement, and the repayment of certain other Ralphs debt, and records borrowings under the New Credit Facility as set forth in the table below: New Term Loans............................................................................ $ 746.2 New Revolving Facility.................................................................... 54.5 New F4L Senior Notes...................................................................... 295.0 New RGC Notes............................................................................. 200.0 Repay Ralphs 1992 Credit Agreement........................................................ (180.0) Repay F4L Credit Agreement................................................................ (154.6) Purchase Old RGC Notes.................................................................... (224.5) Repay other Ralphs debt................................................................... (174.6) ------- Net pro forma adjustment.......................................................... $ 562.0 =======
(p) Reflects payments with respect to a portion of the Ralphs EAR liability ($17.8 million) and the issuance of New Holdings stock options in consideration of the cancellation of the remaining Ralphs EAR liability ($10.0 million). See "Executive Compensation -- Equity Appreciation Rights Plan." No future compensation expense will be recorded as the cancellation of certain EAR liabilities ($10.0 million) in consideration for the issuance of New Holdings stock options is deemed to reflect fair value. (q) Reflects a reserve for Ralphs unfunded defined benefit pension plan, determined as the difference between the projected benefit obligation of the plans as compared to the fair value of plan assets, less amounts previously accrued. (r) Reflects cancellation of cumulative convertible preferred stock of Food 4 Less held by Holdings. (s) Reflects the contribution by New Holdings of RSI stock acquired through the issuance of $131.5 million aggregate principal amount of the Seller Debentures, and $18.5 million initial accreted value of the New Discount Debentures. (t) Reflects the contribution by New Holdings of RSI stock acquired with $100 million of the cash proceeds from the New Equity Investment. (u) Reflects the contribution by New Holdings of $12.1 million in cash proceeds from the New Equity Investment and the satisfaction by New Holdings, through the issuance of New Discount Debentures, of $20.0 million in fees otherwise payable by the Company in connection with the Merger and the Financing. (v) Reflects the elimination of Ralphs historical equity. (w) Represents the write-off of the historical deferred debt issuance costs of Food 4 Less related to its refinanced debt. (x) Represents the purchase of shares of New Holdings common stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (y) The unaudited pro forma combined balance sheet as of January 7, 1995 does not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totaling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations which are estimated to be $50.0 million (includes an estimated $12.0 million related to termination and severance costs) over a three-year period, (iii) other costs related to warehouse closures, which costs are not presently determinable, or (iv) any contingent liability to reimburse Yucaipa in the event it incurs a loss on the resale of $10 million principal amount of Seller Debentures. 41 51 SELECTED HISTORICAL FINANCIAL DATA OF RALPHS The following table presents selected historical financial data of RGC (as the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991, and the 52 weeks ended February 2, 1992, and summary historical financial data of RSI for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29, 1995, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of RSI and RGC and related notes thereto included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, 1991 1992 1993 1994 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS) OPERATING DATA: Sales....................................................... $ 2,799.1 $ 2,889.2 $ 2,843.8 $ 2,730.2 $ 2,724.6 Cost of sales............................................... 2,225.4 2,275.2 2,217.2 2,093.7 2,101.0 ----------- ----------- ----------- ----------- ----------- Gross profit................................................ 573.7 614.0 626.6 636.5 623.6 Selling, general and administrative expenses(a)............. 438.0 459.2 470.0 471.0 467.0 Provision for equity appreciation rights.................... 15.3 18.3 -- -- -- Amortization of excess of cost over net assets acquired..... 11.0 11.0 11.0 11.0 11.0 Provisions for restructuring and tax indemnification payments(b)............................................... -- 10.0 7.1 2.4 -- ----------- ----------- ----------- ----------- ----------- Operating income............................................ 109.4 115.5 138.5 152.1 145.6 Interest expense(c)....................................... 128.5 130.2 125.6 108.8 112.7 Loss on disposal of assets and provisions for legal settlement and earthquake losses(d)..................... 6.4 13.0 10.1 12.9 0.8 Income tax expense (benefit)................................ 12.8 13.5 8.3 (108.0)(e) -- Cumulative effect of change in accounting for postretirement benefits other than pensions............................................. (13.1) -- -- -- -- Extraordinary item-debt refinancing, net of tax benefits.... -- -- (70.6) -- -- ----------- ----------- ----------- ----------- ----------- Net earnings (loss)(f)...................................... $ (51.4) $ (41.2) $ (76.1) $ 138.4 $ 32.1 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges(g)....................... --(g) --(g) 1.02x 1.24x 1.24x BALANCE SHEET DATA (end of period): Working capital surplus (deficit)........................... $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5) Total assets................................................ 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9 Total debt(h)............................................... 986.1 941.9 1,029.8 998.9 1,018.5 Redeemable stock............................................ 3.0 3.0 -- -- -- Stockholders' equity (deficit).............................. (16.0) (57.2) (133.3) 5.1 27.2 OTHER DATA: Depreciation and amortization(i)............................ $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0 Capital expenditures........................................ 87.6 50.4 102.7 62.2 64.0 Stores open at end of period................................ 150 158 159 165 173 EBITDA (as defined)(j)...................................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2 EBITDA margin(k)............................................ 7.4% 7.8% 8.0% 8.4% 8.4%
- --------------- (a) Includes provision for post retirement benefits other than pensions of $2.2 million, $2.6 million, $3.3 million, $3.4 million, and $2.6 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. (b) Provisions for restructuring are charges for expenses relating to closing of Ralphs central bakery operation. The charge reflected the complete write-down of the bakery building, machinery and equipment, leaseholds, related inventory and supplies, and providing severance pay to terminated employees. These charges were $7.1 million and $2.4 million for the 52 weeks ended January 31, 1993 and the 52 weeks ended January 30, 1994, respectively. Provision for tax indemnification payments to Federated were $10.0 million for the 52 weeks ended February 2, 1992. (c) Interest expense includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 53 weeks ended February 3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995, respectively. (d) Loss on disposal of assets was $6.4 million, $13.0 million, $2.6 million, $1.9 million and $0.8 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. The 52 weeks ended February 2, 1992 includes approximately $12.2 million representing a reserve against losses related to the closing of three stores. Provision for legal settlement was $7.5 million for the 52 weeks ended January 31, 1993. Provision for earthquake losses was $11.0 million for the 52 weeks ended January 30, 1994. This represents reserve for losses, net of anticipated insurance recoveries, resulting from the January 17, 1994 Southern California earthquake. (e) Includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.). 42 52 (f) Net earnings (loss) includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses and interest expense, of $29.2 million, $31.2 million, $36.9 million, $36.3 million, and $20.0 million, for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, the 52 weeks ended January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995, respectively. Included in the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995 are reduced employer contributions of $11.8 million and $12.7 million, respectively, related to union health and welfare benefit plans. (g) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary items and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by $25.5 million and $27.7 million, respectively. (h) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (i) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million, respectively. (j) "EBITDA," as defined and presented historically by RGC, represents net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provisions for Equity Appreciation Rights, provision for tax indemnification payments to Federated, provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Ralphs' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (k) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 43 53 SELECTED HISTORICAL FINANCIAL DATA OF FOOD 4 LESS The following table presents selected historical financial data of Food 4 Less as of and for the 53 weeks ended June 30, 1990 and the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 which have been derived from the financial statements of Food 4 Less audited by Arthur Andersen LLP, independent public accountants. The summary historical financial data of Food 4 Less presented below as of and for the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from unaudited interim financial statements of Food 4 Less which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Food 4 Less and related notes thereto included elsewhere in this Amended and Restated Prospectus and Solicitation Statement.
28 WEEKS 28 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY JANUARY JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, 8, 7, 1990 1991(a) 1992 1993 1994(b) 1994 1995 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales...................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,416.2 $1,404.7 Cost of sales.............. 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,154.0 1,167.2 -------- -------- -------- -------- -------- -------- -------- Gross profit............... 204.8 265.7 520.8 484.2 469.3 262.2 237.5 Selling, general, administrative and other expenses................. 157.8 213.1 469.7 434.9 388.8 221.5 199.2 Amortization of excess cost over net assets acquired................. 5.3 5.3 7.8 7.6 7.7 4.1 4.2 Restructuring charge....... -- -- -- -- -- -- 5.1 (d) -------- -------- -------- -------- -------- -------- -------- Operating income........... 41.7 47.3 43.3 41.7 72.8 36.6 29.0 Interest expense(c)........ 50.8 50.1 70.2 69.8 68.3 36.8 37.7 Loss (gain) on disposal of assets................... -- 0.6 (1.3) (2.1) -- 0.1 (0.5) Provision for earthquake losses................... -- -- -- -- 4.5 -- -- Provision for income taxes.................... 1.0 2.5 3.4 1.4 2.7 0.7 0.5 Extraordinary charge....... -- 3.7 (f) 4.8 (g) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net loss(e)................ $ (10.1) $ (9.6) $ (33.8) $ (27.4) $ (2.7) $ (1.0) $ (8.7) ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges (h).............. -- (h) -- (h) -- (h) -- (h) 1.0 x -- (h) -- (h) BALANCE SHEET DATA (end of period)(i): Working capital surplus (deficit)................ $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8) Total assets............... 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(j).............. 360.7 558.9 525.3 538.1 517.9 521.3 551.4 Redeemable stock........... 5.1 -- -- -- -- -- -- Stockholder's equity....... 20.6 84.6 50.8 72.9 69.0 71.2 60.4 OTHER DATA: Depreciation and amortization(k).......... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures....... 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period................... 115 259 249 248 258 249 266 EBITDA (as defined)(l)..... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(m)........... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material, from March 29, 1994, the date of the acquisition of the Food Barn stores. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) Represents the recording of a restructuring charge for the write-off of property and equipment in connection with the conversion of 11 conventional format supermarkets to warehouse format stores. (e) Net loss includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9 million, $25.7 million, $24.8 million, and $14.9 million for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, respectively. Included in the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 44 54 and the 28 weeks ended January 7, 1995 are reduced employer contributions of $8.1 million, $2.8 million and $13.7 million, respectively, related to union health and welfare benefit plans. (f) Represents an extraordinary charge of $3.7 million (net of related income tax benefit of $2.5 million) relating to the refinancing of certain indebtedness in connection with the Alpha Beta acquisition and the write-off of related debt issuance costs. (g) Represents an extraordinary net charge of $4.8 million reflecting the write-off of $6.7 million (net of related income tax benefit of $2.5 million) of deferred debt issuance costs as a result of the early redemption of a portion of Food 4 Less' term loan facility under the F4L Credit Agreement, partially offset by a $1.9 million extraordinary gain (net of a related income tax expense of $0.7 million) on the replacement of partially depreciated assets following the civil unrest in Los Angeles. (h) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges, plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992 and June 26, 1993 and the 28 weeks ended January 8, 1994 and January 7, 1995 by approximately $9.1 million, $3.4 million, $25.6 million, $25.9 million, $0.3 million and $8.2 million, respectively. However, such earnings included non-cash charges of $29.9 million for the 53 weeks ended June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2 million for the 52 weeks ended June 27, 1992 and $62.5 million for the 52 weeks ended June 26, 1993, $33.3 million for the 28 weeks ended January 8, 1994 and $39.0 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation and amortization. (i) Balance sheet data as of June 30, 1990 relate to Food 4 Less and include the effect of the BHC Acquisition, as well as the acquisitions of Bell Markets, Inc. and certain assets of ABC Market Corp. Balance sheet data as of June 29, 1991, June 27, 1992, June 26, 1993 and January 8, 1994 relate to Food 4 Less and reflect the Alpha Beta acquisition and the financings and refinancings associated therewith. Balance sheet data as of June 25, 1994 and January 7, 1995 relate to Food 4 Less and reflect the acquisition of the Food Barn stores. (j) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (k) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (l) "EBITDA," as defined and presented historically by Food 4 Less, represents income before interest expense, depreciation and amortization expense, the LIFO provision, provision for incomes taxes, provision for earthquake losses and the one-time adjustment to the Teamsters Union sick pay accrual. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Food 4 Less' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (m) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 45 55 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The combination of Ralphs and Food 4 Less will create the largest supermarket operator in Southern California with an estimated 264 conventional format Ralphs stores and an estimated 68 price-impact Food 4 Less warehouse format stores. The Company will operate an additional 63 stores in Northern California and certain areas of the Midwest. Management believes that the Company's dual format strategy will appeal to a broad range of Southern California consumers and enable the Company to significantly enhance its overall competitive position. In addition, the Company expects to achieve cost savings and incremental profitability through the integration of advertising, administration, purchasing, distribution, manufacturing and other operations. Due to its increased size, dual format strategy and integration related costs, the Company believes that its future operating results may not be directly comparable to the historical operating results of either Ralphs or Food 4 Less. Certain factors which are expected to affect the future operating results of the Company (or their comparability to prior periods) are discussed below. Regional Economic Conditions. In recent periods Ralphs and Food 4 Less have each been affected by the adverse economic conditions that have existed in Southern California since approximately 1991. These conditions were exacerbated by the substantial layoffs in the defense and aerospace industries and by the civil unrest in Los Angeles in April, 1992. In addition, management estimates that approximately eight million square feet of supermarket selling space has been added in Southern California over the past five years. As a result of these factors and general deflationary pressures in certain food product categories, Ralphs and Food 4 Less have each experienced declining comparable store sales in recent periods. Over the last three fiscal years, Food 4 Less' and Ralphs' total sales declined by 11.3% and 4.2%, respectively, however, both Food 4 Less' and Ralphs' comparable store sales declines have begun to moderate in recent months. Despite these adverse sales trends, however, each company has improved its profitability over the same period as discussed in greater detail below. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that such improvements will occur. Management believes that its dual format strategy and anticipated cost savings will leave it well positioned to take advantage of improvements in the regional economy and growing population and to compete effectively in the Southern California marketplace. See "Risk Factors -- Regional Economic Conditions." Integration Costs and Restructuring Charges. The two principal components of the Company's integration strategy will be (i) the conversion of up to 122 of Food 4 Less' conventional stores (primarily Alpha Beta stores) to the Ralphs name and format and the conversion of 16 other (Boys and Viva) Food 4 Less conventional stores (11 of which were recently completed) and 23 Ralphs stores to the Food 4 Less price impact warehouse format; and (ii) the achievement of substantial cost savings through the consolidation of warehousing, manufacturing and distribution operations and the elimination of certain other duplicative overhead costs. Management has estimated that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) are achievable by the end of the fourth year of combined operations. Although a portion of the anticipated cost savings is premised upon the completion of certain capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. See "Business -- The Merger" and "Risk Factors -- Ability to Achieve Anticipated Cost Savings." Management believes that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over this four-year period. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. See "-- Liquidity and Capital Resources." In addition, management anticipates that certain non-recurring costs associated with the integration of operations will be recorded as a restructuring charge. The charge will cover costs associated with the writedown of property and equipment and related reserves associated with the conversion of certain Food 4 Less conventional supermarkets to warehouse stores and the closure of certain Food 4 Less conventional stores as well as the write-off of the Alpha Beta trademark. This restructuring charge has been estimated, for purposes of the pro forma financial information included elsewhere herein, at approximately $45.5 million. On December 14, 46 56 1994, Food 4 Less and Ralphs entered into a Settlement Agreement (the "Settlement Agreement") with the State of California. See "Business -- California Settlement Agreement." Under the Settlement Agreement, the Company must divest a total of 27 stores (24 Food 4 Less conventional supermarkets or warehouse stores and 3 Ralphs stores). In addition, although not required pursuant to the Settlement Agreement, an additional 5 under-performing stores selected by the Company are scheduled to be closed following the Merger. It is anticipated that such closures and store conversions will be substantially completed by December 31, 1995. The estimated restructuring charge aggregating $45.5 million for the 24 Food 4 Less stores to be divested under the Settlement Agreement, the planned closures (5 Food 4 Less stores) and the conversion of 16 Food 4 Less conventional stores to warehouse format stores reflects (i) the writedown of property, plant and equipment ($27.9 million), (ii) the write-off of the Alpha Beta trademark ($8.6 million), (iii) the write-off of other assets ($4.3 million), (iv) lease termination expense ($3.1 million) and (v) miscellaneous expense accruals ($1.6 million). The expected cash payments to be made in connection with the restructuring charge will total $7.1 million. It is expected that such cash payments will be made by December 31, 1995. As a result of the completion of 11 of the 16 planned Food 4 Less conventional store conversions during the second quarter of the current fiscal year, Food 4 Less has recorded a non-cash restructuring charge of $5.1 million in its results of operations for the 28 weeks ended January 7, 1995. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. The remaining estimated restructuring charge will be recorded as an expense once the Merger is completed. The divestiture of the 3 Ralphs stores pursuant to the Settlement Agreement will be reflected in the allocation of the purchase price and therefore will not give rise to any restructuring charge. Store Mix. Approximately 28% of the Company's total anticipated number of stores following the Merger are expected to be warehouse format stores. Because these stores offer prices that are generally 5-12% below those in Food 4 Less' conventional stores, they produce lower gross profit margins than an average conventional supermarket. As a result, the Company's consolidated gross margin following the Merger is expected to decline from the levels historically reported by Ralphs. In addition, if the percentage of warehouse stores in the overall store mix increases following the Merger, as expected, the Company's consolidated gross margins should also be expected to decline slightly over time. Because of the reduced SG&A (as defined) costs associated with the warehouse format stores, management believes that overall profitability of the warehouse stores is comparable to that of conventional stores. Purchase Accounting. The Merger will be accounted for as a purchase of Ralphs by Food 4 Less. As a result, the assets and liabilities of Ralphs will be recorded at their estimated fair market values on the date the Merger is consummated. The purchase price in excess of the fair market value of Ralphs' assets will be recorded as goodwill and amortized over a forty year period. The purchase price allocation reflected in the pro forma statements is based on management's preliminary estimates. The actual purchase accounting adjustments will be determined following the Merger and may vary from the amounts reflected in the Unaudited Pro Forma Financial Data included elsewhere herein. Fiscal Year and Restatement of Food 4 Less Financial Statements. Food 4 Less and Holdings each have filed a Form 8-K with the Commission to announce that they will adopt Ralphs' fiscal year end for financial reporting purposes. Ralphs' fiscal year ends on the Sunday closest to January 31. In connection with the preparation of this Amended and Restated Prospectus and Solicitation Statement, Food 4 Less elected to restate its historical financial statements to conform to Ralphs' classification of certain expenses. The changes primarily involved the reclassification of certain labor, occupancy and utility costs associated with product deliveries as cost of goods sold, which were previously classified as selling, general, administrative and other expense, net. In addition, depreciation expense, which had been reported separately by Food 4 Less with the amortization of goodwill, was classified as cost of goods sold or selling, general, administrative and other expense, net, as appropriate. The amounts aggregated $236.2 million, $224.5 million, $219.5 million and $114.3 million (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993, June 25, 1994 and the 28 weeks ended January 8, 1994. Food 4 Less has also classified a portion of its self-insurance costs as interest expense that was previously recorded in selling, general, administrative and other expense, net. These self-insurance amounts were reclassified to more completely segregate the interest component of self-insurance costs arising from discounting long-term obligations. The amounts reclassified aggregated $5.0 million, $5.9 million, $5.8 million and $3.3 million (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993, 47 57 June 25, 1994 and the 28 weeks ended January 8, 1994. All historical financial information for Food 4 Less included in this Amended and Restated Prospectus and Solicitation Statement reflects these reclassifications. See Note 14 of Notes to Food 4 Less Consolidated Financial Statements. RESULTS OF OPERATIONS OF RALPHS The following table sets forth the historical operating results of Ralphs for the 52 weeks ended January 31, 1993 ("Fiscal 1992"), January 30, 1994 ("Fiscal 1993") and January 29, 1995 ("Fiscal 1994"):
52 WEEKS ENDED -------------------------------------------------------- JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ---------------- ---------------- ---------------- (IN MILLIONS) Sales............................................... $2,843.8 100.0% $2,730.2 100.0% $2,724.6 100.0% Cost of sales....................................... 2,217.2 78.0 2,093.7 76.7 2,101.0 77.1 Selling, general and administrative expenses........ 470.0 16.5 471.0 17.2 467.0 17.2 Operating income(a)................................. 138.5 4.9 152.1 5.6 145.6 5.3 Net interest expense................................ 125.6 4.4 108.8 4.0 112.7 4.1 Provision for earthquake losses(b).................. -- -- 11.0 0.4 -- -- Income tax expense (benefit)........................ 8.3 0.3 (108.0) (4.0) -- -- Extraordinary item.................................. 70.6 2.5 -- -- -- -- Net earnings (loss)................................. (76.1) (2.7) 138.4 5.1 32.1 1.2
- --------------- (a) Operating income reflects charges of $7.1 million in Fiscal 1992 and $2.4 million in Fiscal 1993, for expenses relating to closing of central bakery operation. The charges reflected the complete write-down of the bakery building, machinery and equipment, leaseholds, related inventory and supplies, and providing severance pay to terminated employees. (b) Represents reserve for losses, net of expected insurance recoveries, resulting from the January 17, 1994 Southern California earthquake. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 29, 1995 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994. Sales For the fifty-two weeks ended January 29, 1995, ("Fiscal 1994"), sales were $2,724.6 million, a decrease of $5.6 million or 0.2% from the fifty-two weeks ended January 30, 1994 ("Fiscal 1993"). During Fiscal 1994, Ralphs opened ten new stores (four in Los Angeles County, three in Orange County, one in San Diego County and two in Riverside County), closed two stores (in conjunction with new stores opening in the same areas), and completed five store remodels. Comparable store sales decreased 3.7%, which included an increase of 0.3% for replacement store sales, from $2,707.9 million in Fiscal 1993 to $2,606.4 million in Fiscal 1994. Ralphs sales continued to be adversely affected by the continuing softness of the economy in Southern California, continuing competitive new store and remodeling activity and recent pricing and promotional changes by competitors. Ralphs continued to take steps to mitigate the impact of the weak retailing environment in its markets, which included continuing its own new store and remodeling program and initiating the Ralphs Savings Plan in February 1994, a new marketing campaign specifically designed to enhance customer value. See "Business -- Advertising and Promotion." On January 17, 1994, an earthquake in Southern California caused considerable damage in Los Angeles and surrounding areas. Several Ralphs supermarkets suffered earthquake damage, with 54 stores closed on the morning of January 17th. Thirty-four stores reopened within one day and an additional 17 stores reopened within three days. Three stores in the San Fernando Valley area of Los Angeles suffered major structural damage. All three stores have since reopened for business, with the last reopening on April 15, 1994. Management believes that there was some negative impact on sales resulting from the temporary disruption of business resulting from the earthquake. Ralphs is partially insured for earthquake losses. The pre-tax financial impact, net of expected insurance recoveries, is expected to be approximately $11.0 million and Ralphs reserved for this loss in Fiscal 1993. The gross earthquake loss is approximately $25.3 million and the expected insurance recovery is approximately $14.3 million. 48 58 Cost of Sales Cost of sales increased $7.3 million or 0.3% from $2,093.7 million in Fiscal 1993 to $2,101.0 million in Fiscal 1994. As a percentage of sales, cost of sales increased to 77.1% in Fiscal 1994 from 76.7% in Fiscal 1993. The increase in cost of sales as a percentage of sales included a one-time charge for Teamsters Union sick pay benefits pursuant to a new contract ratified in August 1994 with the Teamsters. The total charge was $2.5 million, of which $2.1 million was included in cost of sales and $0.4 million in selling, general and administrative expense. Increases in cost of sales were partially offset by savings in warehousing and distribution costs, reductions in self-insurance costs, pass-throughs of increased operating costs and increases in relative margins where allowed by competitive conditions. Warehousing and distribution cost savings were primarily attributable to Ralphs' ASRS and PSC facilities along with the ongoing implementation of new computer-controlled programs and labor standards that improved distribution productivity. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than does a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." Ralphs engages in forward-buy purchases to take advantage of special prices or to delay the impact of upcoming price increases by purchasing and warehousing larger quantities of merchandise than immediately required. The PSC facility has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. Over the last several years, Ralphs has been implementing modifications in its workers compensation and general liability insurance programs. Ralphs believes that these modifications have resulted in a significant reduction in self-insurance costs for Fiscal 1994. Based on a review of the results of these modifications by Ralphs and its actuaries, adjustments to the accruals for self-insurance costs were made during Fiscal 1994 resulting in a reduction of approximately $18.9 million. Of the total $18.9 million reduction in self-insurance costs, $7.5 million is included in cost of sales and $11.4 million is included in selling, general and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased $4.0 million or 0.8% from $471.0 million in Fiscal 1993 to $467.0 million in Fiscal 1994. As a percentage of sales, SG&A was 17.2% in Fiscal 1993 and 17.2% in Fiscal 1994. The decrease in SG&A was primarily due to a reduction in contributions to the United Food and Commercial Workers Union ("UFCW") health care benefit plans, due to an excess reserve in these plans, a reduction in self-insurance costs, as discussed above, and the results of cost savings programs instituted by Ralphs. Ralphs is continuing its expense reduction program. The decrease in SG&A was partially offset by several factors including increases in union wage rates, a one-time charge for Teamsters Union sick pay benefits, as discussed above, transition expense relating to the Merger ($1.4 million) and increased rent expense resulting from new stores, including fixture and equipment financing. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans received a pro rata share of excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. 49 59 Operating Income Operating income in Fiscal 1994 decreased 4.3% to $145.6 million from $152.1 million in Fiscal 1993. Operating margin, defined as operating income as a percentage of sales, was 5.3% in Fiscal 1994 compared to 5.6% in Fiscal 1993. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for postretirement benefits, provision for LIFO expense, gain or loss on disposal of assets, transition expense and a one-time charge for Teamsters Union sick pay benefits, was 8.4% of sales or $230.2 million in Fiscal 1994 and 8.4% of sales or $230.2 million in Fiscal 1993. Net Interest Expense Net interest expense for Fiscal 1994 was $112.7 million versus $108.8 million for Fiscal 1993. Net interest expense increased primarily as a result of increases in interest rates. Included as interest expense during Fiscal 1994 was $97.4 million, representing interest expense on existing debt obligations, capitalized leases and a swap agreement. Comparable interest expense for Fiscal 1993 was $92.8 million. Also included in net interest expense for Fiscal 1994 was $15.3 million representing certain other charges related to amortization of debt issuance costs, self-insurance discounts, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $16.0 million for Fiscal 1993. Investment income, which is immaterial, has been offset against interest expense. The continuation of higher interest rates subsequent to the end of Fiscal 1994 has continued to increase interest expense and adversely affect Ralphs' net income. Net Earnings For Fiscal 1994, Ralphs reported net earnings of $32.1 million compared to net earnings of $138.4 million for Fiscal 1993. The decrease in net earnings is primarily the result of decreased operating income, higher interest expense due to increased interest rates, the recognition of $109.1 million of deferred income tax benefit in Fiscal 1993 partially offset by $11.0 million recorded for earthquake losses in Fiscal 1993. Other In February 1994, the Board of Directors of Ralphs authorized a dividend of $10.0 million to be paid to RSI, and the Board of Directors of RSI authorized distribution of this dividend to its shareholders subject to certain restrictive covenants in the instruments governing certain of Ralphs' indebtedness that impose limitations on the declaration or payment of dividends. Ralphs' credit agreement, entered into in 1992 (the "1992 Credit Agreement"), was amended to allow for the payment of the dividend to RSI for distribution to RSI's shareholders. The fee for the amendment was approximately $500,000, which was included in interest expense for the period. The dividend was distributed to the shareholders of RSI in the second quarter of Fiscal 1994. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 31, 1993. Sales Sales in Fiscal 1993 were $2,730.2 million, a decrease of $113.6 million or 4.0% compared to Fiscal 1992. During Fiscal 1993, Ralphs opened eight new stores, four in Los Angeles County, two in Orange County and two in Riverside County, and remodeled six stores. Two of the eight new stores replaced the two stores closed during the fiscal year. Comparable store sales decreased 5.8%, which included an increase of 0.6% for the replacement stores, from $2,823.4 million to $2,659.3 million in Fiscal 1993. Ralphs' sales continued to be adversely affected by the significant recession in Southern California, continuing competitive new store and remodelling activity and pricing and promotional changes by competitors. Cost of Sales Cost of sales decreased $123.5 million or 5.6% from $2,217.2 million in Fiscal 1992 to $2,093.7 million in Fiscal 1993. As a percentage of sales, cost of sales declined to 76.7% in Fiscal 1993 from 78.0% in Fiscal 1992. 50 60 The decrease in cost of sales as a percentage of sales was the result of savings in warehousing and distribution costs, the pass-through of increased operating costs and increases in relative margins where allowed by competitive conditions. Selling, General and Administrative Expenses SG&A increased $1.0 million or 0.2% from $470.0 million in Fiscal 1992 to $471.0 million in Fiscal 1993. As a percentage of sales, SG&A increased from 16.5% in Fiscal 1992 to 17.2% in Fiscal 1993. The increase in SG&A as a percentage of sales was the result of several factors including the soft sales environment. Increases in expense were partially offset by cost savings programs instituted by Ralphs. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the UFCW multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans are to receive a pro rata share of the excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder will be recognized in the fiscal year ending January 29, 1995. The change in health and welfare plan expenses resulted from the $11.8 million credit associated with the collective bargaining agreement as well as a reduction in the current year plan expense due to the overfunded status of the plan. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Partially offsetting the reductions of health and welfare maintenance payments was a $6.0 million contract ratification bonus paid by Ralphs at the conclusion of contract negotiations with the UFCW in Fiscal 1993. The $6.0 million contract ratification payment was an item separate from either of these plans. Operating Income Operating income in Fiscal 1993 increased to $152.1 million from $138.5 million in Fiscal 1992, a 9.8% increase. Operating margin increased in Fiscal 1993 to 5.6% from 4.9% in Fiscal 1992. This increase was primarily the result of the aforementioned improvements in Ralphs' cost of sales percentage. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expenses, postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses and loss on disposal of assets, improved to $230.2 million or 8.4% of sales in Fiscal 1993 from $227.3 million or 8.0% of sales in Fiscal 1992. Net Interest Expense Net interest expense for Fiscal 1993 was $108.8 million, compared to $125.6 million for Fiscal 1992. The reduction in net interest expense was attributable to the refinancing and defeasance of Ralphs 14% Senior Subordinated Debentures due 2000 (the "14% Debentures") with the proceeds from the issuance of the Old RGC 9% Notes as the final step in a recapitalization plan initiated on July 30, 1992. Cash interest expense during Fiscal 1993 was $92.8 million compared to $105.5 million in Fiscal 1992. Also included in interest expense for Fiscal 1993 was $16.0 million representing certain other charges relating to amortization of debt issuance costs, self-insurance discount, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $20.1 million for Fiscal 1992. Investment income, which is immaterial, has been offset against interest expense. Earthquake Losses Several Ralphs stores suffered earthquake damage from the January 17, 1994 earthquake in Southern California and 54 stores were completely shutdown on the morning of January 17th. Management believes that there was some negative impact on sales resulting from the temporary disruption of business resulting 51 61 from the earthquake. Ralphs is partially insured for earthquake losses. The pre-tax financial impact, net of expected insurance recoveries, is expected to be approximately $11.0 million and Ralphs reserved for this loss in Fiscal 1993. The gross earthquake loss is approximately $25.3 million and the expected insurance recovery is approximately $14.3 million. Income Taxes In Fiscal 1993, Ralphs recorded the incremental impact of The Omnibus Budget Reconciliation Act of 1993 on net deductible temporary differences and Ralphs increased its deferred income tax assets by a net amount of $109.1 million. Income tax expense (benefit) for Fiscal 1993 includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993. See Note 11 of Notes to Ralphs Consolidated Financial Statements. Net Earnings In Fiscal 1993, Ralphs reported net earnings of $138.4 million compared to a net loss of $76.1 million for Fiscal 1992. This increase in net earnings was primarily the result of Ralphs' recognition of $109.1 million of deferred income tax benefit for Fiscal 1993 and the following items recorded in Fiscal 1992: (1) an extraordinary charge, net of tax benefit, of $70.6 million relating to Ralphs' recapitalization plan, (2) a provision of $7.1 million made for expenses related to the closure of the central bakery operation (an additional charge of $2.4 million was recorded in Fiscal 1993) and (3) a provision of $7.5 million made for the maximum loss under a judgment rendered against Ralphs. RESULTS OF OPERATIONS OF FOOD 4 LESS The following table sets forth the historical operating results of Food 4 Less for the 52 weeks ended June 27, 1992 ("Fiscal 1992"), June 26, 1993 ("Fiscal 1993") and June 25, 1994 ("Fiscal 1994"), and for the 28 weeks ended January 8, 1994 and January 7, 1995:
52 WEEKS ENDED 28 WEEKS ENDED ---------------------------------------------------------- ----------------------------------------- JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ---------------- ---------------- ---------------- ------------------ ------------------ (IN MILLIONS) (UNAUDITED) Sales.................. $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,416.2 100.0% $1,404.7 100.0% Gross profit........... 520.8 17.9 484.2 17.7 469.3 18.1 262.2 18.5 237.5 16.9 Selling, general, administrative and other, net........... 469.7 16.1 434.9 15.9 388.8 15.0 221.5 15.6 199.2 14.2 Amortization of excess costs over net assets acquired............. 7.8 0.3 7.6 0.3 7.7 0.3 4.1 0.3 4.2 0.3 Restructuring charge... -- -- -- -- -- -- -- -- 5.1 0.4 Operating income....... 43.3 1.5 41.7 1.5 72.8 2.8 36.6 2.6 29.0 2.0 Interest expense....... 70.2 2.4 69.8 2.5 68.3 2.6 36.8 2.6 37.7 2.6 Loss (gain) on disposal of assets............ (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.5) -- Provision for earthquake losses.... -- -- -- -- 4.5 0.2 -- -- -- -- Provision for income taxes................ 3.4 0.1 1.4 0.1 2.7 0.1 0.7 0.1 0.5 -- Loss before extraordinary charge............... (29.0) (1.0) (27.4) (1.0) (2.7) (0.1) (1.0) (0.1) (8.7) (0.6) Extraordinary charges.............. 4.8 0.2 -- -- -- -- -- -- -- -- Net loss............... (33.8) (1.2) (27.4) (1.0) (2.7) (0.1) (1.0) (0.1) (8.7) (0.6)
COMPARISON OF FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 7, 1995 WITH FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 8, 1994 Sales Sales decreased $11.5 million, or 0.8%, from $1,416.2 million in the 28 weeks ended January 8, 1994, to $1,404.7 million in the 28 weeks ended January 7, 1995, primarily as a result of a 4.5% decline in comparable 52 62 store sales, partially offset by sales from new and acquired stores opened since January 8, 1994. Management believes that the decline in comparable store sales is attributable to the weak economy in Southern California and, to a lesser extent, in Food 4 Less' other operating areas, and competitive store openings and remodels in Southern California. Gross Profit Gross profit decreased as a percentage of sales from 18.5% in the 28 weeks ended January 8, 1994, to 16.9% in the 28 weeks ended January 7, 1995. The decrease in gross profit margin resulted primarily from pricing and promotional activities related to Food 4 Less' "Total Value Pricing" program and an increase in the number of warehouse format stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores) from 48 at January 8, 1994, to 87 at January 7, 1995. The decrease in the gross profit margin was partially offset by improvements in product procurement. Selling, General, Administrative and Other, Net Selling, general, administrative and other expenses, net ("SG&A") were $221.5 million and $199.2 million for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively. SG&A decreased as a percentage of sales from 15.6% to 14.2% for the same period. Food 4 Less experienced a reduction of workers' compensation and general liability self-insurance costs of $9.7 million due to continued improvement in the cost and frequency of claims. The improved experience was due primarily to cost control programs implemented by Food 4 Less, including awards for stores with the best loss experience, specific achievable goals for each store, and increased monitoring of third-party administrators. In addition, Food 4 Less maintained tight control of administrative expenses and store level expenses, including payroll (due primarily to increased productivity), advertising and other controllable store expenses. Because Food 4 Less' warehouse stores have lower SG&A than conventional stores, the increase in the number of warehouse stores, from 48 at January 8, 1994, to 87 at January 7, 1995, also contributed to decreased SG&A. Food 4 Less participates in multi-employer health and welfare plans for its store employees who are members of the UFCW. As part of the renewal of the Southern California UFCW contract in October 1993, employers contributing to UFCW health and welfare plans are to receive a pro rata share of the excess reserves in the plans through a reduction of current employer contributions. Food 4 Less' share of the excess reserves was $24.2 million, of which Food 4 Less recognized $8.1 million in Fiscal 1994 and $13.7 million in the 28 weeks ended January 7, 1995. The remainder of the excess reserves will be recognized as the credits are taken in the future. On August 28, 1994, the Teamsters and Food 4 Less ratified a new contract which, among other things, provided for the vesting of sick pay benefits resulting in a one-time charge of $2.1 million. Restructuring Charge Food 4 Less has converted 11 of its conventional format supermarkets to warehouse format stores. During the 28 weeks ended January 7, 1995, Food 4 Less recorded a non-cash restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. Interest Expense Interest expense (including amortization of deferred financing costs) was $36.8 million and $37.7 million for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively. The increase in interest expense was primarily due to higher interest rates on the term loan portion (the "Term Loan") of Food 4 Less' credit agreement dated as of June 17, 1991, as amended (the "F4L Credit Agreement") and on the revolving credit portion of the F4L Credit Agreement (the "Revolving Credit Facility"). The increase was partially offset by the reduction of indebtedness under the Term Loan as a result of amortization payments. Food 4 Less increased its borrowing under the F4L Credit Agreement as a result of higher capital expenditures subsequent to the end of its first quarter. 53 63 Net Loss Primarily as a result of the factors discussed above, Food 4 Less' net loss increased from $1.0 million in the 28 weeks ended January 8, 1994, to $8.7 million in the 28 weeks ended January 7, 1995. COMPARISON OF FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 25, 1994 WITH FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26, 1993. Sales Sales decreased $156.8 million or 5.7% from $2,742.0 million in Fiscal 1993 to $2,585.2 million in Fiscal 1994. The decrease in sales resulted primarily from a 6.9% decline in comparable store sales. The decline in comparable store sales primarily reflects (i) the continuing softness of the economy in Southern California, (ii) lower levels of price inflation in certain key food product categories, and (iii) competitive factors, including new stores, remodeling and recent pricing and promotional activity. This decrease in sales was partially offset by sales from 13 stores opened or acquired during Fiscal 1994. Gross Profit Gross profit increased as a percent of sales from 17.7% in Fiscal 1993 to 18.1% in Fiscal 1994. The increase in gross profit margin was attributable to improvements in product procurement and an increase in vendors' participation in Food 4 Less' promotional costs. These improvements were partially offset by an increase in the number of warehouse format stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores) from 45 at June 26, 1993 to 66 at June 25, 1994, and the effect of the fixed cost component of gross profit as compared to a lower sales base. Selling, General, Administrative and Other, Net SG&A was $434.9 million and $388.8 million in Fiscal 1993 and Fiscal 1994, respectively. SG&A decreased as a percent of sales from 15.9% to 15.0% for the same periods. Food 4 Less experienced a reduction of self-insurance costs of $18.2 million due to continued improvement in the cost and frequency of claims. The improved experience was due primarily to cost control programs implemented by Food 4 Less, including awards for stores with the best loss experience, specific achievable goals for each store, and increased monitoring of third-party administrators, and, to a lesser extent, a lower sales base which reduced Food 4 Less' exposure. In addition, Food 4 Less maintained tight control of administrative expenses and store level expenses, including payroll (due primarily to increased productivity), advertising, and other controllable store expenses. Because Food 4 Less' warehouse stores have lower SG&A than conventional stores, the increase in the number of warehouse stores, from 45 at June 26, 1993 to 66 at June 25, 1994, also contributed to decreased SG&A as a percentage of sales. The reduction in SG&A as a percentage of sales was partially offset by the effect of the fixed cost component of SG&A as compared to a lower sales base. Food 4 Less participates in multi-employer health and welfare plans for its store employees who are members of the UFCW. As part of the renewal of the Southern California UFCW contract in October 1993, employers contributing to UFCW health and welfare plans are to receive a pro rata share of the excess reserves in the plans through a reduction of current employer contributions. Food 4 Less' share of the excess reserves was $24.2 million, of which Food 4 Less recognized $8.1 million in Fiscal 1994 and the remainder of which will be recognized as the credits are taken in the future. Offsetting the reduction in employer contributions was a $5.5 million contract ratification bonus and contractual wage increases. Interest Expense Interest expense (including amortization of deferred financing costs) decreased $1.5 million from $69.8 million to $68.3 million for Fiscal 1993 and Fiscal 1994, respectively. The decrease in interest expense is due primarily to reduced borrowings under the F4L Credit Agreement. 54 64 Provision for Earthquake Losses On January 17, 1994, Southern California was struck by a major earthquake which resulted in the temporary closing of 31 of Food 4 Less' stores. The closures were caused primarily by loss of electricity, water, inventory, or structural damage. All but one of the closed stores reopened within a week of the earthquake. The final closed store reopened on March 24, 1994. Food 4 Less is insured against earthquake losses (including business interruption), subject to certain deductibles. The pre-tax financial impact, net of expected insurance recovery, was approximately $4.5 million. Net Loss Primarily as a result of the factors discussed above, Food 4 Less' net loss decreased from $27.4 million in Fiscal 1993 to $2.7 million in Fiscal 1994. COMPARISON OF FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26, 1993 WITH FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 27, 1992. Sales Sales decreased $171.5 million or 5.9% from $2,913.5 million in Fiscal 1992 to $2,742.0 million in Fiscal 1993, primarily as a result of a 5.1% decline in comparable store sales and a net reduction in Food 4 Less' total store count of one store at June 26, 1993 compared to June 27, 1992. Management believes that the decline in comparable store sales was attributable to (i) the weak economy in Southern California, and, to a lesser extent, in Food 4 Less' other operating areas, (ii) lower levels of price inflation in certain key food categories, and (iii) increased competitive store openings in Southern California. Gross Profit Gross profit decreased as a percent of sales from 17.9% in Fiscal 1992 to 17.7% in Fiscal 1993 primarily as a result of an increase in the number of Food 4 Less warehouse stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores), from 34 stores in Fiscal 1992 to 45 stores in Fiscal 1993, and as a result of the fixed cost component of gross profit being compared to a lower sales base, partially offset by increases in relative margins allowed by competitive conditions, improvements in the procurement function, and cost savings and operating efficiencies associated with Food 4 Less' warehousing and manufacturing facilities. Selling, General, Administrative and Other, Net SG&A was $469.7 million and $434.9 million in Fiscal 1992 and Fiscal 1993, respectively. SG&A decreased as a percent of sales from 16.1% to 15.9% for the same periods as a result of tight control of direct store expenses, primarily payroll costs, the impact in Fiscal 1992 of the $12.8 million non-cash self-insurance reserve adjustment partially offset by market-wide contractual increases in union wages, current year increases in workers' compensation costs primarily associated with the new law which took effect in 1990, and the fixed cost component of SG&A being compared to a lower sales base. Interest Expense Interest expense (including amortization of deferred financing costs) was $70.2 million for Fiscal 1992 and $69.8 million for Fiscal 1993, respectively. The decrease in interest expense is due to the reduction of indebtedness as a result of amortization payments combined with decreasing interest rates on the Term Loan, partially offset by higher interest expense incurred in connection with the Old F4L Senior Notes which replaced lower cost debt under the F4L Credit Agreement. Loss Before Extraordinary Charge Primarily as a result of the factors discussed above, Food 4 Less' loss before extraordinary charge decreased from $29.0 million in Fiscal 1992 to $27.4 million in Fiscal 1993. Food 4 Less recorded a net 55 65 extraordinary charge of $4.8 million in Fiscal 1992, reflecting the write-off of certain deferred financing costs which were partially offset by a gain on the replacement of partially depreciated assets following the civil unrest in Los Angeles. LIQUIDITY AND CAPITAL RESOURCES In order to consummate the Merger, Holdings and Food 4 Less expect to utilize total new financing proceeds in the amount of approximately $1.5 billion. Pursuant to the New Equity Investment, New Holdings (as the successor to Holdings) will issue capital stock for total cash proceeds of approximately $140 million (excluding a $5 million commitment fee of which $2.5 million will be paid in cash and $2.5 million will be satisfied through the issuance of New Discount Debentures). In addition, Food 4 Less will enter into the New Credit Facility pursuant to which it will have available up to $750 million of New Term Loans, all of which is anticipated to be drawn at the Closing Date (assuming all Old RGC Notes are tendered into the RGC Offers), and will have available a $325 million New Revolving Facility, of which $16.4 million is anticipated to be drawn at the Closing Date. Food 4 Less will also issue up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and will issue up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The proceeds from the New Credit Facility and the Public Offerings, together with the $140 million cash proceeds of the New Equity Investment, $59 million cash proceeds of the New Discount Debenture Placement, $41 million in initial accreted value of additional New Discount Debentures issued other than for cash and $131.5 million principal amount of the Seller Debentures, will provide the sources of financing required to consummate the Merger and to repay existing bank debt of approximately $161.5 million at Food 4 Less and $255.1 million at Ralphs, to repay existing mortgage debt of $174.1 million (excluding prepayment fees) at Ralphs and to pay $83.9 million in consideration for the Discount Notes (excluding related fees). Proceeds from the New Credit Facility and the Public Offerings will also be used to pay the cash portions of the Exchange Offers and the RGC Offers, as well as the Change of Control Offer, if any, and accrued interest on all exchanged debt securities in the amount of $29.3 million (as of May 30, 1995), to pay $17.8 million to the holders of Ralphs Equity Appreciation Rights and to loan $5 million to an affiliate for the benefit of such holders, to pay up to $109.9 million of fees and expenses of the Merger and the Financing and to pay $3.7 million to purchase shares of New Holdings Common Stock. The Company will also assume certain existing indebtedness of Food 4 Less and Ralphs. Pursuant to the Exchange Offers described hereunder and the RGC Offers, Food 4 Less will seek the exchange of at least a majority of the Old RGC Notes for the New RGC Notes and the exchange of at least 80% of the Old F4L Notes for New F4L Senior Notes and New F4L Senior Subordinated Notes, as the case may be. The primary purpose of the Exchange Offers described hereunder and the RGC Offers is to refinance Food 4 Less' and RGC's existing public debt securities with longer term public debt securities, to obtain all necessary consents to consummate the Merger and to eliminate substantially all of the restrictive covenants contained in the Old RGC Indentures and the Old F4L Indentures. After the Merger the Company's principal sources of liquidity are expected to be cash flow from operations, amounts available under the New Revolving Facility and capital and operating leases. It is anticipated that the Company's principal uses of liquidity will be to provide working capital, finance capital expenditures, including the costs associated with the integration of Food 4 Less and Ralphs, and to meet debt service requirements. The New Revolving Facility will be a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Credit Facility. The Company anticipates that letters of credit for approximately $92.6 million will be drawn under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. The New Revolving Facility will be non-amortizing and will have a six-year term. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period. Assuming that the Merger closes on May 30, 1995, giving effect to currently anticipated borrowings and letter 56 66 of credit issuances, the Company's remaining borrowing availability under the New Revolving Facility would have been approximately $216.0 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $375 million, will have a six-year term; (ii) Tranche B, in the amount of $125 million, will have a seven-year term; (iii) Tranche C, in the amount of $125 million, will have an eight-year term; and (iv) Tranche D, in the amount of $125 million, will have a nine-year term. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. The New Term Loans will require quarterly amortization payments aggregating $3.8 million in the first year, $48.8 million in the second year and increasing thereafter. The New Credit Facility will be guaranteed by New Holdings and each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company and its subsidiaries and by a pledge of New Holdings' stock in the Company. The New Credit Facility will contain financial covenants which are expected to require, among other things, the maintenance of specified levels of cash flow and stockholder's equity. See "Description of the New Credit Facility." Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the Exchange Offers, the Other Debt Financing Transactions, the New Equity Investment and the Bank Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline, would constitute a Change of Control Triggering Event under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make the Change of Control Offer following the consummation of the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. The portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes tendered pursuant to the Change of Control Offer. Management anticipates that significant capital expenditures will be required following the Merger in connection with the integration of Ralphs and Food 4 Less. In order to implement the Company's store format strategy, up to 122 conventional stores currently operated by Food 4 Less will be converted to the Ralphs format and 16 conventional stores (primarily Boys and Viva) have been or will be converted and 23 Ralphs stores will be converted to the Food 4 Less warehouse format. An additional 18 Ralphs and Food 4 Less warehouse stores are scheduled to be opened during calendar 1995. It is estimated that the gross capital expenditures to be made by the Company in the first fiscal year following the closing will be approximately $153 million (or $106 million net of expected capital leases), of which approximately $98 million relate to ongoing expenditures for new stores, equipment and maintenance and approximately $55 million relate to store conversions and other Merger-related and non-recurring items. An additional $33 million of Merger-related and non-recurring capital expenditure items (or $22 million net of expected capital leases) are anticipated to be incurred in the second year following the consummation of the Merger. Management expects that these expenditures will be financed primarily through cash flow from operations and capital leases. Ralphs cash flow from operating activities was $55.4 million for the 52 weeks ended January 29, 1995 and $104.0 million for Fiscal 1993. Food 4 Less generated approximately $87.8 million of cash from operating activities during the 52-week period ended June 25, 1994 and used approximately $18.0 million of cash for its operating activities during the 28 weeks ended January 7, 1995 (as compared to generating $30.5 million of cash during the 28 weeks ended January 8, 1994). The decrease in cash from operating activities is due primarily to changes in operating assets and liabilities. The Company anticipates that one of the principal uses of cash in its operating activities will be 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, Ralphs and Food 4 Less had working capital deficits of $119.5 million and $44.8 million at January 29, 1995 and January 7, 1995, respectively. 57 67 Ralphs cash used in investing activities was $45.5 million during Fiscal 1993 and $50.8 million during the 52 weeks ended January 29, 1995. These amounts reflected increased capital expenditures related to store remodels and new store openings (including store acquisitions) and, to a lesser extent, expansion of other warehousing, distribution and manufacturing facilities and equipment, including data processing and computer systems. For the 52 weeks ended June 25, 1994, Food 4 Less' cash used in investing activities was $55.8 million. Investing activities consisted primarily of capital expenditures of $57.5 million, partially offset by $9.3 million of sale/leaseback transactions, and $11.1 million of costs in connection with the acquisition of ten former "Food Barn" stores. For the 28 weeks ended January 7, 1995, Food 4 Less' cash used in investing activities was $32.8 million. Investing activities consisted primarily of capital expenditures of $39.0 million, partially offset by $6.5 million of sale/leaseback transactions. The capital expenditures, net of the proceeds from sale/leaseback transactions, were financed primarily with cash provided by financing activities. The capital expenditures included the costs associated with the conversion of 11 conventional format stores to the Food 4 Less warehouse format. See "Business -- The Merger -- Two Leading Complementary Formats." In January 1995, Food 4 Less entered into an amendment to the F4L Credit Agreement to, among other things, allow for the acceleration of the capital expenditures and other costs associated with the conversion of stores to the warehouse format. Ralphs cash used in financing activities was approximately $24.6 million for the 52 weeks ended January 29, 1995. Reduction of capital lease obligations of $12.2 million and the payment of a $10.0 million dividend reduced cash flow. Food 4 Less' cash provided by financing activities was $33.6 million for the 28 weeks ended January 7, 1995, which consisted primarily of $48.7 million of borrowings outstanding on its revolving credit facility at January 7, 1995 partially offset by a $11.3 million repayment of its term loan. At January 7, 1995, $48.6 million of standby letters of credit had been issued under Food 4 Less' existing letter of credit facility. Ralphs and FFL have significant net operating loss carryforwards for regular federal income tax purposes. As a result of the Merger and the New Equity Investment, the Company's ability to utilize such loss carryforwards in future periods will be limited to approximately $15.6 million per year with respect to FFL net operating loss carryforwards and approximately $15.0 million per year with respect to Ralphs' net operating loss carryforwards. The Company does not expect the Merger to materially adversely affect any of its other tax assets. The Company will be a party to a tax sharing agreement with New Holdings and the subsidiaries of the Company. Pursuant to the tax sharing agreement, payments by the Company will not exceed the amount it would be required to pay if its consolidated liability was calculated on a separate company basis. Conversely, if the Company generates losses or credits which reduce the consolidated tax liability of New Holdings, New Holdings will credit to the Company the amount of such reduction in the consolidated tax liability. See "Certain Relationships and Related Transactions." The Company will continue to be a party to an indemnification agreement with Federated and certain other parties. See Note 1 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc. Pursuant to the terms of such agreement, Ralphs will make annual tax payments of $1.0 million in 1995 and 1996 and a final tax payment of $5.0 million in 1997. Following the Merger, the Company will be a wholly-owned subsidiary of New Holdings. In addition, following the Merger, New Holdings will have $100 million initial accreted value of the New Discount Debentures and $131.5 million principal amount of the Seller Debentures outstanding. New Holdings is a holding company which will have no assets other than the capital stock of the Company. New Holdings will be required to commence semi-annual cash payments of interest on (i) the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of $61.0 million per annum and (ii) any Discount Notes that remain outstanding following the Merger commencing June 15, 1998. Subject to the limitations contained in its debt instruments, the Company intends to make dividend payments to New Holdings in amounts which are sufficient to permit New Holdings to service its cash interest requirements. The Company may pay other dividends to New Holdings in connection with certain employee stock repurchases and for routine administrative expenses. Following the consummation of the Merger and the Financing, the Company will be 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 Facility and its 58 68 other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, integration costs and interest payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that future costs savings and growth can be achieved. See "Risk Factors -- Leverage and Debt Service." Interest Rate Protection Agreements Ralphs and Food 4 Less currently are parties to certain interest rate protection agreements required under the terms of their existing bank indebtedness. In connection with the New Credit Facility, these interest rate protection agreements will be replaced by a new agreement which will be finalized prior to the closing of the Merger. The Company will be exposed to credit loss in the event of nonperformance by the counterparty to the interest rate protection agreement. However, the Company does not anticipate nonperformance by such counterparty. The following details the impact of Ralphs' hedging activity on its weighted average interest rate for each of the last three fiscal years of Ralphs:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.52% 10.22% 1993............................................ 8.96% 8.96% 1994............................................ 9.37% 9.18%
Due to increasing interest rates under its existing credit facility, Ralphs' interest expense has increased during recent periods and may continue to increase, reducing Ralphs' net income during such periods. The following details the impact of Food 4 Less' hedging activity on its weighted average interest rate for each of the last three fiscal years of Food 4 Less:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.28% 10.25% 1993............................................ 10.07% 10.03% 1994............................................ 10.10% 10.09%
Effects of Inflation The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including inflation, availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, Ralphs and Food 4 Less have generally been able to maintain margins by adjusting their retail prices, but competitive conditions may from time to time render the Company unable to do so while maintaining its market share. 59 69 BUSINESS THE MERGER The combination of Ralphs Grocery Company and Food 4 Less Supermarkets, Inc. will create the largest food retailer in Southern California. Pro forma for the Merger, the Company will operate approximately 332 Southern California stores with an estimated 26% market share among the area's supermarkets. The Company will operate the second largest conventional supermarket chain in the region under the "Ralphs" name and the largest warehouse supermarket chain in the region under the "Food 4 Less" name. In addition, the Company will operate approximately 24 conventional format stores and 39 warehouse format stores in Northern California and the Midwest. On a pro forma basis giving effect to the Merger, the Company would have had sales of approximately $5.1 billion and $2.8 billion, operating income of approximately $183 million and $90 million and EBITDA (as defined) of approximately $343 million and $189 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. TWO LEADING COMPLEMENTARY FORMATS In Southern California the Company plans to convert up to 122 conventional stores currently operated by Food 4 Less to the "Ralphs" name and format and 39 Ralphs and Food 4 Less conventional stores to the "Food 4 Less" name and warehouse format. As a result, and pro forma for the Merger, Ralphs will be the region's second largest conventional format supermarket chain, with 264 stores and Food 4 Less will be the region's largest warehouse format supermarket chain with 68 stores. The Ralphs stores will continue to emphasize a broad selection of merchandise, high quality fresh produce, meat and seafood and service departments, including bakery and delicatessen departments in most stores. The Company's conventional stores will also benefit from Ralphs' strong private label program and its strengths in merchandising, store operations and systems. Passing on format-related efficiencies, the Company's price impact warehouse format stores will continue to offer consumers the lowest overall prices while still providing product selections comparable to conventional supermarkets. Management believes the Food 4 Less warehouse format has demonstrated its appeal to a wide range of demographic groups in Southern California and offers a significant opportunity for future growth. The Company plans to open nine new Food 4 Less warehouse stores and 21 new Ralphs stores over the next two years. Management believes the consolidation of its formats will improve the Company's ability to adapt its stores' merchandising strategy to the local markets in which they operate while achieving cost savings and other efficiencies. These conversions will be effected in three phases which the Company believes will be completed within the first 18 months of combined operation. Phase 1. Food 4 Less has converted 11 of its conventional format stores operated under the names "Viva" and "Boys" into Food 4 Less warehouse format supermarkets. Such conversions took up to eight weeks to complete and generally required the store to be closed for up to two weeks. These Phase 1 conversions, which were planned independently, were completed prior to the end of Food 4 Less' second quarter at a cost of approximately $1 million per store. Phase 2. Following the Merger, the Company plans to begin converting up to 122 conventional format stores currently operated by Food 4 Less under the names "Viva," "Alpha Beta" and "Boys" into Ralphs conventional format stores. It is anticipated that these conversions will be completed at the rate of approximately 10 stores per week. Management expects that the Company will be able to substantially complete each conversion without closing the store. Management believes that these Phase 2 conversions will be completed within the first 12-16 weeks of the Company's combined operation at a cost of approximately $75,000 per store. Phase 3. Following the Merger, the Company also plans to convert 23 conventional Ralphs format stores and five Food 4 Less conventional format stores into Food 4 Less warehouse format stores. Management expects that each such conversion will take up to eight weeks and may require the store to be closed for up to two to eight weeks during such period. Management believes that these Phase 3 conversions will be completed within the first 18 months of the Company's combined operation at a cost of approximately $1 million per store. 60 70 The following table summarizes the store formats to be operated by the Company in Southern California both before and after giving effect to the conversion program:
PRO FORMA NUMBER OF ACTUAL STORES(1) ---------- ------------------------- OCTOBER 1, PRIOR TO FOLLOWING STORE FORMATS 1994 CONVERSION CONVERSION -------------------------------------------------- ---------- ---------- ---------- Ralphs Conventional............................... 168 165 264 Food 4 Less Warehouse............................. 30 29 68 Alpha Beta Conventional........................... 129 105 0 Viva Conventional................................. 15 13 0 Boys Conventional................................. 24 20 0 --- --- --- Total........................................... 366 332 332
- --------------- (1) Pro forma store numbers give effect to the anticipated Merger-related divestiture or closing of 32 stores open at October 1, 1994 and the closure of two additional Food 4 Less conventional stores. Ralphs Conventional Format. Following completion of the store conversions described above, and pro forma for the Merger, the Company will operate 264 Ralphs stores in Southern California. Management believes these conversions will enhance Ralphs' market position and competitive advantages. Converted stores will benefit from Ralphs strengths in merchandising, store operations, systems and technology. Although all Ralphs stores use the Ralphs name and are operated under a single format, each store is merchandised to appeal to the local community it serves. Ralphs' substantial supermarket product selection is a significant aspect of its marketing efforts: Ralphs stocks between 20,000 and 30,000 merchandise items in its stores, including approximately 2,800 private label products, representing 17.3% of sales (excluding meat, service delicatessen and produce items) during Fiscal 1993. Ralphs stores offer name-brand grocery products; quality and freshness in its produce, meat, seafood, delicatessen and bakery products; and broad selection in all departments. Most existing Ralphs stores offer service delicatessen departments, on-premises bakery facilities and seafood departments. Ralphs emphasizes store ambiance and cleanliness, fast and friendly service, the convenience of debit and credit card payment (including in-store branch banks) and 24-hour operations in most stores. Food 4 Less' 168 conventional supermarkets, currently operated under the names "Alpha Beta," "Boys" and "Viva," are located throughout densely populated areas of Los Angeles and surrounding counties, including both suburban and urban neighborhoods. Food 4 Less' merchandising strategy for conventional stores has been tailored to the community each store services, but has emphasized customer service, quality of merchandise, and a large variety of product offerings in modern store environments. Of Food 4 Less' 168 conventional supermarkets, up to 122 are intended to be converted to the "Ralphs" name and format, 16 will be converted to the "Food 4 Less" warehouse format and the remainder are expected to be closed or sold. Food 4 Less Warehouse Format. Following completion of the store conversions described above, and pro forma for the Merger, the Company will operate 68 Food 4 Less warehouse stores in Southern California. The conversions will substantially accelerate the growth of the Food 4 Less format and will enhance the Company's position as the largest operator of warehouse supermarkets in Southern California. In addition to the conversions, the Company plans to continue its rapid growth of the Food 4 Less format by opening nine new warehouse format stores over the next two years, including five stores in San Diego, a new market for Food 4 Less. Management believes the expansion of warehouse format stores will create efficiencies in warehousing, distribution, and administrative functions. Food 4 Less' warehouse format stores target the price-conscious segment of the market, encompassing a wide range of demographic groups in both urban and suburban areas. Food 4 Less attempts to offer the lowest overall prices in its marketing areas by passing savings on to the consumer while providing the product selection associated with a conventional format. Savings are achieved through labor efficiencies and lower overhead and advertising costs associated with the warehouse format. In-store operations are designed to allow customers to perform certain labor-intensive services usually offered in conventional supermarkets. For example, merchandise is presented on warehouse style racks in full cartons, reducing labor intensive unpacking, and customers bag their own groceries. Labor costs are also reduced since the stores generally do 61 71 not have service departments such as delicatessens, bakeries and fresh seafood departments, although they do offer a complete line of fresh meat, fish, produce and baked goods. Additionally, labor rates are generally lower than in conventional supermarkets. The Food 4 Less format generally consists of large facilities constructed with high ceilings to accommodate warehouse racking with overhead pallet storage. Wide aisles accommodate forklifts and, compared to conventional supermarkets, a higher percentage of total store space is devoted to retail selling because the top of the warehouse-style grocery racks on sales floors are used to store inventory. This reduces the need for large backroom storage. The Food 4 Less warehouse format supermarkets have brightly painted walls and inexpensive signage in lieu of more expensive graphics. In addition, a "Wall of Values" located at the entrance of each store presents the customer with a selection of specially priced merchandise. SUBSTANTIAL COST SAVINGS OPPORTUNITIES Management believes that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. The following anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. There can be no assurance that such savings will be achieved. The sum of the components of the estimated cost savings exceeds $90 million; however, management's estimate of $90 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. See "Risk Factors -- Ability to Achieve Anticipated Cost Savings." Reduced Advertising Expenses. As a result of the consolidation of conventional format stores in Southern California under the "Ralphs" name, the Company will eliminate most of the separate advertising associated with Food 4 Less' existing Alpha Beta, Boys and Viva formats. Because Ralphs' current advertising program now covers the Southern California region, the Company will be able to expand the number of Ralphs stores without significantly increasing advertising costs. Management estimates that there will be annual advertising cost savings of approximately $28 million as compared to such costs for the pro forma combined fiscal year ended June 25, 1994. Because of reductions in certain advertising and promotional expenses on its conventional format stores that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are presently expected to be $19 million in the first full year of combined operations following the Merger as compared to the current annualized costs. Reduced Store Operations Expense. Management expects to reduce store operations costs as a result of both reduced labor and benefit costs and reduced non-labor expenses. Projected labor and benefit cost savings are based primarily on Ralphs' labor scheduling system, which has reduced Ralphs' labor costs relative to those of Food 4 Less. Other labor savings will result from the reduction of certain high-cost labor as a result of changed manufacturing, warehouse and distribution practices, and productivity enhancements resulting from the installation of Ralphs store level systems. Non-labor expense reductions are based primarily on the installation of Ralphs' computerized energy management equipment in Food 4 Less stores which will require significant capital expenditures. The expense savings associated with the use of this equipment is based on Ralphs' historical experience. Other significant non-labor expense reductions are projected to come from improved safety programs, increased cardboard baling revenues, changes to guard and shoplift agent programs and a reduction in supply and packaging costs. 62 72 Total labor and non-labor operational savings estimated at approximately $21 million annually are anticipated to be achieved by the fourth full year of combined operation. Increased Volume Purchasing Efficiencies. Management has identified approximately $19 million of cost savings it believes can be achieved as a result of purchasing efficiencies. These efficiencies consist primarily of (i) savings from increased discounts and allowances as a result of the combined volume of the two companies; (ii) an improvement in the terms of vendor contracts for products carried in the Company's stores on an exclusive or promoted basis; and (iii) savings from the conversion of some less-than-truckload shipping quantities to full truckload quantities. These savings are anticipated to be achieved by the second full year of combined operation. Warehousing and Distribution Efficiencies. The consolidation of the Company's warehousing and distribution facilities into Ralphs' two primary facilities located in Compton, California and in the Atwater district of Los Angeles and Food 4 Less' primary facility located in La Habra, California will result in lower outside storage, transportation and labor costs. The Company plans facility additions at one Ralphs facility to accommodate the additional volume as a result of such consolidation. Management anticipates improvements in the areas of automation, inventory management and handling, delivering, scheduling and route optimization and worker safety. In addition, the Company plans to close three existing facilities, which will result in lower occupancy expenses. Management believes that annual savings of approximately $16 million associated with warehousing and distribution will be achieved, before giving effect to capital expenditures in connection with facilities expansions and facility closing costs. Such savings are expected to be achieved by the third full year of combined operations. Consolidated Manufacturing. Ralphs and Food 4 Less operate manufacturing facilities that produce similar products or have excess capacity. Through the consolidation of meat, bakery, dairy and other manufacturing and processing operations, and the discontinuance of external purchases of certain goods that can be manufactured internally, management believes that annual cost savings of approximately $10 million can be achieved. In each instance, management has identified the facilities best suited to the needs of the combined company and has estimated the expense savings associated with each consolidation. The combined company will utilize a 316,000 square foot bakery and a 25,722 square foot milk processing plant, located at Food 4 Less' La Habra facility, and a 28,000 square foot milk processing plant, a 9,000 square foot ice cream processing plant, and a 23,000 square foot delicatessen kitchen located at Ralphs' Compton facility. Previously, Ralphs purchased bakery products externally and Food 4 Less purchased ice cream and delicatessen items externally. Management also plans to utilize Ralphs' third party meat processors, which have historically provided Ralphs with a full line of prefabricated and retail cuts of beef, to produce meat for Food 4 Less stores. Management anticipates that manufacturing expense savings will be achieved by the second full year of combined operation. Consolidated Administrative Functions. The Company expects to achieve savings from the elimination of redundant administrative staff, the consolidation of management information systems and a decreased reliance on certain outside services and consultants. To reduce headcount, the Company plans to target several functions for consolidation, including accounting, marketing, management information systems, and administration and human resources. The Company plans to eliminate a data processing center, which is anticipated to result in savings in the areas of equipment, software, headcount and outside programmer fees. The Company also plans to eliminate the use of third party administrators to handle workers compensation and general liability claims. Management estimates that annual savings of approximately $15 million associated with consolidating administrative functions will be achieved by the second full year of combined operation. EXPERIENCED MANAGEMENT TEAM The executive officers of the Company have extensive experience in the supermarket industry. The strength of Ralphs management expertise is evidenced by Ralphs' reputation for quality and service, its technologically advanced systems, strong store operations and high historical EBITDA margins. The Food 4 Less management team will provide valuable experience in operating warehouse supermarkets and in effectively integrating companies into a combined operation. Following the acquisition of Alpha Beta in 1991, 63 73 Food 4 Less management successfully integrated Alpha Beta with its existing Southern California operations and (within three years) achieved annual cost savings in excess of $40 million (compared to a pre-acquisition estimate of approximately $33 million). See "Management." WAREHOUSING AND DISTRIBUTION The combined Company will utilize Ralphs' technologically advanced warehousing and distribution systems, which include a 17 million cubic foot high-rise automated storage and retrieval system warehouse (the "ASRS") for non-perishable items and a 5.4 million cubic foot perishable service center (the "PSC") designed for processing, storing and distributing all perishable items. These facilities and the Food 4 Less La Habra warehouse will provide the Company with substantial operating benefits, including: (i) enhanced turnover to further improve the freshness and quality of in-store products, (ii) additional opportunities in forward buying programs and (iii) an increase in the percentage of inventory supplied by the Company's own warehousing and distribution system. Management believes the consolidation of these operations will enable the Company to meet the combined inventory requirements of all stores with fewer employees and lower operating and occupancy-related expenses. In November 1987, Ralphs opened the 17 million cubic foot highrise ASRS warehouse for non-perishable items in the Atwater district of Los Angeles, at a cost of approximately $50 million. This facility significantly increased capacity and improved the efficiency of Ralphs' warehouse operations. The automated warehouse has a ground floor area of 170,000 square feet and capacity of approximately 50,000 pallets. Guided by computer software, ten-story high cranes move pallets from the receiving dock to programmed locations in the ASRS warehouse while recording the location and time of storage. Goods are retrieved and delivered by the cranes to conveyors leading to an adjacent "picking" warehouse where individual store orders are filled and shipped. The Company plans to utilize existing unused capacity to accommodate additional volume resulting from the consolidation. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." The Company plans to close two existing Ralphs warehouse facilities in Los Angeles and Carson, California and one Food 4 Less facility in Los Angeles, California. In mid-1992, Ralphs opened the 5.4 million cubic foot PSC facility in Compton, California, designed to process and store all perishable products. This facility cost approximately $35 million and has provided Ralphs with the ability to deliver perishable products to its stores on a daily basis, thereby improving the freshness and quality of these products. The facility contains an energy efficient refrigeration system and a computer system designed to document the location and anticipated delivery time of all inventory. The PSC has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. The Company also plans to expand the PSC facility to accommodate additional volume resulting from the consolidation. Most Ralphs stores and Food 4 Less Southern California stores are located within approximately a one-hour drive from Ralphs' distribution and warehousing facilities. This geographical concentration, combined with Ralphs' efficient order system, shortens the lead time between the placement of a merchandise order and its receipt. Food 4 Less currently operates a centralized manufacturing, warehouse and office facility in La Habra, California which it leases from Alpha Beta's former parent corporation. The La Habra facility measures 1,378,083 total square feet over 75 acres and, in addition to serving warehousing, distribution and office functions, houses manufacturing operations which include a bakery and a creamery. The La Habra facility is operated pursuant to a long-term lease which expires in 2001. The La Habra facility is expected to be used as an additional distribution and warehouse facility. Food 4 Less is party to a joint venture with a subsidiary of Certified Grocers of California, Ltd. which operates a general merchandise warehouse in Fresno, California. Management is evaluating the role of such warehouse in the operation of the combined Company. 64 74 MANUFACTURING Ralphs' manufacturing operations produce a variety of dairy and other products, including fluid milk, ice cream, yogurt and bottled waters and juices as well as packaged ice, cheese and salad preparations. Ralphs contracts with meat processors to provide a full line of prefabricated and retail cuts of beef. Ralphs ceased its bakery operations during the second quarter of Fiscal 1993 at its 102,000 square foot facility in Los Angeles. Food 4 Less' La Habra facility includes a full-line bakery as well as a creamery and certain other manufacturing operations. The following table sets forth information concerning the principal manufacturing and processing facilities expected to be owned and operated by the Company:
FACILITY SQUARE FEET LOCATION ----------------------------------------------- ----------- ---------- Milk processing................................ 28,000 Compton Ice cream processing........................... 9,000 Compton Delicatessen kitchen........................... 23,000 Compton Bakery......................................... 316,000 La Habra Milk processing................................ 25,722 La Habra
Management believes that Ralphs' manufacturing facilities and the La Habra bakery can accommodate the volume requirements of the Company, after planned expenditures of approximately $3.0 million over the next year. PRIVATE LABEL PROGRAM Through its private label program, Ralphs offers approximately 2,800 items under the "Ralphs," "Private Selection," "Perfect Choice" and "Plain Wrap" brand names. These products provide quality comparable to that of national brands at prices 20-30% lower. Gross margins on private label goods are generally higher than on national brands. Management believes its private label program is one of the most successful programs in the supermarket industry, representing 17.3% of sales (excluding meats, service delicatessen and produce items) during the twelve months ended July 17, 1994. This figure has grown in the past few years, and management intends to continue the growth of its private label program in the future. Food 4 Less has entered into several private label licensing arrangements which allow it to exclusively utilize recognized brand names in connection with certain goods it manufactures or purchases from others, including "Carnation" and "Sunnyside Farms" (dairy products) and "Van de Kamps" (baked goods). In addition, Food 4 Less has entered into an agreement to distribute private label dry grocery and frozen products under the "Sunny Select" and "Grocers Pride" labels and has established its own private label, "Equality," for health and beauty aid products. Food 4 Less actively promoted its private label products during fiscal 1994, and management believes that the additional variety, superior quality and promotional program resulted in an overall increase in private label sales and corresponding gross margins. It is expected that the Company will continue the Carnation, Van de Kamps and certain of its other licensing agreements following the Merger. EXPANSION AND DEVELOPMENT As a result of Ralphs' 122-year history and Alpha Beta's 91-year history in Southern California, the Company will have valuable and well established store locations, many of which are in densely populated metropolitan areas. Additionally, the Company will have a technologically advanced store base. During the five years ended June 25, 1994, on a combined basis, Ralphs and Food 4 Less opened 74 new stores and remodeled 211 stores. Approximately 84% of the Company's stores have been opened or remodeled in the last five years. The Company plans to expand the Southern California Division by acquiring existing stores and constructing new ones. The Company intends to continue to focus its new store construction and store conversion efforts during calendar 1995 and future years primarily within existing marketing areas. Such efforts will encompass both of the Company's store formats, namely Food 4 Less and Ralphs. To this end, the 65 75 Company plans to continue its store expansion program in Southern California by opening 17 new stores during calendar 1995 (including three Food 4 Less stores which will be located in San Diego, a new market for Food 4 Less), and additional stores in subsequent years. During the second quarter of its current fiscal year, Food 4 Less converted 11 of its conventional format stores to warehouse format stores and, following the Merger, the Company plans to convert approximately five additional conventional stores currently managed by Food 4 Less and approximately 23 stores currently managed by RGC to the "Food 4 Less" name and warehouse format, as Food 4 Less stores have proven to have a strong appeal to value-conscious consumers across a wide range of demographic groups. See "-- The Merger -- Two Leading Complementary Formats." Remodeling activity in Southern California will be focused on the conventional format stores, including 13 planned major remodels of such stores during calendar 1995. The Company's expansion, remodel and conversion efforts have required, and will continue to require, the funding of significant capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." During the last five fiscal years, Ralphs has opened 46 new stores and remodeled 54 stores at a cost of approximately $277.2 million. A majority of these new and remodeled stores offer expanded produce and European-style seafood departments, service delicatessens, fresh bakeries and a broad selection of general merchandise. With enhanced decor reflecting contemporary interior design, these stores are designed to provide a quality shopping experience. At the end of Fiscal 1994, 100 of Ralphs' 173 total stores were newly built or remodeled within the past five fiscal years. While Ralphs has sold or closed 15 stores during the last five fiscal years, the number of Ralphs' stores has increased from 142 stores at January 28, 1990 to 173 stores at January 29, 1995. During the last five fiscal years, in Southern California Food 4 Less has acquired or opened 172 stores (which includes 142 stores acquired in connection with the acquisition of Alpha Beta) and remodeled 113 stores. Since its acquisition of Alpha Beta in 1991, Food 4 Less has undertaken an extensive program of store remodels, conversions and additions, which have resulted in a substantially improved store base. During Fiscal 1994, Food 4 Less spent approximately $50.7 million on capital improvements in Southern California. Additionally, since the Alpha Beta acquisition, Food 4 Less has converted 22 Southern California stores from conventional formats to the warehouse format. As Food 4 Less has remodeled existing stores, opened new larger stores and closed smaller, marginally performing stores, there has been a net reduction in store count, from 209 stores to 196 stores from the year ended June 29, 1991 ("Fiscal 1991") to the end of Fiscal 1994, but an increase in average store size. The average square feet per store has increased from 28,700 at the end of Fiscal 1991 to 30,500 at the end of Fiscal 1994. During the last five fiscal years, 29 stores have been closed or sold (including five stores which closed as a result of the April 1992 civil unrest in Los Angeles). The Company will select most new store sites from developers' proposals after such proposals have been researched and analyzed by the Company's personnel. Each site will be monitored for population shifts, zoning changes, traffic patterns, and nearby new construction and competitors' stores in an effort to determine sales potential. The Company will actively participate with developers in order to attain the Company's objectives for the site, including adequate parking and complementary co-tenant mix. Remodeling involves enhancing a store's decor through fixture replacement, upgrading of service departments and improvements to lighting systems. In order to minimize the disruptive effect on sales, most stores will be kept open during the remodeling period. The primary objectives of remodeling will be to improve the attractiveness of stores, increase sales of higher margin product categories and to increase selling area where feasible. Remodelings and openings, among other things, are subject to the availability of developers' financing, agreements with developers and landlords, local zoning regulations, construction schedules and other factors, including costs, often beyond the Company's control. Accordingly, there can be no assurance that the schedule will be met. Further, the Company expects increasing competition for new store sites, and it is possible that this competition might adversely affect the timing of its new store opening program. 66 76 ADVERTISING AND PROMOTION Ralphs' marketing strategy is to provide a combination of wide product selection, quality and freshness of perishable products, competitive prices and double coupons supporting Ralphs' advertising theme "Everything You Need. Every Time You Shop." In February 1994, Ralphs launched the Ralphs Savings Plan, a new marketing campaign designed to enhance customer value. The Ralphs Savings Plan is comprised of six major components: Guaranteed Low Prices ("GLPs"), Price Breakers, Big Buys, Multi-Buys, Ralphs Brand Products and Double Coupons. GLPs guarantee low prices on certain high volume items that are surveyed and updated every four weeks. Price Breakers are weekly advertised items that offer significant savings. Big Buys are club size items at prices competitive to club store prices and Multi-Buys offer Ralphs shoppers the opportunity to purchase club store quantities of regular sized items at prices competitive to club store prices. In conjunction with this new campaign Ralphs' private label offering of approximately 2,800 products provides value to the customer. In the second quarter of 1994, Ralphs began more aggressively promoting perishables through weekly ad features and lower prices. In addition, Ralphs increased the number of storewide GLPs. Further, a mailer program was intensified to highlight the perishable pricing and increased GLPs. Ralphs stores promote sales through the use of product coupons, consisting of manufacturers' coupons and Ralphs' own promotional coupons. Ralphs offers a double coupon program in all stores with Ralphs matching the price reduction offered by the manufacturer. Ralphs also generates store traffic through weekly advertised specials, special sales promotions such as discounts on recreational activities, seasonal and holiday promotions, increased private label selection, club pack items and exclusive product offerings. Current advertising by Ralphs has substantially the same market coverage as Food 4 Less and it is expected that following the Merger duplicative advertising can be eliminated. The Food 4 Less warehouse stores utilize print and radio advertising which emphasizes Food 4 Less' low-price leadership, rather than promoting special prices on individual items. The Food 4 Less warehouse stores also utilize weekly advertising circulars, customized to local communities, which highlight the merchandise offered in each store. INFORMATION SYSTEMS AND TECHNOLOGY Ralphs' management utilizes technology and industrial engineering methods to enhance operating efficiency. Every checkout lane in every Ralphs store has a point of sale terminal. Information from these terminals is utilized to allocate shelf space, select merchandise based on the buying patterns of each store, reduce out-of-stocks and increase efficiency at the checkstand and in the warehouses. Industrial engineering methods are used to schedule labor thereby improving productivity at the store level and in warehousing and distribution operations. Ralphs was the first supermarket chain in the western United States to adopt scanning in all of its stores and has upgraded this equipment through the purchase of IBM 4680 point-of-sale computers. All Ralphs stores use laser scanning equipment, operating through an integrated computer system, to scan the Universal Product Code, which provides prices and descriptions for most products. Ralphs has a Uniform Communications Standard purchase order system that electronically links Ralphs to major suppliers via computer. This system has enabled the automated processing of purchase orders which management believes reduces the lead time required for product purchases. In Fiscal 1993, Ralphs completed installation of an industry standard, direct store delivery receiving system for goods delivered directly by vendors. This system allows the receipt of each order to be recorded electronically, thereby confirming product retail price and purchase authorization. This system has reduced the incidence of billing errors and unauthorized deliveries. Industrial engineering standards have been established for all major work functions in Ralphs stores, ranging from stocking to checkout. Performance of each major department in each store is measured weekly against these standards. Similar measurements are made in Ralphs' distribution, warehouse and manufacturing operations. Ralphs believes that its application of qualitative methods to the operation of the business has 67 77 given it a competitive advantage and has better enabled management to run its business efficiently and to control costs. The Company plans to convert the Food 4 Less management information systems to the Ralphs management information systems. Ralphs stores that will be converted to the Food 4 Less format will continue to use the Ralphs programs. NORTHERN CALIFORNIA AND MIDWESTERN DIVISIONS The Northern California Division of Food 4 Less operates 19 conventional supermarkets in the greater San Francisco Bay Area under the names "Cala" and "Bell," and six warehouse format stores under the "Foods Co." name. Management believes that the Northern California Division has excellent store locations in the city of San Francisco that are very difficult to replicate. The Midwestern Division of Food 4 Less operates 38 stores, of which 33, including ten former "Food Barn" stores which Food 4 Less acquired in March 1994, are warehouse format stores operated under the "Food 4 Less" name, and five of which are conventional supermarkets operated under the "Falley's" name. Of these 38 stores, 34 are located in Kansas and four are located in Missouri. Management believes the Food 4 Less warehouse format stores are the low-price leaders in each of the markets in which they compete. The Northern California Division's conventional store strategy is to attract customers through its convenient locations, broad product line and emphasis on quality and service and its advertising and promotion strategy highlights the reduced price specials offered in its stores. In contrast, the Company's warehouse format stores, operated under the Food 4 Less name in the Midwestern Division and the Foods Co. name in the Northern California Division, emphasize lowest overall prices rather than promoting special prices on individual items. The Northern California Division's conventional stores range in size from approximately 8,900 square feet to 32,800 square feet, and average approximately 19,400 square feet. The Northern California Division's warehouse stores range in size from approximately 30,000 square feet to 59,600 square feet, and average approximately 37,900 square feet. The Midwestern Division's warehouse format stores range in size from approximately 8,800 square feet to 60,200 square feet and average approximately 37,300 square feet. The Northern California Division purchases merchandise from a number of suppliers; however, approximately 40% of its purchases are made through Certified Grocers of California, Ltd. ("Certified"), a food distribution cooperative, pursuant to supply contracts. The Northern California Division does not operate its own warehouse facilities, relying instead on direct delivery to its stores by Certified and other vendors. Food 4 Less' Southern California warehouse facilities supply a portion of the merchandise sold in the Northern California Division stores, and it is expected that, following completion of the Merger, the Company's Southern California warehouses will continue to do so. The Midwestern Division's primary supplier is Associated Wholesale Grocers ("AWG"), a member-owned wholesale grocery cooperative based in Kansas City. The Midwestern Division does not operate a central warehouse, but purchases approximately 73% of the merchandise sold in its stores from AWG. Management believes that, as AWG's largest single customer, the Midwestern Division has significant buying power, allowing it to provide a broader product line more economically than it could if it maintained its own full-line warehouse. The Midwestern Division produces approximately 50% of all case-ready fresh meat items sold in its stores at its central meat plant located in Topeka, Kansas. In fiscal 1990, the Northern California Division initiated a remodeling program to upgrade its stores and to increase profitability. Food 4 Less remodeled 15 stores during the past five fiscal years, and opened five new stores during the past four fiscal years. During fiscal 1994, Food 4 Less opened one new warehouse store, converted three existing stores to the warehouse format and remodeled one conventional format store. The Company has closed 4 stores during the past five fiscal years and increased its number of stores from 22 at the end of the fiscal year ended June 30, 1990 to 24 at the end of the fiscal year ended June 25, 1994. The average square feet per store has increased from 20,000 at the end of fiscal 1990 to 23,300 at the end of fiscal 1994. The Company plans to open one additional warehouse format store and remodel two conventional format stores during fiscal 1995. Management plans to further expand the Northern California Division in the future by acquiring existing stores and constructing new stores, including warehouse stores. The Northern California 68 78 Division Food 4 Less warehouse stores were renamed "Foods Co." in fiscal 1994 following the sale by Food 4 Less of exclusive rights to use the "Food 4 Less" name in Northern California to Fleming Companies, Inc. See "-- Licensing Operations." The Company intends to focus its Midwestern Division expansion primarily on its Food 4 Less operations. While Food 4 Less expects to construct new stores, it may also expand operations by purchasing existing Food 4 Less stores from unaffiliated licensees, or by acquiring existing supermarkets and converting them to the Food 4 Less warehouse format. The acquisition in March 1994 of ten warehouse stores formerly operated as "Food Barn" stores increased the Midwestern Division's Food 4 Less warehouse store count from 23 at June 26, 1993 to 33 at June 25, 1994. During the last five fiscal years, the Midwestern Division has opened 3 new stores, acquired 13 stores, closed one store and remodeled 10 stores. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. The Southern California stores compete with several large national and regional chains, principally Albertsons, Hughes, Lucky, Smith's, Stater Bros., and Vons, and with smaller independent supermarkets and grocery stores as well as warehouse clubs and other "alternative format" food stores. The Northern California Division competes with large national and regional chains, principally Lucky and Safeway, and with independent supermarket and grocery store operators and other retailers, including "alternative format" stores. The Midwestern Division's supermarkets compete with several national and regional supermarket chains, principally Albertsons and Dillons, as well as independent and "alternative format" stores such as Hypermarket USA. Food 4 Less positions its Food 4 Less warehouse format supermarkets as the overall low-price leader in each marketing area in which they operate. In addition, management believes that Ralphs is a leading competitor in many of its marketing areas, based on its strong customer franchise, desirable store locations, technology and efficient distribution systems. EMPLOYEES RALPHS At January 29, 1995, Ralphs had 6,213 full-time and 8,940 part-time employees as follows:
EMPLOYEE TYPE UNION NON-UNION TOTAL --------------------------------------------- ------ --------- ------ Hourly....................................... 13,854 245 14,099 Salaried..................................... -- 1,054 1,054 ------ --------- ------ Total employees.................... 13,854 1,299 15,153
69 79 Of Ralphs' 15,153 total employees at January 29, 1995, 13,854 were covered by union contracts principally with the UFCW. The table below sets forth information regarding Ralphs' union contracts which cover more than 100 employees.
UNION NUMBER OF EMPLOYEES COVERED DATE OF EXPIRATION - ---------------------------------- -------------------------------- ------------------- UFCW 10,723 clerks and meatcutters October 6, 1996 International Brotherhood of 1,675 drivers and warehousemen September 13, 1998 Teamsters Hotel Employees and Restaurant Employees 977 September 10, 1995 Hospital and Service Employees 328 Los Angeles January 19, 1997 67 San Diego April 20, 1997
FOOD 4 LESS At June 25, 1994, Food 4 Less had a total of 5,728 full-time and 8,959 part-time employees as follows:
EMPLOYEE TYPE UNION NON-UNION TOTAL ----------------------------------------------- ------ --------- ------ Hourly......................................... 11,882 1,907 13,789 Salaried....................................... -- 898 898 ------ --------- ------ Total employees...................... 11,882 2,805 14,687
Of Food 4 Less' 14,687 total employees at June 25, 1994, 11,882 were covered by union contracts, principally with UFCW. The table below sets forth information regarding Food 4 Less' union contracts which cover more than 100 employees.
NUMBER OF DATE OF UNION EMPLOYEES COVERED EXPIRATION - ---------------------------------------------- -------------------------- --------------------- UFCW.......................................... 7,908 Southern California October 6, 1996 clerks and meatcutters Hospital and Service Employees................ 299 Southern California January 19, 1997 store porters International Brotherhood of Teamsters........ 886 Southern California September 13, 1998 produce drivers and warehousemen UFCW.......................................... 971 Northern California February 28, 1995(a) clerks and meatcutters UFCW.......................................... 1,532 Southern California February 25, 1996 clerks and meatcutters Bakery and Confectionery Workers.............. 192 Southern California July 8, 1995 bakers
- --------------- (a) Certain of such employees are covered by a contract expiring on June 2, 1996. The contract which expired on February 28, 1995 and an additional contract which expired on March 4, 1995 have each been provisionally extended for a five-month period and currently are being renegotiated. Pursuant to their collective bargaining agreements, both Ralphs and Food 4 Less contribute to various union-sponsored, multi-employer pension plans. The terms of most collective bargaining agreements that cover employees of conventional stores operated by Food 4 Less are substantially identical to the terms of the corresponding collective bargaining agreements of Ralphs. The terms of each company's collective bargaining agreements generally will remain in effect following the Merger, although it is expected that, as a result of current negotiations, Ralphs' collective bargaining agreements will apply to all Company stores converted to the Ralphs name and format, and the collective bargaining agreements that cover employees of Food 4 Less warehouse format stores will apply to all Company stores converted to the Food 4 Less name and warehouse format. Management believes that both Ralphs and Food 4 Less have good relations with their employees. 70 80 LICENSING OPERATIONS Food 4 Less owns the "Food 4 Less" trademark and service mark and licenses the "Food 4 Less" name for use by others. In Fiscal 1994, earnings from licensing operations were approximately $270,000. An exclusive license with the right to sublicense the "Food 4 Less" name in all areas of the United States except Arkansas, Iowa, Illinois, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin, the upper peninsula of Michigan, certain portions of Kansas, Missouri, and Tennessee has been granted to Fleming Companies, Inc. ("Fleming"), a major food wholesaler and retailer. In August of 1993, Food 4 Less amended (the "Amendment") its licensing agreement with Fleming to give Fleming exclusive use of the Food 4 Less name in Northern California and Food 4 Less exclusive use in Southern California. Fleming paid Food 4 Less a fee of $1.9 million for the Amendment. With the exception of Northern California, and subject to the Amendment and certain proximity restrictions, Food 4 Less retains the right to open and operate its own "Food 4 Less" warehouse supermarkets throughout the United States. As of June 25, 1994, there were 158 Food 4 Less warehouse supermarkets in 20 states, including the 61 stores owned or leased and operated by Food 4 Less. Of the remaining 97 stores, Fleming operates three under license, 67 are operated under sublicenses from Fleming and 27 are operated by other licensees. PROPERTIES At October 1, 1994, Ralphs and Food 4 Less operated a total of 429 stores, as set forth in the table below:
NUMBER OF SUPERMARKETS -------------- TOTAL SELLING OWNED LEASED SQUARE FEET SQUARE FEET ----- ------ ----------- ----------- (IN THOUSANDS) Southern California..................... 49 317(a) 12,929 9,174 Northern California..................... -- 25 610 424 Midwestern.............................. 2(b) 36 1,357 1,025 ----- ------ ----------- ----------- Total......................... 51 378(c) 14,896 10,623 ===== ===== ========= =========
- --------------- (a) Includes 17 stores located on real property subject to a ground lease. (b) Includes one store that is partially owned and partially leased. (c) The average remaining term (including renewal options) of Ralphs' and Food 4 Less' supermarket leases is 27 years. The number of Ralphs and Food 4 Less stores by size classification as of October 1, 1994 is as follows:
AVERAGE GROSS SQUARE FEET AVERAGE SELLING SQUARE FEET NUMBER OF STORES TOTAL SQUARE --------------------------- --------------------------- ----------------------------------- FEET RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS TOTAL - ---------------- ----------- ----------- ----------- ----------- --------- ----------- ----- 8,800 - 15,599 -- 13,175 -- 9,478 -- 8 8 15,600 - 25,000 21,867 21,740 16,709 14,880 3 92 95 25,001 - 30,000 27,926 26,966 19,725 18,633 15 37 52 30,001 - 35,000 32,993 32,574 24,204 23,247 31 51 82 35,001 - 40,000 37,254 36,804 27,053 26,272 32 27 59 40,001 - 45,000 43,264 42,329 31,422 30,038 59 12 71 45,001 - 50,000 46,356 48,037 33,185 34,572 15 11 26 50,001 - 84,280 68,400 55,056 48,466 37,814 13 23 36
At October 1, 1994, the Company also operated 20 distribution, warehouse and administrative facilities and five manufacturing and processing facilities, 14 of which are owned and 11 of which are leased. Certain of the facilities are expected to be sold, closed or subleased following completion of the Merger. See "-- Warehousing and Distribution." Ralphs' distribution and warehouse facilities include the 17 million cubic foot ASRS warehouse for nonperishable items that Ralphs opened in November 1987 and the 5.4 million cubic foot PSC facility for the processing and storage of perishable products opened in mid-1992. Food 4 Less operates two warehouse facilities: The largest of such facilities is Food 4 Less' central office, manufacturing and warehouse complex in La Habra, California, which occupies approximately 1.4 million total square feet over 75 acres. Food 4 Less has entered into a lease of the La Habra property which expires in 2001 (and which may be extended for up to 15 years at the election of Food 4 Less), with American Food and Drug, Inc. ("AFDI"), a subsidiary of 71 81 American Stores Company, and has an option to purchase such property. Rent on the La Habra property was $6.3 million in Fiscal 1994. Four of Food 4 Less' supermarkets are also leased from AFDI. In addition to the La Habra facility, Food 4 Less leases a 321,000 square foot warehouse in Los Angeles. This warehouse, which was formerly owned by Food 4 Less, was the subject of a sale leaseback arrangement entered into by Food 4 Less in August 1990. For information regarding the Company's plan to consolidate its warehouse facilities following completion of the Merger, see "-- The Merger -- Substantial Cost Savings Opportunities -- Warehousing and Distribution Efficiencies." LEGAL PROCEEDINGS In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against RGC and Food 4 Less and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992, respectively. The Court has yet to certify any of these classes. A demurrer to the complaints was denied. Notwithstanding that it believes there is no merit to these cases, RGC had reached an agreement in principle to settle them. However, no settlement agreement has been signed. Food 4 Less is continuing to actively defend these suits and Ralphs has elected to defer any further settlement discussions until after the consummation of the Merger. The Company does not believe that the resolution of these cases will have a material adverse effect on its future financial condition. Any settlement would be subject to court approval. On March 25, 1991, George A. Koteen Associates, Inc. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that RGC breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of approximately $4.9 million in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. RGC has appealed the judgment and fully reserved in Fiscal 1992 against an adverse ruling by the appellate courts. In April 1994, RGC was served with a complaint filed by over 240 former employees at Ralphs' bakery in the Atwater district of Los Angeles (the "Bakery Plaintiffs"). The action was commenced in the United States District Court for the Central District of California, and, among other claims, the Bakery Plaintiffs alleged that RGC breached its collective bargaining agreement and violated the Workers Adjustment Retraining Notification Act (the "WARN Act") when it downsized and subsequently closed the bakery. In their complaint, the Bakery Plaintiffs are seeking damages for lost wages and benefits as well as punitive damages. The Bakery Plaintiffs also named RGC and two of its management employees in fraud, conspiracy and emotional distress causes of action. In addition, the Bakery Plaintiffs sued their union local for breach of its duty of fair representation and other alleged misconduct, including fraud and conspiracy. The defendants have answered the complaint and discovery is ongoing. Trial is set for February, 1996, and RGC is vigorously defending this suit. Management believes, based on its assessment of the facts, that the resolution of this case will not have a material effect on the Company's financial position or results of operations. In addition, Food 4 Less and Ralphs are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on Food 4 Less' or Ralphs' financial position or results of operations. CALIFORNIA SETTLEMENT AGREEMENT On December 14, 1994, Food 4 Less and Ralphs entered into a Settlement Agreement (the "Settlement Agreement") with the State of California to settle potential antitrust and unfair competition claims the State of California asserted against Ralphs and Food 4 Less relating to the effects of the Merger on supermarket competition in Southern California (the "State Claims"). Without admitting any liability in connection with the State Claims, Food 4 Less and Ralphs agreed in the Settlement Agreement to divest 27 specific stores in Southern California. Under the Settlement Agreement, the Company must divest 14 stores by June 30, 1995, and the balance of 13 stores by December 31, 1995. The Company also agreed not to acquire new stores from 72 82 third parties in the six Southern California areas specified in the Settlement Agreement for five years following the date of the Settlement Agreement. If the Company fails to divest the required stores by the two dates set forth in the Settlement Agreement, the Company has agreed not to object to the appointment of a trustee to effect the required sales. The Settlement Agreement also requires the Company to pay the reasonable fees and costs of the attorneys and experts of the State of California associated with its review. GOVERNMENT REGULATION Ralphs and Food 4 Less are subject to regulation by a variety of governmental agencies, including, but not limited to, the California Department of Alcoholic Beverage Control, the California Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments. In addition, the Merger is subject to the review of the Federal Trade Commission and the requirements and waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The waiting period under the HSR Act has expired and on February 2, 1995, the Federal Trade Commission advised Food 4 Less and Ralphs that it had closed its investigation of the Merger. ENVIRONMENTAL MATTERS In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigations by Ralphs. Ralphs has conducted the requested investigations and has reported the results to the Regional Board. Approximately 25 companies have entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate and design a remediation system for contaminated groundwater beneath an area which includes the Atwater property. Ralphs is not a party to that Consent Order, but is cooperating with requests of the subject companies to allow installation of monitoring or recovery wells on Ralphs' property. On or about May 2, 1995 the EPA mailed a General Notice Letter to 14 parties, including Ralphs as owner and operator of the Atwater property, naming them as additional potentially responsible parties ("PRPs"). As such, Ralphs and the other PRPs may be requested to perform or pay remediation or pay oversight costs in connection with the Superfund site. Ralphs is evaluating the implications of this letter to determine an appropriate response. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial condition or results of operations. Ralphs has removed underground storage tanks and remediated soil contamination at the Atwater property. In some instances the removals and the contamination were associated with grocery business operations; in others they were associated with prior property users. Although the possibility of other contamination from prior operations or adjacent properties exists at the Atwater property, management does not believe that the costs of remediating such contamination will be material to the Company. Apart from the Atwater property, Ralphs and Food 4 Less have recently had environmental assessments performed on a significant portion of Ralphs' facilities and Food 4 Less' facilities, including warehouse and distribution facilities. Management believes that any responsive actions required at the examined properties as a result of such assessments will not have a material adverse effect on its financial condition or results of operations. Ralphs has incurred approximately $4.5 million in non-recurring capital expenditures for conversion of refrigerants during 1994. Food 4 Less may incur some additional capital expenditures for such conversion. Other than these expenditures, neither Ralphs nor Food 4 Less has incurred material capital expenditures for 73 83 environmental controls during the previous three years, nor does management anticipate incurring such expenditures during the current fiscal year or the succeeding fiscal year. At the time that Food 4 Less acquired Alpha Beta in 1991, it learned that certain underground storage tanks located on the site of the La Habra facility may have released hydrocarbons. In connection with the acquisition of Alpha Beta the seller (who is also the lessor of the La Habra facility) agreed to retain responsibility, subject to certain limitations, for remediation of the release. Ralphs and Food 4 Less are subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. 74 84 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the persons who are expected to serve as the executive officers and directors of the Company and New Holdings, as successor to Holdings, following the consummation of the Merger, the FFL Merger and the Reincorporation Merger.
YEARS OF SUPERMARKET INDUSTRY SERVICE ---------------------------- NAME AGE POSITION MANAGERIAL POSITIONS TOTAL - ------------------------- --- ----------------------------------- -------------------- ----- Ronald W. Burkle 42 Director and Chairman of the Board 19 24 of New Holdings and the Company Byron E. Allumbaugh 63 Director and Chief Executive 36 36 Officer of New Holdings and the Company George G. Golleher 47 Director and Vice Chairman of New 21 21 Holdings and the Company Alfred A. Marasca 53 Director of the Company and 30 38 President and Chief Operating Officer of New Holdings and the Company Joe S. Burkle 71 Director and Executive Vice 44 48 President of New Holdings and the Company Greg Mays 48 Executive Vice President of New 21 21 Holdings and the Company Terry Peets 50 Executive Vice President of New 18 18 Holdings and the Company Jan Charles Gray 47 Senior Vice President, General 20 31 Counsel and Secretary of New Holdings and the Company Alan J. Reed 48 Senior Vice President and Chief 22 22 Financial Officer of New Holdings and the Company Patrick L. Graham 45 Director of New Holdings and the -- -- Company Mark A. Resnik 47 Director of New Holdings and the -- -- Company
Ronald W. Burkle has been a Director and the Chairman of the Board and Chief Executive Officer of Food 4 Less since its inception in 1989. Mr. Burkle co-founded Yucaipa in 1986 and has served as Director, Chairman of the Board, President and Chief Executive Officer of FFL since 1987 and of Holdings since 1992. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of Jurgensen's, a Southern California gourmet food retailer. Before joining Jurgensen's, Mr. Burkle was a private investor in Southern California. Mr. Burkle is the son of Joe S. Burkle. Byron E. Allumbaugh has been Chairman of the Board and Chief Executive Officer of Ralphs since 1976 and a Director since 1988. He also is a Director of the H.F. Ahmanson Company, El Paso Natural Gas Company and Ultramar, Inc. George G. Golleher has been a Director of Food 4 Less since its inception in 1989 and has been the President and Chief Operating Officer of Food 4 Less since January 1990. From 1986 through 1989 Mr. Golleher served as Senior Vice President, Finance and Administration, of The Boys Markets, Inc. Prior to joining The Boys Markets, Inc. in 1984, Mr. Golleher served as Vice President and Chief Financial Officer of Mayfair Markets, Inc. from 1983 to 1984. Alfred A. Marasca has been President, Chief Operating Officer and a Director of Ralphs since February 1994 and he was President from February 1993 to February 1994, Executive Vice President, Retail from 1991 until 1993 and Executive Vice President, Marketing from 1985 to 1991. 75 85 Joe S. Burkle has been a Director and Executive Vice President of Food 4 Less since its inception in 1989 and has been Chief Executive Officer of Falley's, Inc. since 1987. Mr. Burkle began his career in the supermarket industry in 1946, and served as President and Chief Executive Officer of Stater Bros. Markets, a Southern California supermarket chain. Prior to 1987, Mr. Burkle was a private investor in Southern California. Mr. Burkle is the father of Ronald W. Burkle. Greg Mays has been Executive Vice President -- Finance and Administration, and Chief Financial Officer of Food 4 Less and of Holdings since December 1992. From 1989 until 1991, Mr. Mays was Chief Financial Officer of Almac's, Inc. and, from 1991 to December 1992, President and Chief Financial Officer of Almac's. From April 1988 to June 1989, Mr. Mays was Chief Financial Officer of Food 4 Less of Modesto, Inc. and Cala Foods, Inc. Terry Peets has been Executive Vice President of Ralphs since February 1994. He was Senior Vice President, Marketing from 1991 to February 1994, Senior Vice President, Merchandising from 1990 to 1991, Group Vice President, Merchandising from 1988 to 1990 and Group Vice President, Store Operations from 1987 to 1988. Jan Charles Gray has been Senior Vice President, General Counsel and Secretary of Ralphs since 1988. He was Senior Vice President and General Counsel from 1985 to 1988 and Vice President and General Counsel from 1978 to 1985. Alan J. Reed has been Senior Vice President and Chief Financial Officer of Ralphs since 1988. He was Senior Vice President, Finance from 1985 to 1988 and Vice President, Finance from 1983 to 1985. Patrick L. Graham joined Yucaipa as a general partner in January 1993. Prior to that time he was a Managing Director in the corporate finance department of Libra Investments, Inc. from 1992 to 1993 and PaineWebber Inc. from 1990 to 1992. From 1982 to 1990, he was a Managing Director of the corporate finance department of Drexel Burnham Lambert Incorporated and an Associate Director in the corporate finance department of Bear Stearns & Co., Inc. Mark A. Resnik has been a Director and the Vice President and Secretary of Food 4 Less since its inception in 1989, co-founded Yucaipa in 1986 and has been a Director, Vice President and Secretary of FFL since 1987. From 1986 until 1988, Mr. Resnik served as a Director, Vice President and Secretary for Jurgensen's. From 1983 through 1986, Mr. Resnik served as a Director, Vice President and General Counsel of Stater Bros. Markets. In addition to the directors named above, two members will be nominated to the Board of Directors of each of the Company and New Holdings by Apollo, and one member will be nominated to the Board of Directors of each of the Company and New Holdings by the other New Equity Investors, pursuant to the terms of the 1995 Stockholders Agreement. See "Description of Capital Stock -- 1995 Stockholders Agreement." All directors of the Company and New Holdings will hold office until the election and qualification of their successors. Executive officers of each of the Company and New Holdings will be chosen by its Board of Directors and will serve at its discretion. It is anticipated that neither the Company nor New Holdings will pay any fees or remuneration to its directors for service on the board or any board committee, but that the Company and New Holdings will reimburse directors for their ordinary out-of-pocket expenses incurred in connection with attending meetings of the Board of Directors. 76 86 EXECUTIVE COMPENSATION EMPLOYMENT AGREEMENTS Concurrently with the consummation of the Merger, the Company will enter into employment agreements with certain of the current executive officers of Ralphs and Food 4 Less. It is expected that Byron E. Allumbaugh, George G. Golleher, Alfred A. Marasca, as well as other executive officers of the Company, including Messrs. Mays, Peets, Gray and Reed, will enter into three-year employment contracts with the Company and that the existing employment contracts, if any, of such officers will be cancelled. New Allumbaugh Agreement. The employment agreement between the Company and Byron Allumbaugh, 63, is expected to provide for a salary of $1 million for the first year and $1.25 million for the second year. If Mr. Allumbaugh continues as the Chief Executive Officer during the third year following the Merger, he would be entitled to a salary of $2 million and if he is employed in another capacity then he would be entitled to a salary of $1.25 million for the third year. Mr. Allumbaugh will be entitled to a bonus equal to his salary in each year if certain prescribed earnings targets (the "Earnings Targets") for the year are reached. If the Company completes an initial public offering of capital stock during the first two years of Mr. Allumbaugh's employment, Mr. Allumbaugh will remain Chief Executive Officer for one year after the public offering. If the public offering is anticipated to occur during the third year of Mr. Allumbaugh's employment agreement, Mr. Allumbaugh will resign as Chief Executive Officer six months prior to the intended date of the public offering but will continue to be employed at the lesser compensation level provided in his employment agreement until its termination. New Golleher Agreement. Food 4 Less is currently a party to a five-year employment agreement with George G. Golleher providing for annual base compensation of $350,000, plus employee benefits and an incentive bonus calculated in accordance with a formula based on Food 4 Less' earnings. Under the employment agreement, Mr. Golleher may terminate his employment agreement in the event of a change of control of Food 4 Less, in which case he is entitled to receive all of the salary and benefits provided under the agreement for the remaining term thereof, notwithstanding the termination of his employment. In connection with the consummation of the Merger, the Food 4 Less board of directors has authorized the payment of a special bonus to George Golleher in a lump sum amount equal to the base salary due him under the remaining term of his employment agreement. As a condition of the payment of such bonus, Mr. Golleher's existing employment agreement will be cancelled, and he will enter into a new agreement containing terms to be mutually agreed upon between Food 4 Less and Mr. Golleher. The new employment agreement is expected to provide for an annual salary of $500,000 plus a bonus equal to his salary in each year if the Earnings Targets are reached. Certain existing contractual rights of Mr. Golleher, including the right to be elected to the Company's board of directors and the right to require the Company to repurchase certain of his shares of New Holdings stock upon his death, disability or termination without cause, will continue in effect pursuant to the new employment agreement. New Marasca Agreement. The employment agreement between the Company and Alfred Marasca is expected to provide for a salary of $500,000 per annum and an annual bonus equal to his salary if the Earnings Targets for the year are reached. General Provisions of the New Employment Agreements. The new employment agreements are expected to provide generally that the Company may terminate the agreement for cause or upon the failure of the employee to render services to the Company for a continuous period to be agreed upon by the Company and the employee because of the employee's disability. In addition, the employee's services may be suspended upon notice by the Company and in such event the employee will continue to be compensated by the Company during the remainder of the term of the agreement subject to certain offsets if the employee becomes engaged in another business. Existing Food 4 Less Employment Agreements. Food 4 Less entered into employment agreements with 24 officers providing for their employment for a one-year term commencing on the date of a change of control of Food 4 Less. These agreements provide for the payment of an incentive bonus calculated in accordance with Food 4 Less policies, and certain of the agreements provide for the payment of a special bonus payable upon a change of control (provided certain financial performance targets have been met). These agreements will become effective upon the consummation of the Merger. Greg Mays, who will be an Executive Vice 77 87 President of the Company, will be entitled to receive a base salary of not less than $250,000 and a special bonus of $150,000 (provided certain financial performance targets have been met). It is anticipated that some, but not all, of these employment agreements will be replaced by new employment agreements with the Company. Joe Burkle Consulting Agreement. Food 4 Less has a consulting agreement with Joe S. Burkle providing for compensation of $3,000 per week, pursuant to which Mr. Burkle provides the management and consulting services of an executive vice president. The agreement has a five-year term, which is automatically renewed on January 1 of each year for a five-year term unless sixty days' notice is given by either party; provided that if Food 4 Less terminates Mr. Burkle's services for reasons other than for good cause, the payments due under the agreement continue for the balance of the term. It is expected that the Company will assume Mr. Burkle's consulting agreement upon the consummation of the Merger. EQUITY APPRECIATION RIGHTS PLAN RGC has 1,500,000 EARs outstanding that were granted under the RGC 1988 Equity Appreciation Rights Plan, as amended (the "EAR Plan"). The outstanding EARs are held by 36 officers and former officers of Ralphs, including Byron Allumbaugh, Alfred Marasca, Alan Reed, Terry Peets and Jan Charles Gray. All outstanding EARs are vested in full and not subject to forfeiture by the holders, except in the event a holder's employment is terminated for cause within the meaning of the EAR Plan. The outstanding EARs represent the right to receive, in the aggregate, 15% of the increase of the appraised value of RGC's equity at the time of exercise over a base value of $120 million. Concurrently with the consummation of the Merger, the outstanding EARs will be redeemed for $17.8 million in cash and a deferred payment of up to $5.0 million. An additional $10 million of EAR payments that would otherwise be payable upon consummation of the Merger will be cancelled in exchange for the issuance of the Reinvestment Options (as defined). No future compensation expense will be recorded as the cancellation of certain EAR liabilities ($10.0 million) in consideration for the Reinvestment Options is deemed by management to reflect fair and equal value. See "-- New Management Stock Option Plan and Management Investment," "Description of Capital Stock -- New Equity Investment" and "Certain Relationships and Related Transactions -- Food 4 Less." The price to redeem the EARs is based on a $517 million valuation (the maximum valuation possible under the EAR Plan) of RGC's equity. NEW MANAGEMENT STOCK OPTION PLAN AND MANAGEMENT INVESTMENT Upon the consummation of the Merger, certain members of Ralphs' management and Food 4 Less' management will be entitled to receive options to purchase common stock of New Holdings (the "New Options"). The New Options will have a term of ten years and the exercise price with respect to each New Option will be $10 per share, which is equal to the price paid by the New Equity Investors for the New Equity Investment. The New Options will represent 7.5% of the total equity of New Holdings, and will be allocated as follows: New Options representing 1.5%, 0.5% and 0.5% of the total equity of New Holdings will be granted to Byron Allumbaugh, George Golleher and Alfred Marasca, respectively (the "Tier One Options"). The Tier One Options will be fully vested upon issuance and will be immediately exercisable. New Options for an additional 2.5% of the total equity of New Holdings will be granted to certain other management employees of the Company (the "Tier Two Options"). Fifty percent (50%) of the Tier Two Options granted to each holder will vest immediately upon issuance and 10% will vest each year thereafter. In addition, New Options representing an aggregate of 2.5% of the total equity of New Holdings will be issued to holders of EARs in exchange for the cancellation of $10 million of the EAR payments which would otherwise be payable upon consummation of the Merger (the "Reinvestment Options"). The value of the EAR payments cancelled will be credited against the exercise price for each Reinvestment Option. The Reinvestment Options will be fully vested upon issuance and will be immediately exercisable. Certain of Ralphs' officers, including Messrs. Allumbaugh, Marasca, Reed, Peets and Gray currently hold options to purchase common stock of RSI. These options will be cancelled for cash payments aggregating $880,000 in connection with the Merger. 78 88 Each holder of New Options (collectively, the "Management Shareholders") will also execute a management shareholder agreement with New Holdings (collectively, the "Management Shareholder Agreements"). The Management Shareholder Agreements generally will provide New Holdings with a right of first refusal in the event of proposed sales of New Holdings stock acquired by the Management Shareholders upon the exercise of New Options and an option, exercisable following any termination for cause of a Management Shareholder's employment, or if the Management Shareholder commences employment with a competitor, to repurchase at Fair Market Value (as defined in the Management Shareholder Agreements) any New Holdings stock acquired by such Management Shareholder upon the exercise of New Options. Each Management Shareholder Agreement will contain certain rights of the Management Shareholders to participate in sales by Yucaipa of New Holdings stock and certain obligations of the Management Shareholders to sell their New Holdings stock in the case of a sale for cash of all of the outstanding New Holdings stock. Finally, the Management Shareholders will be required to vote their New Holdings stock to elect to the New Holdings Board of Directors the directors nominated by Yucaipa, Apollo and the other New Equity Investors under New Holdings' 1995 Stockholders Agreement. See "Description of Capital Stock -- 1995 Stockholders Agreement." The Management Shareholders Agreements, and all rights and obligations of the Management Shareholders thereunder described above, will terminate upon an initial public offering of New Holdings common stock meeting certain criteria. SUMMARY COMPENSATION TABLE -- RALPHS 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 Ralphs who are expected to serve as executive officers of the Company, whose total annual salary and bonus exceeded $100,000 for the year ended January 29, 1995.
LONG TERM COMPENSATION AWARDS ------------------- ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#) COMPENSATION($)(2) - ---------------------------- ----- -------- ----------- ------------------- ------------------ Byron E. Allumbaugh, 1994 650,000 0 N/A 25,580 Chairman and 1993 645,000 387,000 N/A 20,075 Chief Executive Officer 1992 620,000 372,000 587,753 21,897 Alfred A. Marasca, 1994 400,000 0 N/A 10,580 President and 1993 340,000 204,000 N/A 7,187 Chief Operating Officer 1992 296,260 148,125 308,812 8,206 Alan J. Reed, 1994 225,000 0 N/A 6,248 Senior Vice President, 1993 222,500 111,250 N/A 8,879 Finance and 1992 211,250 105,625 154,406 6,125 Chief Financial Officer Terry Peets, 1994 215,000 0 N/A 7,562 Executive Vice President 1993 192,500 96,250 N/A 6,127 1992 182,500 91,250 154,406 6,027 Jan Charles Gray, 1994 213,750 0 N/A 9,047 Senior Vice President, 1993 207,500 103,750 N/A 9,084 General Counsel and 1992 196,250 98,125 154,406 6,605 Secretary
- --------------- (1) Bonuses for services performed in Fiscal Year 1994 were paid in Fiscal Year 1995. Bonus amounts for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray were $390,000, $240,000, $112,500, $107,500 and $106,875 respectively. (2) Represents (i) insurance premiums and the dollar value of the remainder of premiums paid under the Senior Executive Supplemental Benefit Plan, and (ii) Ralphs' contributions under the Ralphs Thrift Incentive Plan. The respective amount paid for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray are as follows: (A) Insurance premiums: $18,500, $6,600, $4,025, $5,460 and $4,500; (B) dollar value of the remainder of premiums: $5,232, $2,702, $0, $0 and $2,699; (C) incentive plan contributions; $1,848, $1,278, $2,223, $2,102 and $1,848. 79 89 AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR VALUES -- RALPHS
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($) ACQUIRED --------------------- -------------------- ON EXERCISE VALUE EXERCISABLE/ EXERCISABLE/ NAME (#)(1) REALIZED($) UNEXERCISABLE(2) UNEXERCISABLE(3)(4) - -------------------------------- ----------- ----------- --------------------- -------------------- Byron E. Allumbaugh............. 70,000 1,961,646 352,652/ 0/ 375,101 3,923,290 Alfred A. Marasca............... 13,500 378,317 108,084/ 0/ 259,228 1,639,375 Alan J. Reed.................... 10,500 294,247 54,042/ 0/ 145,864 1,275,069 Terry Peets..................... 7,500 210,176 54,042/ 0/ 132,864 910,764 Jan Charles Gray................ 0 0 54,042/ 0/ 132,864 1,120,940
- --------------- (1) Represents EARs exercised under the EAR Plan. (2) Each number represents the aggregate number of options and EARs outstanding, as currently exercisable/unexercisable. Options and EARs were granted under different plans, not in tandem. All EARs are free standing. (3) Represents value of EARs, based on a value of $28.0235 per EAR at the time of exercise. Outstanding options are not currently in-the-money, based on current estimates of the fair market value of the Common Stock. (4) A portion of the EARs will be redeemed in connection with the Merger and the remaining EARs will be cancelled in exchange for the issuance of the Reinvestment Options by New Holdings, based upon their maximum possible valuation of $39.70 per EAR (or $517 for the total equity of RGC). For purposes of such redemptions and cancellations, the value of outstanding EARs held by Messrs. Allumbaugh, Marasca, Reed, Peets and Gray is expected to equal approximately $8.0 million, $2.7 million, $2.1 million, $1.5 million and $1.7 million, respectively. RALPHS' RETIREMENT PLANS Retirement Plan. The Ralphs Grocery Company Retirement Plan (the "Retirement Plan") is a defined benefit pension plan for salaried and hourly nonunion employees with at least one year of credited service (1,000 hours). Ralphs makes annual contributions to the Retirement Plan in such amounts as are actuarially required to fund the benefits payable to participants in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Supplemental Executive Retirement Plan. To allow Ralphs' retirement program to provide benefits based upon a participant's total compensation and without regard to other ERISA or tax code pension plan limitations, eligible executive employees of Ralphs participate in the Ralphs Grocery Company Supplemental Executive Retirement Plan and, after December 31, 1993, the Ralphs Grocery Company Retirement Supplement Plan (collectively, the "Supplemental Plan"). The Supplemental Plan also modifies the benefit formula under the Retirement Plan in other respects. Benefits provided under the Supplemental Plan were improved effective April 9, 1994. 80 90 The following table sets forth the combined estimated annual benefits payable in the form of a (single) life annuity under both the Retirement Plan and the Supplemental Plan (unreduced by the cash surrender value of any life insurance policies) to a participant in both plans who is retiring at a normal retirement date of January 1, 1995 for the specified final average salaries and years of credited service.
YEARS OF CREDITED SERVICE ------------------------------------------------------------ FINAL AVERAGE SALARY 15 20 25 30 35 - -------------------- -------- -------- -------- -------- -------- $ 100,000 $ 19,484 $ 25,978 $ 32,473 $ 38,967 $ 45,462 200,000 41,984 55,978 69,973 83,967 97,962 300,000 90,000 120,000 150,000 180,000 180,000 400,000 120,000 160,000 200,000 240,000 240,000 600,000 180,000 240,000 300,000 360,000 360,000 800,000 240,000 320,000 400,000 480,000 480,000 1,000,000 300,000 400,000 500,000 600,000 600,000 1,200,000 360,000 480,000 600,000 720,000 720,000
Messrs. Allumbaugh, Marasca, Reed, Peets and Gray have completed 36, 38, 22, 18 and 31 years of credited service, respectively. Compensation covered by the Supplemental Plan includes both salary and bonus. The calculation of retirement benefits generally is based on average compensation for the highest three years of the ten years preceding retirement. The benefits earned by a participant under the Supplemental Plan are reduced by any benefits which the participant has earned under the Retirement Plan and may be offset under certain circumstances by the cash surrender value of life insurance policies maintained by Ralphs pursuant to the split dollar life insurance agreements entered into by Ralphs and the executive. Benefits are not subject to any deduction for social security offset. It is currently anticipated, although there can be no assurance, that Ralphs and Food 4 Less salaried employees will participate in the Retirement Plan and other existing Ralphs benefit plans following the Merger. These plans are currently being evaluated to determine the feasibility of such participation. SUMMARY COMPENSATION TABLE -- FOOD 4 LESS The following Summary Compensation Table sets forth information concerning the compensation of the Chief Executive Officer and the other three most highly compensated executive officers of Food 4 Less who are expected to serve as executive officers of the Company, whose total annual salary and bonus exceeded $100,000 for services rendered in all capacities to Food 4 Less and its subsidiaries for Fiscal 1994.
ANNUAL COMPENSATION ---------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(4)($) - ---------------------------------------------- ---- --------- -------- ------------------ Ronald W. Burkle, Chairman and................ 1994 -- -- -- Chief Executive Officer(1) 1993 -- -- -- 1992 -- -- -- George G. Golleher,........................... 1994 500,000 500,000 3,937 President 1993 500,000 500,000 -- 1992 500,000 235,000 5,300 Greg Mays, Executive Vice-President........... 1994 250,000 150,000 -- Finance/Administration and 1993 108,000 75,000 -- Chief Financial Officer(2) 1992 -- -- -- Joe Burkle,................................... 1994 196,000 50,000 -- Executive Vice President(3) 1993 156,000 -- -- 1992 156,000 -- --
- --------------- (1) Ronald W. Burkle and Mark A. Resnik, Vice President and Secretary of Food 4 Less, provide services to Food 4 Less pursuant to a management agreement between Yucaipa and Food 4 Less. See "Certain Relationships and Related Transactions." Pursuant to this management agreement, Food 4 Less paid Yucaipa and an affiliate of Yucaipa $2.4 million in the fiscal year ended June 25, 1994 for the services of Messrs. Ronald Burkle and Resnik and other Yucaipa personnel. Such payments to Yucaipa and its affiliate are not reflected in the table set forth above. (2) During Fiscal 1993, Greg Mays became Executive Vice President-Finance/Administration and Chief Financial Officer. (3) Mr. Joe Burkle provides services to Food 4 Less pursuant to a consulting agreement. See " -- Employment Agreements." (4) The amounts shown in this column represent annual payments by Food 4 Less to the Employee Profit Sharing and Retirement Program of Food 4 Less for the benefit of Mr. Golleher. 81 91 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION -- FOOD 4 LESS Food 4 Less does not have a board committee performing the functions of a compensation committee. Ronald W. Burkle, Chief Executive Officer of Food 4 Less, and George G. Golleher, President of Food 4 Less, made decisions with regard to Food 4 Less' executive officer compensation for Fiscal 1994. FOOD 4 LESS STOCK PLAN As of June 25, 1994, certain employees of Food 4 Less (the "Management Stockholders") collectively owned approximately 4.5% of Holdings' outstanding common stock which they acquired under the management stock plan of Food 4 Less. Pursuant to this plan, the Board of Directors of Holdings from time to time has offered common stock of Holdings for sale to selected employees at a price and for consideration (which may include a promissory note) determined at the discretion of the Board. Management Stockholders who have purchased shares are party to a Management Stockholders Agreement (the "Stockholders Agreement") with Holdings, a Stockholder Voting Agreement and Proxy (the "Voting Agreement"), and such other documents as Holdings may require. The Stockholders Agreement prohibits the transfer of any of the Management Stockholder's common stock for a period of four years from the date of its original issuance (although such date may, in the case of certain Management Stockholders who were shareholders of BHC, relate back to the date that shares were issued to them by BHC) other than transfers to certain family members and heirs or pursuant to a registration statement. The Management Stockholder's shares may be purchased by Holdings if, (a) prior to the fourth anniversary of their issuance, the Management Stockholder's employment terminates for any reason, or (b) after such fourth anniversary, the Management Stockholder wishes to sell his/her common stock to a third party. In the event of the death or permanent disability of the Management Stockholder, each Management Stockholder has an irrevocable option for one year to require Holdings to purchase all (or a portion) of his common stock in the manner and on the terms set forth in the Stockholders Agreement; provided, however, that the Management Stockholder may exercise such option in the event of death or disability only to the extent that Holdings or Food 4 Less has insurance, under which Holdings or Food 4 Less is the named beneficiary, with respect to such event. Additionally, if shareholders holding at least fifty percent (50%) of the issued and outstanding common stock of Holdings agree to sell to a third party more than eighty percent (80%) of the shares of common stock then held by them, then upon the demand of such selling stockholders, each Management Stockholder must sell to such third party the same percentage of his common stock as is proposed to be sold by the selling stockholders. The Stockholders Agreement terminates on the tenth anniversary of the Merger. Under the Voting Agreement, Ronald W. Burkle, George G. Golleher and Yucaipa Capital Advisors, Inc. have sole voting control over the shares of common stock owned by the other Management Stockholders until the tenth anniversary of the Merger (unless extended by such Management Stockholders). As of January 7, 1995, there was outstanding $0.7 million principal amount of notes receivable from certain Management Stockholders, representing loans for the purchase of Holdings' common stock. The notes are due over various periods, bear interest at the bank "prime" lending rate, and are secured by such common stock. Pursuant to the Reincorporation Merger, New Holdings will succeed to the rights and obligations of Holdings under the Food 4 Less stock plan. It is expected that following the Merger, equity issuances to management will cease to be made under the Food 4 Less stock plan and instead will be made under the New Holdings option plan. See "-- New Management Stock Option Plan and Management Investment." 82 92 PRINCIPAL STOCKHOLDERS The information in the following table gives effect to (i) the Merger and the Financing and (ii) the FFL Merger and the Reincorporation Merger. The information in the following table assumes that the outstanding stock options of RSI have been cancelled, that certain new stock options of New Holdings have been granted to management and that certain warrants to purchase New Holdings Common Stock have been issued to institutional investors who currently hold warrants to purchase Common Stock of Holdings. Based on such assumption and giving effect to the foregoing events, the following table sets forth the ownership of Common Stock and Series A Preferred Stock and Series B Preferred Stock of New Holdings by each person who to the knowledge of Food 4 Less will own 5% or more of New Holdings' outstanding voting stock, by each person who will be a director or named executive officer of the Company, and by all executive officers and directors of the Company as a group. Share amounts and percentage ownership information set forth for the Series A Preferred Stock and Series B Preferred Stock are subject to change pending finalization of the Financing.
SERIES B COMMON SERIES A PREFERRED STOCK(1)(2) PREFERRED STOCK(1) STOCK(1) ------------------ ------------------ ----------------- PERCENTAGE PERCENTAGE NUMBER NUMBER NUMBER OF TOTAL OF ALL OF OF OF VOTING OUTSTANDING BENEFICIAL OWNER(3) SHARES % SHARES % SHARES % POWER STOCK - --------------------------- ---------- ----- ---------- ----- --------- ---- ---------- ----------- Yucaipa and affiliates: The Yucaipa Companies(4)(5)........ 17,567,622 62.3% -- -- -- -- 39.1% 36.6% Ronald W. Burkle(4)(6)... 2,046,392 10.1% -- -- -- -- 5.5% 5.1% George G. Golleher (2)(6)................. 462,525 2.3% -- -- -- -- 1.3% 1.2% 10000 Santa Monica Boulevard, Los Angeles, California 90067 ---------- ----- ---------- ----------- Total................ 20,076,539 71.2% -- -- -- -- 44.7% 41.8% Byron E. Allumbaugh(2)(7).. 600,000 3.0% -- -- -- -- 1.6% 1.5% Alfred A. Marasca(2)(7).... 200,000 1.0% -- -- -- -- 0.5% 0.5% Greg Mays(8)............... -- -- -- -- -- -- -- -- Alan J. Reed(7)............ -- -- -- -- -- -- -- -- Terry Peets(7)............. -- -- -- -- -- -- -- -- Jan Charles Gray(7)........ -- -- -- -- -- -- -- -- Apollo Advisors, L.P.(9) 2 Manhattanville Road Purchase, NY 10577....... 1,285,165 6.4% 12,283,244 73.6% -- -- 36.8% 33.9% BT Investment Partners, Inc.(10) 130 Liberty Street New York, NY 10006....... 509,812 2.5% 900,000 5.4% 3,100,000 100% 3.8% 11.3% Other New Equity Investors as a group(11)........... 3,500,000 21.0% -- -- 9.5% 8.8% All directors and executive officers as a group (15 persons)(2)(4)(5)(6)..... 20,876,539 74.0% -- -- -- -- 46.5% 43.5%
- --------------- (1) Gives effect to (i) a stock split to be effected with respect to the outstanding common stock of Holdings prior to the Merger, (ii) the conversion (in connection with the FFL Merger) of the outstanding common stock of FFL into newly-issued common stock of Holdings in an amount which will preserve the proportionate ownership interests of FFL's stockholders, and of the equity holders of Holdings, in the combined Company, (iii) the conversion (in connection with the Reincorporation Merger) of the outstanding common stock, and warrants to acquire common stock, of Holdings into New Holdings common stock and warrants, (iv) the issuance by New Holdings of 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in connection with the New Equity Investment and the concurrent exchange of outstanding shares of common stock acquired by the New Equity Investors from an existing stockholder and (v) the assumed exercise of the outstanding warrants to acquire New Holdings common stock issued to the former Holdings warrantholders in connection with the Reincorporation Merger. (2) Gives effect to the exercise of Tier One Options to be issued to Byron E. Allumbaugh, George G. Golleher and Alfred A. Marasca under a new management stock option plan to be adopted prior to completion of the Merger, covering 600,000, 200,000 and 200,000 shares, respectively. Does not give effect to the exercise of (a) Tier Two Options to purchase up to 1,000,000 shares of New Holdings common stock to be issued at the discretion of the Board of Directors to certain management employees of the Company, under such stock option plan, concurrently with or following completion of the Merger or (b) Reinvestment Options to purchase up 83 93 to 1,000,000 shares of New Holdings common stock to be issued to holders of EARs in exchange for the cancellation of $10 million of the EAR payments which would otherwise be payable upon consummation of the Merger. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (3) Except as otherwise indicated, each beneficial owner has the sole power to vote, as applicable, and to dispose of all shares of Common Stock or Series A Preferred Stock or Series B Preferred Stock owned by such beneficial owner. (4) Represents shares owned by The Yucaipa Companies, F4L Equity Partners, L.P., FFL Partners, Yucaipa Capital Fund and Yucaipa/F4L Partners. These entities are affiliated partnerships which are controlled, directly or indirectly, by Ronald W. Burkle. Following completion of the Merger, the foregoing entities will be parties to a stockholders agreement with other New Holdings investors which will give to Yucaipa the right to elect a majority of the directors of New Holdings. See "Description of Capital Stock -- 1995 Stockholders Agreement." (5) Share amount and percentages shown for Yucaipa include a warrant to purchase 6,000,000 shares of New Holdings Common Stock to be issued to Yucaipa concurrently with the completion of the Merger and the Financing. Such warrant will become exercisable only upon the occurrence of an initial public offering or certain sale transactions involving New Holdings. See "Description of Capital Stock -- Yucaipa Warrant." (6) Certain management stockholders who own in the aggregate 852,326 shares of Common Stock (pro forma for the events and assumptions described above) have entered into a Stockholder Voting Agreement and Proxy pursuant to which Ronald W. Burkle, George G. Golleher and Yucaipa Capital Advisors, Inc. have sole voting control over the shares currently owned by such management stockholders until December 31, 2002 (unless extended by such stockholders). See "Executive Compensation -- Food 4 Less Stock Plan." The 852,326 shares have been included, solely for purposes of the above table, in the share amounts shown for Mr. Burkle but not for Mr. Golleher. Neither Messrs. Burkle and Golleher nor Yucaipa Capital Advisors, Inc. have the power to dispose of, or any other form of investment power with respect to, such shares. Messrs. Burkle and Golleher have sole voting and investment power with respect to 1,194,066 and 462,525 shares of Common Stock they respectively own (including, in the case of Mr. Golleher, 200,000 shares issuable upon the exercise of Tier One Options). (7) Does not include Reinvestment Options to purchase 228,432 shares, 100,000 shares, 60,000 shares, 60,000 shares and 174,940 shares of New Holdings Common Stock to be issued to Messrs. Allumbaugh, Marasca, Reed, Peets and Gray, respectively, in exchange for the cancellation of EAR payments which would otherwise be payable upon consummation of the Merger. (8) Mr. Mays owns 8,890 of the 852,326 shares of Common Stock which are subject to the Stockholder Voting Agreement and Proxy described in note (6) above. (9) Represents shares owned by one or more entities managed by or affiliated with Apollo Advisors, L.P., together with certain affiliates or designees of Apollo. (10) Represents shares owned by BT Investment Partners, Inc. ("BTIP"), Bankers Trust New York Corporation and BT Securities Corporation. Bankers Trust New York Corporation and BT Securities Corporation are affiliated with BTIP. BTIP expressly disclaims beneficial ownership of all shares owned by Bankers Trust New York Corporation and BT Securities Corporation. (11) Includes certain institutional investors, other than Apollo and BTIP, which will purchase Series A Preferred Stock of New Holdings in connection with the Financing. Pursuant to the 1995 Stockholders Agreement, certain corporate actions by New Holdings and its subsidiaries will require the consent of the directors whom the New Equity Investors, including Apollo and BTIP, are entitled to elect to the New Holdings Board of Directors. See "Description of Capital Stock -- 1995 Stockholders Agreement." Such investors do not affirm the existence of a "group" within the meaning of Rule 13d-5 under the Exchange Act, and expressly disclaim beneficial ownership of all New Holdings shares except for those shares held of record by each such investor or its nominees. DESCRIPTION OF CAPITAL STOCK Following is a description of the capital stock of the Company and New Holdings to be authorized and outstanding upon completion of the Merger, the FFL Merger and the Reincorporation Merger, including the terms of the New Equity Investment to be made in New Holdings in connection with the closing of the Merger. THE COMPANY Upon completion of the Merger, the authorized capital stock of the Company will consist of 1,600,000 shares of common stock, $.01 par value per share, of which 1,513,938 shares will be outstanding. All of such outstanding shares will be owned by New Holdings. There will be no public trading market for the common stock of the Company. The indentures that will govern outstanding debt securities of the Company will contain certain restrictions on the payment of cash dividends with respect to the Company's common stock. In addition, it is expected that the New Credit Facility will also restrict such payments. Subject to the limitations contained in the New Credit Facility and such indentures, holders of common stock of the Company will be entitled to dividends when and as declared by the Board of Directors from funds legally available therefor, and upon liquidation, will be entitled to share ratably in any distribution to holders of common stock. All holders of common stock will be entitled to one vote per share on any matter coming before the stockholders for a vote. 84 94 NEW HOLDINGS Following completion of the Merger, the FFL Merger, the Reincorporation Merger and the New Equity Investment, (i) the authorized capital stock of New Holdings will consist of 60,000,000 shares of common stock, $.01 par value, 25,000,000 shares of Series A Preferred Stock, $.01 par value, and 25,000,000 shares of Series B Preferred Stock, $.01 par value, (ii) 17,207,882 shares of common stock, 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock will be outstanding and held by approximately 100 holders of record, (iii) 2,008,874 shares of common stock will be reserved for issuance upon the exercise of outstanding warrants held by institutional investors, and (iv) 3,000,000 shares of common stock will be reserved for issuance upon the exercise of the New Options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." An additional 8,000,000 shares of common stock will be reserved for issuance upon the exercise of a warrant to be issued to Yucaipa upon closing of the Merger. See "Yucaipa Warrant" below. There is no public trading market for the capital stock of New Holdings, nor will any such market exist following completion of the Merger. New Holdings does not expect in the foreseeable future to pay any dividends on its capital stock. Holders of common stock of New Holdings are entitled to dividends when and as declared by the Board of Directors of New Holdings from funds legally available therefor, and upon liquidation, are entitled to share ratably in any distribution to holders of common stock. All holders of New Holdings common stock are entitled to one vote per share on any matter coming before the stockholders for a vote. The Series A Preferred Stock initially will have an aggregate liquidation preference of $166,832,440, or $10 per share, which will accrete as described below. The holders of the Series A Preferred Stock will vote (on an as-converted basis) together with the common stock as a single class on all matters submitted for stockholder vote. Each share of Series A Preferred Stock initially will be convertible at the option of the holder thereof into a number of shares of New Holdings common stock equal to the liquidation preference of such share of Series A Preferred Stock divided by $10. Upon consummation of an initial public offering of New Holdings equity securities which meets certain criteria, the shares of Series A Preferred Stock will automatically convert into shares of common stock of New Holdings at the same rate as applicable to an optional conversion. The Series B Preferred Stock initially will have an aggregate liquidation preference of $31,000,000, or $10 per share, which will accrete as described below. The holders of Series B Preferred Stock generally will not be entitled to vote on any matters, except as required by the Delaware General Corporation Law. Upon the occurrence of a change of control, each share of Series B Preferred Stock initially will be convertible at the option of the holder thereof into a number of shares of New Holdings common stock equal to the liquidation preference of such share of Series B Preferred Stock divided by $10. Upon consummation of an initial public offering of New Holdings equity securities which meets certain criteria, shares of Series B Preferred Stock will automatically convert into shares of non-voting common stock of New Holdings at the same rate as applicable to an optional conversion. The liquidation preference of the Series A Preferred Stock and the Series B Preferred Stock initially will accrete daily at the rate of 7% per annum, compounded quarterly, until the later of the fifth anniversary of the date of issuance or the date the Company first reports EBDIT (as defined) of at least $500 million for any twelve-month period. Thereafter, the liquidation preference will remain constant. The accretion rate of the liquidation preference will increase (a) by 2% per annum if the Company fails to report EBDIT of at least $400 million for the four fiscal quarters ending closest to the third anniversary of the date of issuance (or for the rolling four-quarter period ending on any of the three subsequent quarter-ends), (b) by 2% per annum if the Company fails to report EBDIT of at least $425 million for the four fiscal quarters ending closest to the fourth anniversary of the date of issuance (or for the rolling four-quarter period ending on any of the three subsequent quarter-ends) or (c) by 2% per annum if the Company fails to report EBDIT of at least $450 million for the four fiscal quarters ending closest to the fifth anniversary of the date of issuance, in each case, such increase to take effect on the first day after the last day of the fiscal quarter with respect to which such failure occurred; provided that the accretion rate of the liquidation preference will not at any time exceed 13% per annum. The accretion of the liquidation preference will result in a proportional increase in the number of 85 95 shares of common stock issuable upon conversion of the Series A Preferred Stock and the Series B Preferred Stock. In addition, the initial aggregate liquidation preference of the Series A Preferred Stock and the Series B Preferred Stock may increase from the amounts set forth above depending on whether New Holdings determines to increase the number of shares it may sell pursuant to the New Equity Investment, and depending on whether certain existing equity holders of FFL and Holdings exercise preemptive rights to participate in the New Equity Investment. Upon any transfer or sale of shares of either Series A Preferred Stock or Series B Preferred Stock, such shares may be converted (subject to certain conditions) at the option of the holder into shares of the other series. The holders of Series A Preferred Stock and Series B Preferred Stock have no rights to any fixed dividends in respect thereof. Subject to certain exceptions, New Holdings will be prohibited from declaring dividends with respect to its common stock without the consent of holders of a majority of the Series A Preferred Stock and of the Series B Preferred Stock. If dividends are declared on the Series A Preferred Stock or the Series B Preferred Stock which are payable in voting securities of New Holdings, New Holdings will make available to each holder of Series A Preferred Stock and Series B Preferred Stock, at such holder's request, dividends consisting of non-voting securities of New Holdings which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities upon a change of control. NEW EQUITY INVESTMENT Concurrently with the issuance of the New Notes and the closing of the Merger, certain existing stockholders of New Holdings, including affiliates of George Soros, will sell 5,783,244 outstanding shares of common stock of New Holdings to CLH, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million. New Holdings will then issue 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in a private placement to the New Equity Investors led by Apollo and including affiliates of BT Securities, CS First Boston and DLJ for an aggregate consideration of $140 million plus the contribution to New Holdings of the shares of common stock purchased from CLH in the secondary sale transaction. The shares of Series A Preferred Stock and Series B Preferred Stock acquired by the New Equity Investors will represent approximately 41% in the aggregate of the fully diluted common equity of New Holdings (assuming exercise of the Yucaipa warrant). See "Principal Stockholders." The $140 million cash proceeds from the issuance of Series A Preferred Stock and Series B Preferred Stock will be applied by New Holdings as set forth under "The Merger and the Financing." Food 4 Less has accepted a commitment letter (the "Equity Commitment") from Apollo pursuant to which Apollo has agreed (subject to certain conditions) to purchase up to $140 million of the Series A Preferred Stock to be offered by New Holdings as part of the New Equity Investment. In consideration of its equity commitment, upon the closing of the Merger Apollo will receive from New Holdings a fee of $5 million, of which $2.5 million will be satisfied through the issuance to Apollo of New Discount Debentures and $2.5 million will be paid to Apollo in cash. See "Certain Relationships and Related Transactions -- Food 4 Less." The Company anticipates that the remainder of the Series A Preferred Stock and Series B Preferred Stock so offered will be purchased by affiliates of lenders and other financial institutions which have provided financing to the Company, including BTIP, which is an affiliate of Bankers Trust, by affiliates of CS First Boston and DLJ and by certain other investors. The amounts of New Holdings stock expected to be held by Apollo, affiliates of Bankers Trust and all other holders of 5% or more of New Holdings' outstanding stock following completion of the Merger and the Financing are set forth above under "Principal Stockholders." 1995 STOCKHOLDERS AGREEMENT Under the terms of the 1995 Stockholders Agreement (which is expected to be entered into by New Holdings, Yucaipa and its affiliates, the New Equity Investors and other stockholders), the New Equity Investors holding Series A Preferred Stock will be entitled to nominate three directors to the Board of Directors of each of New Holdings and the Company (the "Series A Directors"), of which two directors will be nominees of Apollo and one director will be a nominee of the other New Equity Investors holding Series A 86 96 Preferred Stock. The 1995 Stockholders Agreement will give to Yucaipa the right to nominate six directors of New Holdings and seven directors of the Company, and the boards of New Holdings and the Company will consist of a total of nine and ten directors, respectively. The numbers of directors which may be nominated by the foregoing stockholders will be reduced if such stockholders cease to own certain specified percentages of their initial holdings. Unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries may not take certain actions without the approval of the Series A Directors, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. In addition, the New Equity Investors will have certain "demand" and "piggyback" registration rights with respect to their Series A Preferred Stock and Series B Preferred Stock, as well as the right to participate, on a pro rata basis, in sales by Yucaipa of the New Holdings stock it holds. In certain circumstances, Yucaipa will have the right to compel the participation of the New Equity Investors and other stockholders in sales of all the outstanding shares of New Holdings stock. The Company will seek the agreement of the current stockholders of FFL and warrantholders of Holdings to become party to the 1995 Stockholders Agreement, which would grant to such holders certain rights in replacement of two existing stockholders agreements among FFL and its stockholders entered into in 1987 and 1991, respectively, and an agreement among Holdings and its warrantholders executed in 1992. YUCAIPA WARRANT Upon closing of the Merger, New Holdings has agreed to issue to Yucaipa a warrant to purchase up to 8,000,000 shares of New Holdings common stock. The initial exercise price of such warrant will be set such that the warrant will have no value unless and until the value of New Holdings' equity appreciates to $1.220 billion. Such warrant will be exercisable on a cashless basis at the election of Yucaipa in the event New Holdings completes an initial public offering of equity securities meeting certain criteria, or in connection with certain sale transactions involving New Holdings, in either case effected on or prior to the fifth anniversary of the Closing Date. The expiration date of such warrant, and the deadline for such triggering transactions, may be extended from the fifth to the seventh anniversary of the Closing Date if New Holdings meets certain financial performance goals prior to such fifth anniversary. The cashless exercise provisions of such warrant allow the holder to exercise it without the payment of cash consideration, provided that New Holdings will withhold from the shares otherwise issuable upon such exercise a number of shares having a fair market value as of the exercise date equal to the exercise price. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RALPHS In connection with the acquisition of a majority of RSI's common stock in February 1992, EJDC agreed to guarantee RGC's obligations as a self-insurer of worker's compensation liabilities in the State of California (the "EJDC Guaranty"). In consideration of the EJDC Guaranty, RGC unconditionally agreed to reimburse EJDC for any payments made under the EJDC Guaranty and for the cost of insurance up to $200,000 to cover liabilities incurred pursuant to the EJDC Guaranty. Further, RGC agreed to pay EJDC a guarantee fee of $33,500 for each month the EJDC Guaranty was in effect ($402,000 was paid in Fiscal 1994). Concurrently with the completion of the Merger, the EJDC Guaranty will be terminated, and RGC will cease to pay any guarantee fee to EJDC or to reimburse it for the cost of insurance. However, RGC will continue to be obligated to reimburse EJDC for any payments which EJDC could in the future be required to make under the EJDC Guaranty in respect of prior claims. Moreover, FFL has undertaken for the benefit of EJDC to maintain, until the fifth anniversary of the closing of the Merger, bank letters of credit, insurance or other security for the workers' compensation claims for which EJDC could have liability under the EJDC Guaranty. In connection with the bankruptcy reorganization of Federated and its affiliates, Federated agreed to pay certain potential tax liabilities relating to RGC as a member of the affiliated group of companies comprising Federated and its subsidiaries. In consideration thereof, RSI and RGC agreed to pay Federated a total of $10 million, payable $1 million on each of February 3, 1992, 1993, 1994, 1995 and 1996 and $5 million on February 3, 1997. The five $1 million installments are to be paid by RGC and the $5 million payment is the 87 97 joint obligation of RSI and RGC. In the event Federated is required to pay certain tax liabilities, RSI and RGC have agreed to reimburse Federated up to an additional $10 million, subject to certain adjustments. This additional obligation, if any, is the joint and several obligation of RSI and RGC. Pursuant to the terms of the Merger Agreement, the $5 million payment and the potential $10 million payment will be paid in cash. See Note 1 of Notes to Ralphs Consolidated Financial Statements. In addition, EJDC and the other current holders of Common Stock of RSI are parties to an agreement providing for various aspects of corporate governance (the "Ralphs Registration Rights and Governance Agreement") relating to Ralphs. Pursuant to the Ralphs Registration Rights and Governance Agreement, RGC is obligated to provide RSI, by dividend, pursuant to a services agreement or otherwise, with funds sufficient to enable RSI to perform its duties as the holding company of RGC's stock and to perform its obligations set forth in the Ralphs Registration Rights and Governance Agreement. The Ralphs Registration Rights and Governance Agreement will be cancelled concurrently with the closing of the Merger. FOOD 4 LESS Yucaipa provides certain management and financial services to Food 4 Less and its subsidiaries pursuant to a consulting agreement. The services of Ronald Burkle, Mark Resnik and Patrick Graham, acting in their capacities as directors and officers, and the services of other Yucaipa personnel are provided to Food 4 Less pursuant to this agreement. All of such individuals are partners of Yucaipa. Yucaipa's consulting agreement provides for annual management fees currently equal to $2 million plus an additional amount based on Food 4 Less' performance. Upon completion of the Merger, the consulting agreement will be amended to provide for an annual management fee payable by the Company to Yucaipa in the amount of $4 million, with no additional amounts payable based on performance. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, in which case the Company will pay Yucaipa an advisory fee. The agreement has a five-year term, which will be automatically renewed on each anniversary of the Merger for a five-year term unless ninety days' notice is given by either party. The agreement may be terminated at any time by the Company, provided that Yucaipa will be entitled to full monthly payments under the agreement for the remaining term thereof, unless the Company terminates for cause pursuant to the terms of the agreement. Yucaipa may terminate the agreement if the Company fails to make a payment due thereunder, or if there occurs a change of control (as defined in the agreement) of the Company, and upon any such termination Yucaipa will be entitled to full payments for the remainder of the five-year period commencing on the closing of the Merger. Pursuant to the agreement, Food 4 Less paid Yucaipa a total of $2.4 million, $3.8 million and $2 million in management and advisory fees for the fiscal years ended June 25, 1994, June 26, 1993 and June 27, 1992 respectively. The Yucaipa consulting agreement also provides that upon closing of the Merger, Yucaipa will receive an advisory fee from the Company in the amount of $19 million, plus reimbursement of expenses in connection with the Merger and the related transactions. New Holdings will issue $15 million initial accreted value of New Discount Debentures to Yucaipa in satisfaction of a portion of such fee and the Company will pay the remaining $4 million of such fee in cash. Upon closing of the Merger, Yucaipa anticipates that it will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. The Company has no responsibility for such payment by Yucaipa. Additionally, upon closing of the Merger, Yucaipa will receive a warrant to purchase 8,000,000 shares of New Holdings common stock exercisable upon the conditions described under "Description of Capital Stock -- The Yucaipa Warrant." In consideration for its commitment to purchase Series A Preferred Stock of New Holdings, Apollo will receive a fee of $5 million from New Holdings upon the closing of the Merger. New Holdings will issue $2.5 million initial accreted value of New Discount Debentures to Apollo in satisfaction of a portion of such fee, and New Holdings will pay the remaining $2.5 million of such fee in cash. See "Description of Capital Stock -- New Equity Investment." In connection with the execution of the Merger Agreement, Yucaipa entered into the Put Agreement with EJDC, pursuant to which EJDC will be entitled to put up to $10 million aggregate principal amount of Seller Debentures to Yucaipa on the Closing Date. The Yucaipa consulting agreement will provide that the Company will reimburse Yucaipa for any loss and expenses incurred by Yucaipa upon the resale of such Seller 88 98 Debentures to any unaffiliated third party. Yucaipa has advised the Company that it intends to resell the Seller Debentures on the Closing Date or as soon thereafter as practicable. The agreement will also require Yucaipa to contribute any profit realized upon the resale of such Seller Debentures within such period to the capital of the Company. Pursuant to the New Discount Debenture Placement, New Holdings has committed to issue $100 million initial accreted value of New Discount Debentures, which will be acquired by a partnership comprised of FFL Investors L.L.C. (an affiliate of George Soros), Yucaipa RGC L.L.C. (an affiliate of Yucaipa whose members include Ronald Burkle, Mark Resnik and Patrick Graham)("Yucaipa LLC"), RGC Investment Co. (a corporation controlled by certain Yucaipa partners) ("RGCIC"), BTIP, an affiliate of CS First Boston, an affiliate of DLJ, Apollo, EJDC and the other selling stockholders of RSI. New Discount Debentures having an initial accreted value of $59 million will be issued directly to the partnership by New Holdings for cash consideration contributed to the partnership by (i) FFL Investors L.L.C., which will invest $40 million in cash proceeds received from Soros' affiliate as a result of the secondary sale of New Holdings common stock, (ii) BTIP, which will invest $5 million in cash, (iii) an affiliate of CS First Boston, which will invest $2.5 million in cash, (iv) an affiliate of DLJ, which will invest $2.5 million in cash, (v) EJDC, which will invest $4 million of its consulting fee payable by the Company upon closing of the Merger and (vi) RGCIC, which will invest $5 million in cash borrowed from the Company. New Holdings will issue additional New Discount Debentures having an initial accreted value of (a) $15 million to Yucaipa LLC in satisfaction of advisory fees otherwise payable to Yucaipa by the Company in connection with the Merger and the Financing, (b) $5 million to BT Securities in satisfaction of other fees payable to BT Securities by the Company in connection with the Financing, (c) $2.5 million to Apollo in satisfaction of a portion of commitment fees otherwise payable to Apollo by New Holdings in connection with the New Equity Investment and (d) $18.5 million to RSI stockholders as Merger consideration all of which New Discount Debentures shall be contributed to the partnership, whereupon the partnership will hold all $100 million initial accreted value of New Discount Debentures issued by New Holdings. New Holdings will grant to the partnership certain registration rights with respect to the New Discount Debentures. Pursuant to such registration rights agreement, New Holdings will file with the Commission a shelf registration statement which will permit resales of the New Discount Debentures by the partnership commencing 60 days following closing of the Merger. New Holdings will be obligated to use its best efforts to cause such shelf registration statement to remain effective for up to three years. If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. New Holdings and its subsidiaries will agree not to effect any public distribution of securities similar to the New Discount Debentures until the New Discount Debentures are resold by the partnership (or until the third anniversary of the Closing Date, if later). New Holdings believes that the partnership actively would seek to dispose of its entire interest in the New Discount Debentures promptly upon expiration of the 60 day holdback period following closing of the Merger. New Holdings will agree to use its best efforts to assist the partnership in such disposition, and to pay all expenses, including underwriting discounts and brokers' or dealers' commissions and mark-ups (subject to certain limitations), incident thereto. The $5 million cash investment to be made in the partnership by RGCIC, as described above, will be borrowed from the Company by RGCIC, and such borrowings will bear interest at the applicable Federal rate (as defined under the Internal Revenue Code). RGCIC will be obligated to repay such borrowings with any distributions received from the partnership in connection with resales of the New Discount Debentures. Such repayments will be applied first to the principal balance of the borrowings and then to accrued interest. To the extent that such distributions are not sufficient to repay such borrowings, any remaining indebtedness of RGCIC (including all accrued interest) will be forgiven by the Company and the Company's obligation to pay the Ralphs deferred EAR liability will be correspondingly forgiven. Upon receipt of any principal amounts repaid under such borrowings, the Company will be obligated to pay such amounts over to former holders of RGC's EARs redeemed upon closing of the Merger. The aggregate consideration payable to redeem the EARs includes, in addition to the foregoing deferred cash payment of up to $5 million, $17.8 million in cash 89 99 payable at closing and $10 million in Reinvestment Options. See "Executive Compensation -- Equity Appreciation Rights Plan." FFL files a consolidated federal income tax return, under which the federal income tax liability of FFL and its subsidiaries (which since June 23, 1989 includes Food 4 Less) is determined on a consolidated basis. FFL has entered into a federal income tax sharing agreement with Food 4 Less and certain of its subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides that in any year in which Food 4 Less is included in any consolidated tax liability of FFL and has taxable income, Food 4 Less will pay to FFL the amount of the tax liability that Food 4 Less would have had on such due date if it had been filing a separate return. Conversely, if Food 4 Less generates losses or credits which actually reduce the consolidated tax liability of FFL and its other subsidiaries, FFL will credit to Food 4 Less the amount of such reduction in the consolidated tax liability. In the event any state and local income taxes are determinable on a combined or consolidated basis, the Tax Sharing Agreement provides for a similar allocation between FFL and Food 4 Less of such state and local taxes. By operation of the FFL Merger and the Reincorporation Merger, New Holdings will succeed to the rights and obligations of FFL under the Tax Sharing Agreement. Management believes that the terms of the transactions described above are or were fair to Food 4 Less and are or were on terms at least as favorable to Food 4 Less as those which could be obtained from unaffiliated parties (assuming that such transactions could be effected with such parties). 90 100 THE EXCHANGE OFFERS AND SOLICITATION BACKGROUND AND PURPOSES OF THE EXCHANGE OFFERS AND SOLICITATION The Exchange Offers and the Solicitation, together with the financing and solicitation transactions described under "The Merger and the Financing," are part of the transactions required to consummate the Merger of Food 4 Less with and into RSI. Immediately following the RSI Merger, RGC, a wholly-owned subsidiary of RSI, will merge into RSI and RSI will change its name to Ralphs Grocery Company. As a result of the Merger, the New F4L Notes, any Old F4L Notes not tendered for exchange pursuant to the Exchange Offers, the New RGC Notes, any Old RGC Notes not tendered pursuant to the RGC Exchange Offer, and the indebtedness incurred pursuant to the New Credit Facility will be the obligations of the Company. In connection with the consummation of the Merger, Food 4 Less is making the Exchange Offers and the RGC Offers to (i) extend the maturities of the existing long-term debt securities of Food 4 Less and RGC by exchanging such securities for new longer-term securities and (ii) establish uniform covenants in the New F4L Notes and the New RGC Notes in order to simplify the capital structure of the Company. The Exchange Offers afford Old F4L Noteholders an opportunity to elect to participate in the long-term capitalization of the Company. Food 4 Less is also seeking Consents to the Proposed Amendments in the Solicitation. The primary purpose of the Proposed Amendments is to permit the consummation of the Merger and to eliminate substantially all of the restrictive covenants in the Old F4L Indentures. See "The Proposed Amendments." If adopted by the holders of a majority in aggregate principal amount of each of the outstanding Old F4L Senior Notes and the outstanding Old F4L Senior Subordinated Notes, the Proposed Amendments will become effective immediately prior to the consummation of the Merger, upon Food 4 Less' acceptance of properly tendered Old F4L Notes for exchange pursuant to the Exchange Offers. TERMS OF THE EXCHANGE OFFERS Upon the terms and subject to the conditions set forth herein and in the accompanying applicable Letter of Transmittal, Food 4 Less is hereby offering (A) to holders of the Old F4L Senior Notes to exchange for each $1,000 principal amount of Old F4L Senior Notes exchanged, $1,000 principal amount of New F4L Senior Notes plus $5.00 in cash, and (B) to holders of the Old F4L Senior Subordinated Notes to exchange for each $1,000 principal amount of Old F4L Senior Subordinated Notes exchanged, $1,000 principal amount of New F4L Senior Subordinated Notes plus $20.00 in cash, in each case plus accrued and unpaid interest to the date of exchange. The offers by Food 4 Less to exchange Old F4L Senior Notes and Old F4L Senior Subordinated Notes are referred to herein as the "F4L Senior Note Exchange Offer" and the "F4L Senior Subordinated Note Exchange Offer," respectively, and are referred to herein individually as the applicable "Exchange Offer" and collectively as the "Exchange Offers." Each Exchange Offer constitutes a separate exchange offer by Food 4 Less. Food 4 Less reserves the right to extend, delay, accept, amend or terminate either or both of the Exchange Offers, and any extension, delay, acceptance, amendment, termination or expiration of an Exchange Offer shall apply only to such Exchange Offer to which such extension, delay, acceptance, amendment, termination or expiration relates. Satisfaction of the conditions to the Exchange Offer shall be determined separately with respect to each Exchange Offer. Consummation of each Exchange Offer is subject to consummation of the other Exchange Offer. All references herein to the Exchange Offers shall be deemed to include the Solicitation. Noteholders who wish to tender their Old F4L Notes pursuant to the applicable Exchange Offer and consent to the Proposed Amendments must complete the Letter of Transmittal and the table therein entitled "Description of Old F4L Notes." Nominees or other record holders of Old F4L Notes that hold Old F4L Notes for more than one beneficial owner are entitled to make multiple elections pursuant to the Letter of Transmittal that reflect the election of each of the beneficial owners for whom they are exchanging Old F4L Notes. In order to make such multiple elections, nominees or other record holders should properly complete the table under the box entitled "Election on Behalf of Multiple Beneficial Owners." See "-- Procedures for Tendering and Consenting." 91 101 Holders of Old F4L Notes who desire to tender Old F4L Notes in an Exchange Offer will be required to consent to the Proposed Amendments. See "-- The Consent Solicitation," "-- Conditions," "The Proposed Amendments," "Comparison of Old F4L Senior Notes and New F4L Senior Notes" set forth in Appendix A hereto and "Comparison of Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes" set forth in Appendix B hereto. THE TENDER OF OLD F4L NOTES BY THE HOLDER THEREOF PURSUANT TO THE APPLICABLE EXCHANGE OFFER WILL CONSTITUTE THE CONSENT OF SUCH TENDERING HOLDER TO THE PROPOSED AMENDMENTS WITH RESPECT TO SUCH OLD F4L NOTES. Old F4L Notes may be tendered and will be accepted for exchange only in denominations of $1,000 principal amount and integral multiples thereof. Holders must tender all of their Old F4L Senior Notes or Old F4L Senior Subordinated Notes, as the case may be, if any are tendered pursuant to the applicable Exchange Offer. Food 4 Less shall be deemed to have accepted validly tendered Old F4L Notes in the Exchange Offers and validly delivered Consents in the Solicitation when, as and if Food 4 Less has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old F4L Notes for the purposes of receiving the New F4L Notes and the Exchange Payment from the Company. In the event Food 4 Less increases the consideration offered for the Old F4L Notes in the Exchange Offer, such increased consideration will be paid with regard to all Old F4L Notes accepted in the Exchange Offer, including those accepted before the announcement of such increase. The New F4L Notes will be delivered (and payments in cash of accrued and unpaid interest thereon and the accompanying Exchange Payment will be made) in exchange for Old F4L Notes accepted in the Exchange Offers promptly after acceptance on the applicable Expiration Date. As of May 1, 1995, (i) $175 million aggregate principal amount of the Old F4L Senior Notes was outstanding and (ii) $145 million aggregate principal amount of the Old F4L Senior Subordinated Notes was outstanding. Concurrently with the Exchange Offers and the Solicitation, Food 4 Less is offering up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering and is offering up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The Public Offerings are expected to price ten Business Days preceding the final Expiration Date. CONSUMMATION OF EACH EXCHANGE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THE CONSUMMATION OF THE PUBLIC OFFERINGS. There can be no assurance that such condition or the other conditions to the Exchange Offers will be satisfied. See "-- Conditions." As a result of the Merger, the New F4L Notes will become the obligations of the Company. Although it has no obligation to do so, the Company reserves the right in the future to seek to acquire Old F4L Notes not tendered in the Exchange Offers by means of open market purchases, privately negotiated acquisitions, subsequent exchange or tender offers, redemptions or otherwise, at prices or on terms which may be higher or lower or more or less favorable than those in the Exchange Offers. The terms or any such purchases or offers could differ from the terms of the Exchange Offers. Holders of Old F4L Notes who tender in the Exchange Offers will not be required to pay brokerage commissions or fees or, subject to the instructions in the Consent and Letter of Transmittal, transfer taxes with respect to the exchange of Old F4L Notes pursuant to the Exchange Offers. Food 4 Less will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offers. See "-- Fees and Expenses." No appraisal rights are available to Old F4L Noteholders in connection with the Exchange Offers. THE CONSENT SOLICITATION Concurrently with the Exchange Offers, Food 4 Less is soliciting Consents in the Solicitation from holders of each of the Old F4L Senior Notes and the Old F4L Senior Subordinated Notes with respect to the Proposed Amendments to the Old F4L Indentures. The Exchange Offers are subject to, among other things, the condition that the Requisite Consents (i.e., Consents of holders representing at least a majority in 92 102 aggregate principal amount of each of the outstanding Old F4L Senior Notes and Old F4L Senior Subordinated Notes held by persons other than Food 4 Less and its affiliates) shall have been received and not revoked on or prior to the Expiration Date. HOLDERS OF OLD F4L NOTES WHO DESIRE TO ACCEPT THE APPLICABLE EXCHANGE OFFER MUST CONSENT TO THE PROPOSED AMENDMENTS. The Proposed Amendments will only become operative upon consummation of the Exchange Offers. The primary purpose of the Proposed Amendments is to permit the Merger and to eliminate substantially all of the restrictive covenants in the Old F4L Indentures. The Proposed Amendments for each of the Old F4L Senior Notes and the Old F4L Senior Subordinated Notes require the consent of holders of at least a majority in aggregate principal amount of each of the Old F4L Senior Notes and the Old F4L Senior Subordinated Notes, in each case not owned by Food 4 Less or its affiliates. In addition, in order for any of the Proposed Amendments to become effective, a Supplemental Indenture amending each of the Old F4L Senior Note Indenture and the Old F4L Senior Subordinated Note Indenture must be executed by the Company and the applicable Old Trustee. See "The Proposed Amendments," "Comparison of Old F4L Senior Notes and New F4L Senior Notes" set forth in Appendix A hereto and "Comparison of Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes" set forth in Appendix B hereto. Upon receipt of the Requisite Consents from holders of Old F4L Senior Notes or holders of Old F4L Senior Subordinated Notes, Food 4 Less will certify in writing to the Old F4L Senior Note Trustee or the Old F4L Senior Subordinated Note Trustee (together, the "Old Trustees"), as the case may be, that the Requisite Consents to the adoption of the Proposed Amendments have been received with respect to such issue of Old F4L Notes. Upon receipt of such certification, all Consents to the Proposed Amendments theretofore received with respect to such issue of Old F4L Notes will be irrevocable. Except as set forth under "-- Guaranteed Delivery Procedure," Consents from tendering holders of Old F4L Notes will not be counted towards determining whether Food 4 Less has received the Requisite Consents unless Food 4 Less is prepared to accept the tender of Old F4L Notes to which such Consents relate. In addition, Consents with respect to any Old F4L Notes will not be counted if the tender of such holders' Old F4L Notes is defective, unless Food 4 Less waives such defect. After receipt by the Old F4L Senior Note Trustee or the Old F4L Senior Subordinated Note Trustee of, among other things, certification by Food 4 Less that the Requisite Consents with respect to the Old F4L Senior Notes or the Old F4L Senior Subordinated Notes, as the case may be, have been received, Food 4 Less and the applicable Old Trustee will execute a supplemental indenture to evidence the adoption of the Proposed Amendments relating to the applicable indenture under which such Old F4L Notes were issued (each a "Supplemental Indenture"). Upon the acceptance by Food 4 Less of the Requisite Consents from holders of Old F4L Senior Notes or Old F4L Senior Subordinated Notes and the execution of the applicable Supplemental Indenture, such Supplemental Indenture will immediately become effective. Although the Proposed Amendments relating to an issue of Old F4L Notes will become effective upon certification that the Requisite Consents from holders of the applicable Old F4L Notes have been received, such Proposed Amendments will not be operative until Food 4 Less has accepted for exchange all Old F4L Notes validly tendered and not withdrawn. The Company will not be obligated to issue the New F4L Senior Notes or the New F4L Senior Subordinated Notes pursuant to the Exchange Offers unless, among other things, the Requisite Consents to the adoption of the Proposed Amendments have been received from both the Old F4L Senior Noteholders and the Old F4L Senior Subordinated Noteholders. See "-- Conditions." If the Proposed Amendments become effective, (i) the Exchange Agent, as soon as practicable, will transmit a copy of the applicable Supplemental Indenture to all registered holders of Old F4L Notes which remain outstanding, and (ii) non-tendering holders will hold their Old F4L Notes under the applicable Old F4L Indenture as amended by the Proposed Amendments, whether or not that holder consented to the Proposed Amendments. Consents given by holders of Old F4L Notes tendered but rejected by Food 4 Less pursuant to an Exchange Offer will not be counted for the purpose of determining whether the Requisite Consents have been obtained. Only a registered holder of Old F4L Notes (the "Registered Holder") can effectively deliver a Consent to the Proposed Amendments. Pursuant to the terms of the Old F4L Indentures, subsequent transfers of Old 93 103 F4L Notes on the applicable security register for such Old F4L Notes will not have the effect of revoking any Consent theretofore given by the Registered Holder of such Old F4L Notes, and such Consents will remain valid unless revoked by the transferee holder in accordance with the procedures described under the heading "-- Withdrawal of Tenders and Revocation of Consents." EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS Each Exchange Offer and the Solicitation have been extended until and will expire at 12:00 Midnight, New York City time, on May 25, 1995 (the "Expiration Date"), unless further extended by Food 4 Less. Food 4 Less reserves the right to further extend either Exchange Offer or the Solicitation, at its discretion, in which event the term "Expiration Date" shall mean the latest time and date at which such Exchange Offer or the Solicitation, as the case may be, as so further extended by Food 4 Less, shall expire. Food 4 Less does not expect to commence the Public Offerings until such time as the Minimum Exchange has been satisfied and Requisite Consents have been received. Following the pricing of the Senior Note Public Offering, Food 4 Less intends to further extend the Expiration Date to a date that is ten Business Days following the pricing of the Public Offerings. Food 4 Less shall notify the Exchange Agent of any extension by oral or written notice and shall make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next Business Day after the previously scheduled Expiration Date. Such announcement may state that Food 4 Less is extending such Exchange Offer or the Solicitation, as the case may be, for a specified period or on a daily basis. Food 4 Less also expressly reserves the right, at any time or from time to time, to extend the period of time during which an Exchange Offer or the Solicitation, as the case may be, is open. There can be no assurance that Food 4 Less will exercise its right to extend either Exchange Offer or the Solicitation. During any extension of an Exchange Offer all Old F4L Notes previously tendered pursuant thereto and not withdrawn will remain subject to such Exchange Offer and may be accepted for exchange by Food 4 Less at the expiration of such Exchange Offer subject to the right, if any, of a tendering holder to withdraw its Old F4L Notes. See "-- Withdrawal of Tenders and Revocation of Consents." Each of the Company and Food 4 Less, as the case may be, also expressly reserve the right, subject to applicable law and the terms of the Exchange Offers and to the extent not inconsistent with the terms of the Merger, the Other Debt Financing Transactions, the Bank Financing or the New Equity Investment, (i) to delay the acceptance for exchange of any Old F4L Notes or, regardless of whether such Old F4L Notes were theretofore accepted for exchange, to delay the exchange of any Old F4L Notes pursuant to an Exchange Offer and to terminate such Exchange Offer and not accept for exchange any Old F4L Notes not theretofore accepted for exchange, upon the failure of any of the conditions to such Exchange Offer specified herein to be satisfied, by giving oral or written notice of such delay or termination to the Exchange Agent and (ii) at any time, or from time to time, to amend either of the Exchange Offers in any respect. Except as otherwise provided herein, withdrawal rights with respect to Old F4L Notes tendered pursuant to an Exchange Offer will not be extended or reinstated as a result of an extension or amendment of such Exchange Offer, as applicable. See "-- Withdrawal of Tenders and Revocation of Consents." The reservation by Food 4 Less of the right to delay acceptance for exchange of Old F4L Notes is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which requires that Food 4 Less (or the Company as successor by Merger) pay the consideration offered or return the Old F4L Notes deposited by or on behalf of holders thereof promptly after the termination or withdrawal of an Exchange Offer. Any extension, delay, termination or amendment of either Exchange Offer will be followed as promptly as practicable by a public announcement thereof. Without limiting the manner in which Food 4 Less may choose to make a public announcement of any extension, delay, termination or amendment of an Exchange Offer, Food 4 Less shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by issuing a release to the Dow Jones News Service, except in the case of an announcement of an extension of an Exchange Offer, in which case Food 4 Less shall have no obligation to publish, advertise or otherwise communicate such announcement other than by issuing a notice of such extension by press release or other public announcement, which notice shall be issued no later than 9:00 a.m., New York City time, on the next Business Day after the previously scheduled Expiration Date. 94 104 If Food 4 Less shall decide to decrease the amount of Old F4L Notes being sought in either Exchange Offer or to increase or decrease the consideration offered to holders of Old F4L Notes, and if, at the time that notice of such increase or decrease is first published, sent or given to holders of Old F4L Notes in the manner specified above, such Exchange Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth Business Day from and including the date that such notice is first so published, sent or given, then such Exchange Offer will be extended for such purposes until the expiration of such period of ten Business Days. As used in this Prospectus and Solicitation Statement, "Business Day" has the meaning set forth in Rule 14d-1 (and applicable to Regulation 14E) under the Exchange Act. If Food 4 Less makes a material change in the terms of either Exchange Offer or the information concerning either Exchange Offer, or waives any condition to either Exchange Offer that results in a material change to the circumstances of such Exchange Offer, then Food 4 Less will disseminate additional exchange offer or tender offer materials to the extent required under the Exchange Act and will extend such Exchange Offer to the extent required in order to permit holders of Old F4L Notes adequate time to consider such materials. The minimum period during which a tender offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price or percentage of securities sought, will depend upon the specific facts and circumstances, including the relative materiality of the terms or information. CONDITIONS Food 4 Less will not be required to accept any Old F4L Notes for exchange, and may terminate or amend either or both of the Exchange Offers, as provided herein, before the acceptance of any Old F4L Notes, if either of the Exchange Offers has not been consummated. In addition, notwithstanding any other provision of the Exchange Offers or the Solicitation, Food 4 Less shall not be required to accept any Old F4L Notes for exchange or any Consents, and may terminate, extend or amend either or both Exchange Offers or the Solicitation and may postpone, subject to Rule 14e-1 under the Exchange Act, the acceptance of Old F4L Notes so tendered and Consents so delivered, whether or not any other Old F4L Notes or Consents have theretofore been accepted for exchange pursuant to the applicable Exchange Offer, if, on or prior to the Expiration Date, any of the following conditions exist: (i) the Minimum Exchange shall not have been satisfied; (ii) the Requisite Consents shall not have been validly delivered (or shall have been revoked); (iii) all conditions precedent to the Merger shall not have been satisfied or waived, in Food 4 Less' sole discretion; (iv) any of the Other Debt Financing Transactions (including the Public Offerings) shall not have been consummated; (v) either the Bank Financing or the New Equity Investment shall not have been consummated; (vi) either of the Supplemental Indentures containing the Proposed Amendments shall not have been executed; (vii) there shall have been any action taken or threatened, or any statute, rule, regulation, judgment, order, stay, decree or injunction proposed, sought, promulgated, enacted, entered, enforced or deemed applicable to either Exchange Offer by or before any local, state, federal or foreign government or governmental regulatory or administrative agency or authority or by any court or tribunal, domestic or foreign, which (a) challenges or seeks to restrain or prohibit the making or consummation of either Exchange Offer or the exchange of Old F4L Notes pursuant to the Exchange Offers, (b) in the sole judgment of Food 4 Less, might directly or indirectly prohibit, prevent, restrict or delay consummation of either Exchange Offer or otherwise relates in any manner to either Exchange Offer, (c) seeks to make illegal the acceptance of Old F4L Notes for exchange pursuant to either Exchange Offer, (d) makes the Solicitation illegal, (e) might, in the sole judgment of Food 4 Less, adversely affect the financing of either Exchange Offer, the Merger, the Other Debt Financing Transactions, the Bank Financing or the New 95 105 Equity Investment or the transactions contemplated thereby, or (f) in the sole judgment of Food 4 Less, could materially adversely affect the business, condition (financial or otherwise), income, operations, properties, assets, liabilities or prospects of Food 4 Less (or the Company, after giving effect to the Merger) and its subsidiaries, taken as a whole, or materially impair the contemplated benefits of the Exchange Offers and the Solicitation to Food 4 Less (or the Company, after giving effect to the Merger); (viii) there shall have occurred or be likely to occur any event affecting the business or financial affairs of Food 4 Less (or the Company, after giving effect to the Merger) that, in the sole judgment of Food 4 Less, (a) would or might prohibit, prevent, restrict or delay consummation of either Exchange Offer, or (b) will, or is reasonably likely to, materially impair the contemplated benefits to Food 4 Less (or the Company, after giving effect to the Merger) of the Exchange Offers and the Solicitation or otherwise result in the consummation of either Exchange Offer not being in the best interests of Food 4 Less or (c) might be material to holders of Old F4L Notes in deciding whether to accept either Exchange Offer or the Solicitation; (ix) there shall have occurred: (a) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange or in the over-the-counter market (whether or not mandatory); (b) any significant adverse change in the price of either of the Old F4L Senior Notes or the Old F4L Senior Subordinated Notes; (c) a material impairment in the trading market for debt securities generally; (d) a declaration of a banking moratorium or any suspension of payments in respect of banks by federal or state authorities in the United States (whether or not mandatory); (e) a declaration of a national emergency or commencement of a war, armed hostilities or other national or international crisis directly or indirectly involving the United States; (f) any limitation (whether or not mandatory) by any governmental or regulatory authority on, or any other event that in the sole judgment of Food 4 Less might affect, the nature or extension of credit by banks or other financial institutions; (g) any significant change in United States currency exchange rates or a suspension of, or limitation on, the markets therefor (whether or not mandatory); (h) any significant adverse change in United States securities or financial markets; or (i) in the case of any of the foregoing existing at the time of the commencement of the Exchange Offers, in the sole judgment of Food 4 Less, a material acceleration, escalation or worsening thereof; (x) either of the Old F4L Trustees shall have objected in any respect to, or taken any action that could, in the sole judgment of Food 4 Less, adversely affect the consummation of either Exchange Offer or the Solicitation or Food 4 Less' ability to obtain the Consents or to effect any of the Proposed Amendments, or shall have taken any action that challenges the validity or effectiveness of the procedures used by Food 4 Less in soliciting the Consents (including the form thereof) or in the making of either Exchange Offer or the acceptance for exchange of any of the Old F4L Notes; or (xi) the Registration Statement has not been declared effective or a stop order has been issued in connection therewith. The foregoing conditions are for the sole benefit of Food 4 Less and may be asserted by Food 4 Less in its sole discretion regardless of the circumstances giving rise to any such condition (including any action or inaction by Food 4 Less) and may be waived by Food 4 Less, in whole or in part, at any time and from time to time in its sole discretion. If any of the foregoing events shall have occurred, Food 4 Less may, subject to applicable law, (i) terminate the applicable Exchange Offer or the Solicitation and return all Old F4L Notes tendered pursuant to such Exchange Offer or the Solicitation to the tendering holders, (ii) extend the applicable Exchange Offer or the Solicitation and retain all tendered Old F4L Notes until the extended Expiration Date, (iii) amend the terms of the applicable Exchange Offer or the Solicitation or modify the consideration to be paid by Food 4 Less (or the Company as successor by merger) pursuant to such Exchange Offer or the Solicitation or (iv) waive the unsatisfied condition or conditions with respect to such Exchange Offer or the Solicitation and accept all validly tendered Old F4L Notes. See "-- Expiration Date; Extensions; Termination; Amendments" and "-- Procedures for Tendering and Consenting." The failure by Food 4 Less at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any 96 106 determination by Food 4 Less concerning the events described in this section shall be final and binding upon all persons. PROCEDURES FOR TENDERING AND CONSENTING The tender by a holder of Old F4L Notes pursuant to one of the procedures set forth below will constitute an agreement between such holder and Food 4 Less in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Old F4L Notes may be tendered and will be accepted for exchange only in denominations of $1,000 principal amount and integral multiples thereof. To be tendered effectively pursuant to the Exchange Offers, (i) the properly completed Letter of Transmittal, including a valid and unrevoked Consent (or facsimile(s) thereof), duly executed by the registered holder thereof with any required signature guarantee(s), together with the certificates for tendered Old F4L Notes in proper form for transfer, or any book-entry transfer into the Exchange Agent's account at DTC, MSTC or PDTC (each as defined) of Old F4L Notes tendered electronically, and any other documents required by the Letter of Transmittal, must be received by the Exchange Agent at one of its addresses set forth below prior to 12:00 Midnight, New York City time, on the Expiration Date, or (ii) the tendering holder must comply with the guaranteed delivery procedure set forth under the heading "-- Guaranteed Delivery Procedure." THE BLUE CONSENT AND LETTER OF TRANSMITTAL SHOULD BE USED TO TENDER ALL OLD F4L NOTES. LETTERS OF TRANSMITTAL AND OLD F4L NOTES SHOULD BE SENT TO THE EXCHANGE AGENT AND NOT TO FOOD 4 LESS, RGC OR THE DEALER MANAGERS NOR TO EITHER OF THE TRUSTEES UNDER THE INDENTURES RELATING TO THE OLD F4L NOTES. A HOLDER OF OLD F4L NOTES WHO DESIRES TO TENDER INTO THE APPLICABLE EXCHANGE OFFER WITH RESPECT TO ANY OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES MUST TENDER ALL OF SUCH HOLDERS' OLD F4L SENIOR NOTES OR OLD F4L SENIOR SUBORDINATED NOTES, AS THE CASE MAY BE. Holders of Old F4L Notes will not be able to validly tender in the Exchange Offers unless they consent to the Proposed Amendments. Tendering holders who sign the Letter of Transmittal shall be deemed to have consented to the Proposed Amendments. All signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Old F4L Notes tendered or withdrawn, as the case may be, pursuant thereto are tendered (i) by a registered holder of Old F4L Notes (which term, for purposes of the Letter of Transmittal, shall include any participant in DTC, MSTC or PDTC whose name appears on a security position listing as the owner of Old F4L Notes) who has not completed the box entitled "Special Issuance and Payment Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If Old F4L Notes are registered in the name of a person other than the signer of a Letter of Transmittal or a notice of withdrawal, as the case may be, or if payment is to be made or certificates for unexchanged Old F4L Notes are to be issued or returned to a person other than the registered holder, then the Old F4L Notes must be endorsed by the registered holder, or be accompanied by a written instrument or instruments of transfer or exchange in form satisfactory to Food 4 Less duly executed by the registered holder, with such signatures guaranteed by an Eligible Institution. In the event that signatures on a Letter of Transmittal (or other document) are required to be guaranteed, such guarantee must be by a firm that is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. (the "NASD") or by a commercial bank or trust company having an office in the United States (each of the foregoing being an "Eligible Institution"). THE METHOD OF DELIVERY OF OLD F4L NOTES AND OTHER DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED PURSUANT TO "-- GUARANTEED DELIVERY," DELIVERY WILL 97 107 BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. Instead of effecting delivery by mail it is recommended that tendering Old F4L Noteholders use an overnight or hand delivery service. If such delivery is by mail, it is recommended that holders use registered mail, properly insured, with return receipt requested. In all cases, sufficient time should be allowed to ensure delivery to the Exchange Agent prior to 12:00 Midnight, New York City time, on the Expiration Date. Tendering holders should indicate in the applicable box in the Letter of Transmittal the name and address to which payments (including accrued and unpaid interest in cash on the Old F4L Notes and the Exchange Payment), certificates evidencing New F4L Notes and/or certificates evidencing Old F4L Notes for amounts not accepted for tender, each as appropriate, are to be issued or sent, if different from the name and address of the person signing the Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated and a substitute Form W-9 for such recipient must be completed. If no such instructions are given, such payments (including accrued and unpaid interest in cash on the Old F4L Notes and the Exchange Payment), New F4L Notes or Old F4L Notes not accepted for tender, as the case may be, will be made or returned, as the case may be, to the registered holder of Old F4L Notes tendered. Holders of Old F4L Notes who are not registered holders of, and who seek to tender, Old F4L Notes should (i) obtain a properly completed Letter of Transmittal for such Old F4L Notes from the registered holder with signatures guaranteed by an Eligible Institution and obtain and include with such Letter of Transmittal Old F4L Notes properly endorsed for transfer by the registered holder thereof or accompanied by a written instrument or instruments of transfer or exchange from the registered holder with signatures on the endorsement or written instrument or instruments of transfer or exchange guaranteed by an Eligible Institution or (ii) effect a record transfer of such Old F4L Notes and comply with the requirements applicable to registered holders for tendering Old F4L Notes prior to 12:00 Midnight, New York City time, on the Expiration Date. Any Old F4L Notes properly tendered prior to 12:00 Midnight, New York City time, on the Expiration Date accompanied by a properly completed Letter of Transmittal for such Old F4L Notes will be transferred of record by the registrar either prior to or as of the Expiration Date at the discretion of Food 4 Less. Food 4 Less has no obligation to transfer any Old F4L Notes from the name of the registered holder thereof if the Company does not accept for exchange and payment such Old F4L Notes. Issuance of New F4L Notes and payment of the Exchange Payment in exchange for Old F4L Notes will be made only against deposit of the tendered Old F4L Notes. Under the federal income tax laws, the Exchange Agent will be required to withhold and will remit to the United States Treasury 31% of the amount of any cash payments made to certain holders of Old F4L Notes pursuant to the Exchange Offers and the Solicitation, and 31% of the interest payments due to certain holders of New F4L Notes. In order to avoid such backup withholding, each tendering holder of Old F4L Notes electing to exchange Old F4L Notes pursuant to an Exchange Offer, and, if applicable, each other payee, must provide the Exchange Agent with such holder's or payee's correct taxpayer identification number and certify that such holder or payee is not subject to such backup withholding by completing the Substitute Form W-9 accompanying the Letter of Transmittal. In general, if a holder or payee is an individual, the taxpayer identification number is the Social Security number of such individual. If the Exchange Agent is not provided with the correct taxpayer identification number, the holder or payee may be subject to a $50 penalty imposed by the Internal Revenue Service. Certain holders or payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order to satisfy the Exchange Agent that a foreign individual qualifies as an exempt recipient, such holder or payee must submit a statement, signed under penalty of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Exchange Agent. For further information concerning backup withholding and instructions for completing the Substitute Form W-9 (including how to obtain a taxpayer identification number if you do not have one and how to complete the Substitute Form W-9 if Old F4L Notes are held in more than one name), consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Failure to complete the Substitute Form W-9 will not, by itself, cause Old F4L Notes tendered pursuant to the Exchange Offers to be deemed invalidly tendered, but may require the Exchange Agent to withhold 31% of the amount of any payments made. Backup withholding is not an additional federal income tax. 98 108 Rather, the federal income tax liability of a person subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the Internal Revenue Service. All questions as to the form of all documents and the validity (including the time of receipt), eligibility, acceptance and withdrawal of tendered Old F4L Notes will be determined by Food 4 Less, in its sole discretion, which determination shall be final and binding. Food 4 Less expressly reserves the absolute right to reject any and all tenders not in proper form and to determine whether the acceptance of or payment by it for such tenders would be unlawful. Food 4 Less also reserves the absolute right, subject to applicable law, to waive or amend any of the conditions to either Exchange Offer or the Solicitation or to waive any defect or irregularity in the tender of any of the Old F4L Notes. None of Food 4 Less, the Company, the Exchange Agent, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. No tender of Old F4L Notes will be deemed to have been validly made until all defects and irregularities with respect to such Old F4L Notes have been cured or waived. Any Old F4L Notes received by the Exchange Agent that are not properly tendered and as to which irregularities have not been cured or waived will be returned by the Exchange Agent to the appropriate tendering holder as soon as practicable. Food 4 Less' interpretation of the terms and conditions of the Exchange Offers and the Solicitation (including the Letter of Transmittal and the Instructions thereto) will be final and binding on all parties. The Exchange Agent will seek to establish accounts with respect to the Old F4L Notes at The Depository Trust Company ("DTC"), the Midwest Securities Transfer Company ("MSTC"), and the Philadelphia Depository Trust Company ("PDTC" and, together with DTC and MSTC, collectively referred to herein as the "Book-Entry Transfer Facilities") for the purpose of the Exchange Offers within two New York Stock Exchange Inc. ("NYSE") trading days. Any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Old F4L Notes by causing DTC, MSTC or PDTC to transfer such Old F4L Notes into the Exchange Agent's account in accordance with such Book-Entry Transfer Facility's procedure for such transfer. However, although delivery of Old F4L Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, MSTC or PDTC, the Letter of Transmittal (or facsimile thereof), together with any required signature guarantees and any other required documents, must, in any case, be transmitted to, and received or confirmed by, the Exchange Agent at one of its addresses set forth on the back cover of this Amended and Restated Prospectus and Solicitation Statement prior to 12:00 Midnight, New York City time, on the Expiration Date, except as otherwise provided below under the heading "Guarantee Delivery Procedure." Old F4L Notes will not be deemed surrendered for exchange until such documents are received by the Exchange Agent and delivery of such documents to a Book-Entry Transfer Facility will not constitute valid delivery to the Exchange Agent. FOOD 4 LESS UNDERSTANDS THAT THE BOOK-ENTRY TRANSFER FACILITIES WILL MAKE ARRANGEMENTS FOR EXECUTION OF LETTERS OF TRANSMITTAL TO ACCOMMODATE BENEFICIAL OWNERS THAT DESIRE TO TENDER OLD F4L NOTES IN THE EXCHANGE OFFERS. HOWEVER, FOOD 4 LESS UNDERSTANDS THAT THE BOOK-ENTRY TRANSFER FACILITIES WILL NOT ARRANGE FOR THE EXECUTION OF LETTERS OF TRANSMITTAL WITH RESPECT TO THE SOLICITATION, UNLESS THE OLD F4L NOTES ARE ALSO TENDERED IN THE EXCHANGE OFFERS. HOLDERS MAY CONTACT THE EXCHANGE AGENT AT ANY OF THE ADDRESSES SET FORTH ON THE BACK COVER PAGE HEREOF FOR INFORMATION REGARDING WITHDRAWAL OF OLD F4L NOTES FROM A BOOK-ENTRY TRANSFER FACILITY. GUARANTEED DELIVERY PROCEDURE If a registered holder of Old F4L Notes desires to tender such Old F4L Notes and consent to the Proposed Amendments, and the Old F4L Notes are not immediately available, or if time will not permit such holder's Old F4L Notes or any other required documents to be delivered to the Exchange Agent prior to 12:00 Midnight, New York City time, on the Expiration Date, then such Old F4L Notes may nevertheless be 99 109 tendered for exchange and Consents may be effected if all of the following guaranteed delivery procedure conditions are met: (i) the tender for exchange and Consent is made by or through an Eligible Institution; (ii) prior to 12:00 Midnight, New York City time, on the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) substantially in the form provided by Food 4 Less, that contains a signature guaranteed by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery, unless such tender is for the account of an Eligible Institution (in which case no signature guarantee shall be required), and sets forth the name and address of the holder of Old F4L Notes and the principal amount of Old F4L Notes tendered for exchange, states that the tender is being made thereby and guarantees that, within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with the Old F4L Notes and any required signature guarantees and any other documents required by such Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (iii) all tendered Old F4L Notes, or a confirmation of a book-entry transfer of such Old F4L Notes into the Exchange Agent's applicable account at a Book-Entry Transfer Facility as described above, as well as the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, and all other documents required by such Letter of Transmittal, shall be received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. THE YELLOW NOTICE OF GUARANTEED DELIVERY SHOULD BE USED IN CONNECTION WITH TENDERS OF ALL OLD F4L NOTES. Notwithstanding any other provision hereof, the exchange of Old F4L Notes pursuant to an Exchange Offer will in all cases be made only after timely receipt by the Exchange Agent of certificates for such Old F4L Notes and the Letter of Transmittal (or facsimile thereof) in respect thereof, properly completed and duly executed, together with any required signature guarantees and any other documents required by such Letter of Transmittal. ACCEPTANCE OF OLD F4L NOTES FOR EXCHANGE; DELIVERY OF NEW F4L NOTES AND PAYMENT OF THE EXCHANGE PAYMENT Upon the terms and subject to the conditions of the Exchange Offers and the Solicitation, Food 4 Less will accept all Old F4L Notes validly tendered prior to 12:00 Midnight, New York City time, on the Expiration Date and not validly withdrawn. The acceptance for exchange of Old F4L Notes validly tendered and not validly withdrawn and the delivery of New F4L Notes and the payment of the Exchange Payment (and any accrued and unpaid interest on the Old F4L Notes) will be made as promptly as practicable after the Expiration Date. Subject to rules promulgated pursuant to the Exchange Act, Food 4 Less expressly reserves the right to delay acceptance of any of the Old F4L Notes or to terminate either of the Exchange Offers or the Solicitation and not accept for exchange any Old F4L Notes not theretofore accepted if any of the conditions set forth under the heading "-- Conditions" shall not have been satisfied or waived by Food 4 Less. The Company will deliver New F4L Notes and make payments in cash (including accrued and unpaid interest on the Old F4L Notes and the Exchange Payment) in exchange for Old F4L Notes pursuant to the Exchange Offers promptly following acceptance of the Old F4L Notes. In all cases, exchange for Old F4L Notes accepted for exchange pursuant to the applicable Exchange Offer will be made only after timely receipt by the Exchange Agent of Old F4L Notes (or confirmation of book-entry transfer thereof) and a properly completed and validly executed Letter of Transmittal (or a manually signed facsimile thereof) and any other documents required thereby. New F4L Notes will be issued in denominations of $1,000 principal amount and integral multiples thereof. 100 110 For purposes of the Exchange Offers and the Solicitation, Food 4 Less shall be deemed to have accepted validly tendered and not properly withdrawn Old F4L Notes when, as and if Food 4 Less gives oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old F4L Notes for the purposes of receiving the cash and New F4L Notes from the Company and transmitting the cash and New F4L Notes to the tendering holders. Under no circumstances will any additional amount be paid by the Company or the Exchange Agent by reason of any delay in making such payment or delivery. All questions as to the validity, form, eligibility (including the time of receipt), acceptance and withdrawal of tendered Old F4L Notes will be resolved by Food 4 Less, whose determination will be final and binding. Food 4 Less reserves the absolute right to reject any or all tenders that are not in proper form or the acceptance of which would, in the opinion of counsel for Food 4 Less, be unlawful. Food 4 Less also reserves the right to waive any irregularities or conditions of tender as to particular Old F4L Notes. Food 4 Less' interpretation of the terms and conditions of the Exchange Offers and the Solicitation (including the instructions in the Letter of Transmittal) will be final and binding. Unless waived, any irregularities or defects in connection with tenders of Old F4L Notes must be cured within such time as Food 4 Less determines. Neither Food 4 Less, the Company nor the Exchange Agent shall be under any duty to give notification of irregularities or defects in such tenders or shall incur any liability for failure to give such notification. Tenders of Old F4L Notes will not be deemed to have been made until such irregularities have been cured or waived. If, for any reason whatsoever, acceptance for exchange of any Old F4L Notes tendered pursuant to the Exchange Offers is delayed, or Food 4 Less is unable to accept for exchange Old F4L Notes tendered pursuant to the Exchange Offers, then, without prejudice to Food 4 Less' and the Company's rights set forth herein, the Exchange Agent may nevertheless, on behalf of Food 4 Less and subject to rules promulgated pursuant to the Exchange Act, retain tendered Old F4L Notes, and such Old F4L Notes may not be withdrawn except to the extent that the tendering holder of such Old F4L Notes is entitled to withdrawal rights as described herein. See "-- Withdrawal of Tenders and Revocation of Consents." If any tendered Old F4L Notes are not accepted for exchange because of an invalid tender, the occurrence or non-occurrence of certain other events set forth herein or otherwise, then such unaccepted Old F4L Notes will be returned, at Food 4 Less' expense, to the tendering holder thereof as promptly as practicable after the Expiration Date or the termination of the applicable Exchange Offer therefor. No alternative, conditional or contingent tenders will be accepted. A tendering holder, by execution of a Letter of Transmittal, or facsimile thereof, waives all rights to receive notice of acceptance of such holder's Old F4L Notes for purchase or exchange. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS Tenders of Old F4L Notes pursuant to an Exchange Offer may be withdrawn and Consents may be revoked at any time until the "Consent Date," which shall be such time as the Requisite Consents (Consents of holders representing at least a majority in aggregate principal amount of the outstanding Old F4L Senior Notes or Old F4L Senior Subordinated Notes, as the case may be, held by persons other than Food 4 Less and its affiliates) have been delivered by Food 4 Less to the applicable Old Trustee and the Supplemental Indenture for such issue has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Exchange Offer with respect to such issue of Old F4L Notes is terminated without any Old F4L Notes being accepted for exchange thereunder. Tendering holders will receive in cash accrued and unpaid interest on Old F4L Notes accepted for exchange up to, but not including, the date of such exchange. Interest on the New F4L Notes will accrue from, and including, the date of such exchange which will be the date of issuance of the New F4L Notes. A different Consent Date may be established with respect to the Old F4L Senior Notes and the Old F4L Senior Subordinated Notes. The withdrawal of Old F4L Notes prior to the applicable Consent Date in accordance with the procedures set forth hereunder will effect a revocation of the related Consent. Any valid revocation of Consents will automatically render the prior tender of the Old F4L Notes to which such Consents relate defective and Food 4 Less will have the right, which it may waive, to reject such tender as invalid and ineffective. 101 111 Any holder of Old F4L Notes who has tendered Old F4L Notes or who succeeds to the record ownership of Old F4L Notes in respect of which such tenders or Consents previously have been given may withdraw such Old F4L Notes or revoke such Consents prior to the applicable Consent Date by delivery of a written notice of withdrawal or revocation, subject to the limitations described herein. To be effective, a written telegraphic, telex or facsimile transmission (or delivered by hand or by mail) notice of withdrawal of a tender or revocation of a Consent must (i) be timely received by the Exchange Agent at one of its addresses set forth on the back cover hereof or prior to the applicable time provided herein with respect to the applicable class of Old F4L Notes, (ii) specify the name of the person having tendered the Old F4L Notes to be withdrawn or as to which Consents are revoked, the principal amount of such Old F4L Notes to be withdrawn and, if certificates for Old F4L Notes have been tendered, the name of the registered holder(s) of such Old F4L Notes as set forth in such certificates, if different from that of the person who tendered such Old F4L Notes, (iii) identify the Old F4L Notes to be withdrawn or to which the notice of revocation relates and (iv)(a) be signed by the holder in the same manner as the original signature on the Letter of Transmittal or Notice of Guaranteed Delivery (as the case may be) by which such Old F4L Notes were tendered (including any required signature guarantees) or (b) be accompanied by evidence satisfactory to Food 4 Less and the Exchange Agent that the holder withdrawing such tender or revoking such Consents has succeeded to beneficial ownership of such Old F4L Notes. If certificates representing Old F4L Notes to be withdrawn or Consents to be revoked have been delivered or otherwise identified to the Exchange Agent, then the name of the registered holder and the serial numbers of the particular certificate evidencing the Old F4L Notes to be withdrawn or Consents to be revoked and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution, except in the case of Old F4L Notes tendered by an Eligible Institution (in which case no signature guarantee shall be required), must also be so furnished to the Exchange Agent as aforesaid prior to the physical release of the certificates for the withdrawn Old F4L Notes. If Old F4L Notes have been tendered or if Consents have been delivered pursuant to the procedures for book-entry transfer as set forth herein, any notice of withdrawal or revocation of Consent must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Old F4L Notes. Food 4 Less reserves the right to contest the validity of any revocation. A purported notice of revocation which is not received by the Exchange Agent in a timely fashion will not be effective to revoke a Consent previously given. Any permitted withdrawals of tenders of Old F4L Notes and revocation of Consents may not be rescinded, and any Old F4L Notes properly withdrawn will thereafter be deemed not validly tendered and any Consents revoked will be deemed not validly delivered for purposes of either Exchange Offer; provided, however, that withdrawn Old F4L Notes may be retendered and revoked Consents may be redelivered by again following one of the appropriate procedures described herein at any time prior to 12:00 Midnight, New York City time, on the Expiration Date. If Food 4 Less extends an Exchange Offer or is delayed in its acceptance for exchange of Old F4L Notes or is unable to exchange Old F4L Notes pursuant to either Exchange Offer for any reason, then, without prejudice to Food 4 Less' rights under such Exchange Offer, the Exchange Agent may, subject to applicable law, retain tendered Old F4L Notes on behalf of Food 4 Less, and such Old F4L Notes may not be withdrawn (subject to Rule 14e-1 under the Exchange Act, which requires that Food 4 Less deliver the consideration offered or return the Old F4L Notes deposited by or on behalf of the Old F4L Noteholders promptly after the termination or withdrawal of an Exchange Offer), except to the extent that tendering holders are entitled to withdrawal rights as described herein. All questions as to the validity, form and eligibility (including the time of receipt) of notices of withdrawal or revocations of Consents will be determined by Food 4 Less, whose determination will be final and binding on all parties. None of Food 4 Less, the Exchange Agent, the Dealer Managers or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or revocation of Consent or incur any liability for failure to give any such notification. LOST OR MISSING CERTIFICATES If a holder of Old F4L Notes desires to tender an Old F4L Note pursuant to an Exchange Offer, but the Old F4L Note has been mutilated, lost, stolen or destroyed, such holder should write to or telephone the 102 112 appropriate Old Trustee under the Old F4L Note Indentures at the address listed below, concerning the procedures for obtaining replacement certificates for such Old F4L Notes, arranging for indemnification or any other matter that requires handling by such Old F4L Trustee: Old F4L Senior Notes Trustee: Norwest Bank Minnesota, N.A. Sixth and Marquette Minneapolis, Minnesota 55479-0113 Attn: Corporate Trust Department (612) 667-8058 Old F4L Senior Subordinated Notes Trustee: United States Trust Company of New York 114 West 47th Street New York, New York 10036-1532 Attn: Corporate Trust Division (212) 852-1000
DEALER MANAGERS Subject to the terms and conditions set forth in the Dealer Manager Agreement (the "Dealer Manager Agreement") dated January 25, 1995 (as amended), among FFL, Holdings, Food 4 Less and the Subsidiary Guarantors (together, the "Issuers") and BT Securities, CS First Boston and DLJ, as dealer managers and solicitation agents (the "Dealer Managers"), the Issuers have engaged BT Securities, CS First Boston and DLJ to act as Dealer Managers in connection with the Exchange Offers, the Solicitation, the RGC Offers and the Holdings Offer to Purchase. The Issuers will pay the Dealer Managers, as compensation for their services as Dealer Managers, a fee equal to (i) 1.0% of the aggregate principal amount of Old F4L Notes and Old RGC Notes accepted for exchange in the Exchange Offers and the RGC Offers, (ii) 0.5% of the aggregate accreted value of Discount Notes accepted for purchase in the Holdings Offer to Purchase, (iii) 0.5% of the aggregate principal amount of Old F4L Notes and Old RGC Notes in respect of which a consent is accepted in the Solicitation and the RGC Offers (other than Old RGC Notes and Old F4L Notes accepted for exchange or purchase, as the case may be, in the RGC Offers and the Exchange Offers) and (iv) 0.5% of the aggregate accreted value of Discount Notes in respect of which a consent is accepted in the Holdings Offer to Purchase (other than Discount Notes accepted for purchase in the Holdings Offer to Purchase). In addition, the Issuers have agreed to reimburse each of the Dealer Managers for all of its respective reasonable out-of-pocket expenses, including the reasonable fees and expenses of its legal counsel, incurred in connection with the Exchange Offers, the Solicitation, the RGC Offers and the Holdings Offer to Purchase. The Issuers have agreed to indemnify each of the Dealer Managers against certain liabilities in connection with Exchange Offers, the Solicitation, the RGC Exchange Offers and the Holdings Offer to Purchase, including liabilities under the federal securities laws, and will contribute to payments the Dealer Managers may be required to make in respect thereof. Bankers Trust, an affiliate of BT Securities, has been a co-agent and a lender under the existing credit agreements of each of RGC and Food 4 Less and will be administrative agent and a lender under the New Credit Facility. See "Description of the New Credit Facility." BT Securities has provided services to Food 4 Less in connection with the Financing and in consideration therefor Food 4 Less will pay to BT Securities a fee of $5 million upon closing of the Merger. Such fee will be satisfied through the issuance by New Holdings to BT Securities of $5 million initial accreted value of New Discount Debentures. Such New Discount Debentures will be contributed to the partnership which will acquire all of the New Discount Debentures. DLJ has provided financial advisory services to Food 4 Less in connection with the Merger and will receive customary fees for such services. The Dealer Managers will also serve as underwriters for the Public Offerings and will receive customary fees for such services. In addition, affiliates of the Dealer Managers are investing in the capital stock of New Holdings pursuant to the New Equity Investment. After giving effect to the Merger, BTIP will own approximately 900,000 shares of Series A Preferred Stock and approximately 3,100,000 shares of Series B Preferred Stock, affiliates of CS First Boston will own approximately 1,000,000 shares of Series A Preferred Stock and affiliates of DLJ will own approximately 1,000,000 shares of Series A Preferred Stock. Affiliates of BTIP additionally own 509,812 103 113 shares of FFL common stock which they had previously acquired and which will be converted to New Holdings capital stock following the FFL Merger and the Reincorporation Merger. See "Principal Stockholders" and "Description of Capital Stock." Affiliates of each of BT Securities, CS First Boston and DLJ are also investing $5 million, $2.5 million and $2.5 million, respectively, in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." Each of the Dealer Managers has from time to time provided investment banking and financial advisory services to one or more of Food 4 Less, Holdings and RGC and/or their respective affiliates and may continue to do so in the future. The Dealer Managers have received customary fees for such services. No fees or commission have been or will be paid to any broker, dealer or other person, other than the Dealer Managers, in connection with the Exchange Offers, the Solicitation, the RGC Offers or the Holdings Offer to Purchase. EXCHANGE AGENT Bankers Trust has been appointed as Exchange Agent for the Exchange Offers and the Solicitation. Questions and requests for assistance, and all correspondence in connection with the Exchange Offers, the Solicitation, or requests for additional Letters of Transmittal and any other required documents, may be directed to the Exchange Agent at one of its addresses and telephone numbers set forth on the back cover of this Amended and Restated Prospectus and Solicitation Statement. INFORMATION AGENT D.F. King & Co., Inc. is serving as Information Agent in connection with the Exchange Offers and the Solicitation. The Information Agent will assist with the mailing of this Amended and Restated Prospectus and Solicitation Statement and related materials to holders of Old F4L Notes, respond to inquiries of and provide information to holders of Old F4L Notes in connection with the Exchange Offers and the Solicitation and provide other similar advisory services as Food 4 Less may request from time to time. Requests for additional copies of this Amended and Restated Prospectus and Solicitation Statement, Letters of Transmittal and any other required documents should be directed to the Dealer Managers or to the Information Agent at one of its addresses and telephone numbers set forth on the back cover of this Amended and Restated Prospectus and Solicitation Statement. FEES AND EXPENSES In addition to the fees and expenses payable to the Dealer Managers, Food 4 Less will pay the Exchange Agent and the Information Agent reasonable and customary fees for their services (and will reimburse them for their reasonable out-of-pocket expenses in connection therewith), will pay the reasonable expenses of holders in delivering their Old F4L Notes to the Exchange Agent and will pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Amended and Restated Prospectus and Solicitation Statement and related documents to the beneficial owners of the Old F4L Notes and in handling or forwarding tenders for exchange and payment. In addition, Food 4 Less will indemnify the Exchange Agent and the Information Agent against certain liabilities in connection with their services, including liabilities under the federal securities laws. Food 4 Less will pay all transfer taxes, if any, applicable to the exchange of Old F4L Notes pursuant to the Exchange Offers. If, however, New F4L Notes or Old F4L Notes for principal amounts not accepted for tender, or both, are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old F4L Notes, or if tendered Old F4L Notes are to be registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old F4L Notes pursuant to an Exchange Offer, then the amount of any such transfer tax (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such tax or exemption therefrom is not submitted, then the amount of such transfer tax will be deducted from the Exchange Payment otherwise payable to such tendering holder. Any remaining amount will be billed directly to such tendering holder. 104 114 The total cash expenditures for printing, accounting and legal fees, and the fees and expenses of the Exchange Agent, the Information Agent and the trustees under the old and new indentures, to be incurred by Food 4 Less in connection with the Exchange Offers, the RGC Offers and the Holdings Consent Solicitation are estimated to be approximately $9 million. MISCELLANEOUS The Exchange Offers are not subject to Section 13(e) of, or Rules 13e-3 or 13e-4 or Regulation 14D promulgated under, the Exchange Act. The Exchange Offers are being made in compliance with Regulation 14E under the Exchange Act. Other than with respect to the Exchange Agent, the Information Agent and the Dealer Managers, neither Food 4 Less nor any of its affiliates has engaged, or made any arrangements for, and has no contract, arrangement or understanding with, any broker, dealer, agent or other person regarding the exchange of Old F4L Notes hereunder, and no person has been authorized by Food 4 Less, or any of its affiliates to provide any information or to make any representations in connection with the Exchange Offers and the Solicitation, other than those expressly set forth in this Amended and Restated Prospectus and Solicitation Statement, and, if so provided or made, such other information or representations must not be relied upon as having been authorized by Food 4 Less or any of its affiliates. The delivery of this Amended and Restated Prospectus and Solicitation Statement shall not, under any circumstances, create any implication that the information set forth herein is correct as of any time subsequent to the date hereof. 105 115 DESCRIPTION OF THE NEW F4L NOTES GENERAL The New F4L Senior Notes will be issued under an indenture (the "New Senior Note Indenture"), to be dated as of June 1, 1995, by and among the Company, the Subsidiary Guarantors and Norwest Bank Minnesota, N.A., as Trustee (the "New Senior Note Trustee"). The New F4L Senior Subordinated Notes will be issued under an Indenture (the "New Senior Subordinated Note Indenture", and together with the New Senior Note Indenture, the "New Indentures") to be dated as of June 1, 1995, by and among the Company, the Subsidiary Guarantors and United States Trust Company of New York, as Trustee (the "New Senior Subordinated Note Trustee," and together with the New Senior Note Trustee, the "New Trustees"). The following summary of certain provisions of the New F4L Notes and the New Indentures does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the New F4L Notes and the New Indentures, including the definitions of certain terms therein and those terms made a part of the New Indentures by reference to the TIA. The definitions of certain capitalized terms used in the following summary are set forth below under "-- Certain Definitions." A copy of the forms of the New Indentures may be obtained from the Company. The New F4L Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the New Senior Note Trustee will act as Paying Agent and Registrar for the New F4L Senior Notes and the New Senior Subordinated Note Trustee will act as Paying Agent and Registrar for the New F4L Senior Subordinated Notes. The New F4L Senior Notes and the New F4L Senior Subordinated Notes may be presented for registration or transfer and exchange at the offices of their respective Registrar, which for the New F4L Senior Notes initially will be the New Senior Note Trustee's corporate trust office and for the New F4L Senior Subordinated Notes initially will be the New Senior Subordinated Note Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of either the New F4L Senior Notes (the "Senior Noteholders") or of the New F4L Senior Subordinated Notes (the "Senior Subordinated Noteholders," and together with the Senior Noteholders, the "Holders"). The Company will pay principal (and premium, if any) on the New F4L Senior Notes at the Senior Note Trustee's corporate office, and will pay principal (and premium, if any) on the New F4L Senior Subordinated Notes at the New Senior Subordinated Note Trustee's corporate office, each such office located in New York, New York. At the Company's option, interest may be paid at the New Senior Note Trustee's corporate trust office (in the case of interest payments on the New F4L Senior Notes) or the New Senior Subordinated Note Trustee's corporate trust office (in the case of interest payments on the New F4L Senior Subordinated Notes) or by check mailed to the registered address of the relevant Holders. As used below in this "Description of the New F4L Notes," the "Company" means Food 4 Less Supermarkets, Inc. (and Ralphs Grocery Company, as survivor of the Merger), but not any of its subsidiaries. PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW F4L SENIOR NOTES The New F4L Senior Notes will mature on June 1, 2004. The up to $175 million principal amount of New F4L Senior Notes offered for exchange hereby will be part of an issue of up to $470 million aggregate principal amount of New F4L Senior Notes, up to $295 million aggregate principal amount of which will be issued pursuant to the Senior Note Public Offering. The Senior Note Public Offering is expected to price ten Business Days preceding the final Expiration Date of the Exchange Offers. See "The RGC Offers and the Public Offerings -- The Public Offerings." The New F4L Senior Notes offered pursuant to the F4L Senior Notes Exchange Offer will bear interest at a fixed rate per annum equal to the greater of (a) 10.45% and (b) the Applicable Treasury Rate (as hereinafter defined) plus 350 basis points (3.50 percentage points); provided, however, that in no event will the New F4L Senior Notes offered for exchange hereby bear interest at a rate per annum that is less than the interest rate on the New F4L Senior Notes offered pursuant to the Senior Note Public Offering. The "Applicable Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by, and published in, 106 116 the most recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the average life to stated maturity of the New F4L Senior Notes; provided that if the average life to stated maturity of the New F4L Senior Notes is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the Applicable Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of the year) from the weekly average yields of the United States Treasury securities for which such yields are given. Interest on the New F4L Senior Notes will be payable semi-annually on each June 1 and December 1, commencing on December 1, 1995, to the New F4L Senior Noteholders of record on the immediately preceding May 15 and November 15. Interest on the New F4L Senior Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW F4L SENIOR SUBORDINATED NOTES The New F4L Senior Subordinated Notes are limited in aggregate principal amount to $145 million and will mature on June 1, 2005. Interest on the New F4L Senior Subordinated Notes will accrue at the rate of 13.75% per annum and will be payable semi-annually on each June 1 and December 1, commencing on December 1, 1995, to the Senior Subordinated Noteholders of record on the immediately preceding May 15 and November 15. Interest on the New F4L Senior Subordinated Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. OPTIONAL REDEMPTION OF THE NEW F4L SENIOR NOTES The New F4L Senior Notes will be redeemable, at the option of the Company, in whole at any time or in part from time to time, on and after June 1, 2000, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on June 1 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
REDEMPTION YEAR PRICE ------------------------------------------------- ---------- 2000............................................. 103.9188% 2001............................................. 102.6125% 2002............................................. 101.3063% 2003 and thereafter.............................. 100.0000%
In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to June 1, 1998, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the New F4L Senior Notes originally issued, at a redemption price equal to 110.45% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 107.8375% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In order to effect the foregoing redemption with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. OPTIONAL REDEMPTION OF THE NEW F4L SENIOR SUBORDINATED NOTES The New F4L Senior Subordinated Notes will be redeemable, at the option of the Company, in whole at any time or in part, from time to time, on and after June 15, 1996, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing 107 117 on June 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
REDEMPTION YEAR PRICE -------------------------------------------------- ---------- 1996.............................................. 106.111% 1997.............................................. 104.583% 1998.............................................. 103.056% 1999.............................................. 101.528% And thereafter.................................... 100.000%
The documents evidencing Senior Indebtedness will restrict the Company's ability to optionally redeem New F4L Senior Subordinated Notes. NOTICES AND SELECTION In the event of a redemption of less than all of the New F4L Senior Notes or the New F4L Senior Subordinated Notes, as the case may be, such New F4L Notes will be selected for redemption by the appropriate New Trustee pro rata, by lot or by any other method that such New Trustee considers fair and appropriate and, if such New F4L Notes are listed on any securities exchange, by a method that complies with the requirements of such exchange; provided, however, that any redemption of the New F4L Senior Notes pursuant to the provisions relating to a Public Equity Offering shall be made on a pro rata basis unless such method is otherwise legally prohibited. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of New F4L Notes to be redeemed at such Holder's registered address. On and after the redemption date, interest will cease to accrue on New F4L Notes or portions thereof called for redemption (unless the Company shall default in the payment of the redemption price or accrued interest). New F4L Notes that are redeemed by the Company or that are purchased by the Company pursuant to a Net Proceeds Offer as described under "-- Certain Covenants -- Limitation on Asset Sales" below or pursuant to a Change of Control Offer as described under "-- Change of Control" below or that are otherwise acquired by the Company will be surrendered to the appropriate New Trustee for cancellation. RANKING OF THE NEW F4L SENIOR NOTES The New F4L Senior Notes will rank senior in right of payment to all Subordinated Indebtedness of the Company, including the New F4L Senior Subordinated Notes and the New RGC Notes. The New F4L Senior Notes will rank pari passu in right of payment with all unsubordinated Indebtedness and other liabilities of the Company, including borrowings and other obligations of the Company and its Subsidiaries under the Credit Agreement. The borrowings and obligations under the Credit Agreement (and the related guarantees) are secured by substantially all of the assets of the Company and its Subsidiaries, whereas the New F4L Senior Notes are senior unsecured obligations of the Company and its Subsidiaries. As of January 7, 1995, on a pro forma basis after giving effect to the Merger, the aggregate amount of secured indebtedness and other obligations of the Company and its Subsidiaries outstanding would have been approximately $1,057.9 million (and the Company would have had $169.4 million available to be borrowed under the Credit Agreement). SUBORDINATION OF THE NEW F4L SENIOR SUBORDINATED NOTES The payment of the Obligations on the New F4L Senior Subordinated Notes will be subordinated in right of payment, as set forth in the New Senior Subordinated Note Indenture, to the prior payment in full in cash or Cash Equivalents of all Senior Indebtedness, whether outstanding on the Issue Date or thereafter incurred, including, with respect to Designated Senior Indebtedness, any interest accruing subsequent to a bankruptcy or other similar proceeding whether or not such interest is an allowed claim enforceable against the Company in a bankruptcy case under Title 11 of the United States Code. Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities upon any dissolution, winding up, total or partial liquidation or reorganization or the Company (including, without limitation, in bankruptcy, insolvency, or receivership proceedings or upon any assignment 108 118 for the benefit of creditors or any other marshalling of the Company's assets and liabilities), the holders of Senior Indebtedness shall first be entitled to receive payment in full in cash or Cash Equivalents of all amounts payable under Senior Indebtedness (including, with respect to Designated Senior Indebtedness, any interest accruing after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness whether or not such interest is an allowed claim enforceable against the Company in any such proceeding) before the Holders of New F4L Senior Subordinated Notes will be entitled to receive any payment with respect to the New F4L Senior Subordinated Notes (excluding Permitted Subordinated Reorganization Securities), and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders of New F4L Senior Subordinated Notes would be entitled (excluding Permitted Subordinated Reorganization Securities) shall be made to the holders of Senior Indebtedness. No direct or indirect payment (other than payments previously made pursuant to the provisions described under "-- Defeasance of Indenture" below) by or on behalf of the Company of Obligations on the New F4L Senior Subordinated Notes whether pursuant to the terms of the New F4L Senior Subordinated Notes or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of principal of, premium, if any, or interest on any Designated Senior Indebtedness or any other Senior Indebtedness which, at the time of determination, is equal to or greater than $50 million in aggregate principal amount ("Significant Senior Indebtedness") (and the New Senior Subordinated Note Trustee has received written notice thereof), and such default shall not have been cured or waived by or on behalf of the holders of such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or shall have ceased to exist, until such default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, shall have been discharged or paid in full in cash or Cash Equivalents, after which the Company shall resume making any and all required payments in respect of the New F4L Senior Subordinated Notes, including any missed payments. In addition, during the continuance of any other event of default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon the earliest to occur of (a) receipt by the New Senior Subordinated Note Trustee of written notice from the holders of a majority of the outstanding principal amount of the Designated Senior Indebtedness or their representative, or (b) if such event of default results from the acceleration of the New F4L Senior Subordinated Notes, the date of such acceleration, no such payment (other than payments previously made pursuant to the provisions described under "-- Defeasance of Indenture" below) may be made by the Company upon or in respect of the New F4L Senior Subordinated Notes for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 179 days thereafter (unless (x) such Payment Blockage Period shall be terminated by written notice to the New Senior Subordinated Note Trustee from the holders of a majority of the outstanding principal amount of such Designated Senior Indebtedness or their representative who delivered such notice or (y) such default is cured or waived, or ceases to exist or such Designated Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents), after which the Company shall resume making any and all required payments in respect of the New F4L Senior Subordinated Notes, including any missed payments. Notwithstanding anything herein to the contrary, in no event will a Payment Blockage Period extend beyond 179 days from the date on which such Payment Blockage Period was commenced. Not more than one Payment Blockage Period may be commenced with respect to the New F4L Senior Subordinated Notes during any period of 365 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the holders of such Designated Senior Indebtedness or their representative whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. If the Company fails to make any payment on the New F4L Senior Subordinated Notes when due or within any applicable grace period, whether or not on account of the payment blockage provision referred to above, such failure would constitute an Event of Default under the New Senior Subordinated Note Indenture 109 119 and would enable the holders of New F4L Senior Subordinated Notes to accelerate the maturity thereof. See "-- Events of Default." By reason of such subordination, in the event of the insolvency of the Company, holders of the New F4L Senior Subordinated Notes, may recover less, ratably, than holders of Senior Indebtedness. As of January 7, 1995, on a pro forma basis after giving effect to the Merger, the aggregate amount of Senior Indebtedness outstanding (excluding Company guarantees of certain Guarantor Senior Indebtedness) would have been approximately $1,512.7 million, the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.5 million, and the Company would have had $169.4 million available to be borrowed under the New Revolving Facility. GUARANTEES Each Subsidiary Guarantor will unconditionally guarantee, jointly and severally, (i) the Company's obligations under the New F4L Senior Notes on a senior unsecured basis (the "Senior Note Guarantees") and (ii) the Company's obligations under the New F4L Senior Subordinated Notes on a senior subordinated unsecured basis (the "Senior Subordinated Note Guarantees", and together with the Senior Note Guarantees, the "Guarantees"). The Indebtedness represented by each Senior Subordinated Note Guarantee (including the payment of Obligations on the New F4L Senior Subordinated Notes) will be subordinated on the same basis to Guarantor Senior Indebtedness as the New F4L Senior Subordinated Notes are subordinated to Senior Indebtedness. See "-- Subordination of the New F4L Senior Subordinated Notes". Upon (i) the release by the lenders under the Term Loans, related documents and future refinancings thereof of all guarantees of a Subsidiary Guarantor and all Liens on the property and assets of such Subsidiary Guarantor relating to such Indebtedness, or (ii) the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Subsidiary Guarantor (or substantially all of its assets) to an entity which is not a subsidiary of the Company, which is otherwise in compliance with the New Indentures, such Subsidiary Guarantor shall be deemed released from all its obligations under its Senior Note Guarantee and its Senior Subordinated Note Guarantee; provided, however, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, such Indebtedness of the Company shall also terminate upon such release, sale or transfer. Each Subsidiary Guarantor may consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor without limitation. Each of the New Indentures will further provide that a Subsidiary Guarantor may consolidate with or merge into or sell its assets to a corporation other than the Company or another Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor, but subject to the provisions described in the immediately preceding paragraph), provided that (a) if the surviving corporation is not the Subsidiary Guarantor, the surviving corporation agrees to assume such Subsidiary Guarantor's obligations under its Senior Note Guarantee or its Senior Subordinated Note Guarantee, as the case may be, and all its obligations under the applicable New Indenture and (b) such transaction does not (i) violate any covenants set forth in the applicable New Indenture or (ii) result in a Default or Event of Default under the applicable New Indenture immediately thereafter that is continuing. The obligations of each Subsidiary Guarantor under each of its Senior Note Guarantee and its Senior Subordinated Note Guarantee are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor (other than liabilities of such Subsidiary Guarantor under Indebtedness which constitutes Subordinated Indebtedness with respect to its Senior Note Guarantee or its Senior Subordinated Note Guarantee, as the case may be) and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Senior Note Guarantee or Senior Subordinated Note Guarantee, as the case may be, or pursuant to its contribution obligations under the applicable New Indenture, result in the obligations of such Subsidiary Guarantor under such Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a 110 120 payment or distribution under a Senior Note Guarantee or Senior Subordinated Note Guarantee, as the case may be, shall be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. CHANGE OF CONTROL Each of the New Indentures will provide that, upon the occurrence of a Change of Control, each Holder of New F4L Notes issued thereunder will have the right to require the repurchase of such Holder's New F4L Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. Each of the New Indentures will provide that within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder of New F4L Notes issued under such New Indenture, with a copy to the applicable New Trustee, which notice shall govern the terms of the Change of Control Offer. The New Indentures shall require that notice of an event giving rise to a Change of Control shall be given on the same date and in the same manner to all Holders. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Each New Indenture shall provide that the Change of Control Payment Date under the New Senior Note Indenture with respect to any Change of Control shall be one business day prior to the Change of Control Payment Date under the New Senior Subordinated Note Indenture with respect to such Change of Control. Holders electing to have a New F4L Note purchased pursuant to a Change of Control Offer will be required to surrender the New F4L Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the New F4L Note completed, to the applicable Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the applicable Change of Control Payment Date. Each Change of Control Offer is required to remain open for at least 20 Business Days or such longer period as may be required by law. The New Senior Subordinated Note Indenture will further provide that, notwithstanding the foregoing, prior to the mailing of the notice of a Change of Control Offer referred to above, within 30 days following a Change of Control the Company shall either (a) repay in full and terminate all commitments under Indebtedness under the Credit Agreement to the extent the terms thereof require repayment upon a Change of Control (or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and repay the Indebtedness owed to each lender which has accepted such offer), or (b) obtain the requisite consents under the Credit Agreement, the terms of which require repayment upon a Change of Control, to permit the repurchase of the New F4L Senior Subordinated Notes as provided above. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase New F4L Senior Subordinated Notes pursuant to the provisions described above. The Company's failure to comply with the covenants described in this paragraph shall constitute an Event of Default under the New Indentures. In addition, the New F4L Senior Subordinated Note Indenture will provide that prior to purchasing New F4L Senior Subordinated Notes tendered in a Change of Control Offer, the Company shall purchase all New F4L Senior Notes (or permitted refinancings thereof) which it is required to purchase by reason of such Change of Control pursuant to the provisions of the New F4L Senior Note Indenture, as in effect on the Issue Date. The Company must comply with Rule 14e-1 under the Exchange Act and any other applicable provisions of the federal securities laws in connection with a Change of Control Offer. CERTAIN COVENANTS Except as otherwise specified below, each of the New Indentures will contain, among other things, the following covenants: Limitation on Restricted Payments. Each of the New Indentures will provide that the Company shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at 111 121 the time of such proposed Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) the Company could not incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" below or (c) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment as determined in good faith by the Board of Directors of the Company), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100% of such loss) of the Company earned subsequent to the Issue Date and on or prior to the date of the proposed Restricted Payment (the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by the Company from any person (other than a Subsidiary of the Company) from the issuance and sale (including upon exchange or conversion for other securities of the Company) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from the Company or any Subsidiary, until and to the extent such borrowing is repaid), plus (iii) 100% of the aggregate net cash proceeds received by the Company as capital contributions to the Company after the Issue Date, plus (iv) $25 million. The New Indentures will provide that if no Default or Event of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of the Company or the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Company, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of the Company with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, (4) any payments by the Company or any Subsidiary, or any dividend by the Company or any Subsidiary to New Holdings the proceeds of which are used by New Holdings to make payments, required to be made due to the exercise of statutory dissenters', appraisal or similar rights by holders of common stock of FFL in connection with the FFL Merger and (5) Permitted Payments; provided, however, that the declaration of each dividend paid in accordance with clause (1) above, each acquisition, repurchase, redemption or other repayment made in accordance with, or of the type set forth in, clause (2) above, and each payment described in clause (iii), (iv), (vii) and (ix) of the definition of the term "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and no amounts expended pursuant to clause (3) above or pursuant to clause (i), (ii), (v), (vi), (viii), (x) or (xi) of the definition of the term "Permitted Payments" shall be so counted; provided further that to the extent any payments made pursuant to clause (vii) of the definition of the term "Permitted Payments" are deducted for purposes of computing the Consolidated Net Income of the Company, such payments shall not be counted for purposes of computing amounts expended as Restricted Payments pursuant to subclause (c) in the immediately preceding paragraph. Limitation on Incurrences of Additional Indebtedness. Each of the New Indentures will provide that the Company shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the New F4L Notes issued under such New Indenture or Event of Default under such New Indenture shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness, the Company may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of the Company would be greater than 2.0 to 1.0; provided further a Subsidiary may incur Acquired Indebtedness to the extent such Indebtedness could have been incurred by the Company pursuant to the immediately preceding proviso. 112 122 In addition, the New Senior Note Indenture will provide that neither the Company nor any Subsidiary Guarantor will, directly or indirectly, in any event incur any Indebtedness that by its terms (or by the terms of any agreement governing such Indebtedness) is subordinated to any other Indebtedness of the Company or such Subsidiary Guarantor, as the case may be, unless such Indebtedness is also by its terms (or by the terms of any agreement governing such Indebtedness) made expressly subordinate to the New F4L Senior Notes or the Senior Note Guarantee of such Subsidiary Guarantor, as the case may be, to the same extent and in the same manner as such Indebtedness is subordinated pursuant to subordination provisions that are most favorable to the holders of any other Indebtedness of the Company or such Subsidiary Guarantor, as the case may be. Limitation on Liens. Each of the New Indentures will provide that the Company shall not and shall not permit any Subsidiary to create, incur, assume or suffer to exist any Liens upon any of their respective assets unless the New F4L Notes issued thereunder are equally and ratably secured by the Liens covering such assets, except for (i) in the case of the New Senior Subordinated Note Indenture, Liens on assets of the Company securing Senior Indebtedness and Liens on assets of a Subsidiary Guarantor which, at the time of incurrence, secure Guarantor Senior Indebtedness, (ii) existing and future Liens securing Indebtedness and other obligations of the Company and its Subsidiaries under the Credit Agreement and related documents or any refinancing or replacement thereof in whole or in part permitted under the applicable New Indenture, (iii) Permitted Liens, (iv) Liens securing Acquired Indebtedness; provided that such Liens (x) are not incurred in connection with, or in contemplation of the acquisition of the property or assets acquired and (y) do not extend to or cover any property or assets of the Company or any Subsidiary other than the property or assets so acquired, (v) Liens to secure Capitalized Lease Obligations and certain other Indebtedness that is otherwise permitted under the applicable New Indenture; provided that (A) any such Lien is created solely for the purpose of securing such other Indebtedness representing, or incurred to finance, refinance or refund, the cost (including sales and excise taxes, installation and delivery charges and other direct costs of, and other direct expenses paid or charged in connection with, the purchase (whether through stock or asset purchase, merger or otherwise) or construction) or improvement of the property subject thereto (whether real or personal, including fixtures and other equipment), (B) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such costs and (C) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item; (vi) Liens existing on the Issue Date (after giving effect to the Merger); (vii) Liens in favor of the New Trustees under the New Indentures and any substantially equivalent Lien granted to any trustee or similar institution under any indenture for Indebtedness permitted to be incurred under such New Indenture; and (viii) any replacement, extension or renewal, in whole or in part, of any Lien described in this or the foregoing clauses including in connection with any refinancing of the Indebtedness, in whole or in part, secured by any such Lien; provided that to the extent any such clause limits the amount secured or the assets subject to such Liens, no extension or renewal shall increase the amount or the assets subject to such Liens, except to the extent that the Liens associated with such additional assets are otherwise permitted hereunder. Limitation on Asset Sales. Each of the New Indentures will provide that neither the Company nor any of its Subsidiaries shall consummate an Asset Sale unless (a) the Company or the applicable Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold and (b) upon consummation of an Asset Sale, the Company will within 365 days of the receipt of the proceeds therefrom, either: (i) apply or cause its Subsidiary to apply the Net Cash Proceeds of any Asset Sale to (A) a Related Business Investment, (B) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale or (C) an investment in properties and assets that will be used in the business of the Company and its Subsidiaries existing on the Issue Date or in businesses reasonably related thereto; (ii) apply or cause to be applied such Net Cash Proceeds to the permanent repayment of Pari Passu Indebtedness or, in the case of the New Senior Subordinated Note Indenture, Senior Indebtedness; provided, however, that the repayment of any revolving loan (under the Credit Agreement or otherwise) shall result in a permanent reduction in the commitment thereunder; (iii) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (iv) after such time as the accumulated Net Cash Proceeds equals or exceeds $20 million, apply or cause to be applied such Net Cash Proceeds to the purchase of New F4L Notes issued under such New Indenture 113 123 tendered to the Company for purchase at a price equal to 100% of the principal amount thereof plus accrued interest to the date of purchase pursuant to an offer to purchase made by the Company as set forth below (a "Net Proceeds Offer"); provided, however, that the Company shall have the right to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets or equipment which are acquired or constructed by the Company or a Subsidiary subsequent to the Issue Date, provided that such sale and substantially concurrent lease-back occurs within 270 days following such acquisition or the completion of such construction, as the case may be. Pending the utilization of any Net Cash Proceeds in the manner (and within the time period) described above, the Company may use any such Net Cash Proceeds to repay revolving loans (under the Credit Agreement or otherwise) without a permanent reduction of the commitment thereunder. Each Net Proceeds Offer will be mailed to the record Holders of New F4L Senior Notes or New F4L Senior Subordinated Notes, as the case may be, as shown on the register of Holders of such New F4L Notes not less than 325 nor more than 365 days after the relevant Asset Sale, with a copy to the applicable New Trustee, shall specify the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed) and shall otherwise comply with the procedures set forth in the applicable New Indenture. Upon receiving notice of the Net Proceeds Offer, Holders of New F4L Senior Notes or New F4L Senior Subordinated Notes, as the case may be, may elect to tender their New F4L Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender New F4L Senior Notes or New F4L Senior Subordinated Notes, as the case may be, in an amount exceeding the Net Proceeds Offer, New F4L Notes of tendering Holders will be repurchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of New F4L Notes pursuant to a Net Proceeds Offer. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. Each of the New Indentures will provide that the Company shall not, and shall not permit any Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of its Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement and related documents as in effect on the Issue Date as any such payment restriction may apply to any present or future Subsidiary, (ii) the New Indentures and any agreement in effect at or entered into on the Issue Date, (iii) Indebtedness of a person existing at the time such person becomes a Subsidiary (provided that (x) such Indebtedness is not incurred in connection with, or in contemplation of, such person becoming a Subsidiary, (y) such restriction is not applicable to any person, or the properties or assets of any person, other than the person so acquired and (z) such Indebtedness is otherwise permitted to be incurred pursuant to the provisions of the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" above), (iv) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenants described under "-- Limitation on Incurrences of Additional Indebtedness" and "-- Limitation on Liens" above that limit the right of the debtor to dispose of the assets securing such Indebtedness; (b) customary non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into by a Subsidiary; (c) customary net worth provisions contained in leases and other agreements entered into by a Subsidiary in the ordinary course of business; (d) customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; (e) customary provisions in joint venture agreements and other similar agreements; and (f) restrictions contained in Indebtedness incurred to refinance, refund, extend or renew Indebtedness referred to in clause (a) above; provided that the restrictions contained therein are not materially more restrictive taken as a whole than those provided for in such Indebtedness being refinanced, refunded, extended or renewed and (g) Payment Restrictions contained in any other Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the provisions of the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" above; provided that any such Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being incurred (under the relevant 114 124 circumstances), and, in any event, no more restrictive than the most restrictive Payment Restrictions in effect on the Issue Date. Guarantees of Certain Indebtedness. Each of the New Indentures will provide that the Company shall not permit any of its Subsidiaries to (a) incur, guarantee or secure through the granting of Liens the payment of any Indebtedness under the term portion of the Credit Agreement or refinancings thereof or (b) pledge any intercompany notes representing obligations of any of its Subsidiaries, to secure the payment of any Indebtedness under the term portion of the Credit Agreement or refinancings thereof, in each case unless (x) such Subsidiary, the Company and the New Senior Note Trustee execute and deliver a supplemental indenture evidencing such Subsidiary's Senior Note Guarantee in the case of the New Senior Note Indenture and (y) such Subsidiary, the Company and the New Senior Subordinated Note Trustee execute and deliver a supplemental indenture evidencing such Subsidiary's Senior Subordinated Note Guarantee in the case of the New Senior Subordinated Note Indenture. Limitation on Transactions with Affiliates. Each of the New Indentures will provide that neither the Company nor any of its Subsidiaries shall (i) sell, lease, transfer or otherwise dispose of any of its properties or assets or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities (other than equity securities which do not constitute Disqualified Capital Stock) from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of the Company or any Subsidiary (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under the following paragraph and (y) Affiliate Transactions in the ordinary course of business, that are fair to the Company or such Subsidiary, as the case may be, and on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party; provided that (A) with respect to Affiliate Transactions involving aggregate payments in excess of $1 million and less than $5 million, the Company or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the applicable New Trustee certifying that such Affiliate Transaction complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business), (B) with respect to Affiliate Transactions involving aggregate payments in excess of $5 million and less than $15 million, the Company or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the applicable New Trustee certifying that such Affiliate Transaction complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business) and that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of the Company or the Subsidiary, as the case may be, or, in the absence of any such approval by the disinterested members of the Board of Directors of the Company or the Subsidiary, as the case may be, that an Independent Financial Advisor has reasonably and in good faith determined that the financial terms of such Affiliate Transaction are fair to the Company or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as might reasonably have been obtained at such time from an unaffiliated party, and that such Independent Financial Advisor has provided written confirmation of such determination to the Board of Directors and (C) with respect to Affiliate Transactions involving aggregate payments in excess of $15 million, the Company or such Subsidiary, as the case may be, shall have delivered to the applicable New Trustee, a written opinion from an Independent Financial Advisor to the effect that the financial terms of such Affiliate Transaction are fair to the Company or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as those that might reasonably have been obtained at the time from an unaffiliated party. The provisions of the foregoing paragraph shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of the covenant described under "-- Limitation on Restricted Payments" above, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Subsidiary, as determined by the Board of Directors of the Company or any Subsidiary or the senior management thereof in good faith, (iv) transactions exclusively between or among the Company and any of its wholly-owned Subsidiaries or exclusively between or among such wholly-owned Subsidiaries, provided such 115 125 transactions are not otherwise prohibited by the applicable New Indenture, (v) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long as any such amendment is not disadvantageous to the Holders of the New F4L Senior Notes or New F4L Senior Subordinated Notes, as the case may be, in any material respect, (vi) the existence of, or the performance by the Company or any of its Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it (or New Holdings) is a party as of the Issue Date and any similar agreements which it (or New Holdings) may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders of the New F4L Senior Notes or the New F4L Senior Subordinated Notes, as the case may be, in any material respect, (vii) transactions permitted by, and complying with, the provisions of the covenant described under "-- Limitation on Mergers and Certain Other Transactions" below and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the applicable New Indenture which are fair to the Company, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Limitations on Preferred Stock of Subsidiaries. Each of the New Indentures will provide that the Company will not permit any of its Subsidiaries to issue any Preferred Stock (other than to the Company or to a wholly-owned Subsidiary) or permit any person (other than the Company or a wholly-owned Subsidiary) to own any Preferred Stock of any Subsidiary. Limitation on Mergers and Certain Other Transactions. Each of the New Indentures will provide that the Company, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case, (1) either the Company shall be the continuing person, or the person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any person to which assets are transferred) (the Company or such other person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by an indenture supplement, all the obligations of the Company under such New Indenture and the New F4L Notes issued thereunder; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (A) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) the Surviving Person could incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the provisions of the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" above; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) each Subsidiary Guarantor, unless it is the other party to the transaction, shall have by supplemental indenture confirmed that its Guarantee of the obligations of the Company under the New F4L Notes issued under such New Indenture shall apply, without alteration or amendment as such Guarantee applies on the date it was granted under the applicable New Indenture to the obligations of the Company under the applicable New Indenture and the applicable New F4L Notes to the obligations of the Company or such Person, as the case may be, under the applicable New Indenture and the applicable New F4L Notes, after the consummation of such transaction. 116 126 Notwithstanding the foregoing, the consummation of the Merger on the Issue Date need only comply with clauses (1) and (3) of the foregoing paragraph. Each of the New Indentures will provide that upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company or any adoption of a Plan of Liquidation by the Company in accordance with the foregoing, the surviving person formed by such consolidation or into which the Company is merged or to which such transfer is made (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, the Company under such New Indenture with the same effect as if such surviving person had been named as the Company therein; provided, however, that solely for purposes of computing amounts described in subclause (c) of the first paragraph of the covenant described under "-- Limitation on Restricted Payments" above, any such surviving person shall only be deemed to have succeeded to and be substituted for the Company with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Limitation on Other Senior Subordinated Indebtedness. The New F4L Senior Subordinated Note Indenture will provide that neither the Company nor any Subsidiary Guarantor will, directly or indirectly, incur any Indebtedness (including Acquired Indebtedness) that is subordinate in right of payment to any Indebtedness of the Company or such Subsidiary Guarantor, as the case may be, unless such Indebtedness is either (a) pari passu in right of payment with the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be, or (b) subordinate in right of payment to the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be, in the same manner and at least to the same extent as the New F4L Senior Subordinated Notes are subordinate to Senior Indebtedness or as such Senior Subordinated Note Guarantee is subordinated to Guarantor Senior Indebtedness of such Subsidiary Guarantor, as the case may be. EVENTS OF DEFAULT The following events constitute "Events of Default" under each of the New Indentures: (i) failure to make any interest payment on the applicable New F4L Notes when due and the continuance of such default for a period of 30 days; (ii) failure to pay principal of, or premium, if any, on the applicable New F4L Notes when due, whether at maturity, upon acceleration, redemption, required repurchase or otherwise; (iii) failure to comply with any other agreement contained in the applicable New F4L Notes or the applicable New Indenture, if such failure continues unremedied for 30 days after written notice given by the applicable New Trustee or the Holders of at least 25% in principal amount of the applicable New F4L Notes then outstanding (except in the case of a default with respect to the covenants described under "-- Certain Covenants -- Limitation on Restricted Payments," "-- Certain Covenants -- Limitations on Asset Sales," "-- Change of Control," and "-- Certain Covenants -- Limitations on Merger and Certain Other Transactions," which shall constitute Events of Default with notice but without passage of time); (iv) a default under any Indebtedness of the Company or its Subsidiaries, whether such Indebtedness now exists or shall hereinafter be created, if both (A) such default either (1) results from the failure to pay any such Indebtedness at its stated final maturity or (2) relates to an obligation other than the obligation to pay such Indebtedness at its stated final maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated maturity and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity or the maturity of which has been so accelerated, aggregate $20 million or more at any one time outstanding; (v) any final judgment or order for payment of money in excess of $20 million shall be entered against the Company or any Significant Subsidiary and shall not be discharged for a period of 60 days after such judgment becomes final and nonappealable; (vi) either the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents to the entry of 117 127 an order for relief against it in an involuntary case or proceeding; (c) consents to the appointment of a Custodian of it or for all or substantially all of its property; or (d) makes a general assignment for the benefit of its creditors; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any Significant Subsidiary, in an involuntary case or proceeding; (b) appoints a Custodian of the Company or any Significant Subsidiary, or for all or any substantial part of their respective properties; or (c) orders the liquidation of the Company or any Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for 60 days; (viii) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of the Company and its Subsidiaries; or (ix) any of the Guarantees issued under such New Indenture shall be declared or adjudged invalid in a final judgment or order issued by any court of governmental authority. In the event of a declaration of acceleration because an Event of Default set forth in clause (iv) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if either (i) the holders of the Indebtedness which is the subject of such Event of Default have waived such failure to pay at maturity or have rescinded the acceleration in respect of such Indebtedness within 90 days of such maturity or declaration of acceleration, as the case may be, and no other Event of Default has occurred during such 90-day period which has not been cured or waived, or (ii) such Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not then due and payable, or the underlying default has been cured, within 90 days of such maturity or declaration of acceleration, as the case may be. If an Event of Default (other than an Event of Default resulting from bankruptcy, insolvency, receivership or reorganization of the Company or a Subsidiary Guarantor) occurs and is continuing under a New Indenture, the New Trustee under such New Indenture or the Holders of at least 25% in principal amount of the then outstanding New F4L Notes issued under such New Indenture may declare due and payable all unpaid principal and interest accrued and unpaid on the then outstanding New F4L Notes issued under such New Indenture by notice in writing to the Company, the administrative agent under the Credit Agreement and the applicable New Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become due and payable upon the first to occur of an acceleration under the Credit Agreement, or five business days after receipt by the Company and the administrative agent under the Credit Agreement of such Acceleration Notice. If an Event of Default resulting from certain events of bankruptcy, insolvency, receivership or reorganization of the Company or a Subsidiary Guarantor that is a Significant Subsidiary shall occur under a New Indenture, all unpaid principal of and accrued interest on all then outstanding New F4L Notes issued under such New Indenture shall be immediately due and payable without any declaration or other act on the part of the applicable New Trustee or any of the Holders of such New F4L Notes. After a declaration of acceleration under a New Indenture, subject to certain conditions, the Holders of a majority in principal amount of the then outstanding New F4L Notes issued thereunder, by notice to the applicable New Trustee, may rescind such declaration if all existing Events of Default under such New Indenture are remedied. In certain cases the Holders of a majority in principal amount of outstanding New F4L Notes issued under such New Indenture may waive a past default under such New Indenture and its consequences, except a default in the payment of or interest on any of the New F4L Notes issued thereunder. Each New Indenture provides that if a Default or Event of Default occurs and is continuing thereunder and if it is known to the applicable New Trustee, such New Trustee shall mail to each Holder of New F4L Notes issued thereunder notice of the Default or Event of Default within 90 days after such Default or Event of Default occurs; provided, however, that, except in the case of a Default or Event of Default in the payment of the principal of or interest on any such New F4L Notes, including the failure to make payment on a Change of Control Payment Date pursuant to a Change of Control Offer or payment when due pursuant to a Net Proceeds Offer the applicable New Trustee may withhold such notice if it in good faith determines that withholding such notice is in the interest of the Holders of such New F4L Notes. Each New Indenture provides that no Holder of New F4L Notes issued thereunder may pursue any remedy thereunder unless the applicable New Trustee (i) shall have failed to act for a period of 60 days after receiving written notice of a continuing Event of Default under such New Indenture by such Holder and a 118 128 request to act by Holders of at least 25% in principal amount of New F4L Notes issued under such New Indenture and (ii) has received indemnification satisfactory to it; provided, however, that such provision does not affect the right of any Holder to sue for enforcement of any overdue payment of New F4L Notes issued under such New Indenture. Each New Indenture provides that two officers of the Company are required to certify to the applicable New Trustee within 120 days after the end of each fiscal year of the Company whether or not they know of any Default that occurred under such New Indenture during such fiscal year and, if applicable, describe such Default and the status thereof. DEFEASANCE OF INDENTURE The Company may, at its option and at any time, elect to have the obligations of the Company discharged with respect to the outstanding New F4L Senior Notes or the New F4L Senior Subordinated Notes. Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the applicable New F4L Notes except for (i) the rights of Holders of such New F4L Notes to receive payments in respect of the principal of, premium, if any, and interest on such New F4L Notes when such payments are due solely from the funds held by the applicable New Trustee in the trust referred to below; (ii) the Company's obligations to issue temporary New F4L Notes, register the transfer or exchange of such New F4L Notes, replace mutilated, destroyed, lost or stolen New F4L Notes and maintain an office or agency for payments in respect of such New F4L Notes and money for security payments held in respect of such New F4L Notes, (iii) the rights, powers, trusts, duties and immunities of the applicable New Trustee and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of the New Indentures. In addition, the Company may, at its option and at any time elect to have the obligations of the Company released with respect to certain covenants described above under "-- Certain Covenants" ("Covenant Defeasance"), and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to such New F4L Notes. In order to exercise either Legal Defeasance or Covenant Defeasance with respect to either issue of New F4L Notes, (i) the Company must have irrevocably deposited with the applicable New Trustee, in trust, for the benefit of the Holders of such New F4L Notes, cash in U.S. dollars, U.S. Government Obligations (as defined in the New Indentures), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the applicable outstanding New F4L Notes to redemption or maturity provided that the applicable New Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the New F4L Notes on the maturity date or such redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the applicable New Trustee an opinion of counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of New F4L Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the applicable New Trustee an opinion of counsel stating that the Holders of New F4L Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing under the applicable New Indenture on the date of such deposit or insofar as clauses (vi) and (vii) under the first paragraph under "-- Events of Default" above are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not cause the applicable New Trustee to have a conflicting interest with respect to the New F4L Notes; (vi) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the applicable New Indenture or any other material agreement or 119 129 instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound (and in that connection, the New Trustee shall have received a certificate from the Agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (vii) the Company shall have delivered to the applicable New Trustee an opinion of counsel to the effect that after the 91st day following the deposit (A) in the case of the New Senior Subordinated Note Indenture, the trust funds will not be subject to any rights of holders of Senior Indebtedness or Guarantor Senior Indebtedness, including, without limitation, those arising under the New Senior Subordinated Note Indenture and (B) in the case of each of the New Indentures the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (viii) the Company shall have delivered to the applicable New Trustee an Officer's Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of the New F4L Notes over other creditors of the Company or any Subsidiary Guarantor or with the intent of defeating, hindering, delaying or defrauding creditors of the Company, any Subsidiary Guarantor or others; and (ix) the Company shall have delivered to the applicable New Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or Covenant Defeasance, have been complied with. SATISFACTION AND DISCHARGE Each New Indenture will be discharged and will cease to be of further effect as to all outstanding New F4L Notes issued thereunder, when either (a) all such New F4L Notes theretofore authenticated and delivered (except lost, stolen or destroyed New F4L Notes which have been replaced or paid and New F4L Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the appropriate New Trustee for cancellation; or (b)(i) all such New F4L Notes not theretofore delivered to such New Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and the Company has irrevocably deposited or caused to be deposited with such New Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on such New F4L Notes not theretofore delivered to such New Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (ii) no Default or Event of Default with respect to the applicable New Indenture or the applicable New F4L Notes shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (iii) the Company has paid all sums payable by it under such New Indenture; and (iv) the Company has delivered irrevocable instructions to the New Trustee under such New Indenture to apply the deposited money toward the payment of such New F4L Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an Officers' Certificate and an Opinion of Counsel to the appropriate New Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. MODIFICATION OF THE NEW INDENTURES Each of the New Indentures and the New F4L Notes issued thereunder may be amended or supplemented (and compliance with any provision thereof may be waived) by the Company, the Subsidiary Guarantors, the New Trustee thereunder and the Holders of not less than a majority in aggregate principal amount of such New F4L Notes then outstanding, except that (i) without the consent of each Holder of such New F4L Notes affected, no such amendment, supplement or waiver may (1) change the principal amount of the applicable New F4L Notes the Holders of which must consent to an amendment, supplement or waiver of any provision of the applicable New Indenture, the applicable New F4L Notes or the applicable Guarantees, (2) reduce the rate or extend the time for payment of interest on any applicable New F4L Notes, (3) reduce the principal amount of any applicable New F4L Notes, (4) change the Maturity Date of any applicable New F4L Notes or alter the redemption provisions in the applicable New Indenture or the applicable New F4L Notes in a manner adverse to any Holder of such New F4L Notes, (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on or redemption payment with respect to any applicable New F4L Notes, (6) make the principal of, or interest on, any applicable New F4L Notes payable with anything or in any manner other than 120 130 as provided for in the applicable New Indenture, the applicable New F4L Notes and the applicable Guarantees or (7) in the case of the New Senior Subordinated Note Indenture, modify the subordination provisions of the New Senior Subordinated Note Indenture (including the related definitions) so as to adversely affect the ranking of any New F4L Senior Subordinated Note or Senior Subordinated Note Guarantee; provided, however, that it is understood that any amendment the purpose of which is to permit the incurrence of additional Indebtedness under the New Senior Subordinated Note Indenture shall not be construed as adversely affecting the ranking of any New F4L Senior Subordinated Note or Senior Subordinated Note Guarantee, (ii) without the consent of Holders of not less than 75% in aggregate principal amount of such New F4L Notes then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of such New F4L Notes pursuant to the covenant described under "-- Change of Control" above in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "-- Change of Control" above and (iii) without the consent of Holders of not less than two thirds in aggregate principal amount of such New F4L Notes then outstanding, no such amendment, supplement or waiver may release any Subsidiary Guarantor from any of its Obligations under its applicable Guarantee or the applicable New Indenture other than in accordance with the terms of such applicable Guarantee and the applicable New Indenture. In addition, each of the New Indentures, the New F4L Notes issued thereunder and the related Guarantees may be amended by the Company, the Subsidiary Guarantors and the applicable New Trustee (a) to cure any ambiguity, defect or inconsistency therein; provided that such amendment or supplement does not adversely affect the rights of any Holder thereof or (b) to make any other change that does not adversely affect the rights of any Holder thereunder in any material respect. THE NEW TRUSTEES Each New Indenture will provide that the Holders of a majority in principal amount of the outstanding New F4L Notes issued thereunder may remove the New Trustee thereunder and appoint a successor trustee with the Company's consent, by so notifying the trustee to be so removed and the Company. In addition, the Holders of a majority in principal amount of the outstanding New F4L Notes issued under a New Indenture have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the New Trustee under such New Indenture or of exercising any trust or power conferred on such New Trustee. Each of the New Indentures will provide that, in case a Default or an Event of Default has occurred and is continuing thereunder, the New Trustee thereunder shall exercise such of the rights and powers vested in it by such New Indenture, and use the same degree of care and skill in the exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. Subject to the latter provision, the New Trustee under each New Indenture is under no obligation to exercise any of its rights or powers under the applicable New Indenture at the request, order or direction of any of the Holders of the New F4L Notes issued thereunder, unless they shall have offered to such New Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred thereby. If the Company fails to pay such amounts of principal of, premium, if any, or interest on, the New F4L Senior Notes or the New F4L Senior Subordinated Notes as shall have become due and payable upon demand as specified in the applicable New Indenture, the New Trustee thereunder, at the request of the Holders of a majority in aggregate principal amount of such New F4L Notes at the time outstanding, and upon being offered such reasonable indemnity as it may be required against the costs, expenses and liabilities incurred by it, except as a result of its negligence or bad faith, shall institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and collect in the manner provided by law the monies adjudged or decreed to be payable. Each New Indenture contains limitations on the rights of the New Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to be realized on certain property received by it in respect of any such claims, securities or otherwise. Each New Trustee is permitted to engage in other transactions; however, if a New Trustee acquires any "conflicting interest," it must eliminate such conflict or resign. 121 131 REPORTS Each New Indenture will provide that the Company will deliver to the New Trustee thereunder within 15 days after the filing of the same with the Commission, copies of the quarterly and annual report and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Each New Indenture will further provide that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the New Trustee under such New Indenture and Holders of the New F4L Notes issued thereunder with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA sec. 314(a). CERTAIN DEFINITIONS "Acquired Indebtedness" means (i) with respect to any person that becomes a Subsidiary of the Company (or is merged into the Company or any of its Subsidiaries) after the Issue Date, Indebtedness of, such person or any of its Subsidiaries existing at the time such person becomes a Subsidiary of the Company (or is merged into the Company or any of its Subsidiaries) and which was not incurred in connection with, or in contemplation of, such person becoming a Subsidiary of the Company (or being merged into the Company or any of its Subsidiaries) and (ii) with respect to the Company or any of its Subsidiaries, any Indebtedness assumed by the Company or any of its Subsidiaries in connection with the acquisition of any assets from another person (other than the Company or any of its Subsidiaries), and which was not incurred by such other person in connection with, or in contemplation of, such acquisition. "Adjusted Net Assets" means, with respect to the Guarantee of a Subsidiary Guarantor at any date, the lesser of the amount by which (x) the fair value of the property of such Subsidiary Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date (other than liabilities of such Subsidiary Guarantor under Indebtedness which constitutes Subordinated Indebtedness with respect to such Guarantee)), but excluding liabilities under the Senior Note Guarantee of such Subsidiary Guarantor, in the case of the New Senior Note Indenture, or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, in the case of the New Senior Subordinated Note Indenture, at such date and (y) the present fair salable value of the assets of such Subsidiary Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Subsidiary Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date (other than liabilities of such Subsidiary Guarantor under Indebtedness which constitutes Subordinated Indebtedness with respect to such Guarantee) and after giving effect to any collection from any Subsidiary of such Subsidiary Guarantor in respect of the obligations of such Subsidiary under the applicable Guarantee), excluding debt in respect of the Senior Note Guarantee of such Subsidiary Guarantor, in the case of the New Senior Note Indenture, or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, in the case of the New Senior Subordinated Note Indenture, as they become absolute and matured. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the New Indentures, neither BT Securities Corporation nor any of its Affiliates shall be deemed to be an Affiliate of the Company or any of its Subsidiaries. "Asset Sale" means, with respect to any person, any sale, transfer or other disposition or series of sales, transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise) made by such person or any of its subsidiaries to any person other than such person or one of its wholly-owned subsidiaries (or, in the case of a sale, transfer or other disposition by a Subsidiary, to any person other than the Company or a directly or indirectly wholly- 122 132 owned Subsidiary) of any assets of such person or any of its subsidiaries including, without limitation, assets consisting of any Capital Stock or other securities held by such person or any of its subsidiaries, and any Capital Stock issued by any subsidiary of such person, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) involving only Excluded Assets; (ii) resulting in Net Proceeds to the Company and the Subsidiaries of $500,000 or less; (iii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of the Company with a Lien on such assets, which Lien is permitted under the New Indentures, provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law; (iv) involving only Cash Equivalents or inventory in the ordinary course of business or obsolete equipment in the ordinary course of business consistent with past practices of the Company; (v) involving only the lease or sub-lease of any real or personal property in the ordinary course of business; or (vi) the proceeds of such Asset Sale which are not applied as contemplated in "-- Certain Covenants -- Limitation on Assets Sales" and which, together with all other such Asset Sale Proceeds, do not exceed $20 million. "Average Life" means, as of any date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal payments of such debt security multiplied by the amount of each such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any person, the Board of Directors of such person or of a subsidiary of such person or any duly authorized committee of that Board. "Board Resolution" means, with respect to any person, a duly adopted resolution of the Board of Directors of such person. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Capital Stock" means, with respect to any person, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such person. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii), (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500 million, and (c) has the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. and (vi) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any person or entity (other than any Permitted Holder) or (ii) any group of persons or entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act), in either case, of any securities of New Holdings or the Company such that, as a result of such acquisition, such person, entity or 123 133 group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, 40% or more of the then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of the Company (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, however, that no such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, a greater percentage of such voting securities than such other person, entity or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of the Company's Board of Directors. "Commission" means the Securities and Exchange Commission. "Common Stock" means, with respect to any person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such person's common stock, whether outstanding at the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated Net Income" means, with respect to any person, for any period, the aggregate of the net income (or loss) of such person and its subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other person in which such person or any of its subsidiaries has an interest (which interest does not cause the net income of such other person to be consolidated with the net income of such person and its subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to such person or such subsidiary by such other person in such period; (b) the net income of any subsidiary of such person that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been paid to, or received by, such person or a subsidiary of such person not subject to any Payment Restriction; and (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) up to $10 million of severance costs and (C) any other restructuring reserves or charges (provided, however, that any cash payments actually made with respect to the liabilities for which such restructuring reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case, incurred by the Company or any of its Subsidiaries in connection with the Merger, including, without limitation, the divestiture of the Excluded Assets, (viii) losses incurred by the Company and its Subsidiaries resulting from earthquakes and (ix) with respect to the Company, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded; provided further that solely for the purpose of computing amounts described in subclause (c) of the first paragraph of the covenant described under "-- Limitation on Restricted Payments" above, "Consolidated Net Income" of the Company for any period shall be reduced by the aggregate amount of dividends paid by the Company or a Subsidiary to New Holdings pursuant to clauses (v) and (vi) of the definition of "Permitted Payments" during such period. "Consolidated Net Worth" means, with respect to any person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such person and its subsidiaries determined on a consolidated basis in accordance with GAAP. "Consulting Agreement" means that certain Consulting Agreement dated as of the Issue Date, between Food 4 Less, New Holdings and The Yucaipa Companies (as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amended or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date). 124 134 "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among Food 4 Less, certain of its subsidiaries, the Lenders referred to therein, and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. The Company shall promptly notify the New Trustees of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Designated Senior Indebtedness" means (i) in the event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit Agreement" shall not include any agreement governing Indebtedness incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Discount Notes" means the 15.25% Senior Discount Notes due 2004 of New Holdings issued pursuant to the Discount Note Indenture, as the same may be modified or amended from time to time and future refinancings thereof. "Discount Note Indenture" means the indenture dated as of December 15, 1992 under which the 15.25% Senior Discount Notes due 2004 of Holdings were issued, as the same may be modified and amended from time to time and refinancings thereof. "Disqualified Capital Stock" means, with respect to any person, any Capital Stock of such person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security, into which it is convertible, puttable or exchangeable is, or upon the happening of any event or the passage of time would be, required to be redeemed or repurchased by such person or its subsidiaries, including at the option of the holder thereof, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date of the New F4L Senior Notes, in the case of the New Senior Note Indenture, or the New F4L Senior Subordinated Notes, in the case of the New Senior Subordinated Note Indenture, or any other Capital Stock of such person or its subsidiaries designated as Disqualified Capital Stock by such person at the time of issuance; provided, however, that if such Capital Stock is either (i) redeemable or repurchasable solely at the option of such person or (ii) issued to employees of the Company or its Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated. "EBDIT" means, with respect to any person, for any period, the Consolidated Net Income of such person for such period, plus, in each case to the extent deducted in computing Consolidated Net Income of such person for such period (without duplication)(i) provisions for income taxes or similar charges recognized by such person and its consolidated subsidiaries accrued during such period, (ii) depreciation and amortization expense of such person and its consolidated subsidiaries accrued during such period (but only to the extent not included in Fixed Charges), (iii) Fixed Charges of such person and its consolidated subsidiaries for such period, (iv) LIFO charges (credits) of such person and its consolidated subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Merger, and (vi) any other non-cash charges reducing 125 135 Consolidated Net Income for such period (excluding any such charge which requires an accrual of or a cash reserve for cash charges for any future period), less, without duplication, (i) non-cash items increasing Consolidated Net Income of such person for such period (excluding any such items which represent the reversal of any accrual of, or cash reserve for, anticipated cash charges in any prior period) in each case determined in accordance with GAAP and (ii) the amount of all cash payments made by such person or its subsidiaries during such period to the extent that such cash payment has been provided for in a restructuring reserve or charge referred to in clause (v) above (and were not otherwise deducted in the computation of Consolidated Net Income of such person for such period). "Exchange Act" means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated by the Commission thereunder. "Excluded Assets" means assets of the Company required to be disposed of by applicable regulatory authorities in connection with the Merger. "Existing Indebtedness" means the following indebtedness of the Company to the extent outstanding on the Issue Date after giving effect to the Merger: (a) the % Senior Notes due 2004 issued pursuant to an indenture dated as of the Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture dated as of April 15, 1992; (c) the % Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior Subordinated Notes due 2003 issued pursuant to an indenture dated as of March 30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date, and (g) the 13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated as of June 15, 1991. "Fixed Charges" means, with respect to any person, for any period, the aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of such person and its consolidated subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of the Company, any original issue discount on the applicable New F4L Notes but excluding amortization of debt issuance costs) and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period but excluding the amortization of debt issuance costs), (ii) dividend requirements on Preferred Stock of such person and its consolidated subsidiaries (whether in cash or otherwise (except dividends payable in shares of Qualified Capital Stock)) declared or paid, or required to be declared or paid during such period (except to the extent accrued in a prior period) and excluding items eliminated in consolidation and (iii) dividends declared or paid or scheduled or required to be declared or paid to New Holdings which are permitted to be paid pursuant to clauses (v) and (vi) of the definition of "Permitted Payments". For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Fixed Charges are being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as the Company may designate, and (d) Fixed Charges shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. For purposes of clauses (ii) and (iii) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is the amount of such dividend requirements and the denominator of which is one (1) minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. 126 136 "FFL" means Food 4 Less, Inc., a Delaware corporation and its successors, including, without limitation, Holdings following the FFL Merger and New Holdings following the Reincorporation Merger. "FFL Merger" means the merger, prior to the Merger and the Reincorporation Merger, of FFL and Holdings. "Food 4 Less" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and its successors, including, without limitation, Ralphs Supermarkets, Inc. (to be renamed Ralphs Grocery Company following the Merger). "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, the principal of, premium, if any, and interest on any Indebtedness of such Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Senior Subordinated Note Guarantee of such Subsidiary Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Indebtedness" shall include the principal of, premium, if any, and interest on all obligations of every nature of such Subsidiary Guarantor from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, and all fees, indemnities and expenses payable under the Credit Agreement. Notwithstanding the foregoing, "Guarantor Senior Indebtedness" shall not include (a) Indebtedness evidenced by the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of such Subsidiary Guarantor, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Subsidiary Guarantor, (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by such Subsidiary Guarantor for compensation to employees or for services rendered to such Subsidiary Guarantor, (g) any liability for federal, state, local or other taxes owed or owing by such Subsidiary Guarantor, (h) Indebtedness of such Subsidiary Guarantor representing a guarantee of Subordinated Indebtedness or Pari Passu Indebtedness (in each case, with respect to the New F4L Senior Subordinated Notes or any Senior Subordinated Note Guarantee) of the Company or any other Subsidiary Guarantor, (i) Indebtedness of such Subsidiary Guarantor to a Subsidiary of the Company and (j) that portion of any Indebtedness which is incurred by such Subsidiary Guarantor in violation of the New Senior Subordinated Note Indenture. "Holdings" means Food 4 Less Holdings, Inc., a California corporation, and its successors, including, without limitation, New Holdings following the Reincorporation Merger. "Indebtedness" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person; (iii) reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold 127 137 interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution. For purposes of the New Indentures, Indebtedness incurred by any person that is a general partnership (other than non-recourse Indebtedness) shall be deemed to have been incurred by the general partners of such partnership pro rata in accordance with their respective interests in the liabilities of such partnership unless any such general partner shall, in the reasonable determination of the Board of Directors of the Company, be unable to satisfy its pro rata share of the liabilities of the partnership, in which case the pro rata share of any Indebtedness attributable to such partner shall be deemed to be incurred at such time by the remaining general partners on a pro rata basis in accordance with their interests. "Independent Financial Advisor" means a reputable accounting, appraisal or nationally recognized investment banking or consulting firm that is, in the reasonable judgment of the Board of Directors of the Company, qualified to perform the tasks for which such firm has been engaged and disinterested and independent with respect to the Company and its Affiliates. "Interest Swap Obligation" means any obligation of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any person in any other person means any investment by such person in such other person, whether by share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances or to permit the purchase of Qualified Capital Stock of the Company and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other person. "Issue Date" means the date of original issuance of the New F4L Notes under the New Indentures. "Letter of Credit Obligations" means Indebtedness of the Company or any of its Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of the definition of the term "Permitted Indebtedness" above, the aggregate principal amount of Indebtedness outstanding at any time with respect thereto, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell which is intended to constitute or create a security interest, mortgage, pledge or lien, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent 128 138 statutes) of any jurisdiction); provided that in no event shall an operating lease be deemed to constitute a Lien under the New Indentures. "Maturity Date" means (i) with respect to the New F4L Senior Notes, June 1, 2004 and (ii) with respect to the New F4L Senior Subordinated Notes, June 1, 2005. "Merger" means (i) the merger of Food 4 Less Supermarkets, Inc. into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger) pursuant to the Merger Agreement and (ii) immediately following the merger described in clause (i) of this definition, the merger of Ralphs Grocery Company into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger and changing its name to "Ralphs Grocery Company" in connection with such merger). "Merger Agreement" means the Agreement and Plan of Merger, dated September 14, 1994, by and among Holdings, FFL, Food 4 Less, RSI and the stockholders of RSI, as such agreement is in effect on the Issue Date. "Net Cash Proceeds" means the Net Proceeds of any Asset Sale received in the form of cash or Cash Equivalents. "Net Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any person of Qualified Capital Stock, the aggregate net proceeds received by such person after payment of expenses, taxes, commissions and the like incurred in connection therewith (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale), whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such person for or into shares of Qualified Capital Stock of the Company, the sum of (i) the fair market value of the proceeds received by the Company in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the Holder to the Company upon such conversion or exchange. "New Discount Debenture Indenture" means the indenture dated as of the Issue Date under which the 13 5/8% Senior Discount Debentures due 2005 of New Holdings were issued, as the same may be modified and amended from time to time and refinancings thereof. "New Discount Debentures" means the 13 5/8% Senior Discount Debentures due 2005 of New Holdings issued pursuant to the New Discount Debenture Indenture, as the same may be modified or amended from time to time and future refinancings thereof. "New Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation, and its successors. "Obligations" means all obligations of every nature whether for principal, reimbursements, interest, fees, expenses, indemnities or otherwise, and whether primary, secondary, direct, indirect, contingent, fixed or otherwise (including obligations of performance) under the documentation governing any Indebtedness. "Operating Coverage Ratio" means, with respect to any person, the ratio of (1) EBDIT of such person for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed Charges of such person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of such person to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Merger, "EBDIT" for the Pro Forma Period shall be calculated, in the case of the Company, after giving effect on a pro forma basis to the Merger as if it had occurred on the first day of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBDIT" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing 129 139 on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other person that, as a result of such Investment, becomes a subsidiary of such person, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by the applicable New Indenture, and (c) any sales or other dispositions of assets (other than sales of inventory in the ordinary course of business) occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Fixed Charges" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If such person or any of its subsidiaries directly or indirectly guarantees any Indebtedness of a third person, the Operating Coverage Ratio shall give effect to the incurrence of such Indebtedness as if such person or subsidiary had directly incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations under which do not constitute Capitalized Lease Obligations. "Pari Passu Indebtedness" means, with respect to the Company or any Subsidiary Guarantor, (i) in the case of the New Senior Note Indenture, Indebtedness of such person which ranks pari passu in right of payment to the New F4L Senior Notes or the Senior Note Guarantee of such Subsidiary Guarantor, as the case may be, and (ii) in the case of the New Senior Subordinated Note Indenture, Indebtedness of such person which ranks pari passu in right of payment to the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be. "Payment Restriction" means, with respect to a subsidiary of any person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or indebtedness owed to such person or any other subsidiary of such person, (b) make loans or advances to such person or any other subsidiary of such person or (c) transfer any of its properties or assets to such person or any other subsidiary of such persons, or (ii) such person or any other subsidiary of such person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances or (c) transfer of properties or assets. "Permitted Holder" means (i) Food 4 Less Equity Partners, L.P. and The Yucaipa Companies, or any entity controlled thereby or any of the partners thereof, (ii) Apollo Advisors, L.P., Lion Advisors, L.P. or any entity controlled thereby or any of the partners thereof, (iii) an employee benefit plan of the Company, or any of its subsidiaries or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or (v) any Permitted Transferee of any of the foregoing persons. "Permitted Indebtedness" means (a) Indebtedness of the Company and its Subsidiaries pursuant to (i) the Term Loans in an aggregate principal amount at any time outstanding not to exceed $750 million or such lesser amount as may be actually funded under the Term Loans on or within 91 days following the Issue Date (with any such amounts funded after the Issue Date to be used to finance the repurchase of up to $224.5 million aggregate principal amount of Old RGC Notes pursuant to the "change of control purchase offer" provision set forth in section 1014 of the Old RGC Indentures, plus related fees and expenses) less the aggregate amount of all principal repayments thereunder pursuant to and in accordance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above subsequent to the Issue Date, and (ii) the revolving credit facility under the Credit Agreement (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $325 million, less all permanent reductions thereunder pursuant to and in accordance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above, (b) Indebtedness of the Company or a Subsidiary Guarantor owed to and held by the Company or a Subsidiary Guarantor; (c) Indebtedness incurred by the Company or any Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the 130 140 ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations provided that (i) at the time of the incurrence thereof, such Indebtedness, together with any other Indebtedness incurred during the most recently completed four fiscal quarter period in reliance upon this clause (c) does not exceed, in the aggregate, 3% of net sales of the Company and its Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the first anniversary of the Merger) and (ii) such Indebtedness, together with all then outstanding Indebtedness incurred in reliance upon this clause (c) does not exceed, in the aggregate, 3% of the aggregate net sales of the Company and its Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the third anniversary of the Merger); (d) Indebtedness incurred by the Company or any Subsidiary in connection with capital expenditures in an aggregate principal amount not exceeding $150 million, provided that such capital expenditures relate solely to the integration of the operations of RSI, Food 4 Less and their respective subsidiaries, as described in this Amended and Restated Prospectus and Solicitation Statement; (e) Indebtedness of the Company incurred under certain Foreign Exchange Agreements and Interest Swap Obligations; (f) guarantees incurred in the ordinary course of business by the Company or a Subsidiary of Indebtedness of any other person in aggregate not to exceed $25 million at any time outstanding; (g) guarantees by the Company or a Subsidiary Guarantor of Indebtedness incurred by a wholly-owned Subsidiary Guarantor so long as the incurrence of such Indebtedness incurred by such wholly-owned Subsidiary Guarantor is permitted under the terms of the applicable New Indenture; (h) Refinancing Indebtedness; (i) Indebtedness for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; (j) Existing Indebtedness and other Indebtedness outstanding on the Issue Date (after giving effect to the Merger); (k) Indebtedness arising from guarantees of Indebtedness of the Company or any Subsidiary or other agreements of the Company or a Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Subsidiary, other than guarantees of Indebtedness incurred by any person acquiring all or any portion of such bonuses, assets or Subsidiary for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and its Subsidiaries in connection with such disposition; (l) obligations in respect of performance bonds and completion guarantees provided by the Company or any Subsidiary in the ordinary course of business; and (m) additional Indebtedness of the Company and the Subsidiary Guarantors in an amount not to exceed $200 million at any time outstanding. "Permitted Investment" by any person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale made pursuant to the provisions of the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above or any other disposition of assets not constituting an Asset Sale by reason of the $500,000 threshold contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with the provisions of the covenant described under "-- Certain Covenants -- Limitation on Transactions with Affiliates," (vi) Investments by Subsidiary Guarantors in other Subsidiary Guarantors and Investments by Subsidiaries which are not Subsidiary Guarantors in other Subsidiaries which are not Subsidiary Guarantors and (vii) additional Investments in an aggregate amount not exceeding $15 million. "Permitted Liens" means (i) Liens for taxes, assessments and governmental charges or claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business, deposits made to obtain the release of such Liens, and with respect to amounts not yet delinquent for a period of more than 60 days or being contested in good faith by an appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) Liens incurred or pledges or deposits made in the ordinary course of business to secure obligations under workers' compensation, unemployment insurance and other types of social security or similar legislation; (iv) Liens incurred or 131 141 deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Subsidiaries incurred in the ordinary course of business; (vi) Liens upon specific items of inventory or other goods and proceeds of any person securing such person's obligations in respect of bankers' acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods in the ordinary course of business; (vii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to a Default or Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any Subsidiary; (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business that are within the general parameters customary in the industry, in each case securing Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any Subsidiary from fluctuations in the price of commodities; (xii) Liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or its Subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any Subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capitalized or operating other than any such interest or title resulting from or arising out of a default by the Company or any Subsidiary of its obligations under such lease; (xv) Liens arising from filing UCC financing statements for precautionary purposes in connection with true leases of personal property that are otherwise permitted under the applicable Indenture and under which the Company or any Subsidiary is lessee; (xvi) in the case of the New Senior Subordinated Note Indenture, Liens on assets of the Company securing Indebtedness which would constitute Senior Indebtedness but for the provisions of clause (c) in the third sentence of the definition of Senior Indebtedness and Liens on assets of a Subsidiary Guarantor securing Indebtedness which would constitute Guarantor Senior Indebtedness but for the provisions of clause (c) in the third sentence of the definition of Guarantor Senior Indebtedness; and (xvii) additional Liens securing Indebtedness at any one time outstanding not exceeding the sum of (i) $25 million and (ii) 10% of the aggregate Consolidated Net Income of the Company earned subsequent to the Issue Date and on or prior to such time. "Permitted Payments" means (i) any payment by the Company or any Subsidiary, or any dividend by the Company or any Subsidiary to New Holdings the proceeds of which are utilized by New Holdings to make payments, to The Yucaipa Companies or the principals or any Affiliates thereof for consulting, management, investment banking or similar services, or for reimbursement of losses, costs and expenses pursuant to the Consulting Agreement, (ii) any payment by the Company or any Subsidiary pursuant to the Amended and Restated Tax Sharing Agreement, dated as of June 17, 1991, between Food 4 Less and certain Subsidiaries, as such Tax Sharing Agreement may be amended from time to time, so long as the payment thereunder by the Company and its Subsidiaries shall not exceed the amount of taxes the Company would be required to pay if it were the filing person for all applicable taxes, (iii) any payment by the Company or any Subsidiary pursuant to the Transfer and Assumption Agreement, dated as of June 23, 1989, between Food 4 Less and Holdings, as in effect on the Issue Date, (iv) any payment by the Company or any Subsidiary, or any dividend by the Company or any Subsidiary to New Holdings the proceeds of which are used by New Holdings to make payments, (a) in connection with repurchases of outstanding shares of the Company's or New Holdings Common Stock following the death, disability or termination of employment of management stockholders, and (b) of amounts required to be paid by New Holdings, the Company or any of its Subsidiaries to participants or former participants in employee benefit plans upon termination of employment by such 132 142 participants, as provided in the documents related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period), (v) from and after June 30, 1998, payments of cash dividends or loans to New Holdings in an amount sufficient to enable New Holdings to make payments of interest required to be made in respect of the Discount Notes in an amount not to exceed the amount payable thereunder in accordance with the terms thereof in effect on the Issue Date, (vi) from and after June 1, 2000, payments of cash dividends to New Holdings in an amount sufficient to enable New Holdings to make payments of interest required to be made in respect of the Seller Debentures and the New Discount Debentures in an amount not to exceed the amount payable thereunder in accordance with the terms thereof in effect on the Issue Date, (vii) dividends or other payments to New Holdings sufficient to enable New Holdings to perform accounting, legal, corporate reporting and administrative functions in the ordinary course of business or to pay required fees and expenses in connection with the Merger, the FFL Merger, the Reincorporation Merger and the registration under applicable laws and regulations of its debt or equity securities, (viii) dividends or other distributions by the Company to New Holdings on the Issue Date of shares of New Holdings common stock owned by the Company, (ix) dividends by the Company to New Holdings of the Net Cash Proceeds of an Asset Sale to the extent that (a) neither the Company nor any of the Subsidiaries is required, or may be required, pursuant to the documents governing any outstanding Indebtedness of the Company or any of the Subsidiaries to utilize such Net Cash Proceeds to repay (or offer to repay) such Indebtedness (or has complied with all such requirements), (b) such Net Cash Proceeds have not been utilized to repay outstanding Indebtedness of the Company or any of the Subsidiaries and (c) New Holdings is required pursuant to the documents governing any outstanding Indebtedness of New Holdings to utilize such Net Cash Proceeds to repay (or offer to repay) such Indebtedness, (x) in the case of the New Senior Note Indenture, (A) the exchange by the Company of Old RGC Notes for New RGC Notes, or the purchase for cash of up to $224.5 million aggregate principal amount of Old RGC Notes, in each case, in accordance with the terms of the RGC Offers, (B) the exchange by the Company of Old F4L Senior Subordinated Notes for New F4L Senior Subordinated Notes in accordance with the terms of the Exchange Offers and (C) the repurchase by the Company of up to $224.5 million aggregate principal amount of Old RGC Notes, at a repurchase price of 101% of the principal amount thereof plus accrued interest to the repurchase date, pursuant to the "change of control purchase offer" provisions set forth in section 1014 of the Old RGC Indentures as in effect on the Issue Date, and (xi) the loan by the Company on the Issue Date to RGC Investment Co. of not more than $5 million. "Permitted Subordinated Reorganization Securities" means securities of the Company issued in a plan of reorganization in a case under the Bankruptcy Law relating to the Company which constitutes either (y) Capital Stock (other than Disqualified Capital Stock with the reference to "Maturity Date" in the definition of such term modified to relate to the final stated maturity of any debt securities issued in such plan of reorganization to the holders of Designated Senior Indebtedness ("Senior Reorganization Securities")) and (z) debt securities of the Company which are (i) unsecured, (ii) have no scheduled mandatory amortization thereon prior to the final stated maturity of the Senior Reorganization Securities and (iii) are subordinated in right of payment to the Senior Reorganization Securities to at least the same extent as the Securities are subordinated to Designated Senior Indebtedness. "Permitted Transferees" means, with respect to any person, (i) any Affiliate of such person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person and (v) any investment fund or investment entity that is a subsidiary of such person or a Permitted Transferee of such person. "Plan of Liquidation" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or 133 143 substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "Preferred Stock" means, with respect to any person, Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such person, over shares of Capital Stock of any other class of such person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of the New Indentures, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Company's chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Public Equity Offering" means an underwritten public offering of Common Stock of the Company or New Holdings pursuant to a registration statement filed with the Commission in accordance with the Securities Act which public equity offering results in gross proceeds to the Company or New Holdings, as the case may be, of not less than $20 million; provided, however, that in the case of a Public Equity Offering by New Holdings, New Holdings contributes to the capital of the Company net cash proceeds in an amount sufficient to redeem New Notes called for redemption in accordance with the terms thereof. "Qualified Capital Stock" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. "Refinancing Indebtedness" means, with respect to any person, Indebtedness of such person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (c), (d), (h) and (j) of the definition thereof) incurred in accordance with the applicable New Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date of the applicable New F4L Notes and (y) shall contain subordination and default provisions no less favorable in any material respect to holders of the applicable New F4L Notes than those contained in such repaid or amended Subordinated Indebtedness. "Reincorporation Merger" means the merger, prior to the Merger, of Holdings with and into New Holdings. "Related Business Investment" means (i) any Investment by a person in any other person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by the Company or any of its Subsidiaries as of the Issue Date; (ii) any Investment by such person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of the Company and its Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment, in each case reasonably related to the business of the Company and its Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change. 134 144 "Restricted Debt Prepayment" means any purchase, redemption, defeasance (including, but not limited to, in substance or legal defeasance) or other acquisition or retirement for value, directly or indirectly, by the Company or a Subsidiary, prior to the scheduled maturity or prior to any scheduled repayment of principal or sinking fund payment, as the case may be, in respect of Subordinated Indebtedness. "Restricted Payment" means any (i) Stock Payment, (ii) Investment (other than a Permitted Investment) or (iii) Restricted Debt Prepayment. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Seller Debentures" means the 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 of New Holdings issued pursuant to the Seller Debenture Indenture, including any additional 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 issued as interest thereof, in each case, as such Seller Debentures may be modified or amended from time to time and future refinancings thereof. "Seller Debenture Indenture" means the indenture dated as of the Issue Date under which the 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 of New Holdings were issued, as the same may be modified and amended from time to time and refinancings thereof. "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Senior Subordinated Notes. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include (x) the principal of, premium, if any, and interest on all obligations of every nature of the Company from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, all fees and expenses payable under the Credit Agreement, and (y) interest accruing thereon subsequent to the occurrence of any Event of Default specified in clause (vi) or (vii) under "-- Events of Default" relating to the Company, whether or not the claim for such interest is allowed under any applicable Bankruptcy Law. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a) Indebtedness evidenced by the New F4L Senior Subordinated Notes, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of the Company, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company, (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by the Company for compensation to employees or for services rendered to the Company, (g) any liability for federal, state, local or other taxes owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the Company, and (i) that portion of any Indebtedness which is incurred by the Company in violation of the New Senior Subordinated Note Indenture. "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. "Significant Subsidiary" means each subsidiary of the Company that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act of 1933, as amended, and the Exchange Act (as such regulation is in effect on the Issue Date) or (b) material to the financial condition or results of operations of the Company and its Subsidiaries taken as a whole. "Stock Payment" means, with respect to any person, (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in the case of the Company, dividends payable solely in Qualified Capital Stock of the Company), or the making by such person or any of its subsidiaries of any other distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by 135 145 such person or any of its subsidiaries, directly or indirectly, of such person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified Capital Stock of the Company) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), other than, in the case of the Company, through the issuance in exchange therefor solely of Qualified Capital Stock of the Company; provided, however, that in the case of a Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by the Company or a wholly-owned Subsidiary. "Subordinated Indebtedness" means, with respect to the Company or any Subsidiary Guarantor, (i) in the case of the New Senior Note Indenture, Indebtedness of such person which is subordinated in right of payment to the New F4L Senior Notes or the Senior Note Guarantee of such Subsidiary Guarantor, as the case may be, and (ii) in the case of the New Senior Subordinated Note Indenture, Indebtedness of such person which is subordinated in right of payment to the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be. "subsidiary" of any person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such person, by one or more subsidiaries of such person or by such person and one or more subsidiaries of such person or (ii) a partnership in which such person or a subsidiary of such person is, at the date of determination, a general partner of such partnership, but only if such person or its subsidiary is entitled to receive more than fifty percent of the assets of such partnership upon its dissolution, or (iii) any other person (other than a corporation or a partnership) in which such person, a subsidiary of such person or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "Subsidiary" means any subsidiary of the Company. "Subsidiary Guarantor" means (i) each of Alpha Beta Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Cala Co., Cala Foods, Inc., Falley's Inc., Food 4 Less of California, Inc., Food 4 Less Merchandising, Inc., Food 4 Less GM, Inc., Food 4 Less of Southern California, Inc., (ii) upon consummation of the Merger, Crawford Stores, Inc., (iii) each of the Company's Subsidiaries which becomes a guarantor of the New F4L Notes in compliance with the provisions set forth under "-- Certain Covenants -- Guarantees of Certain Indebtedness," and (iv) each of the Company's Subsidiaries executing a supplemental indenture in which such Subsidiary agrees to be bound by the terms of a New Indenture. "Term Loans" means the term loan facility under the Credit Agreement and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings outstanding under such facility or under any prior refunding, replacement or refinancing thereof (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). "Yearly Period" means each fiscal year of the Company; provided that the first Yearly Period shall begin on the Issue Date and shall end on January 28, 1996. "The Yucaipa Companies" means The Yucaipa Companies, a California general partnership, or any successor thereto which is an affiliate of Ronald W. Burkle or his Permitted Transferees and which has been established for the sole purpose of changing the form of The Yucaipa Companies from that of a partnership to that of a limited liability company or any other form of entity which is not materially adverse to the rights of the Holders under the New Indentures. 136 146 MARKET PRICES OF THE OLD F4L NOTES In general, there has been limited trading of the Old F4L Notes and such trading has taken place primarily in the over-the-counter market. Prices and trading volumes of the Old F4L Notes in the over-the-counter market are not reported and can be difficult to monitor. Quotations for securities that are not widely traded, such as the Old F4L Notes, may differ from actual trading prices and should be viewed as approximations. Holders of Old F4L Notes are urged to contact their brokers with respect to current information regarding the Old F4L Notes that they hold. THE PROPOSED AMENDMENTS OLD F4L SENIOR NOTE INDENTURE The 10.45% Senior Notes due 2000 of Food 4 Less were issued under an indenture dated as of April 15, 1992 (the "Old F4L Senior Note Indenture") between Food 4 Less and Norwest Bank Minnesota, N.A., as trustee (the "Old F4L Senior Notes Trustee"). In connection with the consummation of the Merger, Food 4 Less is soliciting Consents from the holders of Old F4L Senior Notes to the Proposed Amendments and is making the Exchange Offers to (i) extend the maturities of the existing long-term debt securities of Food 4 Less and RGC by exchanging such securities for new longer-term securities and (ii) establish uniform covenants in the New F4L Notes and the New RGC Notes in order to simplify the capital structure of the Company. The primary purpose of the Proposed Amendments is to permit the Merger and to eliminate substantially all of the restrictive covenants in the Old F4L Senior Note Indenture. Upon receipt of the Requisite Consents, a supplemental indenture to the Old F4L Senior Note Indenture will be executed between Food 4 Less and the Old F4L Senior Notes Trustee (the "F4L Senior Note Supplemental Indenture"). Following the consummation of the Merger, the obligations of Food 4 Less under the Old F4L Senior Note Indenture and the F4L Senior Note Supplemental Indenture will be assumed by the Company. The Proposed Amendments would make the following changes to the Old F4L Senior Note Indenture: 1. Eliminate the covenant entitled "Maintenance of Net Worth". 2. Eliminate the covenant entitled "Limitation on Change of Control". 3. Eliminate the covenant entitled "Limitation on Restricted Payments". 4. Eliminate the covenant entitled "Limitation on Incurrences of Additional Indebtedness". 5. Eliminate the covenant entitled "Limitation on Liens". 6. Eliminate the covenant entitled "Limitation on Disposition of Assets". 7. Eliminate the covenant entitled "Limitation on Payment Restrictions Affecting Subsidiaries". 8. Eliminate the covenant entitled "Limitation on Transactions with Affiliates". 9. Eliminate the covenant entitled "Guarantees of Certain Indebtedness". 10. Amend the provisions regarding when Food 4 Less may merge, which limits the ability of Food 4 Less to consolidate or merge with or sell all or substantially all of its assets to, any other person or entity unless certain conditions are satisfied, to eliminate the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Food 4 Less or the surviving entity, as the case may be, has a Net Worth (as defined) or Operating Coverage Ratio (as defined) that meets the standards set forth therein. 11. The definitions relating solely to such eliminated covenants will be eliminated. The F4L Senior Note Supplemental Indenture will provide that the New Credit Facility constitutes a refinancing of the Loan Documents (as defined). 137 147 The remaining sections of the Old F4L Senior Note Indenture will not be changed by the Proposed Amendments. Copies of the Old F4L Senior Note Indenture and the form of the F4L Senior Note Supplemental Indenture are available from Food 4 Less upon request. For a description of the covenants being amended or eliminated, see "Comparison of Old F4L Senior Notes and New F4L Senior Notes" set forth in Appendix A hereto. OLD F4L SENIOR SUBORDINATED NOTE INDENTURE The 13.75% Senior Subordinated Notes due 2001 of Food 4 Less were issued under an indenture dated as of June 15, 1991 (the "Old F4L Senior Subordinated Note Indenture"), between Food 4 Less and United States Trust Company of New York, as trustee (the "Old F4L Senior Subordinated Notes Trustee"). In connection with the consummation of the Merger, Food 4 Less is soliciting Consents from the holders of Old F4L Senior Subordinated Notes to the Proposed Amendments and is making the Exchange Offers to (i) extend the maturities of the existing long-term debt securities of Food 4 Less and RGC by exchanging such securities for new longer-term securities and (ii) establish uniform covenants in the New F4L Notes and the New RGC Notes in order to simplify the capital structure of the Company. The primary purpose of the Proposed Amendments is to permit the Merger and to eliminate most of the restrictive covenants in the Old F4L Senior Subordinated Note Indenture. Upon receipt of the Requisite Consents, a supplemental indenture to the Old F4L Senior Subordinated Note Indenture will be executed between Food 4 Less and the Old F4L Senior Subordinated Notes Trustee (the "F4L Senior Subordinated Note Supplemental Indenture"). Following the consummation of the Merger, the obligations of Food 4 Less under the Old F4L Senior Subordinated Note Indenture and the F4L Senior Subordinated Note Supplemental Indenture will be assumed by the Company. The Proposed Amendments would make the following changes to the Old F4L Senior Subordinated Note Indenture: 1. Eliminate the covenant entitled "Maintenance of Net Worth." 2. Eliminate the covenant entitled "Limitation on Restricted Payments". 3. Eliminate the covenant entitled "Limitation on Incurrences of Additional Indebtedness". 4. Eliminate the covenant entitled "Limitation on Liens". 5. Eliminate the covenant entitled "Limitation on Disposition of Assets". 6. Eliminate the covenant entitled "Limitation on Payment Restrictions Affecting Subsidiaries". 7. Eliminate the covenant entitled "Limitation on Transactions with Affiliates". 8. Eliminate the covenant entitled "Limitation on Change of Control". 9. Eliminate the covenant entitled "Guarantees of Certain Indebtedness." 10. Amend the provisions regarding when Food 4 Less may merge, which limits the ability of Food 4 Less to consolidate or merge with or sell all or substantially all of its assets to any other person or entity unless certain conditions are satisfied, to eliminate the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Food 4 Less or the surviving entity, as the case may be, has a Net Worth (as defined) or Operating Coverage Ratio (as defined) that meets the standards set forth therein. 11. The definitions relating solely to such eliminated covenants will be eliminated. The F4L Senior Subordinated Note Supplemental Indenture will provide that the New Credit Facility constitutes a refinancing of the Loan Documents (as defined). The remaining sections of the Old F4L Senior Subordinated Note Indenture will not be changed by the Proposed Amendments. Copies of the Old F4L Senior Subordinated Note Indenture and the form of the F4L Senior Subordinated Note Supplemental Indenture are available from Food 4 Less upon request. For a description of the covenants being amended or eliminated, see "Comparison of Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes" set forth in Appendix B hereto. 138 148 THE RGC OFFERS AND THE PUBLIC OFFERINGS Concurrently with the Exchange Offers, Food 4 Less is (A) offering up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering, (B) offering up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering (which will be part of the same issue as the New F4L Senior Notes offered for exchange pursuant to the F4L Senior Note Exchange Offer), (C) offering to holders of the Old RGC Notes the opportunity to (i) exchange such Old RGC Notes for New RGC Notes (which will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering) plus $20.00 in cash for each $1,000 principal amount of Old RGC Notes accepted for exchange or (ii) to tender for purchase such Old RGC Notes for $1,010.00 cash per $1,000 principal amount of Old RGC Notes accepted for purchased and (D) soliciting consents from holders of the Old RGC Notes to certain amendments to the Old RGC Indentures. The consummation of the Public Offerings, the RGC Offers and the Exchange Offers will occur simultaneously. It is a condition to the consummation of the Exchange Offers that the Public Offerings and the RGC Offers be successfully consummated. See "-- The RGC Offers -- The New RGC Notes" for a description of the securities to be offered pursuant to the Subordinated Note Public Offering and to tendering holders of Old RGC Notes. THE RGC OFFERS The obligation of Food 4 Less to accept for exchange or purchase any validly tendered Old RGC Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) satisfaction of the RGC Minimum Exchange (i.e., at least a majority of the aggregate principal amount of the outstanding Old RGC Notes being validly tendered in exchange for New RGC Notes and not withdrawn pursuant to the RGC Offers prior to the date of expiration); (ii) the receipt of the requisite consents to certain amendments to the Old RGC Indentures (i.e., consents from Old RGC Noteholders representing at least a majority in aggregate principal amount of each issue of Old RGC Notes held by persons other than RGC and its affiliates) on or prior to the date of expiration; (iii) the satisfaction or waiver, in Food 4 Less's sole discretion, of all conditions precedent to the Merger; (iv) the prior or contemporaneous consummation of the Exchange Offers and the Solicitation hereunder, the Public Offerings, the Holdings Offer to Purchase and the New Discount Debenture Placement; and (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. The terms of the Old RGC 9% Indenture and the Old RGC 10 1/4% Indenture (collectively, the "Old RGC Indentures") are substantially identical. Noteholders participating in the RGC Offers will be required to consent to certain proposed amendments to the Old RGC Indentures. Such proposed amendments will modify certain terms of such indentures to permit the Merger and will eliminate substantially all the restrictive covenants in the Old RGC Indentures. The Old RGC Notes. The Old RGC 10 1/4% Notes were originally issued in July 1992, are currently outstanding in an aggregate principal amount of $300 million and will mature on July 15, 2002. The Old RGC 9% Notes were originally issued in March 1993, are currently outstanding in an aggregate principal amount of $150 million and will mature on April 1, 2003. Interest on the Old RGC 10 1/4% Notes accrues at a rate of 10 1/4% per annum and is payable semi-annually on each January 15 and July 15. Interest on the Old RGC 9% Notes accrues at a rate of 9% per annum and is payable semi-annually on each April 1 and October 1. The Old RGC 10 1/4% Notes are subject to redemption at any time on or after July 15, 1997, at the option of RGC, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning July 15 of the years indicated below:
REDEMPTION YEAR PRICE ---------------------------------------------------------- ---------- 1997...................................................... 105.0% 1998...................................................... 102.5% 1999 and thereafter....................................... 100.0%
in each case plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date). 139 149 The Old RGC 9% Notes are subject to redemption at any time on or after April 1, 2000, at the option of RGC, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple of $1,000 at 100% of the principal amount thereof plus accrued interest to the redemption date (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date.) Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the Exchange Offers, the Other Debt Financing Transactions, the New Equity Investment and the Bank Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline would constitute a Change of Control Triggering Event under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make the Change of Control Offer following the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. The Old RGC Indentures contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on incurrence of additional indebtedness; (ii) limitation on dividends and other restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens securing subordinated indebtedness; (v) limitation on other senior subordinated indebtedness; (vi) limitation on preferred stock of subsidiaries; (vii) limitation on dividend and other payment restrictions affecting subsidiaries; and (viii) limitation on mergers and sales of assets. Under the Old RGC Indentures, certain events constitute an event of default including: (i) the failure to make any principal and interest payment on the Old RGC Notes when due; (ii) the failure to comply with any other agreement contained in the Old RGC Indentures or the Old RGC Notes; (iii) a default under certain indebtedness; (iv) certain final judgments or orders for payments of money; and (v) certain events occurring under bankruptcy laws. Upon the consummation of the RGC Offers, supplemental indentures to each of the Old RGC 9% Indenture and the Old RGC 10 1/4% Indenture will become effective, reflecting the proposed amendments to the Old RGC 9% Indenture and the Old RGC 10 1/4% Indenture. Such supplemental indentures will eliminate substantially all of the restrictive covenants in the Old RGC Indentures, including covenants with respect to limitation on indebtedness, limitation on restricted payments, limitation on transactions with affiliates, limitation on liens securing subordinated indebtedness, restrictions on preferred stock of subsidiaries and limitation on dividends and other payment restrictions affecting subsidiaries. In addition, such supplemental indentures will modify the covenants which limit the ability of RGC to consolidate or merge with, or sell all or substantially all of its assets, to any other person or entity unless certain conditions are satisfied, by eliminating the subsections thereof which require that immediately after giving effect to such transaction on a pro forma basis RGC or the surviving entity, as the case may be, has a Consolidated Interest Coverage Ratio (as defined in the Old RGC Indentures) for its four most recently completed fiscal quarters of at least 1.8 to 1.0. The New RGC Notes. The New RGC Notes will be issued upon consummation of the RGC Offers to holders of Old RGC Notes who tender Old RGC Notes in exchange for New RGC Notes and will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering. The New RGC Notes will bear interest at a fixed rate per annum equal to the greater of (a) 11.00% and (b) the RGC Applicable Treasury Rate (as hereinafter defined) plus 400 basis points (4.00 percentage points); provided, however, that in no event will the New RGC Notes bear interest at a rate per annum that is less than the interest rate on the New RGC Notes offered pursuant to the Subordinated Note Public Offering. The "RGC Applicable Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the average life to stated maturity of the New RGC Notes; provided, that if the average life to stated maturity of the New RGC Notes is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the 140 150 Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of the year) from the weekly average yields of the United States Treasury securities for which such yields are given. Interest will be payable on the New RGC Notes on each June 1 and December 1, beginning December 1, 1995. The New RGC Notes will mature on June 1, 2005. On or after June 1, 2000, the New RGC Notes may be redeemed in whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on June 1 of the years set forth below:
REDEMPTION YEAR PRICE ---------------------------------------------------------- ---------- 2000...................................................... 104.125 % 2001...................................................... 102.750 % 2002...................................................... 101.375 % 2003 and thereafter....................................... 100.000 %
In the event that the interest rate on the New RGC Notes is greater than 11.00%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to June 1, 1998 the Company may, at its option, use the net cash proceeds from one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the New RGC Notes originally issued, at a redemption price equal to 111% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1995, 109.625% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 108.25% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New RGC Notes is greater than 11.00%, the above redemption prices will be correspondingly adjusted. In order to effect the foregoing redemption with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. The New RGC Note Indenture provides that if a Change of Control (as defined therein) occurs, each holder will have the right to require the Company to repurchase such holder's New RGC Notes pursuant to a Change of Control Offer (as defined therein) at 101% of the principal amount thereof plus accrued interest, if any, to the date of repurchase. The New RGC Note Indenture contains certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on dividends and other restricted payments; (ii) limitation on incurrences of additional indebtedness; (iii) limitation on liens; (iv) limitation on asset sales; (v) limitation on dividend and other payment restrictions affecting subsidiaries; (vi) limitation on transactions with affiliates; (vii) limitation on preferred stock of subsidiaries; (viii) limitation on mergers and certain other transactions; (ix) limitation on other senior subordinated indebtedness; and (x) limitation on guarantees of certain indebtedness. The aggregate principal amount of Old RGC Notes and New RGC Notes will be limited to $650 million at any one time outstanding. The covenants in the indenture governing the New RGC Notes will be substantially similar to the covenants in the New F4L Senior Subordinated Note Indenture. THE PUBLIC OFFERINGS Concurrently with the Exchange Offers, Food 4 Less is (i) offering up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and (ii) offering up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The New F4L Senior Notes offered pursuant to the Senior Note Public Offering will be part of the same issue as the New F4L Senior Notes offered for exchange pursuant to the F4L Senior Notes Exchange Offer and the New RGC Notes offered pursuant to the Subordinated Note Public Offering will be part of the same issue as the New RGC Notes offered for exchange pursuant to the RGC Offers. Food 4 Less does not expect to commence the Public Offerings until such time as the Minimum Exchange has been satisfied and Requisite Consents have 141 151 been received. The consummation of the Public Offerings, the Exchange Offers, the RGC Offers and the Holdings Offer to Purchase will occur simultaneously. It is a condition to the consummation of the Public Offerings, that the Exchange Offers and the RGC Offers be successfully consummated. Certain proceeds of the Public Offerings are expected to be used to fund the Change of Control Offer. See "The Merger and the Financing -- Sources and Uses." DESCRIPTION OF THE NEW CREDIT FACILITY In connection with the Merger, Food 4 Less will enter into the New Credit Facility with a syndicate of financial institutions for whom Bankers Trust will act as agent. All of Food 4 Less' obligations under the New Credit Facility will be assumed by the Company immediately following the Merger. Food 4 Less has accepted a commitment letter (the "Commitment Letter") from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. The following is a summary of the anticipated material terms and conditions of the New Credit Facility. This summary does not purport to be a complete description of the New Credit Facility and is subject to the detailed provisions of the loan agreement (the "Loan Agreement") and various related documents to be entered into in connection with the New Credit Facility. A draft copy of the Loan Agreement will be available upon request from Food 4 Less. GENERAL The New Credit Facility will provide for (i) term loans in the aggregate amount of $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan; and (ii) the $325 million New Revolving Facility under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount of up to $150 million may be issued, under which approximately $92.6 million of letters of credit are expected to be issued upon the closing of the Merger. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date in an amount not to exceed $225 million will be available for a period of 91 days following the Closing Date to finance the Change of Control Offer. In addition, if the total principal amount of the Old RGC Notes exchanged for New RGC Notes exceeds $225 million the Commitment Letter requires that there be a reduction, in an amount equal to such excess, in one or any combination of (i) the principal amount of proceeds from the Senior Note Public Offering, (ii) the principal amount of proceeds from the Subordinated Note Public Offering or (iii) the principal amount available under the Tranche A Loan. Proceeds of the New Term Loans and loans under the Revolving Credit Facility on the Closing Date, together with proceeds from the New Discount Debenture Placement, the New Equity Investment and the Public Offering will be used to fund the cash requirements for the acquisition of RSI, refinance existing bank indebtedness of Ralphs and Food 4 Less, purchase the Discount Notes, Old RGC 9% Notes and Old RGC 10 1/4% Notes, repay a portion of other indebtedness, pay holders of the Ralphs EARs and pay various fees, expenses and other costs associated with the Merger and the Financing. The New Revolving Facility will be available to provide for the working capital requirements and general corporate purposes of the Company and to issue commercial and standby letters of credit to support workers' compensation contingencies and for other corporate purposes. INTEREST RATE; FEES Borrowings under (i) the New Revolving Facility and the Tranche A Loan will bear interest at a rate equal to the Base Rate (as defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loan will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loan will bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loan will bear interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro-Dollar Rate plus 4.00% per annum, in each case as 142 152 selected by the Company. Applicable interest rates on Tranche A Loan and the New Revolving Facility and the fees payable under the New Revolving Facility on letters of credit, will be reduced by up to 0.50% per annum after the New Term Loans have been reduced by amounts to be agreed upon by the Company and Bankers Trust and if the Company meets certain financial tests. Up to $30 million of the New Revolving Facility will be available as a swingline facility and loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding sentence). After the occurrence of a default under the New Credit Facility, interest will accrue at the rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional 2.00% per annum. The Company will pay the issuing bank a fee of 0.25% on each standby letter of credit and each commercial letter of credit and will pay the lenders under the New Credit Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar Margin") for standby letters of credit and a fee equal to the Eurodollar Margin minus 1% for commercial letters of credit. Each of these fees will be calculated based on the amount available to be drawn under a letter of credit. In addition, the Company will pay a commitment fee of 0.50% per annum on the undrawn amount of the Tranche A Loans from the closing of the Merger until the drawing or termination thereof and on the unused portions of the New Revolving Facility and for purposes of calculating this fee, loans under the swingline facility shall not be deemed to be outstanding. The New Credit Facility will require the Company to enter into hedging agreements to limit its exposure to increases in interest rates for a period of not less than two years. The New Credit Facility may be prepaid in whole or in part without premium or penalty. AMORTIZATION; PREPAYMENTS The Tranche A Loan will mature six years after the closing of the Merger and will be subject to amortization, commencing in the fifteenth month after the closing of the Merger on a quarterly basis in aggregate annual amounts of $45 million in the second year, $75 million in the third year, $80 million in the fourth year, $85 million in the fifth year, and $90 million in the sixth year. The Tranche B Loan will mature seven years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first six years and $117.5 million in the seventh year. The Tranche C Loan will mature eight years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first seven years and $116.25 million in the eighth year. The Tranche D Loan will mature nine years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first eight years and $115 million in the ninth year. The New Revolving Facility will mature on the same date as the Tranche A Loan. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million or less for a period of not less than 30 consecutive days during each consecutive 12-month period. The Company will be required to make certain prepayments, subject to certain exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan Agreement) and with the proceeds from certain asset sales, issuances of debt and equity securities and any pension plan reversion. Such prepayments will be allocated pro rata between the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche D Loans pro rata. Mandatory prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such Loans and to the extent not accepted 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL New Holdings and all active subsidiaries of the Company (including the Subsidiary Guarantors) will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by substantially all personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company (with the exception of the stock of Bell Markets, Inc., which has been pledged to secure notes payable to the former owners thereof, so long and only so long as such stock is subject to the liens of such former owners). New Holdings' guarantee will be secured by a pledge of the stock of the Company. The Company's obligations will also be secured by first 143 153 priority liens on certain unencumbered real property fee interests of the Company and its subsidiaries and the Company and its subsidiaries will use their reasonable economic efforts to provide the lenders with a first priority lien on certain unencumbered leasehold interests of the Company and its subsidiaries. COVENANTS The obligation of the lenders under the New Credit Facility to advance funds is subject to the satisfaction of certain conditions customary in agreements of this type. In addition, the Company will be subject to certain customary affirmative and negative covenants contained in the New Credit Facility, including, without limitation, covenants that restrict, subject to specified exceptions, (i) the incurrence of additional indebtedness and other obligations, (ii) a merger or acquisition, (iii) asset sales, (iv) the granting of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in transactions with affiliates, or (vii) cash capital expenditures. Certain of these covenants may be more restrictive than those in favor of holders of the New F4L Notes as described herein and as set forth in the New F4L Indentures. In addition, the New Credit Facility will require that the Company maintain certain specified financial covenants, including a minimum fixed charge coverage, a minimum EBITDA, a maximum ratio of total debt to EBITDA and a minimum net worth. EVENTS OF DEFAULT The New Credit Facility also provides for customary events of default. The occurrence of any of such events of default could result in acceleration of the Company's obligations under the New Credit Facility and foreclosure on the collateral securing such obligations, which could have material adverse results to holders of the New F4L Notes. DESCRIPTION OF HOLDING COMPANY INDEBTEDNESS THE NEW DISCOUNT DEBENTURES The New Discount Debentures will be issued in the New Discount Debenture Placement upon consummation of the Merger. The New Discount Debentures will be issued in an aggregate principal amount of $193,295,080 at maturity and will mature on July 1, 2005. The New Discount Debentures will be senior unsecured obligations of New Holdings and will be senior in right of payment to all subordinated indebtedness of New Holdings, including the Seller Debentures. Until June 1, 2000, no interest will accrue on the New Discount Debentures, but the Accreted Value (as defined in the indenture governing the New Discount Debentures (the "New Debenture Indenture")) will accrete at a rate of 13 5/8% (representing the amortization of the original issue discount) from the date of original issuance until June 1, 2000, on a semi-annual bond equivalent basis using a 360 day year comprised of twelve 30-day months, such that the Accreted Value shall be equal to the full principal amount of the New Discount Debentures on June 1, 2000. The initial Accreted Value per $1,000 principal amount of New Discount Debentures will be $517.33 (representing the original purchase price). Beginning on June 1, 2000, cash interest on the New Discount Debentures will accrue at a rate of 13 5/8% per annum and will be payable semi-annually in arrears on each June 1 and December 1 of each year, commencing December 1, 2000, to the holders of record on the immediately preceding May 15 and November 15. On or after June 1, 2000, the New Discount Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, to the redemption date, if redeemed during the twelve-month period commencing on June 1 in the years set forth below:
YEAR REDEMPTION PRICE ------------------------------------------ ---------------- 2000...................................... 106.8125% 2001...................................... 105.1094% 2002...................................... 103.4063% 2003...................................... 101.7031% 2004 and thereafter....................... 100.0000%
144 154 Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the New Debenture Indenture) of New Holdings or the Company (or of FFL under certain circumstances) to redeem up to 35% of the New Discount Debentures at a redemption price equal to 110% of the Accreted Value thereof on the date of redemption. In the event of a Change of Control (as defined in the New Debenture Indenture), each holder has the right to require the repurchase of such holder's New Discount Debentures at a purchase price equal to 101% of the Accreted Value thereof on the Change of Control Payment Date (as defined in the New Debenture Indenture) (if such date is prior to June 1, 2000) or 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Change of Control Payment Date (if such date is on or after June 1, 2000). The New Debenture Indenture will contain covenants that, among other things, limit the ability of New Holdings to enter into certain mergers or consolidations or incur certain liens or of New Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the New Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase New Discount Debentures at a price equal to 100% of the Accreted Value thereof on the date of purchase, if such date is prior to June 1, 2000, or 100% of the principal amount thereof, plus accrued interest to the date of purchase, if such date is on or after June 1, 2000, with the proceeds of certain Asset Sales (as defined in the New Debenture Indenture). The New Debenture Indenture will contain certain customary events of defaults, which will include the failure to pay interest and principal, the failure to comply with certain covenants in the New Discount Debentures or the New Debenture Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. Pursuant to the terms of a registration rights agreement to be entered into by New Holdings, New Holdings will be obligated to file a shelf registration statement with the Commission with respect to the New Discount Debentures, to have such shelf registration statement declared effective prior to or at the closing of the Merger, to use its best efforts to cause such shelf registration statement to remain effective for up to three years, and to pay the expenses related thereto, including underwriting discounts and brokers' or dealers' commissions and markups (subject to certain limitations). If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. Under the registration rights agreement, the holder of the New Discount Debentures will be entitled to commence resales of the New Discount Debentures 60 days following closing of Merger. New Holdings and its subsidiaries will agree not to effect any public distribution of securities similar to the New Discount Debentures until the New Discount Debentures are resold by the partnership (or until the third anniversary of the Closing Date, if later). New Holdings believes that the holders of the New Discount Debentures actively would seek to dispose of its entire interest in the New Discount Debentures promptly upon expiration of the 60 day holdback period following closing of the Merger. THE SELLER DEBENTURES The Seller Debentures will be issued to the stockholders of RSI upon consummation of the Merger. The Seller Debentures will be issued in an aggregate principal amount of $131.5 million and will mature on June 1, 2007. The Seller Debentures will be general unsecured obligations of New Holdings and will be subordinated to the prior payment when due of all Senior Indebtedness (as defined in the indenture governing the Seller Debentures (the "Debenture Indenture")), including the New Discount Debentures and any Discount Notes that remain outstanding following consummation of the Merger. The Seller Debentures will bear interest at a rate equal to 13 5/8% per annum. Interest will accrue on the Seller Debentures beginning from the date of issuance or from the most recent date to which interest has been paid and will be payable semi-annually in arrears on each interest payment date. New Holdings will have the option, in its sole discretion, to issue additional securities ("Secondary Securities") in lieu of a cash payment of any or all of the interest due for the period prior to the interest payment date five years after the date of issuance of the Seller Debentures. 145 155 On or after June 1, 2000, the Seller Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period commencing on June 1 in the years set forth below:
REDEMPTION YEAR PRICE ------------------------------------------ ---------- 2000...................................... 106.8125% 2001...................................... 105.1094% 2002...................................... 103.4063% 2003...................................... 101.7031% 2004 and thereafter....................... 100.0000%
Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the Debenture Indenture) of New Holdings or Food 4 Less to redeem up to 35% of the Seller Debentures at a redemption price equal to 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption. In the event of a Change of Control (as defined in the Debenture Indenture), each holder has the right to require the repurchase of such holder's Seller Debentures at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Debenture Indenture will contain certain covenants that, among other things, limit the ability of New Holdings to enter into certain mergers or consolidations or incur certain liens or of New Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase Seller Debentures at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date with the proceeds of certain Asset Sales (as defined in the Debenture Indenture). The Debenture Indenture will contain certain customary events of default, which will include the failure to pay interest and principal, the failure to comply with certain covenants in the Seller Debentures or the Debenture Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. Pursuant to the terms of the Merger Agreement and a registration rights agreement to be executed concurrently with the closing of the Merger, New Holdings is obligated to file a shelf registration statement with the Commission with respect to the Seller Debentures, use its best efforts to cause such shelf registration statement to become effective and remain effective for up to three years, and pay the expenses related thereto. The effectiveness of such shelf registration statement is a condition to the consummation of the Merger. If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, Holdings will be obligated to pay certain liquidated damages. THE DISCOUNT NOTES Concurrently with the Exchange Offers and the RGC Offers, Holdings is (A) offering to holders of the Discount Notes to purchase such Discount Notes for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for every $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase and (B) soliciting consents from holders of the Discount Notes to certain amendments to the Discount Note Indenture. The obligation of Holdings to accept for exchange any validly tendered Discount Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) the receipt of the requisite consents to certain amendments to the Discount Note Indenture (i.e., consents from Discount Noteholders representing at least a majority in aggregate principal amount of Discount Notes held by persons other than Holdings and its affiliates) on or prior to the date of expiration, (ii) the satisfaction or waiver, in 146 156 Holdings' sole discretion, of all conditions precedent to the RSI Merger, (iii) the prior or contemporaneous successful completion of the Public Offerings, the Exchange Offers, the RGC Offers and the New Discount Debenture Placement, and (iv) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. The Discount Notes were issued in December 1992, are limited in aggregate principal amount (at maturity) to $103.6 million and will mature on December 15, 2004. The Discount Notes are unsecured general obligations of Holdings (and will become obligations of New Holdings by operation of the Reincorporation Merger). Cash interest does not accrue on the Discount Notes prior to December 15, 1997. Thereafter, cash interest on the Discount Notes will accrue at the rate of 15.25% per annum, and will be payable in cash semiannually in arrears on each June 15 and December 15, commencing on June 15, 1998. The Discount Notes were issued at a substantial discount from their principal amount and the purchase discount accretes at a rate of 15.25% per annum compounded semi-annually on each June 15 and December 15 through (but excluding) December 15, 1997. The Discount Notes are redeemable, at the option of Holdings, in whole at any time or in part from time to time, on or after December 15, 1997 at the following redemption prices (expressed as percentages of the accreted value) if redeemed during the twelve-month period commencing on December 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
YEAR REDEMPTION PRICE ------------------------------------- ---------------- 1997................................. 107.630% 1998................................. 106.100% 1999................................. 104.575% 2000................................. 103.050% 2001................................. 101.525% 2002 and thereafter.................. 100.000%
Notwithstanding the foregoing, prior to December 15, 1997, Holdings may use the net proceeds of an Initial Public Offering (as defined in the Discount Note Indenture) of Holdings or Food 4 Less to redeem up to 25% of the Discount Notes at redemption prices equal to the sum of (i) the applicable percentage of the accreted value plus (ii) the Proportionate Share (as defined in the Discount Note Indenture) of the Discount Notes, if any to the date of redemption if redeemed during the twelve-month period beginning December 15 of the year set forth below:
YEAR REDEMPTION PRICE ------------------------------------- ---------------- 1992................................. 120.000% 1993................................. 117.525% 1994................................. 115.050% 1995................................. 112.575% 1996................................. 110.100%
In the event of a Change of Control (as defined in the Discount Note Indenture), each holder has the right to require the repurchase of such holder's Discount Notes at a purchase price equal to 101% of the accreted value, plus either, (i) if the date of the purchase is prior to December 15, 1997, the Proportionate Share, if any, with respect to the Discount Notes to the date of purchase and (ii) if the date of the purchase is on or after December 15, 1997, the aggregate principal amount thereof plus accrued interest, if any, to the date of purchase. Holdings will make a mandatory sinking fund payment on December 15, 2003, sufficient to retire 50% of the Discount Notes, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date. Holdings may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Discount Notes previously acquired or redeemed by Holdings and surrendered to the trustee under the Discount Note Indenture for cancellation and which were not previously used as a credit against any other required payment pursuant to the Discount Note Indenture. 147 157 New Holdings intends to credit Discount Notes purchased pursuant to the Holdings Offer to Purchase against its sinking fund obligations. The Discount Note Indenture contains certain covenants that, among other things, limit the ability of Holdings to enter into certain mergers or consolidations or incur certain liens or of Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, Holdings will be required to make an offer to purchase Discount Notes at a price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date, with the proceeds of certain Asset Sales (as defined in the Debenture Indenture). The Discount Note Indenture contains certain customary events of default, including the failure to pay interest and principal, the failure to comply with certain covenants in the Discount Notes or the Discount Note Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. In connection with the Holdings Offer to Purchase, Holdings is soliciting consents to delete all of the restrictive covenants from the Discount Note Indenture. Following the Reincorporation Merger, New Holdings and the trustee under the Discount Note Indenture will execute a supplemental indenture assuming the obligations of Holdings thereunder. New Holdings and the trustee under the Discount Note Indenture will then execute a second supplemental indenture implementing such proposed amendments to the Discount Note Indenture after certification to such trustee that Holdings has received consents from at least a majority in aggregate principal amount of such notes. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS Latham & Watkins, counsel to Food 4 Less ("Counsel"), has advised Food 4 Less that the following discussion expresses their opinion as to the material federal income tax consequences expected to result from the Exchange Offers and the Solicitation. Such opinion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations, judicial authority and current administrative rulings and pronouncements of the Internal Revenue Service (the "Service"), any of which may be altered with retroactive effect, thereby changing the federal income tax consequences discussed below. There can be no assurance that the Service will not take a contrary view, and no ruling from the Service has been or will be sought. The tax treatment of a holder of Old F4L Notes or New F4L Notes may vary depending upon such holder's particular situation. Certain holders (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. This discussion is limited to those holders who have held the Old F4L Notes as "capital assets" and who will hold the New F4L Notes as "capital assets" (generally, property held for investment) within the meaning of Section 1221 of the Code. EACH HOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING, HOLDING AND DISPOSING OF OLD F4L NOTES AND NEW F4L NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS. EXCHANGES OF OLD F4L NOTES FOR NEW F4L NOTES AND EXCHANGE PAYMENTS GENERAL Whether the exchange of Old F4L Notes for New F4L Notes and Exchange Payments will be a recapitalization under the Code will depend in part upon whether the Old F4L Notes and New F4L Notes are considered to be "securities" within the meaning of the provisions of the Code governing reorganizations. The test as to whether a debt instrument is a "security" involves an overall evaluation of the nature of the debt instrument, with the term of the debt instrument usually regarded as a significant factor. Generally, a debt 148 158 instrument with a term of ten years or more is considered to constitute a security for purposes of the reorganization provisions of the Code. Although the treatment of Old F4L Senior Notes and New F4L Senior Notes is not entirely certain because the stated term of such instruments may be less than ten years, the Old F4L Senior Notes and New F4L Senior Notes should, and the Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes will, be treated as "securities" for federal income tax purposes. As a result, an exchange of Old F4L Notes for New F4L Notes and Exchange Payments pursuant to the Exchange Offers should constitute a recapitalization for federal income tax purposes, and exchanging holders of Old F4L Notes who receive New F4L Notes and Exchange Payments should recognize gain, but not loss, equal to the lesser of (i) the amount of cash received (other than that portion, if any, attributable to accrued but unpaid interest on the Old F4L Notes) or (ii) the excess of the sum of the issue price of the New F4L Notes (or possibly their fair market value for cash method holders) and the amount of cash (other than that portion, if any, attributable to accrued but unpaid interest on the Old F4L Notes) received over the holders' adjusted tax basis in the Old F4L Notes surrendered therefor. Such gain will be long-term capital gain if the Old F4L Notes had been held for more than one year. A holder's initial tax basis in the New F4L Notes received will equal such holder's adjusted tax basis in the Old F4L Notes exchanged therefor, increased by any gain recognized as a result of the exchange and decreased by the amount of cash received. Because the law is unclear, however, Counsel is unable to opine on whether the Old F4L Senior Notes or New F4L Senior Notes will be treated as "securities" for federal income tax purposes. If either the Old F4L Senior Notes or New F4L Senior Notes were determined not to constitute "securities" for federal income tax purposes, holders exchanging Old F4L Senior Notes for New F4L Senior Notes and the Exchange Payment would recognize gain or loss equal to the difference between the sum of the issue price of the New F4L Senior Notes (or possibly their fair market value for cash method holders) and the amount of cash received (other than that portion, if any, attributable to accrued but unpaid interest on the Old F4L Senior Notes) and the holders' adjusted tax basis on the Old F4L Senior Notes surrendered therefor. Such gain or loss would generally be long-term capital gain or loss, provided the Old F4L Senior Notes had been held for more than one year. It should be noted that restrictions apply to the deduction of net capital losses. Noncorporate taxpayers may deduct no more than $3,000 of capital losses from ordinary income and corporations may deduct capital losses only from capital gains. ACCRUED INTEREST Under the terms of the Exchange Offers, accrued interest on tendered Old F4L Notes up to, but not including, the date on which such Old F4L Notes are accepted for exchange will be paid in cash promptly after consummation of the Exchange Offers. CONSEQUENCES TO HOLDERS OF OLD F4L NOTES NOT PARTICIPATING IN THE EXCHANGE OFFERS Although not free from doubt, holders of Old F4L Notes who do not participate in the Exchange Offers should not recognize any income, gain or loss for federal income tax purposes as a result of the Proposed Amendments. Because the law is unclear however, Counsel is unable to opine on whether holders of Old F4L Notes who do not participate in the Exchange Offers will recognize any such income, gain or loss. The Service could assert that, due to the adoption of the Proposed Amendments, such non-participating holders should be treated as having exchanged their Old F4L Notes for modified Old F4L Notes ("Modified Old F4L Notes"). The deemed exchange should, however, constitute a recapitalization and non-participating holders would not recognize any gain or loss as a result of such deemed exchange. Modified Old F4L Notes may be considered to be issued with original issue discount if the Old F4L Notes were treated as "traded on an established securities market" or, in certain circumstances, in the case of a "potentially-abusive situation." See "-- New F4L Notes -- Original Issue Discount." 149 159 NEW F4L NOTES STATED INTEREST Holders of New F4L Notes will be required to include stated interest in gross income in accordance with their methods of accounting for tax purposes. ORIGINAL ISSUE DISCOUNT General Original Issue Discount Rules. The amount of original issue discount, if any, on a debt instrument is the excess of its "stated redemption price at maturity" over its "issue price," subject to a statutorily-defined de minimis exception. The "issue price" of a debt instrument that is part of an issue of debt instruments a substantial amount of which is issued for money (such as the New F4L Senior Notes) will be equal to the first price at which a substantial amount of such debt instruments is sold for money. The "issue price" of a debt instrument that is not part of an issue of debt instruments a substantial amount of which is issued for money but is issued in exchange for another debt instrument (such as the New F4L Senior Subordinated Notes) depends on whether either debt instrument is treated as "traded on an established securities market." If neither is so traded, the issue price of the debt instrument received will be equal to its stated principal amount, assuming the debt instrument provides for "adequate stated interest" (i.e., interest at least at the applicable federal rate), and will be equal to its "imputed principal amount" (the sum of the present values of all payments due under the debt instrument, using a discount rate equal to the applicable federal rate) if either the debt instrument does not provide for "adequate stated interest" or in the case of a "potentially abusive situation" (including certain recent sales transactions). If the debt instrument received is "traded on an established securities market," then its issue price will be its trading price immediately following issuance. If the exchanged debt instrument is so traded (but the debt instrument received in exchange therefor is not), the issue price of the debt instrument received will generally be equal to the fair market value of the debt instrument exchanged therefor. The "stated redemption price at maturity" of a debt instrument is the sum of its principal amount plus all other payments required thereunder, other than payments of "qualified stated interest" (defined generally as stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate that appropriately takes into account the length of intervals between payments). In general, a holder of a debt instrument with original issue discount must include in gross income for federal income tax purposes the sum of the daily portions of original issue discount with respect to such debt instrument for each day during the taxable year or portion of a taxable year on which such holder holds the debt instrument. The daily portion is determined by allocating to each day of any accrual period (generally, a six month period or a shorter or longer period from the date of original issuance) a pro rata portion of an amount equal to the "adjusted issue price" of the debt instrument at the beginning of the accrual period multiplied by the yield to maturity of the debt instrument. The "adjusted issue price" is the issue price of the debt instrument increased by the accrued original issue discount for all prior accrual periods (and decreased by the amount of cash payments made in all prior accrual periods, other than qualified stated interest payments). The tax basis of the debt instrument in the hands of the holder will be increased by the amount of original issue discount, if any, on the debt instrument that is included in the holder's gross income and will be decreased by the amount of any cash payments (other than qualified stated interest payments) received with respect to the debt instrument, whether such payments are denominated as principal or interest. Sections 1272 and 1273 of the Code and the Treasury regulations thereunder provide detailed rules for computing original issue discount. Notwithstanding the original issue discount rules described in the preceding paragraphs, a holder of a debt instrument would not be required to include original issue discount in income if such holder's tax basis in the debt instrument were to exceed the debt instrument's stated principal amount. In addition, a holder would be permitted to offset any original issue discount income by an amount equal to the excess of such holder's tax basis (if less than or equal to the stated principal amount) over the adjusted issue price of the debt instrument. New F4L Senior Notes. Because the New F4L Senior Notes will be part of an issue a substantial amount of which will be sold in the Senior Note Public Offering for money, the issue price of the New F4L Senior 150 160 Notes received by holders in exchange for their Old F4L Senior Notes should be equal to the first price at which a substantial amount of the New F4L Senior Notes is sold pursuant to the Senior Note Public Offering. The stated redemption price at maturity of the New F4L Senior Notes will be equal to their stated principal amount (in that all interest will be paid on a current basis in cash). As a result, the New F4L Senior Notes will not be issued with original issue discount unless the first price at which the New F4L Senior Notes are sold pursuant to the Senior Note Public Offering is less than the stated principal amount of the New F4L Senior Notes by more than the de minimis amount. New F4L Senior Subordinated Notes. If neither the Old F4L Senior Subordinated Notes nor the New F4L Senior Subordinated Notes were treated as "traded on an established securities market," the issue price of the New F4L Senior Subordinated Notes would be equal to their stated principal amount (except in the case of a "potentially abusive situation," as discussed above) and, because the stated redemption price at maturity of the New F4L Senior Subordinated Notes would also be equal to their stated principal amount (in that all interest will be paid on a current basis in cash), the New F4L Senior Subordinated Notes would generally not be issued with original issue discount. If the New F4L Senior Subordinated Notes were considered to be "traded on an established securities market," their issue price would be their trading price immediately following their issuance. If the Old F4L Senior Subordinated Notes, but not the New F4L Senior Subordinated Notes, were considered to be so traded, then the issue price of the New F4L Senior Subordinated Notes received would be equal to the fair market value of the Old F4L Senior Subordinated Notes exchanged therefor. In either event, if such trading price or fair market value were less than the stated principal amount of the New F4L Senior Subordinated Notes by more than the de minimis amount, holders of New F4L Senior Subordinated Notes would be required to include original issue discount in income. MARKET DISCOUNT The Code generally requires holders of "market discount bonds" to treat as ordinary income any gain realized on the disposition (or gift) of such bonds to the extent of the market discount accrued during the holder's period of ownership. A "market discount bond" is a debt obligation purchased at a market discount subject to a statutory de minimis exception. For this purpose, a purchase at a market discount includes a purchase at or after the original issue at a price below the stated redemption price at maturity, or, in the case of a debt instrument issued with original issue discount, at a price below (a) its "issue price," plus (b) the amount of original issue discount includible in income by all prior holders of the debt instrument, minus (c) all cash payments (other than payments constituting qualified stated interest) received by such previous holders. The accrued market discount generally equals a ratable portion of the bond's market discount, based on the number of days the taxpayer has held the bond at the time of such disposition, as a percentage of the number of days from the date the taxpayer acquired the bond to its date of maturity. An exception is made for certain tax-free (and partially tax-free) exchanges, such as the exchange of Old F4L Notes for New F4L Notes and Exchange Payments. In such cases, however, on a subsequent disposition of the stock or securities received in such a non-recognition transaction, gain is treated as ordinary income to the extent of the market discount accrued prior to the nontaxable exchange. In that regard, the New F4L Notes received by a holder of Old F4L Notes will contain accrued market discount to the extent of the market discount accrued in the Old F4L Notes but not recognized at the time of the exchange. AMORTIZABLE BOND PREMIUM Generally, if the tax basis of an obligation held as a capital asset exceeds the amount payable at maturity of the obligation, such excess will constitute amortizable bond premium that the holder may elect to amortize under the constant interest rate method and deduct over the period from his acquisition date to the obligation's maturity date. A holder who elects to amortize bond premium must reduce his tax basis in the related obligation by the amount of the aggregate deductions allowable for amortizable bond premium. Amortizable bond premium will be treated under the Code as an offset to interest income on the related debt instrument for federal income tax purposes, subject to the promulgation of Treasury regulations altering such treatment. 151 161 DISPOSITION In general, a holder of New F4L Notes will recognize gain or loss upon the sale, exchange, redemption or other taxable disposition of such New F4L Notes measured by the difference between (i) the amount of cash and the fair market value of property received (except to the extent attributable to accrued interest on the New F4L Notes) and (ii) the holder's tax basis in the New F4L Notes (as increased by any original issue discount and market discount previously included in income by the holder and decreased by any amortizable bond premium, if any, deducted over the term of the New F4L Notes). Subject to the market discount rules discussed above, any such gain or loss will generally be long-term capital gain or loss, provided the New F4L Notes had been held for more than one year. ELECTION A holder of New F4L Notes, subject to certain limitations, may elect to include all interest and discount, if any, on the New F4L Notes in gross income under the constant yield method. For this purpose, interest includes stated and unstated interest, acquisition discount, original issue discount, de minimis market discount and market discount, as adjusted by any acquisition premium. Such election, if made in respect of a market discount bond, will constitute an election to include market discount in income currently on all market discount bonds acquired by such holder on or after the first day of the first taxable year to which the election applies. See "-- Market Discount." BACKUP WITHHOLDING A holder of New F4L Notes may be subject to backup withholding at the rate of 31% with respect to interest paid on and gross proceeds from a sale of the New F4L Notes unless (i) such holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A holder of New F4L Notes who does not provide the Company with his or her correct taxpayer identification number may be subject to penalties imposed by the Service. The Company will report to the holders of the New F4L Notes and the Service the amount of any "reportable payments" (including any interest paid on the New F4L Notes) and any amount withheld with respect to the New F4L Notes during the calendar year. TAX CONSEQUENCES TO THE COMPANY EXCHANGE OFFERS AND SOLICITATION In general, the consummation of the Exchange Offers and the Solicitation will result in no material federal income tax consequences to the Company, except that the Company will recognize cancellation of indebtedness income to the extent that the adjusted issue price of the Old F4L Notes surrendered by holders exceeds the sum of (i) the issue price of the New F4L Notes (as described above under "New F4L Notes -- Original Issue Discount") and (ii) the amount of the Exchange Payments delivered to holders in exchange therefor. The Company does not expect to recognize any cancellation of indebtedness income as a result of the consummation of the Exchange Offers and the Solicitation, although no assurance can be given in this regard due to the uncertainty regarding the issue price of the New F4L Notes (see "New F4L Notes -- Original Issue Discount"). NET OPERATING LOSS CARRYFORWARDS Under Section 382 of the Code, if a corporation with net operating losses (a "loss corporation") undergoes an "ownership change," the use of such net operating losses will be limited annually to the product of the long-term tax exempt rate (published monthly by the Service) and the value of the loss corporation's outstanding stock immediately before the ownership change (excluding certain capital contributions) (the "Section 382 Limitation"). In general, an "ownership change" occurs if the percentage of the value of the loss 152 162 corporation's stock owned by one or more direct or indirect "five percent shareholders" has increased by more than 50 percentage points over the lowest percentage of that value owned by such five percent shareholder or shareholders at any time during the applicable "testing period" (generally the shorter of (i) the three-year period preceding the testing date or (ii) the period of time since the most recent ownership change of the corporation). Both FFL and RSI have significant net operating loss carryforwards for regular federal income tax purposes. The New Equity Investment and Merger will trigger ownership changes for both the FFL and RSI affiliate groups for purposes of Section 382 of the Code. As a result, the use of the FFL and RSI pre- ownership change net operating loss carryforwards will be limited annually by the Section 382 Limitation. The annual Section 382 Limitation that will be applicable to the FFL net operating loss carryforwards is estimated to be approximately $15.6 million, and the annual Section 382 Limitation that will be applicable to the RSI net operating loss carryforwards is estimated to be approximately $15 million. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF OLD F4L NOTES AND NEW F4L NOTES IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF OLD F4L NOTES AND NEW F4L NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OFFERS AND THE SOLICITATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. LEGAL MATTERS The validity of the New F4L Senior Notes and the New F4L Senior Subordinated Notes to be issued in connection with the Exchange Offers and the Solicitation will be passed upon for Food 4 Less by Latham & Watkins, Los Angeles, California. Certain legal matters in connection with the Exchange Offers and the Solicitation will be passed upon for the Dealer Managers by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated balance sheets of Ralphs Supermarkets, Inc. as of January 30, 1994 and January 29, 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for the year ended January 31, 1993, the year ended January 30, 1994 and the year ended January 29, 1995, have been included in this Amended and Restated Prospectus and Solicitation Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated balance sheets and schedules of Food 4 Less Supermarkets, Inc. and subsidiaries as of June 26, 1993 and June 25, 1994, and the related consolidated statements of operations, cash flows and stockholders' equity of Food 4 Less Supermarkets, Inc. for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993 and the 52 weeks ended June 25, 1994, and the related financial statement schedules, included in this Amended and Restated Prospectus and Solicitation Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 153 163 INDEX TO FINANCIAL STATEMENTS
PAGE ----- RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY): Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-2 Consolidated balance sheets at January 30, 1994 and January 29, 1995 ................. F-3 Consolidated statements of operations for the years ended January 31, 1993, January 30, 1994 and January 29, 1995....................................................... F-4 Consolidated statements of cash flows for the years ended January 31, 1993, January 30, 1994 and January 29, 1995....................................................... F-5 Consolidated statements of stockholders' equity for the years ended January 31, 1993, January 30, 1994 and January 29, 1995............................................... F-6 Notes to consolidated financial statements............................................ F-7 FOOD 4 LESS SUPERMARKETS, INC.: Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-28 Consolidated balance sheets as of June 26, 1993, June 25, 1994 and January 7, 1995 (unaudited)......................................................................... F-29 Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and January 7, 1995 (unaudited)......................................................... F-31 Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and January 7, 1995 (unaudited)......................................................... F-32 Consolidated statements of stockholder's equity for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 7, 1995 (unaudited)......................................................................... F-34 Notes to consolidated financial statements............................................ F-35
F-1 164 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Ralphs Supermarkets, Inc.: We have audited the consolidated balance sheets of Ralphs Supermarkets, Inc. and subsidiary as of January 30, 1994 and January 29, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended January 31, 1993, the year ended January 30, 1994 and the year ended January 29, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ralphs Supermarkets, Inc. and subsidiary as of January 30, 1994 and January 29, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California March 9, 1995 F-2 165 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- Current Assets: Cash and cash equivalents......................................... $ 55,080 $ 35,125 Accounts receivable............................................... 30,420 43,597 Inventories....................................................... 202,354 221,388 Prepaid expenses and other current assets......................... 18,111 19,793 ---------- ---------- Total current assets...................................... 305,965 319,903 Property, plant and equipment, net................................ 601,897 624,724 Excess of cost over net assets acquired, net...................... 376,414 365,418 Beneficial lease rights, net...................................... 55,553 49,164 Deferred debt issuance costs, net................................. 26,583 23,011 Deferred income taxes............................................. 109,125 112,491 Other assets...................................................... 8,113 15,203 ---------- ---------- Total assets.............................................. $1,483,650 $1,509,914 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt.............................. $ 70,975 $ 83,989 Short-term debt................................................... -- 51,500 Bank overdrafts................................................... 37,716 45,669 Accounts payable.................................................. 138,554 130,889 Accrued expenses.................................................. 101,543 99,804 Current portion of self-insurance reserves........................ 30,138 27,552 ---------- ---------- Total current liabilities................................. 378,926 439,403 Long-term debt.................................................... 927,909 883,020 Self-insurance reserves........................................... 49,872 44,954 Lease valuation reserve........................................... 32,575 28,957 Other non-current liabilities..................................... 89,299 86,393 ---------- ---------- Total liabilities......................................... 1,478,581 1,482,727 ---------- ---------- Stockholders' equity: Common stock, $.01 par value per share Authorized 50,000,000 shares; issued and outstanding, 25,587,280 shares at January 30, 1994 and January 29, 1995.................................. 256 256 Additional paid-in capital........................................ 175,292 175,292 Accumulated deficit............................................... (170,479) (148,361) ---------- ---------- Total stockholders' equity................................ 5,069 27,187 ---------- ---------- Commitments and contingencies (See Notes 2 and 8) Total liabilities and stockholders' equity (deficit)...... $1,483,650 $1,509,914 ========== ==========
See accompanying notes to consolidated financial statements. F-3 166 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, 1993 JANUARY 30, 1994 JANUARY 29, 1995 ------------------ ------------------ ------------------ Sales............................ $2,843,816 100.0% $2,730,157 100.0% $2,724,604 100.0% Cost of sales.................... 2,217,197 78.0 2,093,727 76.7 2,101,033 77.1 ---------- ----- ---------- ----- ---------- ----- Gross profit................... 626,619 22.0 636,430 23.3 623,571 22.9 Selling, general and administrative expenses..... 470,012 16.5 471,000 17.2 467,022 17.2 Amortization of excess cost over net assets acquired.... 10,997 0.4 10,996 0.4 10,996 0.4 Provision for restructuring.... 7,100 0.2 2,374 0.1 -- -- ---------- ----- ---------- ----- ---------- ----- Operating income............... 138,510 4.9 152,060 5.6 145,553 5.3 Other expenses: Interest expense, net.......... 125,611 4.4 108,755 4.0 112,651 4.1 Loss on disposal of assets..... 2,607 0.1 1,940 0.1 784 0.0 Provision for legal settlement.................. 7,500 0.3 -- -- -- -- Provision for earthquake losses...................... -- -- 11,048 0.4 -- -- ---------- ----- ---------- ----- ---------- ----- Earnings before income taxes and extraordinary item............. 2,792 0.1 30,317 1.1 32,118 1.2 Income tax expense (benefit)..... 8,346 0.3 (108,049) (4.0) -- -- ---------- ----- ---------- ----- ---------- ----- Earnings (loss) before extraordinary item............. (5,554) (0.2) 138,366 5.1 32,118 1.2 Extraordinary item-debt refinancing, net of tax benefit $4,173......................... (70,538) (2.5) -- -- -- -- ---------- ----- ---------- ----- ---------- ----- Net earnings (loss).............. $ (76,092) (2.7)% $ 138,366 5.1% $ 32,118 1.2% ========= ===== ========= ===== ========= =====
See accompanying notes to consolidated financial statements. F-4 167 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- Cash flows from operating activities: Net earnings (loss)................................. $ (76,092) $ 138,366 $ 32,118 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................... 76,873 74,452 76,043 Amortization of discounts and deferred debt issuance costs................................. 20,978 9,768 9,032 LIFO charge (credit)............................. 1,115 (2,054) 2,085 Loss on sale of assets........................... 6,841 4,314 784 Provision for post-retirement benefits........... 3,275 3,370 2,555 Provision for legal settlement................... 7,500 -- -- Other changes in assets and liabilities: Accounts receivable................................. 6,376 326 (13,177) Inventories at replacement cost..................... (13,682) 6,724 (21,120) Prepaid expenses and other current assets........... 3,703 (1,658) (1,682) Other assets........................................ (616) 4,449 (7,287) Interest payable.................................... (13,393) (4,822) (2,419) Accounts payable and accrued liabilities............ 23,054 (1,622) (1,047) Income taxes payable................................ (527) (1,480) (2,906) Deferred tax asset.................................. -- (109,125) (3,366) Business interruption credit........................ -- (581) -- Earthquake losses................................... -- (11,048) -- Self insurance reserves............................. 8,456 7,031 (7,503) Other liabilities................................... (170) (12,407) (6,692) ----------- ----------- ----------- Cash provided by operating activities............... 53,691 104,003 55,418 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures................................ (102,697) (62,181) (64,018) Proceeds from sale of property, plant and equipment........................................ 219 16,700 13,257 ----------- ----------- ----------- Cash used in investing activities................... (102,478) (45,481) (50,761) ----------- ----------- ----------- Cash flows from financing activities: Net borrowings under lines of credit................ 2,100 (31,100) 51,500 Redemption of preferred stock....................... (3,000) -- -- Capitalized financing and acquisition costs......... (22,426) (5,108) (2,496) Increase (decrease) in bank overdrafts.............. (8,865) 655 7,952 Proceeds from issuance of long-term debt............ 668,269 150,000 -- Dividends paid...................................... -- -- (10,000) Principal payments on long-term debt................ (577,902) (164,081) (71,568) ----------- ----------- ----------- Cash provided by (used in) financing activities..... 58,176 (49,634) (24,612) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents......................................... 9,389 8,888 (19,955) Cash and cash equivalents at beginning of period...... 36,803 46,192 55,080 ----------- ----------- ----------- Cash and cash equivalents at end of period............ $ 46,192 $ 55,080 $ 35,125 ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 168 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
RALPHS RALPHS SUPERMARKETS, INC. GROCERY COMPANY -------------------- -------------------- ADDITIONAL OUTSTANDING COMMON OUTSTANDING COMMON PAID-IN- ACCUMULATED SHARES STOCK SHARES STOCK CAPITAL DEFICIT TOTAL ----------- ------ ----------- ------ ---------- ----------- --------- BALANCES AT FEBRUARY 2, 1992...................... -- $ -- 100 -- $ 175,548 $(232,753) $ (57,205) Capitalization of Ralphs Supermarkets, Inc. .... 25,587,280 256 (100) -- (256) -- -- Net Loss.................. -- -- -- -- -- (76,092) (76,092) ----------- ------ ----------- ------ ---------- ----------- --------- BALANCES AT JANUARY 31, 1993...................... 25,587,280 256 -- -- 175,292 (308,845) (133,297) Net earnings.............. -- -- -- -- -- 138,366 138,366 ----------- ------ ----------- ------ ---------- ----------- --------- BALANCES AT JANUARY 30, 1994...................... 25,587,280 256 -- -- 175,292 (170,479) 5,069 Net Earnings.............. -- -- -- -- -- 32,118 32,118 Dividends Paid............ -- -- -- -- -- (10,000) (10,000) ----------- ------ ----------- ------ ---------- ----------- --------- BALANCES AT JANUARY 29, 1995...................... 25,587,280 $256 -- $ -- $ 175,292 $(148,361) $ 27,187 ========= ====== ========= ====== ======== ========= =========
See accompanying notes to consolidated financial statements. F-6 169 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION At February 2, 1992, Ralphs Grocery Company was an indirect wholly owned subsidiary of Federated Stores, Inc. ("Federated"). Two wholly owned subsidiaries of Federated, Federated Holdings III, Inc. ("Holdings III") and Allied Stores Corporation ("Allied") directly owned the common stock of Ralphs Grocery Company approximately 84% and 16% respectively. In January 1990 Holdings III and Allied, and certain other subsidiaries of Federated, each filed petitions for relief under Chapter 11, Title 11 of the United States Code ("Chapter 11"). In March 1990, Federated filed a petition for relief under Chapter 11. Pursuant to the plans of reorganization for Federated and certain of its subsidiaries, Ralphs Supermarkets, Inc. was formed to hold the outstanding shares of common stock of Ralphs Grocery Company. On February 3, 1992, Holdings III and Allied contributed their shares of Ralphs Grocery Company to Ralphs Supermarkets, Inc. in exchange for the issuance by Ralphs Supermarkets, Inc. of Ralphs Supermarkets, Inc. shares in the same proportion in Ralphs Grocery Company shares were owned ("Internal Reorganization"). For financial reporting purposes, this transaction was recorded at predecessor cost. For Federal tax purposes, a new basis was established at Ralphs Supermarket, Inc. as more fully described in Note 11. Under the plans of reorganization for Federated, Holdings III and certain other subsidiaries of Federated (the "FSI Plan"), all Ralphs Supermarkets, Inc. shares of common stock held by Holdings III were to be distributed to certain creditors of Federated and Holdings III, including The Edward J. DeBartolo Corporation ("EJDC"), Bank of Montreal ("BMO"), Banque Paribas ("BP") and Camdev Properties Inc. ("Camdev"), and Federated. The FSI Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated on February 3, 1992. Under the plan of reorganization of Allied and certain affiliates including Federated Department Stores, Inc. (the "Allied-Federated Plan"), a portion of Allied's Holding Company shares were to be distributed to BMO and BP. The Allied-Federated Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated shortly after the FSI Plan. Thus, following consummation of both the FSI Plan and the Allied-Federated Plan and the transfer on July 19, 1993 of the shares of common stock in Ralphs Supermarkets, Inc. held by Federated Stores, Inc. to Camdev, the approximate ownership of Ralphs Supermarkets, Inc. is as follows:
APPROXIMATE PERCENT OWNERSHIP OF RALPHS SUPERMARKETS, INC. COMMON STOCK AS OF JULY 19, 1993 ---------------------------- EJDC................................................ 60.4% BMO................................................. 10.1% BP.................................................. 10.1% Camdev.............................................. 12.8% Federated Department Stores, Inc. (as successor by merger to Allied)................................. 6.6%
Pursuant to certain agreements entered into contemporaneously with the effectiveness of the FSI Plan and the Allied-Federated Plan, certain income tax liabilities of Ralphs Grocery Company, Federated, Allied, Federated Department Stores, Inc. and other affiliates have been settled with the Internal Revenue Service. In addition, Ralphs Grocery Company and certain affiliates including Federated Department Stores, Inc., Allied and Federated (the "Affiliated Group") entered into an agreement (the "Tax Indemnity Agreement") pursuant to which Federated Department Stores, Inc. agreed to pay certain tax liabilities, if any, relating to Ralphs Grocery Company being a member of the Affiliated Group. The Tax Indemnity Agreement provides a formula to determine the amount of additional tax liabilities through February 3, 1992 that Ralphs Grocery F-7 170 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company would be obligated to pay the Affiliated Group. However, such additional liability, if any, is limited to $10 million subject to certain adjustments. Under the Tax Indemnity agreement, both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to pay Federated Department Stores, Inc. $1 million annually for each of five years starting on February 3, 1992, and an additional $5 million on February 3, 1997. These total payments of $10 million have been recorded in the consolidated financial statements at February 2, 1992. The five $1 million installments are to be paid by Ralphs Grocery Company and the $5 million is the joint obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company. Also, in the event Federated Department Stores, Inc. is required to pay certain tax liabilities on behalf of Ralphs Grocery Company, both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to reimburse Federated Department Stores, Inc. up to an additional $10 million, subject to certain adjustments. This additional obligation is the joint and several obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company. The $5 million payment and the potential $10 million payment may be paid, at the option of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company, in cash or newly issued Ralphs Supermarkets, Inc. Common Stock. In connection with the consummation of the FSI Plan and the Allied-Federated Plan, Ralphs Grocery Company and certain parties entered into an agreement (the "Comprehensive Settlement Agreement") pursuant to which the parties thereto, among other things, agreed to deliver releases to the various parties to the Comprehensive Settlement Agreement as well as certain additional parties. Under the Comprehensive Settlement Agreement, Ralphs Grocery Company received general releases from Allied, Federated, Federated Department Stores, Inc. and certain other affiliates which released it from any and all claims which could have been asserted by the parties thereto prior to the effective dates of FSI Plan and the Allied-Federated Plan other than for claims arising under the Comprehensive Settlement Agreement, the FSI Plan, the Allied-Federated Plan and the Tax Indemnity Agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These consolidated financial statements present the statements of financial position of Ralphs Supermarkets, Inc. and subsidiary as of January 31, 1993, January 30, 1994 and January 29, 1995 and the results of their operations and their cash flows for the three years then ended. Ralphs Grocery Company is deemed to be the predecessor entity of Ralphs Supermarkets, Inc. For purposes of these consolidated financial statements Ralphs Supermarkets, Inc. and Ralphs Grocery Company will be collectively referred to as "Ralphs". (b) Reporting Period Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal year-ends are as follows: January 31, 1993 (Fiscal 1992) January 30, 1994 (Fiscal 1993) January 29, 1995 (Fiscal 1994) (c) Cash and Cash Equivalents For purposes of the statements of cash flows, Ralphs considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. F-8 171 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) Inventories Inventories are stated at the lower cost or market. Cost is determined primarily using the last-in, first-out (LIFO) method. The replacement cost of inventories exceeded the LIFO inventory cost by $15.5 million and $17.6 million at January 30, 1994 and January 29, 1995, respectively. (e) Property, Plant and Equipment Property, plant and equipment are stated at cost. Property and equipment held under capital leases are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of assets. Plant and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Useful lives range from 10 to 40 years for buildings and improvements and 3 to 20 years for fixtures and equipment. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Interest cost capitalized during fiscal 1992, 1993 and 1994 was $1.074 million, $.740 million and $.324 million, respectively. (f) Deferred Debt Issuance Costs Direct costs incurred as a result of financing transactions are capitalized and amortized over the terms of the applicable debt agreements using the effective interest method. (g) Pre-opening Costs Pre-opening costs of new stores are deferred and expensed at the time the store opens. If a new store is ultimately not opened, the costs are expensed directly to selling, general and administrative expense at the time it is determined that the store will not be opened. (h) Self Insurance Reserves Ralphs is self-insured for a portion of workers' compensation, general liability and automobile accident claims. Ralphs establishes reserve provisions based on an independent actuary's review of claims filed and an estimate of claims incurred but not yet filed. (i) Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired, resulting from the May 3, 1988 acquisition of Ralphs is being amortized using the straight-line method over 40 years. Ralphs assesses the recoverability of this intangible asset by determining whether the amortization of the asset balance over its remaining life can be recovered through projected undiscounted operating income (including interest, depreciation and all amortization expense except amortization of excess of cost over net assets acquired) over the remaining amortization period of the excess of cost over net assets acquired. The amount of excess of cost over net assets acquired impairment, if any, is measured based on projected discounted future results using a discount rate reflecting Ralphs' average cost of funds. Accumulated amortization aggregated $63.4 million and $74.4 million at January 30, 1994 and January 29, 1995, respectively. F-9 172 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (j) Acquired Leases Beneficial lease rights and lease valuation reserves are recorded as the net present value of the differences between contractual rents under existing lease agreements and fair value of entering such lease agreements as of the May 3, 1988 acquisition of Ralphs. All beneficial lease rights and lease valuation reserves arose solely as a result of the May 3, 1988 acquisition. Adjustments to the carrying value of these assets would typically occur only through additional business combinations or in the event of early lease termination. Beneficial lease rights are amortized using the straight-line method over the terms of the leases. Lease valuation reserves are amortized using the interest method over the terms of the leases. (k) Discounts and Promotional Allowances Promotional allowances and vendor discounts are recorded as a reduction of cost of sales in the accompanying statements of operations. Allowance proceeds received in advance are deferred and recognized over the period earned. (l) Income Taxes Through February 2, 1992, Ralphs operated under a tax-sharing agreement with Federated and was included in the consolidated Federal tax returns of Federated. Through January 28, 1990, Ralphs was included in the combined state tax returns of Federated; however, Ralphs filed separate state tax returns subsequent to January 28, 1990. Under the tax-sharing agreement, tax-sharing payments were made to Federated based on the amount that Ralphs would be liable for had Ralphs filed separate tax returns, taking into account applicable carryback and carryforward provision of the tax laws. Subsequent to February 2, 1992, Ralphs is responsible for filing tax returns with the Internal Revenue Service and state taxing authorities. Prior to February 3, 1992 Ralphs paid alternative minimum tax to Federated under its tax sharing agreement. As a result of the Internal Reorganization, Ralphs will not be entitled to offset its future Federal regular tax liability with the payments made to Federated. Effective for the fiscal year ended February 2, 1992, Ralphs adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." At the date of adoption such change had no impact on the consolidated financial results. (m) Reclassification Certain amounts in the accompanying financial statements have been reclassified to conform to the current year's presentation. (n) Consolidation Policy The consolidated financial statements include the accounts of Ralphs Supermarkets, Inc., and its wholly owned subsidiary, Ralphs Grocery Company, and its wholly owned subsidiary, collectively referred to as the Company. All material intercompany balances and transactions are eliminated in consolidation. (o) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (i) Cash and short-term investments The carrying amount approximates fair value because of the short maturity of those instruments. F-10 173 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ii) Long-term debt The fair value of Ralphs' long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Ralphs for debt of the same remaining maturities. (iii) Interest Rate Swap Agreements The fair value of interest rate swap agreements is the estimated amount that Ralphs would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit-worthiness of the swap counterparties. (p) Advertising The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense was $17.5 million, $16.4 million and $18.2 million in fiscal 1992, 1993 and 1994, respectively. (q) Transaction Costs In connection with the proposed merger, Ralphs has capitalized in other assets approximately $2.3 million of transaction costs, principally attorney and accounting fees. Upon completion of the merger these amounts will be reclassified to excess of cost of net assets acquired and amortized accordingly. (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Land................................................. $ 159,904 $ 161,725 Buildings and improvements........................... 191,179 199,133 Leasehold improvements............................... 161,341 170,430 Fixtures and equipment............................... 354,626 372,077 Capital leases....................................... 86,964 124,861 ----------- ----------- 954,014 1,028,226 Less: Accumulated depreciation....................... (312,746) (354,539) Less: Accumulated capital lease amortization......... (39,371) (48,963) ----------- ----------- Property, plant and equipment, net................... $ 601,897 $ 624,724 ========= =========
(4) ACCRUED EXPENSES Accrued expenses are summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Accrued wages, vacation and sick leave............... $ 34,763 $ 43,766 Taxes other than income tax.......................... 11,084 10,055 Interest............................................. 11,090 8,670 Other................................................ 44,606 37,313 ----------- ----------- $ 101,543 $ 99,804 ========= =========
F-11 174 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM DEBT Long-term debt is summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) First mortgage notes payable in monthly installments, commencing June 1, 1994 of $1.6 million including interest at an effective rate of 9.651%; interest only payable monthly prior to June 1, 1994. Final payment due June 1, 1999. Secured by land and buildings with a net book value of $188.8 million.......................... $ 178,013 $ 176,634 Notes payable in varying monthly installments including interest ranging from 11.5% to 18.96%. Final payment due through November 30, 1996. Secured by equipment with a net book value of $28.5 million.................................... 9,721 6,291 Capitalized lease obligations at interest rates ranging from 7.25% to 14% maturing at various dates through 2019 (note 6)...................... 61,150 89,084 Note payable to bank............................... 300,000 245,000 Initial Notes and Exchange Notes, 9% due 2003...... 150,000 150,000 Senior Subordinated Debentures, 10 1/4%, due 2002............................................. 300,000 300,000 ----------- ----------- Total long-term debt............................... 998,884 967,009 Less current maturities............................ (70,975) (83,989) ----------- ----------- Long-term debt..................................... $ 927,909 $ 883,020 ========= =========
During the third quarter of 1992, the Company implemented a recapitalization plan (the "Recapitalization Plan") which was completed during the first quarter of 1993 by the Company's offering of $150.0 million aggregate principal amount of its 9% Senior Subordinated notes due 2003 (the "Initial Notes") in private placement under the Securities Act of 1933, as amended (the "Securities Act"). The proceeds of the Initial Notes were used to (i) purchase for cancellation of $60.0 million aggregate principal amount of the Company's 14% Senior Subordinated Debentures due 2000 (the "14% Subordinated Debentures") from a noteholder who had made an unsolicited offer to sell such 14% Subordinated Debentures, (ii) defease the remaining $38.1 million aggregate principal amount of the 14% Subordinated Debentures, (iii) prepay $36.1 million of borrowings under the Company's $350.0 million 1992 term loan facility entered into as part of the Recapitalization Plan and (iv) pay fees and expenses associated with such transactions and for other purposes. As part of a registration rights agreement entered into with the initial purchasers of the Initial Notes, the Company agreed to offer to exchange up to $150.0 million aggregate principal amount of the Exchange Notes for all of the outstanding Initial Notes (the "Exchange Offer"). The terms of the Exchange Notes are substantially identical (including principal amount, interest rate and maturity) in all respects to the terms of the Initial Notes except that the Exchange Notes are freely transferable by the holders thereof (with certain exceptions) and are not subject to any covenant upon the Company regarding registration under the Securities Act. On June 24, 1993, the Company completed the Exchange Offer exchanging $149.7 million aggregate principal amount of Exchange Notes for Initial Notes ($.3 million of Initial Notes remain outstanding). The note payable to bank and working capital line, under the 1992 Credit Agreement, are secured by first priority liens on Ralphs' inventory and receivables, servicemarks and registered trademarks, equipment (other than equipment located at facilities subject to existing liens in favor of equipment financiers) and after-acquired real property interests and all existing real property interests (other than those that are subject to prior encumbrances) and bears interest at the rates, as selected by Ralphs as follows: (i) 1 3/4% over the prime F-12 175 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) rate, or (ii) 2 3/4% over the Eurodollar Rate. Interest calculated pursuant to (i) above is payable quarterly, otherwise interest is payable quarterly or at the selected borrowings option maturity. During the 52 weeks ended January 29, 1995, interest rates under these borrowings ranged from 5.9375% to 10.25%. Ralphs is required to pay an annual administrative fee of $300,000 pursuant to the 1992 Credit Agreement as well as a commitment fee of 0.5% on the average daily amounts available for borrowing under the $120.0 million working capital credit line. The 1992 Credit Agreement, which includes a $350.0 million term loan and $120.0 million working capital credit line, also supports up to $60.0 million of letters of credit which reduce the available borrowings on the credit line. The 1992 Credit Agreement is subject to quarterly principal payment requirements, which commenced on March 31, 1993, with payment in full on June 30, 1998. As of January 29, 1995, $52.4 million of letters of credit and $51.5 million in borrowings were outstanding, with $16.1 million available under the working capital credit line. In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three-year maturity. The interest rate cap agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million notional principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest based on LIBOR at the end of each six month calculation period and Ralphs will receive interest payments based on LIBOR at the beginning of each six month calculation period. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. The following details the impact of the hedging activity on the weighted average interest rate for each of the last three fiscal years.
WITH HEDGE WITHOUT HEDGE ---------- ------------- 1992........................................ 10.52% 10.22% 1993........................................ 8.96% 8.96% 1994........................................ 9.37% 9.18%
The Initial Notes and Exchange Notes are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the aforementioned senior debt. Interest at 9% is payable each April 1 and October 1 through April 1, 2003, when the notes mature. The 10 1/4% Senior Subordinated Debentures are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the senior debt. Interest at 10 1/4% is payable each January 15 and July 15 through July 15, 2002, when the debentures mature. The aforementioned debt agreements contain various restrictive covenants pertaining to net worth levels, limitations on additional indebtedness and capital expenditures, financial ratios and dividends. The 1992 Credit Agreement requires Ralphs to reduce its working capital credit line to zero for 30 consecutive days annually. The current annual period extends from July 1 to June 30. The Company has not yet complied with this annual covenant. The Company intends to either satisfy this covenant by June 30, 1995 or seek to obtain the necessary waiver from its lenders, if such event of non-compliance ultimately occurs but there is no assurance that such waiver will be granted, or, if granted, will be on terms acceptable to the Company. At January 29, 1995, Ralphs is in compliance with all its 1992 Credit Agreement restrictive covenants. The Company currently anticipates that it may be out of compliance with certain other maintenance covenants at the end of the second quarter of 1995. The Company intends to seek the necessary waivers from its lenders F-13 176 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) should these events of non-compliance ultimately occur, but there is no assurance that such waivers will be granted, or, if granted, will be on terms acceptable to the Company. The aggregate maturities on long-term debt for each of the five years subsequent to fiscal 1994 are as follows:
(DOLLARS IN THOUSANDS) ------------ 1995...................................................... $ 83,989 1996...................................................... 86,792 1997...................................................... 84,771 1998...................................................... 53,605 1999...................................................... 175,400 2000 and thereafter....................................... 482,452 ------------ $967,009 ========
The estimated fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s): Long-term debt............................................ $953,883 Interest rate swap agreement.............................. $ 1,252 Interest rate cap agreement............................... $ (366)
(6) LEASES Ralphs has leases for retail store facilities, warehouses and manufacturing plants for periods up to 30 years. Generally, the lease agreements include renewal options for five years each. Under most leases, Ralphs is responsible for property taxes, insurance, maintenance and expense related to the lease property. Certain store leases require excess rentals based on a percentage of sales at that location. Certain equipment is leased by Ralphs under agreements ranging from 3 to 15 years. The agreements usually do not include renewal option provisions. Minimum rental payments due under capital leases and operating leases subsequent to fiscal 1994 are as follows:
CAPITAL OPERATING LEASES LEASES TOTAL -------- -------- -------- (DOLLARS IN THOUSANDS) 1995............................................... $ 21,640 $ 61,324 $ 82,964 1996............................................... 19,093 60,847 79,940 1997............................................... 18,288 58,182 76,470 1998............................................... 15,901 53,321 69,222 1999............................................... 11,784 52,839 64,623 2000 and thereafter................................ 53,959 373,021 426,980 -------- -------- -------- Total minimum lease payments....................... $140,665 $659,534 $800,199 ======== ======== Less amounts representing interest................. (51,581) -------- Present value of net minimum lease payments........ 89,084 Less current portion of lease obligations.......... (13,151) -------- Long-term capital lease obligations................ $ 75,933 ========
F-14 177 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total rent expense is summarized as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Capital Leases Contingent rental............................. $ 2,443 $ 2,241 $ 2,256 Rentals from subleases........................ (2,144) (2,048) (1,734) Operating Leases Minimum rentals............................... 49,001 54,965 55,906 Contingent rentals............................ 5,058 3,645 3,763 Rentals from subleases........................ (1,123) (1,150) (1,791) ----------- ----------- ----------- $53,235 $57,653 $58,400 ======== ======== ========
(7) SELF-INSURANCE Ralphs is a qualified self-insurer in the State of California for worker's compensation and for automobile liability. For fiscal 1992, 1993 and 1994 self insurance loss provisions amounted to (in thousands) $25,950, $30,323 and $14,003, respectively. Ralphs discounts self-insurance liabilities using an 8% discount rate for all years presented. Management believes that this rate approximates the time value of money over the anticipated payout period (approximately 8 years) for essentially risk free investments. Based on a review of modifications in its workers compensation and general liability insurance programs, Ralphs adjusted its self-insurance costs during Fiscal 1994, resulting in a reduction in the loss provision in Fiscal 1994 of approximately $18.9 million. Ralphs' historical self-insurance liability for the previous two fiscal years is as follows:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY JANUARY 30, 29, 1994 1995 -------- -------- (DOLLARS IN THOUSANDS) Self-insurance liability..................................... $ 97,864 $ 87,830 Less: Discount............................................... (17,854) (15,324) -------- -------- Net self-insurance liability................................. $ 80,010 $ 72,506 ======== ========
The Company expects that cash payments for claims over the next five years will aggregate approximately $28 million in fiscal year 1995, $19 million in fiscal year 1996, $13 million in fiscal year 1997, $8 million in fiscal year 1998 and $7 million in fiscal year 1999. (8) COMMITMENTS AND CONTINGENCIES In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992, respectively. The Court has yet to certify any of these classes. A demurrer to the complaints was denied. Notwithstanding F-15 178 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that it believes there is no merit to these cases, Ralphs had reached an agreement in principle to settle them. However, no settlement agreement has been signed. The Company does not believe that the resolution of these cases will have a material adverse effect on its future financial condition. Any settlement would be subject to court approval. On March 25, 1991, George A. Koteen Associates, In. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that Ralphs breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of approximately $4.9 million in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an adverse ruling by the appellate courts. In April 1994, Ralphs was served with a complaint filed by over 240 former employees at Ralphs' bakery in the Atwater district of Los Angeles (the "Bakery Plaintiffs"). The action was commenced in the United States District Court for the Central District of California, and, among other claims, the Bakery Plaintiffs alleged that Ralphs breached its collective bargaining agreement and violated the Workers Adjustment Retraining Notification Act (the "WARN Act") when it downsized and subsequently closed the bakery. In their complaint, the Bakery Plaintiffs are seeking damages for lost wages and benefits as well as punitive damages. The Bakery Plaintiffs also named Ralphs and two of its management employees in fraud, conspiracy and emotional distress causes of action. In addition, the Bakery Plaintiffs sued their union local for breach of its duty of fair representation and other alleged misconduct, including fraud and conspiracy. The defendants have answered the complaint and discovery is ongoing. Trial is set for February, 1996, and Ralphs is vigorously defending this suit. Management believes, based on its assessment of the facts, that the resolution of this case will not have a material effect on the Company's financial position or results of operations. In addition, Ralphs is a defendant in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on Ralphs' financial position or results of operations. Environmental Matters In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigation by Ralphs. Ralphs has conducted the requested investigations and has reported the results to the Regional Board. Approximately 25 companies have entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate and design a remediation system for contaminated groundwater beneath an area which includes the Atwater property. Ralphs is not a party to the Consent Order, but is cooperating with requests of the subject companies to allow installation of monitoring or recovery wells on Ralphs' property. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial condition or results of operations. Ralphs has removed underground storage tanks and remediated soil contamination at the Atwater property. In some instances the removals and the contamination were associated with grocery business F-16 179 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations, in others they were associated with prior property users. Although the possibility of other contamination from prior operations or adjacent properties exists at the Atwater property, management does not believe that the costs of remediating such contamination will be material to the Company. Apart from the Atwater property, the Company has recently had environmental assessments performed on a significant portion of its facilities, including warehouse and distribution facilities. The Company believes that any responsive actions required at the examined properties as a result of such assessments will not have a material adverse effect on its financial condition or results of operations. Ralphs has incurred approximately $4.5 million in non-recurring capital expenditures for conversion of refrigerants during 1994. Other than these expenditures, Ralphs has not incurred material capital expenditures for environmental controls during the previous three years, nor does management anticipate incurring such expenditures during the current fiscal year or the succeeding fiscal year. Ralphs is subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. (9) REDEEMABLE PREFERRED STOCK Ralphs' non-voting preferred stock consisted of 10,000,000 shares of authorized $.01 par value preferred stock. At February 3, 1991 and February 2, 1992, 170,000 shares of Class A Preferred Stock and 130,000 shares of Class B Preferred Stock were issued and outstanding. All of the outstanding shares of preferred stock were redeemed by Ralphs during February 1992 at their initial issuance price of $3.0 million. (10) EQUITY APPRECIATION RIGHTS PLANS Effective August 26, 1988, Ralphs adopted an Equity Appreciation Plan ("1988 Plan"), whereby certain officers received equity rights representing, in aggregate, the right to receive 15% of the increase in the appraised value (as defined in the 1988 Plan) of the Ralphs' equity over an initial value of $120.0 million. The 1988 Plan was amended in January 1992 by agreement among Ralphs and the Equity Rights holders ("Amended Plan"). Ralphs accrued for the increase in equity appreciation rights over the contractually defined vesting period (fully accrued in fiscal 1991), based upon the maximum allowable contractual amount which approximated ending appraised value. Under the Amended Plan, all outstanding Equity Rights vested in full are no longer subject to forfeiture by the holders, except in the event a holder's employment is terminated for cause within the meaning of the Amended Plan. The appraised value of Ralphs' equity is to be determined as of May 1 each year by an investment banking company engaged for this purpose utilizing the methodology specified in the Amended Plan (which is unchanged from that specified in the 1988 Plan); however, under the Amended Plan the appraised value of Ralphs' equity for purposes of the plan may not be less than $400.0 million nor exceed $517.0 million. The amount of equity rights redeemable at any given time is defined in each holders' separate agreement. On exercise of an equity right, the holder will be entitled to receive a pro rata percentage of any such increase in appraised value. In addition, the Amended Plan provides for the possible additional further payment to the holder of each exercised Equity Right of an amount equal to the "Deferred Value" of such Equity Right as defined in the Amended Plan. Ralphs did not incur any expense under the Equity Appreciation Rights Plan in fiscal 1992, fiscal 1993 and fiscal 1994. F-17 180 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of Equity Rights redeemable for each of the four years subsequent to fiscal 1994 are as follows:
(DOLLARS IN THOUSANDS) 1995...................................................... $ 6,669 1996...................................................... 12,389 1997...................................................... 3,636 1998...................................................... 10,150 ----------- $32,844 ========
(11) INCOME TAXES Income tax expense (benefit) consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Current Federal...................................... $ 4,173 $ (2,424) $ 713 State........................................ -- 3,500 2,653 ----------- ----------- ----------- $ 4,173 $ 1,076 $ 3,366 ----------- ----------- ----------- Deferred Federal...................................... $ -- $ (109,125) $ (3,366) State........................................ -- -- -- ----------- ----------- ----------- $ -- $ (109,125) $ (3,366) ----------- ----------- ----------- Total income tax expense (benefit)........... $ 4,173 $ (108,049) $ -- ======== ========= =========
Income tax expense (benefit) has been classified in the accompanying statements of operations as follows:
1992 1993 1994 ------- --------- --------- Earnings before extraordinary items............. $ 8,346 $(108,049) $ -- Extraordinary item.............................. (4,173) -- -- ------- --------- --------- Net tax expense (benefit)....................... $ 4,173 $(108,049) $ -- ======= ========= =========
F-18 181 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between income tax expense and income taxes computed using the top marginal U.S. Federal income tax rate of 34% for fiscal 1992 and of 35% for fiscal 1993 and fiscal 1994 applied to earnings (loss) before income taxes (including, in fiscal 1992, the extraordinary loss of $74.8 million) were as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of expected expense (benefit) computed using the statutory Federal rate............... $ (24,450) $ 10,611 $ 11,241 Utilization of financial operating loss........ -- (10,611) (11,241) Amortization of excess cost over net assets acquired.................................... 3,356 -- -- State income taxes, net of Federal income tax benefit..................................... -- 3,500 2,653 Accounting limitation (recognition) of deferred tax benefit................................. 20,041 (109,125) (3,366) Alternative minimum tax........................ 4,173 625 -- Other, net..................................... 1,053 (3,049) 713 ----------- ----------- ----------- Total income tax expense (benefit)..... $ 4,173 $ (108,049) $ -- ========= ========= =========
Ralphs' deferred tax assets, recorded under SFAS 109, were comprised of the following:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Deductible intangible assets................................. $ 56,000 $ 43,000 Net operating loss carryforward and tax credit............... 40,125 55,000 Self insurance accrual....................................... 43,000 25,000 Software basis difference and amortization................... -- -- Fees collected in advance.................................... -- 2,600 Property, plant and equipment basis difference and depreciation............................................... 21,000 16,000 Equity appreciation rights................................... 16,000 11,000 Favorable lease basis differences............................ 16,000 16,000 State deferred taxes......................................... 17,000 19,000 Other........................................................ 40,000 51,103 ----------- ----------- 249,125 238,703 Less valuation allowance................................... (140,000) (126,212) ----------- ----------- Total.............................................. $ 109,125 $ 112,491 ========= =========
On October 15, 1992, Ralphs filed an election with the Internal Revenue Service under Section 338(h)(10). Under this Section, Ralphs is required to restate, for Federal tax purposes, its assets and liabilities to fair market value as of February 3, 1992. The effect of this transaction is to record a new Federal tax basis to reflect a change of control for Federal tax purposes resulting from the Internal Reorganization. No change of control for financial reporting purposes was affected. In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted. The Act increased the Federal income tax rate from 34 to 35 percent for filers whose taxable income exceeded $10.0 million. In the current year, the effect of the Federal income tax rate change was to increase the net F-19 182 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred tax assets. In addition, the Act also provided for the deductibility of certain intangibles, including costs in excess gross assets acquired. The Act has significantly impacted the aggregate deferred tax asset position of Ralphs at January 29, 1995. Ralphs elected to retroactively apply certain provisions of the Act related to the February 3, 1992 change of control for Federal tax purposes. As such, approximately $610.7 million in excess of cost over net assets acquired became fully deductible for Federal tax purposes. This amount is deductible over 15 years. This excess in the tax basis over the financial statement basis of excess of cost over net assets acquired aggregated $123.0 million at January 29, 1995. During the year ended January 30, 1994, Ralphs recorded the incremental impact of the Act on deductible temporary differences and increased its deferred income tax assets by a net amount of $109.1 million. The decision to reduce the valuation allowance was based upon several factors. Specific among them, was the Company's completion of its restructuring plan which effectively reduced estimated interest expense by approximately $9.0 as compared to the year ended January 31, 1993. In addition, the January 31, 1993 operating results were negatively effected by several charges including provisions for restructuring, legal settlements and a loss on retirement of debt all aggregating approximately $90 million on a pre-tax basis. Although there can be no assurance as to future taxable income, the Company believes that, based upon the above mentioned events, as well as the Company's expectation of future taxable income, it is more likely than not that the recorded deferred tax asset will be realized. In order to realize the net deferred tax asset currently recorded, Ralphs will need to generate sufficient future taxable income, assuming current tax rates, of approximately $320.0 million. At January 29, 1995, the Company has Federal net operating loss (NOL) carryforwards of approximately $162.0 million and Federal and state Alternative Minimum Tax Credit carryforwards of approximately $2.1 million which can be used to offset Federal taxable income and regular taxes payable, respectively. The NOL carryforwards begin expiring in 2008. During the past three fiscal years, the Company has generated Federal taxable losses of approximately $162.0 million versus financial pre-tax earnings of approximately $65.2 million for the same periods. These differences result principally from excess tax versus financial amortization on certain intangible assets (excess of cost over net assets acquired), as well as several other originating temporary differences. (12) EMPLOYEE BENEFIT PLANS Ralphs has a defined benefit pension plan covering substantially all employees not already covered by collective bargaining agreements with at least one year of credit service (defined at 1,000 hours). Ralphs' policy is to fund pension costs at or above the minimum annual requirement. On February 23, 1990, the Company adopted a Supplemental Executive Retirement Plan covering certain key officers of Ralphs. The Company has purchased split dollar life insurance policies for participants under this plan. Under certain circumstances, the cash surrender value of certain split dollar life insurance policies will offset Ralphs obligations under the Supplemental Executive Retirement Plan. During the second quarter of 1994, the Company approved and adopted a new non-qualified retirement plan, the Ralphs Grocery Company Retirement Supplemental Plan ("Retirement Supplement Plan") effective January 1, 1994 and amended the existing Supplemental Executive Retirement Plan effective April 9, 1994. These changes to the retirement plans were made pursuant to the enactment of the 1993 Omnibus Budget Reconciliation Act. F-20 183 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At January 29, 1995, the Company recorded a $4.0 million additional minimum liability in offsetting intangible asset to reflect the changes in the new and amended plans. Under the provisions of the Retirement Supplement Plan, participants are entitled to receive benefits based on earnings over the indexed amount of $150,000. The following actuarially determined components were included in the net pension expense:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost...................................... $ 2,076 $ 2,228 $ 2,901 Interest cost on projected benefit obligation..... 2,471 2,838 3,821 Actual return on assets........................... (2,794) (2,695) (1,447) Net amortization and deferral..................... 237 (46) (1,100) ----------- ----------- ----------- Net pension expense............................. $ 1,990 $ 2,325 $ 4,175 ======== ======== ========
The funded status of Ralphs' pension plan, (based on December 31, 1993 and 1994 asset values), is as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Assets Exceed Accumulated Benefits: Actuarial present value of benefit obligations: Vested benefit obligation................................... $29,659 $31,621 Accumulated benefit obligation.............................. 29,950 31,856 Projected benefit obligation................................ 42,690 45,246 Plan assets at fair value................................... 32,968 38,179 ----------- ----------- Projected benefit obligation in excess of Plan Assets......... (9,722) (7,067) Unrecognized net gain......................................... 4,567 3,611 Unrecognized prior service cost............................... (1,778) (1,659) Unrecognized net asset........................................ -- -- ----------- ----------- Accrued pension cost........................................ $(6,933) $(5,115) ======== ======== Accumulated Benefits Exceed Assets: Actuarial present value of benefit obligations: Vested benefit obligation................................... 2,982 Accumulated benefit obligation.............................. 2,982 Projected benefit obligation................................ 7,102 Plan assets at fair value................................... -- ----------- Projected benefit obligation in excess of plan assets......... (7,102) Unrecognized net gain......................................... (229) Unrecognized prior service cost............................... 8,354 Adjustment required to recognized minimum liability........... (4,005) ----------- Accrued pension cost........................................ $(2,982) ========
F-21 184 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accrued pension cost for accumulated benefits that exceeded assets at January 30, 1994 was immaterial to the consolidated financial statements. Service costs for fiscal 1992 and 1993 were calculated using a discount rate of 8.5% and a rate of increase in future compensation levels of 6%. The 1994 discount rate and the rate of increase in future compensation levels were reduced to 7.75% and 5.0%, respectively, to reflect the decline in interest rates in 1994. The discount rate will be increased to 8.25% in 1995 in order to reflect the increase in the current long-term interest rate. A long-term rate of return on assets of 9% was used for fiscal 1992, 1993 and 1994. The pension plan assets consist primarily of common stocks, bonds, debt securities, and a money market fund. Plan benefits are based primarily on years of service and on average compensation during the last years of employment. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans received a prorata share of excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. The expense related to these plans is summarized as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Multi-employer pension plans.............. $ 7,973 $17,687 $ 8,897 ======== ======== ======== Multi-employer health and welfare......... $71,183 $45,235 $66,351 ======== ======== ========
Ralphs maintains the Ralphs Grocery Company Savings Plan Plus--Prime and the Ralphs Grocery Savings Plan Plus -- Basic (collectively referred to as the "401(k) Plan") covering substantially all employees who are not covered by collective bargaining agreements and who have at least one year of credited service (defined at 1,000 hours). The 401(k) Plan provided for both pre-tax and after-tax contributions by participating employees. With certain limitations, participants may elect to contribute from 1% to 12% of their annual compensation on a pre-tax basis to the Plan. Ralphs has committed to match a minimum of 20% of an employee's contribution to the 401(k) Plan that do not exceed 5% of the employee's compensation. Expenses under the 401(k) Plan for fiscal 1992, 1993 and 1994 were $407,961, $431,774 and $446,826, respectively. Ralphs has an executive incentive compensation plan which covers approximately 39 key employees. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was $2.5 million, $2.6 million and $2.4 million, respectively. Ralphs has also adopted an incentive plan for certain members of management. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was $2.8 million, $3.0 million and $3.1 million, respectively. F-22 185 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aforementioned incentive plans may be cancelled by the Board of Directors at any time. Ralphs sponsors a postretirement medical benefit plan (Postretirement Medical Plan) covering substantially all employees who are not members of a collective bargaining agreement and who retire under certain age and service requirements. The Postretirement Medical Plan is a traditional type medical plan providing outpatient, inpatient and various other covered services. Such benefits are funded from Ralphs' general assets. The calendar year deductible is $1,270 per individual, indexed to the Medical Consumer Price Index. The net periodic cost of the Postretirement Medical Plan includes the following components:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost.............................. $ 1,908 $ 1,767 $ 1,396 Interest cost............................. 1,367 1,603 1,387 Return on plan assets..................... -- -- -- Net amortization and deferral............. -- -- (228) ----------- ----------- ----------- Net postretirement benefit cost......... $ 3,275 $ 3,370 $ 2,555
The funded status of the postretirement benefit plan is as follows:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.............................................. $ 1,237 $ 1,303 Fully eligible plan participants...................... 357 1,499 Other active plan participants........................ 16,062 10,289 Plan assets at fair value............................. -- -- ----------- ----------- Funded status......................................... (17,656) (13,091) Plan assets in excess of projected obligations........ -- -- Unrecognized gain (loss).............................. 6,302 13,676 Unrecognized prior service cost....................... -- (358) ----------- ----------- Accrued postretirement benefit obligation............. $ (23,958) $ (26,409) ======== ========
Service cost was calculated using a medical cost trend of 10.5% for fiscal 1992. Service cost was calculated using a medical cost trend of 10.5% and a decreasing medical cost trend rate of 14%-8% for 1993 and 1994 respectively. The discount rate for 1993 was 8.5% and was reduced to 7.75% in 1994 to reflect the decline in interest rates in 1994. In 1995, the discount rate will increase to 8.25% in order to reflect the increase in the current long-term interest rate. The long-term rate of return of plan assets is not applicable as the plan is not funded. The effect of a one-percent increase in the medical cost trend would increase the fiscal 1994 service and interest cost to 18%. The accumulated postretirement benefit obligation at January 29, 1995 would also increase by 27%. F-23 186 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) QUARTERLY RESULTS (UNAUDITED) Quarterly results for fiscal 1993 and 1994 are as follows:
GROSS OPERATING INCOME NET SALES PROFIT INCOME TAXES EARNINGS ------- ------ --------- ------- -------- (DOLLARS IN MILLIONS) FY 1993 Quarters 12 weeks ended 04/25/93......................... $ 632.4 $142.4 $ 31.4 $ 1.0 $ 3.9 12 weeks ended 07/18/93......................... 629.0 145.2 36.8 (1.0) 12.9 12 weeks ended 10/10/93......................... 612.8 141.5 31.7 -- 7.0 16 weeks ended 01/30/94......................... 856.0 207.4 52.2 (108.0) 114.6 -------- ------ ------- ------- ------ Total.................................. $2,730.2 $636.5 $ 152.1 $(108.0) $138.4 ======== ====== ======= ======= ====== FY 1994 Quarters 12 weeks ended 04/24/94......................... $ 616.0 $141.7 $ 34.1 $ -- $ 8.4 12 weeks ended 07/17/94......................... 625.0 142.9 32.9 -- 7.2 12 weeks ended 10/09/94......................... 615.4 138.8 30.8 -- 4.3 16 weeks ended 01/29/95......................... 868.2 200.2 47.8 -- 12.2 -------- ------ ------- ------- ------ Total.................................. $2,724.6 $623.6 $ 145.6 $ -- $ 32.1 ======== ====== ======= ======= ======
(14) SUPPLEMENTAL CASH FLOW INFORMATION
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Supplemental cash flow disclosures: Interest paid, net of amounts capitalized................... $ 118,391 $93,738 $99,067 Income taxes paid........................................... $ 7,169 $ 2,423 $ 6,270 Capital lease assets and obligations assumed................ $ -- $15,395 $41,131
(15) STOCK OPTION PLAN On February 3, 1992, 3,162,235 options for Common Stock of the Company were granted under the Ralphs Non-qualified Stock Option Plan. All options were vested, but not exercisable, on the date of the grant. Options granted to certain officers become exercisable at the rate of 20% on each September 30 of calendar years 1992 through 1996. Options granted to other officers become exercisable as to 10% of the grant on each of September 30, 1992 and 1993, 15% on each of September 30, 1994 through September 30, 1997, and 20% on September 20, 1998. F-24 187 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Ralphs Non-qualified Stock Option Plan.
NUMBER OF PRICE OPTIONS RANGE --------- ------ Options Outstanding at January 30, 1994: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 811,760 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------ Options Outstanding at January 29, 1995: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 1,330,924 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------
The option price for outstanding options at January 29, 1995 assumes a grant date fair market value of Common Stock of the Company equal to $20.21 per share, which represents the high end of a range of estimated values of the Common Stock of the Company on February 3, 1992, the date of the grant. (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value is discussed in Note 2. The estimated fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s):
JANUARY 30, 1994 JANUARY 29, 1995 ----------------------- ----------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Long term debt................................ $998,884 $1,014,634 $967,009 $ 953,883 Interest rate swap agreements................. n/a 1,153 n/a 1,252 Interest rate cap agreements.................. n/a (19) n/a (366)
In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three year maturity. The interest rate cap agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This F-25 188 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million national principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest based on LIBOR at the end of each six month calculation period and Ralphs will receive interest payments based on LIBOR at the beginning of each six month calculation period. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. The following details the impact of the hedging activity on the weighted average rate for each of the last three fiscal years.
WITH HEDGE WITHOUT HEDGE ---------- ------------- 1992........................................................ 10.52% 10.22% 1993........................................................ 8.96% 8.96% 1994........................................................ 9.37% 9.18%
(17) THE MERGER (UNAUDITED) On September 14, 1994, Food 4 Less Supermarkets, Inc. ("Food 4 Less"), Food 4 Less Holdings, Inc. ("Holdings"), and the parent company of Holdings, Food 4 Less, Inc. ("FFL"), entered into a definitive Agreement and Plan of Merger (as amended from time to time, the "Merger Agreement") with Ralphs Supermarkets, Inc. (the "Holding Company") and its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less will be merged with and into Holding Company (the "RSI Merger") and Holding Company will continue as the surviving corporation. Food 4 Less is a multiple format supermarket operator that operates in three geographic areas: Southern California, Northern California and certain areas of the Midwest. Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), which is currently a wholly-owned subsidiary of Holding Company, will merge with and into Holding Company (the "RGC Merger," and together with the RSI Merger, the "Merger"), and Holding Company will change its name to Ralphs Grocery Company (the "New Company"). Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging with a newly-formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger, the New Company will become a wholly-owned subsidiary of New Holdings. Agreement has been reached with each of the California Attorney General and the Federal Trade Commission for approval of the Merger. Food 4 Less and Ralphs have agreed in a settlement agreement with the Attorney General to divest 27 specific stores in Southern California. Under the agreement, the Company must divest 14 stores by June 30, 1995, and the balance of 13 stores by December 31, 1995. In order to consummate the Merger, Food 4 Less has made an Offer to Exchange and Offer to Purchase and Solicit Consents with respect to the holders of the 9% Senior Subordinated Notes (the "Old RGC 9% Notes") due April 1, 2003 of Ralphs and the 10 1/4% Senior Subordinated Notes due July 15, 2002 of RGC (the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes") (i) to exchange (as so amended and restated, the "Exchange Offers") such Old RGC Notes for New Senior Subordinated Notes due 2005 (the "New Notes") plus a cash payment of $20.00 in cash for each $1,000 principal amount of Old RGC Notes tendered for exchange or (ii) to purchase (the "Cash Offers," and together with the Exchange Offers, the "Offers") Old RGC Notes for $1,010 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, in each case, plus accrued and unpaid interest to the date of F-26 189 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exchange or purchase. The Offers are subject to the terms and conditions set forth in an Amended and Restated Prospectus and Solicitation Statement, filed by Food 4 Less with the Securities and Exchange Commission and which is subject to further change (the "Prospectus"), including: (1) satisfaction of a minimum tender amount (i.e., at least a majority of the aggregate principal amount of the outstanding Old RGC Notes being validly tendered for exchange for New Notes and not withdrawn pursuant to the Offers prior to the date of expiration); (2) the receipt of the requisite consents to certain amendments to the indentures (the "Indentures") under which the Old RGC Notes were issued (i.e., consents from holders of Old RGC Notes representing at least a majority in aggregate principal amount of each issue of Old RGC Notes held by persons other than Ralphs and its affiliates) on or prior to the date of expiration; (3) the satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the Merger; (4) the prior or contemporaneous consummation of other exchange offers, consent solicitations and public offerings contemplated by the Prospectus; and (5) the prior or contemporaneous consummation of the bank financing and the equity investment described in the Prospectus. As a result of the RSI Merger and the RGC Merger, the New Notes and any outstanding Old RGC Notes not tendered in the Offers will be the obligations of the New Company. Conditions to the consummation of the RSI Merger include the receipt of necessary consents and the completion of financing of the transaction. The purchase price for Holding Company is approximately $1.5 billion, including the assumption or repayment of debt. The consideration payable to the stockholders of Holding Company consists of $375 million in cash, $131.5 million principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 to be issued to the selling shareholders of Holding Company (the "Seller Debentures") by New Holdings and $18.5 million initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures"). New Holdings will use $100 million of the cash received from a new equity investment (the "New Equity Investment"), together with the Seller Debentures and the New Discount Debentures, to acquire approximately 48% of the capital stock of Holding Company immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of Holding Company stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of Holding Company stock will be acquired for $275 million in cash. Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline pursuant to the Indentures. The consummation of the Merger and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline, would constitute a Change of Control Triggering Event under the Indentures. Although RGC does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the Exchange Offers, upon such a Change of Control Triggering Event, the New Company would be obligated to make the Change of Control Offer following the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. Due to the increased size, dual format strategy and integration related costs, after giving effect to or in connection with the Merger, RGC believes that its future operating results will not be directly comparable to the historical operating results of RGC. Upon consummation of the Merger, the operations and activities of RGC will be significantly impacted due to conversions of some existing stores to Food 4 Less warehouse stores as well as the consolidation of various operating functions and departments. This consolidation may result in a restructuring charge for the New Company. The amount of the restructuring charge is not determinable due to various factors, including uncertainties inherent in the completion of the Merger, however, the restructuring charge may be material in relation to the stockholders' equity and financial position of RGC and the New Company. Following the consummation of the Merger, the New Company will be highly leveraged. F-27 190 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of Food 4 Less Supermarkets, Inc.: We have audited the accompanying consolidated balance sheets of Food 4 Less Supermarkets, Inc. (a Delaware corporation) and subsidiaries (the Company) as of June 26, 1993 and June 25, 1994, and the related consolidated statements of operations, stockholder's equity and cash flows for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Food 4 Less Supermarkets, Inc. and subsidiaries as of June 26, 1993 and June 25, 1994, and the results of their operations and their cash flows for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California July 29, 1994 (except with respect to the matter discussed in Note 14, as to which the date is October 14, 1994, and with respect to the matter discussed in Note 15, as to which the date is April 13, 1995) F-28 191 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
JANUARY 7, 1995 JUNE 26, JUNE 25, ------------- 1993 1994 -------- -------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents.............................. $ 25,089 $ 32,996 $ 15,750 Trade receivables, less allowances of $1,919, $1,386 and $1,264 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively....................... 22,048 25,039 25,992 Notes and other receivables............................ 1,278 1,312 777 Inventories............................................ 191,467 212,892 223,261 Patronage receivables from suppliers................... 2,680 2,875 5,093 Prepaid expenses and other............................. 6,011 6,323 12,542 -------- -------- ------------- Total current assets........................... 248,573 281,437 283,415 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: A.W.G.................................................. 6,693 6,718 6,718 Certified and Other.................................... 6,657 5,984 5,694 PROPERTY AND EQUIPMENT: Land................................................... 23,912 23,488 23,488 Buildings.............................................. 12,827 12,827 24,148 Leasehold improvements................................. 81,049 97,673 106,484 Store equipment and fixtures........................... 129,178 148,249 153,538 Transportation equipment............................... 31,758 32,259 32,363 Construction in progress............................... 757 12,641 14,459 Leased property under capital leases................... 77,553 78,222 78,222 Leasehold interests.................................... 93,863 93,464 93,226 -------- -------- ------------- 450,897 498,823 525,928 Less: Accumulated depreciation and amortization........ 96,948 134,089 155,758 -------- -------- ------------- Net property and equipment.......................... 353,949 364,734 370,170 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $11,611, $17,083 and $20,166 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively..... 33,778 28,536 25,529 Goodwill, less accumulated amortization of $26,254, $33,945 and $38,113 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively................... 280,895 267,884 263,658 Other, net............................................. 27,295 24,787 29,438 -------- -------- ------------- $957,840 $980,080 $ 984,622 ======== ======== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-29 192 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDER'S EQUITY
JANUARY 7, 1995 JUNE 26, JUNE 25, ---------- 1993 1994 -------- -------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable........................................ $140,468 $180,708 $ 164,981 Accrued payroll and related liabilities................. 40,319 42,805 39,976 Accrued interest........................................ 5,293 5,474 7,454 Other accrued liabilities............................... 40,467 53,910 60,619 Income taxes payable.................................... 2,053 2,000 689 Current portion of self-insurance liabilities........... 23,552 29,492 28,616 Current portion of long-term debt....................... 12,778 18,314 22,290 Current portion of obligations under capital leases..... 2,865 3,616 3,634 -------- -------- ---------- Total current liabilities................................. 267,795 336,319 328,259 LONG-TERM DEBT............................................ 335,576 310,944 342,396 OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 38,071 SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000 DEFERRED INCOME TAXES..................................... 22,429 14,740 14,740 SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 55,701 COMMITMENTS AND CONTINGENCIES............................. -- -- -- STOCKHOLDER'S EQUITY: Cumulative convertible preferred stock, $.01 par value, 200,000 shares authorized and 50,000 shares issued at June 26, 1993, June 25, 1994 and January 7, 1995 (aggregate liquidation value of $53.8 million, $62.2 million and $67.3 million at June 26, 1993, June 25, 1994 and January 7, 1995, respectively).............. 50,230 58,997 64,541 Common stock, $.01 par value, 1,600,000 shares authorized and 1,519,632 shares issued at June 26, 1993, June 25, 1994 and January 7, 1995.............. 15 15 15 Additional paid-in capital.............................. 107,650 107,650 107,650 Notes receivable from shareholders of parent............ (714) (586) (702) Retained deficit........................................ (83,119) (94,586) (108,858) -------- -------- ---------- 74,062 71,490 62,646 Treasury stock: 13,249 shares, 16,732 shares and 14,205 shares of common stock at June 26, 1993, June 25, 1994 and January 7, 1995, respectively............... (1,199) (2,469) (2,191) -------- -------- ---------- Total stockholder's equity...................... 72,863 69,021 60,455 -------- -------- ---------- $957,840 $980,080 $ 984,622 ======== ======== =========
The accompanying notes are an integral part of these consolidated balance sheets. F-30 193 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SALES....................................... $2,913,493 $2,742,027 $2,585,160 $1,416,213 $1,404,665 COST OF SALES (including purchases from related parties of $277,812, $204,028, $175,929, $106,060 and $99,367 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, and for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively)............................. 2,392,655 2,257,835 2,115,842 1,153,989 1,167,205 ---------- ---------- ---------- ---------- ---------- GROSS PROFIT................................ 520,838 484,192 469,318 262,224 237,460 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET....................................... 469,751 434,908 388,836 221,464 199,161 AMORTIZATION OF EXCESS COST OVER NET ASSETS ACQUIRED.................................. 7,795 7,571 7,691 4,132 4,168 RESTRUCTURING CHARGE........................ -- -- -- -- 5,134 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME............................ 43,292 41,713 72,791 36,628 28,997 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs............ 63,907 64,831 62,778 33,914 34,601 Amortization of deferred financing costs.................................. 6,304 4,901 5,472 2,948 3,083 ---------- ---------- ---------- ---------- ---------- 70,211 69,732 68,250 36,862 37,684 LOSS (GAIN) ON DISPOSAL OF ASSETS........... (1,364) (2,083) 37 87 (459) PROVISION FOR EARTHQUAKE LOSSES............. -- -- 4,504 -- -- ---------- ---------- ---------- ---------- ---------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES..................... (25,555) (25,936) -- (321) (8,228) PROVISION FOR INCOME TAXES.................. 3,441 1,427 2,700 700 500 ---------- ---------- ---------- ---------- ---------- LOSS BEFORE EXTRAORDINARY CHARGES........... (28,996) (27,363) (2,700) (1,021) (8,728) EXTRAORDINARY CHARGES: Loss on extinguishment of debt, net of income tax benefit of $2,484........... 6,716 -- -- -- -- Gain on partially depreciated assets replaced by insurance companies, net of income tax expense of $702............. (1,898) -- -- -- -- ---------- ---------- ---------- ---------- ---------- NET LOSS.................................... $ (33,814) $ (27,363) $ (2,700) $ (1,021) $ (8,728) ========== ========== ========== ========== ========== PREFERRED STOCK ACCRETION................... -- 3,882 8,767 4,721 5,544 LOSS APPLICABLE TO COMMON SHARES............ $ (33,814) $ (31,245) $ (11,467) $ (5,742) $ (14,272) ========== ========== ========== ========== ========== LOSS PER COMMON SHARE: Loss before extraordinary charges......... $ (20.74) $ (21.52) $ (7.63) $ (3.82) $ (9.49) Extraordinary charges..................... (3.45) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net loss.................................. $ (24.19) $ (21.52) $ (7.63) $ (3.82) $ (9.49) ========== ========== ========== ========== ========== Average Number of Common Shares Outstanding............................ 1,397,939 1,452,184 1,503,828 1,504,245 1,504,288 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-31 194 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Cash received from customers............. $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 1,416,213 $ 1,404,665 Cash paid to suppliers and employees..... (2,752,442) (2,711,779) (2,441,353) (1,361,103) (1,389,667) Interest paid............................ (56,234) (58,807) (56,762) (29,178) (32,621) Income taxes (paid) refunded............. (4,665) 2,971 (247) 1,652 (1,811) Interest received........................ 1,266 993 903 486 836 Other, net............................... 4,734 8,093 121 2,388 583 ----------- ----------- ----------- ------------- ------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................... 106,152 (16,502) 87,822 30,458 (18,015) CASH PROVIDED (USED) BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment............................. 17,395 15,685 11,953 12,307 7,120 Payment for purchase of property and equipment............................. (60,263) (53,467) (57,471) (20,404) (39,049) Proceeds (payment) for sale (purchase) of other assets.......................... (4,754) (18) 813 -- -- Business acquisition costs, net of cash acquired.............................. (27,563) -- (11,050) -- -- Receivable received from seller of business acquired..................... 12,259 -- -- -- -- Other, net............................... -- -- -- 61 (907) ----------- ----------- ----------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES...... (62,926) (37,800) (55,755) (8,036) (32,836) CASH PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................................. 177,500 26,557 28 28 -- Net increase (decrease) in revolving loan.................................. (23,900) 4,900 (4,900) (4,900) 48,700 Payments of long-term debt............... (184,389) (14,319) (14,224) (10,395) (13,272) Proceeds from the issuance of preferred stock................................. -- 46,348 -- -- -- Proceeds from issuance of common stock, net................................... 341 3,652 -- -- -- Purchase (sale) of treasury stock, net... (313) (545) (1,192) (726) 92 Payments of capital lease obligation..... (2,814) (2,840) (3,693) (1,565) (1,909) Deferred financing costs and other....... (6,656) (8,839) (179) (161) (6) ----------- ----------- ----------- ------------- ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................... (40,231) 54,914 (24,160) (17,719) 33,605 ----------- ----------- ----------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 2,995 612 7,907 4,703 (17,246) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 21,482 24,477 25,089 25,089 32,996 ----------- ----------- ----------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 24,477 $ 25,089 $ 32,996 $ 29,792 $ 15,750 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-32 195 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Net loss................................ $ (33,814) $(27,363) $ (2,700) $ (1,021) $ (8,728) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization........ 61,181 62,541 62,555 33,320 33,878 Extraordinary charge................. 4,818 -- -- -- -- Restructuring charge................. -- -- -- -- 5,134 Loss (gain) on sale of assets........ (1,364) (4,613) 65 87 (459) Equity loss on investments in supplier cooperative............... 472 207 -- -- -- Change in assets and liabilities, net of effects from acquisition of businesses: Accounts and notes receivable...... (7,688) 17,145 (3,220) (9,568) (2,725) Inventories........................ 202 17,697 (17,125) (16,106) (10,369) Prepaid expenses and other......... (2,834) (6,163) (5,717) (5,659) (9,097) Accounts payable and accrued liabilities..................... 71,369 (83,286) 55,301 23,752 (20,228) Self-insurance liabilities......... 15,034 2,935 (3,790) 3,301 (4,110) Deferred income taxes.............. 2,033 4,004 2,506 1,714 -- Income taxes payable............... (3,257) 394 (53) 638 (1,311) ------------ ------------ ------------ ------------ ------------ Total adjustments.................... 139,966 10,861 90,522 31,479 (9,287) ------------ ------------ ------------ ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............................. $ 106,152 $(16,502) $ 87,822 $ 30,458 $(18,015) ========== ========== ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of property and equipment through issuance of capital lease obligation........................... -- -- $ 2,575 -- -- ========== ========== ========== ========== ========== Reduction of goodwill and deferred income taxes......................... -- -- $ 9,896 -- -- ========== ========== ========== ========== ========== Acquisition of businesses: Fair value of assets acquired........ -- -- $ 11,241 -- -- Net cash paid in acquisition......... -- -- (11,050) -- -- ------------ ------------ ------------ ------------ ------------ Liabilities assumed.................. -- -- $ 191 -- -- ========== ========== ========== ========== ========== Final purchase price allocation for the Alpha Beta Acquisition: Property and equipment valuation adjustment......................... $ 44,231 -- -- -- -- ========== ========== ========== ========== ========== Additional acquisition liabilities... $ 14,305 -- -- -- -- ========== ========== ========== ========== ========== Deferred tax benefit................. $ 12,800 -- -- -- -- ========== ========== ========== ========== ========== Accretion of preferred stock............ $ -- $ 3,882 $ 8,767 $ 4,721 $ 5,544 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-33 196 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ---------------- ------------------ ----------------- TOTAL NUMBER NUMBER NUMBER SHARE- ADD'L STOCK- OF OF OF HOLDERS' PAID-IN RETAINED HOLDER'S SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) EQUITY ------ ------- --------- ------ ------- ------- -------- -------- --------- -------- BALANCES AT JUNE 29, 1991................... -- $ -- 1,396,878 $ 14 (1,250) $ (125) $ (930) $103,658 $ (18,060) $ 84,557 Net loss............... -- -- -- -- -- -- -- -- (33,814) (33,814) Issuance of Common Stock................ -- -- 1,636 -- -- -- (190) 341 -- 151 Purchase of Treasury Stock................ -- -- -- -- (3,947) (463) 131 -- -- (332) Sale of Treasury Stock................ -- -- -- -- 1,560 159 (50) -- -- 109 Payments of Shareholders' Notes................ -- -- -- -- -- -- 100 -- -- 100 ------ ------- --------- ------ ------- ------- -------- -------- --------- -------- BALANCES AT JUNE 27, 1992................... -- -- 1,398,514 14 (3,637) (429) (939) 103,999 (51,874) 50,771 Net loss............... -- -- -- -- -- -- -- -- (27,363) (27,363) Issuance of Common Stock................ -- -- 121,118 1 -- -- -- 3,651 -- 3,652 Purchase of Treasury Stock................ -- -- -- -- (9,612) (770) 225 -- -- (545) Issuance of Cumulative Convertible Preferred Stock................ 50,000 46,348 -- -- -- -- -- -- -- 46,348 Accretion of Preferred Stock................ -- 3,882 -- -- -- -- -- -- (3,882) -- ------ ------- --------- ------ ------- ------- -------- -------- --------- -------- BALANCES AT JUNE 26, 1993................... 50,000 50,230 1,519,632 15 (13,249) (1,199) (714) 107,650 (83,119) 72,863 Net loss............... -- -- -- -- -- -- -- -- (2,700) (2,700) Purchase of Treasury Stock................ -- -- -- -- (3,483) (1,270) 78 -- -- (1,192) Payments of Shareholders' Notes................ -- -- -- -- -- -- 50 -- -- 50 Accretion of Preferred Stock................ -- 8,767 -- -- -- -- -- -- (8,767) -- ------ ------- --------- ------ ------- ------- -------- -------- --------- -------- BALANCES AT JUNE 25, 1994................... 50,000 58,997 1,519,632 15 (16,732) (2,469) (586) 107,650 (94,586) 69,021 Net loss (unaudited)... -- -- -- -- -- -- -- -- (8,728) (8,728) Payment of Shareholders' Notes (unaudited).......... -- -- -- -- -- -- 70 -- -- 70 Issuance of Treasury Stock (unaudited).... -- -- -- -- 3,644 340 (191) -- -- 149 Purchase of Treasury Stock (unaudited).... -- -- -- -- (1,117) (62) 5 -- -- (57) Accretion of Preferred Stock (unaudited).... -- 5,544 -- -- -- -- -- -- (5,544) -- ------ ------- --------- ------ ------- ------- -------- -------- --------- -------- BALANCES AT JANUARY 7, 1995 (unaudited)....... 50,000 $64,541 1,519,632 $ 15 (14,205) $(2,191) $ (702) $107,650 $(108,858) $ 60,455 ======= ======== ========= ======= ======== ======== ======= ========= ========== ========
The accompanying notes are an integral part of these consolidated statements. F-34 197 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND ACQUISITIONS Food 4 Less Supermarkets, Inc. (the "Company"), a wholly-owned subsidiary of Food 4 Less Holdings, Inc. ("Holdings"), is a multiple format supermarket operator that tailors its retail strategy to the particular needs of the individual communities it serves. Holdings is a majority-owned subsidiary of Food 4 Less, Inc. ("FFL"). The Company operates in three geographic areas: Southern California, Northern California and certain areas of the Midwest. The Company has three first-tier subsidiaries: Cala Co. ("Cala"), Falley's, Inc. ("Falley's") and Food 4 Less of Southern California, Inc. ("F4L-SoCal"), formerly known as Breco Holding Company, Inc. ("BHC"). Cala Foods, Inc. ("Cala Foods") and Bell Markets, Inc. ("Bell") are subsidiaries of Cala, and Alpha Beta Company ("Alpha Beta") is a subsidiary of F4L-SoCal. (a) Acquisitions On March 29, 1994, the Company purchased certain operating assets formerly owned by Food Barn Stores, Inc. (the "Food Barn Stores") from Associated Wholesale Grocers, Inc. ("AWG") (the "Food Barn Acquisition") for $11,241,000 (including acquisition costs of $180,000). The financial statements reflect the preliminary allocation of the purchase price as the purchase price allocation has not been finalized. The effect of the acquisition was not material to the Company's financial position and results of operations. Falley's has agreed to purchase merchandise (as defined) for the Food Barn Stores from AWG through March 24, 2001. Falley's has pledged its patronage dividends and notes receivable from AWG as security under this supply agreement. On June 17, 1991, the Company acquired all of the common stock of Alpha Beta for $270,513,000 (including acquisition costs of $41,477,000) in a transaction accounted for as a purchase. In January 1990, the Company purchased certain operating assets of ABC Market Corp. ("ABC") for $14,675,000, plus approximately $1,000,000 in fees and expenses. On June 30, 1989, the Company acquired Bell for approximately $13,700,000, which includes $8,000,000 of notes and the assumption of Bell's long-term debt. The transaction was accounted for as a purchase. Certified Grocers of California, Ltd. ("Certified") has guaranteed up to $4,000,000 of notes issued by the Company to the seller in connection with the purchase and the performance of a lease. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Business The Company is engaged primarily in the operation of retail supermarkets. (b) Basis of Presentation Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The results of operations of Alpha Beta, F4L-SoCal (BHC), Bell, ABC and the Food Barn Stores have been excluded from the consolidated financial statements prior to their respective acquisition dates. The excess of the purchase price over the fair value of the net assets acquired is classified as goodwill. All intercompany transactions have been eliminated in consolidation. Interim Financial Statements. The consolidated balance sheet of the Company as of January 7, 1995 and the consolidated statements of operations and cash flows for the interim periods ended January 7, 1995 and January 8, 1994 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the F-35 198 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's financial statements and notes thereto included herein. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. (c) Fiscal Years The Company's fiscal year is the 52 or 53-week period which ends on the last Saturday in June. Fiscal years 1994, 1993, and 1992 include 52 weeks. (d) Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. (e) Inventories Inventories, which consist of grocery products, are stated at the lower of cost or market. Cost has been principally determined using the last-in, first-out ("LIFO") method. If inventories had been valued using the first-in, first-out ("FIFO") method, inventories would have been higher by $13,103,000, $13,802,000 and $16,202,000 (unaudited) at June 26, 1993, June 25, 1994 and January 7, 1995, respectively, and gross profit and operating income would have been greater by $3,554,000, $4,441,000, $699,000, $2,200,000 (unaudited) and $2,400,000 (unaudited) for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994, and the 28 weeks ended January 7, 1995, respectively. (f) Pre-opening Costs The costs associated with opening new stores are deferred and amortized over one year following the opening of each new store. (g) Closed Store Reserves When a store is closed, 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 sublease income. For the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, utilization of this reserve was $4.0 million, $2.4 million, $1.1 million, $0.5 million (unaudited) and $0.5 million (unaudited), respectively. (h) Investments in Supplier Cooperatives The investment in Certified is accounted for on the cost method. There are certain restrictions on the sale of this investment. (i) Investment in Food 4 Less of Modesto, Inc. During the 52 weeks ended June 26, 1993, the Company sold its 20% investment in Food 4 Less of Modesto, Inc. ("Modesto") for gross proceeds of $4.5 million, which included a $1.5 million note receivable, resulting in a gain of $2.5 million. The Company previously accounted for this investment using the cost method. F-36 199 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (j) Property and Equipment Property and equipment are stated at cost and are depreciated principally using the straight-line method over the following estimated useful lives: Buildings and improvements.................... 5-40 years Equipment and fixtures........................ 3-10 years Property under capital leases and leasehold interests................................... 3-45 years (lease term)
(k) 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. (l) Goodwill and Covenants Not to Compete The excess of the purchase price over the fair value of the net assets of businesses acquired is amortized on a straight-line basis over 40 years beginning at the date of acquisition. Covenants not to compete, which are included in Other Assets, are amortized on a straight-line basis over the term of the covenant. Current and undiscounted future operating cash flows are compared to current and undiscounted future goodwill amortization to determine if an impairment of goodwill has occurred and is continuing. As of June 25, 1994, no impairment exists. (m) Income Taxes On June 27, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. Under SFAS 109, the Company recognizes to a greater degree the future tax benefits of expenses which have been recognized in the financial statements. The implementation of SFAS No. 109 did not have a material effect on the accompanying consolidated financial statements. (n) Notes Receivable from Shareholders of Parent Notes receivable from shareholders of parent represent loans to employees of the Company for purchases of Holdings' stock. The notes are due over various periods, bear interest at the prime rate, and are secured by each shareholder's shares of common stock. (o) Self-Insurance Certain of the Company's subsidiaries are self-insured for a portion of workers' compensation, general liability and automobile accident 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. F-37 200 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (p) 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. (q) Provision for Earthquake Losses On January 17, 1994, Southern California was struck by a major earthquake which resulted in the temporary closing of 31 of the Company's stores. The closures were caused primarily by loss of electricity, water, inventory, or structural damage. All but one of the closed stores reopened within a week of the earthquake. The final closed store reopened on March 24, 1994. The Company is insured against earthquake losses (including business interruption), subject to certain deductibles. The pre-tax financial impact, net of insurance claims, was approximately $4.5 million. At June 25, 1994, the Company had received all expected insurance proceeds related to this claim. (r) Extraordinary Items For the 52 weeks ended June 27, 1992, the Company classified the write-off of deferred financing costs associated with the early extinguishment of debt as an extraordinary item. For the 52 weeks ended June 27, 1992, the Company also classified the difference between the net book value and replacement cost of property and equipment destroyed during the April 1992 civil unrest in Los Angeles and replaced by insurance companies as an extraordinary item. Proceeds received from insurance companies for business interruption related to the civil unrest are included as a component of selling, general, administrative and other expenses. (s) Loss Per Common Share Loss per common share is computed based on the weighted average number of shares outstanding during the applicable period. Fully diluted loss per share has been omitted as it is anti-dilutive for all periods presented. (t) Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the June 25, 1994 presentation. (3) PREFERRED STOCK On December 31, 1992, the Company issued 50,000 shares of $.01 par value Series A cumulative convertible preferred stock (the "Preferred Stock") with a liquidation value of $1,000 per share and 121,118 shares of its $.01 par value common stock (the "Common Stock") to its parent company, Food 4 Less Holdings, Inc. ("Holdings") in exchange for gross proceeds of $50.0 million. The Preferred Stock is convertible into common stock at the option of the holder based upon a conversion price which results in a one-for-one exchange. The Preferred Stock has a stated dividend rate of $152.50 per share, per annum, and is anti-dilutive. The Company may pay dividends on or before December 31, 1997 only by issuing additional shares of Preferred Stock. The Company may redeem the Preferred Stock at any time after December 31, 1997 for its liquidation value. At June 25, 1994, the Company had accrued approximately $12,649,000 for the Preferred Stock dividends earned but not yet declared. In order to finance the purchase of the Preferred and Common Stock from the Company, Holdings issued $103.6 million aggregate principal amount of 15.25% Senior Discount Notes due 2004 (the "Holdings F-38 201 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes") and 121,118 Common Stock Purchase Warrants (the "Warrants") for gross proceeds of $50.0 million. No cash interest is payable on the Notes until June 15, 1998. At the present time, Holdings has no other income or assets other than its investment in the Company's Common and Preferred Stock and intends to service the interest payments on the Holdings Notes when they become payable in cash (in fiscal 1998) through dividends it receives on the Company's capital stock. (4) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT The Company's long-term debt is summarized as follows:
JUNE 26, JUNE 25, 1993 1994 ------------ ------------ Bank Term Loan, principal due quarterly through January 1999, with interest payable monthly in arrears........ $148,478,000 $137,064,000 10.45 percent Senior Notes principal due 2000 with interest payable semi-annually in arrears............. 175,000,000 175,000,000 Revolving Loan.......................................... 4,900,000 -- 10.625 percent first real estate mortgage due 1998, $12,000 of principal plus interest payable monthly secured by land and building with a net book value of $2,122,000............................................ 1,558,000 1,521,000 9.2 to 9.25 percent notes payable, collateralized by equipment, due September 1994, $67,000 of principal plus interest payable monthly, plus balloon payment of $992,000.............................................. 1,772,000 1,103,000 10.8 percent notes payable, collateralized by equipment, due September 1995, $72,000 of principal plus interest payable monthly, plus balloon payment of $1,004,000... 2,447,000 1,819,000 10.0 percent secured promissory note, collateralized by the stock of Bell, due 1996, interest payable quarterly through June 1996........................... 8,000,000 8,000,000 10.08 percent notes payable, collateralized by equipment, due November 1996, $34,000 of principal plus interest payable monthly, plus balloon payment of $493,000.............................................. 1,515,000 1,242,000 10.15 percent notes payable, collateralized by equipment, due December 1996, $45,000 of principal and interest payable monthly, plus balloon payment of $640,000.............................................. 1,994,000 1,675,000 10.0 percent real estate mortgage due 2000, $8,000 of principal and interest payable monthly................ 474,000 419,000 Other long-term debt.................................... 2,216,000 1,415,000 ------------ ------------ 348,354,000 329,258,000 Less -- current portion................................. 12,778,000 18,314,000 ------------ ------------ $335,576,000 $310,944,000 =========== ===========
In June 1991, the Company and certain of its subsidiaries entered into a Credit Agreement (the "Credit Agreement") with certain banks, comprised of a $315,000,000 Term Loan (the "Bank Term Loan") facility, a $70,000,000 Revolving Loan (the "Revolving Loan") facility and a $55,000,000 standby letter of credit facility (the "Letter of Credit Facility"). At June 25, 1994, $137,064,000 was outstanding under the Bank Term Loan, there were no borrowings outstanding under the Revolving Loan and $48,131,000 of standby letters of credit had been issued on behalf of the Company. A commitment fee of 1/2 of 1 percent is charged on the average daily unused portion of the Revolving Loan and the Letter of Credit Facility; such commitment fees are due quarterly in arrears. Interest on borrowings under the Bank Term Loan is at the bank's Base Rate (as defined) plus 1.25 percent or the Eurodollar Rate (as defined) plus 2.5 percent. At June 25, 1994, the F-39 202 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) weighted average interest rate on the Bank Term Loan was 6.5 percent. In accordance with certain requirements of the Credit Agreement, the Company purchased an interest rate cap for a principal amount of approximately $91.4 million on the three-month Libor rate at 5.5% which expires on January 3, 1995. Quarterly principal installments on the Bank Term Loan continue to December 1998, with $15,580,000 payable in fiscal year 1995, $21,245,000 payable in fiscal year 1996, $22,661,000 payable in fiscal 1997, $40,489,000 payable in fiscal 1998, and $37,089,000 payable in fiscal 1999. Interest on borrowings under the Revolving Loan is at the bank's Base Rate (as defined) plus 1.25 percent. At June 25, 1994, the interest rate on the Revolving Loan was 8.5 percent. To the extent borrowings under the Revolving Loan are not paid earlier, they are due in June 1996. The common stock of F4L-SoCal, Falley's, Cala and certain of their direct and indirect subsidiaries has been pledged as security under the Credit Agreement. In April 1992, the Company and its wholly-owned subsidiaries issued $175,000,000 of 10.45 percent Senior Notes (the "Senior Notes"). These notes are due in two equal sinking fund payments on April 15, 1999 and 2000. They are general unsecured obligations of the Company and rank senior in right of payment to all subordinated indebtedness (as defined). The Senior Notes rank "pari passu" in right of payment with all borrowings and other obligations of the Company under its bank Credit Agreement; however, the obligations under the Credit Agreement are secured by substantially all the assets of the Company and its subsidiaries. The Senior Notes may be redeemed beginning in 1996 at 104.5 percent, declining ratably to 100 percent in 1999. The proceeds received, net of issuance costs, were used to pay down borrowings under the Bank Term Loan. Deferred financing costs related to the portion of the Bank Term Loan that was retired of $6.7 million, net of related tax benefit of $2.5 million, are classified as an extraordinary item in the Company's consolidated statement of operations for the 52 weeks ended June 27, 1992. Scheduled maturities of principal of Long-Term Debt at June 25, 1994 are as follows: 1995................................................... $ 18,314,000 1996................................................... 23,384,000 1997................................................... 32,322,000 1998................................................... 40,701,000 1999................................................... 124,823,000 Later years............................................ 89,714,000 ------------ $329,258,000 ===========
The Company issued $145,000,000 principal amount of Senior Subordinated Notes (the "Subordinated Notes") in connection with the acquisition of Alpha Beta as described in Note 1. The Subordinated Notes bear interest, payable semi-annually on June 15 and December 15, at an annual rate of 13.75 percent. The Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of the Company, and may be redeemed beginning in 1996 at a redemption price of 106 percent. The redemption price declines ratably to 100 percent in 2000. The debt agreements, among other things, require the Company to maintain minimum levels of net worth (as defined), to maintain minimum levels of earnings (as defined), to maintain a hedge agreement to provide interest rate protection, and to comply with certain ratios related to interest expense (as defined), fixed charges (as defined), working capital and indebtedness. In addition, the debt agreements limit, among other things, additional borrowings, dividends on, and redemption of, capital stock, capital expenditures, incurrence of lease obligations, and the acquisition and disposition of assets. At June 26, 1993 and June 25, 1994 the Company was in compliance with the financial covenants of its debt agreements. At June 25, 1994, dividends and certain other payments are restricted based on terms in the debt agreements. F-40 203 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LEASES The Company's operations are conducted primarily in leased properties. Substantially all leases contain renewal options. Rental expense under operating leases was as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ----------- ----------- ----------- Minimum rents................................. $46,706,000 $44,504,000 $49,788,000 Rents based on sales.......................... 7,656,000 5,917,000 3,806,000
Following is a summary of future minimum lease payments under operating leases at June 25, 1994: 1995................................................... $ 52,542,000 1996................................................... 48,966,000 1997................................................... 45,325,000 1998................................................... 38,925,000 1999................................................... 34,423,000 Later years............................................ 269,332,000 ------------ $489,513,000 ===========
The Company has entered into lease agreements for new supermarket sites which were not in operation at June 25, 1994. Future minimum lease payments under such operating leases generally begin when such supermarkets open and at June 25, 1994 are: 1995 -- $5,990,000; 1996 -- $11,772,000; 1997 -- $11,825,000; 1998 -- $11,810,000; 1999 -- $11,819,000; later years -- $218,480,000. Certain leases qualify as capital leases under the criteria established in Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and are classified on the consolidated balance sheets as leased property under capital leases. Future minimum lease payments for the property under capital leases at June 25, 1994 are as follows: 1995.................................................... $ 7,948,000 1996.................................................... 7,521,000 1997.................................................... 6,995,000 1998.................................................... 6,374,000 1999.................................................... 6,071,000 Later years............................................. 44,108,000 ----------- Total minimum lease payments.................. 79,017,000 Less: amounts representing interest..................... 35,403,000 ----------- Present value of minimum lease payments................. 43,614,000 Less: current portion................................... 3,616,000 ----------- $39,998,000 ==========
Accumulated depreciation related to capital leases was $20,356,000 and $24,041,000 at June 26, 1993 and June 25, 1994, respectively. The Company is leasing a distribution facility and four store locations from the previous owner of Alpha Beta. The agreement contains a purchase option for the land, buildings and improvements and equipment at a price that equals or exceeds the estimated fair market value throughout the term of the lease. F-41 204 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INVESTMENT IN A.W.G. The investment in Associated Wholesale Grocers ("A.W.G.") consists principally of the cooperative's six percent interest-bearing seven and eight-year patronage certificates received in payment of certain rebates. Following is a summary of future maturities based upon current redemption terms: 1995..................................................... $ -- 1996..................................................... -- 1997..................................................... 795,000 1998..................................................... 1,420,000 1999..................................................... 1,520,000 Later years.............................................. 2,983,000 ---------- $6,718,000 =========
(7) INCOME TAXES The provision (benefit) for income taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ---------- ---------- ----------- Current: Federal..................................... $2,507,000 $ -- $ 3,251,000 State and other............................. 934,000 82,000 712,000 ---------- ---------- ----------- 3,441,000 82,000 3,963,000 ---------- ---------- ----------- Deferred: Federal..................................... -- 1,345,000 (70,000) State and other............................. -- -- (1,193,000) ---------- ---------- ----------- -- 1,345,000 (1,263,000) ---------- ---------- ----------- $3,441,000 $1,427,000 $ 2,700,000 ========= ========= ==========
A reconciliation of the provision (benefit) for income taxes to amounts computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35% for fiscal 1994 is as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ----------- ----------- ---------- Federal income taxes at statutory rate on loss before provision for income taxes and extraordinary charges...................... $(8,689,000) $(8,818,000) $ -- State and other taxes, net of federal tax benefit.................................... 934,000 82,000 (1,000) Alternative minimum tax...................... 2,507,000 -- -- Effect of permanent differences resulting primarily from amortization of goodwill.... 2,706,000 2,850,000 2,820,000 Accounting limitation (recognition) of deferred tax benefit....................... 5,983,000 7,313,000 (119,000) ----------- ----------- ---------- $ 3,441,000 $ 1,427,000 $2,700,000 ========== ========== =========
F-42 205 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for deferred taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ------------ ----------- ----------- Depreciation....................................... $ 6,282,000 $ 7,756,000 $ 2,536,000 Difference between book and tax basis of assets sold............................................. 2,514,000 3,198,000 (4,223,000) Deferred revenues and allowances................... (7,028,000) 40,000 (2,349,000) Pre-opening costs.................................. 1,072,000 (512,000) 174,000 Accounts receivable reserves....................... -- (270,000) 249,000 Unicap............................................. (124,000) (5,000) (536,000) Capital lease obligation........................... (2,010,000) (1,385,000) 2,792,000 Self-insurance reserves............................ (13,558,000) (4,082,000) (535,000) Inventory shrink reserve........................... (528,000) 777,000 (869,000) LIFO............................................... 7,104,000 (554,000) (1,010,000) Closed store reserve............................... 964,000 1,092,000 440,000 Accrued expense.................................... -- -- (582,000) Accrued payroll and related liabilities............ (2,656,000) 193,000 1,721,000 Damaged inventory reimbursement.................... 1,195,000 -- -- Acquisition costs.................................. 4,974,000 2,626,000 1,397,000 Sales tax reserves................................. -- (715,000) (418,000) Deferred rent subsidy.............................. -- (483,000) (624,000) Net operating loss usage........................... -- -- 5,782,000 Tax credits benefited.............................. -- (1,392,000) (4,477,000) Accounting limitation (recognition) of deferred tax benefit.......................................... 1,588,000 (4,591,000) (1,085,000) Other, net......................................... 211,000 (348,000) 354,000 ------------ ----------- ----------- $ -- $ 1,345,000 $(1,263,000) =========== ========== ==========
F-43 206 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the Company's deferred tax assets (liabilities) are as follows:
JUNE 26, JUNE 25, 1993 1994 ------------ ------------ Deferred tax assets: Accrued payroll and related liabilities............... $ 4,064,000 $ 2,448,000 Other accrued liabilities............................. 13,488,000 13,953,000 Property and equipment................................ 9,674,000 2,997,000 Self-insurance liabilities............................ 30,907,000 27,744,000 Loss carryforwards.................................... 27,863,000 20,675,000 Tax credit carryforwards.............................. 1,392,000 5,869,000 Other................................................. 1,223,000 580,000 ------------ ------------ Gross deferred tax assets.......................... 88,611,000 74,266,000 Valuation allowance................................... (45,008,000) (31,149,000) ------------ ------------ Net deferred tax assets............................ $ 43,603,000 $ 43,117,000 ------------ ------------ Deferred tax liabilities: Inventories........................................... $(20,243,000) $(16,738,000) Property and equipment................................ (38,298,000) (30,516,000) Obligations under capital leases...................... (5,802,000) (8,733,000) Other................................................. (1,689,000) (1,870,000) ------------ ------------ Gross deferred tax liability....................... (66,032,000) (57,857,000) ------------ ------------ Net deferred tax liability......................... $(22,429,000) $(14,740,000) =========== ===========
The Company recorded a valuation allowance to reserve a portion of its gross deferred tax assets at June 25, 1994 due primarily to financial and tax losses in recent years. Under SFAS 109, this valuation allowance will be adjusted in future periods as appropriate. However, the timing and extent of such future adjustments to the allowance cannot be determined at this time. At June 25, 1994, approximately $8,864,000 of the valuation allowance for deferred tax assets will reduce goodwill when the allowance is no longer required. At June 25, 1994, the Company has net operating loss carryforwards for federal income tax purposes of $59,071,000, which expire in 2007 through 2008. The Company has federal and state Alternative Minimum Tax ("AMT") credit carryforwards of approximately $4,090,000 which are available to reduce future regular taxes in excess of AMT. Currently, there is no expiration date for these credits. FFL files a consolidated federal income tax return, under which the federal income tax liability of FFL and its subsidiaries (which since June 23, 1989 include the Company) is determined on a consolidated basis. FFL has entered into a federal income tax sharing agreement with the Company and certain of its subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides that in any year in which the Company is included in any consolidated tax liability of FFL and has taxable income, the Company will pay to FFL the amount of the tax liability that the Company would have had on such due date if it had been filing a separate return. Conversely, if the Company generates losses or credits which actually reduce the consolidated tax liability of FFL and its other subsidiaries, FFL will credit to the Company the amount of such reduction in the consolidated tax liability. These credits are passed between FFL and the Company in the form of cash payments. In the event any state and local income taxes are determinable on a combined or consolidated basis, the Tax Sharing Agreement provides for a similar allocation between FFL and the Company of such state and local taxes. F-44 207 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company currently has an Internal Revenue Service examination in process covering its 1990 and 1991 fiscal years. The Internal Revenue Service has not yet made any additional tax assessments related to these years. (8) RELATED PARTY TRANSACTIONS The Company has a five-year consulting agreement with an affiliated company effective June 17, 1991 for management, financing, acquisition and other services. The agreement is automatically renewed on January 1 of each year for the five-year term unless ninety (90) days' notice is given by either party. The contract provides for annual management fees equal to $2 million plus an additional amount based on the Company's performance and advisory fees for acquisition and financing transactions. Fees paid or accrued associated with management services were $2,270,000 during the 52 weeks ended June 25, 1994, $2,000,000 during the 52 weeks ended June 26, 1993, and $2,000,000 during the 52 weeks ended June 27, 1992. Advisory fees paid or accrued were $170,000 during the 52 weeks ended June 25, 1994, $1,795,000 for the 52 weeks ended June 26, 1993, and $116,000 for the 52 weeks ended June 27, 1992. Advisory fees paid or accrued for financing transactions are capitalized and amortized over the term of the related financing. In connection with the acquisitions of Alpha Beta, ABC and the Food Barn Stores, the Company capitalized fees of $8,000,000, $500,000 and $92,000, respectively, which were paid to this affiliated company for acquisition services. (9) COMMITMENTS AND CONTINGENCIES The Company is contingently liable to former stockholders of certain predecessors for any prorated gains which may be realized within ten years of the acquisition of the respective companies resulting from the sale of the Certified stock. Such gains are only payable if Certified is purchased or dissolved, or if the Company sells the shares to Certified within the period noted above. The Company is a partner in a supplier partnership, in which it is contingently liable for the partnership's long-term debt. The Company's portion of such debt is approximately $1,650,000. The Company has entered into lease agreements with the developers of several new sites in which the Company has agreed to provide construction financing. At June 25, 1994, the Company had capitalized construction costs of $10,435,000 on total commitments of $19,250,000. In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against the Company and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in and to fix the price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and December 23, 1992, respectively. To date, the Court has yet to certify any of these classes, while a demurrer to the complaints was denied. The Company will vigorously defend itself in these class action suits. In addition, the Company or its subsidiaries are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. The Company self-insures its workers compensation and general liability. For the 52 weeks ended June 25, 1994, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 27, 1992, self-insurance loss provisions were $19,880,000, $38,040,000 and $46,140,000, respectively. The Company discounts its self- insurance liability using a 7% discount rate for all years presented. Management believes that this rate F-45 208 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximates the time value of money over the anticipated payout period (approximately 10 years) for essentially risk free investments. The Company's historical self-insurance liability for the three most recent fiscal years is as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ------------ ------------ ----------- Self-insurance liability.......... $ 95,605,000 $100,773,000 $90,898,000 Less: Discount.................... (13,046,000) (15,279,000) (9,194,000) ------------ ------------ ----------- Net self-insurance liability...... $ 82,559,000 $ 85,494,000 $81,704,000 ============ ============ ===========
The Company expects that cash payments for claims will aggregate approximately $16 million, $20 million, $18 million, $12 million and $7 million for its fiscal years ended in June 1995, 1996, 1997, 1998 and 1999. (10) EMPLOYEE BENEFIT PLANS The Company implemented SOP No. 93-6, Employer Accounting for Employee Stock Ownership Plans, effective June 26, 1994. The implementation of SOP No. 93-6 did not have a material effect on the accompanying unaudited consolidated financial statements. The Company and its subsidiaries sponsor several defined contribution benefit plans. The full-time employees of Falley's who are not members of a collective bargaining agreement are covered under a 401(k) plan under which the Company matches certain employee contributions with cash or FFL stock (the "Falley's ESOP"). As part of the original stock sale agreement between FFL and the Falley's ESOP, which has been amended from time to time, a partnership which owns stock of FFL has assumed the obligation to purchase any FFL shares as to which terminated plan participants exercise a put option under the terms of Falley's ESOP. The Company is not required to make cash payments to redeem the shares. As part of that agreement, the Company may elect, after providing a right of first refusal to the partnership, to purchase FFL shares put under the provisions of the plan. However, the partnership's obligation to purchase such FFL shares is unconditional, and any repurchase of shares by the Company is at the Company's sole election. During the year ended June 25, 1994, the Company elected to purchase $1.0 million of FFL shares as to which terminated plan participants had exercised their put option. FFL shares purchased by the Company are classified as treasury stock. As of April 30, 1994, the fair value of the shares allocated which are subject to a repurchase obligation by the partnership referred to above was approximately $15,170,000. The Company also sponsors two ESOPs for employees of the Company who are members of certain collective bargaining agreements (the "Union ESOPs"). The Union ESOPs provide for annual contributions based on hours worked at a rate specified by the terms of the collective bargaining agreements. The Company contributions are made in the form of Holdings stock or cash for the purchase of Holdings stock and are to be allocated to participants based on hours worked. During the 28 weeks ended January 7, 1995, the Company recorded a charge against operations of approximately $230,000 (unaudited) for benefits under the Union ESOPs. There were no shares issued to the Union ESOPs at January 7, 1995. All other full-time employees of the Company who are not members of a collective bargaining agreement are covered under a separate 401(k) plan (the "Management Plan"). The Management Plan provides for annual contributions which are determined at the discretion of the Company. The Company contributions are allocated to participants based on employee compensation and matching of certain employee contributions. A portion of the Company contribution allocated based on compensation is made in the form of stock or cash for the purchase of stock. F-46 209 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total charges against operations related to all employee benefit plans sponsored by the Company and its subsidiaries were $337,000, $284,000 and $699,000 for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994, respectively. No contributions were made with stock and no stock was acquired by any plans in fiscal 1992, fiscal 1993 or fiscal 1994. The Company contributes to multi-employer pension plans administered by various trustees. Contributions to these plans are based upon negotiated wage contracts. These plans may be deemed to be defined benefit plans. Information related to accumulated plan benefits and plan net assets as they may be allocated to the Company at June 25, 1994 is not available. The Company contributed $78.6 million, $69.4 million and $57.2 million to these plans for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, respectively. Management is not aware of any plans to terminate such plans. The United Food and Commercial Workers health and welfare plans were overfunded and those employers who contributed to the plans are to receive a pro rata share of the excess reserves in these plans through a reduction of current contributions. The Company's share of the excess reserve was $24.2 million, of which $8.1 million was recognized in the 52 weeks ended June 25, 1994, with the remainder to be recognized in future periods as the credits are taken. Offsetting the reduction in employer contributions was a $5.5 million union contract ratification bonus and contractual wage increases. (11) COMMON STOCK On December 31, 1992, concurrent with the sale of the Preferred Stock, the Company sold 121,118 shares of common stock to Holdings. Concurrently, the remaining shares of common stock of the Company were exchanged for shares of Holdings common stock on a one for one basis. (12) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (a) Cash and Cash Equivalents The carrying amount approximates fair value as a result of the short maturity of these instruments. (b) Short-Term Notes and Other Receivables The carrying amount approximates fair value as a result of the short maturity of these instruments. (c) Investments In and Notes Receivable From Supplier Cooperatives The Company maintains a non-current deposit with Certified in the form of Class B shares of Certified. Certified is not obligated in any fiscal year to redeem more than a prescribed number of the Class B shares issued. Therefore, it is not practicable to estimate the fair value of this investment. The Company maintains a non-current note receivable from A.W.G. There are no quoted market prices for this investment and a reasonable estimate could not be made without incurring excessive costs. Additional information pertinent to the value of this investment is provided in Note 6. (d) Long-Term Debt The fair value of the $175.0 million Senior Notes, the $145.0 million Subordinated Notes and the Bank Term Loan is based on quoted market prices. Market quotes for the fair value of the remainder of the Company's debt are not available, and a reasonable estimate of the fair value could not be made without F-47 210 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) incurring excessive costs. Additional information pertinent to the value of the unquoted debt is provided in Note 4. The estimated fair values of the Company's financial instruments are as follows:
JUNE 25, 1994 ------------------------- CARRYING FAIR AMOUNT VALUE ----------- ----------- Cash and cash equivalents................................... $32,996,000 $32,996,000 Short-term notes and other receivables...................... 4,187,000 4,187,000 Investments in and notes receivable from supplier cooperatives.............................................. 12,702,000 -- Long-term debt for which it is: - Practicable to estimate fair values..................... 457,064,000 472,779,000 - Not practicable......................................... 17,194,000 --
(13) OTHER INCOME, NET The components of other income items included in SG&A are as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ---------- ---------- --------- Interest income.................................... $1,266,000 $ 993,000 $ 903,000 Licensing fees..................................... 493,000 246,000 270,000 Other income (expense)............................. 769,000 3,710,000 (177,000) ---------- ---------- --------- $2,528,000 $4,949,000 $ 996,000 ========= ========= =========
(14) RESTATEMENT The Company has restated the statements of operations for its fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 to classify certain buying, occupancy and labor costs associated with making its products available for sale as cost of sales. These amounts were previously classified as selling, general, administrative, and other net, and depreciation and amortization of property and equipment and totalled $236,152,000, $224,469,000, $219,548,000 and $114,334,000 (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994, respectively. The Company has also classified a portion of its self-insurance costs as interest expense that was previously recorded in selling, general, administrative and other, net. These amounts were $4,960,000, $5,865,000, $5,836,000 and $3,275,000 (unaudited) for the fiscal years 1992, 1993 and 1994 and the 28 weeks ended January 8, 1994, respectively. Depreciation and amortization costs not classified in cost of sales are included in selling, general, administrative and other, net. The change in classification did not affect the net loss, loss before provision for income taxes and extraordinary charges or loss per common share. (15) SUBSEQUENT EVENT (UNAUDITED) On September 14, 1994, the Company, Holdings, and FFL entered into a definitive Agreement and Plan of Merger (the "Merger") with Ralphs Supermarkets, Inc. ("Ralphs") and the stockholders of Ralphs. Pursuant to the terms of the Merger Agreement, the Company will, subject to certain terms and conditions being satisfied or waived, be merged into Ralphs and Ralphs will become a wholly-owned subsidiary of Holdings. Conditions to the consummation of the Merger include, among other things, receipt of regulatory approvals and other necessary consents and the completion of financing for the transaction. The purchase price for Ralphs is approximately $1.5 billion, including the assumption of debt. F-48 211 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate purchase price, payable to the stockholders of Ralphs, will consist of $375 million in cash, $131.5 million initial principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 ("Seller Debentures") and $18.5 million of initial accreted value of 13 5/8% Senior Discount Debentures due 2005 ("New Discount Debentures"). In addition, the Company will enter into an agreement with a stockholder of Ralphs pursuant to which such stockholder will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the closing of the Ralphs Merger in exchange for the payment of a consulting fee. The financing required to complete the Merger will include the issuance of significant additional equity by FFL, the issuance of new debt securities by the Company and Holdings and the incurrence of additional bank financing by the Company. The equity issuance would be made to a group of investors led by Apollo Advisors, L.P. ("Apollo"), which will purchase up to $140 million in FFL stock. Apollo will receive a $5 million fee for its commitment to make an equity investment. The issuance of new debt securities would be in the form of senior notes of Supermarkets of up to $295 million and senior subordinated notes of Supermarkets of up to $200 million. The bank financing would be made pursuant to a commitment by Bankers Trust Company to provide up to $1,075 million in such financing. In connection with the receipt of new financing, the Company and Holdings will also be required to complete certain exchange offers, consent solicitations and or other transactions with the holders of their currently outstanding debt securities. Holdings will issue an additional $81.5 million of initial accreted value of New Discount Debentures for $59.0 million in cash and $22.5 million in lieu of cash for fees associated with the Merger. Holdings will redeem the Discount Notes, with a book value of $64.5 million at January 7, 1995, for $83.9 million in cash. As of January 29, 1995, Ralphs had outstanding indebtedness of approximately $1,018.5 million. Ralphs had sales of $2,724.6 million, operating income of $145.6 million and earnings before income taxes of $32.1 million for its most recent fiscal year ended January 29, 1995. Upon consummation of the Merger, the operations and activities of the Company will be significantly impacted due to conversions of the Company's existing Southern California conventional stores to either Ralphs or Food 4 Less warehouse stores as well as the consolidation of various operating functions and departments. The Merger will result in restructuring charges that are currently estimated to be approximately $45 million, of which approximately $5.1 million was recorded in the Company's results of operations for the 28 weeks ended January 7, 1995. The remaining estimated restructuring charges will be recorded as an expense once the Merger is completed. (16) RESTRUCTURING CHARGE (UNAUDITED) The Company has converted 11 of its conventional format supermarkets to warehouse format stores. During the 28 weeks ended January 7, 1995, the Company recorded a non-cash restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. F-49 212 APPENDIX A COMPARISON OF OLD F4L SENIOR NOTES AND NEW F4L SENIOR NOTES The following is a brief comparison of the principal features of the Old F4L Senior Notes and the New F4L Senior Notes. The terms of the New F4L Senior Notes differ from the current (unamended) terms of the Old F4L Senior Notes in certain significant respects, including those described below. The summary comparisons set forth below do not purport to be complete and are qualified in their entirety by reference to the Old F4L Senior Note Indenture, the Old F4L Senior Notes, the New F4L Senior Note Indenture, the New F4L Senior Notes, the "Description of the New F4L Notes" and "The Proposed Amendments" and the related definitions contained therein.
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ ISSUER ISSUER Food 4 Less. The Company, as successor by merger to Food 4 Less. PRINCIPAL AMOUNT OUTSTANDING PRINCIPAL AMOUNT OUTSTANDING As of May 1, 1995, $175 million. The up to $175 million principal amount of New F4L Senior Notes offered hereby will be part of an issue of up to $470 million aggregate principal amount of New F4L Senior Notes, up to $295 million principal amount of which will be issued pursuant to the Senior Note Public Offering. INTEREST RATE INTEREST RATE The Old F4L Senior Notes bear interest at the rate of The New F4L Senior Notes will bear interest at a fixed 10.45% per annum. rate per annum equal to the greater of (a) 10.45% and (b) the Applicable Treasury Rate (as hereinafter defined) plus 350 basis points (3.50 percentage points); provided, however, that in no event will the New F4L Senior Notes bear interest at a rate per annum that is less than the interest rate on the New F4L Senior Notes offered pursuant to the Senior Note Public Offering. The "Applicable Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the average life to stated maturity of the New F4L Senior Notes; provided that if the average life to stated maturity of the New F4L Senior Notes is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of the year) from the weekly average yields of the United States Treasury securities for which such yields are given. INTEREST PAYMENT DATES INTEREST PAYMENT DATES April 15 and October 15. June 1 and December 1, commencing on December 1, 1995. FINAL MATURITY DATE FINAL MATURITY DATE April 15, 2000. June 1, 2004. OPTIONAL REDEMPTION OPTIONAL REDEMPTION The Old F4L Senior Notes are redeemable, at the option The New F4L Senior Notes are redeemable, at the option of Food 4 Less, in whole at any time or in part from of the Company, in whole at any time or in part from time to time, on or after April 15, 1996, at the time to time, on or after June 1, 2000, at the following redemption prices if redeemed during the following redemption prices if redeemed during the twelve-month period commencing on April 15 of the years twelve-month period commencing on June 1 of the years set forth below: set forth below: 1996..........................................104.48% 2000........................................103.9188% 1997..........................................102.99% 2001........................................102.6125% 1998..........................................101.49% 2002........................................101.3063% 1999 and thereafter...........................100.00% 2003 and thereafter.........................100.0000% in each case plus accrued and unpaid interest to the in each case plus accrued and unpaid interest to the date of redemption. date of redemption. In the event the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to June 1, 1998, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the New F4L Senior Notes originally issued, at a redemption price equal to 110.45% of the principal amount
A-1 213
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ thereof if redeemed during the 12 months commencing on June 1, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 107.8375% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest to the redemption date. In the event the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. MANDATORY REDEMPTION MANDATORY REDEMPTION Food 4 Less will make a mandatory sinking fund payment The New F4L Senior Notes are not subject to a mandatory of $87.5 million on April 15, 1999, sufficient to sinking fund requirement. retire 50% of the Old F4L Senior Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. Food 4 Less may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Old F4L Senior Notes previously acquired by Food 4 Less and surrendered to the Old F4L Senior Note Trustee for cancellation or redeemed at the option of Food 4 Less and which, in each case, were not previously used for or as a credit against any other required payment pursuant to the Old F4L Senior Note Indenture. Food 4 Less may use the same Old F4L Senior Note as a credit only once. Food 4 Less intends to credit Old F4L Senior Notes tendered into the Exchange Offer against its sinking fund obligation. RANKING RANKING The Old F4L Senior Notes are general unsecured senior The New F4L Senior Notes will be senior unsecured obligations of Food 4 Less and are senior to all obligations of the Company and will be senior to all Subordinated Indebtedness of Food 4 Less, including the Subordinated Indebtedness. The New F4L Senior Notes Old F4L Subordinated Notes. The Old F4L Senior Notes will rank pari passu in right of payment with all rank pari passu in right of payment with all borrowings unsubordinated Indebtedness and other liabilities of and other obligations of Food 4 Less and its the Company. Such borrowings and obligations under the subsidiaries under the Credit Agreement. Such Credit Agreement and the related guarantees are secured borrowings and obligations under the Credit Agreement by substantially all of the assets of the Company and and related guarantees are secured by substantially all its subsidiaries, whereas the New F4L Senior Notes are of the assets of Food 4 Less and its subsidiaries, senior unsecured obligations of the Company and its whereas the Old F4L Senior Notes are senior unsecured subsidiaries. obligations of Food 4 Less and its subsidiaries. GUARANTEES GUARANTEES Each Subsidiary Guarantor has unconditionally Each Subsidiary Guarantor will unconditionally guaranteed, jointly and severally, the complete and guarantee, jointly and severally, the complete and prompt performance of Food 4 Less' obligations under prompt performance of the Company's obligations under the Old F4L Senior Note Indenture and the Old F4L the New F4L Senior Note Indenture and New F4L Senior Senior Notes. See "Guarantees of Certain Indebtedness" Notes. See "Guarantees of Certain Indebtedness" below. below. "Subsidiary Guarantor" means (i) each of Alpha Beta "Subsidiary Guarantor" means (i) each of Alpha Beta Company, Bell Markets, Inc., Cala Co., Cala Foods, Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Falley's, Inc., Food 4 Less of California, Inc., Inc., Cala Co., Cala Foods, Inc., Falley's Inc., Food 4 Food 4 Less Merchandising, Inc., Food 4 Less GM, Inc. Less of California, Inc., Food 4 Less Merchandising, and Food 4 Less of Southern California, Inc., (ii) each Inc., Food 4 Less GM, Inc., Food 4 Less of Southern of Food 4 Less' subsidiaries which becomes a guarantor California, Inc., (ii) upon consummation of the Merger, of the Old F4L Senior Notes in compliance with the Crawford Stores, Inc., (iii) each of the Company's provisions set forth under "Guarantees of Certain subsidiaries which becomes a guarantor of the New F4L Indebtedness," and (iii) each of Food 4 Less' Senior Notes in compliance with the provisions set subsidiaries executing a supplemental indenture in forth under "Guarantees of Certain Indebtedness," and which such subsidiary agrees to be bound by the terms (iv) each of the Company's Subsidiaries executing a of the Old F4L Senior Note Indenture. supplemental indenture in which such Subsidiary agrees to be bound by the terms of the New F4L Senior Notes Indenture. CHANGE OF CONTROL CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder The New F4L Senior Note Indenture will provide that if will have the right to require the repurchase of such a Change of Control occurs, each holder will have the holder's Old F4L Senior Notes at a purchase price equal right to require the Company to repurchase such to 101% of the principal amount thereof plus accrued holder's New F4L Senior Notes pursuant to a Change of and unpaid interest to the date of repurchase. Control Offer at 101% of the principal amount thereof plus accrued and unpaid interest to the date of "Change of Control" means the acquisition after the repurchase. Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the "Change of Control" means (i) the acquisition after the Exchange Act) by Issue Date, in one or more transactions, of beneficial ownership
A-2 214
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ (i) any person or entity (other than any Permitted (within the meaning of Rule 13d-3 under the Exchange Holder) or (ii) any group of persons or entities Act) by (a) any person or entity (other than any (excluding any Permitted Holders) who constitute a Permitted Holder) or (b) any group of persons or group (within the meaning of Section 13(d)(3) of the entities (excluding any Permitted Holders) who Exchange Act), in either case, of any securities of FFL constitute a group (within the meaning of Section or of Food 4 Less such that, as a result of such 13(d)(3) of the Exchange Act), in either case, of any acquisition, such person, entity or group either (A) securities of New Holdings or the Company such that, as beneficially owns (within the meaning of Rule 13d-3 a result of such acquisition, such person, entity or under the Exchange Act), directly or indirectly, 51% or group either beneficially owns (within the meaning of more of Food 4 Less' then outstanding voting securities Rule 13d-3 under the Exchange Act), directly or entitled to vote on a regular basis for a majority of indirectly, 40% or more of the then outstanding voting the board of directors of Food 4 Less (but only to the securities entitled to vote on a regular basis for a extent that such beneficial ownership is not shared majority of the board of directors of the Company (but with any Permitted Holder who has the power to direct only to the extent that such beneficial ownership is the vote thereof) or (B) otherwise has the ability to not shared with any Permitted Holder who has the power elect, directly or indirectly, a majority of the to direct the vote thereof), provided, however, that no members of Food 4 Less' board of directors. such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the "Permitted Holder" means (i) Food 4 Less Equity aggregate, at such time, a greater percentage of such Partners, L.P., The Yucaipa Companies or any entity voting securities than such other person, entity or controlled thereby, (ii) an employee benefit plan of group or (B) at the time of such acquisition, the Food 4 Less, or any participant therein or any of its Permitted Holders (or any of them) possess the ability subsidiaries, (iii) a trustee or other fiduciary (by contract or otherwise) to elect, or cause the holding securities under an employee benefit plan of election, of a majority of the members of the Company's Food 4 Less or any of its subsidiaries or (iv) any board of directors. Permitted Transferee of any of the foregoing persons. "Permitted Holder" means (i) Food 4 Less Equity "Permitted Transferees" means, with respect to any Partners, L.P., and The Yucaipa Companies, or any person, (i) any affiliates of such person, (ii) the entity controlled thereby or any of the partners heirs, executors, administrators, testamentary thereof, (ii) Apollo Advisors, L.P., Lion Advisors, trustees, legatees or beneficiaries of any such person, L.P. or any entity controlled thereby or any of the and (iii) a trust the beneficiaries of which, or a partners thereof, (iii) an employee benefit plan of the corporation of partnership, the stockholders or general Company, or any of its subsidiaries or any participant or limited partners of which, include only such person therein, (iv) a trustee or other fiduciary holding or his or her spouse or lineal descendents, in each securities under an employee benefit plan of the case to whom such person has transferred securities of Company or any of its subsidiaries or (v) any Permitted Food 4 Less. Transferee of any of the foregoing persons. "Permitted Transferees" means, with respect to any IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD person, (i) any Affiliate of such person, (ii) the F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE heirs, executors, administrators, testamentary THIS COVENANT AND CERTAIN RELATED DEFINITIONS. trustees, legatees or beneficiaries of any such person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person and (v) any investment fund or investment entity that is a subsidiary of such person or a Permitted Transferee of such person. CERTAIN COVENANTS CERTAIN COVENANTS LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the New Old F4L Senior Note Indenture, Food 4 Less shall not, F4L Senior Note Indenture, the Company shall not, and and shall cause each of its subsidiaries not to, shall cause each of its subsidiaries not to, directly directly or indirectly, make any Restricted Payment if, or indirectly, make any Restricted Payment if, at the at the time of such Restricted Payment, or after giving time of such proposed Restricted Payment, or after effect thereto, (a) a Default or an Event of Default giving effect thereto, (a) a Default or an Event of (as defined below) shall have occurred and be continu- Default shall have occurred and be continuing, (b) the ing, (b) the net worth of Food 4 Less on the last day Company could not incur $1.00 of additional Indebted- of the full fiscal quarter immediately preceding the ness (other than Permitted Indebtedness) pursuant to date of such Restricted Payment (pro forma to give the covenant described below under "Limitation on effect thereto) is not greater than $115 million, (c) Incurrences of Additional Indebtedness" or (c) the Food 4 Less' Operating Coverage Ratio, calculated on a aggregate amount expended for all Restricted Payments, pro forma basis as if such Restricted Payment had been including such proposed Restricted Payment (the amount made at the beginning of the pro forma period, shall be of any Restricted Payment, if other than cash, to be less than 2.25 to 1.0 or (d) the aggregate amount the fair market value thereof at the date of payment as expended for all Restricted Payments, including such determined in good faith by the board of directors of Restricted Payment (the amount of any Restricted the Company), subsequent to the Issue Date, shall Payment, if other than cash, to be the fair market exceed the sum of (i) 50% of the aggregate Consolidated value thereof at the date of payment as determined in Net Income (or if such aggregate Consolidated Net good faith by the board of directors of Food 4 Less Income is a loss, minus 100% of such loss) of the which determination shall be evidenced by a board Company earned subsequent to the Issue Date and on or resolution), subsequent to the Issue Date, shall exceed prior to the date of the proposed Restricted Payment the sum of (i) 25% of the aggregate Consolidated Net (the "Reference Date") plus (ii) 100% of the aggregate Income (or if such aggregate Consolidated Net Income is net proceeds received by the Company from any person a loss, minus 100% of such loss) of Food 4 Less earned (other than a subsidiary of the Company) from the subsequent to the Issue Date and prior to the date issuance and sale
A-3 215
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ the Restricted Payment occurs (the "Reference Date") (including upon exchange or conversion for other plus (ii) 100% of the aggregate net proceeds received securities of the Company) subsequent to the Issue Date by Food 4 Less from any person (other than a and on or prior to the Reference Date of Qualified subsidiary) from the issuance and sale (including upon Capital Stock (excluding (A) Qualified Capital Stock exchange or conversion for other securities of Food 4 paid as a dividend on any capital stock or as interest Less) subsequent to the Issue Date and on or prior to on any Indebtedness and (B) any net proceeds from the Reference Date of Qualified Capital Stock issuances and sales financed directly or indirectly (excluding (A) Qualified Capital Stock paid as a using funds borrowed from the Company or any dividend on any capital stock or as interest on any subsidiary, until and to the extent such borrowing is Indebtedness and (B) any net proceeds from issuances repaid), plus (iii) 100% of the aggregate net cash and sales financed directly or indirectly using funds proceeds received by the Company as capital borrowed from Food 4 Less or any subsidiary, until and contributions to the Company after the Issue Date, plus to the extent such borrowing is repaid). (iv) $25 million. Notwithstanding the foregoing, if no Default or Event Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing as a of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the consequence thereof, the provisions set forth in the immediately preceding paragraph will not prevent (1) immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the the payment of any dividend within 60 days after the date of its declaration if the dividend would have been date of its declaration if the dividend would have been permitted on the date of declaration, (2) the permitted on the date of declaration, (2) the acquisition of any shares of capital stock of Food 4 acquisition of any shares of capital stock of the Less or the repayment of any Indebtedness of Food 4 Company or the repurchase, redemption or other Less in exchange for or solely out of the proceeds of repayment of any Subordinated Indebtedness in exchange the substantially concurrent sale (other than to a for or solely out of the proceeds of the substantially subsidiary) of shares of Qualified Capital Stock, (3) concurrent sale (other than to a subsidiary) of shares the repurchase or redemption of (a) Old F4L Notes in of Qualified Capital Stock of the Company, (3) the accordance with the provisions of (i) Section 5.04 repurchase, redemption or other repayment or redemption ("Maintenance of Net Worth"), (ii) Section 5.16 of any Subordinated Indebtedness in exchange for or ("Limitation on Change of Control") and (iii) Section solely out of the proceeds of the substantially 5.17 ("Limitation on Disposition of Assets") set forth concurrent sale (other than to a subsidiary) of in the Old F4L Subordinated Note Indenture or (b) any Subordinated Indebtedness of the Company with an other Indebtedness of Food 4 Less in exchange for or Average Life equal to or greater than the then solely out of the proceeds of the substantially remaining Average Life of the Subordinated Indebtedness concurrent sale (other than to a Subsidiary) of repurchased or redeemed or repaid, (4) any payments by Indebtedness which is subordinated in right of payment the Company or any Subsidiary, or any dividend by the to the Old F4L Senior Notes with no scheduled or Company or any Subsidiary to New Holdings the proceeds required maturity or scheduled or required repayment of of which are used by New Holdings to make payments, principal or sinking fund payment prior to the final required to be made due to the exercise of statutory maturity of the Old F4L Senior Notes, or (4) Permitted dissenters, appraisal or similar rights by holders of Payments; provided that the declaration of each common stock of FFL in connection with the FFL Merger dividend paid in accordance with clause (1) above, each and (5) Permitted Payments; provided, however, that the acquisition or repayment made in accordance with, or of declaration of each dividend paid in accordance with the type set forth in, clause (2) above, each clause (1) above, each acquisition, repurchase, repurchase of Old F4L Subordinated Notes pursuant to redemption or other repayment made in accordance with, clause (3)(a)(i) and each payment described in clause or of the type set forth in, clause (2) above, and each (iii) or (iv) of the definition of "Permitted Payments" payment described in clause (iii), (iv), (vii) and (ix) shall each be counted for purposes of computing amounts of the definition of the term "Permitted Payments" expended pursuant to subclause (d) in the immediately shall each be counted for purposes of computing amounts preceding paragraph, and no payment described in clause expended pursuant to subclause (c) in the immediately (3) above (other than clause (3)(a)(i)) or pursuant to preceding paragraph, and no amounts expended pursuant clause (i) or (ii) of the definition of "Permitted to clause (3) above or pursuant to clause (i), (ii), Payments" shall be so counted. (v), (vi), (viii), (x) or (xi) of the definition of the term "Permitted Payments" shall be so counted, "Restricted Payment" means any (i) Stock Payment, provided, further that to the extent any payments made (ii) Investment (other than a Permitted Investment) or pursuant to clause (vii) of the definition of the term (iii) Restricted Debt Prepayment. "Permitted Payments" are deducted for purposes of computing the Consolidated Net Income of the Company, "Stock Payment" means, with respect to any person, such payments shall not be counted for purposes of (a) the declaration or payment by such person, either computing amounts expended as Restricted Payments in cash or in property, of any dividend on (except, in pursuant to subclause (c) in the immediately preceding the case of Food 4 Less, dividends payable solely in paragraph. Qualified Capital Stock of Food 4 Less), or the making by such person or any of its subsidiaries of any other "Restricted Payment" means any (i) Stock Payment, (ii) distribution in respect of, such person's Qualified Investment (other than a Permitted Investment) or (iii) Capital Stock or any warrants, rights or options to Restricted Debt Prepayment. purchase or acquire shares of any class of such capital stock (other than exchangeable or convertible "Stock Payment" means, with respect to any person, (a) Indebtedness of such person), or (b) the redemption, the declaration or payment by such person, either in repurchase, retirement or other acquisition for value cash or in property, of any dividend on (except, in the by such person or any of its subsidiaries, directly or case of the Company, dividends payable solely in indirectly, of such person's Qualified Capital Stock Qualified Capital Stock of the Company), or the making (and, in the case of a subsidiary, Qualified Capital by such person or any of its subsidiaries of any other Stock of Food 4 Less) or any warrants, rights or distribution in respect of, such person's Qualified options to purchase or acquire shares of any class of Capital Stock or any warrants, rights or options to such capital stock (other than exchangeable or purchase or acquire shares of any class of such capital convertible Indebtedness of such person), other than, stock (other than exchangeable or convertible in the case of Food 4 Less, through the issuance in Indebtedness of such person), or (b) the redemption, exchange therefor solely of Qualified Capital Stock of repurchase, retirement or other acquisition for value Food 4 Less; provided, however, that in the case of a by such person or any of its subsidiaries, directly or subsidiary, the term "Stock Payment" shall not include indirectly, of such person's Qualified Capital Stock any such payment with respect to its capital stock or (and, in the
A-4 216
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ warrants, rights or options to purchase or acquire case of a subsidiary, Qualified Capital Stock of the shares of any class of its capital stock that are owned Company) or any warrants, rights or options to purchase solely by Food 4 Less or a wholly-owned subsidiary. or acquire shares of any class of such capital stock (other than exchangeable or convertible Indebtedness of "Investment" by any person in any other person means such person), other than, in the case of the Company, any investment by such person in such other person, through the issuance in exchange therefor solely of whether by a purchase of assets, in any transaction or Qualified Capital Stock of the Company; provided, series of related transactions, individually or in the however, that in the case of a subsidiary, the term aggregate, in an amount greater than $5 million, share "Stock Payment" shall not include any such payment with purchase, capital contribution, loan, advance (other respect to its capital stock or warrants, rights or than reasonable loans and advances to employees for options to purchase or acquire shares of any class of moving and travel expenses, as salary advances, or to its capital stock that are owned solely by the Company permit the purchase of Qualified Capital Stock of Food or a wholly-owned subsidiary. 4 Less and other similar customary expenses incurred, in each case in the ordinary course of business "Investment" by any person in any other person means consistent with past practice) or similar credit any investment by such person in such other person, extension constituting Indebtedness of such other whether by share purchase, capital contribution, loan, person, and any guarantee of Indebtedness of any other advance (other than reasonable loans and advances to person. employees for moving and travel expenses, as salary advances, or to permit the purchase of Qualified "Permitted Investment" by any person means (i) any Capital Stock of the Company and other similar Related Business Investment, (ii) Investments in customary expenses incurred, in each case in the securities not constituting cash or cash equivalents ordinary course of business consistent with past and received in connection with an Asset Sale made practice) or similar credit extension constituting pursuant to the provisions of the Old F4L Senior Note Indebtedness of such other person, and any guarantee of Indenture summarized under "Limitation on Disposition Indebtedness of any other person. of Assets" or any other disposition of assets not constituting an Asset Sale by reason of the $250,000 "Permitted Investment" by any person means (i) any threshold contained in the definition thereof, (iii) Related Business Investment, (ii) Investments in cash and cash equivalents, (iv) Investments existing on securities not constituting cash or cash equivalents June 17, 1991, (v) Investments specifically permitted and received in connection with an Asset Sale made by and made in accordance with the provisions of the pursuant to the provisions of the covenant described Old F4L Senior Note Indenture summarized under under "Limitation on Asset Sales" or any other dispo- "Limitation on Restricted Payments," "Limitation on sition of assets not constituting an Asset Sale by Transactions with Affiliates" and "Limitation on reason of the $500,000 threshold contained in the Incurrences of Additional Indebtedness," and (vi) definition thereof, (iii) cash and cash equivalents, Investments by Subsidiary Guarantors in other (iv) Investments existing on the Issue Date, (v) Subsidiary Guarantors and Investments by subsidiaries Investments specifically permitted by and made in which are not Subsidiary Guarantors in other subsid- accordance with the provisions of the covenant iaries which are not Subsidiary Guarantors. described under "Limitation on Transactions with Affiliates", (vi) Investments by Subsidiary Guarantors in other Subsidiary Guarantors and Investments by subsidiaries which are not Subsidiary Guarantors in other subsidiaries which are not Subsidiary Guarantors, and (vii) additional Investments in an aggregate amount not exceeding $15 million. "Restricted Debt Prepayment" means any purchase, "Restricted Debt Prepayment" means any purchase, redemption, defeasance (including, but not limited redemption, defeasance (including, but not limited to, to, in-substance or legal defeasance) or other in substance or legal defeasance) or other acquisition acquisition or retirement for value, directly or or retirement for value, directly or indirectly, by the indirectly, by Food 4 Less or a subsidiary, prior to Company or a subsidiary, prior to the scheduled the scheduled maturity or prior to any scheduled maturity or prior to any scheduled repayment of repayment of principal or sinking fund payment, as the principal or sinking fund payment, as the case may be, case may be, in respect of Indebtedness of Food 4 Less in respect of Subordinated Indebtedness. that is subordinate in right of payment to the Old F4L Senior Subordinated Notes; provided, however, that any "Permitted Payments" means (i) any payment by the Com- such acquisition shall be deemed not to be a Restricted pany or any Subsidiary, or any dividend by the Company Debt Prepayment to the extent it is made (x) in or any Subsidiary to New Holdings the proceeds of which exchange for or with the proceeds from the are utilized by New Holdings to make payments, to The substantially concurrent issuance of Qualified Capital Yucaipa Companies or the principals or any Affiliates Stock or (y) in exchange for or with the proceeds from thereof for consulting, management, investment banking the substantially concurrent issuance of Indebtedness, or similar services, or for reimbursement of losses, in a principal amount (or, if such Indebtedness costs and expenses pursuant to the Consulting provides for an amount less than the principal amount Agreement, (ii) any payment by the Company or any thereof to be due and payable upon the acceleration subsidiary pursuant to the Amended and Restated Tax thereof, with an original issue price) not to exceed Sharing Agreement, dated as of June 17, 1991, between the sum of (A) the lesser of (i) the principal amount Food 4 Less and certain subsidiaries, as such Tax of Indebtedness being acquired in exchange therefor (or Sharing Agreement may be amended from time to time, so with the proceeds therefrom) and (ii) if such long as the payment thereunder by the Company and its Indebtedness being acquired was issued at an original subsidiaries shall not exceed the amount of taxes the issue discount, the original issue price thereof plus Company would be required to pay if it were the filing amortization of the original issue discount at the time person for all applicable taxes, (iii) any payment by of the incurrence of the Indebtedness being issued in the Company or any subsidiary pursuant to the Transfer exchange therefor (or the proceeds of which will and Assumption Agreement, dated as of June 23, 1989, finance such acquisition), and (B) the amount of between Food 4 Less and Holdings, as in effect on the penalties, fees and expenses actually incurred with Issue Date, (iv) any payment by the Company or any respect thereto, and provided further that (x) any such subsidiary, or any dividend by the Company or any Indebtedness shall have an average life not less than Subsidiary to New Holdings the proceeds of which are the average life of the Indebtedness being acquired, used by New Holdings to make payments, (a) in and shall contain subordination and default provisions connection with repurchases of outstanding shares of no less favorable, in any material respect, to holders the Company's or New of the Old F4L Senior Subordinated Notes than those
A-5 217
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ contained in such Indebtedness being acquired (y) any Holdings' common stock following the death, disability such Indebtedness that repays the F4L Senior or termination of employment of management Subordinated Notes shall not have any fixed mandatory stockholders, and (b) of amounts required to be paid by redemption or sinking fund requirement in an amount New Holdings, the Company or any of its subsidiaries to greater than or at a time prior to the amounts and participants or former participants in employee benefit times specified in the F4L Senior Subordinated Notes or plans upon termination of employment by such any Indebtedness refinancing the F4L Senior Subordi- participants, as provided in the documents related nated Notes, as the case may be, unless any such thereto, in an aggregate amount (for both clauses (a) requirement applies on a date after the Maturity Date. and (b)) not to exceed $10 million in any yearly period (provided that any unused amounts may be carried over "Permitted Payments" means any payment by Food 4 Less to any subsequent yearly period subject to a maximum or any subsidiary (i) to The Yucaipa Companies or the amount of $20 million in any yearly period), (v) from principals thereof for consulting, investment banking and after June 30, 1998, payments of cash dividends or or similar services during such period pursuant to that loans to New Holdings in an amount sufficient to enable certain Amended and Restated Consulting Agreement, New Holdings to make payments of interest required to dated as of June 17, 1991, among Food 4 Less, Yucaipa be made in respect of the Discount Notes in an amount Management Company and The Yucaipa Companies, as such not to exceed the amount payable thereunder in amounts would be calculated under such Consulting accordance with the terms thereof in effect on the Agreement as in effect on the Issue Date, (ii) pursuant Issue Date, (vi) from and after June 1, 2000, payments to the Amended and Restated Tax Sharing Agreement, of cash dividends to New Holdings in an amount dated as of June 17, 1991, between Food 4 Less and sufficient to enable New Holdings to make payments of certain subsidiaries, as such Tax Sharing Agreement may interest required to be made in respect of the Seller be amended from time to time, so long as the payment Debentures and the New Discount Debentures in an amount thereunder by Food 4 Less and its subsidiaries shall not to exceed the amount payable thereunder in not exceed the amount of taxes Food 4 Less would be accordance with the terms thereof in effect on the required to pay if it were the filing person for all Issue Date, (vii) dividends or other payments to New applicable taxes, (iii) pursuant to the Transfer and Holdings sufficient to permit New Holdings to perform Assumption Agreement, dated as of June 23, 1989, accounting, legal, corporate and administrative between Food 4 Less and FFL, as in effect on the Issue functions in the ordinary course of business or to pay Date, and (iv) (a) in connection with repurchases of required fees and expenses in connection with the outstanding shares of Food 4 Less' common stock Merger, the Reincorporation Merger and the registration following the death, disability or termination of under applicable laws and regulations of its debts and employment of management stockholders, and (b) of securities, (viii) dividends or other distributions by amounts required to be paid by FFL, Food 4 Less or any the Company to New Holdings on the Issue Date of shares of its subsidiaries to participants in employee benefit of New Holdings common stock owned by the Company, (ix) plans upon any termination of employment by such dividends by the Company to New Holdings of the Net participants, as provided in the documents related Cash Proceeds of an Asset Sale to the extent that (a) thereto, in an aggregate amount (for both clauses (a) neither the Company nor any of the Subsidiaries is and (b)) not to exceed $5 million in any yearly period required, or may be required, pursuant to the documents (provided that any unused amounts may be carried over governing any outstanding Indebtedness of the Company to any subsequent yearly period subject to a maximum or any of the Subsidiaries to utilize such Net Cash amount of $10 million in any yearly period). Proceeds to repay (or offer to repay) such Indebtedness, (b) such Net Cash Proceeds have not been "Consolidated Net Income," means, with respect to any utilized to repay outstanding Indebtedness of the person, for any period, the aggregate of the net income Company or any of the Subsidiaries and (c) New Holdings (or loss) of such person and its subsidiaries for such is required pursuant to the documents governing any period, on a consolidated basis, determined in outstanding Indebtedness of New Holdings to utilize accordance with GAAP; provided that (a) the net income such Net Cash Proceeds to repay (or offer to repay) of any other person in which such person or any of its such Indebtedness, (x) (A) the exchange by the Company subsidiaries has an interest (which interest does not of Old RGC Notes for New RGC Notes, or the purchase for cause the net income of such other person to be cash of up to $224.5 million aggregate principal amount consolidated with the net income of such person and its of Old RGC Notes, in each case, in accordance with the subsidiaries in accordance with GAAP) shall be included terms of the RGC Offers, (B) the exchange by the only to the extent of the amount of dividends or Company of Old F4L Senior Subordinated Notes for New distributions actually paid to such person or such F4L Senior Subordinated Notes in accordance with the subsidiary by such other person in such period; (b) the terms of the Exchange Offers and (c) the repurchase by net income of any subsidiary of such person that is the Company of up to $224.5 million aggregate principal subject to any Payment Restriction shall be excluded to amount of Old RGC Notes, at a repurchase price of 101% the extent such Payment Restriction actually prevented of the principal amount thereof plus accrued interest the payment of an amount that otherwise could have been to the repurchase date, pursuant to the "change of paid to, or received by, such person or a subsidiary of control purchase offer" provisions set forth in section such person not subject to any Payment Restriction; and 1014 of the Old RGC Indentures as in effect on the (c)(i) the net income (or loss) of any other person Issue Date, and (xi) the loan by the Company on the acquired in a pooling of interests transaction for any Issue Date to RGC Investment Company of not more than period prior to the date of such acquisition, (ii) all $5 million. gains and losses realized on any Asset Sale or in connection with the closure of the Long Beach "Consolidated Net Income" means, with respect to any Warehouse, (iii) all gains realized upon or in person, for any period, the aggregate of the net income connection with or as a consequence of the issuance of (or loss) of such person and its subsidiaries for such the capital stock of such person or any of its period, on a consolidated basis, determined in subsidiaries and any gains on pension reversions accordance with GAAP; provided that (a) the net income received by such person or any of its subsidiaries, of any other person in which such person or any of its (iv) all gains and losses realized on the purchase or subsidiaries has an interest (which interest does not other acquisition by such person or any of its cause the net income of such other person to be subsidiaries of any securities of such person or any of consolidated with the net income of such person and its its subsidiaries, (v) all gains and losses resulting subsidiaries in accordance with GAAP) shall be included from the cumulative effect of any accounting change only to the extent of the amount of dividends or pursuant to the application of Accounting Principles distributions actually paid to such person or such Board Opinion No. 20, as amended, (vi) all other subsidiary by such other person in such period; (b) the extraordinary gains and losses, and (vii) with respect net income of any subsidiary of such person that is to Food 4 Less all deferred financing costs written off in connection with the early
A-6 218
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ extinguishment of any Indebtedness shall each be subject to any Payment Restriction shall be excluded to excluded. the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD paid to, or received by, such person or a subsidiary of F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE such person not subject to any Payment Restriction; and THIS COVENANT AND CERTAIN RELATED DEFINITIONS. (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the capital stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii) all non-cash charges incurred by the Company or any of its subsidiaries in connection with the Merger, including, without limitation, the divestiture of the Excluded Assets, (viii) losses incurred by the Company and its subsidiaries resulting from earthquakes and (ix) with respect to the Company, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded; provided further that solely for the purpose of computing amounts described in subclause (c) of the first paragraph of the covenant described under "-- Limitation on Restricted Payments" above, "Consolidated Net Income" of the Company for any period shall be reduced by the aggregate amount of dividends paid by the Company or a Subsidiary to New Holdings pursuant to clauses (v) and (vi) of the definition of "Permitted Payments" during such period. "Consulting Agreement" means that certain Consulting Agreement dated as of the Issue Date, between Food 4 Less, New Holdings and The Yucaipa Companies (as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amended or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date). "Subordinated Indebtedness" means, with respect to the Company or any Subsidiary Guarantor, Indebtedness of such person which is subordinated in right of payment to the New F4L Senior Notes or the guarantee of such Subsidiary Guarantor, as the case may be. LIMITATION ON INCURRENCES OF ADDITIONAL LIMITATION ON INCURRENCES OF ADDITIONAL INDEBTEDNESS. Pursuant to the Old F4L Senior Note INDEBTEDNESS. Pursuant to the New F4L Senior Note Indenture, Food 4 Less shall not, and shall not permit Indenture, the Company shall not, and shall not permit any of its subsidiaries, directly or indirectly, to any of its subsidiaries, directly or indirectly, to incur, assume, guarantee, become liable, contingently incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") responsible for the payment of (collectively "incur") any Indebtedness; provided, however, that (i) Food 4 any Indebtedness other than Permitted Indebtedness; Less may incur Indebtedness if (A) no Default with provided, however, that if no Default with respect to respect to payment of principal of, or interest on, the payment of principal of, or interest on, the New F4L Old F4L Senior Notes or Event of Default shall have Senior Notes issued under the New F4L Senior Note occurred and be continuing at the time or as a Indenture or Event of Default under the New F4L Senior consequence of the incurrence of any such Indebtedness Note Indenture shall have occurred and be continuing at and (B) on the date of the incurrence of such the time or as a consequence of the incurrence of any Indebtedness the Operating Coverage Ratio of Food 4 such Indebtedness, the Company may incur Indebtedness Less would be greater than 2.2. to 1.0 if such date is if immediately before and immediately after giving after June 15, 1994 and prior to June 15, 1996; and effect to the incurrence of such Indebtedness the greater than 2.4 to 1.0 thereafter; and (ii) a Operating Coverage Ratio of the Company would be subsidiary may incur Acquired Indebtedness to the greater than 2.0 to 1.0; provided, further, that a extent such Indebtedness could have been incurred by subsidiary may incur Acquired Indebtedness to the Food 4 Less pursuant to the preceding clause (i). extent such Indebtedness could have been incurred by the Company pursuant to the immediately preceding The foregoing limitation shall not apply to (a) proviso. Indebtedness of Food 4 Less and its subsidiaries pursuant to (i) the Term Facility under or pursuant to In addition, the New F4L Senior Note Indenture will the Loan Documents in an aggregate principal amount at provide that neither the Company nor any Subsidiary any time outstanding not to exceed $301.7 million, less Guarantor will, directly or indirectly, in any event the aggregate amount of all principal repay- incur any Indebtedness that by its terms (or by the terms of any agreement governing such
A-7 219
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ ments thereunder out of the net proceeds of the Indebtedness) is subordinated to any other Indebtedness offering of the Old F4L Senior Notes, and less any of the Company or such Subsidiary Guarantor, as the future repayments subsequent to the Issue Date, (ii) case may be, unless such Indebtedness is also by its the Subsidiary Letter of Credit Obligations (and Food 4 terms (or by the terms of any agreement governing such Less and each subsidiary (to the extent it is not an Indebtedness) made expressly subordinate to the New F4L obligor) may guarantee such Indebtedness) not to exceed Senior Notes or the guarantee of such Subsidiary $55 million at any time outstanding and (iii) the Guarantor, as the case may be, to the same extent and Revolving Facility under the Loan Documents (and Food 4 in the same manner as such Indebtedness is subordi- Less and each subsidiary (to the extent it is not an nated pursuant to subordination provisions that are obligor) may guarantee such Indebtedness) in an most favorable to the holders of any other Indebtedness aggregate principal amount at any time outstanding not of the Company or such Subsidiary Guarantor, as the to exceed $70 million, less all permanent reductions of case may be. the unused portion under the Revolving Facility, (b) the Old F4L Senior Notes; (c) certain intercompany "Indebtedness" means, with respect to any person, Indebtedness; (d) Indebtedness incurred by Food 4 Less without duplication, (i) all liabilities, contingent or or any subsidiary in connection with the purchase or otherwise, of such person (a) for borrowed money improvement of property (real or personal) or equipment (whether or not the recourse of the lender is to the or other capital expenditures in the ordinary course of whole of the assets of such person or only to a portion business (including for the purchase of assets or stock thereof), (b) evidenced by bonds, notes, debentures, of any retail grocery store or business) or consisting drafts accepted or similar instruments or letters of of capitalized lease obligations, in aggregate not to credit or representing the balance deferred and unpaid exceed $25 million in any yearly period (provided that of the purchase price of any property (other than any any unused amounts may be carried over to the next (but such balance that represents an account payable or any not any subsequent) yearly period); (e) Indebtedness of other monetary obligation to a trade creditor (whether Food 4 Less under certain Foreign Exchange Agreements or not an affiliate) created, incurred, assumed or and Interest Swap Obligations; (f) Permitted Guarantees guaranteed by such person in the ordinary course of of Indebtedness in aggregate not to exceed $25 million business of such person in connection with obtaining at any time outstanding in addition to those goods, materials or services and due within twelve outstanding on the date of the Alpha Beta Acquisition; months (or such longer period for payment as is (g) guarantees by Food 4 Less and its subsidiaries of customarily extended by such trade creditor) of the Indebtedness incurred by a wholly-owned subsidiary incurrence thereof, which account is not overdue by provided that the incurrence of such Indebtedness by more than 90 days, according to the original terms of such wholly-owned subsidiary is permitted under the sale, unless such account payable is being contested in terms of the Old F4L Senior Note Indenture; (h) good faith), or (c) for the payment of money relating Refinancing Indebtedness; (i) Indebtedness in to a capitalized lease obligation; (ii) the maximum connection with the acquisition of the La Habra fixed repurchase price of all Disqualified Capital Facility and Option Stores if, after giving effect to Stock of such person; (iii) reimbursement obligations such incurrence, the Operating Coverage Ratio of Food 4 of such person with respect to letters of credit; (iv) Less would be greater than 2.0 to 1.0; (j) Indebtedness obligations of such person with respect to Interest for letters of credit relating to workers' compensation Swap Obligations and Foreign Exchange Agreements; (v) claims and self-insurance or similar requirements in all liabilities of others of the kind described in the the ordinary course of business; (k) the Old F4L preceding clause (i), (ii), (iii) or (iv) that such Subordinated Notes and related guarantees; and (l) person has guaranteed or that is otherwise its legal additional Indebtedness of Food 4 Less and its liability; and (vi) all obligations of others secured Subsidiary Guarantors in an amount not to exceed $75 by a lien to which any of the properties or assets million at any time outstanding. (including, without limitation, leasehold interests and any other tangible or intangible property rights) of "Indebtedness" means with respect to any person, such person are subject, whether or not the obligations without duplication, (i) all liabilities, contingent or secured thereby shall have been assumed by such person otherwise, of such person (a) for borrowed money or shall otherwise be such person's legal liability (whether or not the recourse of the lender is to the (provided that if the obligations so secured have not whole of the assets of such person or only to a portion been assumed by such person or are not otherwise such thereof), (b) evidenced by bonds, notes, debentures, person's legal liability, such obligations shall be drafts accepted or similar instruments or letters of deemed to be in an amount equal to the fair market credit or representing the balance deferred and unpaid value of such properties or assets, as determined in of the purchase price of any property (other than any good faith by the board of directors of such person, such balance that represents an account payable or any which determination shall be evidenced by a board other monetary obligation to a trade creditor (whether resolution). For purposes of the preceding sentence, or not an affiliate) created, incurred, assumed or the "maximum fixed repurchase price" of any guaranteed by such person in the ordinary course of Disqualified Capital Stock that does not have a fixed business of such person in connection with obtaining repurchase price shall be calculated in accordance with goods, materials or services and due within twelve the terms of such Disqualified Capital Stock as if such months (or such longer period for payment as is Disqualified Capital Stock were purchased on any date customarily extended by such trade creditor) of the on which Indebtedness shall be required to be incurrence thereof, which account is not overdue by determined pursuant to this Indenture, and if such more than 90 days, according to the original terms of price is based upon, or measured by, the fair market sale, unless such account payable is being contested in value of such Disqualified Capital Stock (or any equity good faith), or (c) for the payment of money relating security for which it may be exchanged or converted), to a capitalized lease obligation; (ii) the maximum such fair market value shall be determined in good fixed repurchase price of all Disqualified Capital faith by the board of directors of such person, which Stock of such person; (iii) reimbursement obligations determination shall be evidenced by a board resolution. of such person with respect to letters of credit; (iv) For purposes of the New F4L Senior Note Indenture, obligations of such person with respect to Interest Indebtedness incurred by any person that is a general Swap Obligations and Foreign Exchange Agreements; (v) partnership (other than non-recourse Indebtedness) all liabilities of others of the kind described in the shall be deemed to have been incurred by the general preceding clause (i), (ii), (iii) or (iv) that such partners of such partnership pro rata in accordance person has guaranteed or that is otherwise its legal with their respective interests in the liabilities of liability; and (vi) all obligations of others secured such partnership unless any such general partner shall, by a lien to which any of the properties or assets in the reasonable determination of the board of (including, without limitation, leasehold interests and directors of the Company, be unable to satisfy its pro any other tangible or intangible property rights) of rata share of the liabilities of the partnership, in such person are subject, whether or not the which case the pro rata share of any Indebtedness attributable to such partner
A-8 220
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ obligations secured thereby shall have been assumed shall be deemed to be incurred at such time by the by such person or shall otherwise be such person's remaining general partners on a pro rata basis in legal liability (provided that if the obligations so accordance with their interests. secured have not been assumed by such person or are not otherwise such person's legal liability, "Permitted Indebtedness" means (a) Indebtedness of the such obligations shall be deemed to be in an Company and its Subsidiaries pursuant to (i) the Term amount equal to the fair market value of such Loans in an aggregate principal amount at any time properties or assets, as determined in good faith by outstanding not to exceed $750 million or such lesser the board of directors of such person, which amount as may be actually funded under the Term Loans determination shall be evidenced by a board on or within 91 days following the Issue Date (with any resolution). For purposes of the preceding sentence, such amounts funded after the Issue Date to be used to the "maximum fixed repurchase price" of any finance the repurchase of up to $224.5 million Disqualified Capital Stock that does not have a fixed aggregate principal amount of Old RGC Notes pursuant to repurchase price shall be calculated in accordance with the "change of control purchase offer" provision set the terms of such Disqualified Capital Stock as if such forth in section 1014 of the Old RGC Indentures, plus Disqualified Capital Stock were purchased on any date related fees and expenses), less the aggregate amount on which Indebtedness shall be required to be of all principal repayments thereunder pursuant to and determined pursuant to the Old F4L Senior Note in accordance with the covenant described under Indenture, and if such price is based upon, or measured "-- Certain Covenants -- Limitation on Asset Sales" by, the fair market value of such Disqualified Capital above subsequent to the Issue Date, and (ii) the Stock (or any equity security for which it may be revolving credit facility under the Credit Agreement exchanged or converted), such fair market value shall (and the Company and each Subsidiary (to the extent it be determined in good faith by the board of directors is not an obligor) may guarantee such Indebtedness) in of such person, which determination shall be evidenced an aggregate principal amount at any time outstanding by a board resolution. For purposes of the Old F4L not to exceed $325 million, less all permanent Senior Note Indenture, Indebtedness incurred by any reductions thereunder pursuant to and in accordance person that is a general partnership (other than with the covenant described under "-- Certain non-recourse Indebtedness) shall be deemed to have been Covenants -- Limitation on Asset Sales" above, (b) incurred by the general partners of such partnership Indebtedness of the Company or a Subsidiary Guarantor pro rata in accordance with their respective interests owed to and held by the Company or a Subsidiary in the liabilities of such partnership unless any such Guarantor; (c) Indebtedness incurred by the Company or general partner shall, in the reasonable determination any Subsidiary in connection with the purchase or of the board of directors of Food 4 Less, be unable to improvement of property (real or personal) or equipment satisfy its pro rata share of the liabilities of the or other capital expenditures in the ordinary course of partnership, in which case the pro rata share of any business (including for the purchase of assets or stock Indebtedness attributable to such partner shall be of any retail grocery store or business) or consisting deemed to be incurred at such time by the remaining of Capitalized Lease Obligations provided that (i) at general partners on a pro rata basis in accordance with the time of the incurrence thereof, such Indebtedness, their interests. together with any other Indebtedness incurred during the most recently completed four fiscal quarter period "Operating Coverage Ratio" means, with respect to any in reliance upon this clause (c) does not exceed, in person, the ratio of (1) EBDIT of such person for the the aggregate, 3% of net sales of the Company and its period (the "Pro Forma Period") consisting of the most Subsidiaries during the most recently completed four recent four full fiscal quarters for which financial fiscal quarter period on a consolidated basis information in respect thereof is available immediately (calculated on a pro forma basis if the date of prior to the date of the transaction giving rise to the incurrence is prior to the first anniversary of the need to calculate the Operating Coverage Ratio (the Merger) and (ii) such Indebtedness, together with all "Transaction Date") to (2) the aggregate Fixed Charges then outstanding Indebtedness incurred in reliance upon of such person for the fiscal quarter in which the this clause (c) does not exceed, in the aggregate, 3% Transaction Date occurs and the three fiscal quarters of the aggregate net sales of the Company and its immediately subsequent to such fiscal quarter (the Subsidiaries during the most recently completed twelve "Forward Period") reasonably anticipated by the board fiscal quarter period on a consolidated basis (calcu- of directors of such person to become due from time to lated on a pro forma basis if the date of incurrence is time during such period. For purposes of this prior to the third anniversary of the Merger); (d) definition, if the Transaction Date occurs prior to the Indebtedness incurred by the Company or any subsidiary first anniversary of the Alpha Beta Acquisition, in connection with capital expenditures in an aggregate "EBDIT" for the Pro Forma Period shall be calculated, principal amount not exceeding $150 million, provided in the case of Food 4 Less, after giving effect on a that such capital expenditures relate solely to the pro forma basis to the Alpha Beta Acquisition as if it integration of the operations of RSI, Food 4 Less and had occurred on the first day of the Pro Forma Period. their respective subsidiaries, as described in this In addition to, but without duplication of, the Amended and Restated Prospectus and Solicitation foregoing, for purposes of this definition, "EBDIT" Statement; (e) Indebtedness of the Company incurred shall be calculated after giving effect (without under certain Foreign Exchange Agreements and Interest duplication), on a pro forma basis for the Pro Forma Swap Obligations; (f) guarantees incurred in the Period (but no longer), to (a) any Investment, during ordinary course of business by the Company or a the period commencing on the first day of the Pro Forma Subsidiary of Indebtedness of any other person in Period to and including the Transaction Date (the aggregate not to exceed $25.0 million at any time "Reference Period"), in any other person that, as a outstanding; (g) guarantees by the Company or a result of such Investment, becomes a subsidiary of such Subsidiary Guarantor of Indebtedness incurred by a person, (b) the acquisition, during the Reference wholly-owned Subsidiary Guarantor so long as the Period (by merger, consolidation or purchase of stock incurrence of such Indebtedness incurred by such or assets) of any business or assets, which acquisition wholly-owned Subsidiary Guarantor is permitted under is not prohibited by the Old F4L Senior Note Indenture, the terms of the applicable New Indenture; (h) and (c) any sales or other dispositions of assets Refinancing Indebtedness; (i) Indebtedness for letters (other than sales of inventory in the ordinary course of credit relating to workers' compensation claims and of business) occurring during the Reference Period, in self-insurance or similar requirements in the ordinary each case as if such incurrence, Investment, repay- course of business; (j) Existing Indebtedness and other ment, acquisition or asset sale had occurred on the Indebtedness outstanding on the Issue Date (after first day of the Reference Period. In addition, for giving effect to the Merger); (k) Indebtedness arising purposes of this definition, "Fixed Charges" shall be from guarantees of Indebtedness of the Company or any calculated after giving effect (without duplication), Subsidiary or other agree- on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the
A-9 221
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ Forward Period and prior to the Transaction Date. ments of the Company or a Subsidiary providing for indemnification, adjustment of purchase price or "Refinancing Indebtedness" means, with respect to any similar obligations, in each case, incurred or assumed person, Indebtedness of such person issued in exchange in connection with the disposition of any business, for, or the proceeds from the issuance and sale or assets or Subsidiary, other than guarantees of disbursement of which are used to substantially Indebtedness incurred by any person acquiring all or concurrently repay, redeem, refund, refinance, any portion of such bonuses, assets or Subsidiary for discharge or otherwise retire for value, in whole or in the purpose of financing such acquisition; provided part (collectively, "repay"), or constituting an that the maximum aggregate liability in respect of all amendment, modification or supplement to, or a deferral such Indebtedness shall at no time exceed the gross or renewal of (collectively, an "amendment"), any proceeds actually received by the Company and its Indebtedness of such person existing on the Issue Date subsidiaries in connection with such disposition; (l) or Indebtedness (other than Permitted Indebtedness, obligations in respect of performance bonds and except Permitted Indebtedness incurred pursuant to completion guarantees provided by the Company or any clauses (a), (c), (d), (h), (j) and (k) of the Subsidiary in the ordinary course of business; and (m) definition thereof) incurred in accordance with the additional Indebtedness of the Company and the applicable New Indenture (a) in a principal amount (or, Subsidiary Guarantors in an amount not to exceed $200 if such Refinancing Indebtedness provides for an amount million at any time outstanding. less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original "Operating Coverage Ratio" means, with respect to any issue price) not in excess of (without duplication) (i) person, the ratio of (1) EBDIT of such person for the the principal amount or the original issue price, as period (the "Pro Forma Period") consisting of the most the case may be, of the Indebtedness so refinanced (or, recent four full fiscal quarters for which financial if such Refinancing Indebtedness refinances information in respect thereof is available immediately Indebtedness under a revolving credit facility or other prior to the date of the transaction giving rise to the agreement providing a commitment for subsequent need to calculate the Operating Coverage Ratio (the borrowings, with a maximum commitment not to exceed the "Transaction Date") to (2) the aggregate fixed charges maximum commitment under such revolving credit facility of such person for the fiscal quarter in which the or other agreement) plus (ii) unpaid accrued interest Transaction Date occurs and the three fiscal quarters on such Indebtedness plus (iii) premiums, penalties, immediately subsequent to such fiscal quarter (the fees and expenses actually incurred by such person in "Forward Period") reasonably anticipated by the board connection with the repayment or amendment thereof and of directors of such person to become due from time to (b) with respect to Refinancing Indebtedness that time during such period. For purposes of this repays or constitutes an amendment to Subordinated definition, if the Transaction Date occurs prior to the Indebtedness, such Refinancing Indebtedness (x) shall first anniversary of the Merger, "EBDIT" for the Pro not have any fixed mandatory redemption or sinking fund Forma Period shall be calculated, in the case of the requirement in an amount greater than or at a time Company, after giving effect on a pro forma basis to prior to the amounts and times specified in such repaid the Merger as if it had occurred on the first day of or amended Subordinated Indebtedness, except to the the Pro Forma Period. In addition to, but without extent that any such requirement applies on a date duplication of, the foregoing, for purposes of this after the Maturity Date of the New F4L Senior Notes and definition, "EBDIT" shall be calculated after giving (y) shall contain subordination and default provisions effect (without duplication), on a pro forma basis for no less favorable in any material respect to holders of the Pro Forma Period (but no longer), to (a) any the New Senior F4L Notes than those contained in such Investment, during the period commencing on the first repaid or amended Subordinated Indebtedness. day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other "Loan Documents" means the Credit Agreement and all person that, as a result of such Investment, becomes a promissory notes, guarantees, security agreements, subsidiary of such person, (b) the acquisition, during pledge agreements, deeds of trust, mortgages, letters the Reference Period (by merger, consolidation or of credit and other instruments, agreements and purchase of stock or assets) of any business or assets, documents executed pursuant thereto or in connection which acquisition is not prohibited by the New F4L therewith, including all amendments, supplements, Senior Note Indenture, and (c) any sales or other extensions, renewals, restatements, replacements or dispositions of assets (other than sales of inventory refinancings thereof, or other modifications (in whole in the ordinary course of business) occurring during or in part, and without limitation as to amount, terms, the Reference Period, in each case as if such conditions, covenants or other provisions) thereof from incurrence, Investment, repayment, acquisition or asset time to time. sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Credit Agreement" means the Credit Agreement, dated "Fixed Charges" shall be calculated after giving effect as of June 17, 1991, by and among Food 4 Less, certain (without duplication), on a pro forma basis for the of its subsidiaries, the Lenders and Designated Issuers Forward Period, to any Indebtedness incurred or repaid of the Lenders referred to therein, Bankers Trust on or after the first day of the Forward Period and Company, Citicorp North America, Inc., and prior to the Transaction Date. If such person or any of Manufacturers Hanover Trust Company, as Co-Agents, and its subsidiaries directly or indirectly guarantees any Citicorp North America, Inc., as Administrative Agent, Indebtedness of a third person, the Operating Coverage as amended, extended, renewed, restated, supplemented Ratio shall give effect to the incurrence of such or otherwise modified (in whole or in part, and without Indebtedness as if such person or subsidiary had limitation as to amount, terms, conditions and other directly incurred such guaranteed Indebtedness. provisions) from time to time, and any agreement governing Indebtedness required to refund or refinance "Credit Agreement" means the Credit Agreement, dated as the entirety of the borrowings and commitments then of the Issue Date, by and among Food 4 Less, certain of outstanding or permitted to be outstanding under such its subsidiaries, the Lenders referred to therein, Credit Agreement or such agreement. Food 4 Less shall Bankers Trust Company, as administrative agent, as the promptly notify the Old F4L Senior Note Trustee of any same may be amended, extended, renewed, restated, such refunding or refinancing of the Credit Agreement. supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, "Acquired Indebtedness" means Indebtedness of a terms, conditions, covenants and other provisions) from person or any of its subsidiaries existing at the time time to time, and any agreement governing Indebtedness such person becomes a subsidiary or assumed in incurred to refund, replace or refinance any borrowings connection with the acquisition of assets from such and commitments then outstanding or permitted to be person and not incurred by such person in connection outstanding under such Credit Agreement or any such with, or in anticipation or contemplation of, such prior agreement as the same may be amended, extended, person becom- renewed, restated, supplemented or
A-10 222
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ ing a subsidiary or such acquisition. otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, "Permitted Guarantees" means (i) guarantees in effect covenants and other provisions). The term "Credit on the Issue Date and (ii) guarantees incurred in the Agreement" shall include all related or ancillary ordinary course of business, by Food 4 Less or a documents, including, without limitation, any guarantee subsidiary, of Indebtedness of any other person. agreements and security documents. The Company shall promptly notify the New Trustee of any such refunding "Refinancing Indebtedness" means Indebtedness of Food or refinancing of the Credit Agreement. 4 Less or a subsidiary (i) issued in exchange for, or the proceeds from the issuance and sale or disbursement "Acquired Indebtedness" means (i) with respect to of which are used to substantially concurrently repay, any person that becomes a subsidiary of the Company redeem, refund, refinance, discharge or otherwise (or is merged into the Company or any of its retire for value, in whole or in part (collectively, subsidiaries) after the Issue Date, Indebtness of, "repay"), or constituting an amendment, modification or such person or any of its subsidiaries existing supplement to, or a deferral or renewal of at the time such person becomes a subsidiary (collectively, an "amendment"), any Indebtedness of of the Company (or is merged into the Company or any of Food 4 Less or a subsidiary (and any penalties, fees its subsidiaries) and which was not incurred in and expenses actually incurred by Food 4 Less or such connection with, or in contemplation of, such person subsidiary in connection with the repayment or becoming a subsidiary of the Company (or being merged amendment thereof) existing immediately after the into the Company or any of its subsidiaries) and (ii) original issuance of the Old F4L Senior Notes or with respect to the Company or any of its subsidiaries, incurred pursuant to the Operating Coverage Ratio test any Indebtedness assumed by the Company or any of its set forth under "Limitation on the Incurrence of subsidiaries in connection with the acquisition of any Additional Indebtedness," or pursuant to certain other assets from another person (other than the Company or exceptions thereunder, in a principal amount (or, if any of its subsidiaries), and which was not incurred by such Refinancing Indebtedness provides for an amount such other person in connection with, or in contem- less than the principal amount thereof to be due and plation of, such acquisition. payable upon the acceleration thereof, with an original issue price) not in excess of (1) the principal amount "EBDIT" means, with respect to any person, for any of the Indebtedness so refinanced (or, if such period, the Consolidated Net Income of such person for Refinancing Indebtedness refinances Indebtedness under such period, plus, in each case to the extent deducted a revolving credit facility or other agreement in computing Consolidated Net Income of such person for providing a commitment for subsequent borrowings, with such period (without duplication( (i) provisions for a maximum commitment not to exceed the maximum income taxes or similar charged recognized by such commitment under such revolving credit facility or person and its consolidated subsidiaries accrued during other agreement) plus (2) unpaid accrued interest on such period, (ii) depreciation and amortization expense such Indebtedness plus (3) penalties, fees and ex- of such person and its consolidated subsidiaries penses actually incurred by Food 4 Less or such accrued during such period (but only to the extent not subsidiary, as the case may be, in connection with the included in Fixed Charges), (iii) Fixed Charges of such repayment or amendment thereof; or (ii) in an amount person and its consolidated subsidiaries for such permitted to be incurred at the time of such incurrence period, (iv) LIFO charges (credits) of such person and by Food 4 Less or such subsidiary, as the case may be, its consolidated subsidiaries for such period, (v) the under the Credit Agreement pursuant to "Limitation on amount of any restructuring reserve or charge recorded the Incurrence of Additional Indebtedness"; provided during such period in accordance with GAAP, including that (for both clauses (i) and (ii) above) (A) any such reserve or charge related to the Merger, and Refinancing Indebtedness of any subsidiary shall not be (vi) any other non-cash charges reducing Consolidated used to repay outstanding Indebtedness of Food 4 Less, Net Income for such period (excluding any such charge (B) Refinancing Indebtedness of Food 4 Less that repays which requires an accrual of or a cash reserve for cash or constitutes an amendment to Indebtedness of Food 4 charges for any future period), less, without Less (other than any of the Old F4L Senior Notes) duplication, (i) non-cash items increasing Consolidated ranking junior in right of payment to, the Old F4L Net Income of such person for such period (excluding Senior Notes shall not have an average life less than any such items which represent the reversal of any the Indebtedness to be so refinanced at the time of accrual of, or cash reserve for, anticipated cash such incurrence; provided, however, Refinancing charges in any prior period) in each case determined in Indebtedness of Food 4 Less that repays or constitutes accordance with GAAP and (ii) the amount of all cash an amendment to the Old F4L Subordinated Notes or any payments made by such person or its subsidiaries during Indebtedness refinancing the Old F4L Subordinated Notes such period to the extent that such cash payment has shall not have any fixed mandatory redemption or been provided for in a restructuring reserve or charge sinking fund requirement in an amount greater than or referred to in clause (v) above (and were not otherwise at a time prior to the amounts and times specified in deducted in the computation of Consolidated Net Income the Old F4L Subordinated Notes or any Indebtedness of such person for such period). refinancing the Old F4L Subordinated Notes, as the case may be, unless any such requirement applies on a date "Permitted Guarantees" means (i) guarantees in effect after the final maturity of the Old F4L Senior Notes; on the Issue Date and (ii) guarantees incurred in the and, in any case, shall contain subordination and ordinary course of business, by the Company or a default provisions no less favorable in any material subsidiary, of Indebtedness of any other person. respect to holders of the Old F4L Senior Notes than those contained in such repaid or amended Indebtedness, "Refinancing Indebtedness" means, with respect to any and (C) notwithstanding the foregoing, any Refinancing person, Indebtedness of such person issued in exchange Indebtedness incurred to repay all of the Old F4L for, or the proceeds from the issuance and sale or Senior Notes then outstanding shall not be limited in disbursement of which are used to substantially principal amount or otherwise if Food 4 Less concurrently repay, redeem, refund, refinance, irrevocably deposits with the Old F4L Senior Note discharge or otherwise retire for value, in whole or in Trustee or Paying Agent an amount of the proceeds of part (collectively, "repay"), or constituting an such Refinancing Indebtedness sufficient to redeem the amendment, modification or supplement to, or a deferral outstanding principal amount of the Old F4L Senior or renewal of (collectively, an "amendment"), any Notes on the date fixed for the repayment thereof. Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (c), (d), (h) and (j) of the definition thereof) incurred in accordance with the applicable New Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount
A-11 223
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances In- debtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date of the New F4L Senior Subordinated Notes and (y) shall contain subordination and default provisions no less favorable in any material respect to holders of the New Senior Subordinated F4L Notes than those contained in such repaid or amended Subordinated Indebtedness. "Designated Senior Indebtedness" means (i) in the event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit Agreement" shall not include any agreement governing Indebtedness incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Existing Indebtedness" means the following indebtedness of the Company to the extent outstanding on the Issue Date after giving effect to the Merger: (a) the % Senior Notes due 2004 issued pursuant to an indenture dated as of the Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture dated as of April 15, 1992; (c) the % Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior Subordinated Notes due 2003 issued pursuant to an indenture dated as of March 30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes due 2005 issued pursuant to and indenture dated as of the Issue Date, and (g) the 13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated as of June 15, 1991. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED DEFINITIONS. LIMITATION ON LIENS. Pursuant to the Old F4L Senior LIMITATION ON LIENS. Pursuant to the New F4L Senior Note Indenture, Food 4 Less shall not and shall not Note Indenture, the Company shall not and shall not permit any subsidiary to create, incur, assume or permit any subsidiary to create, incur, assume or suffer to exist any liens upon any of their respective suffer to exist any liens upon any of their respective assets unless the Old F4L Senior Notes are equally and assets unless the New F4L Senior Notes issued ratably secured by the liens covering such assets, thereunder are equally and ratably secured by the liens except for (i) existing and future liens securing covering such assets, except for (i) liens on assets of Indebtedness and other obligations of Food 4 Less its the Company securing Senior Indebtedness and liens on subsidiaries under the Loan Documents and related assets of a Subsidiary Guarantor which, at the time of documents or any refinancing or replacement thereof in incurrence, secure Guarantor Senior Indebtedness, (ii) whole or in part, (ii) Permitted Liens, existing and future liens
A-12 224
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ (iii) liens securing Acquired Indebtedness; provided securing Indebtedness and other obligations of the that such liens (x) are not incurred in connection Company and its subsidiaries under the Credit Agreement with, or in contemplation of the acquisition of the and related documents or any refinancing or replacement property or assets acquired and (y) do not extend to or thereof in whole or in part permitted under the New F4L cover any property or assets of Food 4 Less or any Senior Note Indenture, (iii) Permitted Liens, (iv) subsidiary other than the property or assets so liens securing Acquired Indebtedness; provided that acquired, (iv) liens securing Indebtedness to the such liens (x) are not incurred in connection with, or extent incurred to refinance secured Indebtedness in contemplation of the acquisition of the property or outstanding as of the Issue Date; provided that such assets acquired and (y) do not extend to or cover any refinancing Indebtedness shall be secured solely by the property or assets of the Company or any subsidiary assets securing such currently outstanding Indebt- other than the property or assets acquired, (v) liens edness, (v) liens to secure certain Indebtedness that to secure capitalized lease obligations and certain is otherwise permitted under the Old F4L Senior Note other Indebtedness that is otherwise permitted under Indenture; provided that (A) any such lien is created the New F4L Senior Note Indenture; provided that (A) solely for the purpose of securing Indebtedness any such lien is created solely for the purpose of representing, or incurred to finance, refinance or securing such other Indebtedness representing, or refund, the cost (including sales and excise taxes, incurred to finance, refinance or refund, the cost installation and delivery charges and other direct (including sales and excise taxes, installation and costs of, and other direct expenses paid or charged in delivery charges and other direct costs of, and other connection with, the purchase (whether through stock or direct expenses paid or charged in connection with, the asset purchase, merger or otherwise) or construction) purchase (whether through stock or asset purchase, of the property subject thereto, (B) the principal merger or otherwise) or construction) or improvement of amount of the Indebtedness secured by such lien does the property subject thereto (whether real or personal, not exceed 100% of such costs and (C) such lien does including fixtures and other equipment), (B) the not extend to or cover any other property other than principal amount of the Indebtedness secured by such such item of property and any improvements on such lien does not exceed 100% of such costs and (C) such item; (vi) liens existing on the Issue Date; (vii) lien does not extend to or cover any other property liens in favor of the Old F4L Senior Note Trustee; other than such item of property and any improvements (viii) liens securing Indebtedness permitted by clauses on such item; (vi) liens existing on the Issue Date (d), (h) or (k) above of "Limitation on Incurrences of (after giving effect to the Merger); (vii) liens in Additional Indebtedness," provided that, in the case of favor of the New F4L Senior Note Trustee under the New Indebtedness permitted by clause (h) above, the F4L Senior Note Indenture and any substantially principal amount of the Indebtedness secured by liens equivalent lien granted to any trustee or similar does not exceed 100% of the purchase price of the La institution under any indenture for Indebtedness Habra Facility or the Option Stores, as the case may permitted to be incurred under the New F4L Senior Note be; and (ix) any replacement, extension or renewal, in Indenture; and (viii) any replacement, extension or whole or in part, of any lien described in this or the renewal, in whole or in part, of any lien described in foregoing clauses including in connection with any this or the foregoing clauses including in connection refinancing of the Indebtedness, in whole or in part, with any refinancing of the Indebtedness, in whole or secured by any such lien provided that to the extent in part, secured by any such lien provided that to the any such clause limits the amount secured or the assets extent any such clause limits the amount secured or the subject to such liens, no extension or renewal shall assets subject to such liens, no extension or renewal increase the amount of the assets subject to such shall increase the amount or the assets subject to such liens, except to the extent that the liens associated liens, except to the extent that the liens associated with such additional assets are otherwise permitted with such additional assets are otherwise permitted hereunder. hereunder. "Permitted Liens" shall mean (i) liens for taxes, "Permitted Liens" means (i) liens for taxes, assessments and governmental charges to the extent assessments and governmental charges or claims not yet not required to be paid under the Old F4L Senior Note due or which are being contested in good faith by Indenture; (ii) statutory liens of landlords and appropriate proceedings promptly instituted and carriers, warehousemen, mechanics, suppliers, ma- diligently conducted and if a reserve or other terialmen, repairmen or other like liens arising in the appropriate provision, if any, as shall be required in ordinary course of business and with respect to amounts conformity with GAAP shall have been made therefor; not yet delinquent or being contested in good faith by (ii) statutory liens of landlords and carriers, an appropriate process of law, and for which a reserve warehousemen, mechanics, suppliers, materialmen, or other appropriate provision, if any, as shall be repairmen or other like liens arising in the ordinary required by GAAP shall have been made; (iii) pledges or course of business, deposits made to obtain the release deposits in the ordinary course of business to secure of such liens, and with respect to amounts not yet lease obligations or nondelinquent obligations under delinquent for a period of more than 60 days or being workers' compensation, unemployment insurance or contested in good faith by an appropriate process of similar legislation; (iv) liens to secure the law, and for which a reserve or other appropriate performance of public statutory obligations that are provision, if any, as shall be required by GAAP shall not delinquent, appeal bonds, performance bonds or have been made; (iii) liens incurred or pledges or other obligations of a like nature (other than for deposits made in the ordinary course of business to borrowed money); (v) easements, rights-of-way, secure obligations under workers' compensation, restrictions, minor defects or irregularities in title unemployment insurance and other types of social and other similar charges or encumbrances not security or similar legislation; (iv) liens incurred or interfering in any material respect with the business deposits made to secure the performance of tenders, of Food 4 Less or any of its subsidiaries incurred in bids, leases, statutory obligations, surety and appeal the ordinary course of business; (vi) purchase money bonds, government contracts, performance and return of liens upon or in any real or personal property money bonds and other obligations of a like nature (including fixtures and other equipment) acquired or incurred in the ordinary course of business (exclusive held by Food 4 Less or any subsidiary in the ordinary of obligations for the payment of borrowed money); (v) course of business to secure the purchase price of such easements, rights-of-way, zoning or other restrictions, property or to secure Indebtedness incurred solely for minor defects or irregularities in title and other the purpose of financing or refinancing the acquisition similar charges or encumbrances not interfering in any or improvement of such property, or liens existing on material respect with the business of the Company or such property at the time of its acquisition (other any of its Subsidiaries incurred in the ordinary course than any such lien created in contemplation of such of business; (vi) liens upon specific items of acquisition) provided that (x) no such lien shall inventory or other goods and proceeds of any person extend to or cover any property other than the property securing such person's obligations in respect of being acquired or improved and (y) any such bankers' acceptances Indebtedness would be permitted to
A-13 225
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ be incurred pursuant to "Limitation on Incurrences of issued or created for the account of such person to Additional Indebtedness"; (vii) liens upon specific facilitate the purchase, shipment or storage of such items of inventory or other goods and proceeds of any inventory or other goods in the ordinary course of person securing such person's obligations in respect of business; (vii) liens securing reimbursement bankers' acceptances issued or created for the account obligations with respect to letters of credit which of such person to facilitate the purchase, shipment or encumber documents and other property relating to such storage of such inventory or other goods in the letters of credit and the products and proceeds ordinary course of business; (viii) liens securing thereof; (viii) liens in favor of customs and revenue reimbursement obligations with respect to letters of authorities arising as a matter of law to secure credit which encumber documents and other property payment of nondelinquent customs duties in connection relating to such letters of credit and the products and with the importation of goods; (ix) judgment and proceeds thereof; (ix) liens in favor of customs and attachment liens not giving rise to a Default or Event revenue authorities arising as a matter of law to of Default; (x) leases or subleases granted to others secure payment of nondelinquent customs duties in not interfering in any material respect with the connection with the importation of goods; (x) judgment business of the Company or any Subsidiary; (xi) liens and attachment liens not giving rise to a Default or encumbering customary initial deposits and margin Event of Default; (xi) leases or subleases granted to deposits, and other liens incurred in the ordinary others not interfering in any material respect with the course of business that are within the general business of Food 4 Less or any subsidiary; (xii) liens parameters customary in the industry, in each case encumbering customary initial deposits and margin securing Indebtedness under interest swap obligations deposits, and other liens incurred in the ordinary and foreign exchange agreements and forward contracts, course of business that are within the general option futures contracts, futures options or similar parameters customary in the industry, in each case agreements or arrangements designed to protect the securing Indebtedness under Interest Swap Obligations Company or any Subsidiary from fluctuations in the and Foreign Exchange Agreements and forward contracts, price of commodities; (xii) liens encumbering deposits option futures contracts, futures options or similar made in the ordinary course of business to secure agreements or arrangements designed to protect Food 4 nondelinquent obligations arising from statutory, Less or any subsidiary from fluctuations in the price regulatory, contractual or warranty requirements of the of commodities; (xiii) liens encumbering deposits made Company or its Subsidiaries for which a reserve or in the ordinary course of business to secure other appropriate provision, if any, as shall be nondelinquent obligations arising from statutory, required by GAAP shall have been made; (xiii) liens regulatory, contractual or warranty requirements of arising out of consignment or similar arrangements for Food 4 Less or its subsidiaries for which a reserve or the sale of goods entered into by the Company or any other appropriate provision, if any, as shall be Subsidiary in the ordinary course of business in accor- required by GAAP shall have been made; (xiv) liens dance with past practices; (xiv) any interest or title arising out of consignment or similar arrangements for of a lessor in the property subject to any lease, the sale of goods entered into by Food 4 Less or any whether characterized as capitalized or operating other subsidiary in the ordinary course of business in than any such interest or title resulting from or accordance with past practices; (xv) any interest or arising out of a default by the Company or any title of a lessor in the property subject to any lease, Subsidiary of its obligations under such lease; and whether characterized as capitalized or operating other (xv) liens arising from filing UCC financing statements than any such interest or title resulting from or for precautionary purposes in connection with true arising out of a default by Food 4 Less or any leases of personal property that are otherwise subsidiary of its obligations under such lease; and permitted under the New F4L Senior Note Indenture and (xvi) liens arising from filing UCC financing under which the Company or any Subsidiary is lessee; statements for precautionary purposes in connection (xvi) liens on assets of the Company securing with true leases of personal property that are Indebtedness which would constitute Senior Indebtedness otherwise permitted under the Old F4L Senior Note but for the provisions of clause (c) in the third Indenture and under which Food 4 Less or any subsidiary sentence of the definition of Senior Indebtedness and is a lessee. liens on assets of a Subsidiary Guarantor securing Indebtedness which would constitute Guarantor Senior IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD Indebtedness but for the provisions of clause (c) in F4L SENIOR NOTE INDENTURES WILL BE MODIFIED TO the third sentence of the definition of Guarantor ELIMINATE THIS PROVISION AND CERTAIN RELATED LIENS. Senior Indebtedness; and (xvii) additional liens securing Indebtedness at any one time outstanding not exceeding the sum of (i) $25 million and (ii) 10% of the aggregate Consolidated Net Income of the Company earned subsequent to the Issue Date and on or prior to such time. LIMITATION ON DISPOSITIONS OF ASSETS. Pursuant to the LIMITATION ON ASSET SALES. Pursuant to the New F4L Old F4L Senior Note Indenture, Food 4 Less will not, Senior Note Indenture, the Company, will not, and will and will not permit any of its subsidiaries to make any not permit any of its subsidiaries to make any Asset Asset Sale unless (a) Food 4 Less or its applicable Sale unless (a) the Company or the applicable subsidiary receives consideration at the time of such subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of and at least the assets sold and (b) upon consummation of an Asset 75% of the consideration so received by Food 4 Less or Sale, the Company will within 365 days of the receipt such subsidiary is in the form of cash; provided, of the proceeds therefrom either: (i) apply or cause however, that the amount of (i) any liabilities (as its subsidiary to apply the net cash proceeds of any shown on Food 4 Less' or such subsidiary's most recent Asset Sale to (A) a Related Business Investment, (B) an balance sheet or in the notes thereto) of Food 4 Less investment in properties and assets that replace the or any subsidiary that are assumed by the transferee in properties and assets that are the subject of such any such transaction and (ii) any cash equivalents or Asset Sale or (C) an investment in properties and notes or other obligations received by Food 4 Less or assets that will be used in the business of the Company any subsidiary from such transferee that are and its subsidiaries existing on the Issue Date or in immediately converted by Food 4 Less or such subsidiary businesses reasonably related thereto; (ii) apply or into cash, shall both be deemed to be cash, solely to cause to be applied such Net Cash Proceeds to the the extent of the cash received in the case of this permanent repayment of Pari Passu Indebtedness; clause (ii), for the purposes of this provision; provided, however, that any repayment of any revolving provided, further, however, that the 75% limitation loan (under the Credit Agreement or otherwise) shall referred to above shall not apply to (A) any result in a
A-14 226
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ Asset Sale in which the cash portion of the permanent reduction in the commitment thereunder; (iii) consideration received therefor, determined in use such net cash proceeds to secure Letter of Credit accordance with the foregoing clause, is equal to or Obligations to the extent the related letters of credit greater than what the net after-tax proceeds would have have not been drawn upon or returned undrawn; or (iv) been had such Asset Sale complied with the afore- after such time as the accumulated net cash proceeds mentioned 75% limitation and (B) any Asset Sale in equals or exceeds $20 million, apply or cause to be which the consideration received by Food 4 Less or any applied such net cash proceeds to the purchase of New of its subsidiaries is less than $5 million; and (b) F4L Senior Notes tendered to the Company for purchase the net cash proceeds received by Food 4 Less or such at a price equal to 100% of the principal amount subsidiary, as the case may be, will within 180 days of thereof plus accrued interest thereon to the date of such Asset Sale, at the election of Food 4 Less, either purchase pursuant to an offer to purchase made by the (i) invest or cause to be invested in a manner that Company as set forth below (a "Net Proceeds Offer"); would constitute a Related Business Investment; (ii) provided, however, that the Company shall have the apply or cause to be applied to the payment of right to exclude from the foregoing provisions Asset Indebtedness under the Credit Agreement or used to Sales subsequent to the Issue Date the proceeds of secure Letter of Credit Obligations to the extent the which are derived from the sale and substantially related letters of credit have not been drawn upon or concurrent lease-back of a supermarket and/or related returned undrawn; provided, however, that any repayment assets or equipment which are acquired or constructed of Indebtedness under the Revolving Facility under the by the Company or a subsidiary subsequent to the Issue Loan Documents shall result in a permanent reduction in Date, provided that such sale and substantially the commitment thereunder; or (iii) after such time as concurrent lease-back occurs within 270 days following the accumulated net cash proceeds equals or exceeds such acquisition or the completion of such $2.5 million, apply or cause to be applied such net construction, as the case may be. Pending the cash proceeds to the purchase of Old F4L Senior Notes utilization of any Net Cash Proceeds in the manner (and tendered to Food 4 Less for purchase at a price equal within the time period) described above, the Company to 100% of the principal amount thereof plus accrued may use any such Net Cash Proceeds to repay revolving interest thereon to the date of purchase pursuant to an loans (under the Credit Agreement or otherwise) without offer to purchase made by Food 4 Less as set forth a permanent reduction of the commitment thereunder. below (a "Net Proceeds Offer"); provided, however, that Food 4 Less shall have the right to exclude Asset Sales Pursuant to the New F4L Senior Note Indenture, each Net subsequent to the Issue Date, the proceeds of which in Proceeds Offer will be mailed to the record holders of the aggregate do not exceed $10 million, from the New F4L Senior Notes as shown on the register of foregoing provisions. holders of New F4L Senior Notes not less than 325 nor more than 365 days after the relevant Asset Sale, with Pursuant to the Old F4L Senior Note Indenture, each a copy to the New F4L Senior Note Trustee and the Net Proceeds Offer will be mailed to the record holders Credit Agent. Such notice shall state, among other of the Old F4L Senior Notes as shown on the register of things, the purchase date (which shall be no earlier holders of Old F4L Senior Notes not less than 140 nor than 30 days nor later than 40 days from the date such more than 180 days after the relevant Asset Sale, with notice is mailed) and shall otherwise comply with the a copy to the Old F4L Senior Note Trustee and the procedures set forth in the New F4L Senior Note Credit Agent. Such notice shall state, among other Indenture. Upon receiving notice of the Net Proceeds things, the purchase date (which shall be no earlier Offer, holders may elect to tender their New F4L Senior than 30 days nor later than 40 days from the date such Notes in whole or in part in integral multiples of notice is mailed) and shall otherwise comply with the $1,000 in exchange for cash. To the extent holders procedures set forth in the Old F4L Senior Note properly tender New F4L Senior Notes in an amount Indenture. Upon receiving notice of the Net Proceeds exceeding the Net Proceeds Offer, New F4L Senior Notes Offer, holders of the Old F4L Senior Notes may elect to of tendering holders will be repurchased on a pro rata tender their Old F4L Senior Notes in whole on in part basis (based on amounts tendered). A Net Proceeds Offer in integral multiples of $1,000 in exchange for cash. shall remain open for a period of 20 Business Days or To the extent holders properly tender Old F4L Senior such longer period as may be required by law. Notes in an amount exceeding the Net Proceeds Offer, Old F4L Senior Notes of tendering holders will be Pursuant to the New F4L Senior Note Indenture, the Com- repurchased on a pro rata basis (based on amounts pany will comply with the requirements of Rule 14e-1 tendered). under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and Pursuant to the Old F4L Senior Note Indenture, Food 4 regulations are applicable in connection with the Less will comply with the requirements of Rule 14e-1 repurchase of New F4L Senior Notes pursuant to a Net under the Exchange Act and any other securities laws Proceeds Offer. and regulations thereunder to the extent such laws and regulations are applicable in connection with the "Asset Sale" means, with respect to any person, any repurchase of Old F4L Senior Notes pursuant to a Net sale, transfer or other disposition or series of sales, Proceeds Offer. transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange "Asset Sale" means, for any person, any sale, of assets and whether by operation of law or otherwise) transfer or other disposition or series of sales, made by such person or any of its subsidiaries to any transfers or other dispositions (including, without person other than such person or one of its limitation, by merger or consolidation or by exchange wholly-owned subsidiaries (or, in the case of a sale, of assets and whether by operation of law or otherwise) transfer or other disposition by a subsidiary, to any made by such person or any of its subsidiaries to any person other than the Company or a directly or person other than such person or one of its indirectly wholly-owned subsidiary) of any assets of wholly-owned subsidiaries (or, in the case of a sale, such person or any of its subsidiaries including, transfer or other disposition by a subsidiary, to any without limitation, assets consisting of any capital person other than Food 4 Less or a directly or stock or other securities held by such person or any of indirectly wholly-owned subsidiary) of any assets of its subsidiaries, and any capital stock issued by any such person or any of its subsidiaries including, subsidiary of such person, in each case, outside of the without limitation, assets consisting of any capital ordinary course of business, excluding, however, any stock or other securities held by such person, or any sale, transfer or other disposition, or series of of its subsidiaries, and any capital stock issued by related sales, transfers or other dispositions (i) any subsidiary of such person, outside of the ordinary involving only Excluded Assets, (ii) resulting in net course of business, excluding, however, any sale, proceeds to the Company and the subsidiaries of transfer or other disposition, or series of related $500,000 or less, (iii) pursuant to any foreclosure of sales, transfers or other dispositions, having a assets or other remedy provided by applicable law to a purchase price or transaction value, as the case may creditor of the be, of
A-15 227
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ $250,000 or less. Company with a Lien on such assets, which lien is permitted under the New F4L Senior Note Indenture, "Related Business Investment" means (i) any provided that such foreclosure or other remedy is Investment by a person in any other person a majority conducted in a commercially reasonable manner or in of whose revenues are derived from the operation of one accordance with any Bankruptcy Law, (iv) involving only or more retail grocery stores or supermarkets or any Cash Equivalents or inventory in the ordinary course of other line of business engaged in by Food 4 Less or any business or obsolete equipment in the ordinary course of its subsidiaries as of the Issue Date; (ii) any of business consistent with past practices of the Investment by such person in any cooperative or other Company, (v) involving only the lease or sub-lease of supplier, including, without limitation, any joint any real or personal property in the ordinary course of venture which is intended to supply any product or business or (vi) the proceeds of such Asset Sale which service useful to the business of Food 4 Less and its are not applied as contemplated in "-- Certain subsidiaries as it is conducted as of the Issue Date Covenants -- Limitation on Asset Sales" and which, and as such business may thereafter evolve or change; together with all other such Asset Sale Proceeds, do and (iii) any capital expenditure or Investment not exceed $20 million. (without regard to the $5 million threshold in the definition thereof), in each case reasonably related to "Related Business Investment" means (i) any Investment the business of Food 4 Less and its subsidiaries as it by a person in any other person a majority of whose is conducted as of the Issue Date and as such business revenues are derived from the operation of one or more may thereafter evolve or change. retail grocery stores or supermarkets or any other line of business engaged in by the Company or any of its IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD subsidiaries as of the Issue Date; (ii) any Investment F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE by such person in any cooperative or other supplier, THIS PROVISION AND CERTAIN RELATED DEFINITIONS. including, without limitation, any joint venture which is intended to supply any product or service useful to the business of the Company and its subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment, in each case reasonably related to the business of the Company and its subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change. LIMITATION ON PAYMENT RESTRICTIONS AFFECTING LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS SUBSIDIARIES. Pursuant to the Old F4L Senior Note AFFECTING SUBSIDIARIES. Pursuant to the New F4L Senior Indenture, Food 4 Less shall not, and shall not permit Note Indenture, the Company shall not, and shall not any subsidiary to, directly or indirectly, create or permit any subsidiary to, directly or indirectly, suffer to exist, or allow to become effective any create or suffer to exist, or allow to become effective consensual Payment Restriction with respect to any of any consensual Payment Restriction with respect to any its subsidiaries, except for (a) any such restrictions of its subsidiaries, except for (a) any such contained in (i) the Loan Documents as in effect on the restrictions contained in (i) the Credit Agreement and Issue Date as any such payment restriction may apply to related documents as in effect on the Issue Date as any any present or future subsidiary, (ii) Indebtedness of such payment restriction may apply to any present or Food 4 Less and any subsidiary existing on the Issue future subsidiary, (ii) the New F4L Senior Note Date, (iii) the Old F4L Senior Note Indenture, (iv) Indenture and any agreement in effect at or entered Indebtedness of a person existing at the time such into on the Issue Date, (iii) Indebtedness of a person person becomes a subsidiary (provided that (x) such existing at the time such person becomes a subsidiary Indebtedness is not incurred in connection with, or in (provided that (x) such Indebtedness is not incurred in contemplation of, such person becoming a subsidiary, connection with, or in contemplation of, such person (y) such restriction is not applicable to any person, becoming a subsidiary, (y) such restriction is not or the properties or assets of any person, other than applicable to any person, or the properties or assets the person so acquired and (z) such Indebtedness is of any person, other than the person so acquired and otherwise permitted to be incurred pursuant to the (z) such Indebtedness is otherwise permitted to be provisions of "Limitation on Incurrences of Additional incurred pursuant to the provisions described above Indebtedness"), (v) secured Indebtedness otherwise under "Limitation on Incurrences of Additional permitted to be incurred pursuant to the provisions of Indebtedness"), (iv) secured Indebtedness otherwise "Limitation on Incurrences of Additional Indebtedness" permitted to be incurred pursuant to the provisions and that limits the right of the debtor to dispose of described above under "Limitation on Incurrences of the assets securing such Indebtedness; (b) customary Additional Indebtedness" and "Limitation on Liens" that non-assignment provisions restricting subletting or limit the right of the debtor to dispose of the assets assignment of any lease or assignment of any contract securing such Indebtedness; (b) customary of any subsidiary; (c) customary net worth provisions non-assignment provisions restricting subletting or contained in leases and other agreements entered into assignment of any lease or other agreement entered into by a subsidiary in the ordinary course of business; (d) by a subsidiary; (c) customary net worth provisions customary restrictions with respect to a subsidiary contained in leases and other agreements entered into pursuant to an agreement that has been entered into for by a subsidiary in the ordinary course of business; (d) the sale or disposition of all or substantially all of customary restrictions with respect to a subsidiary the capital stock or assets of such subsidiary; (e) pursuant to an agreement that has been entered into for customary provisions in instruments or agreements the sale or disposition of all or substantially all of relating to a lien permitted to be created, incurred or the capital stock or assets of such subsidiary; (e) assumed pursuant to the provisions of "Limitation on customary provisions in joint venture agreements and Liens" and prohibiting the transfer of the property other similar agreements; and (f) restrictions subject to such lien; (f) customary provisions in joint contained in Indebtedness incurred to refinance, venture agreements and other similar agreements entered refund, extend or renew Indebtedness referred to in into in the ordinary course of business which provide clause (a) above; provided that the restrictions that distributions from such venture may only be made contained therein are not materially more restrictive with the consent of the partners; and (g) restrictions taken as a whole than those provided for in such contained in Indebtedness incurred to refinance, Indebtedness being refinanced, refunded, extended or refund, extend or renew Indebtedness referred to in renewed and (g) Payment Restrictions contained in any clause (a) above or amendments to the Indebtedness other Indebtedness permitted to be incurred subsequent referred to to the Issue Date pursuant to the provisions of the covenant
A-16 228
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ in clause (a) above; provided that the restrictions described under "-- Limitation on Incurrences of contained therein relating to the payment of dividends Additional Indebtedness" above; provided that any such by such subsidiaries are not materially more Payment Restrictions are ordinary and customary with restrictive than those provided for in such respect to the type of Indebtedness being incurred Indebtedness being refinanced, refunded, extended or (under the relevant circumstances), and, in any event, renewed. no more restrictive than the most restrictive Payment Restrictions in effect on the Issue Date. "Payment Restriction" means, with respect to a subsidiary of any person, any encumbrance, restriction "Payment Restriction" means, with respect to a or limitation, whether by operation of the terms of its subsidiary of any person, any encumbrance, restriction charter or by reason of any agreement, instrument, or limitation, whether by operation of the terms of its judgment, decree, order, statute, rule or governmental charter or by reason of any agreement, instrument, regulation, on the ability of (i) such subsidiary to judgment, decree, order, statute, rule or governmental (a) pay dividends or make other distributions on its regulation, on the ability of (i) such subsidiary to capital stock or make payments on any obligation, (a) pay dividends or make other distributions on its liability or Indebtedness owed to such person or any capital stock or make payments on any obligation, other subsidiary of such person, (b) make loans or liability or Indebtedness owed to such person or any advances to such person or any other subsidiary of such other subsidiary of such person, (b) make loans or person or (c) transfer any of its properties or assets advances to such person or any other subsidiary of such to such person or any other subsidiary of such person, person or (c) transfer any of its properties or assets or (ii) such person or any other subsidiary of such to such person or any other subsidiary of such person, person to receive or retain any such (a) dividends, or (ii) such person or any other subsidiary of such distributions or payments, (b) loans or advances or (c) person to receive or retain any such (a) dividends, transfer of properties or assets distributions or payments, (b) loans or advances or (c) transfer of properties or assets. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR NOTE INDENTURES WILL BE MODIFIED TO ELIMINATE THIS PROVISION, AND CERTAIN RELATED DEFINITIONS. GUARANTEES OF CERTAIN INDEBTEDNESS. Pursuant to the GUARANTEES OF CERTAIN INDEBTEDNESS. Pursuant to the New Old F4L Senior Note Indenture, Food 4 Less shall not F4L Senior Note Indenture, the Company shall not permit permit any of its subsidiaries, directly or indirectly, any of its subsidiaries to (a) incur, guarantee or to (a) incur, guarantee or secure through the granting secure through the granting of liens the payment of any of liens the payment of any Indebtedness under the Term Indebtedness under the term portion of the Credit Facility under the Credit Agreement or refinancings Agreement or refinancings thereof or (b) pledge any related thereto or (b) pledge any intercompany notes intercompany notes representing obligations of any of representing obligations of any of its subsidiaries, to its subsidiaries, to secure the payment of any secure the payment of any Indebtedness under the Term Indebtedness under the term portion of the Credit Facility under the Credit Agreement or refinancings Agreement or refinancings thereof, in each case unless related thereto, in each case unless such subsidiary, such subsidiary, the Company and the New F4L Senior Food 4 Less and the Old F4L Senior Note Trustee execute Note Trustee execute and deliver a supplemental and deliver a supplemental indenture evidencing such indenture evidencing such subsidiary's guarantee. subsidiary's guarantee, such guarantee to be a senior unsecured obligation of such subsidiary. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS PROVISION AND CERTAIN RELATED DEFINITIONS. LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pursuant LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pursuant to to the Old F4L Senior Note Indenture, neither Food 4 the New F4L Senior Note Indenture, neither the Company Less nor any of its subsidiaries shall (i) sell, lease, nor any of its Subsidiaries shall (i) sell, lease, transfer or otherwise dispose of any of its properties, transfer or otherwise dispose of any of its properties, assets or securities to, (ii) purchase any property, or assets or issue securities (other than equity assets or securities from, (iii) make any Investment securities which do not constitute Disqualified Capi- in, or (iv) enter into or suffer to exist any contract tal Stock) to, (ii) purchase any property, assets or or agreement with or for the benefit of, an affiliate securities (other than equity securities which do not or Significant Stockholder (and any affiliate of such constitute Disqualified Capital Stock) from, (iii) make Significant Stockholder) of Food 4 Less or any any Investment in, or (iv) enter into or suffer to subsidiary (an "Affiliate Transaction"), other than exist any contract or agreement with or for the benefit Affiliate Transactions (including lease transactions) of, an affiliate or Significant Stockholder (or any in the ordinary course of business, that are fair to affiliate of such Significant Stockholder) of the Food 4 Less or such subsidiary, as the case may be, and Company or any Subsidiary (an "Affiliate Transaction"), on terms at least as favorable as might reasonably have other than (x) Affiliate Transactions permitted under been obtainable at such time from an unaffiliated the following paragraph and (y) Affiliate Transactions party, unless the board of directors of Food 4 Less or in the ordinary course of business, that are fair to such subsidiary, as the case may be, pursuant to a the Company or such Subsidiary, as the case may be, and board resolution, reasonably and in good faith on terms at least as favorable as might reasonably have determines that such Affiliate Transaction is fair to been obtainable at such time from an unaffiliated Food 4 Less or such subsidiary, as the case may be, and party; provided, that (A) with respect to Affiliate is on terms at least as favorable as might reasonably Transactions involving aggregate payments in excess of have been obtainable at such time from an unaffiliated $1 million and less than $5 million, the Company or party. In addition, neither Food 4 Less nor any of its such Subsidiary, as the case may be, shall have subsidiaries shall enter into an Affiliate Transaction delivered an officers' certificate to the New F4L or series of related Affiliate Transactions involving Senior Note Trustee certifying that such Affiliate or having a value of more than $15 million unless Food Transactions complies with clause (y) above (other than 4 Less or such subsidiary, as the case may be, has the requirement set forth in such clause (y) that such received an opinion from an independent financial Affiliate Transaction be in the ordinary course of advisor to the effect that the financial terms of such business), (B) with respect to Affiliate Transactions Affiliate Transaction are fair to Food 4 Less or such involving aggregate payments in excess of $5 million subsidiary from a financial point of view. and less than $15 million, with respect to which the Company or such Subsidiary, as the case may, shall have The provisions of the Old F4L Senior Note Indenture delivered an officers' certificate to the New F4L de- Senior Note Trustee certifying that
A-17 229
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ scribed in the foregoing paragraph shall not apply to such Affiliate Transactions complies with clause (y) (i) any Permitted Payment, (ii) any Restricted Payment above (other than the requirement set forth in such that is made in compliance with the provisions set clause (y) that such Affiliate Transaction be in the forth in "Limitation on Restricted Payments," (iii) ordinary course of business) and that such Affiliate reasonable and customary fees and compensation paid to, Transactions has received the approval of a majority of and indemnity provided on behalf of, officers, the disinterested members of the board of directors of directors, employees or consultants of Food 4 Less or the Company or the Subsidiary, as the case may be, or, any subsidiary, as determined by the board of directors in the absence of any such approval by the of Food 4 Less or any subsidiary or the senior disinterested members of the board of directors of the management thereof in good faith, (iv) transactions Company or that the Subsidiary, as the case may be, exclusively between or among Food 4 Less and any of its that an independent financial advisor has reasonably wholly-owned subsidiaries or exclusively between or and in good faith determined that the financial terms among such subsidiaries, provided such transactions are of such Affiliate Transaction are fair to the Company not otherwise prohibited by the Old F4L Senior Note or such subsidiary, as the case may be, or that the Indenture, (v) any agreement as in effect as of the terms of such Affiliate Transaction are at least as Issue Date or any amendment thereto or any transaction favorable as might reasonably have been obtained at contemplated thereby (including pursuant to any such time from an unaffiliated party, and that such amendment thereto) so long as any such amendment is not Independent Financial Advisor has provided written disadvantageous to the holders of the Old F4L Senior confirmation of such determination to the Board of Notes in any material respect, (vi) the existence of, Directors and (C) with respect to Affiliate or the performance by Food 4 Less or any of its Transactions involving aggregate payments in excess of subsidiaries of its obligations under the terms of, any $15 million, with respect to which the Company or such stockholders agreement (including any registration subsidiary, as the case may be, shall have delivered to rights agreement or purchase agreement related thereto) the New F4L Senior Note Trustee, a written opinion from to which it FFL is a party as of the Issue Date and any an independent financial advisor to the effect that the similar agreements which it FFL may enter into financial terms of such Affiliate Transaction are fair thereafter; provided, however, that the existence of, to the Company or such Subsidiary, as the case may be, or the performance by Food 4 Less or any subsidiaries or that the terms of such Affiliate Transaction are at of obligations under any future amendment to, any such least as favorable as those that might reasonably have existing agreement or under any similar agreement been obtained at the time from an unaffiliated party. entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the The provisions of the New F4L Senior Note Indenture de- terms of any such amendment or new agreement are not scribed in the foregoing paragraph shall not apply to otherwise disadvantageous to the holders of the Old F4L (i) any Permitted Payment, (ii) any Restricted Payment Senior Notes in any material respect, (vii) that is made in compliance with the provisions transactions permitted by, and complying with, the described herein under "Limitation on Restricted provisions set forth in "Limitation on Merger and Payments," (iii) reasonable and customary fees and Certain Other Transactions," and (viii) transactions compensation paid to, and indemnity provided on behalf with Certified Grocers of California, Inc., Affiliated of, officers, directors, employees or consultants of Wholesale Grocers of Kansas City, Inc. or their the Company or any Subsidiary, as determined by the subsidiaries or other suppliers in the ordinary course board of directors of the Company or any Subsidiary or of business (including, without limitation, pursuant to the senior management thereof in good faith, (iv) joint venture arrangements with such persons) and transactions exclusively between or among the Company otherwise in compliance with the terms of the Old F4L and any of its wholly-owned Subsidiaries or exclusively Senior Note Indenture. between or among such wholly-owned Subsidiaries, provided such transactions are not otherwise prohibited "Significant Stockholder" means, with respect to any by the New F4L Senior Note Indenture, (v) any agreement person, any other person who is the beneficial owner as in effect as of the Issue Date or any amendment (within the meaning of Rule 13d-3 under the Exchange thereto or any transaction contemplated thereby Act) of more than 10% of any class of equity securities (including pursuant to any amendment thereto) so long of such person that are entitled to vote on a regular as any such amendment is not disadvantageous to the basis for the election of directors of such person. holders of the New F4L Senior Notes in any material respect, (vi) the existence of, or the performance by IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD the Company or any of its subsidiaries of its F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE obligations under the terms of, any stockholders THIS PROVISION AND CERTAIN RELATED DEFINITIONS. agreement (including any registration rights agreement or purchase agreement related thereto) to which it (or New Holdings) is a party as of the Issue Date and any similar agreements which it (or New Holdings) may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the holders of the New F4L Senior Notes in any material respect, (vii) transactions permitted by, and complying with, the provisions described below under "Limitation on Merg- ers and Certain Other Transactions," and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the applicable New F4L Senior Note Indenture which are fair to the Company, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party.
A-18 230
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. LIMITATION ON CHANGE OF CONTROL. Pursuant to the Old LIMITATION ON CHANGE OF CONTROL. The New F4L Subordi- F4L Senior Note Indenture, upon the occurrence of a nated Note Indenture will provide that if a Change of Change of Control, each holder will have the right to Control occurs, each holder will have the right to require the repurchase of such holder's Old F4L Senior require the Company to repurchase such holder's New F4L Notes pursuant to the offer described below (the Senior Notes pursuant to a Change of Control Offer at "Change of Control Offer"), at a purchase price equal 101% of the principal amount thereof plus accrued and to 101% of the principal amount thereof plus accrued unpaid interest to the date of repurchase. interest, if any, to the date of purchase. Within 10 days after any Change of Control Date requiring Food 4 The New F4L Senior Note Indenture will further provide Less to make a Change of Control Offer Food 4 Less that, notwithstanding the foregoing, prior to the shall so notify the Old F4L Senior Note Trustee and the mailing of the notice of a Change of Control Offer Credit Agent. Food 4 Less must comply with Rule 14e-1 referred to above, the Company shall within 30 days under the Securities Exchange Act of 1934, as amended, following any change of control either (a) repay in and any other applicable provisions of the federal full and terminate all commitments under Indebtedness securities laws in connection with a Change of Control under the Credit Agreement to the extent the terms Offer. thereof require repayment upon a Change of Control (or offer to repay in full and terminate all commitments Pursuant to the Old F4L Senior Note Indenture, within under all Indebtedness under the Credit Agreement and 30 days following any Change of Control Date, Food 4 repay the Indebtedness owed to each lender which has Less must send, by first class mail, a notice to each accepted such offer), or (b) obtain the requisite holder, with copies to the Credit Agent and the Old F4L consents under the Credit Agreement, the terms of which Senior Subordinated Note Trustee, which notice shall require repayment upon a Change of Control, to permit govern the terms of the Change of Control Offer. Such the repurchase of the New F4L Senior Notes as provided notice shall state, among other things, the purchase above. The Company shall first comply with the covenant date, which must be no earlier than 30 days nor later in the immediately preceding sentence before it shall than 40 days from the date such notice is mailed, other be required to repurchase New F4L Senior Notes pursuant than as may be required by law (the "Change of Control to the provisions described below. The Company's Payment Date"). Holders electing to have a Old F4L failure to comply with the covenants described in this Senior Note purchased pursuant to a Change of Control paragraph shall constitute an Event of Default under Offer will be required to surrender the Old F4L Senior the New F4L Senior Note Indenture. Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Old F4L Senior In addition, the New F4L Senior Subordinated Note Subordinated Note completed, to the Paying Agent at the Indenture will provide that prior to purchasing New F4L address specified in the notice prior to the close of Senior Subordinated Notes tendered in a Change of business on the business day prior to the Change of Control Offer, the Company shall purchase all Senior Control Payment Date. F4L Notes (or permitted refinancings thereof) which it is required to purchase by reason of such Change of IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD Control pursuant to the provisions of the indenture F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE under which such New Senior F4L Notes are issued, as in THIS COVENANT AND CERTAIN RELATED DEFINITIONS. effect on the Issue Date. LIMITATION ON MERGER AND CERTAIN OTHER LIMITATION ON MERGER AND CERTAIN OTHER TRANSACTIONS. Pursuant to the Old F4L Senior Note TRANSACTIONS. Pursuant to the New F4L Senior Note Indenture, Food 4 Less, in a single transaction or Indenture, the Company, in a single transaction or through a series of related transactions, shall not (i) through a series of related transactions, shall not (i) consolidate with or merge with or into any other consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties otherwise) all or substantially all of its properties and assets as an entirety or substantially as an and assets as an entirety or substantially as an entirety to another person or group of affiliated entirety to another person or group of affiliated persons or (ii) adopt a plan of liquidation, unless, in persons or (ii) adopt a plan of liquidation, unless, in either case, (1) either Food 4 Less shall be the either case, (1) either the Company shall be the continuing person, or the person (if other than Food 4 continuing person, or the person (if other than the Less) formed by such consolidation or into which Food 4 Company) formed by such consolidation or into which the Less is merged or to which all or substantially all of Company is merged or to which all or substantially all the properties and assets of Food 4 Less as an entirety of the properties and assets of the Company as an or substantially as an entirety are transferred (or, in entirety or substantially as an entirety are the case of a plan of liquidation, any person to which transferred (or, in the case of a plan of liquidation, assets are transferred) (Food 4 Less or such other any person to which assets are transferred) (the person being hereinafter referred to as the "Surviving Company or such other person being hereinafter referred Person") shall be a corporation organized and validly to as the "Surviving Person") shall be a corporation existing under the laws of the United States, any state organized and validly existing under the laws of the thereof or the District of Columbia, and shall United States, any state thereof or the District of expressly assume, by an indenture supplement, all the Columbia, and shall expressly assume, by an indenture obligations of Food 4 Less under the Old F4L Senior supplement, all the obligations of the Company under Notes and the Old F4L Senior Note Indenture; (2) the New F4L Senior Note Indenture and the New F4L immediately after and giving effect of such transaction Senior Notes; (2) immediately after and giving effect and the assumption contemplated by clause (1) above and to such transaction and the assumption contemplated by the incurrence or anticipated incurrence of any In- clause (1) above and the incurrence or anticipated debtedness to be incurred in connection therewith, (A) incurrence of any Indebtedness to be incurred in the surviving person shall have a Net Worth equal to or connection therewith, (A) the Surviving Person shall greater than the Net Worth of Food 4 Less immediately have a Consolidated Net Worth equal to or greater than preceding the transaction, (B) the surviving person the Consolidated Net Worth of the Company immediately could incur at least $1 of Indebtedness pursuant to preceding the transaction and (B) the Surviving Person provisions of the Old F4L Senior Note Indenture could incur at least $1.00 of additional Indebtedness described in the first paragraph under the heading (other than Permitted Indebtedness) pursuant to the provisions
A-19 231
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ "Limitation on the Incurrence of Additional described herein under "Limitation on Incurrences of Indebtedness" and (C) if the Operating Coverage Ratio Additional Indebtedness;" (3) immediately before and of Food 4 Less immediately preceding the transaction is immediately after and giving effect to such transaction within a range set forth under column X below, then the and the assumption of the obligations as set forth in Surviving Person shall have an Operating Coverage Ratio clause (1) above and the incurrence or anticipated at least equal to the greater of (i) the actual incurrence of any Indebtedness to be incurred in Operating Coverage Ratio of Food 4 Less multiplied by connection therewith, no Default or Event of Default the appropriate percentage set forth in column Y and shall have occurred and be continuing; and (iv) each (ii) the ratio set forth in column Z below: Subsidiary Guarantor, unless it is the other party to the transaction, shall have by supplemental indenture X Y Z confirmed that its guarantee of the obligations of the - ---------------- ---- ----- Company under the New F4L Senior Notes and the New F4L 1.8:1 to 2.499:1 100% 1.8:1 Senior Note Indenture shall apply, without alteration 2.5:1 to 2.999:1 90% 2.5:1 or amendment as such guarantee applies on the date it 3.0:1 or more 80% 2.7:1 was granted under the New F4L Senior Note Indenture to the obligations of the Company under the New F4L Senior and provided, further, that if immediately after giving Notes Indenture and the New F4L Senior Notes to the effect of such transaction on a pro forma basis, the obligations of the Company or such person, as the case Operating Coverage Ratio of Food 4 Less or the may be, under the New F4L Senior Note Indenture and the surviving entity, as the case may be, is 3.2:1 or more, New F4L Senior Notes, after the consummation of such the calculation in the preceding proviso shall be transaction. Notwithstanding the foregoing, the inapplicable and such transaction shall be deemed to consummation of the Merger on the Issue Date need only have complied with the requirements of such provision; comply with clauses (1) and (3) of the foregoing. (3) immediately before and immediately after and giving effect to such transaction and the assumption of the "Consolidated Net Worth" means, with respect to any obligations as set forth in clause (1) above and the person, the total stockholders' equity (exclusive of incurrence or anticipated incurrence of any any Disqualified Capital Stock) of such person and its Indebtedness to be incurred in connection therewith, no subsidiaries determined on a consolidated basis in Default or Event of Default shall have occurred and be accordance with GAAP. continuing. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more subsidiaries, the capital stock of which constitutes all or substantially all of the properties and assets of Food 4 Less shall be deemed to be the transfer of all or substantially all of the properties and assets of Food 4 Less. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR NOTE INDENTURES WILL BE MODIFIED TO ELIMINATE THE SUBSECTIONS OF THIS PROVISION WHICH REQUIRE THAT IMMEDIATELY AFTER GIVING EFFECT TO SUCH TRANSACTION AND THE INCURRENCE OF ANY INDEBTEDNESS IN CONNECTION THEREWITH, FOOD 4 LESS OR THE SURVIVING ENTITY, AS THE CASE MAY BE, HAS A NET WORTH OR OPERATING COVERAGE RATIO THAT MEETS THE STANDARDS SET FORTH THEREIN. MAINTENANCE OF NET WORTH. Pursuant to the Old F4L MAINTENANCE OF NET WORTH. THE NEW F4L SENIOR NOTE Senior Subordinated Note Indenture, if Food 4 Less' INDENTURE WILL NOT CONTAIN A COVENANT REQUIRING THE Net Worth at the end of each of any two consecutive MAINTENANCE OF A MINIMUM NET WORTH. fiscal quarters (the last day of the second fiscal quarter being referred to as the "Acceleration Date") is equal to or less than $50 million (the "Minimum Net Worth"), then Food 4 Less shall make an offer to all holders (an "Offer") to purchase, on a pro rata basis, on or before the last day of the next following fiscal quarter or, in the event that the Acceleration Date is the last day of Food 4 Less' fiscal year, the forty-fifth day after the last day of the next following fiscal quarter (the "Accelerated Payment Date"), $17.5 million aggregate principal amount of Old F4L Senior Subordinated Notes (an "Accelerated Payment") at a purchase price equal to 100% of principal amount plus accrued but unpaid interest to the Accelerated Payment Date. Food 4 Less may credit against the principal amoount of Old F4L Senior Subordinated Notes to be acquired in any Accelerated Payment 100% of the principal amount of Old F4L Senior Subordinated Notes acquired by Food 4 Less through purchase, optional redemption, exchange or otherwise during the 180-day period ending on the Acceleration Date and surrendered for cancellation. Food 4 Less, however, may not credit Old F4L Senior Subordinated Notes against an Accelerated Payment if such Old F4L Senior Subordinated Notes were previously used as a credit against any other required payment under the Old F4L Senior Subordinated Note Indenture. In no event shall the failure of Food 4 Less' Net Worth to equal or exceed $50 million at the end of any fiscal quarter be counted toward the making of more than one Offer. "Net Worth" as of any date means, with respect to any person, the amount of the equity of the holders of capital stock of such person that would appear on the balance sheet of such person as
A-20 232
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ of such date, determined in accordance with GAAP, adjusted to exclude (to the extent included in such equity), (i) the amount of equity attributable to Disqualified Capital Stock and (ii) with respect to Food 4 Less, the effect of (a) all non-cash charges reducing such equity amount and attributable to the early extinguishment of, or acceleration of costs of, the financing of the Alpha Beta Acquisition (other than amortization of original issue discount), (b) prepayment penalties or other charges incurred in connection with the retirement of certain Indebtedness of a subsidiary of Food 4 Less existing immediately prior to the Alpha Beta Acquisition and (c) the recognition of deferred losses, in an amount not to exceed $3 million, on the Long Beach Warehouse. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED DEFINITIONS. LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. Pursuant Old F4L Senior Note Indenture does not have a to the New Senior Note Indenture, the Company will not covenant providing for the limitation on the issuance permit any of its Subsidiaries to issue any Preferred of preferred stock of subsidiaries. Stock (other than to the Company or to a wholly-owned Subsidiary) or permit any person (other than the Company or a wholly-owned subsidiary) to own any Preferred Stock of any subsidiary. EVENTS OF DEFAULT EVENTS OF DEFAULT Under the terms of the Old F4L Senior Note Indenture Under the terms of the New F4L Senior Note Indenture, the following events constitute "Events of Default:" the following events constitute "Events of Default": (i) failure to make any interest payment on the Old F4L (i) failure to make any interest payment on the New F4L Senior Notes when due and the continuance of such Senior Notes when due and the continuance of such default for a period of 30 days; (ii) failure to pay default for a period of 30 days; (ii) failure to pay principal of the Old F4L Senior Notes when due, whether principal of, or premium, if any, on the New F4L Senior at maturity, upon acceleration, redemption or Notes when due, whether at maturity, upon accelera- otherwise; (iii) failure to comply with any other tion, redemption, required repurchase or otherwise; agreement contained in the Old F4L Senior Notes or the (iii) failure to comply with any other agreement Old F4L Senior Note Indenture, if such failure contained in the New F4L Senior Notes or the New F4L continues unremedied for 30 days after written notice Senior Note Indenture, if such failure continues given by the Old F4L Senior Note Trustee or the holders unremedied for 30 days after written notice given by of at least 25% in principal amount of the Old F4L the New F4L Senior Note Trustee or the holders of at Senior Notes then outstanding (except in the case of a least 25% in principal amount of the New F4L Senior default with respect to the covenants set forth in the Notes then outstanding (except in the case of a default Old F4L Senior Note Indenture, and described herein with respect to the covenants set forth in the New F4L under the headings "Limitation on Restricted Payments," Senior Note Indenture, and described herein under the "Maintenance of Net Worth," "Limitations on headings "Limitation on Restricted Payments," Dispositions of Assets," "Change of Control," and "Limitations on Asset Sales," "Change of Control," and "Limitations on Merger and Certain Other Transactions," "Limitations on Merger and Certain Other Transactions," which shall constitute Events of Default with notice which shall constitute Events of Default with notice but without passage of time); (iv) a default under any but without passage of time); (iv) a default under any Indebtedness of Food 4 Less or its subsidiaries, Indebtedness of the Company or its subsidiaries, whether such Indebtedness now exists or shall whether such Indebtedness now exists or shall hereinafter be created, if both (A) such default either hereinafter be created, if both (A) such default either (1) results from the failure to pay any such (1) results from the failure to pay any such Indebtedness at its stated final maturity or (2) Indebtedness at its stated final maturity or (2) relates to an obligation other than the obligation to relates to an obligation other than the obligation to pay any principal of such Indebtedness at its stated pay such Indebtedness at its stated final maturity and maturity and results in the holder or holders of such results in the holder or holders of such Indebtedness Indebtedness causing such Indebtedness to become due causing such Indebtedness to become due prior to its prior to its stated maturity and (B) the principal stated maturity and (B) the principal amount of such amount of such Indebtedness, together with the Indebtedness, together with the principal amount of any principal amount of any other such Indebtedness in other such Indebtedness in default for failure to pay default for failure to pay principal at maturity or the principal at stated final maturity or the maturity of maturity of which has been so accelerated, aggregate which has been so accelerated, aggregate $20 million or $20 million or more at any one time outstanding; (v) more at any one time outstanding; (v) any final any final judgment or order for payment of money in judgment or order for payment of money in excess of $20 excess of $20 million shall be entered against Food 4 million shall be entered against the Company or any Less or any Significant Subsidiary and shall not be Significant Subsidiary and shall not be discharged for discharged for a period of 60 days after such judgment a period of 60 days after such judgment becomes final becomes final and nonappealable; (vi) either Food 4 and nonappealable; (vi) either the Company or any Less or any Significant Subsidiary pursuant to or Significant Subsidiary pursuant to or within the within the meaning of any Bankruptcy Law: (a) commences meaning of any Bankruptcy Law: (a) commences a a voluntary case or proceeding; (b) consents to the voluntary case or proceeding; (b) consents to the entry entry of an order for relief against it in an of an order for relief against it in an involuntary involuntary case or proceeding; (c) consents to the case or proceeding; (c) consents to the appointment of appointment of a custodian of it or for all or a custodian of it or for all or substantially all of substantially all of its property; or (d) makes a its property; or (d) makes a general assignment for the general assignment for the benefit of its creditors; benefit of its creditors; (vii) a court of competent (vii) a court of competent jurisdiction enters an order jurisdiction enters an order or decree under any or decree in an involuntary case or proceeding under Bankruptcy Law that: (a) is for relief against the any Bankruptcy Law that: (a) is for relief against Food Company or any Significant Subsidiary, in an invol- 4 Less or any
A-21 233
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ Significant Subsidiary; (b) appoints a custodian of untary case or proceeding; (b) appoints a custodian of Food 4 Less or any Significant Subsidiary, or for all the Company or any Significant Subsidiary, or for all or any substantial part of their respective properties; or any substantial part of their respective properties; or (c) orders the liquidation of Food 4 Less or any or (c) orders the liquidation of the Company or any Significant Subsidiary, and in each case the order or Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for 60 days; and decree remains unstayed and in effect for 60 days; (viii) the lenders under the Loan Documents shall (viii) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any commence judicial proceedings to foreclose upon any material portion of the assets of Food 4 Less and its material portion of the assets of the Company and its subsidiaries. In the event of a declaration or subsidiaries; or (ix) any of the guarantees shall be acceleration because an Event of Default set forth in declared or adjudged invalid in a final judgment or clause (iv) above has occurred and is continuing, such order issued by any court of governmental authority. In declaration of acceleration shall be automatically the event of a declaration of acceleration because an rescinded and annulled if either (i) the holders of the Event of Default set forth in clause (iv) above has Indebtedness which is the subject of such Event of occurred and is continuing, such declaration of Default have waived such failure to pay at maturity or acceleration shall be automatically rescinded and have rescinded the acceleration in respect of such annulled if either (i) the holders of the Indebtedness Indebtedness within 90 days of such maturity or which is the subject of such Event of Default have declaration of acceleration, as the case may be, and no waived such failure to pay at maturity or have other Event of Default has occurred during such 90-day rescinded the acceleration in respect of such period which has not been cured or waived, or (ii) such Indebtedness within 90 days of such maturity or Indebtedness shall have been discharged or the maturity declaration of acceleration, as the case may be, and no thereof shall have been extended such that it is not other Event of Default has occurred during such 90-day then due and payable, or the underlying default has period which has not been cured or waived, or (ii) such been cured, within 90 days of such maturity or Indebtedness shall have been discharged or the maturity declaration of acceleration, as the case may be. thereof shall have been extended such that it is not then due and payable, or the underlying default has Pursuant to the Old F4L Senior Note Indenture, if an been cured, within 90 days of such maturity or Event of Default (other than an Event of Default declaration of acceleration, as the case may be. resulting from bankruptcy, insolvency, receivership or reorganization of Food 4 Less) occurs and is Pursuant to the New F4L Senior Note Indenture, if an continuing, the Old F4L Senior Note Trustee or the Event of Default (other than an Event of Default holders of at least 25% in principal amount of the Old resulting from bankruptcy, insolvency, receivership or F4L Senior Notes then outstanding may declare reorganization of the Company or a Subsidiary immediately due and payable all unpaid principal plus Guarantor) occurs and is continuing, the New F4L Senior accrued and unpaid interest on the Old F4L Senior Notes Note Trustee or the holders of at least 25% in then outstanding. If an Event of Default resulting from principal amount of the then outstanding New F4L Senior certain events of bankruptcy, insolvency, receivership Notes may declare due and payable all unpaid principal or reorganization of Food 4 Less shall occur, all and interest accrued and unpaid on the then outstanding unpaid principal and accrued interest shall be New F4L Senior Notes issued under such New F4L Senior immediately due and payable without any declaration or Note Indenture by notice in writing to the Company, the other act on the part of the Old F4L Senior Note administrative agent under the Credit Agreement and the Trustee or any of the holders. Subject to certain applicable New F4L Senior Note Trustee specifying the conditions, the holders of a majority in principal respective Event of Default and that it is a "notice of amount of the Old F4L Senior Notes then outstanding, by acceleration" (the "Acceleration Notice"), and the same notice to the Old F4L Senior Note Trustee, may rescind (i) shall become immediately due and payable or (ii) if such declaration if all existing Events of Default are there are any amounts outstanding under the Credit remedied. In certain cases the holders of a majority in Agreement, shall become due and payable upon the first principal amount of outstanding Old F4L Senior Notes to occur of an acceleration under the Credit Agreement, may waive any past default and its consequences, except or five business days after receipt by the Company and a default in the payment of principal of or interest on the administrative agent under the Credit Agreement of any of the Old F4L Senior Notes. such Acceleration Notice. If an Event of Default resulting from certain events of bankruptcy, insol- The Old F4L Senior Note Indenture provides that if a vency, receivership or reorganization of the Company or Default or Event of Default occurs and is continuing a Subsidiary Guarantor that is a Significant Subsidiary and if it is known to the Old F4L Senior Note Trustee, shall occur, all unpaid principal of and accrued the Old F4L Senior Note Trustee shall mail to each interest on all then outstanding New F4L Senior Notes holder notice of the uncured Default or Event of shall be immediately due and payable without any Default within 90 days after such Default or Event of declaration or other act on the part of the New F4L Default occurs; provided, however, that, except in the Senior Note Trustee or any of the holders. After a case of a Default or Event of Default in the payment of declaration of acceleration, subject to certain the principal of or interest on any of the Old F4L conditions, the holders of a majority in principal Senior Notes, including the failure to make payment on amount of the then outstanding New F4L Senior Notes, by the Change of Control Payment Date pursuant to a Change notice to the New F4L Senior Note Trustee, may rescind of Control Offer, payment when due pursuant to a Net such declaration if all existing Events of Default are Proceeds Offer or payment when due pursuant to an Offer remedied. In certain cases the holders of a majority in described above under "Maintenance of Net Worth," the principal amount of outstanding New F4L Senior Notes Old F4L Senior Note Trustee may withhold such notice if may waive a past default under the New F4L Senior Note it in good faith determines that withholding such Indenture and its consequences, except a default in the notice is in the interest of the holders. payment of or interest on any of the New F4L Senior Notes. The Old F4L Senior Note Indenture provides that no holder may pursue any remedy thereunder unless the Old The New F4L Senior Note Indenture provides that if a F4L Senior Note Trustee (i) shall have failed to act Default or Event of Default occurs and is continuing for a period of 60 days after receiving written notice thereunder and if it is known to the New F4L Senior of a continuing Event of Default by such holder and a Note Trustee, the New F4L Senior Note Trustee shall request to act by holders of at least 25% in principal mail to each holder of New F4L Senior Notes notice of amount of Old F4L Senior Notes and (ii) has received the Default or Event of Default within 90 days after indemnification satisfactory to it; provided, however, such Default or Event of Default occurs; provided, that such provision does not affect the right of any however, that, except in the case of a Default or Event holder to sue for enforcement of any overdue payment of of Default in the payment of the principal of or Old F4L Senior Notes. interest on any New F4L Senior Notes, including the failure to make payment on a
A-22 234
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ Under the Old F4L Senior Note Indenture, two officers Change of Control Payment Date pursuant to a Change of of Food 4 Less are required to certify to the Old F4L Control Offer or payment when due pursuant to a Net Senior Note Trustee within 120 days after the end of Proceeds Offer the New F4L Senior Note Trustee may each fiscal year of Food 4 Less whether or not they withhold such notice if it in good faith determines know of any Default that occurred during such fiscal that withholding such notice is in the interest of the year and if applicable, describe such Default and the holders. status thereof. The New F4L Senior Note Indenture provides that no holder of New F4L Senior Notes may pursue any remedy thereunder unless the New F4L Senior Note Trustee (i) shall have failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such holder and a request to act by holders of at least 25% in principal amount of New F4L Senior Notes and (ii) has received indemnification satisfactory to it; provided, however, that such provision does not affect the right of any holder to sue for enforcement of any overdue payment of New F4L Senior Notes. Under the New F4L Senior Note Indenture, two officers of the Company are required to certify to the New F4L Senior Note Trustee within 120 days after the end of each fiscal year of New F4L Senior Note whether or not they know of any Default that occurred during such fiscal year and, if applicable, describe such Default and the status thereof. MODIFICATION OF THE OLD F4L SENIOR NOTE INDENTURE MODIFICATION OF THE NEW F4L SENIOR NOTE INDENTURE Pursuant to the terms of the Old F4L Senior Note Pursuant to the terms of the New F4L Senior Note Indenture, the Old F4L Senior Note Indenture and the Indenture, the New F4L Senior Note Indenture and the Old F4L Senior Notes may be amended or supplemented New F4L Senior Notes may be amended or supplemented (and compliance with any provision thereof may be (and compliance with any provision thereof may be waived) by Food 4 Less, the Old F4L Senior Note Trustee waived) by the Company, the Subsidiary Guarantors, the and the holders of not less than a majority in New F4L Senior Note Trustee and the holders of not less aggregate principal amount of the Old F4L Senior Notes than a majority in aggregate principal amount of New then outstanding, except that without the consent of F4L Senior Notes then outstanding, except that (i) each holder affected, no such amendment, supplement or without the consent of each holder of New F4L Senior waiver may (1) change the principal amount of Old F4L Notes affected, no such amendment, supplement or waiver Senior Notes whose holders must consent to an may (1) change the principal amount of the New F4L amendment, supplement or waiver of any provision of the Senior Notes the holders of which must consent to an Old F4L Senior Note Indenture or the Old F4L Senior amendment, supplement or waiver of any provision of the Notes; (2) reduce the rate or extend the time for New F4L Senior Note Indenture, the New F4L Senior Notes payment of interest on any Old F4L Senior Note; (3) or the guarantees, (2) reduce the rate or extend the reduce the principal amount of any Old F4L Senior Note; time for payment of interest on any New F4L Senior (4) change the date of maturity of any Old F4L Senior Notes, (3) reduce the principal amount of any New F4L Note or alter the redemption provisions in a manner Senior Notes, (4) change the date of maturity of any adverse to any holder; (5) make any changes in the New F4L Senior Notes or alter the redemption provisions provisions concerning waivers of Defaults or Events of in the New F4L Senior Note Indenture or the New F4L Default by holders or the rights of holders to recover Senior Notes in a manner adverse to any holder, (5) the principal of, interest on or redemption payment make any changes in the provisions concerning waivers with respect to any Old F4L Senior Note; and (6) make of Defaults or Events of Default by holders or the the principal of, or interest on, any Old F4L Senior rights of holders to recover the principal of, interest Note payable with anything or in any manner other than on or redemption payment with respect to any New F4L as provided for in the Old F4L Senior Note Indenture Senior Notes or (6) make the principal of, or interest and the Old F4L Senior Notes. on, any New F4L Senior Notes payable with anything or in any manner other than as provided for in the New F4L In addition, pursuant to the Old F4L Senior Note Senior Note Indenture, the New F4L Senior Notes and the Indenture, Food 4 Less and the Old F4L Senior Note Senior Note Guarantee, (ii) without the consent of Trustee may amend the Old F4L Senior Note Indenture and Holders of not less than 75% in aggregate principal the Old F4L Senior Notes (a) to cure any ambiguity, amount of such New F4L Senior Notes then outstanding, defect or inconsistency therein; provided that such no such amendment, supplement or waiver may change the amendment or supplement does not adversely affect the Change of Control Payment Date or the purchase price in rights of any holder or (b) to make any other change connection with any repurchase of such New F4L Senior that does not adversely affect the rights of any Notes pursuant to the covenant described under "-- holder. Change of Control" in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "-- Change of Control" above and (iii) without the Consent of holders of not less than two-thirds in aggregate principal amount of such New F4L Senior Notes then outstanding, no such amendment, supplement or waiver may release any Subsidiary Guarantor from any of its Obligations under its guarantee or the New F4L Senior Note Indenture other than in accordance with the terms of such guarantee and the New F4L Senior Note Indenture. In addition, to the New F4L Senior Note Indenture, the New F4L Senior Notes and the related guarantees may be amended
A-23 235
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES - ------------------------------------------------------ ------------------------------------------------------ by the Company, the Subsidiary Guarantors and the New F4L Senior Note Trustee (a) to cure any ambiguity, defect or inconsistency therein; provided that such amendment or supplement does not adversely affect the rights of any holder thereof or (b) to make any other change that does not adversely affect the rights of any holder thereunder in any material respect.
A-24 236 APPENDIX B COMPARISON OF OLD F4L SENIOR SUBORDINATED NOTES AND NEW F4L SENIOR SUBORDINATED NOTES The following is a brief comparison of the principal features of the Old F4L Senior Subordinated Notes to the New F4L Senior Subordinated Notes. The terms of the New F4L Senior Subordinated Notes differ from the current (unamended) terms of the Old F4L Senior Subordinated Notes in certain significant respects, including those discussed below. The summary comparisons set forth below do not purport to be complete and are qualified in their entirety by reference to the Old F4L Senior Subordinated Note Indenture, the Old F4L Senior Subordinated Notes, the New F4L Senior Subordinated Note Indenture, the New F4L Senior Subordinated Notes, the "Description of the New F4L Notes" and "The Proposed Amendments" and the related definitions contained therein.
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ ISSUER ISSUER. Food 4 Less. The Company, as successor by merger to Food 4 Less. PRINCIPAL AMOUNT OUTSTANDING PRINCIPAL AMOUNT OUTSTANDING As of May 1, 1995, $145 million. Up to $145 million. INTEREST RATE INTEREST RATE The Old F4L Senior Subordinated Notes bear interest at The New F4L Senior Subordinated Notes will bear the rate of 13 3/4% per annum. interest at the rate of 13.75% per annum. INTEREST PAYMENT DATES INTEREST PAYMENT DATES June 15 and December 15. June 1 and December 1, commencing on December 1, 1995. FINAL MATURITY DATE FINAL MATURITY DATE June 15, 2001. June 1, 2005. OPTIONAL REDEMPTION OPTIONAL REDEMPTION The Old F4L Senior Subordinated Notes are redeemable, The New F4L Senior Subordinated Notes are redeemable, at the option of Food 4 Less, in whole at any time or at the option of the Company in whole at any time or in in part from time to time, on or after June 15, 1996, part from time to time, on or after June 15, 1996, at at the following redemption prices if redeemed during the following redemption prices if redeemed during the the twelve-month period commencing on June 15 of the twelve-month period commencing on June 15 of the years years set forth below: set forth below: 1996..........................................106.111% 1996..........................................106.111% 1997..........................................104.583% 1997..........................................104.583% 1998..........................................103.056% 1998..........................................103.056% 1999..........................................101.528% 1999..........................................101.528% 2000 and thereafter...........................100.000% 2000 and thereafter...........................100.000% in each case plus accrued and unpaid interest to the in each case plus accrued and unpaid interest to the date of redemption. date of redemption. In the event of a Change of Control, the Old F4L Senior Subordinated Notes may be redeemed on or after June 15, 1994 and prior to June 15, 1996, at the option of Food 4 Less, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, together with accrued and unpaid interest to the date of redemption, if redeemed during the 12 months commencing on June 15 in the years set forth below: YEAR PERCENTAGE - ---- ---------- 1994..........................................109.167% 1995..........................................107.639% MANDATORY REDEMPTION MANDATORY REDEMPTION Food 4 Less will make a mandatory sinking fund payment The New F4L Senior Subordinated Notes are not subject on June 15, 2000, sufficient to retire 50% of the Old to a mandatory sinking fund requirement. F4L Senior Subordinated Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. Food 4 Less may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Old F4L Senior Subordinated Notes previously acquired by Food 4 Less in the open market and surrendered to the Old F4L Senior Subordinated Note Trustee for cancellation or redeemed at the option of Food 4 Less and which, in each case, were not previously used for or as a credit against any other required payment pursuant to the Old F4L
B-1 237
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Senior Subordinated Note Indenture. Food 4 Less may use the same Old F4L Senior Subordinated Note as a credit only once. Food 4 Less intends to credit Old F4L Senior Subordinated Notes tendered into the Exchange Offer against its sinking fund obligation. RANKING RANKING The Old F4L Senior Subordinated Notes are unsecured The New F4L Senior Subordinated Notes will be unsecured general obligations of Food 4 Less and are general obligations of the Company and will be subordinated to all Senior Indebtedness of Food 4 Less, subordinated to all Senior Indebtedness of the Company, including the Old F4L Senior Notes and the borrowings including the Company's obligations under the Credit and other obligations under the Credit Agreement. As of Agreement and the indebtedness under the New F4L Senior January 7, 1995, the aggregate outstanding amount of Notes and the Old F4L Senior Notes, if any. The New F4L Senior Indebtedness of Food 4 Less (excluding Food 4 Senior Subordinated Notes will rank senior to, or pari Less guarantees of certain Guarantor Senior Indebted- passu with, all subordinated indebtedness of the ness) would have been approximately $395.5 million and Company. the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding "Senior Indebtedness" means the principal of, premium, guarantees by Subsidiary Guarantors of certain Senior if any, and interest on any Indebtedness of the Indebtedness of Food 4 Less) would have been Company, whether outstanding on the Issue Date or approximately $16.5 million. thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the New F4L Senior Subordinated Notes. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include (x) the principal of, premium, if any, and interest on all obligations of every nature of the Company from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, and all fees and expenses payable under the Credit Agreement and the Letter of Credit Obligations, and (y) interest accruing thereon subsequent to the occurrence of any Event of Default specified in clause (vi) or (vii) under "-- Events of Default" relating to the Company, whether or not the claim for such interest is allowed under any applicable Bankruptcy Law. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a) Indebtedness evidenced by the New F4L Senior Subordinated Notes, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of the Company, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company, (d) Indebtedness which is represented by Disqualified Capital Stock, (e) Obligations for goods, materials or services purchased in the ordinary course of business or Indebtedness consisting of trade payables, (f) Indebtedness of or amounts owed by the Company for compensation to employees or for services rendered to the Company, (g) any liability for federal, state, local or other taxes owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the Company, and (i) that portion of any Indebtedness which is incurred by the Company in violation of the New F4L Senior Subordinated Note Indenture. GUARANTEES GUARANTEES Each Subsidiary Guarantor has unconditionally Each Subsidiary Guarantor will unconditionally guaranteed, jointly and severally, the full and guarantee, jointly and severally, the full and prompt prompt performance of Food 4 Less' obligations under performance of the Company's obligations under the New the Old F4L Senior Subordinated Note Indenture and the F4L Senior Subordinated Note Indenture and the New F4L Old F4L Subordinated Notes. Senior Subordinated Notes. "Subsidiary Guarantor" means (i) Cala Co., Cala "Subsidiary Guarantor" means (i) each of Alpha Beta Foods, Inc., Bell Markets, Inc., Food 4 Less of Company, Bay Area Warehouse Stores, Inc., Bell Markets, Southern California, Inc., Alpha Beta Company, Food 4 Inc., Cala Co., Cala Foods, Inc., Falley's Inc., Food 4 Less of California, Inc., Falley's, Inc., and Food 4 Less of California, Inc., Food 4 Less Merchandising, Less Merchandising, Inc., (ii) each of the Food 4 Less' Inc., Food 4 Less GM, Inc., Food 4 Less of Southern subsidiaries that becomes a guarantor of the Old F4L California, Inc. (ii) upon consummation of the Mergers, Senior Subordinated Notes pursuant to the provisions of Crawford Stores, Inc., (iii) each of the Company's the Old F4L Senior Subordinated Note Indenture subsidiaries which becomes a guarantor of the New F4L summarized under "Guarantees of Certain Indebtedness" Senior Subordinated Notes in compliance with the and (iii) each of Food 4 Less's subsidiaries executing provisions set forth under "Guarantees of Certain a supplemental indenture in which such subsidiary Indebtedness," and (iv) each of the Company's agrees to be bound by the provisions of the Old F4L Subsidiaries executing a supplemental indenture in Senior Subordinated Note Indenture. See "Guarantees which such Subsidiary agrees to be bound by
B-2 238
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ of Certain Indebtedness" below. the terms of the New F4L Senior Subordinated Indenture. See "Guarantees of Certain Indebtedness" below. CHANGE OF CONTROL CHANGE OF CONTROL Under the occurrence of a Change of Control, each Under the occurrence of a Change of Control, each holder will have the right to require the repurchase holder will have the right to require the repurchase of of such holder's Old F4L Senior Subordinated Notes at a such holder's New F4L Senior Subordinated Notes at a purchase price equal to 101% of the principal amount purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of thereof plus accrued and unpaid interest to the date of repurchase. See "Limitation on Change of Control" repurchase. below. "Change of Control" means (i) the acquisition after the "Change of Control" means the acquisition, in one or Issue Date, in one or more transactions, of beneficial more transactions, of beneficial ownership (within the ownership (within the meaning of Rule 13d-3 under the meaning of Rule 13d-3 under the Exchange Act) by (i) Exchange Act) by (a) any person or entity (other than any person or entity other than any Permitted Holder any Permitted Holder) or (b) any group of persons or (as defined below) or (ii) any group of persons or entities (excluding any Permitted Holders) who entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section constitute a group (within the meaning of section 13(d)(3) of the Exchange Act), in either case, of any 13(d)(3) of the Exchange Act), in either case, of any securities of New Holdings or the Company such that, as securities of FFL or Food 4 Less such that, as a result a result of such acquisition, such person, entity or of such acquisition, such person, entity or group group either beneficially owns (within the meaning of either (A) beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or Rule 13d-3 under the Exchange Act) 51% or more of Food indirectly, 40% or more of the then outstanding voting 4 Less's then outstanding voting securities entitled to securities entitled to vote on a regular basis for a vote on a regular basis for a majority of the board of majority of the board of directors of the Company (but directors of Food 4 Less (to the extend such beneficial only to the extent that such beneficial ownership is ownership is not shared with any Permitted Holder who not shared with any Permitted Holder who has the power has the power to direct the vote thereof), or (B) to direct the vote thereof), provided, however, that no otherwise has the ability to elect a majority of the such Change of Control shall be deemed to have occurred members of Food 4 Less's board of directors. if (A) the Permitted Holders beneficially own, in the aggregate, at such time, a greater percentage of such "Permitted Holder" means (i) Food 4 Less Equity voting securities than such other person, entity or Partners, L.P., The Yucaipa Companies or any entity group or (B) at the time of such acquisition, the controlled thereby, (ii) an employee benefit plan of Permitted Holders (or any of them) possess the ability Food 4 Less, or any participant therein or any of its (by contract or otherwise) to elect, or cause the subsidiaries, (iii) a trustee or other fiduciary election, of a majority of the members of the Company's holding securities under an employee benefit plan of board of directors. Food 4 Less or any of its subsidiaries or (iv) any Permitted Transferee of any of the foregoing persons. "Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., and The Yucaipa Companies or any entity "Permitted Transferee" means, with respect to any controlled thereby or any of the partners thereof, (ii) person, (i) any affiliate of such person, (ii) the Apollo Advisors, L.P., Lion Advisors, L.P. or any heirs, executors, administrators, testamentary entity controlled thereby or any of the partners trustees, legatees or beneficiaries of any such person, thereof, (iii) an employee benefit plan of the Company, and (iii) a trust, the beneficiaries of which, or a or any of its subsidiaries or any participant therein, corporation or partnership, the stockholders or general (iv) a trustee or other fiduciary holding securities or limited partners of which, include only such person under an employee benefit plan of the Company or any of or his or her spouse or lineal descendants, in each its subsidiaries or (v) any Permitted Transferee of any case to whom such person has transferred securities of of the foregoing persons. Food 4 Less. "Permitted Transferees" means, with respect to any IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD person, (i) any Affiliate of such person, (ii) the F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED heirs, executors, administrators, testamentary TO ELIMINATE THIS COVENANT AND CERTAIN RELATED trustees, legatees or beneficiaries of any such person, DEFINITIONS. (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person and (v) any investment fund or investment entity that is a subsidiary of such person or a Permitted Transferee of such person. CERTAIN COVENANTS CERTAIN COVENANTS LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the New Old F4L Senior Subordinated Note Indenture, Food 4 F4L Senior Subordinated Note Indenture, the Company Less shall not, and shall cause each of its shall not, and shall cause each of its subsidiaries not subsidiaries not to, directly or indirectly, make any to, directly or indirectly, make any Restricted Payment Restricted Payment if, at the time of such Restricted if, at the time of such proposed Restricted Payment, or Payment, or after giving effect thereto, (a) a Default after giving effect thereto, (a) a Default or an Event or an Event of Default shall have occurred and be of Default shall have occurred and be continuing, (b) continuing, (b) the Net Worth of Food 4 Less on the the Company could not incur $1.00 of additional last day of the full fiscal quarter immediately Indebtedness (other than Permitted Indebtedness) preceding the date of such Restricted Payment (pro pursuant to the covenant described under "-- Limitation forma to give effect thereto) is not greater than $115 on Incurrences of Additional Indebtedness" below or (c) million, (c) Food 4 Less's Operating Coverage Ratio, the aggregate amount expended for all Restricted calculated on a pro forma basis as if such Restricted Payments, including such proposed Payment had been made at the
B-3 239
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ beginning of the Pro Forma Period, shall be less than Restricted Payment (the amount of any Restricted 2.25 to 1.0 or (d) the aggregate amount expended for Payment, if other than cash, to be the fair market all Restricted Payments, including such Restricted value thereof at the date of payment as determined in Payment (the amount of any Restricted Payment, if other good faith by the board of directors of the Company), than cash, to be the fair market value thereof at the subsequent to the Issue Date, shall exceed the sum of date of payment as determined in good faith by the (i) 50% of the aggregate Consolidated Net Income (or if board of directors of Food 4 Less), subsequent to June such aggregate Consolidated Net Income is a loss, minus 17, 1991, shall exceed the sum of (i) 25% of the 100% of such loss) of the Company earned subsequent to aggregate Consolidated Net Income (or if such the Issue Date and on or prior to the date of the Consolidated Net Income is a loss, minus 100% of such proposed Restricted Payment (the "Reference Date") plus loss) of Food 4 Less earned subsequent to June 17, 1991 (ii) 100% of the aggregate net proceeds received by the and on or prior to the date the Restricted Payment Company from any person (other than a subsidiary of the occurs (the "Reference Date") plus (ii) 100% of the Company) from the issuance and sale (including upon aggregate net proceeds received by Food 4 Less from any exchange or conversion for other securities of the person (other than a subsidiary) from the issuance and Company) subsequent to the Issue Date and on or prior sale subsequent to June 17, 1991 and on or prior to the to the Reference Date of Qualified Capital Stock Reference Date of Qualified Capital Stock (excluding (excluding (A) Qualified Capital Stock paid as a (A) Qualified Capital Stock paid as a dividend on any dividend on any capital stock or as interest on any capital stock or as interest on any Indebtedness and Indebtedness and (B) any net proceeds from issuances (B) any net proceeds from issuances and sales financed and sales financed directly or indirectly using funds directly or indirectly using funds borrowed from Food 4 borrowed from the Company or any subsidiary, until and Less or any subsidiary, until and to the extent such to the extent such borrowing is repaid), plus (iii) borrowing is repaid). 100% of the aggregate net cash proceeds received by the Company as capital contributions to the Company after Notwithstanding the foregoing, if no Default or Event the Issue Date, plus (iv) $25 million. of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the Notwithstanding the foregoing, if no Default or Event immediately preceding paragraph will not prevent (1) of Default shall have occurred and be continuing as a the payment of any dividend within 60 days after the consequence thereof, the provisions set forth in the date of its declaration if the dividend would have been immediately preceding paragraph will not prevent (1) permitted on the date of declaration, (2) the the payment of any dividend within 60 days after the acquisition of any shares of capital stock of Food 4 date of its declaration if the dividend would have been Less or the repayment of any Indebtedness of Food 4 permitted on the date of declaration, (2) the Less in exchange for or solely out of the proceeds of acquisition of any shares of capital stock of the the substantially concurrent sale (other than to a Company or the repurchase, redemption or other subsidiary) of shares of Qualified Capital Stock or the repayment of any Subordinated Indebtedness in exchange repayment of any Indebtedness of Food 4 Less in ex- for or solely out of the proceeds of the substantially change for or solely out of the proceeds of the concurrent sale (other than to a subsidiary) of shares substantially concurrent sale (other than to a of Qualified Capital Stock of the Company, (3) the subsidiary) of Indebtedness subordinated in right of repurchase, redemption or other repayment of any payment to the Old F4L Senior Subordinated Notes with Subordinated Indebtedness in exchange for or solely out no scheduled or required maturity or scheduled or of the proceeds of the substantially concurrent sale required repayment of principal or sinking fund payment (other than to a subsidiary) of Subordinated prior to the date of maturity, (3) Permitted Payments; Indebtedness of the Company with an Average Life equal provided, however, that the declaration of each to or greater than the then remaining Average Life of dividend paid in accordance with clause (1) above, and the Subordinated Indebtedness repurchased, redeemed or each acquisition made in accordance with clause (2) repaid, (4) any payments by the Company or any above, and each payment described in clause (ii), (iii) Subsidiary, or any dividend by the Company or any or (iv) of the definition of "Permitted Payments" shall Subsidiary to New Holdings the proceeds of which are each be counted for purposes of computing amounts used by New Holdings to make payments, required to be expended pursuant to subclause (d) in the immediately made due to the exercise of statutory dissenters', preceding paragraph, and no amounts expended pursuant appraisal or similar rights by holders of common stock to clause (i) or (v) of the definition of "Permitted of FFL in connection with the FFL Merger and (5) Payments" shall be so counted. Permitted Payments; provided, however, that the declaration of each dividend paid in accordance with "Restricted Payment" means any (i) Stock Payment, clause (1) above, each acquisition or repayment made in (ii) Investment (other than a Permitted Investment) or accordance with, or of the type set forth in, clause (iii) Restricted Debt Prepayment (each as defined (2) above, and each payment described in clause (iii), below). (iv), (vii) and (ix) of the definition of the term "Permitted Payments" shall each be counted for purposes "Stock Payment" means, with respect to any person, of computing amounts expended pursuant to subclause (c) (a) the declaration or payment by such person, either in the immediately preceding paragraph, and no amounts in cash or in property, of any dividend on (except, in expended pursuant to clause (3) above or pursuant to the case of Food 4 Less, dividends payable solely in clause (i), (ii), (v), (vi), (viii) or (x) of the Qualified Capital Stock of Food 4 Less), or the making definition of the term "Permitted Payments" shall be so by such person or any of its subsidiaries of any other counted; provided, further that to the extent any distribution in respect of, such person's Qualified payments made pursuant to clause (vii) of the Capital Stock or any warrants, rights or options to definition of the term "Permitted Payments" are purchase or acquire shares of any class of such capital deducted for purposes of computing the Consolidated Net stock (other than exchangeable or convertible Income of the Company, such payments shall not be Indebtedness of such person), or (b) the redemption, counted for purposes of computing amounts expended as repurchase, retirement or other acquisition for value Restricted Payments pursuant to subclause (c) in the by such person or any of its subsidiaries, directly or immediately preceding paragraph. indirectly, of such person's Qualified Capital Stock (and, in the case of a subsidiary, Qualified Capital "Restricted Payment" means any (i) Stock Payment, (ii) Stock of Food 4 Less) or any warrants, rights or Investment (other than a Permitted Investment) or (iii) options to purchase or acquire shares of any class of Restricted Debt Prepayment (each as defined below). such capital stock (other than exchangeable or convertible Indebtedness of such person), other than, "Stock Payment" means, with respect to any person, (a) in the case of Food 4 Less, through the issuance in the exchange therefor solely of Qualified Capital Stock of Food 4 Less; provided, however, that in the case of a subsidiary, the term "Stock Payment" shall
B-4 240
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ not include any such payment with respect to its declaration or payment by such person, either in cash capital stock or warrants, rights or options to or in property, of any dividend on (except, in the case purchase or acquire shares of any class of its capital of the Company, dividends payable solely in Qualified stock that are owned solely by Food 4 Less or a Capital Stock of the Company), or the making by such wholly-owned subsidiary. person or any of its subsidiaries of any other distribution in respect of, such person's Qualified "Investment" by any person in any other person means Capital Stock or any warrants, rights or options to any investment by such person in such other person, purchase or acquire shares of any class of such capital whether by a purchase of assets, in any transaction or stock (other than exchangeable or convertible series of related transactions, individually or in the Indebtedness of such person), or (b) the redemption, aggregate, in an amount greater than $5 million, share repurchase, retirement or other acquisition for value purchase, capital contribution, loan, advance (other by such person or any of its subsidiaries, directly or than reasonable loans and advances to employees for indirectly, of such person's Qualified Capital Stock moving and travel expenses, as salary advances, or to (and, in the case of a subsidiary, Qualified Capital permit the purchase of Qualified Capital Stock of Food Stock of the Company) or any warrants, rights or 4 Less and other similar customary expenses incurred, options to purchase or acquire shares of any class of in each case in the ordinary course of business such capital stock (other than exchangeable or consistent with past practice) or similar credit convertible Indebtedness of such person), other than, extension constituting Indebtedness of such other in the case of the Company, through the issuance in person, and any guarantee of Indebtedness of any other exchange therefor solely of Qualified Capital Stock of person. the Company; provided, however, that in the case of a subsidiary, the term "Stock Payment" shall not include any such payment with respect to its capital stock or warrants, rights or options to purchase or acquire shares of any class of its capital stock that are owned solely by the Company or a wholly-owned subsidiary. "Investment" by any person in any other person means "Permitted Investment" by any person means (i) any any investment by such person in such other person, Related Business Investment, (ii) Investments in whether by share purchase, capital contribution, loan, securities not constituting cash or cash equivalents advance (other than reasonable loans and advances to and received in connection with an Asset Sale made employees for moving and travel expenses, as salary pursuant to the provisions of the Old F4L Senior advances, or to permit the purchase of Qualified Subordinated Note Indenture summarized under "Limi- Capital Stock of the Company and other similar tation on Disposition of Assets" or any other customary expenses incurred, in each case in the disposition of assets not constituting an Asset Sale by ordinary course of business consistent with past reason of the $250,000 threshold contained in the practice) or similar credit extension constituting definition thereof, (iii) cash and cash equivalents, Indebtedness of such other person, and any guarantee (iv) Investments existing on June 17, 1991, (v) of Indebtedness of any other person. Investments specifically permitted by and made in accordance with the provisions of the Old F4L Senior "Permitted Investment" by any person means (i) any Subordinated Note Indenture summarized under Related Business Investment, (ii) Investments in "Limitation on Restricted Payments," "Limitation on securities not constituting cash or cash equivalents Transactions with Affiliates" and "Limitation on and received in connection with an Asset Sale made Incurrences of Additional Indebtedness," and (vi) pursuant to the provisions of the covenant described Investments by Subsidiary Guarantors in other under "Limitation on Asset Sales" or any other dispo- Subsidiary Guarantors and Investments by subsidiaries sition of assets not constituting an Asset Sale by which are not Subsidiary Guarantors in other reason of the $500,000 threshold contained in the subsidiaries which are not Subsidiary Guarantors. definition thereof, (iii) cash and cash equivalents, (iv) Investments existing on the Issue Date, (v) "Restricted Debt Prepayment" means any purchase, Investments specifically permitted by and made in redemption, defeasance (including, but not limited to, accordance with the provisions of the covenant in-substance or legal defeasance) or other acquisition described under "Limitation on Transactions with or retirement for value, directly or indirectly, by Affiliates", (vi) Investments by Subsidiary Guarantors Food 4 Less or a subsidiary, prior to the scheduled in other Subsidiary Guarantors and Investments by maturity or prior to any scheduled repayment of subsidiaries which are not Subsidiary Guarantors in principal or sinking fund payment, as the case may be, other subsidiaries which are not Subsidiary Guarantors in respect of Indebtedness of Food 4 Less that is and (vii) additional investments in an aggregate amount subordinate in right of payment to the Old F4L Senior not exceeding $15 million. Subordinated Notes; provided, however, that any such acquisition shall be deemed not to be a Restricted Debt "Restricted Debt Prepayment" means any purchase, Prepayment to the extent it is made (x) in exchange for redemption, defeasance (including, but not limited to, or with the proceeds from the substantially concurrent in substance or legal defeasance) or other acquisition issuance of Qualified Capital Stock or (y) in exchange or retirement for value, directly or indirectly, by the for or with the proceeds from the substantially Company or a subsidiary, prior to the scheduled concurrent issuance of Indebtedness, in a principal maturity or prior to any scheduled repayment of amount (or, if such Indebtedness provides for an amount principal or sinking fund payment, as the case may be, less than the principal amount thereof to be due and in respect of Subordinated Indebtedness. payable upon the acceleration thereof, with an original issue price) not to exceed the sum of (A) the lesser of "Permitted Payments" means (i) any payment by the Com- (i) the principal amount of Indebtedness being acquired pany or any Subsidiary, or any dividend by the Company in exchange therefor (or with the proceeds therefrom) or any Subsidiary to New Holdings the proceeds of which and (ii) if such Indebtedness being acquired was issued are utilized by New Holdings to make payments, to The at an original issue discount, the original issue price Yucaipa Companies or the principals or any Affiliates thereof plus amortization of the original issue thereof for consulting, management, investment banking discount at the time of the incurrence of the or similar services, or for reimbursement of losses, Indebtedness being issued in exchange therefor (or the costs and expenses pursuant to the Consulting proceeds of which will finance such acquisition), and Agreement, (ii) any payment by the Company or any (B) the amount of penalties, fees and expenses actually subsidiary pursuant to the Amended and Restated Tax incurred with respect thereto, and provided further Sharing Agreement, dated as of June 17, 1991, between that any such Indebtedness shall have an average life Food 4 Less and certain subsidiaries, as such Tax not less than the average life of the Sharing Agreement may be amended
B-5 241
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Indebtedness being acquired, and shall contain from time to time, so long as the payment thereunder by subordination and default provisions no less favorable, the Company and its subsidiaries shall not exceed the in any material respect, to holders of the Old F4L amount of taxes the Company would be required to pay if Senior Subordinated Notes than those contained in such it were the filing person for all applicable taxes, Indebtedness being acquired. (iii) any payment by the Company or any subsidiary pursuant to the Transfer and Assumption Agreement, "Permitted Payments" means any payment by Food 4 Less dated as of June 23, 1989, between Food 4 Less and or any subsidiary (i) to The Yucaipa Companies or the Holdings, as in effect on the Issue Date, (iv) any principals thereof for consulting, investment banking payment by the Company or any subsidiary, or any or similar services during such period pursuant to that dividend by the Company or any subsidiary to New certain Amended and Restated Consulting Agreement, Holdings the proceeds of which are used by New Holdings dated as of June 17, 1991, among Food 4 Less, Yucaipa to make payments, (a) in connection with repurchases of Management Company and The Yucaipa Companies, as such outstanding shares of the Company's or New Holdings' amounts would be calculated under such Consulting common stock following the death, disability or termi- Agreement as in effect on the date of the Old F4L nation of employment of management stockholders, and Senior Subordinated Note Indenture, (ii) pursuant to (b) of amounts required to be paid by New Holdings, the the Amended and Restated Tax Sharing Agreement, dated Company or any of its subsidiaries to participants or as of June 17, 1991, between Food 4 Less and certain former participants in employee benefit plans upon subsidiaries, as such Tax Sharing Agreement may be termination of employment by such participants, as amended from time to time, so long as the payment provided in the documents related thereto, in an thereunder by Food 4 Less and its subsidiaries shall aggregate amount (for both clauses (a) and (b)) not to not exceed the amount of taxes Food 4 Less would be exceed $10 million in any yearly period (provided that required to pay if it were the filing person for all any unused amounts may be carried over to any applicable taxes, (iii) pursuant to the Transfer and subsequent yearly period subject to a maximum amount of Assumption Agreement, dated as of June 23, 1989, $20 million in any yearly period), (v) from and after between Food 4 Less and FFL, as in effect on June 17, June 30, 1998, payments of cash dividends or loans to 1991, and (iv) (a) in connection with repurchases of New Holdings in an amount sufficient to enable New outstanding shares of Food 4 Less's common stock Holdings to make payments of interest required to be following the death, disability or termination of made in respect of the Discount Notes in an amount not employment of management stockholders, and (b) of to exceed the amount payable thereunder in accordance amounts required to be paid by FFL, Food 4 Less or any with the terms thereof in effect on the Issue Date, of its subsidiaries to participants in employee benefit (vi) from and after June 1, 2000, payments of cash plans upon any termination of employment by such dividends to New Holdings in an amount sufficient to participants, as provided in the documents related enable New Holdings to make payments of interest thereto, in an aggregate amount (for both clauses (a) required to be made in respect of the Seller Debentures and (b)) not to exceed $5 million in any yearly period and the New Discount Debentures in an amount not to (provided that any unused amounts may be carried over exceed the amount payable thereunder in accordance with to any subsequent yearly period subject to a maximum the terms thereof in effect on the Issue Date, (vii) amount of $10 million in any yearly period). dividends or other payments to New Holdings sufficient to permit New Holdings to perform accounting, legal, In addition to the foregoing, the maximum annual fee corporate, and administrative functions in the ordinary payable to Yucaipa for management and consulting course of business or to pay required fees and expenses services pursuant to the Amended and Restated in connection with the Merger, the Reincorporation Consulting Agreement (and thereby allowable as a Merger and the registration under applicable laws and Permitted Payment under the Old F4L Senior Subordinated regulations of its debt or equity securities, (viii) Note Indenture) is either (a) one-tenth of one percent dividends or other distributions by the Company to New of annual revenues or (b) a fixed annual fee of $2 Holdings on the Issue Date of shares of New Holdings million plus 2.5 percent of the excess of (i) earnings common stock owned by the Company, (ix) dividends by before interest, taxes, depreciation and amortization the Company to New Holdings of the Net Cash Proceeds of ("EBITDA") over (ii) a minimum EBITDA threshold of $110 an Asset Sale to the extent that (a) neither the million. Yucaipa may elect either method for Company nor any of the Subsidiaries is required, or may determining its consulting fee at the beginning of each be required, pursuant to the documents governing any fiscal year during the term of the agreement. However, outstanding Indebtedness of the Company or any of the pursuant to the terms of the 1991 Stockholders Agree- Subsidiaries to utilize such Net Cash Proceeds to repay ment, Yucaipa's consulting fee is currently limited to (or offer to repay) such Indebtedness (or has complied an amount not greater than that specified in clause (b) with all such requirements), (b) such Net Cash Proceeds above. The maximum fee payable to Yucaipa for have not been utilized to repay outstanding transactional consulting services pursuant to the Indebtedness of the Company or any of the Subsidiaries Amended and Restated Consulting Agreement (and thereby and (c) New Holdings is required pursuant to the allowable as a Permitted Payment under the Old F4L documents governing any outstanding Indebtedness of New Senior Subordinated Note Indenture) is one percent of Holdings to utilize such Net Cash Proceeds to repay (or the cash and noncash consideration paid or received offer to repay) such Indebtedness and (x) the loan by (including assumed indebtedness) by Food 4 Less in any the Company on the Issue Date to RGC Investment Company acquisition or disposition transaction, and, without of not more than $5 million. duplication of the foregoing, one percent of the maximum principal amount or proceeds of any debt, "Consolidated Net Income" means, with respect to any equity or lease financing by Food 4 Less. person, for any period, the aggregate of the net income (or loss) of such person and its subsidiaries for such "Consolidated Net Income" with respect to any person, period, on a consolidated basis, determined in for any period, means the aggregate of the net income accordance with GAAP; provided that (a) the net income (or loss) of such person and its subsidiaries for such of any other person in which such person or any of its period, on a consolidated basis, determined in subsidiaries has an interest (which interest does not accordance with GAAP; provided that (a) the net income cause the net income of such other person to be of any other person in which such person or any of its consolidated with the net income of such person and its subsidiaries has an interest (which interest does not subsidiaries in accordance with GAAP) shall be included cause the net income of such other person to be only to the extent of the amount of dividends or consolidated with the net income of such person and its distributions actually paid to such person or such subsidiaries in accordance with GAAP) shall be included subsidiary by such other person in such period; (b) the only to the extent of the amount of dividends or net income of any subsidiary of such person that is distributions actually paid to such person or such subject to any Payment Restriction shall be excluded to subsidiary by such other person in such period; the
B-6 242
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ (b) the net income of any subsidiary of such person extent such Payment Restriction actually prevented the that is subject to any Payment Restriction shall be payment of an amount that otherwise could have been excluded to the extent such Payment Restriction paid to, or received by, such person or a subsidiary of actually prevented the payment of an amount that such person not subject to any Payment Restriction; and otherwise could have been paid to, or received by, such (c)(i) the net income (or loss) of any other person person or a subsidiary of such person not subject to acquired in a pooling of interests transaction for any any Payment Restriction; and (c)(i) the net income (or period prior to the date of such acquisition, (ii) all loss) of any other person acquired in a pooling of gains and losses realized on any Asset Sale, (iii) all interests transaction for any period prior to the date gains realized upon or in connection with or as a of such acquisition, (ii) all gains and losses-realized consequence of the issuance of the capital stock of on any Asset Sale or in connection with the closure of such person or any of its subsidiaries and any gains on the Long Beach Warehouse, (iii) all gains realized upon pension reversions received by such person or any of or in connection with or as a consequence of the its subsidiaries, (iv) all gains and losses realized on issuance of the capital stock of such person or any of the purchase or other acquisition by such person or any its subsidiaries and any gains on pension reversions of its subsidiaries of any securities of such person or received by such person or any of its subsidiaries, any of its subsidiaries, (v) all gains and losses (iv) all gains and losses realized on the purchase or resulting from the cumulative effect of any accounting other acquisition by such person or any of its change pursuant to the application of Accounting subsidiaries of any securities of such person or any of Principles Board Opinion No. 20, as amended, (vi) all its subsidiaries, (v) all gains and losses resulting other extraordinary gains and losses, (vii) all from the cumulative effect of any accounting change non-cash charges incurred by the Company or any of its pursuant to the application of Accounting Principles subsidiaries in connection with the Merger, including Board Opinion No. 20, as amended, (vi) all other without limitation the divestiture of the excluded extraordinary gains and losses, and (vii) with respect assets, (viii) losses incurred by the Company and its to Food 4 Less, all deferred financing costs written subsidiaries resulting from earthquakes and (ix) with off in connection with the early extinguishment of any respect to the Company, all deferred financing costs Indebtedness, shall each be excluded. written off in connection with the early extinguishment of any Indebtedness, shall each be excluded; provided IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD further that solely for the purpose of computing F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED amounts described in subclause (c) of the first TO ELIMINATE THIS COVENANT AND CERTAIN RELATED paragraph of the covenant described under DEFINITIONS. "-- Limitation on Restricted Payments" above, "Consolidated Net Income" of the Company for any period shall be reduced by the aggregate amount of dividends paid by the Company or a Subsidiary to New Holdings pursuant to clauses (v) and (vi) of the definition of "Permitted Payments" during such period. "Consulting Agreement" means that certain Consulting Agreement dated as of the Issue Date, between Food 4 Less, New Holdings and The Yucaipa Companies (as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amended or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date). "Subordinated Indebtedness" means, with respect to the Company or any Subsidiary Guarantor, Indebtedness of such person which is subordinated in right of payment to the New F4L Senior Subordinated Notes or the senior subordinated note guarantee of such Subsidiary Guarantor, as the case may be. LIMITATION ON INCURRENCES OF ADDITIONAL INDEBTEDNESS. LIMITATION ON INCURRENCES OF ADDITIONAL Pursuant to the Old F4L Senior Subordinated Note INDEBTEDNESS. Pursuant to the New F4L Senior Indenture, Food 4 Less shall not, and shall not permit Subordinated Note Indenture, the Company shall not, and any of its subsidiaries, after the original issuance shall not permit any of its subsidiaries, directly or of the Old F4L Senior Subordinated Notes, directly indirectly, to incur, assume, guarantee, become liable, or indirectly, to incur, assume, guarantee, become contingently or otherwise, with respect to, or liable, contingently or otherwise, with respect to, otherwise become responsible for the payment of or otherwise become responsible for the payment of (collectively "incur") any Indebtedness other than (collectively "incur") any Indebtedness; provided, Permitted Indebtedness; provided, however, that if no however, that if no Default with respect to payment Default with respect to payment of principal of, or of principal of, or interest on, the Old F4L Senior interest on, the New F4L Senior Subordinated Notes Subordinated Notes or Event of Default shall have issued under the New F4L Senior Subordinated Note occurred and be continuing at the time or as a Indenture or Event of Default under the New F4L Senior consequence of the incurrence of any such Subordinated Note Indenture shall have occurred and be Indebtedness, Food 4 Less (and, in certain circum- continuing at the time or as a consequence of the stances subsidiaries) may incur Indebtedness if on the incurrence of any such Indebtedness, the Company may date of the incurrence of such Indebtedness the incur Indebtedness if immediately before and Operating Coverage Ratio of Food 4 Less would be immediately after giving effect to the incurrence of greater than 2.0 to 1.0 if such date is after June 15, such Indebtedness the Operating Coverage Ratio of 1992 and prior to June 15, 1994; greater than 2.2 to Ralphs Grocery would be greater than 2.0 to 1.0; 1.0 if such date is on or after June 15, 1994 and prior provided, further, a subsidiary may incur Acquired to June 15, 1996; and greater than 2.4 to 1.0 Indebtedness to the extent such Indebtedness could have thereafter. been incurred by the Company pursuant to the immediately preceding proviso. The foregoing limitation shall not apply to (a) certain Indebtedness of Food 4 Less and its "Indebtedness" means with respect to any person, subsidiaries pursuant to (i) the Term Facility under without duplication, (i) all liabilities, contingent or the Loan Documents, (ii) the Subsidiary Letter of otherwise, of such person (a) for borrowed money Credit Obligations, and (iii) the Revolving Facility (whether or not the recourse of under the Loan Documents (and Food 4 Less and each subsidi-
B-7 243
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ ary (to the extent it is not an obligor) may guarantee the lender is to the whole of the assets of such person such Indebtedness, subject to certain limitations) (b) or only to a portion thereof), (b) evidenced by bonds, the Old F4L Senior Subordinated Notes; (c) certain notes, debentures, drafts accepted or similar intercompany Indebtedness; (d) Indebtedness incurred by instruments or letters of credit or representing the Food 4 Less or any subsidiary in connection with the balance deferred and unpaid of the purchase price of purchase or improvement of property (real or personal) any property (other than any such balance that repre- or equipment or other capital expenditures in the sents an account payable or any other monetary ordinary course of business (including for the purchase obligation to a trade creditor (whether or not an of assets or stock of any retail grocery store or affiliate) created, incurred, assumed or guaranteed by business) or consisting of capitalized lease such person in the ordinary course of business of such obligations, in aggregate not to exceed $25 million in person in connection with obtaining goods, materials or any yearly period (provided, that any unused amounts services and due within twelve months (or such longer may be carried over to the next (but not any subse- period for payment as is customarily extended by such quent) yearly period); (e) Indebtedness of Food 4 Less trade creditor) of the incurrence thereof, which under certain Foreign Exchange Agreements and Interest account is not overdue by more than 90 days, according Swap Obligations; (f) certain Permitted Guarantees of to the original terms of sale, unless such account Indebtedness, in aggregate not to exceed $25 million at payable is being contested in good faith), or (c) for any time outstanding, in addition to Permitted the payment of money relating to a capitalized lease Guarantees outstanding on June 17, 1991; (g) guarantees obligation; (ii) the maximum fixed repurchase price of by Food 4 Less and its subsidiaries of Indebtedness all Disqualified Capital Stock of such person; (iii) incurred by a wholly-owned subsidiary so long as the reimbursement obligations of such person with respect incurrence of such Indebtedness by such wholly-owned to letters of credit; (iv) obligations of such person subsidiary is permitted under the terms of the Old F4L with respect to Interest Swap Obligations and Foreign Senior Subordinated Note Indenture; (h) Refinancing Exchange Agreements; (v) all liabilities of others of Indebtedness; (i) Indebtedness in connection with the the kind described in the preceding clause (i), (ii), acquisition of the La Habra Facility and Option Stores (iii) or (iv) that such person has guaranteed or that if, after giving effect to such incurrence, the is otherwise its legal liability, and (vi) all Operating Coverage Ratio of Food 4 Less would be obligations of others secured by a lien to which any of greater than 2.0 to 1.0; (j) Indebtedness for letters the properties or assets (including, without of credit relating to workers compensation claims and limitation, leasehold interests and any other tangible self-insurance and (k) additional Indebtedness of Food or intangible property rights) of such person are 4 Less and Subsidiary Guarantors not to exceed $75 subject, whether or not the obligations secured thereby million at any time outstanding. shall have been assumed by such person or shall otherwise be such person's legal liability (provided, IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD that if the obligations so secured have not been F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED assumed by such person or are not otherwise such TO ELIMINATE THIS PROVISION AND CERTAIN RELATED person's legal liability, such obligations shall be DEFINITIONS. deemed to be in an amount equal to the fair market value of such properties or assets, as determined in "Indebtedness" means with respect to any person, good faith by the board of directors of such person, without duplication, (i) all liabilities, contingent or which determination shall be evidenced by a board otherwise, of such person (a) for borrowed money resolution). For purposes of the preceding sentence, (whether or not the recourse of the lender is to the the "maximum fixed repurchase price" of any whole of the assets of such person or only to a portion Disqualified Capital Stock that does not have a fixed thereof), (b) evidenced by bonds, notes, debentures, repurchase price shall be calculated in accordance with drafts accepted or similar instruments or letters of the terms of such Disqualified Capital Stock as if such credit or representing the balance deferred and unpaid Disqualified Capital Stock were purchased on any date of the purchase price of any property (other than any on which Indebtedness shall be required to be such balance that represents an account payable or any determined under the New F4L Senior Subordinated Note other monetary obligation to a trade creditor (whether Indenture, and if such price is based upon, or measured or not an affiliate) created, incurred, assumed or by, the fair market value of such Disqualified Capital guaranteed by such person in the ordinary course of Stock (or any equity security for which it may be business of such person in connection with obtaining exchanged or converted), such fair market value shall goods, materials or services and due within twelve be determined in good faith by the board of directors months (or such longer period for payment as is of such person, which determination shall be evidenced customarily extended by such trade creditor) of the by a board resolution. For purposes of the New F4L incurrence thereof, which account is not overdue by Senior Subordinated Indenture, Indebtedness incurred by more than 90 days, according to the original terms of any person that is a general partnership (other than sale, unless such account payable is being contested in non-recourse Indebtedness) shall be deemed to have been good faith), or (c) for the payment of money relating incurred by the general partners of such partnership to a capitalized lease obligation; (ii) the maximum pro rata in accordance with their respective interests fixed repurchase price of all Disqualified Capital in the liabilities of such partnership unless any such Stock of such person; (iii) reimbursement obligations general partner shall, in the reasonable determination of such person with respect to letters of credit; (iv) of the board of directors of the Company, be unable to obligations of such person with respect to Interest satisfy its pro rata share of the liabilities of the Swap Obligations and Foreign Exchange Agreements; (v) partnership, in which case the pro rata share of any all liabilities of others of the kind described in the Indebtedness attributable to such partner shall be preceding clause (i), (ii), (iii) or (iv) that such deemed to be incurred at such time by the remaining person has guaranteed or that is otherwise its legal general partners on a pro rata basis in accordance with liability, and (vi) all obligations of others secured their interests. by a lien to which any of the properties or assets (including, without limitation, leasehold interests and "Permitted Indebtedness" means (a) Indebtedness of the any other tangible or intangible property rights) of Company and its subsidiaries pursuant to (i) the Term such person are subject, whether or not the obligations Loans in an aggregate principal amount at any time secured thereby shall have been assumed by such person outstanding not to exceed $750 million or such lesser or shall otherwise be such person's legal liability amount as may be actually funded under the Term Loans (provided, that if the obligations so secured have not on or within 91 days following the Issue Date (with any been assumed by such person or are not otherwise such such amounts funded after the Issue Date to be used to person's legal liability, such obligations shall be finance the repurchase of up to $224.5 million deemed to be in an amount equal to the fair market aggregate principal amount of Old RGC Notes pursuant to value of such properties or assets, as determined in the "change of control purchase offer" provision set good faith by the board of directors of such person, forth in section 1014 of the Old RGC Indentures, plus which related fees and
B-8 244
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ determination shall be evidenced by a board expenses), less the aggregate amount of all principal resolution). For purposes of the preceding sentence, repayments thereunder pursuant to and in accordance the "maximum fixed repurchase price" of any with the covenant described under "-- Limitation on Disqualified Capital Stock that does not have a fixed Asset Sales" herein subsequent to the Issue Date, and repurchase price shall be calculated in accordance with (ii) the revolving credit facility under the Credit the terms of such Disqualified Capital Stock as if such Agreement (and the Company and each subsidiary (to the Disqualified Capital Stock were purchased on any date extent it is not an obligor) may guarantee such on which Indebtedness would be required to be Indebtedness) in an aggregate principal amount at any determined under the Old F4L Senior Subordinated Note time outstanding not to exceed $325 million, less all Indenture, and if such price is based upon, or measured permanent reductions thereunder pursuant to and in by, the fair market value of such Disqualified Capital accordance with the covenant described under Stock (or any equity security for which it may be "-- Limitation on Asset Sales" herein, (b) Indebtedness exchanged or converted), such fair market value shall of the Company or a Subsidiary Guarantor owed to and be determined in good faith by the board of directors held by the Company or a Subsidiary Guarantor; (c) of such person, which determination shall be evidenced Indebtedness incurred by the Company or any subsidiary by a board resolution. in connection with the purchase or improvement of property (real or personal) or equipment or other "Operating Coverage Ratio" means, with respect to any capital expenditures in the ordinary course of business person, the ratio of (1) EBDIT of such person for the (including for the purchase of assets or stock of any period (the "Pro Forma Period") consisting of the most retail grocery store or business) or consisting of recent four full fiscal quarters for which financial Capitalized Lease Obligations provided that (i) at the information in respect thereof is available immediately time of the incurrence thereof, such Indebtedness, prior to the date of the transaction giving rise to the together with any other Indebtedness incurred during need to calculate the Operating Coverage Ratio (the the most recently completed four fiscal quarter period "Transaction Date") to (2) the aggregate Fixed Charges in reliance upon this clause (c) does not exceed, in of such person for the fiscal quarter in which the the aggregate, 3% of net sales of the Company and its Transaction Date occurs and the three fiscal quarters subsidiaries during the most recently completed four immediately subsequent to such fiscal quarter (the fiscal quarter period on a consolidated basis "Forward Period") reasonably anticipated by the board (calculated on a pro forma basis if the date of of directors of such person to become due from time to incurrence is prior to the first anniversary of the time during such period. For purposes of this Merger) and (ii) such Indebtedness, together with all definition, if the Transaction Date occurs prior to the then outstanding Indebtedness incurred in reliance upon first anniversary of June 17, 1991, "EBDIT" for the Pro this clause (c) does not exceed, in the aggregate, 3% Forma Period shall be calculated, in the case of Food 4 of the aggregate net sales of the Company and its Less, after giving effect on a pro forma basis to the Subsidiaries during the most recently completed twelve Alpha Beta Acquisition as if it had occurred on the fiscal quarter period on a consolidated basis first day of the Pro Forma Period. In addition to, but (calculated on a pro forma basis if the date of without duplication of, the foregoing, for purposes of incurrence is prior to the third anniversary of the this definition, "EBDIT" shall be calculated after Merger); (d) Indebtedness incurred by the Company or giving effect (without duplication), on a pro forma any subsidiary in connection with capital expenditures basis for the Pro Forma Period (but no longer), to (a) in an aggregate principal amount not exceeding $150.0 any Investment, during the period commencing on the million, provided that such capital expenditures relate first day of the Pro Forma Period to and including the solely to the integration of the operations of RSI, Transaction Date (the "Reference Period"), in any other Food 4 Less and their respective subsidiaries, as person that, as a result of such Investment, becomes a described in this Amended and Restated Prospectus and subsidiary of such person, (b) the acquisition, during Solicitation Statement; (e) Indebtedness of the Company the Reference Period (by merger, consolidation or incurred under certain Foreign Exchange Agreements and purchase of stock or assets) of any business or assets, Interest Swap Obligations; (f) guarantees incurred in which acquisition is not prohibited by the Old F4L the ordinary course of business by the Company or a Senior Subordinated Note Indenture, and (c) any sales Subsidiary of Indebtedness of any other person in or other dispositions of assets (other than sales of aggregate not to exceed $25 million at any time inventory in the ordinary course of business) occurring outstanding; (g) guarantees by the Company or a during the Reference Period, in each case as if such Subsidiary Guarantor of Indebtedness incurred by a incurrence, Investment, repayment, acquisition or asset wholly-owned Subsidiary Guarantor so long as the sale had occurred on the first day of the Reference incurrence of such Indebtedness incurred by such Period. In addition, for purposes of this definition, wholly-owned Subsidiary Guarantor is permitted under "Fixed Charges" shall be calculated after giving effect the terms of the applicable New Indenture; (h) (without duplication), on a pro forma basis for the Refinancing Indebtedness; (i) Indebtedness for letters Forward Period, to any Indebtedness incurred or repaid of credit relating to workers' compensation claims and on or after the first day of the Forward Period and self-insurance or similar requirements in the ordinary prior to the Transaction Date. course of business; (j) Existing Indebtedness and other Indebtedness outstanding on the Issue Date (after "Loan Documents" means the Credit Agreement and all giving effect to the Merger); (k) Indebtedness arising promissory notes, guarantees, security agreements, from guarantees of Indebtedness of the Company or any pledge agreements, deeds of trust, mortgages, letters subsidiary or other agreements of the Company or a of credit and other instruments, agreements and subsidiary providing for indemnification, adjustment of documents executed pursuant thereto or in connection purchase price or similar obligations, in each case, therewith, including all amendments, supplements, incurred or assumed in connection with the disposition extensions, renewals, restatements, replacements or of any business, assets or subsidiary, other than refinancings thereof, or other modifications (in whole guarantees of Indebtedness incurred by any person or in part, and without limitation as to amount, terms, acquiring all or any portion of such bonuses, assets or conditions, covenants or other provisions) thereof from subsidiary for the purpose of financing such time to time. acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness shall at "Credit Agreement" means the Credit Agreement, dated no time exceed the gross proceeds actually received by as of June 17, 1991, by and among Food 4 Less, certain the Company and its subsidiaries in connection with of its subsidiaries, the Lenders and Designated Issuers such disposition; (l) obligations in respect of of the Lenders referred to therein, Bankers Trust performance bonds and completion guarantees provided by Company, Citicorp North America, Inc., and the Company or any subsidiary in the ordinary course of Manufacturers Hanover Trust Company, as Co-Agents, and business; and (m) additional Indebtedness of the Citicorp North America, Inc., as Administrative Agent, Company and the Subsidiary Guarantors in an amount not as the same may be amended, extended, renewed, re- to exceed $200 million at any time outstanding.
B-9 245
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ stated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, "Operating Coverage Ratio" means, with respect to any conditions, covenants and other provisions) from time person, the ratio of (1) EBDIT of such person for the to time, and any agreement governing Indebtedness period (the "Pro Forma Period") consisting of the most incurred to refund or refinance the entirety of the recent four full fiscal quarters for which financial borrowings and commitments then outstanding or information in respect thereof is available immediately permitted to be outstanding under such Credit Agreement prior to the date of the transaction giving rise to the or such agreement; provided that such refunding or need to calculate the Operating Coverage Ratio (the refinancing by its terms states that it is intended to "Transaction Date") to (2) the aggregate Fixed Charges be senior in right of payment to the Old F4L Senior of such person for the fiscal quarter in which the Subordinated Notes. Food 4 Less shall promptly notify Transaction Date occurs and the three fiscal quarters the Trustee of any such refunding or refinancing of the immediately subsequent to such fiscal quarter (the Credit Agreement. "Forward Period") reasonably anticipated by the board of directors of such person to become due from time to "Acquired Indebtedness" means Indebtedness of a time during such period. For purposes of this person or any of its subsidiaries existing at the time definition, if the Transaction Date occurs prior to the such person becomes a subsidiary of Food 4 Less or first anniversary of the Merger, "EBDIT" for the Pro assumed in connection with the acquisition of assets Forma Period shall be calculated, in the case of the from such person and not incurred by such person in Company, after giving effect on a pro forma basis to connection with, or in anticipation or contemplation the Merger as if it had occurred on the first day of of, such person becoming a subsidiary or such the Pro Forma Period. In addition to, but without acquisition. duplication of, the foregoing, for purposes of this definition, "EBDIT" shall be calculated after giving "Permitted Guarantees" means (i) guarantees in effect effect (without duplication), on a pro forma basis for on June 17, 1991 and (ii) guarantees incurred in the the Pro Forma Period (but no longer), to (a) any ordinary course of business, by Food 4 Less or a Investment, during the period commencing on the first subsidiary, of Indebtedness of any other person. day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other "Refinancing Indebtedness" means Indebtedness of Food person that, as a result of such Investment, becomes a 4 Less or a subsidiary (i) issued in exchange for, or subsidiary of such person, (b) the acquisition, during the proceeds from the issuance and sales or the Reference Period (by merger, consolidation or disbursement of which are used to substantially purchase of stock or assets) of any business or assets, concurrently repay, redeem, refund, refinance, dis- which acquisition is not prohibited by the New F4L charge or otherwise retire for value, in whole or in Senior Subordinated Indenture, and (c) any sales or part (collectively, "repay"), or constituting an other dispositions of assets (other than sales of amendment, modification or supplement to, or a deferral inventory in the ordinary course of business) occurring or renewal of (collectively, an "amendment"), any during the Reference Period, in each case as if such Indebtedness of Food 4 Less or a subsidiary (and any incurrence, Investment, repayment, acquisition or asset penalties, fees and expenses actually incurred by Food sale had occurred on the first day of the Reference 4 Less or such subsidiary in connection with the Period. In addition, for purposes of this definition, repayment or amendment thereof) existing immediately "Fixed Charges" shall be calculated after giving effect after the original issuance of the Old F4L Senior (without duplication), on a pro forma basis for the Subordinated Notes or incurred pursuant to paragraphs Forward Period, to any Indebtedness incurred or repaid (b), (c), (d), (f), (g), (h), (i), (j), (k), (l), (m) on or after the first day of the Forward Period and or (n) of Section 5.13 in a principal amount (or, if prior to the Transaction Date. If such person or any of such Refinancing Indebtedness provides for an amount its subsidiaries directly or indirectly guarantees any less than the principal amount thereof to be due and Indebtedness of a third person, the Operating Coverage payable upon the acceleration thereof, with an original Ratio shall give effect to the incurrence of such issue price) not in excess of (l) the principal amount Indebtedness as if such person or subsidiary had of the Indebtedness so refinanced (or, if such directly incurred such guaranteed Indebtedness. Refinancing Indebtedness refinances Indebtedness under a revolving facility or other agreement providing a "EBDIT" means, with respect to any person, for any commitment for subsequent borrowings, with a maximum period, the Consolidated Net Income of such person for commitment not to exceed the maximum commitment under such period, plus, in each case to the extent deducted such revolving credit facility or other agreement) plus in computing Consolidated Net Income of such person for (2) unpaid accrued interest on such Indebtedness plus such period (without duplication)(i) provisions for (3) penalties, fees and expenses actually incurred by income taxes or similar charges recognized by such Food 4 Less or such subsidiary, as the case may be, in person and its consolidated subsidiaries accrued during connection with the repayment or amendment thereof; or such period, (ii) depreciation and amortization expense (ii) in an amount permitted to be incurred at the time of such person and its consolidated subsidiaries of such incurrence by Food 4 Less or such subsidiary, accrued during such period (but only to the extent not as the case may be, under the Credit Agreement pursuant included in Fixed Charges), (iii) Fixed Charges of such to limitations on Incurrences of Additional person and its consolidated subsidiaries for such Indebtedness; provided that (for both clauses (i) and period, (iv) LIFO charges (credits) of such person and (ii) above) (A) Refinancing Indebtedness of any its consolidated subsidiaries for such period, (v) the subsidiary shall not be used to repay outstanding amount of any restructuring reserve or charge recorded Indebtedness of Food 4 Less and (B) Refinancing during such period in accordance with GAAP, including Indebtedness of Food 4 Less that repays or constitutes any such reserve or charge related to the Merger, and an amendment to Indebtedness of Food 4 Less (other than (vi) any other non-cash charges reducing Consolidated any of the Securities) ranking pari passu with, or Net Income for such period (excluding any such charge junior in right of payment to, the Old F4L Senior which requires an accrual of or a cash reserve for cash Subordinated Notes shall not have an Average Life less charges for any future period), less, without than the Indebtedness to be so refinanced at the time duplication, (i) non-cash items increasing Consolidated of such incurrence and shall not rank senior in right Net Income of such person for such period (excluding of payment in any respect to such repaid or amended any such items which represent the reversal of any Indebtedness, and (C) notwithstanding the foregoing, accrual of, or cash reserve for, anticipated cash any Refinancing Indebtedness incurred to repay all of charges in any prior period) in each case determined in Old F4L Senior Subordinated Notes then outstanding accordance with GAAP and (ii) the amount of all cash shall not be limited in principal amount or otherwise payments made by such person or its subsidiaries during if Food 4 Less irrevocably deposits with the Old F4L such period to the extent that such cash payment has Senior Subordinated Notes Trustee or Paying Agent an been provided for in a restructuring reserve or charge amount of the proceeds of such Refinancing Indebtedness referred to in sufficient to redeem the outstand-
B-10 246
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ ing principal amount of the Old F4L Senior Subordinated clause (v) above (and were not otherwise deducted in Notes on the date fixed for the repayment thereof. the computation of Consolidated Net Income of such person for such period). IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED "Credit Agreement" means the Credit Agreement, dated as TO ELIMINATE THIS COVENANT AND CERTAIN RELATED of the Issue Date, by and among Food 4 Less, certain of DEFINITIONS. its subsidiaries, the Lenders referred to therein, Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. The Company shall promptly notify the New Trustee of any such refunding or refinancing of the Credit Agreement. "Acquired Indebtedness" means (i) with respect to any person that becomes a subsidiary of the Company (or is merged into the Company or any of its subsidiaries) after the Issue Date, Indebtedness of, such person or any of its subsidiaries existing at the time such person becomes a subsidiary of the Company (or is merged into the Company or any of its subsidiaries) and which was not incurred in connection with, or in contemplation of, such person becoming a subsidiary of the Company (or being merged into the Company or any of its subsidiaries) and (ii) with respect to the Company or any of its subsidiaries, any Indebtedness assumed by the Company or any of its subsidiaries in connection with the acquisition of any assets from another person (other than the Company or any of its subsidiaries), and which was not incurred by such other person in connection with, or in contemplation of, such acquisition. "Permitted Guarantees" means (i) guarantees in effect on the Issue Date and (ii) guarantees incurred in the ordinary course of business, by the Company or a subsidiary, of Indebtedness of any other person. "Refinancing Indebtedness" means, with respect to any person, Indebtedness of such person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (c), (d), (h) and (j) of the definition thereof) incurred in accordance with the applicable New Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commit- ment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebted-
B-11 247
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ ness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date of the New F4L Senior Subordinated Notes and (y) shall contain subordination and default provisions no less favorable in any material respect to holders of the New Senior Subordinated F4L Notes than those contained in such repaid or amended Subordinated Indebtedness. "Designated Senior Indebtedness" means (i) in the event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit Agreement" shall not include any agreement governing Indebtedness incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Existing Indebtedness" means the following indebtedness of the Company to the extent outstanding on the Issue Date after giving effect to the Merger: (a) the % Senior Notes due 2004 issued pursuant to an indenture dated as of the Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture dated as of April 15, 1992; (c) the % Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior Subordinated Notes due 2003 issued pursuant to an indenture dated as of March 30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date, and (g) the 13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated as of June 15, 1991. LIMITATION ON LIENS. Pursuant to the Old F4L Senior LIMITATION ON LIENS. Pursuant to the New F4L Senior Subordinated Note Indenture, Food 4 Less shall not Subordinated Note Indenture, the Company shall not and and shall not permit any subsidiary to create, incur, shall not permit any subsidiary to create, incur, assume or suffer to exist any liens upon any of their assume or suffer to exist any liens upon any of their respective assets, except for (i) existing and future respective assets unless the New F4L Senior liens securing Senior Indebtedness and Guarantor Senior Subordinated Notes are issued thereunder equally and Indebtedness of each Subsidiary Guarantor, (ii) ratably secured by the liens covering such assets, Permitted Liens, (iii) liens securing certain Acquired except for (i) liens on assets of the Company securing Indebtedness, (iv) liens existing on June 17, 1991, (v) Senior Indebtedness and liens on assets of a Subsidiary liens securing certain Refinancing Indebtedness, and Guarantor which, at the time of incurrence, secure (vi) liens to secure certain Indebtedness that is Guarantor Senior Indebtedness, (ii) existing and future otherwise permitted under the Old F4L Senior liens securing Indebtedness and other obligations of Subordinated Note Indenture and that is incurred to the Company and its Subsidiaries under the Credit finance the costs of the property subject thereto, Agreement and related documents or any refinancing or (vii) liens in favor of the Old F4L Senior Subordinated replacement thereof in whole or in part permitted under Note Trustee; and (viii) any replacement, extension or the New F4L Senior Subordinated Indenture, (iii) renewal, in whole or in part, of any lien described in Permitted Liens, (iv) liens securing Acquired the foregoing clauses (i) through (vii) provided that Indebtedness; provided that such liens (x) are not if any such clause limits the amount secured or the incurred in connection with, or in contemplation of the assets subject to such liens, no extension or renewal acquisition of the property or assets acquired and (y) shall increase the amount of the assets subject to such do not extend to or cover any property or assets of the liens. Company or any subsidiary other than the property or assets so acquired, (v) liens to secure capitalized "Permitted Liens" shall mean (i) liens for taxes, lease obligation and certain other Indebtedness that is assessments, and governmental charges to the extent not otherwise permitted under the New F4L Senior required to be paid under the provisions of the Old F4L Subordinated Indenture; provided that (A) any such lien Senior Subordinated Note Indenture concerning payment is created solely for the purpose of securing such of taxes and other claims; (ii) statutory liens of other Indebtedness representing, or incurred to landlords and carriers, warehousemen, mechanics, finance, refinance or refund, the cost (including sales suppliers, materialmen, repairmen, or other like liens and excise taxes, installation and delivery charges and arising in the ordinary course of business and with other direct costs of, and other direct expenses paid respect to amounts not yet delinquent or being or charged in connection with, the purchase (whether contested in good faith by through
B-12 248
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ appropriate process of law, and for which a reserve or stock or asset purchase, merger or otherwise) or other appropriate provision, if any, as shall be construction) or improvement of the property subject required by GAAP shall have been made; (iii) pledges or thereto (whether real or personal, including fixtures deposits in the ordinary course of business to secure and other equipment), (B) the principal amount of the lease obligations or nondelinquent obligations under Indebtedness secured by such lien does not exceed 100% workers' compensation, unemployment insurance or of such costs and (C) such lien does not extend to or similar legislation; (iv) liens to secure the cover any other property other than such item of performance of public statutory obligations that are property and any improvements on such item; (vi) liens not delinquent, appeal bonds, performance bonds or existing on the Issue Date (after giving effect to the other obligations of a like nature (other than for Merger); (vii) liens in favor of the New F4L Senior borrowed money); (v) easements, rights-of-way, other Subordinated Note Trustee under the New F4L Senior similar charges or encumbrances not interfering in any Subordinated Indenture; and any substantially material respect with the business of Food 4 Less or equivalent Lien granted to any trustee or similar any of its subsidiaries incurred in the ordinary course institution and or any indenture for indebtedness of business; (vi) purchase money liens upon or in any permitted to be incurred under the New Indentures; and real or personal property (including fixtures and other (viii) any replacement, extension or renewal, in whole equipment) acquired or held by Food 4 Less or any or in part, of any lien described in this or the subsidiary in the ordinary course of business to secure foregoing clauses including in connection with any the purchase price of such property or to secure refinancing of the Indebtedness, in whole or in part, Indebtedness incurred solely for the purpose of secured by any such lien provided that to the extent financing or refinancing the acquisition or improvement any such clause limits the amount secured or the assets of such property, or liens existing on such property at subject to such liens, no extension or renewal shall the time of its acquisition (other than any such lien increase the amount or the assets subject to such created in contemplation of such acquisition); provided liens, except to the extent that the liens associated that (x) no such lien shall extend to or cover any with such additional assets are otherwise permitted property other than the property being acquired or hereunder. improved and (y) any such Indebtedness would be permitted to be incurred pursuant to the provisions of "Permitted Liens" means (i) liens for taxes, the Old F4L Senior Subordinated Note Indenture assessments and governmental charges or claims not yet summarized under "Limitation on Incurrences of due or which are being contested in good faith by Additional Indebtedness"; (vii) liens upon specific appropriate proceedings promptly instituted and items of inventory or other goods and proceeds of any diligently conducted and if a reserve or other person securing such person's obligations in respect of appropriate provision, if any, as shall be required in bankers' acceptances issued or created for the account conformity with GAAP shall have been made therefor; of such person to facilitate the purchase, shipment or (ii) statutory liens of landlords and carriers, storage of such inventory or other goods in the warehousemen, mechanics, suppliers, materialmen, ordinary course of business; (viii) liens securing repairmen or other like liens arising in the ordinary reimbursement obligations with respect to letters of course of business, deposits made to obtain the release credit which encumber documents and other property of such liens, and with respect to amounts not yet relating to such letters of credit and the products and delinquent for a period of more than 60 days or being proceeds thereof; (ix) liens in favor of customs and contested in good faith by an appropriate process of revenue authorities arising as a matter of law to law, and for which a reserve or other appropriate secure payment of nondelinquent customs duties in provision, if any, as shall be required by GAAP shall connection with the importation of goods; (x) judgement have been made; (iii) liens incurred or pledges or and attachments liens not giving rise to a Default of deposits made in the ordinary course of business to Event of Default; (xi) leases or subleases granted to secure obligations under workers' compensation, others not interfering in any material respect with the unemployment insurance and other types of social business of Food 4 Less or any of its subsidiaries; security or similar legislation; (iv) liens incurred or (xii) liens encumbering customary initial deposits and deposits made to secure the performance of tenders, margin deposits, and other liens incurred in the bids, leases, statutory obligations, surety and appeal ordinary course of business that are within the general bonds, government contracts, performance and return of parameters customary in the industry, in each case money bonds and other obligations of a like nature securing Indebtedness under Interest Swap Obligations incurred in the ordinary course of business (exclusive and Foreign Exchange Agreements and forward contracts, of obligations for the payment of borrowed money); (v) option futures contracts, futures options or similar easements, rights-of-way, zoning or other restrictions, agreements or arrangements designed to protect Food 4 minor defects or irregularities in title and other Less or any of its subsidiaries from fluctuations in similar charges or encumbrances not interfering in any the price of commodities; (xiii) liens encumbering material respect with the business of the Company or deposits made in the ordinary course of business to any of its subsidiaries incurred in the ordinary course secure nondelinquent obligations arising from statu- of business; (vi) liens upon specific items of tory, regulatory, contractual or warranty requirements inventory or other goods and proceeds of any person of Food 4 Less or its subsidiaries for which a reserve securing such person's obligations in respect of or other appropriate provision, if any, as shall be bankers' acceptances issued or created for the account required by GAAP shall have been made; (xiv) liens of such person to facilitate the purchase, shipment or arising out of consignment or similar arrangements for storage of such inventory or other goods in the the sale of goods entered into by Food 4 Less or any of ordinary course of business; (vii) liens securing its subsidiaries in the ordinary course of business in reimbursement obligations with respect to letters of accordance with past practices; (xv) any interest or credit which encumber documents and other property title of a lessor in the property subject to any lease, relating to such letters of credit and the products and whether characterized as capitalized or operating, proceeds thereof; (viii) liens in favor of customs and other than any such interest or title resulting from or revenue authorities arising as a matter of law to arising out of a default by Food 4 Less or any of its secure payment of nondelinquent customs duties in subsidiaries of its obligations under such lease; and connection with the importation of goods; (ix) judgment (xvi) liens arising from filing UCC financing and attachment liens not giving rise to a Default or statements for precautionary purposes in connection Event of Default; (x) leases or subleases granted to with true leases of personal property that are others not interfering in any material respect with the otherwise permitted under the Old F4L Senior business of the Company or any subsidiary; (xi) liens Subordinated Note Indenture and under which Food 4 Less encumbering customary initial deposits and margin or any of its subsidiaries is a lessee. deposits, and other liens incurred in the ordinary course of business that are within the general IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD parameters customary in the industry, in each case F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED securing Indebtedness under interest swap obligations TO ELIMI- and foreign exchange agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any subsidiary from fluctuations in the price of commodities;
B-13 249
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ NATE THIS PROVISION AND CERTAIN RELATED LIENS. (xii) liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or its subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capital- ized or operating other than any such interest or title resulting from or arising out of a default by the Company or any subsidiary of its obligations under such lease; and (xv) liens arising from filing UCC financing statements for precautionary purposes in connection with true leases of personal property that are other- wise permitted under the New F4L Senior Subordinated Note Indenture and under which the Company or any subsidiary is lessee; (xvi) liens on assets of the Company securing Indebtedness which would constitute Senior Indebtedness but for the provisions of clause (c) in the third sentence of the definition of Senior Indebtedness and liens on assets of a Subsidiary Guarantor securing Indebtedness which would constitute Guarantor Senior Indebtedness but for the provisions of clause (c) in the third sentence of the definition of Guarantor Senior Indebtedness and; (xvii) additional liens securing Indebtedness at any one time outstanding not exceeding the sum of (i) $25 million and (ii) 10% of the aggregate Consolidated Net Income of the Company earned subsequent to the Issue Date on or prior to such time. LIMITATION ON ASSET SALES. Pursuant to the Old F4L LIMITATION ON ASSET SALES. Pursuant to the New F4L Senior Subordinated Note Indenture, Food 4 Less will Senior Subordinated Note Indenture, the Company will not, and will not permit any of its subsidiaries to, not, and will not permit any of its subsidiaries to, make any Asset Sale unless (a) Food 4 Less or the make any Asset Sale unless (a) the Company or the applicable subsidiary receives consideration at the applicable subsidiary receives consideration at the time of such Asset Sale at least equal to the fair time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed market value of the assets sold and (b) upon of (as determined in good faith by the board of consummation of an Asset Sale, the Company will within directors of Food 4 Less or, if the aggregate 365 days of the receipt of the proceeds therefrom, fair-market value of all non-cash consideration either: (i) apply or cause its subsidiary to apply the received by the Food 4 Less or such subsidiary, as the net cash proceeds of any Asset Sale to (A) a Related case may be, from any such Asset Sale shall exceed $15 Business Investment, (B) an investment in properties million, as determined by an independent financial and assets that replace the properties and assets that advisor, provided that no such determination by the are the subject of such Asset Sale or (C) an investment board of directors of Food 4 Less shall be required if in properties and assets that will be used in the the fair market value of the assets sold or otherwise business of the Company and its subsidiaries existing disposed of does not exceed $5 million) and (b) an on the Issue Date or in businesses reasonably related amount equal to the aggregate cash, net of expenses, thereto; (ii) apply or cause to be applied such Net taxes, commissions and the like incurred in connection Cash Proceeds to the permanent repayment of Pari Passu with such Asset Sale and the amount of cash required to Indebtedness or Senior Indebtedness; provided, however, repay any Indebtedness secured by the asset involved in that the repayment of any revolving loan (under the such Asset Sale, received by Food 4 Less or such Credit Agreement or otherwise) shall result in a subsidiary, as the case may be, from such Asset Sale permanent reduction in the commitment thereunder; (iii) (the "Applied Amount") is applied in accordance with use such net cash proceeds to secure Letter of Credit this covenant and (c) the Applied Amount is within 180 Obligations to the extent the related letters of credit days of such Asset Sale, at the election of Food 4 Less have not been drawn upon or returned undrawn; or (iv) (i) either applied or caused to be applied to the after such time as the accumulated net cash proceeds payment of any Senior Indebtedness or used to secure equals or exceeds $20 million, apply or cause to be Letter of Credit Obligations to the extent the related applied such net cash proceeds to the purchase of New letters of credit have not been drawn upon or have not F4L Senior Subordinated Notes issued under such New F4L been returned undrawn and all other Senior Indebtedness Senior Subordinated Indenture tendered to the Company has been paid in full; provided, however, that, subject for purchase at a price equal to 100% of the principal to clause (ii) below, any repayment of Indebtedness amount thereof plus accrued interest to the date of under the Revolving Facility under the Loan Documents purchase pursuant to an offer to purchase made by the or other revolving line of credit shall result in a Company as set forth below (a "Net Proceeds Offer"); permanent reduction of the Revolving Commitment or such provided, however, that the Company shall have the other line of credit in a like amount; (ii) invested or right to exclude from the foregoing provisions Asset caused to be invested in a manner that would constitute Sales subsequent to the Issue Date the proceeds of a Related Business Investment hereunder; provided, which are derived from the sale and substantially however, that pending such Related Business Investment, concurrent lease-back of a supermarket and/or related nothing contained herein shall prohibit Food 4 Less assets or equipment which have acquired or constructed from applying or causing to be applied all or any by the Company or a Subsidiary subsequent to the Issue portion of the Applied Amount to the repayment of Date, provided that such sale and substantially Indebtedness under the Revolving Facility under the concurrent lease-back occurs within 270 days following Loan Documents or other revolving line of credit such acquisition or the completion of such without a permanent reduction of the Revolving construction, as the case may be. Pending utilization Commitment or such other line of of any net
B-14 250
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ credit in a like amount; or (iii) applied or caused to cash proceeds in the manner (and within the time be applied to the purchase of Old F4L Senior Notes period) described above, the Company may use any such pursuant to a Net Proceeds Offer as set forth in the net cash proceeds to repay revolving loans (under the Old F4L Senior Note Indenture provided, however, that Credit Agreement or otherwise) without a permanent Food 4 Less shall not be required to satisfy the reduction of the commitment thereunder. condition specified in clause (a) above if such Asset Sale is pursuant to a foreclosure by the Lenders under Each Net Proceeds Offer will be mailed to the record the Credit Agreement and the other Loan Documents or holders of New F4L Senior Subordinated Notes, as shown their Representatives on collateral securing on the register of holders of New F4L Senior Indebtedness under the Loan Documents; provided, Subordinated Notes not less than 325 nor more than 365 further, that if at any time any non-cash consideration days after the relevant Asset Sale, with a copy to the received by Food 4 Less or any subsidiary in connection New F4L Senior Subordinated Note Trustee, shall specify with any Asset Sale is converted into or sold or the purchase date (which shall be no earlier than 30 otherwise disposed of for cash, then such cash shall days nor later than 40 days from the date such notice constitute Applied Amounts for purposes of this is mailed) and shall otherwise comply with the covenant and shall be applied in accordance with clause procedures set forth in the New F4L Senior Subordinated (c) above within 180 days of the receipt of such cash; Note Indenture. Upon receiving notice of the Net provided, further, Food 4 Less shall have the right to Proceeds Offer, New F4L Senior Subordinated Notes, may exclude up to $10 million of proceeds in the aggregate elect to tender their New F4L Senior Subordinated Notes received from Asset Sales subsequent to the Issue Date in whole or in part in integral multiples of $1,000 in from the provisions of this covenant. To the extent exchange for cash. To the extent holders properly that the Applied Amount is not actually applied in tender New F4L Senior Subordinated Notes, in an amount accordance with clauses (c)(i) or (ii) above, or after exceeding the Net Proceeds Offer, New F4L Senior such application there remains a portion of the Applied Subordinated Notes of tendering holders will be Amount which, when added to any other Applied Amounts repurchased on a pro rata basis (based on amounts remaining after such application, accumulates at least tendered). A Net Proceeds Offer shall remain open for a $2,500,000 subsequent to the previous time Food 4 Less period of 20 Business Days or such longer period as may shall have accumulated at least such an amount and used be required by law. it in accordance with this covenant, or if no such accumulation shall previously have occurred, subsequent The Company will comply with the requirements of Rule to the date of the Old F4L Senior Note Indenture, Food 14e-1 under the Exchange Act and any other securities 4 Less shall make an offer as described in the Old F4L laws and regulations thereunder to the extent such laws Senior Note Indenture (the "Net Proceeds Offer") to and regulations are applicable in connection with the purchase at a price equal to 100% of the aggregate repurchase of New F4L Senior Subordinated Notes principal amount thereof, plus accrued interest to the pursuant to a Net Proceeds Offer. date of purchase, such aggregate principal amount of Old F4L Senior Notes which, when added to the accrued "Asset Sale" means, with respect to any person, any interest thereon, shall be equal to the Net Proceeds sale, transfer or other disposition or series of sales, required by this covenant to be used to purchase transfers or other dispositions (including, without securities in a Net Proceeds Offer; provided, however, limitation, by merger or consolidation or by exchange that Food 4 Less may credit against the principal of assets and whether by operation of law or otherwise) amount of Old F4L Senior Notes to be acquired pursuant made by such person or any of its subsidiaries to any to this covenant the principal amount of Old F4L Senior person other than such person or one of its Notes acquired by Food 4 Less through purchase, wholly-owned subsidiaries (or, in the case of a sale, optional redemption, exchange or otherwise following transfer or other disposition by a subsidiary, to any consummation of the Asset Sale and surrendered for person other than the Company or a directly or cancellation and not previously used as a credit indirectly wholly-owned subsidiary) of any assets of against any other required payment pursuant to the Old such person or any of its subsidiaries including, F4L Senior Note Indenture. The Net Proceeds Offer shall without limitation, assets consisting of any capital remain open from the time of mailing until 5 days (or stock or other securities held by such person or any of such shorter period as may be required under applicable its subsidiaries, and any capital stock issued by any law) before the Proceeds Purchase Date. subsidiary of such person, in each case, outside of the ordinary course of business, excluding, however, any "Asset Sale" means, for any person, any sale, sale, transfer or other disposition, or series of transfer or other disposition or series of sales, related sales, transfers or other dispositions (i) transfers or other dispositions (including, without involving only Excluded Assets, (ii) resulting in Net limitation, by merger or consolidation or by exchange Proceeds to the Company and the subsidiaries of of assets and whether by operation of law or otherwise) $500,000 or less, (iii) pursuant to any foreclosure of made by such person or any of its subsidiaries to any assets or other remedy provided by applicable law to a person other than such person or one of its creditor of the Company with a lien on such assets, wholly-owned subsidiaries (or, in the case of a sale, which lien is permitted under the New F4L Senior transfer or other disposition by a subsidiary, to any Subordinated Note Indenture, provided that such person other than Food 4 Less or a directly or foreclosure or other remedy is conducted in a indirectly wholly-owned subsidiary) of any assets of commercially responsible manner or in accordance with such person or any of its subsidiaries including, any Bankruptcy Law, (iv) involving only Cash without limitation, assets consisting of any capital Equivalents or inventory in the ordinary course of stock or other securities held by such person, or any business or obsolete equipment in the ordinary course of its subsidiaries, and any capital stock issued by of business consistent with past practices of the any subsidiary of such person, outside of the ordinary Company, (v) involving only the lease or sub-lease of course of business, excluding, however, any sale, any real or personal property in the ordinary course of transfer or other disposition, or series of related business or (vi) the proceeds of such Asset Sale which sales, transfers or other dispositions, having a are not applied as contemplated in "-- Certain purchase price or transaction value, as the case may Covenants -- Limitation on Asset Sales" and which, be, of $250,000 or less. together with all other such Asset Sale Proceeds, do not exceed $20 million. "Related Business Investment" means (i) any Investment by a person in any other person a majority "Related Business Investment" means (i) any Investment of whose revenues are derived from the operation of one by a person in any other person a majority of whose or more retail grocery stores or supermarkets or any revenues are derived from the operation of one or more other line of business engaged in by Food 4 Less or any retail grocery stores or supermarkets or any other line of its subsidiaries as of the Issue Date; (ii) any of business engaged in by the Company or any of its subsidiaries as of the Issue Date; (ii) any
B-15 251
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Investment by such person in any cooperative or other Investment by such person in any cooperative or other supplier, including, without limitation, any joint supplier, including, without limitation, any joint venture which is intended to supply any product or venture which is intended to supply any product or service useful to the business of Food 4 Less and its service useful to the business of the Company and its subsidiaries as it is conducted as of the Issue Date subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment and (iii) any capital expenditure or Investment, in (without regard to the $5 million threshold in the each case reasonably related to the business of the definition thereof), in each case reasonably related to Company and its subsidiaries as it is conducted as of the business of Food 4 Less and its subsidiaries as it the Issue Date and as such business may thereafter is conducted as of the Issue Date and as such business evolve or change. may thereafter evolve or change. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS PROVISION. LIMITATION ON PAYMENT RESTRICTIONS AFFECTING LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS SUBSIDIARIES. Pursuant to the Old F4L Senior AFFECTING SUBSIDIARIES. Pursuant to the New F4L Senior Subordinated Note Indenture, Food 4 Less shall not, and Subordinated Note Indenture, the Company shall not, and shall not permit any subsidiary to, directly or shall not permit any subsidiary to, directly or indirectly, create or suffer to exist, or allow to indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction become effective any consensual Payment Restriction with respect to any of its subsidiaries, except for (a) with respect to any of its subsidiaries, except for (a) any such restrictions contained in (i) the Loan any such restrictions contained in (i) the Credit Documents and related documents as in effect on June Agreement and related documents as in effect on the 17, 1991 as any such payment restriction may apply to Issue Date as any such payment restriction may apply to any present or future subsidiary, (ii) Indebtedness of any present or future subsidiary, (ii) the New F4L a subsidiary existing on June 17, 1991, (iii) the Old Senior Subordinated Note Indenture and any agreement in F4L Senior Subordinated Note Indenture, (iv) effect at or entered into on the Issue Date, (iii) Indebtedness of a person existing at the time such Indebtedness of a person existing at the time such person becomes a subsidiary (provided, that (x) such person becomes a subsidiary (provided that (x) such Indebtedness is not incurred in connection with, or in Indebtedness is not incurred in connection with, or in contemplation of, such person becoming a subsidiary, contemplation of, such person becoming a subsidiary, (y) such restriction is not applicable to any person, (y) such restriction is not applicable to any person, or the properties or assets of any person, other than or the properties or assets of any person, other than the person so acquired and (z) such Indebtedness is the person so acquired and (z) such Indebtedness is otherwise permitted to be incurred pursuant to the otherwise permitted to be incurred pursuant to the provisions of the Old F4L Senior Subordinated Note provisions described under "Limitation on Incurrences Indenture summarized under "Limitation on Incurrences of Additional Indebtedness" above), and (iv) secured of Additional Indebtedness"), (v) secured Indebtedness Indebtedness otherwise permitted to be incurred otherwise permitted under the provisions of the Old F4L pursuant to the provisions described under "Limitation Senior Subordinated Note Indenture summarized under on Incurrences of Additional Indebtedness" and "Limitation on Incurrences of Additional Indebtedness" "Limitation on Liens" above that limit the right of the and that limits the right of the debtor to dispose of debtor to dispose of the assets securing such the assets securing such Indebtedness; (b) customary Indebtedness; (b) customary non-assignment provisions non-assignment provisions restricting subletting or restricting subletting or assignment of any lease or assignment of any lease or assignment of any contract other agreement entered into by a subsidiary; (c) of any subsidiary, (c) customary net worth provisions customary net worth provisions contained in leases and contained in leases and other agreements entered into other agreements entered into by a subsidiary in the by a subsidiary in the ordinary course of business; (d) ordinary course of business; (d) customary restrictions customary restrictions with respect to a subsidiary with respect to a subsidiary pursuant to an agreement pursuant to an agreement that has been entered into for that has been entered into for the sale or disposition the sale or disposition of all or substantially all of of all or substantially all of the capital stock or the capital stock or assets of such subsidiary; (e) assets of such subsidiary; (e) customary provisions in customary provisions in instruments or agreements joint venture agreements and other similar agreements; relating to a lien created, incurred or assumed in and (f) restrictions contained in Indebtedness incurred accordance with the provisions of the Old F4L Senior to refinance, refund, extend or renew Indebtedness Subordinated Note Indenture summarized under referred to in clause (a) above; provided that the "Limitation on Liens" and prohibiting the transfer of restrictions contained therein are not materially more the property subject to such lien; and (f) restrictions restrictive taken as a whole than those provided for in contained in Indebtedness incurred to refinance, such Indebtedness being refinanced, refunded, extended refund, extend or renew Indebtedness referred to in or renewed and (g) Payment Restriction contained in any clause (a) above; provided, that the restrictions other Indebtedness permitted to be incurred subsequent contained therein relating to the payment of dividends to the Issue Date pursuant to the provisions of the by such subsidiaries are not materially more covenant described under "-- Limitation on Incurrences restrictive than those provided for in such of Additional Indebtedness" above; provided that any Indebtedness being refinanced, refunded, extended, such Payment Restriction is ordinary and customary with renewed or amended. respect to the type of Indebtedness being incurred (under the relevant circumstances), and, in any event, "Payment Restriction" means, with respect to a no more restrictive than the most restrictive Payment subsidiary of any person, any encumbrance, restriction Restrictions in effect on the Issue Date. or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, "Payment Restriction" means, with respect to a judgment, decree, order, statute, rule or governmental subsidiary of any person, any encumbrance, restriction regulation, on the ability of (i) such subsidiary to or limitation, whether by operation of the terms of its (a) pay dividends or make other distributions on its charter or by reason of any agreement, instrument, capital stock or make payments on any obligation, judgment, decree, order, statute, rule or governmental liability or Indebtedness owed to such person or any regulation, on the ability of (i) such subsidiary to other subsidiary of such person, (b) make loans or (a) pay dividends or make other distributions on its advances to such person or any other subsidiary of such capital stock or make payments on any obligation, person, or (c) transfer any of its properties or assets liability or Indebtedness owed to such person or any to such person or any other subsidiary of such person, other subsidiary of such person, or (ii) such person or any other subsidiary of such person to receive
B-16 252
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ or retain any such (a) dividends, distributions or (b) make loans or advances to such person or any other payments, (b) loans or advances, or (c) transfer of subsidiary of such person, or (c) transfer any of its properties or assets. properties or assets to such person or any other subsidiary of such person, or (ii) such person or any IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD other subsidiary of such person to receive or retain F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED any such (a) dividends, distributions or payments, (b) TO ELIMINATE THIS COVENANT AND CERTAIN RELATED loans or advances, or (c) transfer of properties or DEFINITIONS. assets. GUARANTEES OF CERTAIN INDEBTEDNESS. Pursuant to the GUARANTEES OF CERTAIN INDEBTEDNESS. Pursuant to the New Old F4L Senior Subordinated Note Indenture, Food 4 F4L Senior Subordinated Note Indenture, the Company Less shall not permit any of its subsidiaries to (a) shall not permit any of its subsidiaries to (a) incur, incur, guarantee or secure through the granting of guarantee or secure through the granting of liens the liens the payment of any Indebtedness under the Term payment of any Indebtedness under the term portion of Facility under the Credit Agreement or any Refinancing the Credit Agreement or refinancings thereof or (b) Indebtedness related thereto or (b) pledge any pledge any intercompany notes representing obligations intercompany notes representing obligations of any of of any of its subsidiaries, to secure the payment of its subsidiaries, to secure the payment of any any Indebtedness under the term portion of the Credit Indebtedness under the Term Facility under the Credit Agreement or refinancings thereof, in each case unless Agreement or any Refinancing Indebtedness related such subsidiary, the Company and the New F4L Senior thereto, in each case unless such subsidiary, Food 4 Subordinated Note Trustee execute and deliver a Less and the Old F4L Senior Subordinated Note Trustee supplemental indenture evidencing such subsidiary's execute and deliver a supplemental indenture evidencing guarantee. such subsidiary's guarantee, such guarantee to be subordinated to Guarantor Senior Indebtedness in accordance with the Old F4L Senior Subordinated Note Indenture. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT. LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pursuant LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pursuant to to the Old F4L Senior Subordinated Note Indentures, the New F4L Senior Subordinated Note Indenture, neither neither Food 4 Less nor any of its subsidiaries shall the Company nor any of its Subsidiaries shall (i) sell, (i) sell, lease, transfer or otherwise dispose of any lease, transfer or otherwise dispose of any of its of its properties, assets or issue debt securities to, properties or assets or issue securities (other than (ii) purchase any property, assets or securities from, equity securities which do not constitute Disqualified (iii) make any Investment in, or (iv) enter into or Capital Stock) to, (ii) purchase any property, assets suffer to exist any contract or agreement with or for or securities from, (iii) make any Investment in, or the benefit of, an affiliate or Significant Stockholder (iv) enter into or suffer to exist any contract or (and any affiliate of such Significant Stockholder) of agreement with or for the benefit of, an affiliate or Food 4 Less or any subsidiary (an "Affiliate Significant Stockholder (or any affiliate of such Transaction"), other than Affiliate Transactions Significant Stockholder) of the Company or any Subsidi- (including lease transactions) in the ordinary course ary (an "Affiliate Transaction"), other than (x) of business, that are fair to Food 4 Less or such Affiliate Transactions permitted under the following subsidiary, as the case may be, and on terms at least paragraph and (y) Affiliate Transactions in the as favorable as might reasonably have been obtainable ordinary course of business, that are fair to the at such time from an unaffiliated party, unless the Company or such Subsidiary, as the case may be, and on board of directors of Food 4 Less or such subsidiary, terms at least as favorable as might reasonably have as the case may be, pursuant to a board resolution, been obtainable at such time from an unaffiliated reasonably and in good faith determines that such party; provided that (A) with respect to Affiliate Affiliate Transaction is fair to Food 4 Less or such Transactions involving aggregate payments in excess of subsidiary, as the case may be, and is on terms at $1 million and less than $5 million, the Company or least as favorable as might reasonably have been such Subsidiary, as the case may be, shall have obtainable at such time from an unaffiliated party. In delivered an officers' certificate to the New F4L addition, neither Food 4 Less nor any of its Senior Subordinated Note Trustee certifying that such subsidiaries shall enter into an Affiliate Transaction Affiliate Transaction complies with clause (y) above or series of related Affiliate Transactions involving (other than the requirement set forth in such clause or having a value of more than $15 million unless Food (y) that such Affiliate Transaction be in the ordinary 4 Less or such subsidiary, as the case may be, has course of business), (B) with respect to Affiliate received an opinion from an independent financial Transactions involving aggregate payments in excess of advisor to the effect that the financial terms of such $5 million and less than $15 million, with respect to Affiliate Transaction are fair to Food 4 Less or such which the Company or such Subsidiary, as the case may subsidiary from a financial point of view. be, shall have delivered an officers' certificate to the New F4L Senior Subordinated Note Trustee certifying The provisions of the foregoing paragraph shall not that such Affiliate Transaction complies with clause apply to (i) any Permitted Payment, (ii) any Restricted (y) above (other than the requirement set forth in such Payment that is made in compliance with the provisions clause (y) that such Affiliate Transaction be in the of the Old F4L Senior Subordinated Note Indenture ordinary course of business) and that such Affiliate summarized above under "Limitation on Restricted Transaction has received the approval of a majority of Payments," (iii) reasonable and customary fees and the disinterested members of the board of directors of compensation paid to, and indemnity provided on behalf the Company or the Subsidiary, as the case may be, or, of, officers, directors, employees or consultants of in the absence of any such approval by the Food 4 Less or any subsidiary, as determined by the disinterested members of the board of directors of the board of directors of Food 4 Less or any subsidiary or Company or that the Subsidiary, as the case may be, the senior management thereof in good faith, (iv) that an independent financial advisor has reasonably transactions exclusively between or among Food 4 Less and in good faith determined that the financial terms and any of its wholly owned subsidiaries or exclu- of such Affiliate Transaction are fair to the Company sively between or among such subsidiaries, provided or such Subsidiary, as the case may be, or that the such transactions are not otherwise prohibited by the terms of such Affiliate Transaction are at least as Old F4L Senior Subordinated Note Indenture, (v) any favorable as might reasonably have been obtained at agreement as in effect as of June 17, 1991 or any such time from an unaffiliated party, and that such amendment thereto or any transaction independent financial advisor has provided written confirmation of such determination to the
B-17 253
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ contemplated thereby (including pursuant to any board of directors and (C) with respect to Affiliate amendment thereto) so long as any such amendment is not Transactions involving aggregate payments in excess of disadvantageous to the holders in any material respect, $15 million, with respect to which the Company or such (vi) the existence of, or the performance by Food 4 Subsidiary, as the case may be, shall have delivered to Less or any of its subsidiaries of its obligations the New F4L Senior Subordinated Note Trustee, a written under the terms of, any stockholders agreement opinion from an independent financial advisor to the (including any registration rights agreement or effect that the financial terms of such Affiliate purchase agreement related thereto) to which it (or Transaction are fair to the Company or such Subsidiary, FFL) is a party as of June 17, 1991 and any similar as the case may be, or that the terms of such Affiliate agreements which it (or FFL) may enter into thereafter, Transaction are at least as favorable as those that provided, however, that the existence of, or the might reasonably have been obtained at the time from an performance by Food 4 Less or any subsidiaries of unaffiliated party. obligations under any future amendment to, any such existing agreement or under any similar agreement The provisions of the foregoing paragraph shall not entered into after June 17, 1991 shall only be apply to (i) any Permitted Payment, (ii) any Restricted permitted by this clause (vi) to the extent that the Payment that is made in compliance with the provisions terms of any such amendment or new agreement are not of the covenant described under "-- Limitation on otherwise disadvantageous to the holders in any Restricted Payments" above, (iii) reasonable and material respect, (vii) transactions permitted by, and customary fees and compensation paid to, and indemnity complying with, the provisions of the Old F4L Senior provided on behalf of, officers, directors, employees Subordinated Note Indenture summarized below under or consultants of the Company or any Subsidiary, as "Limitations on Merger and Certain Other Transactions," determined by the board of directors of the Company or (viii) transactions with Certified Grocers of any Subsidiary or the senior management thereof in good California, Inc., Affiliated Wholesale Grocers of faith, (iv) transactions exclusively between or among Kansas City, Inc. or other suppliers in the ordinary the Company and any of its wholly-owned Subsidiaries or course of business and otherwise in compliance with the exclusively between or among such wholly-owned terms of the Old F4L Senior Subordinated Note Subsidiaries, provided such transactions are not Indenture. otherwise prohibited by the New F4L Senior Subordinated Note Indenture, (v) any agreement as in effect as of "Significant Stockholder" means, with respect to any the Issue Date or any amendment thereto or any person, any other person who is the beneficial owner transaction contemplated thereby (including pursuant to (within the meaning of Rule 13d-3 under the Exchange any amendment thereto) so long as any such amendment is Act) of more than 10% of any class of equity securities not disadvantageous to the holders of the New F4L of such person that are entitled to vote on a regular Senior Subordinated Notes, in any material respect, basis for the election of directors of such person. (vi) the existence of, or the performance by the Company or any of its Subsidiaries of its obligations IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD under the terms of, any stockholders agreement F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED (including any registration rights agreement or TO ELIMINATE THIS COVENANT AND CERTAIN RELATED purchase agreement related thereto) to which it (or New DEFINITIONS. Holdings) is a party as of the Issue Date and any similar agreements which it (or New Holdings) may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the holders of the New F4L Senior Subordinated Notes, in any material respect, (vii) transactions permitted by, and complying with, the provisions of the covenant described under "-- Limitation on Mergers and Certain Other Transactions" below and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the New New F4L Senior Subordinated Note Indenture which, are fair to the Company in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. LIMITATION ON CHANGE OF CONTROL. Pursuant to the Old LIMITATION ON CHANGE OF CONTROL. The New F4L Senior F4L Senior Subordinated Note Indenture, upon the Subordinated Note Indenture will provide that if a occurrence of a Change of Control, each holder will Change of Control occurs, each holder will have the have the right to require the repurchase of such right to require the Company to repurchase such holder's Old F4L Senior Subordinated Notes pursuant to holder's New F4L Senior Subordinated Notes pursuant to the offer described below (the "Change of Control a Change of Control Offer at 101% of the principal Offer"), at a purchase price equal to 101% of the amount thereof plus accrued and unpaid interest to the principal amount thereof plus accrued interest, if any, date of repurchase. to the date of purchase. Prior to the mailing of the notice to holders described below, but in any event The New F4L Senior Subordinated Note Indenture will within 30 days following the date upon which the Change further provide that, notwithstanding the foregoing, of Control occurred (the "Change of Control prior to the
B-18 254
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Date"), Food 4 Less will (i) repay in full all mailing of the notice of a Change of Control Offer Indebtedness of Food 4 Less and its subsidiaries under referred to above, within 30 days following a Change of the loan documents and related documents or offer to Control the Company shall either (a) repay in full and repay in full all such Indebtedness and repay the terminate all commitments under Indebtedness under the Indebtedness of each lender who has accepted such offer Credit Agreement to the extent the terms thereof or (ii) obtain the requisite consent under the Credit require repayment upon a Change of Control (or offer to Agreement and related documents to permit the repay in full and terminate all commitments under all repurchase of the Old F4L Senior Subordinated Notes. such Indebtedness under the Credit Agreement and repay Food 4 Less must first comply with the covenant in the the Indebtedness owed to each lender which has accepted preceding sentence before it will be required to such offer), or (b) obtain the requisite consents under repurchase Old F4L Senior Subordinated Notes pursuant the Credit Agreement, the terms of which require to a Change of Control Offer. Food 4 Less must comply repayment upon a Change of Control, to permit the with Rule 14e-1 under the Securities Exchange Act of repurchase of the New F4L Senior Subordinated Notes as 1934, as amended, and any other applicable provisions provided above. The Company shall first comply with the of the federal securities laws in connection with a covenant in the immediately preceding sentence before Change of Control Offer. it shall be required to repurchase New F4L Senior Subordinated Notes pursuant to the provisions described Pursuant to the Old F4L Senior Subordinated Note below. The Company's failure to comply with the covenants Indenture, within 30 days following any Change of described in this paragraph shall constitute an Event Control Date, Food 4 Less must send, by first class of Default under the New F4L Senior Subordinated Note mail, a notice to each holder, with copies to the Indenture. Credit Agent and the Old F4L Senior Subordinated Note Trustee, which notice shall govern the terms of the In addition, the New F4L Senior Subordinated Note Change of Control Offer. Such notice shall state, among Indenture will provide that prior to purchasing New F4L other things, the purchase date, which must be no Senior Subordinated Notes tendered in a Change of earlier than 30 days nor later than 40 days from the Control Offer, the Company shall purchase all Senior date such notice is mailed, other than as may be F4L Notes (or permitted refinancings thereof) which it required by law (the "Change of Control Payment Date"). is required to purchase by reason of such Change of Holders electing to have a Old F4L Senior Subordinated Control pursuant to the provisions of the indenture Notes purchased pursuant to a Change of Control Offer under which such New Senior F4L Notes are issued, as in will be required to surrender the Old F4L Senior effect on the Issue Date. Subordinated Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Old F4L Senior Subordinated Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the business day prior to the Change of Control Payment Date. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED DEFINITIONS. LIMITATIONS ON MERGERS AND CERTAIN OTHER LIMITATIONS ON MERGERS AND CERTAIN OTHER TRANSACTIONS. TRANSACTIONS. Pursuant to the Old F4L Senior Pursuant to the New F4L Senior Subordinated Note Subordinated Note Indenture, Food 4 Less shall not, in Indenture, the Company, in a single transaction or a single transaction or through a series of related through a series of related transactions, shall not (i) transactions, (i) consolidate with or merge with or consolidate with or merge with or into any other into any other person, or transfer (by lease, person, or transfer (by lease, assignment, sale or assignment, sale or otherwise) all or substantially all otherwise) all or substantially all of its properties of its properties and assets as an entirety or and assets as an entirety or substantially as an substantially as an entirety to another person or group entirety to another person or group of affiliated of affiliated persons or (ii) adopt a plan of persons or (ii) adopt a plan of liquidation, unless, in liquidation, unless, in either case, (1) either Food 4 either case, (1) either the Company shall be the Less shall be the continuing person, or the person (if continuing person, or the person (if other than the other than Food 4 Less) formed by such consolidation or Company) formed by such consolidation or into which the into which Food 4 Less is merged or to which all or Company is merged or to which all or substantially all substantially all of the properties and assets of Food of the properties and assets of the Company as an 4 Less as an entirety or substantially as an entirety entirety are transferred (or, in the case of a plan of are transferred (or, in the case of a plan of liquidation, any person to which assets are liquidation, any person to which assets are transferred) (the Company or such other person being transferred) (Food 4 Less or such other person being hereinafter referred to as the "Surviving Person") hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing shall be a corporation organized and validly existing under the laws of the United States, any state thereof under the laws of the United States, any state thereof or the District of Columbia, and shall expressly or the District of Columbia, and shall expressly assume, by an indenture supplement, all the obligations assume, by an indenture supplement executed and of the Company under the New F4L Senior Subordinated delivered to the Old F4L Senior Subordinated Note Note Indenture and the New F4L Senior Subordinated Trustee in form satisfactory to the Old F4L Senior Notes thereunder; (2) immediately after and giving Subordinated Note Trustee, all the obligations of Food effect of such transaction and the assumption 4 Less under the Old F4L Senior Subordinated Notes and contemplated by clause (1) above and the incurrence or the Old F4L Senior Subordinated Note Indenture; (2) anticipated incurrence of any Indebtedness to be immediately after and giving effect to such transaction incurred in connection therewith, (A) the Surviving and the assumption contemplated by clause (1) above and Person shall have a Consolidated Net Worth equal to or the incurrence or anticipated incurrence of any greater than the Consolidated Net Worth of the Company Indebtedness to be incurred in connection therewith, immediately preceding the transaction and (B) the (A) the Surviving Person shall have a net worth equal Surviving Person could incur at least $1.00 of to or greater than the net worth of Food 4 Less additional Indebtedness (other than Permitted Indebt- immediately preceding the transaction, (B) the edness) pursuant to the provisions described above Surviving Person could incur at least $1 of Indebt- under "Limitation on Incurrences of Additional edness pursuant to provisions of the Old F4L Senior Indebtedness"; (3) immediately before and immediately Subordinated Note Indenture summarized above in the after and giving effect to such transaction and the first paragraph under the heading "Limitation on assumption of the obligations as set forth in clause Incurrences of Additional Indebtedness," and (C) if the (1) above and the incurrence or anticipated incurrence Operating Coverage Ratio of Food 4 Less immediately of any Indebtedness to be incurred in connection preceding the transaction is within a range set forth therewith, no under column X below, then the
B-19 255
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Surviving Person shall have an Operating Coverage Ratio Default or Event of Default shall have occurred and be at least equal to the greater of (i) the actual continuing; and (iv) each Subsidiary Guarantor, unless Operating Coverage Ratio of Food 4 Less multiplied by it is the other party to the transaction, shall have by the appropriate percentage set forth in column Y below supplemental indenture confirmed that its guarantee of and (ii) the ratio set forth in column Z below: the obligations of the Company under the New F4L Senior Subordinated Notes and the New F4L Senior Subordinated X Y Z Note Indenture shall apply, without alteration or - - - amendment as such guarantee applies on the date it was 1.8:1 to 2.499:1 100% 1.8:1 granted under the New F4L Senior Subordinated Note 2.5:1 to 2.999:1 90% 2.5:1 Indenture to the obligations of the Company under the 3.0:1 or more 80% 2.7:1 New F4L Senior Subordinated Note Indenture and the New F4L Senior Subordinated Notes to the obligations of the and, provided further, that if immediately after giving Company or such person, as the case may be, under the effect to such transaction on a pro forma basis, the New F4L Senior Subordinated Note Indenture and the New Operating Coverage Ratio of Food 4 Less or the F4L Senior Subordinated Notes, after the consummation surviving entity, as the case may be, is 3.2:1 or more, of such transaction. the calculation in the preceding proviso shall be inapplicable and such transaction shall be deemed to Notwithstanding the foregoing, the consummation of the have complied with the requirements of such provision; Merger on the Issue Date need only comply with clauses (3) immediately before and immediately after and giving (1) and (3) of the foregoing paragraph. effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the The New F4L Senior Subordinated Note Indenture will incurrence or anticipated incurrence of any provide that upon any consolidation or merger or any Indebtedness to be incurred in connection therewith, no transfer of all or substantially all of the assets of Default or Event of Default shall have occurred and be the Company or any adoption of a plan of liquidation by continuing. For purposes of the foregoing, the transfer the Company in accordance with the foregoing, the (by lease, assignment, sale or otherwise) of all or surviving person formed by such consolidation or into substantially all of the properties and assets of one which the Company is merged or to which such transfer or more subsidiaries, the capital stock of which is made (or, in the case of a plan of liquidation, to constitutes all or substantially all of the properties which assets are transferred) shall succeed to, and be and assets of Food 4 Less shall be deemed to be the substituted for, and may exercise every right and power transfer of all or substantially all of the properties of, the Company under the New F4L Senior Subordinated and assets of Food 4 Less. Note Indenture with the same effect as if such surviving person had been named as the Company therein; IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD provided, however, that solely for purposes of F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED computing amounts described in subclause (c) of the TO ELIMINATE THE SUBSECTIONS OF THIS PROVISION WHICH first paragraph of the covenant described above under REQUIRE THAT IMMEDIATELY AFTER GIVING EFFECT TO SUCH "Limitation on Restricted Payments", any such surviving TRANSACTION AND THE INCURRENCE OF ANY INDEBTEDNESS IN person shall only be deemed to have succeeded to and be CONNECTION THEREWITH, FOOD 4 LESS OR THE SURVIVING substituted for the Company with respect to periods ENTITY, AS THE CASE MAY BE, HAS A NET WORTH OR subsequent to the effective time of such merger, OPERATING COVERAGE RATIO THAT MEETS THE STANDARDS SET consolidation or transfer of assets. FORTH THEREIN. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more subsidiaries, the capital stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. "Consolidated Net Worth" means, with respect to any person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such person and its subsidiaries determined on a consolidated basis in accordance with GAAP. MAINTENANCE OF NET WORTH. Pursuant to the Old F4L MAINTENANCE OF NET WORTH. The New F4L Senior Subordi- Senior Subordinated Note Indenture, if Food 4 Less' nated Note Indenture will not contain a covenant Net Worth at the end of each of any two consecutive requiring the maintenance of a minimum net worth. fiscal quarters (the last day of the second fiscal quarter being referred to as the "Acceleration Date") is equal to or less than $50 million (the "Minimum Net Worth"), then Food 4 Less shall make an offer to all holders (an "Offer") to purchase, on a pro rata basis, on or before the last day of the next following fiscal quarter or, in the event that the Acceleration Date is the last day of Food 4 Less' fiscal year, the forty-fifth day after the last day of the next following fiscal quarter (the "Accelerated Payment Date"), $14.5 million aggregate principal amount of Old F4L Senior Subordinated Notes (an "Accelerated Payment") at a purchase price equal to 100% of principal amount plus accrued but unpaid interest to the Accelerated Payment Date. Food 4 Less may credit against the forty-fifth day after the last day of the next following fiscal quarter (the "Accelerated Payment Date"), $14.5 million aggregate principal amount of Old F4L Senior Subordinated Notes (an "Accelerated Payment") at a purchase price equal to 100% of principal amount plus accrued but unpaid interest to the Accelerated Payment Date. Food 4 Less may credit against the principal amount of Old F4L Senior Subordinated Notes to be
B-20 256
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ acquired in any Accelerated Payment 100% of the principal amount of Old F4L Senior Subordinated Notes acquired by Food 4 Less through purchase, optional redemption, exchange or otherwise during the 180-day period ending on the Acceleration Date and surrendered for cancellation. Food 4 Less, however, may not credit Old F4L Senior Subordinated Notes against an Accelerated Payment if such Old F4L Senior Subordinated Notes were previously used as a credit against any other required payment under the Old F4L Senior Subordinated Note Indenture. In no event shall the failure of Food 4 Less' Net Worth to equal or exceed $50 million at the end of any fiscal quarter be counted toward the making of more than one Offer. "Net Worth" as of any date means, with respect to any person, the amount of the equity of the holders of capital stock of such person that would appear on the balance sheet of such person as of such date, determined in accordance with GAAP, adjusted to exclude (to the extent included in such equity), (i) the amount of equity attributable to Disqualified Capital Stock and (ii) with respect to Food 4 Less, the effect of (a) all non-cash charges reducing such equity amount and attributable to the early extinguishment of, or acceleration of costs of, the financing of the Alpha Beta Acquisition (other than amortization of original issue discount), (b) prepayment penalties or other charges incurred in connection with the retirement of certain Indebtedness of a subsidiary of Food 4 Less existing immediately prior to June 17, 1991 and (c) the recognition of deferred losses, in an amount not to exceed $3 million, on the Long Beach Warehouse. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED DEFINITIONS. LIMITATION ON OTHER SENIOR SUBORDINATED LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Old F4L Senior Subordinated Note INDEBTEDNESS. The New F4L Senior Subordinated Note Indenture does not have a covenant providing for the Indenture will provide that neither the Company nor any limitation on other senior subordinated indebtedness. Subsidiary Guarantor will, directly or indirectly, incur any Indebtedness (including Acquired In- debtedness) that is subordinate in right of payment to any Indebtendess of the Company or such Subsidiary Guarantor, as the case may be, unless such Indebtedness is either (a) pari passu in right or payment with the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be, or (b) subordinate in right of payment to the New F4L Senior Subordinated Notes or the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, as the case may be, in the same manner and at least to the same extent as the New F4L Senior Subordinated Notes are subordinate to Senior Indebtedness or as such Senior Subordinated Note Guarantee is subordinated to Guarantor Senior Indebtedness of such Subsidiary Guarantor, as the case may be. "Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor, the principal of, premium, if any, and interest on any Indebtedness of such Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such indebtedness shall not be senior in right of payment to the Senior Subordinated Note Guarantee of such Subsidiary Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Indebtedness" shall include the principal of, premium, if any, and interest on all obligations of every nature of such Subsidiary Guarantor from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, and all fees, indemnities and expenses payable under the Credit Agreement. Notwithstanding the foregoing, "Guarantor Senior Indebtedness" shall not include (a) Indebtedness evidenced by the Senior Subordinated Note Guarantee of such Subsidiary Guarantor, (b) Indebtedness that is expressly subordinate or
B-21 257
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ junior in right of payment to any Indebtedness of such Subsidiary Guarantor, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Subsidiary Guarantor, (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by such Subsidiary Guarantor for compensation to employees or for services rendered to such Subsidiary Guarantor, (g) any liability for federal, state, local or other taxes owed or owing by such Subsidiary Guarantor, (h) Indebtedness of such Subsidiary Guarantor representing a guarantee of Subordinated Indebtedness or Pari Passu Indebtedness (in each case, with respect to the New F4L Senior Subordinated Notes or any Senior Subordinated Note Guarantee) of the Company or any other Subsidiary Guarantor, (i) Indebtedness of such Subsidiary Guarantor to a Subsidiary of the Company and (j) that portion of any Indebtedness which is incurred by such Subsidiary Guarantor in violation of the New Senior Subordinated Note Indenture. LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. Pursuant Old F4L Senior Subordinated Note Indenture does not have to the New Senior Subordinated Note Indenture, the a covenant providing for the limitation on the issuance Company will not permit any of its Subsidiaries to of preferred stock of subsidiaries. issue any Preferred Stock (other than to the Company or to a wholly-owned Subsidiary) or permit any person (other than the Company or a wholly-owned subsidiary) to own any Preferred Stock of any subsidiary. EVENTS OF DEFAULT EVENTS OF DEFAULT Pursuant to the Old F4L Senior Subordinated Note Pursuant to the New F4L Senior Subordinated Note Indenture, the following events constitute "Events of Indenture the following events constitute "Events of Default": (i) failure to make any interest payment on Default": (i) failure to make any interest payment on the Old F4L Senior Subordinated Notes when due, and the the New F4L Senior Subordinated Notes when due and the continuance of such default for a period of 30 days continuance of such default for a period of 30 days; (whether or not such payment would be prohibited by the (ii) failure to pay principal of, or premium, if any, provisions of the Old F4L Senior Subordinated Note on the New F4L Senior Subordinated Notes when due, Indenture concerning the subordination of the Old F4L whether at maturity, upon acceleration, redemption, Senior Subordinated Notes); (ii) failure to pay required repurchase or otherwise; (iii) failure to principal of the Old F4L Senior Subordinated Notes when comply with any other agreement contained in the New due, whether at maturity, upon acceleration, redemption F4L Senior Subordinated Notes or the New F4L Senior or otherwise (including the failure to make an Subordinated Note Indenture, if such failure continues Accelerated Payment and whether or not such payment unremedied for 30 days after written notice given by would be prohibited by the provisions of the Old F4L the New F4L Senior Subordinated Note Trustee or the Senior Subordinated Note Indenture concerning the holders of at least 25% in principal amount of the New subordination of the New F4L Senior Subordinated F4L Senior Subordinated Notes then outstanding (except Notes); (iii) failure to comply with any other in the case of a default with respect to the covenants agreement contained in the New F4L Senior Subordinated described under "Limitation on Restricted Payments," Notes or the Old F4L Senior Subordinated Note "Limitations on Asset Sales," "Change of Control," and Indenture, if such failure continues unremedied for 30 "Limitations on Merger and Certain Other Transactions," days after written notice given by the Old F4L Senior which shall constitute Events of Default with notice Subordinated Note Trustee or the holders of at least but without passage of time); (iv) a default under any 33 1/3% in principal amount of the Old F4L Senior Indebtedness of the Company or its subsidiaries, Subordinated Notes then outstanding (except in the case whether such Indebtedness now exists or shall of a default with respect to the covenants set forth in hereinafter be created, if both (A) such default either the Old F4L Senior Subordinated Note Indenture under (1) results from the failure to pay any such the headings "Limitation on Restricted Payments," Indebtedness at its stated final maturity or (2) "Maintenance of Net Worth," "Limitation on Disposition relates to an obligation other than the obligation to of Assets," "Limitation on Change of Control," and pay such Indebtedness at its stated final maturity and "Limitations on Merger and Certain Other Transactions," results in the holder or holders of such Indebtedness which shall constitute Events of Default with notice causing such Indebtedness to become due prior to its but without passage of time specified); (iv) a default stated maturity and (B) the principal amount of such under any Indebtedness, whether such Indebtedness now Indebtedness, together with the principal amount of any exists or shall hereinafter be created, if both (A) other such Indebtedness in default for failure to pay such default either (1) results from the failure to pay principal at stated final maturity or the maturity of any such Indebtedness at its stated final maturity or which has been so accelerated, aggregate $20 million or (2) relates to an obligation other than the obligation more at any one time outstanding; (v) any final to pay such Indebtedness at its stated maturity and judgment or order for payment of money in excess of $20 results in the holder or holders of such Indebtedness million shall be entered against the Company or any causing such Indebtedness to become due prior to its Significant Subsidiary and shall not be discharged for stated maturity and (B) the principal amount of such a period of 60 days after such judgment becomes final Indebtedness, together with the principal amount of any and nonappealable; (vi) either the Company or any other such Indebtedness in default for failure to pay Significant Subsidiary pursuant to or within the principal at maturity or the maturity of which has been meaning of any Bankruptcy Law: (a) commences a so accelerated, aggregates $20 million or more at any voluntary case or proceeding; (b) consents to the entry one time outstanding, (v) either Food 4 Less or any of an order for relief against it in an involuntary Significant Subsidiary (a) admits in writing its case or proceeding; (c) consents to the appointment
B-22 258
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ inability to pay its debts generally as they become of a custodian of it or for all or substantially all of due, (b) commences a voluntary case or proceeding under its property; or (d) makes a general assignment for the any Bankruptcy Law; (c) consents to the entry of a benefit of its creditors; (vii) a court of competent judgment, decree or order for relief against it in an jurisdiction enters an order or decree under any involuntary case or proceeding under any Bankruptcy Bankruptcy Law that: (a) is for relief against the Law; (d) consents to the appointment of a Custodian of Company or any significant subsidiary, in an it or for all or substantially all of its property, (e) involuntary case or proceeding; (b) appoints a consents to or acquieces in the institution of a custodian of the Company or any significant subsidiary, bankruptcy or an insolvency proceeding against it, (f) or for all or any substantial part of their respective makes a general assignment for the benefit of its properties; or (c) orders the liquidation of the Com- creditors, or (g) takes any corporate action to pany or any significant subsidiary, and in each case authorize or effect any of the foregoing; (vi) a court the order or decree remains unstayed and in effect for of competent jurisdiction enters a judgment, decree or 60 days; (viii) the lenders under the Credit Agreement order for relief in respect of Food 4 Less or any shall commence judicial proceedings to foreclose upon Significant Subsidiary in an involuntary case or any material portion of the assets of the Company and proceeding under any Bankruptcy Law which shall: (a) its subsidiaries; or (ix) any of the guarantees issued approve as properly filed a petition seeking under the New F4L Senior Subordinated Indenture shall reorganization, arrangement, adjustment or composition be declared or adjudged unenforceable or invalid in a in respect of Food 4 Less or any Significant final judgment or order issued by any court of Subsidiary, (b) appoint a Custodian of Food 4 Less or governmental authority. In the event of a declaration any Significant Subsidiary, or for substantially all of of acceleration because an Event of Default set forth their respective properties; or (c) order the winding in clause (iv) above has occurred and is continuing, up liquidation of its affairs, and in each case the such declaration of acceleration shall be automati- order or decree remains unstayed and in effect for 60 cally rescinded and annulled if either (i) the holders days; (vii) any Warrant of attachment is issued against of the Indebtedness which is the subject of such Event any portion of the property of Food 4 Less or any of Default have waived such failure to pay at maturity Significant Subsidiary having a value of at least $20 or have rescinded the acceleration in respect of such million, which Warrant is not released within 60 days Indebtedness within 90 days of such maturity or after service of process with respect thereto, or final declaration of acceleration, as the case may be, and no judgment not covered by insurance which in the other Event of Default has occurred during such 90-day aggregate at any one time exceeds $20 million shall be period which has not been cured or waived, or (ii) such entered against Food 4 Less or any Significant Indebtedness shall have been discharged or the maturity Subsidiary and shall not be discharged for a period of thereof shall have been extended such that it is not 60 days after such judgment becomes final and then due and payable, or the underlying default has nonappealable; and (viii) the lenders under the Loan been cured, within 90 days of such maturity or Documents or any refinancing indebtedness related declaration of acceleration, as the case may be. thereto shall foreclose or take any action to foreclose upon any material portion of the collateral securing Under the terms of the New F4L Senior Subordinated Note such indebtedness. In the event of a declaration of Indenture, if an Event of Default (other than an Event acceleration because an Event of Default set forth in of Default resulting from bankruptcy, insolvency, clause (iv) above has occurred and is continuing, such receivership or reorganization of the Company or a declaration of acceleration shall be automatically Subsidiary Guarantor) occurs and is continuing, the New rescinded and annulled if either (i) the holders of the F4L Senior Subordinated Note Trustee or the holders of Indebtedness which is the subject of such Event of at least 25% in principal amount of the then Default have waived such failure to pay at maturity or outstanding New F4L Senior Subordinated Notes issued have rescinded the acceleration in respect of such under the New Indenture may declare immediately due and Indebtedness within 90 days of such maturity or payable all unpaid principal and interest accrued and declaration of acceleration, as the case may be, and no unpaid on the then outstanding New F4L Senior other Event of Default has occurred during such 90-day Subordinated Notes by notice in writing to the Company, period which has not been cured or waived, or (ii) such the administrative agent under the Credit Agreement and Indebtedness shall have been discharged or the maturity the New F4L Senior Subordinated Note Trustee specifying thereof shall have been extended such that it is not the respective Event of Default and that it is a then due and payable, or the underlying default has "notice of acceleration" (the "Acceleration Notice"), been cured, within 90 days of such maturity or and the same (i) shall become immediately due and declaration of acceleration, as the case may be. payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become due and Under the terms of the Old F4L Senior Subordinated payable upon the first to occur of an acceleration Note Indenture, if an Event of Default (other than an under the Credit Agreement, or five business days after Event of Default resulting from bankruptcy, insolvency, receipt by the Company and the administrative agent receivership or reorganization of Food 4 Less) occurs under the Credit Agreement of such Acceleration Notice. and is continuing, the Old F4L Senior Subordinated Note If an Event of Default resulting from certain events of Trustee or the holders of at least 33 1/3% in principal bankruptcy, insolvency, receivership or reorganization amount of the Old F4L Senior Subordinated Notes then of the Company or a Subsidiary Guarantor that is a outstanding may declare immediately due and payable all Significant Subsidiary shall occur, all unpaid unpaid principal and interest accrued and unpaid on the principal of and accrued interest on all then outstand- Old F4L Senior Subordinated Notes then outstanding; ing New F4L Senior Subordinated Notes shall be provided, however, that if any Senior Indebtedness is immediately due and payable without any declaration or outstanding under the Credit Agreement or the Credit other act on the part of the New F4L Senior Agreement is otherwise in effect, upon any such Subordinated Note Trustee or any of the holders. After declaration, all unpaid principal and interest accrued a declaration of acceleration, subject to certain and unpaid on the Old F4L Senior Subordinated Notes conditions, the holders of a majority in principal then outstanding shall become due and payable upon the amount of the then outstanding New F4L Senior first to occur of (i) five business days after notice Subordinated Notes, by notice to the New F4L Senior is received by Food 4 Less and the Credit Agent; and Subordinated Note Trustee, may rescind such declaration (ii) an acceleration under the Credit Agreement. If an if all existing Events of Default are remedied. In Event of Default resulting from certain events of certain cases the holders of a majority in principal bankruptcy, insolvency, receivership or reorganization amount of outstanding New F4L Senior Subordinated Notes shall occur, all unpaid principal and accrued interest may waive a past default under the New F4L Senior shall be immediately due and payable without any Subordinated Note Indenture and its consequences, declaration or other act on the part of the Old F4L except a default in the payment of or interest on any Senior Subordinated Note Trustee or any of the holders. of the New F4L Senior Subordinated Notes. Subject to certain conditions, the holders of a majority in principal amount of the Old F4L Senior Subordi-
B-23 259
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ nated Notes then outstanding, by notice to the Old F4L The New F4L Senior Subordinated Note Indenture provides Senior Subordinated Note Trustee, may rescind such that if a Default or Event of Default occurs and is declaration if all existing Events of Default are continuing thereunder and if it is known to the New F4L remedied. In certain cases the holders of a majority in Senior Subordinated Note Trustee, the New F4L Senior principal amount of outstanding Old F4L Senior Subordinated Note Trustee shall mail to each holder of Subordinated Notes may waive any past default and its New F4L Senior Subordinated Notes notice of the Default consequences, except a default in the payment of or Event of Default within 90 days after such Default principal of or interest on any of the Old F4L Senior or Event of Default occurs; provided, however, that, Subordinated Notes. except in the case of a Default or Event of Default in the payment of the principal of or interest on any New The Old F4L Senior Subordinated Note Indenture F4L Senior Subordinated Note, including the failure to provides that if a Default or Event of Default occurs make payment on a Change of Control Payment Date and is continuing and if it is known to the Old F4L pursuant to a Change of Control Offer or payment when Senior Subordinated Note Trustee, the Old F4L Senior due pursuant to a Proceeds Offer the New F4L Senior Subordinated Note Trustee shall mail to each holder Subordinated Note Trustee may withhold such notice if notice of the uncured Default or Event of Default it in good faith determines that withholding such within 90 days after such Default or Event of Default notice is in the interest of the holders. occurs; provided, however, that, except in the case of a Default or Event of Default in the payment of the The New F4L Senior Subordinated Note Indenture provides principal of or interest on any of the Old F4L Senior that no holder of New F4L Senior Subordinated Notes may Subordinated Notes, including an Accelerated Payment pursue any remedy thereunder unless the New F4L Senior and the failure to make payment on the Change of Subordinated Note Trustee (i) shall have failed to act Control Payment Date pursuant to a Change of Control for a period of 60 days after receiving written notice Offer, the Old F4L Senior Subordinated Note Trustee may of a continuing Event of Default by such holder and a withhold such notice if it in good faith determines request to act by holders of at least 25% in principal that withholding such notice is in the interest of the amount of New F4L Senior Subordinated Notes and (ii) holders. has received indemnification satisfactory to it; provided, however, that such provision does not affect The Old F4L Senior Subordinated Note Indenture the right of any holder to sue for enforcement of any provides that no holder may pursue any remedy overdue payment of New F4L Senior Subordinated Notes. thereunder unless the Old F4L Senior Subordinated Note Trustee (i) shall have failed to act for a period of 60 Under the New F4L Senior Subordinated Note Indenture, days after receiving written notice of a continuing two officers of the Company are required to certify to Event of Default by such holder and a request to act by the New F4L Senior Subordinated Note Trustee within 120 holders of at least 33 1/3% in principal amount of Old days after the end of each fiscal year of the Company F4L Senior Subordinated Notes and (ii) has received whether or not they know of any Default that occurred indemnification satisfactory to it; provided, however, during such fiscal year and, if applicable, describe that such provision does not affect the right of any such Default and the status thereof. holder to sue for enforcement of any overdue payment on Old F4L Senior Subordinated Notes. Under the Old F4L Senior Subordinated Note Indenture, two officers of Food 4 Less are required to certify to the Trustee within 120 days after the end of each fiscal year of Food 4 Less whether or not they know of any Default that occurred during such fiscal year and, if applicable, describe such Default and the status thereof. MODIFICATION OF THE OLD F4L SENIOR MODIFICATION OF THE NEW F4L SENIOR SUBORDINATED NOTE INDENTURE SUBORDINATED NOTE INDENTURE Pursuant to the terms of the Old F4L Senior Pursuant to the terms of the New F4L Senior Subordinated Note Indenture, the Old F4L Senior Subordinated Note Indenture, the New F4L Senior Subordinated Note Indenture and the Old F4L Senior Subordinated Note Indenture and the New F4L Senior Subordinated Notes may be amended or supplemented (and Subordinated Notes may be amended or supplemented (and compliance with any provision thereof may be waived) by compliance with any provision thereof may be waived) by Food 4 Less, the Old F4L Senior Subordinated Note the Company, the Subsidiary Guarantors, the New F4L Trustee and the holders of not less than a majority in Senior Subordinated Note Trustee and the holders of not aggregate principal amount of the Old F4L Senior less than a majority in aggregate principal amount of Subordinated Notes then outstanding, except that (A) New F4L Senior Subordinated Notes then outstanding, without the consent of each holder affected, no such except that (i) without the consent of each holder of amendment supplement or waiver may (1) change the New F4L Senior Subordinated Notes affected, no such principal amount of Old F4L Senior Subordinated Notes amendment, supplement or waiver may (1) change the whose holders must consent to an amendment, supplement principal amount of the New F4L Senior Subordinated or waiver of any provision of the Old F4L Senior Notes the holders of which must consent to an Subordinated Note Indenture or the Old F4L Senior amendment, supplement or waiver of any provision of the Subordinated Notes; (2) reduce the rate or extend the New F4L Senior Subordinated Note Indenture, the New F4L time for payment of interest on any Old F4L Senior Senior Subordinated Notes or the senior subordinated Subordinated Note; (3) reduce the principal amount of guarantee, (2) reduce the rate or extend the time for any Old F4L Senior Subordinated Note; (4) change the payment of interest on the New F4L Senior Subordinated date of maturity of any Old F4L Senior Subordinated Notes, (3) reduce the principal amount of any New F4L Note, or alter the redemption provisions in a manner Senior Subordinated Notes, (4) change the Maturity Date adverse to any holder; (5) make any changes in the of the New F4L Senior Subordinated Notes or the Change provisions concerning waivers of Defaults or Events of of Control Payment Date or alter the redemption Default by holders or the rights of holders to recover provisions in the New F4L Senior Subordinated Note the principal of, interest on, or redemption payment Indenture, the New F4L Senior Subordinated Notes or the with respect to, any Old F4L Senior Subordinated Note; purchase price in connection with any repurchase of New or (6) make the principal of, or the interest on, any F4L Senior Subordinated Notes pursuant to the covenant Old F4L Senior Subordinated Note payable with anything described under " -- Limitation on Change of Control" or in any manner other than as provided for in the Old above in a manner adverse to any holder of the New F4L F4L Senior Subordinated Note Indenture and the Old F4L Senior Subordinated Notes, (5) make any changes in the Senior Subordinated Notes; and (B) no provision in any provisions concerning waivers of Defaults or Events of supplemental indenture that affects the subordination Default by holders or the rights of the Old F4L
B-24 260
OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES - ------------------------------------------------------ ------------------------------------------------------ Senior Subordinated Notes and the Guarantee Obligations of holders to recover the principal of, interest on or or other provisions relating thereto shall be effective redemption payment with respect to New F4L Senior against the holders of the Senior Indebtedness or Subordinated Notes, (6) make the principal of, or Senior Guarantor Indebtedness who have not consented interest on, any New F4L Senior Subordinated Notes thereto. payable with anything or in any manner other than as provided for in the New F4L Senior Subordinated Note According to the terms of the Old F4L Senior Indenture, the New F4L Senior Subordinated Notes and Subordinated Note Indenture, Food 4 Less and the the Senior Subordinated Note Guarantee, (7) modify the Trustee may amend the Old F4L Senior Subordinated Note subordination provisions of the New F4L Senior Indenture and the Old F4L Senior Subordinated Notes (a) Subordinated Note Indenture (including the related to cure any ambiguity, defect or inconsistency therein; definitions) so as to adversely affect the ranking of provided, that such amendment or supplement does not the New F4L Senior Subordinated Notes or any Senior adversely affect the rights of any holder or (b) to Subordinated Note Guarantee; provided, however, that it make any other change that does not adversely affect is understood that any amendment the purpose of which the rights of any holder. is to permit the incurrence of additional Indebtedness under the New Senior Subordinated Note Indenture shall not be construed as adversely affecting the ranking of any New F4L Senior Subordinated Note or Senior Subordinated Note Guarantee, (ii) without the consent of Holders of not less than 75% in aggregate principal amount of such New F4L Senior Subordinated Notes then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of such New F4L Senior Subordinated Notes pursuant to the covenant described under "-- Change of Control" in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "-- Change of Control" above and (iii) without the consent of holders of not less than two thirds in aggregate principal amount of New F4L Senior Subordinated Notes then outstanding, no such amendment, supplement or waiver may release any Guarantor from any of its obligations under its guarantee or the New F4L Senior Subordinated Note Indenture other than in accordance with the terms of the senior subordinated guarantee and the New F4L Senior Subordinated Note Indenture. In addition, the New F4L Senior Subordinated Note Indentures, the New F4L Senior Subordinated Notes and the guarantees may be amended by the Company, the Subsidiary Guarantors and the New F4L Senior Subordinated Note Trustee (a) to cure any ambiguity, defect or inconsistency therein; provided that such amendment or supplement does not adversely affect the rights of any holder thereof or (b) to make any other change that does not adversely affect the rights of any holder thereunder in any material respect.
B-25 261 Facsimile copies of the Letters of Transmittal, properly completed and duly executed, will be accepted, Letters of Transmittal, certificates for the Old F4L Notes and any other required documents should be sent by each holder or its broker, dealer, commercial bank, trust company or other nominee to the Exchange Agent at one of its addresses set forth below. The Exchange Agent is: BANKERS TRUST COMPANY Facsimile Transmission Number: (212) 250-6275 (212) 250-3290 By Mail: (For Eligible Institutions Only) By Hand/Overnight Delivery: Bankers Trust Company Bankers Trust Company Corporate Trust and Agency Group Confirm by Telephone: Corporate Trust and Agency Group Reorganization Dept. (212) 250-6270 Receipt & Delivery Window P.O. Box 1458 123 Washington Street, 1st Floor Church Street Station New York, New York 10006 New York, New York 10008-1458
Any questions or requests for assistance or additional copies of this Amended and Restated Prospectus and Solicitation Statement, the Letters of Transmittal and the Notices of Guaranteed Delivery may be directed to the Information Agent or one of the Dealer Managers at their respective telephone numbers and locations set forth below. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offers and the Solicitation. The Information Agent is: D.F. KING & CO., INC. Call Toll Free: (800) 669-5550 77 Water Street New York, NY 10005 (212) 269-5550 (collect) The Dealer Managers are: BT SECURITIES CS FIRST BOSTON DONALDSON, LUFKIN CORPORATION 55 East 52nd Street & JENRETTE One Bankers Trust Plaza New York, New York 10055 SECURITIES CORPORATION 130 Liberty Street (212) 909-2873 140 Broadway New York, New York 10006 New York, New York 10005 (212) 775-2166 (212) 504-4753
262 EDGAR APPENDIX This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T regarding graphic and image information. It describes material appearing on pages 8 and 9 of the Amended and Restated Prospectus and Solicitation Statement. PAGE 8 The chart consists of two columns which graphically illustrate the respective corporate structures of Food 4 Less and Ralphs before the Merger. Food 4 Less' corporate structure illustrates that Food 4 Less, Inc. ("FFL") owns Food 4 Less Holdings, Inc. ("Holdings"), which, in turn, owns Food 4 Less Supermarkets, Inc. ("Food 4 Less") which, in turn, owns several other Food 4 Less subsidiaries. The Ralphs' corporate structure illustrates that Ralphs Supermarkets, Inc. ("RSI"), owns Ralphs Grocery Company ("RGC") which, in turn, owns Crawford Stores, Inc. A dotted arrow has been drawn from the box representing Food 4 Less to the box representing RSI to simulate the RSI Merger. A dotted arrow has been drawn from the box representing RGC to the box representing RSI to simulate the RGC Merger. A dotted arrow has been drawn to the box representing Holdings from the box representing FFL to simulate the FFL Merger. PAGE 9 The chart illustrates the corporate structure of the Company after the Merger and the FFL Merger. The corporate structure illustrates that New Holdings owns the Company which, in turn, is the parent of all other subsidiaries of the Company. The anticipated debt obligations of New Holdings are placed in order of ranking next to the box representing New Holdings and the anticipated debt obligations of the Company are placed in order of ranking next to the box representing the Company. -----END PRIVACY-ENHANCED MESSAGE-----