-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbXYCnkl6Kr/iJ5JmWDy7jeokEqA1OcnT263YwlZVdl7IeZRa5c0f3Ap2TREkVYW nFy9qXM6HbFXo4CHnpzS7w== 0000950150-97-001741.txt : 19971127 0000950150-97-001741.hdr.sgml : 19971127 ACCESSION NUMBER: 0000950150-97-001741 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971012 FILED AS OF DATE: 19971126 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RALPHS GROCERY CO /DE/ CENTRAL INDEX KEY: 0000835676 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954356030 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-46750 FILM NUMBER: 97728554 BUSINESS ADDRESS: STREET 1: 1100 WEST ARTESIA BOULEVARD CITY: COMPTON STATE: CA ZIP: 90220 BUSINESS PHONE: 3108849000 MAIL ADDRESS: STREET 1: 1100 WEST ARTESIA BOULEVARD CITY: COMPTON STATE: CA ZIP: 90220 FORMER COMPANY: FORMER CONFORMED NAME: FOOD 4 LESS SUPERMARKETS INC DATE OF NAME CHANGE: 19931027 10-Q 1 FORM 10-Q DATED 10/12/97 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number October 12, 1997 33-46750 RALPHS GROCERY COMPANY (Exact name of registrant as specified in its charter) DELAWARE 95-4356030 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification Number) 1100 West Artesia Boulevard Compton, California 90220 (Address of principal executive offices) (Zip code) (310) 884-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. At November 26, 1997, there were 1,513,938 shares of Common Stock outstanding. As of such date, all of the outstanding shares of Common Stock were held by Food 4 Less Holdings, Inc., and there was no public market for the Common Stock. ================================================================================ 2 RALPHS GROCERY COMPANY INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1 Financial Statements Consolidated balance sheets as of February 2, 1997 and October 12, 1997 ........................ 2 Consolidated statements of operations for the 12 weeks ended October 6, 1996 and October 12, 1997.......................... 4 Consolidated statements of operations for the 36 weeks ended October 6, 1996 and October 12, 1997.......................... 5 Consolidated statements of cash flows for the 36 weeks ended October 6, 1996 and October 12, 1997.......................... 6 Consolidated statements of stockholder's deficit as of February 2, 1997 and October 12, 1997......................... 8 Notes to consolidated financial statements....................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................. 17 Signatures....................................................... 18
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 1 4 RALPHS GROCERY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
February 2, October 12, ASSETS 1997 1997 ---------- ---------- (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 67,589 $ 63,524 Trade receivables, less allowances of $4,057 and $3,630 at February 2, 1997 and October 12, 1997, respectively 46,560 42,078 Notes and other receivables 531 520 Inventories 502,095 492,894 Patronage receivables from suppliers 4,433 3,532 Prepaid expenses and other 21,925 23,713 ---------- ---------- Total current assets 643,133 626,261 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: Associated Wholesale Grocers 7,020 6,797 Certified Grocers of California and others 4,945 4,945 PROPERTY AND EQUIPMENT: Land 173,803 173,878 Buildings 188,311 193,947 Leasehold improvements 226,159 257,383 Fixtures and equipment 401,716 448,970 Construction in progress 51,117 37,686 Leased property under capital leases 200,199 225,322 Leasehold interests 112,398 110,673 ---------- ---------- 1,353,703 1,447,859 Less: Accumulated depreciation and amortization 301,477 367,171 ---------- ---------- Net property and equipment 1,052,226 1,080,688 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $17,615 and $8,605 at February 2, 1997 and October 12, 1997, respectively 88,889 50,764 Goodwill, less accumulated amortization of $99,057 and $123,453 at February 2, 1997 and October 12, 1997, respectively 1,310,956 1,286,560 Other, net 24,824 20,753 ---------- ---------- $3,131,993 $3,076,768 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 2 5 RALPHS GROCERY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
February 2, October 12, LIABILITIES AND STOCKHOLDER'S DEFICIT 1997 1997 ----------- ----------- (unaudited) CURRENT LIABILITIES: Accounts payable $ 343,704 $ 302,081 Accrued payroll and related liabilities 106,764 110,476 Accrued interest 31,011 58,247 Other accrued liabilities 261,582 216,889 Income taxes payable 1,956 1,929 Current portion of self-insurance liabilities 48,251 48,251 Current portion of long-term debt 4,465 6,409 Current portion of obligations under capital leases 28,041 32,047 ----------- ----------- Total current liabilities 825,774 776,329 SENIOR DEBT, net of current portion 1,263,142 1,314,024 OBLIGATIONS UNDER CAPITAL LEASES 126,336 133,177 SENIOR SUBORDINATED DEBT 671,222 689,379 DEFERRED INCOME TAXES 21,074 20,874 SELF-INSURANCE LIABILITIES 91,332 87,758 LEASE VALUATION RESERVE 62,389 56,314 OTHER NON-CURRENT LIABILITIES 106,286 108,416 COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S DEFICIT: Common stock, $.01 par value, 5,000,000 shares authorized; 1,513,938 shares issued and outstanding at February 2, 1997 and October 12, 1997, respectively 15 15 Additional capital 466,783 466,933 Notes receivable from stockholders of parent (592) (584) Retained deficit (501,768) (575,867) ----------- ----------- Total stockholder's deficit (35,562) (109,503) ----------- ----------- $ 3,131,993 $ 3,076,768 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. 3 6 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
12 Weeks 12 Weeks Ended Ended October 6, October 12, 1996 1997 ----------- ----------- SALES $ 1,221,018 $ 1,230,522 COST OF SALES (including purchases from related parties of $19,829 and $16,453 for the 12 weeks ended October 6, 1996 and the 12 weeks ended October 12, 1997, respectively) 957,086 976,662 ----------- ----------- GROSS PROFIT 263,932 253,860 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 211,064 200,867 AMORTIZATION OF GOODWILL 8,218 8,132 ----------- ----------- OPERATING INCOME 44,650 44,861 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs 53,721 52,637 Amortization of deferred financing costs 2,794 916 ----------- ----------- 56,515 53,553 LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES (11,865) (8,692) PROVISION FOR INCOME TAXES -- -- ----------- ----------- LOSS BEFORE EXTRAORDINARY CHARGES (11,865) (8,692) EXTRAORDINARY CHARGES -- -- ----------- ----------- NET LOSS $ (11,865) $ (8,692) =========== =========== LOSS PER COMMON SHARE: Loss before extraordinary charges $ (7.84) $ (5.74) Extraordinary charges -- -- ----------- ----------- Net loss $ (7.84) $ (5.74) =========== =========== Average Number of Common Shares Outstanding 1,513,938 1,513,938 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 4 7 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 6, October 12, 1996 1997 ----------- ----------- SALES $ 3,695,594 $ 3,778,470 COST OF SALES (including purchases from related parties of $67,694 and $48,958 for the 36 weeks ended October 6, 1996 and the 36 weeks ended October 12, 1997, respectively) 2,941,360 3,000,531 ----------- ----------- GROSS PROFIT 754,234 777,939 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 626,809 615,933 AMORTIZATION OF GOODWILL 24,403 24,396 ----------- ----------- OPERATING INCOME 103,022 137,610 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs 160,545 159,320 Amortization of deferred financing costs 7,862 4,406 ----------- ----------- 168,407 163,726 LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES (65,385) (26,116) PROVISION FOR INCOME TAXES -- -- ----------- ----------- LOSS BEFORE EXTRAORDINARY CHARGES (65,385) (26,116) EXTRAORDINARY CHARGES -- 47,983 ----------- ----------- NET LOSS $ (65,385) $ (74,099) =========== =========== LOSS PER COMMON SHARE: Loss before extraordinary charges $ (43.19) $ (17.25) Extraordinary charges -- (31.69) ----------- ----------- Net loss $ (43.19) $ (48.94) =========== =========== Average Number of Common Shares Outstanding 1,513,938 1,513,938 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 5 8 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 6, October 12, 1996 1997 ----------- ----------- CASH PROVIDED BY OPERATING ACTIVITIES: Cash received from customers $ 3,695,594 $ 3,778,470 Cash paid to suppliers and employees (3,443,282) (3,592,757) Interest paid (128,831) (132,452) Income taxes paid -- (27) Interest received 1,610 322 Other, net (276) (8,861) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 124,815 44,695 CASH USED BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment 23,680 25,736 Payment for purchase of property and equipment (74,328) (111,154) Payment of acquisition costs, net of cash acquired (5,573) (6,823) Other, net (2,530) (1,959) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (58,751) (94,200) CASH PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from the issuance of long-term debt 94,625 721,961 Payments of long-term debt (58,284) (688,432) Payments of capital lease obligations (18,730) (20,344) Increase (decrease) in revolving loan, net (79,400) 37,500 Capital contribution from parent -- 150 Deferred financing costs and other (5,236) (5,395) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (67,025) 45,440 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (961) (4,065) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67,983 67,589 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,022 $ 63,524 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 6 9 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 6, October 12, 1996 1997 --------- --------- RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (65,385) $ (74,099) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 119,487 121,047 Non-cash extraordinary charges -- 39,122 Amortization of debt discount 103 322 Amortization of debt premium -- (368) Loss (gain) on sale of assets 276 (10) Change in assets and liabilities, net of effects from acquisition of business: Accounts and notes receivable 1,858 5,394 Inventories 19,864 9,201 Prepaid expenses and other (906) (9,482) Accounts payable and accrued liabilities 44,285 (42,630) Self-insurance liabilities 5,233 (3,575) Deferred income taxes -- (200) Income taxes payable -- (27) --------- --------- Total adjustments 190,200 118,794 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 124,815 $ 44,695 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Fixed assets acquired through the issuance of capital leases $ 23,912 $ 36,084 ========= ========= Retirement of capital leases $ -- $ 4,893 ========= =========
The accompanying notes are an integral part of these consolidated statements. 7 10 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock ----------------------- Number Total of Stockholder's Additional Retained Stockholder's Shares Amount Notes Capital Deficit Deficit --------- --------- ------------- --------- --------- --------- BALANCES AT FEBRUARY 2, 1997 1,513,938 $ 15 $ (592) $ 466,783 $(501,768) $ (35,562) Payments on Stockholder's Notes -- -- 8 -- -- 8 Capital contribution by F4L Holdings, Inc. -- -- -- 150 -- 150 Net loss (unaudited) -- -- -- -- (74,099) (74,099) --------- --------- --------- --------- --------- --------- BALANCES AT OCTOBER 12, 1997 (unaudited) 1,513,938 $ 15 $ (584) $ 466,933 $(575,867) $(109,503) ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 8 11 RALPHS GROCERY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 12, 1997 (UNAUDITED) 1. ORGANIZATION AND ACQUISITION Ralphs Grocery Company (the "Company"), a wholly-owned subsidiary of Food 4 Less Holdings, Inc. ("Holdings"), is a retail supermarket company with a total of 406 stores which are located in Southern California (342), Northern California (27) and certain areas of the Midwest (37). The Company is the largest supermarket operator in Southern California. The Company operates the second largest conventional supermarket chain in the region under the "Ralphs" name and the largest warehouse supermarket chain in the region under the "Food 4 Less" name. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated balance sheet and statement of stockholder's deficit of the Company as of October 12, 1997 and the consolidated statements of operations and cash flows for the interim periods ended October 6, 1996 and October 12, 1997 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles and, therefore, should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1997. The results of operations for the interim periods are not necessarily indicative of the results for a full fiscal year. Inventories Inventories, which consist primarily of grocery products, are stated at the lower of cost or market. Cost has been principally determined using the last-in, first-out ("LIFO") method. If inventories had been valued using the first-in, first-out ("FIFO") method, inventories would have been higher by $24.3 million and $26.6 million at February 2, 1997 and October 12, 1997, respectively, and gross profit and operating income would have been greater by $3.7 million and $2.2 million for the 36 weeks ended October 6, 1996 and October 12, 1997, respectively. Income Taxes The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. Deferred taxes result from the future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," that the ultimate realization of net deferred tax assets is more likely than not. For the period ended October 12, 1997, the estimated effective income tax rate is less than the U.S. statutory rate primarily due to a 100% valuation allowance provided against the additional deferred tax assets that arose from the current operating loss. 9 12 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. Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the October 12, 1997 presentation. New Accounting Standards In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128") was issued. SFAS No. 128 is effective for earnings per share calculations for periods ending after December 15, 1997. The new method of calculating earnings per share will have no effect on the Company's historical earnings per share. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") was issued. Adoption of this statement will not have a material effect on historical results of operations. 3. RESTRUCTURING CHARGE During the 36 weeks ended October 12, 1997, the Company utilized $2.8 million and $2.9 million of the remaining restructuring reserve related to the fiscal 1995 $75.2 and $47.9 million restructuring charges, respectively. The amounts utilized primarily include write-downs of property and equipment ($1.6 million) and payments for lease obligations ($3.6 million). At October 12, 1997 approximately $19.6 million of the restructuring accrual related to the $75.2 million charge and $14.1 million of the restructuring accrual related to the $47.9 million charge remained accrued on the Company's balance sheet consisting primarily of provisions for lease obligations. As of February 2, 1997 the Company has completed a majority of the restructuring actions, although certain lease obligations will continue through 2010. 4. DEBT During the first quarter of fiscal 1997, the Company issued $155 million principal amount of 11% Senior Subordinated Notes due 2005 (the "1997 11% Senior Subordinated Notes") with terms substantially identical to the Company's existing 11% Senior Subordinated Notes at a price of 105.5% of their principal amount, resulting in gross proceeds of $163.5 million. The proceeds were used to redeem all of the Company's $145 million principal amount of 13.75% Senior Subordinated Notes at a price of 106.1% of their principal amount and to pay the related accrued interest through the redemption date, which was April 28, 1997. The remaining proceeds were used to pay fees and expenses associated with the issuance of the 1997 11% Senior Subordinated Notes. During the first quarter of fiscal 1997, the Company also amended and restated its existing credit facility ("Old Credit Facility") to lower interest margins and allow more flexibility with respect to application of proceeds from certain asset sales and capital expenditures. The amended and restated credit facility (the "New Credit Facility") consists of a $200.0 million Term Loan A Facility and a $350.0 million Term Loan B Facility (together, the "Term Loans") and a $325.0 million Revolving Credit Facility ("Revolving Facility") under which working capital loans may be made and commercial or standby letters of credit in the maximum of $150.0 million may be issued. 10 13 Borrowings under the New Credit Facility bear interest at the bank's Base Rate (as defined) plus a margin ranging from 0.25 percent to 1.75 percent or the Eurodollar Rate (as defined) plus a margin ranging from 1.25 percent to 2.75 percent. At October 12, 1997, $548.3 million was outstanding under the Term Loans, $136.9 million was outstanding under the Revolving Facility, and $75.5 million of standby Letters of Credit had been issued on behalf of the Company. At October 12, 1997, the weighted average interest rates on the Term Loans and on the Revolving Facility were 7.82 percent and 7.83 percent, respectively. Quarterly principal installments on the Term Loans continue to 2004, with principal amounts due as follows: $2.6 million in fiscal 1997, $3.5 million in fiscal 1998, $25.5 million in fiscal 1999, $62.6 million in fiscal 2000, $87.5 million in fiscal 2001 and $368.3 million thereafter. As a result of the refinancings described above, the Company recorded extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0 million, consisting of the call premium on the 13.75% Senior Subordinated Notes and the write-off of deferred financing costs associated with the Old Credit Facility and the 13.75% Senior Subordinated Notes. 5. RELATED PARTY TRANSACTIONS During the 12 weeks ended October 12, 1997 and October 6, 1996, the Company purchased $16.5 million and $19.8 million, respectively, in inventory from Certified Grocers. During the 36 weeks ended October 12, 1997 and October 6, 1996, the Company purchased $49.0 million and $67.7 million, respectively, in inventory from Certified Grocers. 6. SUBSEQUENT EVENT On November 6, 1997, Holdings, which is the parent of the Company, Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"), and FFL Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Fred Meyer ("Acquisition"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Acquisition would merge with and into Holdings (the "Merger"), subject to certain conditions being satisfied or waived. Pursuant to the Merger Agreement, the stockholders of Holdings would receive an aggregate of the greater of (i) 22.5 million shares of Fred Meyer Common Stock or (ii) the lesser of (A) the number of shares of Fred Meyer Common Stock equal to $600 million divided by the average closing price of the Fred Meyer Common Stock on the New York Stock Exchange for 15 out of the 35 trading days ending on the second trading day preceding the effective date of the Merger or (B) 24 million shares of Fred Meyer Common Stock; provided, however, that such aggregate number of shares of Fred Meyer Common Stock will be reduced (i) to the extent necessary to terminate or otherwise satisfy Holdings' obligations under existing stock options and warrants and (ii) upon the occurrence of certain other events, in each case, as specified in the Merger Agreement. In addition, Fred Meyer would assume or refinance the debt of Holdings and the Company. Conditions to the consummation of the Merger include the receipt of regulatory approvals and approval by the stockholders of Fred Meyer and Holdings. Certain shareholders of Holdings holding approximately 64.3% of the aggregate voting power of Holdings have entered into agreements to vote their Holdings shares in favor of the Merger. 11 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS On November 6, 1997, Food 4 Less Holdings, Inc. ("Holdings"), which is the parent of Ralphs Grocery Company (the "Company"), Fred Meyer, Inc. ("Fred Meyer"), and FFL Acquisition Corp., a wholly owned subsidiary of Fred Meyer ("Acquisition"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Acquisition would merge with and into Holdings (the "Merger"), subject to certain conditions being satisfied or waived. Pursuant to the Merger Agreement, the stockholders of Holdings would receive an aggregate of the greater of (i) 22.5 million shares of Fred Meyer Common Stock or (ii) the lesser of (A) the number of shares of Fred Meyer Common Stock equal to $600 million divided by the average closing price of the Fred Meyer Common Stock on the New York Stock Exchange for 15 out of the 35 trading days ending on the second trading day preceding the effective date of the Merger or (B) 24 million shares of Fred Meyer Common Stock; provided, however, that such aggregate number of shares of Fred Meyer Common Stock will be reduced (i) to the extent necessary to terminate or otherwise satisfy Holdings' obligations under existing stock options and warrants and (ii) upon the occurrence of certain other events, in each case, as specified in the Merger Agreement. In addition, Fred Meyer will assume or refinance the debt of Holdings and the Company. Conditions to the consummation of the Merger include the receipt of regulatory approvals and approval by the stockholders of Fred Meyer and Holdings. Certain shareholders of Holdings holding approximately 64.3% of the aggregate voting power of Holdings have entered into agreements to vote their Holdings shares in favor of the Merger. Concurrently with the execution of the Merger Agreement, Fred Meyer executed an agreement and plan of merger with Quality Food Centers, Inc. ("QFC") pursuant to which QFC will become a wholly-owned subsidiary of Fred Meyer. QFC operates retail supermarkets in the State of Washington and in Southern California. The Merger is an independent transaction and is not conditioned on the consummation of Fred Meyer's merger with QFC. RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth the selected unaudited operating results of the Company for the 12 and 36 weeks ended October 6, 1996 and October 12, 1997, respectively:
12 Weeks Ended 36 Weeks Ended ----------------------------------------- ---------------------------------------- October 6, 1996 October 12, 1997 October 6, 1996 October 12, 1997 --------------- ---------------- --------------- ---------------- (in millions) (unaudited) Sales $ 1,221.0 100.0% $ 1,230.5 100.0% $ 3,695.6 100.0% $ 3,778.5 100.0% Gross profit 263.9 21.6 253.9 20.6 754.2 20.4 777.9 20.6 Selling, general and administrative expenses 211.1 17.3 200.9 16.3 626.8 17.0 615.9 16.3 Amortization of goodwill 8.2 0.7 8.1 0.7 24.4 0.7 24.4 0.6 Operating income 44.7 3.7 44.9 3.6 103.0 2.8 137.6 3.6 Interest expense 56.5 4.6 53.6 4.4 168.4 4.6 163.7 4.3 Provision for income taxes -- -- -- -- -- -- -- -- Loss before extraordinary charges (11.9) (1.0) (8.7) (0.7) (65.4) (1.8) (26.1) (0.7) Extraordinary charges -- -- -- -- -- -- 48.0 1.3 Net loss $ (11.9) (1.0)% $ (8.7) (0.7)% $ (65.4) (1.8)% $ (74.1) (2.0)%
Sales. Sales for the 12 weeks ended October 12, 1997 increased $9.5 million to $1,230.5 million from $1,221.0 million for the 12 weeks ended October 6, 1996 and increased $82.9 million to $3,778.5 million in the 36 weeks ended October 12, 1997 from $3,695.6 million in the 36 weeks ended October 6, 1996. The increases in sales were primarily attributable to 0.4 percent and 2.2 percent increases in comparable store sales for the 12 and 36 week periods ended October 12, 1997, respectively, and the continued success of new store openings, partially offset by store closings and the recent deflationary environment. Since the beginning of fiscal 1996, 32 stores have 12 15 been opened and 35 stores have been closed and a total of 58 stores have been remodeled. The third quarter of fiscal 1997 represents the sixth consecutive quarter that the Company has achieved positive comparable store sales. The increases in comparable store sales reflect consumers' favorable response to the Company's "First in Southern California" marketing program, which focuses on the Company's lower price program in conjunction with its premier offering of quality, selection and customer service, as well as its continuing remodeling program. During the third quarter, the Company completed the development of the first phase of its "Ralphs Club Card" program and launched the marketing program shortly after the quarter ended. The "Ralphs Club Card" program is a frequent shopper program designed to increase customer shopping frequency and transaction size and to provide valuable information about consumer shopping habits. The Company estimates that it will incur one-time costs of approximately $10 million to develop and launch the program, $2 million of which was incurred in the third quarter. Gross Profit. Gross profit decreased as a percentage of sales from 21.6 percent in the 12 weeks ended October 6, 1996 to 20.6 percent in the 12 weeks ended October 12, 1997 and increased as a percentage of sales from 20.4 percent in the 36 weeks ended October 6, 1996 to 20.6 percent in the 36 weeks ended October 12, 1997. The decrease in gross profit margin in the 12 weeks ended October 12, 1997 is primarily attributable to competitive promotional activity and higher advertising costs as the Company prepares to launch the Ralphs Club Card. The increase in gross profit margin in the 36 weeks ended October 12, 1997 reflects a reduction in warehousing and distribution costs as a result of the consolidation of the Company's distribution operations, as well as a reduction in the cost of goods sold as the benefits of product procurement programs instituted by the Company are realized, partially offset by the factors discussed above. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $211.1 million and $200.9 million for the 12 weeks ended October 6, 1996 and October 12, 1997, respectively, and were $626.8 million and $615.9 million for the 36 weeks ended October 6, 1996 and October 12, 1997, respectively. SG&A decreased as a percentage of sales from 17.3 percent to 16.3 percent for the 12 weeks ended October 6, 1996 and October 12, 1997, respectively, and decreased as a percentage of sales from 17.0 percent to 16.3 percent for the 36 weeks ended October 6, 1996 and October 12, 1997, respectively. The reduction in SG&A as a percentage of sales reflects the continued results of tighter expense and labor controls at the store level and continued administrative cost reductions, partially offset by start-up costs associated with the launch of the "Ralphs Club Card" program in Southern California. Additionally, the Company participates in multi-employer health and welfare plans for its store employees who are members of the United Food and Commercial Workers Union ("UFCW") and recognized pension suspension credits of $11.5 million and $11.8 million in the 36 weeks ended October 6, 1996 and the 36 weeks ended October 12, 1997, respectively. Operating Income. Primarily as a result of the factors discussed above, the Company's operating income increased slightly from $44.7 million in the 12 weeks ended October 6, 1996 to $44.9 million in the 12 weeks ended October 12, 1997 and increased from $103.0 million in the 36 weeks ended October 6, 1996 to $137.6 million in the 36 weeks ended October 12, 1997. Loss Before Extraordinary Charges. Primarily as a result of the factors discussed above, the Company's loss before extraordinary charges decreased from $11.9 million in the 12 weeks ended October 6, 1996 to $8.7 million in the 12 weeks ended October 12, 1997 and decreased from $65.4 million in the 36 weeks ended October 6, 1996 to $26.1 million in the 36 weeks ended October 12, 1997. Extraordinary Charges. Extraordinary charges of $48.0 million were recorded during the 12 weeks ended April 27, 1997. These charges relate to the call premium on the 13.75% Senior Subordinated Notes and the write-off of deferred financing costs associated with the Old Credit Facility and the 13.75% Senior Subordinated Notes. 13 16 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations, amounts available under the Company's $325.0 million revolving facility ("Revolving Facility") and lease financing are the Company's principal sources of liquidity. The Company believes that these sources will be adequate to meet its anticipated capital expenditure, working capital and debt service requirements for the remainder of fiscal 1997. At October 12, 1997, borrowings of $136.9 million under the Revolving Facility and $75.5 million of standby letters of credit were outstanding. The level of borrowings under the Company's Revolving Facility is dependent upon cash flows from operations, the timing of disbursements, seasonal requirements and capital expenditure activity. The Company is required to reduce loans outstanding under the Revolving Facility to $110.0 million for a period of not less than 30 consecutive days during the twelve consecutive month-period ended on the last day of fiscal 1997. The Company complied with this requirement in the second quarter of fiscal 1997. At November 14, 1997, the Company had $127.7 million available for borrowing under the Revolving Facility. During the 36-week period ending October 12, 1997, cash provided by operating activities was approximately $44.7 million compared to $124.8 million in the 36-week period ending October 6, 1996. The decline in cash from operating activities in the 36-week period ending October 12, 1997 is primarily due to the timing of payments of accounts payable and accrued liabilities and prepaid expenses. These reductions in cash were partially offset by an improvement in operating income of approximately $34.6 million. The improvement in operating income can primarily be attributed to strong comparable store sales, a reduction in warehousing and distribution costs resulting from the consolidation of the Company's distribution operations, and a reduction in cost of goods sold as the benefits of product procurement programs are realized. The Company's principal use of cash in its operating activities is inventory purchases. The Company's high inventory turnover rate generally allows it to finance a substantial portion of its inventory through trade payables, thereby reducing its short-term borrowing needs. Cash used by investing activities was $94.2 million for the 36-week period ending October 12, 1997. Investing activities consisted primarily of capital expenditures of $111.2 million to build 16 new stores (6 of which had been completed at October 12, 1997) and the remodeling of 61 stores (38 of which had been completed at October 12, 1997). The Company currently anticipates that its aggregate capital expenditures for fiscal 1997 will be approximately $140.0 million (net of expected capital leases) and will include ten new stores and 45 remodels. Consistent with past practices, the Company intends to finance these capital expenditures primarily with cash provided by operations, borrowings under the Revolving Facility and through leasing transactions. At November 14, 1997, the Company had approximately $6.0 million of unused equipment leasing facilities. No assurance can be given that sources of financing for capital expenditures will be available or sufficient to finance its anticipated capital expenditure requirements; however, management believes the capital expenditure program has substantial flexibility and is subject to revision based on various factors, including changes in business conditions and cash flow requirements. Management believes that if the Company were to substantially reduce or postpone these programs, there would be no substantial impact on short-term operating profitability. However, management also believes that the construction of new stores is an important component of its future operating strategy. Consequently, management believes that if these programs were substantially reduced, future operating results, and ultimately its cash flow, would be adversely affected. The capital expenditures discussed above do not include any costs associated with the Merger or any other potential acquisitions which the Company could make to expand within its existing markets or to enter other markets. The Company has grown through acquisitions in the past and from time to time engages in discussions with potential sellers of individual stores, groups of stores or other retail supermarket chains. 14 17 The Company continues to monitor and evaluate the performance of individual stores as well as operating markets in relation to its overall business objectives. As a result of this evaluation, alternative strategies may be considered by the Company which could result in the disposition of certain assets. Cash provided by financing activities was $45.4 million for the 36-week period ending October 12, 1997, resulting primarily from refinancing activities. Refinancing activities consisted of the issuance of the 1997 11% Senior Subordinated Notes to refinance the Company's 13.75% Senior Subordinated Notes and the refinancing and amendment of the Old Credit Facility. In total, financing activities consisted primarily of proceeds of $722.0 million from the issuance of long-term debt and net borrowings of $37.5 million under the Revolving Facility, partially offset by principal payments of long-term debt of $688.4 million and capital lease payments of $20.3 million. During the first quarter of fiscal 1997, the Company issued the 1997 11% Senior Subordinated Notes with terms substantially identical to the Company's existing 11% Senior Subordinated Notes at a price of 105.5% of their principal amount, resulting in gross proceeds of $163.5 million. The proceeds were used to redeem all of the Company's $145 million principal amount of 13.75% Senior Subordinated Notes at a price of 106.1% of their principal amount and to pay the related accrued interest through the redemption date, which was April 28, 1997. The remaining proceeds were used to pay fees and expenses associated with the issuance of the 1997 11% Senior Subordinated Notes. During the first quarter, the Company also amended and restated its Old Credit Facility to lower interest margins and allow more flexibility with respect to application of proceeds from certain asset sales and capital expenditures. The amended and restated credit facility (the "New Credit Facility") consists of a $200.0 million Term Loan A Facility and a $350.0 million Term Loan B Facility (together, the "Term Loans") and a $325.0 million Revolving Credit Facility ("Revolving Facility") under which working capital loans may be made and commercial or standby letters of credit in the maximum of $150.0 million may be issued. Quarterly principal installments on the Term Loans continue to 2004, with principal amounts due as follows: $2.6 million in fiscal 1997, $3.5 million in fiscal 1998, $25.5 million in fiscal 1999, $62.6 million in fiscal 2000, $87.5 million in fiscal 2001 and $368.3 million thereafter. As a result of the refinancings described above, the Company recorded extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0 million, consisting of the call premium on the 13.75% Senior Subordinated Notes and write-off of deferred financing costs associated with the Old Credit Facility and the 13.75% Senior Subordinated Notes. The Company is a wholly-owned subsidiary of Holdings. Holdings has outstanding $135.7 million accreted value of Discount Debentures and $175.8 million principal amount of Pay-In-Kind Debentures. Holdings is a holding company which has no assets other than the capital stock of the Company. Holdings will be required to commence semi-annual cash payments of interest on the Discount Debentures and the Pay-In-Kind Debentures commencing December 15, 2000 in the amount of approximately $61 million per annum. Subject to the limitations contained in its debt instruments, the Company intends to make dividend payments to Holdings in amounts which are sufficient to permit Holdings to service its cash interest requirements. The Company may pay other dividends to Holdings in connection with certain employee stock repurchases and for routine administrative expenses. The Company is highly leveraged. At October 12, 1997, the Company's total long-term indebtedness (including current maturities) and stockholder's deficit were $2.2 billion and $109.5 million, respectively. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with available borrowings under the Revolving Facility and its other sources of liquidity (including lease financing), will be adequate to meet its anticipated requirements for working capital, capital expenditures, other 15 18 long-term liabilities and debt service payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that future cost savings and growth can be achieved. CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 When used in this report, the words "believe," "estimate," "expect," "project" and similar expressions, together with other discussion of future trends or results, are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. All of these forward-looking statements are based on estimates and assumptions made by management of the Company which, although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such estimates. The following important factors, among others, could cause the Company's results of operations to be adversely affected in future periods: (i) increased competitive pressures from existing competitors and new entrants, including price-cutting strategies, store openings and remodels; (ii) loss or retirement of key members of management or the termination of the Company's Consulting Agreement with Yucaipa; (iii) inability to negotiate more favorable terms with suppliers; (iv) increases in interest rates or the Company's cost of borrowing or a default under any material debt agreements; (v) inability to develop new stores in advantageous locations or to successfully convert or remodel additional stores; (vi) prolonged labor disruption; (vii) deterioration in general or regional economic conditions, particularly in Southern California, the Company's principal operating region; (viii) adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; (ix) loss of customers or sales weakness; (x) adverse determinations in connection with pending or future litigation or other material claims against the Company; (xi) inability to achieve future sales levels or other operating results that support its programs to reduce costs; (xii) the unavailability of funds for capital expenditures; (xiii) increases in labor costs; (xiv) inability to control inventory levels; (xv) operational inefficiencies in distribution or other Company systems and (xvi) any failure to consummate the Merger on a timely basis. Many of such factors are beyond the control of the Company. There can be no assurance that the Company will not incur new or additional unforeseen costs in connection with the ongoing conduct of its business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. In addition, assumptions relating to budgeting, marketing, advertising, litigation and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. 16 19 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27. Financial Data Schedule. (b) Reports on Form 8-K The Company filed a current report on Form 8-K dated November 13, 1997 with respect to the acquisition by Fred Meyer, Inc. and FFL Acquisition Corp. ("Acquisition") of Food 4 Less Holdings, Inc. ("Holdings") pursuant to a merger of Acquisition with and into Holdings. 17 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Los Angeles, State of California. Dated: November 26, 1997 RALPHS GROCERY COMPANY /s/ John T. Standley --------------------------------------- John T. Standley Senior Vice President and Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED CONSOLIDATED BALANCE SHEETS AND UNAUDITED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 36 WEEKS ENDED OCTOBER 12, 1997 1,000 9-MOS FEB-01-1998 FEB-03-1997 OCT-12-1997 63,524 0 45,708 (3,630) 492,894 626,261 1,447,859 (367,171) 3,076,768 776,329 2,136,580 0 0 15 (109,518) 3,076,768 3,778,470 3,778,470 3,000,531 3,000,531 640,329 0 163,726 (26,116) 0 (26,116) 0 47,983 0 (74,099) (48.94) 0
-----END PRIVACY-ENHANCED MESSAGE-----