-----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, kh2mHZBy8CmoXcN1lVle2eMfT+kAJKSVhqDFgy9B9C133JuMEy6fEp+FzbqcSUgz 7bveiChnByzEShg+PJ2Whg== 0000950150-94-000727.txt : 19941116 0000950150-94-000727.hdr.sgml : 19941116 ACCESSION NUMBER: 0000950150-94-000727 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19941114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS SUPERMARKETS INC CENTRAL INDEX KEY: 0000835676 STANDARD INDUSTRIAL CLASSIFICATION: 5411 IRS NUMBER: 954222386 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451 FILM NUMBER: 94559941 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: 5400 IRS NUMBER: 480605992 STATE OF INCORPORATION: KS FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-01 FILM NUMBER: 94559942 BUSINESS ADDRESS: STREET 1: 3120 S KANSAS AVE CITY: TOPEKA STATE: KS ZIP: 66611 BUSINESS PHONE: 2132671501 MAIL ADDRESS: 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: 5411 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-02 FILM NUMBER: 94559943 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST STREET, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-03 FILM NUMBER: 94559944 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST ST,SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-04 FILM NUMBER: 94559945 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST ST, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: 5411 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-05 FILM NUMBER: 94559946 BUSINESS ADDRESS: STREET 1: 250M WEST FIRST ST, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 MAIL ADDRESS: 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: 5411 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-06 FILM NUMBER: 94559947 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST STREET, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: 5411 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-07 FILM NUMBER: 94559948 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST STREET, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: 5411 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-08 FILM NUMBER: 94559949 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST STREET, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: 5411 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-09 FILM NUMBER: 94559950 BUSINESS ADDRESS: STREET 1: 250 WEST FIRST STREET, SUITE 210 CITY: CLAREMONT STATE: CA ZIP: 91711 BUSINESS PHONE: 7146268776 MAIL ADDRESS: 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: FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-56451-10 FILM NUMBER: 94559951 BUSINESS ADDRESS: STREET 1: 777 SOUTH HARBOR BLVD CITY: LA HARSERA STATE: CA ZIP: 90631 BUSINESS PHONE: 7147382000 MAIL ADDRESS: STREET 2: 777 SOUTH HARBOR BLVD CITY: LA HARSRA STATE: CA ZIP: 90631 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1994 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FOOD 4 LESS SUPERMARKETS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5411 95-4222386 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) SUBSIDIARY REGISTRANTS ALPHA BETA COMPANY CALIFORNIA 95-1456805 BAY AREA WAREHOUSE STORES, INC. CALIFORNIA 93-1087199 BELL MARKETS, INC. CALIFORNIA 94-1569281 CALA CO. DELAWARE 95-4200005 CALA FOODS, INC. CALIFORNIA 94-1342664 FALLEY'S, INC. KANSAS 48-0605992 FOOD 4 LESS OF CALIFORNIA, INC. CALIFORNIA 33-0293011 FOOD 4 LESS GM, INC. CALIFORNIA 95-439047 FOOD 4 LESS MERCHANDISING, INC. CALIFORNIA 33-0483193 FOOD 4 LESS OF SOUTHERN CALIFORNIA, INC. DELAWARE 33-0483203 (EXACT NAME OF REGISTRANT AS (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER SPECIFIED IN ITS CHARTER) INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
777 SOUTH HARBOR BOULEVARD LA HABRA, CALIFORNIA 90631 (714) 738-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES) ------------------------ MARK A. RESNIK, ESQ. VICE PRESIDENT AND SECRETARY FOOD 4 LESS SUPERMARKETS, INC. 777 SOUTH HARBOR BOULEVARD LA HABRA, CALIFORNIA 90631 (714) 738-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: THOMAS C. SADLER, ESQ. WILLIAM M. HARTNETT, ESQ. LATHAM & WATKINS CAHILL GORDON & REINDEL 633 WEST FIFTH STREET 80 PINE STREET LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10005 (213) 485-1234 (212) 701-3000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ PROPOSED PROPOSED TITLE OF EACH MAXIMUM MAXIMUM AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------------------ % Senior Notes due 2004....................... $175,000,000 100% $175,000,000 $60,344 Guarantees of the % Senior Notes due 2004....... -- -- -- (2) 13.75% Senior Subordinated Notes due 2005......... $145,000,000 100% $145,000,000 $50,000 Guarantees of the 13.75% Senior Subordinated Notes due 2005........................................ -- -- -- (2) 10.45% Senior Notes due 2000, as amended.......... -- -- -- (3) 13.75% Senior Subordinated Notes due 2001, as amended...................................... -- -- -- (4) - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of computing the registration fee pursuant to Rule 457. (2) Pursuant to Rule 457(n) no separate fee is required. (3) The amount to be registered will be equal to the principal amount of 10.45% Senior Notes due 2000, as amended, not exchanged for the % Senior Notes due 2004. The principal amount of % Senior Notes due 2004 and 10.45% Senior Notes due 2000, as amended, will not collectively exceed $175,000,000. (4) The amount to be registered will be equal to the principal amount of 13.75% Senior Subordinated Notes due 2001, as amended, not exchanged for the 13.75% Senior Subordinated Notes due 2005. The principal amount of 13.75% Senior Subordinated Notes due 2001, as amended, will not collectively exceed $145,000,000. ------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SECTION 8(A) MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FOOD 4 LESS SUPERMARKETS, INC. CROSS-REFERENCE SHEET PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
ITEM NO. FORM S-4 CAPTION PROSPECTUS CAPTION - -------- ----------------------------------------- ----------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Outside Front Cover Page; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front Cover Page; Outside Back Cover Page 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information............ Summary; Risk Factors; Business; Selected Historical Financial Data of Food 4 Less 4. Terms of the Transaction................. The Exchange Offers and Solicitation; Certain Federal Income Tax Considerations; The Proposed Amendments; Description of the New F4L Notes; Appendix A; Appendix B 5. Pro Forma Financial Information.......... Unaudited Pro Forma Combined Financial Statements 6. Material Contracts with the Company Being Acquired................................. * 7. Additional Information Required for Reoffering by Person and Parties Deemed to Be Underwriters....................... * 8. Interests of Named Experts and Counsel... Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. * 10. Information with Respect to S-3 Registrants.............................. * 11. Incorporation of Certain Information by Reference................................ * 12. Information with Respect to S-2 or S-3 Registrants.............................. * 13. Incorporation of Certain Information by Reference................................ * 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants........ Inside Front Cover Page; Summary; Pro Forma Capitalization; Selected Historical Financial Data of Food 4 Less; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Consolidated Financial Statements of Food 4 Less 15. Information with Respect to S-3 Companies................................ *
3
ITEM NO. FORM S-4 CAPTION PROSPECTUS CAPTION - -------- ---------------- ------------------ 16. Information with Respect to S-2 or S-3 Companies................................ * 17. Information with Respect to Companies Other than S-2 or S-3 Companies.......... * 18. Information If Proxies, Consents or Authorizations Are to Be Solicited....... * 19. Information If Proxies, Consents or Authorizations Are not to Be Solicited, or in an Exchange Offer.................. Management; Executive Compensation; Principal Stockholders; Certain Relationships and Related Transactions
- --------------- * Inapplicable 4 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1994 NO CONSENT WILL BE SOLICITED NOR WILL ANY EXCHANGE OFFER BE MADE AND NO TENDER OF OLD SECURITIES PURSUANT TO THE EXCHANGE OFFERS MAY BE MADE OR WILL BE ACCEPTED UNTIL THE REGISTRATION STATEMENT RELATING TO THE SECURITIES OFFERED HEREBY BECOMES EFFECTIVE UNDER THE SECURITIES ACT OF 1933. ------------------------ PROSPECTUS AND SOLICITATION STATEMENT FOOD 4 LESS SUPERMARKETS, INC. TO BE COMBINED THROUGH MERGER WITH RALPHS GROCERY COMPANY OFFERS TO EXCHANGE UP TO $175,000,000 OF ITS % SENIOR NOTES DUE 2004 FOR ITS 10.45% SENIOR NOTES DUE 2000 AND UP TO $145,000,000 OF ITS 13.75% SENIOR SUBORDINATED NOTES DUE 2005 FOR ITS 13.75% SENIOR SUBORDINATED NOTES DUE 2002 AND SOLICITATION OF CONSENTS ------------------------ Food 4 Less Supermarkets, Inc. ("Food 4 Less") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and Solicitation Statement and in the accompanying Consent and Letter of Transmittal (the "Letter of Transmittal"), (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 its 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," and together with the F4L Senior Notes Exchange Offer, the "Exchange Offers") such Old F4L Senior Subordinated Notes for its 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.
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.
The New F4L Senior Notes will bear interest at a rate of % per annum (which will be set based upon the Applicable Treasury Rate (as defined) plus 350 basis points (3.50 percentage points)). The Exchange Offers and the Solicitation (as defined) 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 become the obligations of the Company. THE EXCHANGE OFFERS AND THE SOLICITATION (AS DEFINED) WILL EXPIRE AT 10:00 A.M., NEW YORK CITY TIME, ON , 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). CONSENTS MAY BE REVOKED AND TENDERS MAY BE WITHDRAWN AT ANY TIME UNTIL 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. ------------------------ 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 ------------------------ The date of this Prospectus and Solicitation Statement is , 1994 5 (cover page continued) 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 at least 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 November 1, 1994, 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. Interest on the New F4L Senior Notes will be set based upon the Applicable Treasury Rate plus 350 basis points (3.50 percentage points). Interest will be payable semiannually on each January and July , commencing on July , 1995, at the rate set forth above. The New F4L Senior Notes will mature on January , 2004. Interest on the New F4L Senior Subordinated Notes will be payable semiannually on each January and July , commencing July , 1995, at the rate of 13.75% per annum. The New F4L Senior Subordinated Notes will mature on January , 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 April 15, 1996 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. Upon a Change of Control (as defined) each holder of New F4L Notes has 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 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 September 17, 1994, 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 $1,047.6 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 Senior Unsecured Term Loan (as defined), 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. 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 September 17, 1994, on a pro ii 6 (cover page continued) 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 $1,244.0 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 $116.7 million and the Company would have had $224.0 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. In addition to the Exchange Offers and the Solicitation, (i) Food 4 Less is (A) offering 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") to exchange (the "RGC Exchange Offer") such Old RGC Notes for new % Senior Subordinated Notes due 2005 of F4L (the "New RGC Notes") plus $5.00 in cash for each $1,000 principal amount of Old RGC Notes tendered for exchange, and (B) 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 Exchange Offer and the solicitation of consents being referred to herein collectively as the "RGC Exchange Offers"), and (ii) Food 4 Less Holdings, Inc. ("Holdings"), which currently owns 100% of the outstanding stock of Food 4 Less, is soliciting consents from holders of its 15.25% Senior Discount Notes due 2004 (the "Holdings Discount Notes") to certain amendments to the indenture (the "Holdings Discount Note Indenture"), under which the Holdings Discount Notes were issued, with respect to which Holdings will make a cash consent payment of $20.00 for each $1,000 principal amount of Holdings Discount Notes for which a consent is properly delivered and accepted (such transaction being referred to herein as the "Holdings Consent Solicitation"). Prior to the Merger, Holdings will merge with and into its parent, Food 4 Less, Inc. ("FFL"), which will be the surviving corporation (the "FFL Merger"). See "Description of Holding Company Indebtedness" and "The RGC Exchange Offers." The RGC Exchange Offers and the Holdings Consent Solicitation 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 Exchange Offers are collectively referred to herein as the "RGC Senior Subordinated Notes." The Merger will constitute a Change of Control (as defined in the Old RGC Indentures) under the Old RGC Indentures. In the event that following the consummation of the Merger there is a Rating Decline (as defined) with respect to the Old RGC Notes, the Company will be obligated under the Old RGC Indentures to make a change of control purchase offer 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"). Concurrently with the consummation of the Exchange Offers and the Other Debt Financing Transactions, Food 4 Less and RGC intend to refinance the existing long term debt (including Senior Indebtedness) of Food 4 Less and RGC with long-term debt of the Company and to obtain additional senior financing (the "Bank Financing") pursuant to a senior facility of up to $1,225 million (the "New Credit Facility") and to obtain $150 million in equity financing (the "New Equity Investment"). In addition, the Company will obtain a $150 million senior unsecured term loan (the "Senior Unsecured Term Loan") and FFL will issue as part of the consideration for the RSI Merger $100 million aggregate principal amount of 13% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller Debentures"). 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 the satisfaction or waiver of certain conditions, including (i) at least 80% of the aggregate principal amount of each of the outstanding Old F4L Senior Notes and the outstanding Old F4L Senior Subordinated Notes being validly tendered and not withdrawn pursuant to the Exchange Offers prior to the Expiration Date (the "Minimum Tender"), iii 7 (cover page continued) (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, (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment and the execution of the Senior Unsecured Term Loan, and (vi) certain other conditions. There can be no assurance that such conditions will be satisfied or waived. See "The Exchange Offers and Solicitation -- Conditions." 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 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. 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. 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 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 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 , 1994. iv 8 (cover page continued) AVAILABLE INFORMATION Food 4 Less has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (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 Securities Exchange Act of 1934, as amended (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 60661. 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, the 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 Prospectus and Solicitation Statement summarizes the contents and terms of documents not included herewith. Certain of these documents are available upon request from, as applicable, Food 4 Less at 777 South Harbor Blvd., La Habra, California 90631, Attn: Robert P. Bermingham, Esq., Vice President and General Counsel; RGC at 1100 West Artesia Blvd., Compton, California 90220, Attn: Jan Charles Gray, Esq., Senior Vice President, General Counsel and Secretary; or D.F. King & Co., Inc., at the address 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. v 9 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................................. v SUMMARY............................................................................... 1 COMPARISON OF OLD F4L SENIOR NOTES AND NEW F4L SENIOR NOTES........................... 9 COMPARISON OF OLD F4L SENIOR SUBORDINATED NOTES AND NEW F4L SENIOR SUBORDINATED NOTES............................................................................... 11 RISK FACTORS.......................................................................... 22 THE MERGER AND THE FINANCING.......................................................... 28 PRO FORMA CAPITALIZATION.............................................................. 31 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 32 SELECTED HISTORICAL FINANCIAL DATA OF RALPHS.......................................... 39 SELECTED HISTORICAL FINANCIAL DATA OF FOOD 4 LESS..................................... 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 43 BUSINESS.............................................................................. 58 MANAGEMENT............................................................................ 72 EXECUTIVE COMPENSATION................................................................ 74 PRINCIPAL STOCKHOLDERS................................................................ 80 DESCRIPTION OF CAPITAL STOCK.......................................................... 81 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 84 THE EXCHANGE OFFERS AND SOLICITATION.................................................. 86 DESCRIPTION OF THE NEW F4L NOTES...................................................... 101 MARKET PRICES OF THE OLD F4L NOTES.................................................... 130 THE PROPOSED AMENDMENTS............................................................... 130 THE RGC EXCHANGE OFFERS............................................................... 132 DESCRIPTION OF THE NEW CREDIT FACILITY................................................ 134 DESCRIPTION OF THE SENIOR UNSECURED TERM LOAN......................................... 136 DESCRIPTION OF HOLDING COMPANY INDEBTEDNESS........................................... 139 DESCRIPTION OF OTHER COMPANY INDEBTEDNESS............................................. 141 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................. 141 LEGAL MATTERS......................................................................... 145 EXPERTS............................................................................... 146 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
vi 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 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 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 343 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 $100 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 EBITDA of $350 million for the 52 weeks ended June 25, 1994. If the anticipated cost savings had been fully achieved during the pro forma period, the Company would have had an adjusted EBITDA of $450 million. 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 274 Ralphs conventional format stores and 69 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 $100 million of net annual cost savings will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $149 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 60% 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 $100 million; however, management has made 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 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 annual advertising cost savings of approximately $28 million will be achieved in the first full year of combined operations. -- 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 will reduce outside storage requirements, resulting in lower transportation, labor and equipment 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 $28 million will be achieved by the third full year of combined operations after certain capital expenditures on existing facilities and the renegotiation of certain existing leases are completed. The Company continues to evaluate alternative plans for the consolidation of its warehousing and distribution activities. These include extending the period of time in which Food 4 Less' La Habra distribution facility is used to support Ralphs' two primary facilities. Such a plan, if implemented, would reduce or delay the estimated cost savings in this area, but would also reduce or delay the required capital expenditures. -- 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 will achieve annual cost savings of approximately $12 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 reduction of occupancy costs, the consolidation of management information systems and a decreased reliance on certain outside services and consultants. Management estimates that annual savings of approximately $17 million associated with consolidating administrative functions will be achieved by the second full year of combined operations. 2 12 - - 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 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) reduced in-store storage space to increase available selling space, (iii) added opportunities in forward buying programs and (iv) an increased 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. - - STORE LOCATIONS. As a result of Ralphs' 121-year history and Alpha Beta Company's ("Alpha Beta") 90-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 ten 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 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, Holdings will merge with and into its parent, FFL, which will be the surviving corporation (the "FFL Merger"). As a result of the Merger and the FFL Merger, the Company will become a wholly-owned subsidiary of FFL. 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 become 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 3 13 purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $425 million in cash and $100 million principal amount of the Seller Debentures to be issued by FFL. FFL will use $150 million of cash received from the New Equity Investment, together with $100 million principal amount of the Seller Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. FFL 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 $900 million aggregate principal amount of 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"), none of which is anticipated to be drawn at closing. - Borrowings of $150 million under the Senior Unsecured Term Loan to be provided by an affiliate of Bankers Trust (the "Senior Unsecured Lender"), to fund the purchase of RSI common stock, repayment of certain outstanding indebtedness and related costs. - The issuance of preferred stock in a private placement by FFL 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 the Dealer Managers or their affiliates and other institutional investors, for proceeds of $150 million pursuant to the New Equity Investment. - The exchange by Food 4 Less pursuant to the RGC Exchange Offer of 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 $5.00 in cash per $1,000 principal amount exchanged, 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 Exchange Offer that at least 80% of the outstanding principal amount of the Old RGC Notes are exchanged pursuant to the RGC Exchange Offer. - The Exchange Offers made hereunder to holders of Old F4L Notes to exchange such Old F4L Notes for New F4L Notes and the Exchange Payment, together with the solicitation of consents from such holders to certain amendments to the Old F4L Indentures. - The purchase by FFL of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of the proceeds of the New Equity Investment and $100 million principal amount of the Seller 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 assumption by the Company, pursuant to the Merger, of approximately $263.7 million of other indebtedness of RGC and Food 4 Less. - The solicitation of certain consents pursuant to the Holdings Consent Solicitation from the holders of the Holdings Discount Notes to certain amendments to the Holdings Discount Notes Indenture. 4 14 The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of January 15, 1995. This presentation assumes that $360 million principal amount of Old RGC Notes is tendered into the RGC Exchange Offers and $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers. 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 Exchange Offers and the Exchange Offers. 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)................ $ 780.0 Purchase RSI Common Stock(f)....... $ 425.9 New Revolving Facility(b)........ 0.0 Repay Ralphs 1992 Credit Senior Unsecured Term Loan(c).... 150.0 Agreement........................ 279.5 New Equity Investment(d)......... 150.0 Repay F4L Credit Agreement......... 170.0 -------- Pay Accrued Interest(g)............ 17.0 Pay EAR Liability(h)............... 22.8 Repay Other Debt................... 46.3 Fees and Expenses.................. 118.5 -------- Total Cash Sources............ $1,080.0 Total Cash Uses.................... $1,080.0 ======== ======== NON-CASH SOURCES NON-CASH USES ---------------- ------------- New F4L Senior Notes............. $ 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.................... 360.0 Old RGC Notes Exchanged............ 360.0 Assumed Old RGC Notes............ 90.0 Assumed Old RGC Notes.............. 90.0 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt.......................... 263.7 Debt............................. 263.7 Seller Debentures(e)............. 100.0 Purchase RSI Common Stock(e)....... 100.0 -------- -------- Total Non-Cash Sources........ $1,133.7 Total Non-Cash Uses................ $1,133.7 ======== ========
- --------------- (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 $1,225 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 $900 million, comprised of a $450 million tranche with a six year term (the "Tranche A Loan"), a $175 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 $150 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 (as defined). 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 90 days following the Closing Date to refinance outstanding indebtedness, including to fund the Change of Control Offer, if any, and to refinance the Senior Unsecured Term Loan. 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 $101 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) Food 4 Less has accepted a commitment letter from the Senior Unsecured Lender pursuant to which it has agreed, subject to certain conditions, to provide the Company the $150 million aggregate principal amount Senior Unsecured Term Loan. See "Description of the Senior Unsecured Term Loan." 5 15 (d) Does not include the $10 million equity contribution by Ralphs management. See note (h) below. Concurrently with the New Equity Investment, certain existing stockholders of FFL, including affiliates of George Soros, will sell outstanding shares of FFL stock for an aggregate purchase price of $57.7 million (which represents the same price per share as will be paid in the New Equity Investment). The financing for such purchase will be provided by the New Equity Investors. See "Description of Capital Stock -- New Equity Investment." (e) In connection with the RSI Merger, FFL will issue $100 million principal amount of its 13% Senior Subordinated Pay-In-Kind Debentures due 2007 as part of the purchase price for the RSI common stock. See "Description of Holding Company Indebtedness -- The Seller Debentures." (f) Includes $425 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." (g) Represents accrued interest payable on all debt securities assumed to be tendered in the Exchange Offers and the RGC Exchange Offers. (h) Represents payments to Ralphs management with respect to the cancellation of outstanding equity appreciation rights (the "EARs" or "Equity Appreciation Rights") in connection with the Merger. Ralphs management will receive new FFL stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan." 6 16 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 and the FFL Merger and (ii) the corporate structure of the Company, and the anticipated outstanding indebtedness of the Company and its parent, FFL, 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, Holdings will merge with and into FFL, and FFL will be the surviving corporation in the FFL Merger. [See EDGAR Appendix] 7 17 [See EDGAR Appendix] 8 18 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 November 1, 1994, $175 million. Up to $175 million. OUTSTANDING INTEREST RATE The Old F4L Senior Notes bear interest at The New F4L Senior Notes will bear interest the rate of 10.45% per annum. at the rate of % per annum (which will be set based upon the Applicable Treasury Rate plus 350 basis points (3.50 percentage points)). INTEREST PAYMENT April 15 and October 15. January and July , commencing on July DATES , 1995. FINAL MATURITY DATE April 15, 2000. January , 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 April 15, 1996, 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 April 15 of the year set forth below: of the year set forth below: 1996.................................104.48% 1996.................................104.48% 1997.................................102.99% 1997.................................102.99% 1998.................................101.49% 1998.................................101.49% 1999 and thereafter..................100.00% 1999 and thereafter..................100.00% 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. 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.
9 19
OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES -------------------------------------------- -------------------------------------------- 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 September 17, Food 4 Less and its subsidiaries. 1994, on a pro forma basis after giving effect to the Merger and the Financing (and certain related assumptions) the Company would have had outstanding $1,047.6 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 and incurrence of liens; (iv) limitation on disposition of subordinated indebtedness; (iii) limitation assets; (v) limitation on dividend payment on liens; (iv) limitation on asset sales; restrictions affecting subsidiaries; (vi) (v) limitation on dividend and other payment guarantees of certain indebtedness; (vii) restrictions affecting subsidiaries; (vi) limitation on transactions with affiliates; guarantees of certain indebtedness; (vii) (viii) limitation on change of control; (ix) limitation on transactions with affiliates; limitation on mergers and certain other (viii) limitation on change of control; (ix) transactions; and (x) maintenance of Net limitation on mergers and certain other Worth. transactions; and (x) limitations on preferred stock of subsidiaries.
10 20 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 November 1, 1994, $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. January and July , commencing on July DATES , 1995. FINAL MATURITY DATE June 15, 2001. January , 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 year 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.
11 21
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 September 17, 1994, the Facility, the Senior Unsecured Term Loan Senior Indebtedness of Food 4 Less was Agreement, and the F4L Senior Notes. At approximately $1,244.0 million September 17, 1994, 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 $1,244.0 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 $116.7 million and the Company would have had $224.0 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; limitation on change of control; (ix) (viii) limitaiton on change of control; (ix) limitations on merger and certain other limitation on mergers and certain other transactions and (x) maintenance of Net transactions; and (x) limitation on Worth. preferred stock of subsidiaries.
12 22 PURPOSES OF THE EXCHANGE OFFERS AND CONSENT SOLICITATION The Exchange Offers and the Solicitation, together with the other financing 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 Exchange Offers, and the indebtedness incurred pursuant to the New Credit Facility and the Senior Unsecured Term Loan will become the obligations of the Company. In connection with the consummation of the Merger, Food 4 Less and RGC desire to replace the existing long-term debt of Food 4 Less and RGC with long-term debt of the Company in order to simplify the capital structure of the surviving entity in the Merger and to facilitate the operating and financial flexibility of the Company following the Merger. Accordingly, Food 4 Less is making the Exchange Offers to 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. 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, $1,000 principal amount of New F4L Senior Notes and $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, $1,000 principal amount of New F4L Senior Subordinated Notes and $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 Offers and Solicitation -- Acceptance of Old F4L Notes for Ex- 13 23 change; 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 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 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 (as defined) 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 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 November 1, 1994, 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 will expire at 10:00 a.m., New York City time, on , 1995, unless extended by Food 4 Less. Food 4 Less reserves the right to 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 extended by Food 4 Less, shall expire. See "The Exchange Offers and Solicitation -- Expiration Date; Extensions; Termination; Amendments." 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 14 24 Requisite Consents with respect to the applicable Old F4L Notes have been received and the applicable Supplemental Indenture relating to such Old F4L Notes has been executed and, thereafter, if the Exchange Offer with respect to such Old F4L Notes is terminated without any Old F4L Notes being exchanged 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 the satisfaction or waiver of certain conditions, including (i) satisfaction of the Minimum Tender (i.e., at least 80% of the aggregate principal amount of each of the outstanding Old F4L Senior Notes and Old F4L Senior Subordinated 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, (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment and the execution of the Senior Unsecured Term Loan, and (vi) certain other conditions. 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.................. 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, 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 15 25 the transaction for him. 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 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. 16 26 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") and CS First Boston Corporation ("CS First Boston") are serving as Dealer Managers in connection with the Exchange Offers and the Solicitation. Their telephone numbers are (212) 775-2995 and (212) 909-2873, 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 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 Prospectus and Solicitation Statement. The telephone number of the Information Agent is (800) 669-5550. 17 27 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 12 weeks ended September 17, 1994, after giving effect to the 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, other and adjusted EBITDA data, and as of September 17, 1994, 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 12 weeks ended September 17, 1994, 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 12 weeks ended October 9, 1994, 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 Prospectus and Solicitation Statement.
52 WEEKS ENDED 12 WEEKS ENDED JUNE 25, 1994 SEPTEMBER 17, 1994 -------------- ------------------ (DOLLARS IN MILLIONS) OPERATING DATA: Sales.................................................... $5,146.7 $1,182.2 Gross profit............................................. 1,067.1 235.5 Selling, general and administrative expenses............. 843.1 190.5 Interest expense: Cash.................................................. 202.3 47.5 Non-cash.............................................. 15.2 3.3 Amortization of debt issuance costs................... 16.4 2.8 ---------- ---------- Total interest expense................................... 233.9 53.6 Net earnings (loss)(a)................................... (62.1) (16.4) Ratio of earnings to fixed charges(b).................... -- -- OTHER DATA: EBITDA(a)(c)............................................. $ 349.8 $ 80.7 EBITDA margin(d)......................................... 6.8% 6.8% Depreciation and amortization............................ $ 154.4 $ 35.9 Capital expenditures(e).................................. 196.5 46.3 Stores open at end of period(f).......................... -- 406 ADJUSTED EBITDA DATA: - -------------------------------------------------------------------------------------------------------- Adjusted EBITDA, reflecting annual cost savings to be realized over four years(a)(g)........................ $ 449.8 $ 103.7 Adjusted EBITDA margin(h)................................ 8.7% 8.8% Ratio of Adjusted EBITDA to cash interest................ 2.2x 2.2x - -------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (END OF PERIOD): Working capital (deficit)........................................................ $ (149.8) Total assets..................................................................... 3,057.8 Total debt....................................................................... 1,967.6 Stockholder's equity............................................................. 251.5
- --------------- (a) The summary unaudited pro forma combined financial data and the results of operations, EBITDA and Adjusted EBITDA for the 52 weeks ended June 25, 1994 and the 12 weeks ended September 17, 1994 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 18 28 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) costs related to the anticipated disposition of a portion of Food 4 Less' La Habra facility, which costs are not presently determinable, (iv) $1.8 million in costs related to the cancellation of an employment agreement, and (v) other costs related to warehouse closures, which costs are not presently determinable. In addition, because of the substantial impact of the Merger on Food 4 Less, the Company will also determine if there has been any impairment of value of Food 4 Less' historical assets or goodwill. (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 $62.1 million and $16.4 million for the 52 weeks ended June 25, 1994 and the 12 weeks ended September 17, 1994, respectively. However, such pro forma earnings included non-cash charges of $191.0 million and $43.0 million, respectively, primarily consisting of depreciation and amortization. (c) EBITDA 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 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." (d) EBITDA margin represents EBITDA as a percentage of sales. (e) Includes Merger-related capital expenditures of $73.3 million and $10.0 million for the 52 weeks ended June 25, 1994 and the 12 weeks ended September 17, 1994, respectively. (f) The pro forma number of stores is based on October 1, 1994 totals, but gives effect to the closing or divestiture of 23 stores in connection with the Merger. An additional 19 stores may be closed post-Merger; however, because the decision to close them, and the timing of such closures, is at management's discretion, these stores have not been eliminated for purposes of the pro forma financial statements. The additional 19 stores contributed sales and EBITDA of $118.4 million and $5.2 million, respectively, for the 52 weeks ended June 25, 1994, and sales and EBITDA of $27.3 million and $1.2 million, respectively, for the 12 weeks ended September 17, 1994. If such stores are closed it is estimated that the Company would incur one-time costs associated with such closings of approximately $12.3 million. If such stores are not closed, 18 of such stores will be converted from a Food 4 Less conventional format to the Ralphs conventional format at an aggregate cost of approximately $1.4 million. (g) Adjusted EBITDA gives full effect to $100 million of anticipated net annual cost savings which have not been reflected in pro forma EBITDA, and which management believes are achievable by the end of the fourth full year of combined operations. It is also anticipated that approximately $149 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 60% 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 $100 million; however, management has made 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." Adjusted EBITDA has been calculated as follows:
(IN MILLIONS) Pro forma EBITDA for the 52 weeks ended June 25, 1994........................ $ 349.8 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.................................. 28.0 Consolidated manufacturing................................................. 12.0 Consolidated administrative functions...................................... 17.0 Less: Annual reinvestment of cost savings.................................. (25.0) ------ Total estimated net annual cost savings...................................... 100.0 ------ Adjusted EBITDA, reflecting annual cost savings to be realized over four years...................................................................... $ 449.8 ===========
Adjusted EBITDA for the 12 weeks ended September 17, 1994 was calculated by adding a pro rata fraction (12/52) of the estimated net annual cost savings described above to the pro forma EBITDA of the Company for such period. (h) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of sales. 19 29 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 52 weeks ended January 28, 1990, 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 and January 30, 1994, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The summary historical financial data of RSI presented below as of and for the 36 weeks ended October 10, 1993 and October 9, 1994 have been derived from unaudited interim financial statements of RSI 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 RSI and RGC and related notes thereto included elsewhere in this Prospectus and Solicitation Statement.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY 28, FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, OCTOBER 10, OCTOBER 9, 1990 1991 1992 1993 1994 1993 1994 ----------- ----------- ----------- ----------- ----------- ----------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales........................ $ 2,556.1 $ 2,799.1 $ 2,889.2 $ 2,843.8 $ 2,730.2 $ 1,874.2 $1,856.3 Gross profit................. 505.0 573.7 614.0 626.6 636.5 429.1 423.3 Selling, general and administrative expense..... 391.0 435.8 456.6 466.7 467.6 319.4 316.0 Interest expense(a).......... 130.9 128.5 130.2 125.6 108.8 75.7 77.2 Net earnings (loss)(b)....... (69.7) (51.4) (41.2) (76.1) 138.4(h) 23.7 19.9 Ratio of earnings to fixed charges(c)................. --(c) --(c) --(c) 1.02x 1.24x 1.27x 1.22x OTHER DATA: EBITDA(d).................... $ 188.8 $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 155.9 $ 156.1 EBITDA margin(e)............. 7.4% 7.4% 7.8% 8.0% 8.4% 8.3% 8.4% Depreciation and amortization(f)............ $ 81.6 $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 51.7 $ 51.9 Capital expenditures......... 103.5 87.6 50.4 102.7 62.2 46.8 44.5 Stores open at end of period..................... 142 150 158 159 165 163 168 BALANCE SHEET DATA (end of period): Working capital surplus (deficit).................. $ (46.5) $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (87.5) $ (118.3) Total assets................. 1,404.8 1,406.4 1,357.6 1,388.5 1,483.7 1,363.9 1,491.4 Total debt(g)................ 991.0 986.1 941.9 1,029.8 998.9 990.4 1,000.6 Redeemable stock............. 3.0 3.0 3.0 -- -- -- -- Stockholders' equity (deficit).................. 35.4 (16.0) (57.2) (133.3) 5.1 (109.5) 15.0
- --------------- (a) Interest expense includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 52 weeks ended January 28, 1990, $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 $4.5 and $4.3 for the 36 weeks ended October 10, 1993 and October 9, 1994, respectively. (b) 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. (c) 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 52 weeks ended January 28, 1990, the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by approximately $57.7 million, $25.5 million and $27.7 million, respectively. (d) EBITDA 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 and loss 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." (e) EBITDA margin represents EBITDA as a percentage of sales. (f) For the 52 weeks ended January 28, 1990, the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993 and January 30, 1994 and the 36 weeks ended October 10, 1993 and October 9, 1994, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.7 million, $11.0 million, $11.0 million, $11.0 million, $11.0 million, $7.6 million and $7.6 million, respectively. (g) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (h) 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). 20 30 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 12 weeks ended September 18, 1993 and September 17, 1994 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 Prospectus and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 12 WEEKS 12 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, SEPTEMBER 18, SEPTEMBER 17, 1990 1991(A) 1992 1993 1994(B) 1993 1994 -------- -------- -------- -------- -------- ------------- ------------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales.................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $ 616.6 $ 598.7 Gross profit............................. 204.8 265.7 520.8 484.2 469.3 112.4 103.0 Selling, general, administrative and other expense.......................... 157.8 213.1 469.7 434.9 388.8 95.7 88.1 Interest expense(c)...................... 50.8 50.1 70.2 69.8 68.3 15.7 16.0 Net loss................................. (10.1 ) (9.6 ) (33.8 ) (27.4 ) (2.7 ) (1.1) (3.3) Ratio of earnings to fixed charges(d).... --(d ) --(d ) --(d ) --(d ) 1.0 x --(d) --(d) OTHER DATA: EBITDA(e)................................ $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 29.0 $ 29.7 EBITDA margin(f)......................... 5.3 % 5.0 % 3.5 % 3.9 % 5.0 % 4.7% 5.0% Depreciation and amortization(g)......... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 13.1 $ 13.0 Capital expenditures..................... 36.4 34.7 60.3 53.5 57.5 6.6 16.8 Stores open at end of period............. 115 259 249 248 258 248 261 BALANCE SHEET DATA (end of period)(h): Working capital surplus (deficit)........ $ (40.5 ) $ 13.7 $ (66.3 ) $ (19.2 ) $ (54.9 ) $ (18.6) $ (58.1) Total assets............................. 574.7 980.0 998.5 957.8 980.1 967.3 978.5 Total debt(i)............................ 360.7 558.9 525.3 538.1 517.9 530.6 518.8 Redeemable stock......................... 5.1 -- -- -- -- -- -- Stockholder's equity..................... 20.6 84.6 50.8 72.9 69.0 71.6 65.7
- --------------- (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, $1.2 million for the 12 weeks ended September 18, 1993 and $1.3 million for the 12 weeks ended September 17, 1994. (d) 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 12 weeks ended September 18, 1993 and September 17, 1994, by approximately $9.1 million, $3.4 million, $25.6 million, $25.9 million, $0.8 million and $2.4 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, $14.3 million for the 12 weeks ended September 18, 1993 and $14.3 million for the 12 weeks ended September 17, 1994, primarily consisting of depreciation and amortization. (e) EBITDA 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." (f) EBITDA margin represents EBITDA as a percentage of sales. (g) 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 12 weeks ended September 18, 1993 and September 17, 1994, 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, $1.8 million and $1.8 million, respectively. (h) 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 September 18, 1993 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 September 17, 1994 relate to Food 4 Less and reflect the acquisition of the Food Barn stores. (i) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. 21 31 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 Prospectus and Solicitation Statement. LEVERAGE AND DEBT SERVICE Following the consummation of the Merger and the Financing, the Company will be highly leveraged. At September 17, 1994, pro forma for the Merger and the Financing (and certain related assumptions), the Company's total indebtedness (including current maturities) and stockholder's equity would have been $1,967.6 million and $251.5 million, respectively, and the Company would have had an additional $224.0 million available to be borrowed under the New Revolving Facility. In addition, as of September 17, 1994, after giving effect to the Merger and the Financing, scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $111.6 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 12 weeks ended September 17, 1994, the Company's earnings before fixed charges would have been inadequate to cover fixed charges by $62.1 million and $16.4 million, respectively. However, such earnings include non-cash charges of $191.0 million and $43.0 million, respectively, primarily consisting of depreciation and amortization. The Company's obligations under the Senior Unsecured Term Loan will accrue interest at a rate which shall increase over time and the Company will be required to either fully repay such obligations one year following the closing of the Merger or convert the Senior Unsecured Term Loan into nine-year senior loans. However, the ability of the Company to convert the Senior Unsecured Term Loan is subject to certain conditions. See "Description of the Senior Unsecured Term Loan." Moreover, at September 17, 1994, after giving effect to the Merger, the Financing and the FFL Merger (and certain related assumptions), FFL would have had (i) $61.4 million in accreted value of Indebtedness outstanding under the Holdings Discount Notes, which will accrete to $103.6 million aggregate principal amount on December 15, 1997 and (ii) $100 million principal amount of Indebtedness outstanding under the Seller Debentures which, through payment of interest thereon with additional Seller Debentures, will increase to $187.7 million aggregate principal amount over a five-year period. The New Notes Indenture permits the Company (in the absence of a default or event of default thereunder) to pay cash dividends to FFL in an amount sufficient to allow FFL 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 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. Based upon the current level of operations and anticipated cost savings and future growth, 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. The Company also believes that it will be able to either refinance the borrowings under the Senior Unsecured Term Loan or convert the facility to senior loans. 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 future growth can be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures, it 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. 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 22 32 in the New Credit Facility and other agreements relating to the Company's senior 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 $100 million of annualized net cost savings 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 $149 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. In addition, the estimated savings related to the closure of portions of the Company's La Habra, California warehouse do not reflect any costs that may be incurred to modify the existing La Habra lease, which otherwise does not expire until 2001 and is not assignable by the Company without consent. The Company continues to evaluate alternative plans for the consolidation of its warehousing and distribution activities. These include extending the period of time in which Food 4 Less' La Habra distribution facility is used to support Ralphs' two primary facilities. Such a plan, if implemented, would reduce or delay the estimated cost savings in this area, but would also reduce or delay the required capital expenditures. 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 Prospectus and Consent Solicitation. 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 30, 1994, Food 4 Less and Ralphs experienced 6.9% and 5.8% 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 12 weeks ended 23 33 September 17, 1994 and the 36 weeks ended October 9, 1994, Food 4 Less and Ralphs experienced 5.8% and 3.8% declines, respectively, in comparable store sales. Although the declines in comparable store sales have begun to moderate in recent months, and management believes that sales trends will continue to be favorable, there can be no assurance that this trend will continue 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 (as defined). 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 and the FFL Merger, all of the Company's outstanding common stock will be held by FFL. Pro forma for the Merger and certain related events, affiliates of Yucaipa and Apollo will have beneficial ownership of approximately 37.2% and 33.1%, respectively, of the outstanding capital stock of the Company. Pursuant to a new stockholders' agreement (the "1994 Stockholders Agreement") which will be entered into by new equity investors and certain existing stockholders of FFL upon 24 34 completion of the Merger, FFL and the Company will have boards consisting of nine and ten members, respectively, and Yucaipa, Apollo and BT Investment Partners, Inc. ("BTIP") will have the right to elect six (seven in the case of the Company), two and one director(s), respectively, to each board. Under the 1994 Stockholders Agreement, unless and until FFL has effected an initial public offering of its equity securities, FFL and its subsidiaries, including the Company, may not take certain actions without the approval of at least two of the three FFL 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 Apollo, 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. 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, the Senior Unsecured Term Loan 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 such Subsidiary Guarantor under the New Credit Facility, the Senior Unsecured Term Loan and the F4L Senior Notes. As of September 17, 1994, 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 $1,244.0 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 $116.7 million and the Company would have had $224.0 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 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 25 35 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 Discussions and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ABSENCE OF ESTABLISHED PUBLIC 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. 26 36 POTENTIAL ADVERSE EFFECTS OF THE EXCHANGE OFFERS AND THE SOLICITATION ON HOLDERS OF 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." 27 37 THE MERGER AND THE FINANCING On September 14, 1994, Food 4 Less and its parent company, 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, Holdings will merge with and into its parent, FFL, which will be the surviving corporation in the FFL Merger. As a result of the Merger and the FFL Merger, the Company will become a wholly-owned subsidiary of FFL. 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 become 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 $425 million in cash and $100 million principal amount of the Seller Debentures to be issued by FFL. FFL will use $150 million of cash received from the New Equity Investment, together with $100 million principal amount of the Seller Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. FFL 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. 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 par value. In addition, on the Closing Date Food 4 Less and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to Food 4 Less 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. As currently contemplated, the Merger will be financed through the following transactions: - Borrowings of up to $900 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, none of which is anticipated to be drawn at closing. - Borrowings of $150 million under the Senior Unsecured Term Loan to be provided by the Senior Unsecured Lender to fund the purchase of RSI common stock, repayment of certain outstanding indebtedness and related costs. - The issuance of preferred stock in a private placement by FFL to a group of investors led by Apollo and including the Dealer Managers or their affiliates and other institutional investors, for proceeds of $150 million pursuant to the New Equity Investment. - The exchange by Food 4 Less pursuant to the RGC Exchange Offer of (a) 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 $5.00 in cash per $1,000 principal amount exchanged, 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 Exchange Offer that at least 80% of the outstanding principal amount of the Old RGC Notes are exchanged pursuant to the RGC Exchange Offer. - The Exchange Offers made hereunder to holders of Old F4L Notes to exchange such Old F4L Notes for New F4L Notes and the Exchange Payment, together with the solicitation of consents from such holders to certain amendments to the Old F4L Indentures. - The purchase by FFL of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of the proceeds of the New Equity Investment and $100 million principal amount of the Seller Debentures followed by the contribution of such common 28 38 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 assumption by the Company, pursuant to the RGC Merger, of approximately $263.7 million of other indebtedness of RGC and Food 4 Less. - The solicitation of certain consents pursuant to the Holdings Consent Solicitation from the holders of the Holdings Discount Notes to certain amendments to the Holdings Discount Note Indenture. The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of January 15, 1995. This presentation assumes that $360 million principal amount of Old RGC Notes is tendered into the RGC Exchange Offers and $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers. 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 Exchange Offers and the Exchange Offers. SOURCES AND USES (in millions)
CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a).................. $ 780.0 Purchase RSI Common Stock(f)....... $ 425.9 Repay Ralphs 1992 Credit New Revolving Facility(b).......... 0.0 Agreement.......................... 279.5 Senior Unsecured Term Loan(c)...... 150.0 Repay F4L Credit Agreement......... 170.0 New Equity Investment(d)........... 150.0 Pay Accrued Interest(g)............ 17.0 -------- Pay EAR Liability(h)............... 22.8 Repay Other Debt................... 46.3 Fees and Expenses.................. 118.5 -------- Total Cash Sources............ $1,080.0 Total Cash Uses.................... $1,080.0 ======== ======== NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes............... $ 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...................... 360.0 Old RGC Notes Exchanged............ 360.0 Assumed Old RGC Notes.............. 90.0 Assumed Old RGC Notes.............. 90.0 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt............................. 263.7 Debt............................... 263.7 Seller Debentures(e)............... 100.0 Purchase RSI Common Stock(e)....... 100.0 -------- -------- Total Non-Cash Sources........ $1,133.7 Total Non-Cash Uses................ $1,133.7 ======== ========
- --------------- (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 $1,225 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 $900 million, comprised of the $450 million Tranche A Loan, the $175 million Tranche B Loan, the $125 million Tranche C Loan, and the $150 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 90 days following the Closing Date to refinance outstanding indebtedness, including to fund the Change of Control Offer, if any, and to refinance the Senior Unsecured Term Loan. (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 $101 million will be issued under the New 29 39 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) Food 4 Less has accepted a commitment letter from the Senior Unsecured Lender pursuant to which it has agreed, subject to certain conditions, to provide the Company the $150 million aggregate principal amount Senior Unsecured Term Loan. (d) Does not include the $10 million equity contribution by Ralphs management. See note (h) below. Concurrently with the New Equity Investment, certain existing stockholders of FFL, including affiliates of George Soros, will sell outstanding shares of FFL stock for an aggregate purchase price of $57.7 million (which represents the same price per share as will be paid in the New Equity Investment). The financing for such purchase will be provided by the New Equity Investors. See "Description of Capital Stock -- New Equity Investment." (e) In connection with the RSI Merger, FFL will issue $100 million principal amount of its 13% Senior Subordinated Pay-In-Kind Debentures due 2007 as part of the purchase price for the RSI common stock. (f) Includes $425 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." (g) Represents accrued interest payable on all debt securities assumed to be tendered in the RGC Exchange Offers and the Exchange Offers. (h) Represents payments to Ralphs management with respect to the cancellation of outstanding EARs in connection with the Merger. Ralphs management will receive new FFL stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan." For additional information, see "Description of the New Credit Facility," "Description of the Senior Unsecured Term Loan," "The RGC Exchange Offers," "Description of Holding Company Indebtedness" and "Description of Other Company Indebtedness." 30 40 PRO FORMA CAPITALIZATION The following table sets forth the pro forma combined capitalization of the Company as of September 17, 1994, adjusted to give effect to the Merger and the Financing (and certain related assumptions). This presentation assumes that $360 million principal amount of Old RGC Notes is tendered into the RGC Exchange Offers, and $256 million principal amount of Old F4L Notes is tendered into the Exchange Offers. 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 Prospectus and Solicitation Statement.
PRO FORMA CAPITALIZATION --------------- (IN MILLIONS) Cash............................................................................ $ 69.9 ========= Short-term and current portion of long-term debt: New Term Loans................................................................ $ 4.5 Senior Unsecured Term Loan(a)................................................. 150.0 Other indebtedness............................................................ 23.0 --------- Total short-term and current portion of long-term debt................ $ 177.5 ========= Long-term debt: New Term Loans(b)............................................................. $ 775.5 New Revolving Facility(c)..................................................... 0.0 Other indebtedness............................................................ 244.6 New F4L Senior Notes.......................................................... 140.0 Old F4L Senior Notes.......................................................... 35.0 New RGC Notes................................................................. 360.0 Old RGC Notes................................................................. 90.0 New F4L Senior Subordinated Notes............................................. 116.0 Old F4L Senior Subordinated Notes............................................. 29.0 --------- Total long-term debt.................................................. 1,790.1 --------- Stockholders' equity: Common stock, $.01 par value.................................................. 0.0 Additional paid-in capital.................................................... 424.4 Notes receivable(d)........................................................... (0.6) Retained deficit.............................................................. (169.8) Treasury stock................................................................ (2.5) --------- Total stockholders' equity................................................. 251.5 --------- Total capitalization.................................................. $ 2,041.6 =========
- --------------- (a) Food 4 Less has accepted a commitment letter from the Senior Unsecured Lender pursuant to which it has agreed, subject to certain conditions, to provide the Company the $150 million Senior Unsecured Term Loan. The Senior Unsecured Term Loan will be available to fund the purchase of RSI common stock, repayment of certain outstanding indebtedness and related costs. (b) 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 $1,225 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 $900 million, comprised of the $450 million Tranche A Loan, the $175 million Tranche B Loan, the $125 million Tranche C Loan and the $150 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 90 days following the Closing Date to refinance outstanding indebtedness, including to fund the Change of Control Offer, if any, and to refinance the Senior Unsecured Term Loan. See "Description of the New Credit Facility." (c) 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 $101 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. (d) Represents notes receivable from shareholders of Holdings with respect to the purchase of Holdings' common stock. See "Executive Compensation -- Food 4 Less Stock Plan." 31 41 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 12 weeks ended September 17, 1994, give effect to the Merger and the Financing (and certain related assumptions set forth below) as if such transactions occurred on June 27, 1993, with respect to the pro forma operating, other and adjusted EBITDA data, and as of September 17, 1994, 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 12 weeks ended September 17, 1994, 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 12 weeks ended October 9, 1994, respectively. For information regarding the Merger and the Financing, see "The Merger and the Financing." The pro forma adjustments are based upon the assumption that all conditions to the consummation of the Exchange Offers are satisfied, including the following: (i) $360 million aggregate principal amount of Old RGC Notes are tendered into the RGC Exchange Offers and (ii) $256 million aggregate principal amount of Old F4L Notes are tendered into the Exchange Offers. 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 23 stores. An additional 19 stores may be closed post-Merger; however, because the decision to close them, and the timing of such closures, is at management's discretion, these stores have not been eliminated for purposes of the pro forma financial statements. 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 Prospectus and Solicitation Statement. 32 42 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 $(148.2)(a) $5,146.7 -------- -------- ------- -------- Cost of sales................................... 2,076.3 2,115.9 (120.3)(a) 4,079.6 4.2 (b) 2.8 (c) 0.7 (d) -------- -------- ------- -------- Gross profit............................... 633.4 469.3 (35.6) 1,067.1 Selling, general and administrative expenses.... 465.9 388.8 (23.2)(a) 843.1 8.1 (b) 1.4 (d) 1.6 (e) 0.5 (f) Amortization of excess cost over net assets acquired...................................... 11.0 7.7 10.6 (g) 29.3 Provision for restructuring..................... 2.4 0.0 -- 2.4 Provision for postretirement benefits........... 3.2 0.0 -- 3.2 -------- -------- ------- -------- Operating income........................... 150.9 72.8 (34.6) 189.1 Other expenses: Interest expense -- cash...................... 93.2 57.0 52.1 (h) 202.3 Interest expense -- non-cash.................. 9.4 5.8 -- 15.2 Amortization of debt issuance costs........... 6.4 5.5 4.5 (h) 16.4 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................................ 29.1 (0.0) (91.2) (62.1) Income tax expense (benefit).................... (108.0) 2.7 105.3 (i) -- -------- -------- ------- -------- Net earnings (loss)(o)..................... $ 137.1 $ (2.7) $(196.5) $ (62.1) ======== ======== ======= ======== Preferred stock accretion....................... -- 8.8 (8.8)(j) -- Earnings (loss) applicable to common shares................................... $ 137.1 $ (11.5) $(187.7) $ (62.1) ======== ======== ======= ======== Ratio of earnings to fixed charges(k)...... 1.2x 1.0x -- ======== ======== ======= ======== Other Data: EBITDA(l)(o).................................. $ 228.1 $ 130.5 $ (8.8)(m) $ 349.8 EBITDA margin(n).............................. 8.4% 5.0% 6.8%
See Notes to Unaudited Pro Forma Combined Statement of Operations 33 43 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED (DOLLARS IN MILLIONS)
12 WEEKS ENDED --------------------------- RALPHS FOOD 4 LESS (HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED) OCTOBER 9, SEPTEMBER 17, PRO FORMA PRO FORMA 1994 1994 ADJUSTMENTS COMBINED ------------ ------------- ----------- --------- Sales.......................................... $615.4 $598.7 $(31.9)(a) $1,182.2 Cost of sales.................................. 476.6 495.7 (26.8)(a) 946.7 1.0 (b) 0.0 (c) 0.2 (d) ------ ------ ------ -------- Gross profit.............................. 138.8 103.0 (6.3) 235.5 Selling, general and administrative expenses... 104.8 88.1 (5.2)(a) 190.5 1.9 (b) 0.4 (d) 0.4 (e) 0.1 (f) Amortization of excess cost over net assets acquired..................................... 2.6 1.8 2.5 (g) 6.9 Provision for restructuring.................... 0.0 0.0 -- 0.0 Provision for postretirement benefits.......... 0.6 0.0 -- 0.6 ------ ------ ------ -------- Operating income.......................... 30.8 13.1 (6.4) 37.5 Other expenses: Interest expense -- cash..................... 22.3 13.4 11.8 (h) 47.5 Interest expense -- non-cash................. 2.0 1.3 -- 3.3 Amortization of debt issuance costs.......... 1.4 1.3 0.1 (h) 2.8 Loss (gain) on disposal of assets.............. 0.8 (0.5) -- 0.3 Provision for earthquake loss.................. 0.0 0.0 -- 0.0 ------ ------ ------ -------- Earnings (loss) before income tax provision............................... 4.3 (2.4) (18.3) (16.4) Income tax expense (benefit)................... 0.0 0.9 (0.9)(i) 0.0 ------ ------ ------ -------- Net earnings (loss)(o).................... $ 4.3 $ (3.3) $(17.4) $ (16.4) ====== ====== ====== ======== Preferred stock accretion...................... -- 2.4 (2.4)(j) -- Earnings (loss) applicable to common shares.................................. $ 4.3 $ (5.7) $(15.0) $ (16.4) ====== ====== ====== ======== Ratio of earnings to fixed charges(k)..... 1.2x -- -- ====== ====== ====== ======== Other Data: EBITDA(l)(o)................................. $ 52.0 $ 29.7 $ (1.0)(m) $ 80.7 EBITDA margin(n)............................. 8.5% 5.0% 6.8%
See Notes to Unaudited Pro Forma Combined Statement of Operations. 34 44 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (a) Reflects the anticipated closing or divestiture of 23 stores. An additional 19 stores may be closed post-Merger; however, because the decision to close them, and the timing of such closures, is at management's discretion, these stores have not been eliminated for purposes of the pro forma financial statements. The additional 19 stores contributed sales and EBITDA of $118.4 million and $5.2 million for the 52 weeks ended June 25, 1994 and $27.3 million and $1.2 million for the 12 weeks ended September 17, 1994, respectively. If such stores are not closed, up to 18 of such stores will be converted from a Food 4 Less conventional format to the Ralphs conventional format at an aggregate cost of up to $1.4 million. If such stores are closed it is estimated that the Company would incur one-time costs associated with such closings of approximately $12.3 million. (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 $36.0 million of additional fixed assets required for the conversion of 23 Ralphs stores to the Food 4 Less warehouse format and 112 Alpha Beta, Boys and Viva stores to the Ralphs format. Does not include any depreciation expense associated with the possible conversion of up to 18 additional conventional stores to the Ralphs format at an aggregate cost of up to $1.4 million. (e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks ended June 25, 1994 and $0.5 million for the 12 weeks ended September 17, 1994) and the elimination of an annual guarantee fee ($0.4 million for the 52 weeks ended June 25, 1994 and $0.1 million for the 12 weeks ended September 17, 1994) 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 ($21.6 million for the 52 weeks ended June 25, 1994 and $5.0 million for the 12 weeks ended September 17, 1994) and elimination of Ralphs' historical amortization ($11.0 million for the 52 weeks ended June 25, 1994 and $2.5 million for the 12 weeks ended September 17, 1994). (h) The following table presents a reconciliation of pro forma interest expense and amortization of deferred financing costs:
52 WEEKS 12 WEEKS ENDED ENDED JUNE 25, 1994 SEPTEMBER 17, 1994 ------------- ------------------ Historical interest expense -- cash........................................ $150.2 $35.7 ------ ----- Plus: Interest on borrowings under: New Credit Facility.................................................... 75.3 18.0 Senior Unsecured Term Loan............................................. 3.9 -- New RGC Notes.......................................................... 39.6 9.1 Other bank fees........................................................ 3.5 0.8 Other debt............................................................. 2.0 0.8 Less: Interest on borrowings under: Old bank term loans: Ralphs............................................................... (21.3) (5.4) Food 4 Less.......................................................... (11.5) (2.5) Old RGC Notes.......................................................... (35.1) (8.0) Other debt............................................................. (4.3) (1.0) ------ ----- Pro forma adjustment..................................................... 52.1 11.8 ------ ----- Pro forma interest expense -- cash......................................... $202.3 $47.5 ====== ===== Historical amortization of debt issuance costs............................. $ 11.9 $ 2.7 Plus: Financing and exchange/consent fees.................................... 13.0 2.0 Other fees and expenses................................................ 2.0 0.5 Less: Historical financing costs: Ralphs................................................................. (5.2) (1.1) Food 4 Less............................................................ (5.3) (1.3) ------ ----- Pro forma adjustment..................................................... 4.5 0.1 ------ ----- Pro forma amortization of debt issuance costs.............................. $ 16.4 $ 2.8 ====== =====
(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 $0.9 million for the 12 weeks ended September 17, 1994) 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 35 45 earnings were inadequate to cover pro forma fixed charges for the 52 weeks ended June 25, 1994 and for the 12 weeks ended September 17, 1994 by approximately $62.1 million and $16.4 million, respectively. However, such pro forma earnings included non-cash charges of $191.0 million for the 52 weeks ended June 25, 1994 and $43.0 million for the 12 weeks ended September 17, 1994, primarily consisting of depreciation and amortization. (l) EBITDA 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, 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." (m) Reflects primarily EBITDA associated with closed or divested stores and the adjustments referred to in notes (e) and (f) above. (n) EBITDA margin represents EBITDA as a percentage of sales. (o) The unaudited pro forma results of operations and EBITDA for the 52 weeks ended June 25, 1994 and the 12 weeks ended September 17, 1994 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) costs related to the anticipated disposition of a portion of Food 4 Less' La Habra facility, which costs are not presently determinable, (iv) $1.8 million in costs related to the cancellation of an employment agreement, or (v) other costs related to warehouse closures, which costs are not presently determinable. In addition, because of the substantial impact of the Merger on Food 4 Less, the Company will also determine if there has been any impairment of value of Food 4 Less' historical assets or goodwill. 36 46 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
FOOD 4 LESS RALPHS (HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED) SEPTEMBER 17, PRO FORMA OCTOBER 9, 1994 1994 ADJUSTMENTS PRO FORMA --------------- ------------- ----------- --------- ASSETS Current assets: Cash and cash equivalents................ $ 33.3 $ 29.4 $ 7.2 (a) $ 69.9 Accounts receivable...................... 45.2 25.4 -- 70.6 Inventories.............................. 217.2 210.6 39.9 (b) 467.7 Prepaid expense and other current assets................................ 18.3 13.4 -- 31.7 -------- ------ ------- -------- Total current assets............. 314.0 278.8 47.1 639.9 Investments................................ 0.0 12.7 12.7 Property, plant and equipment.............. 611.6 370.0 160.0 (c) 1,122.8 (18.8)(d) Excess of cost over net assets acquired, net...................................... 368.8 266.1 494.4 (e) 1,129.3 Beneficial lease rights.................... 50.7 0.0 -- 50.7 Deferred debt issuance costs, net.......... 22.7 27.2 75.0 (f) 81.5 (43.4)(g) Deferred income taxes...................... 113.6 0.0 (113.6)(h) 0.0 Other assets............................... 10.0 23.7 (12.8)(d) 20.9 -------- ------ ------- -------- Total assets..................... $1,491.4 $978.5 $ 587.9 $3,057.8 ======== ====== ======= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt..... $ 79.9 $ 23.2 $ (75.6)(i) $ 27.5 Short-term debt.......................... 37.4 0.0 112.6 (j) 150.0 Accounts payable......................... 177.5 176.1 -- 353.6 Accrued expenses......................... 109.3 108.1 (21.8)(k) 200.9 3.5 (d) 1.8 (l) Current portion of self-insurance reserves.............................. 28.2 29.5 -- 57.7 -------- ------ ------- -------- Total current liabilities........ 432.3 336.9 20.5 789.7 Long-term debt............................. 883.4 495.7 411.0 (m) 1,790.1 Self-insurance reserves.................... 46.0 65.5 -- 111.5 Deferred income taxes...................... 0.0 14.7 -- 14.7 Lease valuation reserve.................... 30.1 0.0 -- 30.1 Other non-current liabilities.............. 84.6 0.0 (33.8)(n) 70.2 11.0 (o) 8.4 (d) -------- ------ ------- -------- Total liabilities................ 1,476.4 912.8 417.1 2,806.3 -------- ------ ------- -------- Stockholder's equity: Preferred Stock.......................... 0.0 61.4 (61.4)(p) 0.0 Common Stock............................. 0.3 0.0 (0.3)(p) 0.0 Additional paid-in capital............... 175.2 107.7 61.7 (p) 424.4 10.0 (n) 145.0 (q) 100.0 (r) (175.2)(s) Notes receivable from shareholders of parent................................ 0.0 (0.6) -- (0.6) Accumulated deficit...................... (160.5) (100.3) (24.2)(t) (169.8) 160.5 (s) (43.5)(d) (1.8)(l) Treasury stock........................... 0.0 (2.5) -- (2.5) -------- ------ ------- -------- Total stockholder's equity(u).... 15.0 65.7 170.8 251.5 -------- ------ ------- -------- Total liabilities and stockholder's equity........... $1,491.4 $978.5 $ 587.9 $3,057.8 ======== ====== ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 37 47 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 Senior Unsecured Term Loan and (iv) the New Equity Investment 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............................................. $780.0 New Revolving Facility..................................... 0.0 Senior Unsecured Term Loan................................. 150.0 New Equity Investment...................................... 150.0 Purchase RSI Common Stock.................................. (425.9) Repay Ralphs 1992 Credit Agreement......................... (296.1) Repay F4L Credit Agreement................................. (140.3) Pay EAR liability.......................................... (23.8) Repay other Ralphs debt.................................... (46.4) Accrued Interest........................................... (21.8) Fees and Expenses.......................................... (118.5) ------ Pro forma adjustment............................... $ 7.2 ======
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million) and the write-up of certain inventory ($22.5 million) to estimated fair market value in connection with the purchase price allocation. (c) Reflects the estimated write-up to fair value of Ralphs property, plant and equipment as of the date of the Merger. (d) Reflects primarily the writedown of property and equipment and related reserves associated with the conversion of 16 Food 4 Less conventional supermarkets to warehouse stores, and the closing of 22 Food 4 Less conventional stores as well as the write-off of the Alpha Beta trademark. An additional 18 Food 4 Less conventional stores and one Ralphs store may be closed post-Merger, which would require additional reserves or writedowns of approximately $12.3 million. In addition, because of the substantial impact of the Merger on Food 4 Less, the Company will also determine if there has been any impairment of value of Food 4 Less' historical assets or goodwill. (e) Reflects the excess of costs over the fair value of the net assets of Ralphs acquired in connection with the Merger ($863.2 million) and the elimination of Ralphs historical excess of costs over the fair value of the net assets acquired ($368.8 million). (f) Reflects the debt issuance costs associated with the New Credit Facility, the Exchange Offers, the RGC Exchange Offers and other components of the Financing. (g) Reflects the elimination of deferred debt issuance costs associated with the Ralphs 1992 Credit Agreement (as defined) ($7.4 million), the F4L Credit Agreement (as defined) ($10.4 million), the Old RGC Notes ($10.8 million) and the Old F4L Notes ($13.8 million) and other indebtedness of RGC and Food 4 Less ($1.0 million) to be repaid in connection with the Merger. (h) 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. (i) Reflects the repayment and cancellation of the current maturities of Ralphs 1992 Credit Agreement ($62.5 million), the F4L Credit Agreement ($17.0 million), certain other Ralphs debt ($0.6 million) and the recording of the current maturities of the New Credit Facility ($4.5 million). (j) Reflects the repayment of Ralphs' old revolving credit facility ($37.4 million) and records borrowing under the Senior Unsecured Term Loan ($150.0 million). (k) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement ($2.3 million), the F4L Credit Agreement ($0.5 million), the Old RGC Notes ($7.4 million), the Old F4L Notes ($10.8 million) and other indebtedness of RGC and Food 4 Less ($0.8 million) to be repaid in connection with the Merger. (l) Represents the liability to an executive under his employment contract due to a change of control provision. (m) 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.............................................. $775.5 New Revolving Facility..................................... 0.0 Repay Ralphs 1992 Credit Agreement......................... (196.3) Repay F4L Credit Agreement................................. (123.3) Repay other Ralphs debt.................................... (44.9) ------ Net pro forma adjustment........................... $411.0 ======
(n) Reflects the payment of a portion of the Ralphs EAR liability ($23.8 million) and the issuance of new FFL stock options in consideration of the cancellation of the remaining Ralphs EAR liability ($10.0 million). See "Executive Compensation -- Equity Appreciation Rights Plan." (o) Represents a reserve for Ralphs unfunded defined benefit pension plans. (p) Reflects cancellation of cumulative convertible preferred stock of Food 4 Less held by Holdings ($61.4 million) and the cancellation of Ralphs common stock ($0.3 million). (q) Reflects the contribution by FFL of RSI stock acquired with the proceeds of the New Equity Investment of $150.0 million offset by $5.0 million in related commitment fees. (r) Reflects the contribution by FFL of RSI stock acquired through the issuance of $100.0 million aggregate principal amount of the Seller Debentures. (s) Reflects the elimination of Ralphs historical equity. (t) Represents the write-off of the historical deferred debt issuance costs of Food 4 Less related to its refinanced debt. (u) The unaudited pro forma combined balance sheet as of September 17, 1994 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 over a three-year period, (iii) costs of lease modifications with respect to Food 4 Less' La Habra facility, which costs are not presently determinable, or (iv) other costs related to warehouse closures, which costs are not presently determinable. 38 48 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 52 weeks ended January 28, 1990, 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 and January 30, 1994, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected historical financial data of RSI presented below as of and for the 36 weeks ended October 10, 1993 and October 9, 1994 have been derived from unaudited interim financial statements of RSI 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 financial statements of RSI and RGC and related notes thereto included elsewhere in this Prospectus and Solicitation Statement.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY 28, FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, OCTOBER 10, OCTOBER 9, 1990 1991 1992 1993 1994 1993 1994 ----------- ------------ ------------ ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales......................... $ 2,556.1 $2,799.1 $2,889.2 $ 2,843.8 $ 2,730.2 $ 1,874.2 $ 1,856.3 Cost of sales................. 2,051.1 2,225.4 2,275.2 2,217.2 2,093.7 1,445.2 1,433.0 --------- -------- -------- --------- --------- --------- --------- Gross profit.................. 505.0 573.7 614.0 626.6 636.5 429.0 423.3 Selling, general and administrative expenses..... 391.0 435.8 456.6 466.7 467.6 319.4 316.0 Provision for equity appreciation rights......... 26.0 15.3 18.3 -- -- -- -- Amortization of excess of cost over net assets acquired.... 11.7 11.0 11.0 11.0 11.0 7.6 7.6 Provisions for restructuring, post retirement benefits and tax indemnification payments(a)................. -- 2.2 12.6 10.4 5.8 2.1 1.8 --------- -------- -------- --------- --------- --------- --------- Operating income.............. 76.3 109.4 115.5 138.5 152.1 99.9 97.9 Interest expense(b)......... 130.9 128.5 130.2 125.6 108.8 75.7 77.2 Loss on disposal of assets and provisions for legal settlement and earthquake losses(c)................. 3.1 6.4 13.0 10.1 12.9 0.4 0.8 Income tax expense (benefit)................... 12.0 12.8 13.5 8.3 (108.0)(d) -- -- 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)........... $ (69.7) $ (51.4) $ (41.2) $ (76.1) $ 138.4 $ 23.8 $ 19.9 ========= ======== ======== ========= ========= ========= ========= Ratio of earnings to fixed charges(e).................. --(e) --(e) --(e) 1.02x 1.24x 1.27x 1.22x OTHER DATA: EBITDA(f)..................... $ 188.8 $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 155.9 $ 156.1 EBITDA margin(g).............. 7.4% 7.4% 7.8% 8.0% 8.4% 8.3% 8.4% Depreciation and amortization(h)............. $ 81.6 $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 51.7 $ 51.9 Capital expenditures.......... 103.5 87.6 50.4 102.7 62.2 46.8 44.5 Stores open at end of period...................... 142 150 158 159 165 163 168 BALANCE SHEET DATA (end of period): Working capital surplus (deficit)................... $ (46.5) $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (87.5) $ (118.3) Total assets.................. 1,404.8 1,406.4 1,357.6 1,388.5 1,483.7 1,363.9 1,491.4 Total debt(i)................. 991.0 986.1 941.9 1,029.8 998.9 990.4 1,000.6 Redeemable stock.............. 3.0 3.0 3.0 -- -- -- -- Stockholders' equity (deficit)................... 35.4 (16.0) (57.2) (133.3) 5.1 (109.5) 15.0
- --------------- (a) 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 post retirement benefits other than pensions was $2.2 million, $2.6 million, $3.3 million, $3.4 million, $2.1 million and $1.8 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, and January 30, 1994, and the 36 weeks ended October 10, 1993 and ended October 9, 1994, respectively. Provision for tax indemnification payments to Federated were $10.0 million for the 52 weeks ended February 2, 1992. 39 49 (b) Net earnings (loss) includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 52 weeks ended January 28, 1990, $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 $4.5 and $4.3 for the 36 weeks ended October 10, 1993 and October 9, 1994, respectively. (c) Loss on disposal of assets was $3.1 million, $6.4 million, $13.0 million, $2.6 million, $1.9 million, $0.4 million and $0.8 million for the 52 weeks ended January 28, 1990, the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, and January 30, 1994 and the 36 weeks ended October 10, 1993 and October 9, 1994, 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. (d) 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). (e) 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 52 weeks ended January 28, 1990, the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by $57.7 million, $25.5 million and $27.7 million, respectively. (f) EBITDA 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 and loss 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." (g) EBITDA margin represents EBITDA as a percentage of sales. (h) For the 52 weeks ended January 28, 1990, the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, and January 30, 1994 and the 36 weeks ended October 10, 1993 and October 9, 1994, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.7 million, $11.0 million, $11.0 million, $11.0 million, $11.0 million, $7.6 million and $7.6 million, respectively. (i) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. 40 50 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 12 weeks ended September 18, 1993 and September 17, 1994 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 Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Food 4 Less and related notes thereto included elsewhere in this Prospectus and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 12 WEEKS 12 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, SEPTEMBER 18, SEPTEMBER 17, 1990 1991(A) 1992 1993 1994(B) 1993 1994 -------- -------- -------- -------- -------- ------------- ------------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales................................. $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $616.6 $598.7 Cost of sales......................... 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 504.2 495.7 -------- -------- -------- -------- -------- ------ ------ Gross profit.......................... 204.8 265.7 520.8 484.2 469.3 112.4 103.0 Selling, general, administrative and other expenses...................... 157.8 213.1 469.7 434.9 388.8 95.7 88.1 Amortization of excess cost over net assets acquired..................... 5.3 5.3 7.8 7.6 7.7 1.8 1.8 -------- -------- -------- -------- -------- ------ ------ Operating income...................... 41.7 47.3 43.3 41.7 72.8 14.9 13.1 Interest expense(c)................... 50.8 50.1 70.2 69.8 68.3 15.7 16.0 Loss (gain) on disposal of assets..... -- 0.6 (1.3) (2.1) -- -- (0.5) Provision for earthquake losses....... -- -- -- -- 4.5 -- -- Provision for income taxes............ 1.0 2.5 3.4 1.4 2.7 0.3 0.9 Extraordinary charge.................. -- 3.7(d) 4.8(e) -- -- -- -- -------- -------- -------- -------- -------- ------ ------ Net loss.............................. $ (10.1) $ (9.6) $ (33.8) $ (27.4) $ (2.7) $ (1.1) $ (3.3) ======== ======== ======== ======== ======== ====== ====== Ratio of earnings to fixed charges(f). --(f) --(f) --(f) --(f) 1.0x --(f) --(f) OTHER DATA: EBITDA(g)............................. $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 29.0 $ 29.7 EBITDA margin(h)...................... 5.3% 5.0% 3.5% 3.9% 5.0% 4.7% 5.0% Depreciation and amortization(i)....... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 13.1 $ 13.0 Capital expenditures.................. 36.4 34.7 60.3 53.5 57.5 6.6 16.8 Stores open at end of period.......... 115 259 249 248 258 248 261 BALANCE SHEET DATA (end of period)(j): Working capital surplus (deficit)..... $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $(18.6) $(58.1) Total assets.......................... 574.7 980.0 998.5 957.8 980.1 967.3 978.5 Total debt(k)......................... 360.7 558.9 525.3 538.1 517.9 530.6 518.8 Redeemable stock...................... 5.1 -- -- -- -- -- -- Stockholder's equity.................. 20.6 84.6 50.8 72.9 69.0 71.6 65.7
- --------------- (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, $1.2 million for the 12 weeks ended September 18, 1993 and $1.3 million for the 12 weeks ended September 17, 1994. (d) 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. (e) 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. 41 51 (f) 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 12 weeks ended September 18, 1993 and September 17, 1994 by approximately $9.1 million, $3.4 million, $25.6 million, $25.9 million, $0.8 million and $2.4 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, $14.3 million for the 12 weeks ended September 18, 1993 and $14.3 million for the 12 weeks ended September 17, 1994, primarily consisting of depreciation and amortization. (g) EBITDA 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." (h) EBITDA margin represents EBITDA as a percentage of sales. (i) 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 12 weeks ended September 18, 1993 and September 17, 1994, 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, $1.8 million and $1.8 million, respectively. (j) 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 September 18, 1993 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 September 17, 1994 relate to Food 4 Less and reflect the acquisition of the Food Barn stores. (k) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. 42 52 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 274 conventional format Ralphs stores and an estimated 69 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 5.5%, respectively. Despite these adverse sales trends, however, each company has improved its profitability over the same period as discussed in greater detail below. In addition, comparable store sales declines have begun to moderate in recent periods, which is consistent with data indicating a mild recovery in the Southern California economy. 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. The two principal components of the Company's integration strategy will be (i) the conversion of up to 130 of Food 4 Less' conventional stores (primarily Alpha Beta stores) to the Ralphs name and format and the conversion of 16 other Food 4 Less conventional stores (Boys and Viva) 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 $100 million of net annual cost savings 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 such capital expenditures, management believes that over 60% 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 $149 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 $43.5 million. In addition, because of the substantial impact of the Merger on Food 4 Less, the Company will also determine if there has been any impairment of the value of Food 4 Less' historical assets or goodwill. 43 53 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. Following the Merger, the Company 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 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. 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. All historical financial information for Food 4 Less included in this Prospectus and Solicitation Statement reflects these reclassifications. See Note 15 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 February 2, 1992 ("Fiscal 1991"), January 31, 1993 ("Fiscal 1992") and January 30, 1994 ("Fiscal 1993") and for the 36 weeks ended October 10, 1993 and October 9, 1994:
52 WEEKS ENDED 36 WEEKS ENDED -------------------------------------------------------- ------------------------------------ FEBRUARY 2, JANUARY 31, JANUARY 30, OCTOBER 10, OCTOBER 9, 1992 1993 1994 1993 1994 ---------------- ---------------- ---------------- ---------------- ---------------- (IN MILLIONS) (UNAUDITED) Sales.......................... $2,889.2 100.0% $2,843.8 100.0% $2,730.2 100.0% $1,874.2 100.0% $1,856.3 100.0% Cost of sales.................. 2,275.2 78.8 2,217.2 78.0 2,093.7 76.7 1,445.2 77.1 1,433.0 77.2 Selling, general and administrative expenses...... 456.6 15.8 466.7 16.4 467.6 17.1 319.4 17.1 316.0 17.0 Operating income(a)............ 115.5 4.0 138.5 4.9 152.1 5.6 99.9 5.3 97.9 5.3 Net interest expense........... 130.2 4.5 125.6 4.4 108.8 4.0 75.7 4.0 77.2 4.2 Provision for earthquake losses(b).................... -- -- -- -- 11.0 0.4 -- -- -- -- Income tax expense (benefit)... 13.5 0.4 8.3 0.3 (108.0) (4.0) -- -- -- -- Extraordinary item............. -- -- 70.6 2.5 -- -- -- -- -- -- Net earnings (loss)............ (41.2) (1.4) (76.1) (2.7) 138.4 5.1 23.8 1.3 19.9 1.1
- --------------- (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. 44 54 COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED OCTOBER 9, 1994 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED OCTOBER 10, 1993. Sales For the thirty-six weeks ended October 9, 1994, sales were $1,856.3 million, a decrease of $17.9 million or 1.0% from the thirty-six weeks ended October 10, 1993. During the first three quarters of the fiscal year ending January 29, 1995 ("Fiscal 1994"), Ralphs opened five new stores (three in Los Angeles County, one in San Diego County and one in Riverside County), closed two stores (in conjunction with new stores opening in the same areas), and completed three store remodels. Comparable store sales decreased 3.8%, which included an increase of 0.3% for replacement store sales, from $1,855.0 million in the first three quarters of Fiscal 1993 to $1,784.4 million in the first three quarters of 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. Cost of Sales Cost of sales decreased $12.2 million or 0.8% from $1,445.2 million in the first three quarters of Fiscal 1993 to $1,433.0 million in the first three quarters of Fiscal 1994. As a percentage of sales, cost of sales increased to 77.2% in the first three quarters of Fiscal 1994 from 77.1% in the first three quarters of 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. 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 the second and third quarters of Fiscal 1994 resulting in reductions of approximately $7.8 million and $3.9 million, 45 55 respectively. Of the total $11.7 million reduction in self-insurance costs, $4.3 million is included in cost of sales and $7.4 million is included in selling, general and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased $3.4 million or 1.1% from $319.4 million in the first three quarters of Fiscal 1993 to $316.0 million in the first three quarters of Fiscal 1994. As a percentage of sales, SG&A decreased from 17.1% in the first three quarters of Fiscal 1993 to 17.0% in the first three quarters of 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 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 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 Fiscal 1994. In the first three quarters of Fiscal 1994 $8.7 million of the excess reserve was recognized. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Operating Income Operating income in the first three quarters of Fiscal 1994 decreased 2.0% to $97.9 million from $99.9 million in the first three quarters of Fiscal 1993. Operating margin, defined as operating income as a percentage of sales, remained at 5.3% in the first three quarters of Fiscal 1994 and Fiscal 1993. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for post-retirement benefits, gain or loss on disposal of assets and a one-time charge for Teamsters Union sick pay benefits, was 8.4% of sales or $156.1 million in the first three quarters of Fiscal 1994 and 8.3% of sales or $155.9 million in the first three quarters of Fiscal 1993. Net Interest Expense Net interest expense for the first three quarters of Fiscal 1994 was $77.2 million versus $75.7 million for the first three quarters of Fiscal 1993. Net interest expense increased primarily as a result of increases in interest rates. Included as interest expense during the first three quarters of Fiscal 1994 was $66.5 million, representing interest expense on existing debt obligations, capitalized leases and a swap agreement. Comparable interest expense for the first three quarters of Fiscal 1993 was $64.6 million. Also included in net interest expense for the first three quarters of Fiscal 1994 was $10.7 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 $11.1 million for the first three quarters of Fiscal 1993. Investment income, which is immaterial, has been offset against interest expense. 46 56 Net Earnings For the first three quarters of Fiscal 1994, Ralphs reported net earnings of $19.9 million compared to net earnings of $23.8 million for the first three quarters of Fiscal 1993. The decrease in net earnings is primarily the result of decreased operating income and higher interest expense due to increased interest rates. Other In February 1994, the Board of Directors of RGC authorized a dividend of $10.0 million to be paid to RSI, and the Board of Directors of RSI authorized distribution of this dividend to its shareholders subject to certain restrictive covenants in the instruments governing certain of RGC's indebtedness that impose limitations on the declaration or payment of dividends. RGC's credit agreement, entered into in 1992 (the "1992 Credit Agreement"), was amended to allow for the payment of the dividend to RSI for distribution to RSI's shareholders. The fee for the amendment was approximately $500,000, which was included in interest expense for the period. The dividend was distributed to the shareholders of RSI in the second quarter of Fiscal 1994. 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. 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 $0.9 million or 0.2% from $466.7 million in Fiscal 1992 to $467.6 million in Fiscal 1993. As a percentage of sales, SG&A increased from 16.4% in Fiscal 1992 to 17.1% 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 47 57 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, post-retirement 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 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 48 58 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. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 31, 1993 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED FEBRUARY 2, 1992. Sales Fiscal 1992 sales were $2,843.8 million, a decrease of $45.4 million or 1.6% compared to Fiscal 1991. During Fiscal 1992, Ralphs opened six new stores, three in Los Angeles County, one in Riverside County, one in San Bernardino County and one in San Diego County, closed five stores and remodeled 23 stores. Comparable stores sales decreased 3.5%, which included an increase of 0.6% for replacement stores, from $2,859.4 million to $2,759.1 million in Fiscal 1992. Cost of Sales Cost of sales decreased $58.0 million or 2.5% from $2,275.2 million in Fiscal 1991 to $2,217.2 million in Fiscal 1992. As a percentage of sales, cost of sales declined to 78.0% in Fiscal 1992 from 78.8% in Fiscal 1991. The decrease in cost of sales as a percentage of sales was the result of the pass-through of increased operating costs, an increase in the mix of above average gross margin products and increases in relative margins where allowed by competitive conditions. The Company believes that through achieving cost savings and applying effective pricing policies, both cost and gross margins can be improved. However, given the highly competitive nature of the Southern California grocery market, such cost and gross margin improvements cannot be assured. Selling, General and Administrative Expenses SG&A increased $10.1 million or 2.2% from $456.6 million in Fiscal 1991 to $466.7 million in Fiscal 1992. As a percentage of sales, SG&A increased from 15.8% in Fiscal 1991 to 16.4% in Fiscal 1992. The increase in SG&A as a percent of sales was the result of several factors including the continuing soft sales environment. Other factors impacting SG&A during Fiscal 1992 were increases in union wage rates. These expense increases were partially offset by significant cost savings programs instituted by Ralphs. These programs were intensified in the third quarter of Fiscal 1992 due to the prolonged period of soft sales experienced in Southern California. Operating Income Operating income in Fiscal 1992 increased to $138.5 million from $115.5 million in Fiscal 1991, a 19.9% increase. Operating margin increased in Fiscal 1992 to 4.9% from 4.0% in Fiscal 1991. This increase was primarily the result of the aforementioned improvements in Ralphs' cost of sales percentage and the vesting of then outstanding rights under Ralphs' 1988 Equity Appreciation Rights Plan. EBITDA, defined as 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, provision for post-retirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring and gains and losses on disposal of assets, improved to $227.3 million or 8.0% of sales in Fiscal 1992 from $225.8 million or 7.8% of sales in Fiscal 1991. Net Interest Expense Net interest expense for Fiscal 1992 was $125.6 million, including an adjustment of $2.3 million related to additional interest on self-insurance, compared to $130.2 million for Fiscal 1991. On July 30, 1992 Ralphs initiated its recapitalization plan, which was designed to reduce interest expense and improve financial flexibility. The first part of the recapitalization plan consisted of a tender offer for its 14% Debentures (of which $301.9 million were tendered), the issuance of $300 million Old RGC 10 1/4% Notes, and the new $470.0 million 1992 Credit Agreement. The 1992 Credit Agreement replaced the 1988 credit agreements (the 49 59 "1988 Credit Agreements"), which were paid in full, including termination of existing interest rate swap agreements. Included as interest expenses during Fiscal 1992 was $105.5 million of cash interest as compared to $115.8 million for Fiscal 1991. Also included in interest expense for Fiscal 1992 was $20.1 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 $14.4 million for Fiscal 1991. Investment income, which is immaterial, has been offset against interest expenses. Recapitalization Charges In Fiscal 1992 Ralphs incurred a non-recurring after-tax charge of $70.6 million (net of a tax benefit of $4.2 million) in connection with the retirement of $400.0 million aggregate principal amount of the 14% Debentures and the write-off of deferred financing costs related to the $400.0 million principal amount of the 14% Debentures and the 1988 Credit Agreements, charges incurred to terminate interest rate swap agreements and costs related to a prospective equity offering. Incurrence of the non-recurring charge resulted in a substantial reduction in income taxes payable in Fiscal 1992. Net Loss In Fiscal 1992, Ralphs reported a net loss of $76.1 million compared to a loss of $41.2 million for Fiscal 1991. This increase in the loss was primarily the result of the consummation of the recapitalization plan, which resulted in an extraordinary charge, net of a tax benefit, of $70.6 million. In addition, a provision of $7.1 million was made for expenses related to the closing of the central bakery operation and a provision of $7.5 million was made for the maximum loss under a judgment rendered against Ralphs in December 1992. 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 12 weeks ended September 18, 1993 and September 17, 1994:
12 WEEKS ENDED 52 WEEKS ENDED ------------------------------------- ---------------------------------------------------------- SEPTEMBER 18, SEPTEMBER 17, JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 1993 1994 ---------------- ---------------- ---------------- ---------------- ---------------- (IN MILLIONS) (UNAUDITED) Sales...................... $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $616.6 100.0% $598.7 100.0% Gross profit............... 520.8 17.9 484.2 17.7 469.3 18.1 112.4 18.2 103.0 17.2 Selling, general, administrative and other, net...................... 469.7 16.1 434.9 15.9 388.8 15.0 95.7 15.5 88.1 14.7 Amortization of excess costs over net assets acquired................. 7.8 0.3 7.6 0.3 7.7 0.3 1.8 0.3 1.8 0.3 Operating income........... 43.3 1.5 41.7 1.5 72.8 2.8 14.9 2.4 13.1 2.2 Interest expense........... 70.2 2.4 69.8 2.5 68.3 2.6 15.7 2.6 16.0 2.7 Loss (gain) on disposal of assets .................. (1.3) -- (2.1) (0.1) -- -- -- -- (0.5) (0.1) Provision for earthquake losses................... -- -- -- -- 4.5 0.2 -- -- -- -- Provision for income taxes.................... 3.4 0.1 1.4 0.1 2.7 0.1 0.3 -- 0.9 0.2 Loss before extraordinary charge................... (29.0) (1.0) (27.4) (1.0) (2.7) (0.1) (1.1) (0.2) (3.3) (0.6) Extraordinary charges...... 4.8 0.2 -- -- -- -- -- -- -- -- Net loss................... (33.8) (1.2) (27.4) (1.0) (2.7) (0.1) (1.1) (0.2) (3.3) (0.6)
COMPARISON OF FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 12 WEEKS ENDED SEPTEMBER 17, 1994 WITH FOOD 4 LESS' RESULTS OF OPERATIONS FOR THE 12 WEEKS ENDED SEPTEMBER 18, 1993 Sales Sales decreased $17.9 million, or 2.9%, from $616.6 million in the 12 weeks ended September 18, 1993, to $598.7 million in the 12 weeks ended September 17, 1994, primarily as a result of a 5.8% decline in 50 60 comparable store sales partially offset by sales from 18 new stores opened since September 18, 1993. Management believes that the decline in comparable store sales is attributable to the continuing softness of the economy in Southern California and, to a lesser extent, in Food 4 Less' other operating areas, and increased competitive store openings and remodels in Southern California. Gross Profit Gross profit decreased as a percentage of sales from 18.2% in the 12 weeks ended September 18, 1993, to 17.2% in the 12 weeks ended September 17, 1994. The decrease in gross profit margin resulted primarily from pricing and promotional activities related to Food 4 Less' "Total Value Pricing" program, 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 the Food 4 Less' conventional stores) from 46 at September 18, 1993, to 69 at September 17, 1994, and the effect of the fixed cost component of gross profit as compared to a lower sales base. The decrease in gross profit was partially offset by improvements in product procurement and an increase in vendors' participation in Food 4 Less' promotional costs. Selling, General, Administrative and Other Expenses, Net Selling, general, administrative and other expenses ("SG&A") were $95.7 million and $88.1 million for the 12 weeks ended September 18, 1993 and September 17, 1994, respectively. SG&A decreased as a percentage of sales from 15.5% to 14.7% for the same periods. Food 4 Less experienced a reduction of workers' compensation and general liability self-insurance costs of $3.5 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 advertising, payroll (due primarily to increased productivity), 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 46 at September 18, 1993, to 69 at September 17, 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 $4.7 million in the 12 weeks ended September 17, 1994. 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. Interest Expense Interest expense (including amortization of deferred financing costs) increased $0.3 million from $15.7 million to $16.0 million for the 12 weeks ended September 18, 1993 and September 17, 1994, respectively. The increase in interest expense was due primarily to increasing interest rates on the revolving credit facility and the term loan portions of the Old F4L Credit Agreement. These increases were partially offset by the reduction of indebtedness under such term loan and such revolving credit facility as a result of amortization payments. 51 61 Net Loss Primarily as a result of the factors discussed above, Food 4 Less' net loss increased from $1.1 million in the 12 weeks ended September 18, 1993, to $3.3 million in the 12 weeks ended September 17, 1994. 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 Expenses, 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 Food 4 Less' credit agreement dated as of June 17, 1991, as amended (the "F4L Credit Agreement"). 52 62 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 Expenses, 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 fees) 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 under the F4L Credit Agreement, 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. 53 63 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 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, Food 4 Less expects to utilize total new financing proceeds in the amount of approximately $1.1 billion. Pursuant to the New Equity Investment, FFL will issue capital stock for total proceeds of approximately $150 million (excluding a $5.0 million commitment fee). In addition, Food 4 Less will enter into the New Credit Facility pursuant to which it will have available up to $900 million of New Term Loans of which not less than $780 million will be drawn at the Closing Date and will have available a $325 million New Revolving Facility. Food 4 Less will also obtain the Senior Unsecured Term Loan, pursuant to which $150 million may be borrowed to fund the purchase of RSI common stock, repayment of certain outstanding indebtedness and the payment of related costs. The proceeds from the New Credit Facility and the Senior Unsecured Term Loan, together with the $150 million proceeds of the New Equity Investment and $100 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 $170 million at Food 4 Less and $279.5 million at Ralphs. Proceeds from the New Term Loans will also be used to pay the cash portion of the Exchange Offers and accrued interest on all exchanged debt securities in the amount of $17.0 million (as of January 15, 1995), to pay $22.8 million to the holders of Ralphs Equity Appreciation Rights and to pay up to $118.5 million of fees and expenses of the Merger and the Financing. The Company will also assume certain existing indebtedness of Food 4 Less and Ralphs. Pursuant to the Exchange Offer described hereunder and the RGC Exchange Offers, Food 4 Less will seek the exchange of at least 80% of the Old RGC Senior Subordinated Notes for the New RGC Senior Subordinated Notes and the exchange of at least 80% of each of the Old F4L Senior Notes and Senior Subordinated Notes for New F4L Senior Notes and New F4L Senior Subordinated Notes, respectively. The primary purpose of the Exchange Offers described hereunder and the RGC Exchange 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 in the Old RGC Indentures and Old F4L Indentures. After the Merger the Company's principal sources of liquidity are expected to be cash flow from operations, borrowings 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 $101 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 January 15, 1995, giving effect to currently anticipated borrowings and letter of credit issuances, the Company's remaining borrowing availability under the New Revolving Facility would have been approximately $224.0 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $450 million, will have a six-year term; (ii) Tranche B, in the amount of $175 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 $150 million, will have a 54 64 nine-year term. The Tranche A Loan may not be fully funded on the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded on the Closing Date will be available for a period of 90 days following the Closing Date to refinance outstanding indebtedness, including to fund the Change of Control Offer, if any, and to refinance the Senior Unsecured Term Loan. The New Term Loans will require quarterly amortization payments aggregating $4.5 million in the first year, $64.5 million in the second year and increasing thereafter. The New Credit Facility will be guaranteed by FFL 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 FFL's 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." The Company's obligations under the Senior Unsecured Term Loan will accrue interest at a rate which shall increase over time, and the Company will be required to either repay such obligations in full within one year following the closing of the Merger or convert the Senior Unsecured Term Loan into long-term senior loans. However, the ability of the Company to convert the Senior Unsecured Term Loan is subject to certain conditions. Food 4 Less has engaged BT Securities as lead underwriter and placement agent with respect to the sale of debt securities to refinance the Senior Unsecured Term Loan and the long-term senior loans. The engagement period shall be for a period of eighteen months following the Closing Date. If following the ninth month after the Closing Date, the Senior Unsecured Term Loan or long-term senior loans are outstanding, upon notice from BT Securities, subject to certain terms and conditions, the Company will cause the issuance and sale of debt securities to refinance such Senior Unsecured Term Loan or long-term senior loans on the terms and conditions specified by BT Securities. While management anticipates issuing debt securities of the Company to refinance the Senior Unsecured Term Loan or the long-term senior loans, as the case may be, within twelve months following the Merger, there can be no assurance that it will able to do so. See "Description of the Senior Unsecured Term Loan." 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 130 conventional stores currently operated by Food 4 Less will be converted to the Ralphs format and 16 conventional stores (primarily Boys and Viva) and 23 Ralphs 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. Other anticipated Merger-related capital expenditures are expected to include the expansion of Ralphs' ASRS and PSC facilities in order to support the additional volume of the Food 4 Less stores. 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 $195 million (or $141 million net of expected capital leases), of which approximately $121.2 million relate to ongoing expenditures for new stores, equipment and maintenance and approximately $73.3 million relate to store conversions and other Merger-related and nonrecurring items. An additional $56 million of Merger-related and non-recurring capital expenditure items (or $44 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. The Company continues to evaluate alternative plans for the consolidation of its warehousing and distribution activities. These include extending the period of time in which Food 4 Less' La Habra distribution facility is used to support Ralphs' two primary facilities. Such a plan, if implemented, would reduce or delay the estimated cost savings in this area, but would also reduce or delay the required capital expenditures. Ralphs cash flow from operating activities was $43.5 million for the 36 weeks ended October 9, 1994 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 $9.5 million of cash from operating activities during the 12 weeks ended September 17, 1994 (as compared to $29.1 million during the 12 weeks ended September 18, 1993). 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 55 65 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 $118.3 million and $58.1 million at October 9, 1994 and September 17, 1994, respectively. Ralphs cash used in investing activities was $45.5 million during Fiscal 1994 and $38.2 million during the thirty-six weeks ended October 9, 1994. 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 12 weeks ended September 17, 1994, Food 4 Less' cash used in investing activities was $14.0 million. Investing activities consisted primarily of capital expenditures of $16.8 million, partially offset by $2.1 million of sale/leaseback transactions. The capital expenditures, net of the proceeds from sale/leaseback transactions, and the Food Barn acquisition costs were financed with cash provided by operating activities. 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 carryforward 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 FFL 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. See "Certain Relationships and Related Transactions." The Company will continue to be a party to an indemnification agreement with Federated and certain other parties. 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 FFL. FFL will have outstanding $103.6 million aggregate principal amount of the Holdings Discount Notes (with an accreted value of $61.4 million) as of September 17, 1994 and following the Merger, FFL will have an additional $100.0 million principal amount of the Seller Debentures outstanding. FFL is a holding company which will have no assets other than the capital stock of the Company. FFL will be required to commence semi-annual cash payments of interest on the Holdings Discount Notes on June 15, 1998 in the amount of approximately $15.8 million per annum. FFL will also be required to commence semi-annual cash payments of interest on the Seller Debentures commencing five years from their date of issuance in the amount of $24.4 million per annum. Subject to the limitations contained in its debt instruments, the Company intends to make dividend payments to FFL in amounts which are sufficient to permit FFL to service its cash interest requirements. The Company may pay other dividends to FFL 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 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 56 66 protection agreements will be replaced by new agreements 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 agreements. 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 -------- -------- 1991............................................ 11.87% 11.52% 1992............................................ 10.52% 10.22% 1993............................................ 8.96% 8.96%
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% 10.52% 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. 57 67 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 343 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 and EBITDA of approximately $5.1 billion and $350 million, respectively, for the twelve months ending June 25, 1994. TWO LEADING COMPLEMENTARY FORMATS In Southern California the Company plans to convert up to 130 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 274 stores and Food 4 Less will be the region's largest warehouse format supermarket chain with 69 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 is currently in the process of converting 16 of its conventional format stores operated under the names "Viva," "Alpha Beta" and "Boys" into Food 4 Less warehouse format supermarkets. These conversions have already begun at the rate of two stores per week. Management expects that each such conversion will take up to eight weeks to complete and may require the store to be closed for up to two weeks during such period. Management believes that these Phase 1 conversions, which were planned independently, will be completed prior to the consummation of the Merger at a cost of approximately $1 million per store. Phase 2. Immediately following the Merger, the Company plans to begin converting up to 130 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 consummation of the Phase 2 conversions, the Company plans to convert 23 conventional Ralphs 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 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. 58 68 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............................... 168 167 274 Food 4 Less Warehouse............................. 30 30 69 Alpha Beta Conventional........................... 129 112 0 Viva Conventional................................. 15 14 0 Boys Conventional................................. 24 20 0 --- --- --- Total........................................... 366 343 343
- --------------- (1) Pro forma store numbers give effect to the anticipated divestiture or closing of 23 stores open at October 1, 1994. An additional 19 stores may be closed post-Merger; however, because the decision to close them, and the timing of such closures, is at management's discretion, these stores have not been eliminated for purposes of the pro forma financial statements. Ralphs Conventional Format. Following completion of the store conversions described above, and pro forma for the Merger, the Company will operate 274 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 130 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 69 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 59 69 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 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 $100 million of net annual cost savings will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $149 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 60% 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 $100 million; however, management has made an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested 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 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 annual advertising cost savings of approximately $28 million will be achieved in the first full year of combined operations. 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. 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; 60 70 (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 will enable the Company to reduce its reliance on outside storage, resulting in lower transportation, labor and equipment costs. The Company plans facility additions for the two Ralphs facilities to accommodate the additional volume. 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 two existing facilities, which will result in lower occupancy expenses, and to sublease a portion of Food 4 Less' main warehouse and distribution facility in La Habra, California. However, the La Habra facility is operated pursuant to a long-term lease which expires in 2001 and may not be sublet or assigned without the lessor's consent. Any proposal to transfer the La Habra lease may result in certain costs to the Company which are not currently quantifiable. Management believes that annual savings of approximately $28 million associated with warehousing and distribution will be achieved, before giving effect to capital expenditures in connection with facilities expansions and facility closing costs, including the renegotiation of existing leases. Such savings are expected to be achieved by the third full year of combined operation. The Company continues to evaluate alternative plans for the consolidation of its warehousing and distribution activities. These include extending the period of time in which Food 4 Less' La Habra distribution facility is used to support Ralph's two primary facilities. Such a plan, if implemented, would reduce or delay the estimated cost savings in this area, but would also reduce or delay the required capital expenditures. 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, management believes that annual cost savings of approximately $12 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, located at Food 4 Less' La Habra facility, that manufactures a broad line of baked goods, 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 facilities. Previously, Ralphs purchased bakery products externally and Food 4 Less manufactured dairy items separately and 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 reduction of occupancy costs, 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 $17 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 61 71 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). 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 will provide the Company with substantial operating benefits, including: (i) enhanced turnover to further improve the freshness and quality of in-store products, (ii) reduction of in-store storage space to increase available selling space, (iii) additional opportunities in forward buying programs and (iv) 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 the adjacent grocery "picking" warehouse where individual store orders are filled and shipped. The Company plans to expand the ASRS facility 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, each of which is currently operated on a short-term lease, pending expansion of Ralphs' ASRS warehouse. 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. Following completion of the Merger, the Company expects to discontinue operation of the La Habra facility, except for the bakery operations, and to supply Food 4 Less' conventional and warehouse supermarkets through Ralphs' manufacturing and distribution facilities. The La Habra facility is operated pursuant to a long-term lease which expires in 2001, and the contemplated closure of portions of such facility may result in certain costs to the Company which are not currently quantifiable. Pending expansion of Ralphs' ASRS warehouse, the La Habra facility is expected to be used as a secondary source of supply for the Company's stores. 62 72 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. 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
Management believes that Ralphs' manufacturing facilities and the La Habra bakery can accommodate the volume requirements of the Company, after planned expenditures of approximately $16.6 million over the next two years. 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' 121-year history and Alpha Beta's 90-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. 63 73 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 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. Moreover, in connection with the Merger, the Company plans to convert approximately 16 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 16 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 87 stores at a cost of approximately $283.6 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 1993, 133 of Ralphs' 165 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 165 stores at January 30, 1994. 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 11 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. 64 74 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 1994, 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 65 75 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 66 76 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 July 17, 1994, Ralphs had 6,052 full-time and 8,755 part-time employees as follows:
EMPLOYEE TYPE UNION NON-UNION TOTAL ------------- ------ --------- ------ Hourly................................. 13,487 250 13,737 Salaried............................... -- 1,070 1,070 ------ ----- ------ Total employees.............. 13,487 1,320 14,807
67 77 Of Ralphs' 14,807 total employees at July 17, 1994, 13,487 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 10,506 clerks and meatcutters October 6, 1996 International Brotherhood of 1,607 drivers and warehousemen September 13, 1998 Teamsters Hotel Employees and Restaurant Employees 906 September 10, 1995 Hospital and Service Employees 323 Los Angeles January 19, 1997 66 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 contracts expiring on March 4, 1995 or June 2, 1996. 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. 68 78 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 TOTAL SELLING SUPERMARKETS SQUARE FEET SQUARE FEET -------------- ----------- ----------- OWNED LEASED (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 69 79 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. RGC has reached an agreement in principle to settle these cases in amounts that are not material to Ralphs financial position or results of operations, but no settlement agreement has been signed. Any settlement would be subject to court approval. Food 4 Less is continuing to actively defend these suits. 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 judgment. 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. 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. 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 70 80 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 with the EPA to investigate 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. 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 several underground storage tanks and remediated soil contamination at the Atwater property. Although the possibility of other localized 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 Ralphs' facilities and Food 4 Less' 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 the mandated 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 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. 71 81 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 FFL following the consummation of the Merger.
YEARS OF SUPERMARKET INDUSTRY SERVICE ---------------------------- NAME AGE POSITION MANAGERIAL POSITIONS TOTAL - ------------------------- --- ----------------------------------- -------------------- ----- Ronald W. Burkle 41 Director and Chairman of the Board 19 24 of FFL and the Company Byron E. Allumbaugh 62 Director and Chief Executive 36 36 Officer of FFL and the Company George G. Golleher 46 Director and Vice Chairman of FFL 21 21 and the Company Alfred A. Marasca 53 Director of the Company and 29 37 President and Chief Operating Officer of FFL and the Company Joe S. Burkle 71 Director and Executive Vice 44 48 President of FFL and the Company Greg Mays 48 Executive Vice President of FFL and 21 21 the Company Terry Peets 50 Executive Vice President of FFL and 17 17 the Company Jan Charles Gray 47 Senior Vice President, General 19 31 Counsel and Secretary of FFL and the Company Alan J. Reed 48 Senior Vice President and Chief 21 21 Financial Officer of FFL and the Company Patrick L. Graham 45 Director of FFL and the Company -- -- Mark A. Resnik 47 Director of FFL 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. 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 72 82 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. Two members will be nominated to the Board of Directors of each of the Company and FFL by Apollo and one member will be nominated to the Board of Directors of each of the Company and FFL by BT Investment Partners, Inc., pursuant to the terms of the 1994 Stockholders Agreement. See "Description of Capital Stock -- New Equity Investment." All directors of the Company will hold office until the election and qualification of their successors. Executive officers of the Company will be chosen by the Board of Directors and will serve at its discretion. It is anticipated that the Company will not pay any fees or remuneration to its directors for service on the board or any board committee, but that the Company will reimburse directors for their ordinary out-of-pocket expenses incurred in connection with attending meetings of the Board of Directors. 73 83 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, 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, 62, 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. 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 President of the Company, will be entitled to receive a base salary of not less than $250,000 and a special 74 84 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, Jan Charles Gray and Terry Peets. 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 $22.8 million in cash. 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). See "-- New Management Stock Option Plan and Management Investment" and "Description of Capital Stock -- New Equity Investment." 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 FFL (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 the Company, and will be allocated as follows: New Options representing 1.5%, 0.5% and 0.5% of the total equity of the Company 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 the Company 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 the Company 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, Gray and Peets, 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. Each holder of New Options (collectively, the "Management Shareholders") will also execute a management shareholder agreement with FFL (collectively, the "Management Shareholder Agreements"). The Management Shareholder Agreements will provide FFL with a right of first refusal with respect to all FFL stock held by the Management Shareholders. In addition, under each of the Management Shareholder 75 85 Agreements FFL will have an option, exercisable during the six-month period following the termination of a Management Shareholder's employment, to repurchase at the Repurchase Price (as defined in the applicable Management Shareholder Agreement) all FFL stock held by such Management Shareholder. Each Management Shareholder Agreement will also provide that if RGC or FFL has a death or disability insurance policy on a Management Shareholder, then such Management Shareholder (or his or her legal representative) will have the option for six months following such Management Shareholder's death or disability to require FFL to repurchase the FFL stock at the Repurchase Price; provided that the aggregate Repurchase Price for such shall be limited to the proceeds FFL receives pursuant to the applicable death or disability insurance policy. Finally, each Management Shareholder Agreement contains certain rights to require the Management Shareholders to sell their FFL stock if shareholders holding at least 50% of the FFL stock agree to a bona fide offer from an independent third party. 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 $100,000 for the year ended January 30, 1994.
LONG TERM COMPENSATION AWARDS ------------------- ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($)(1) - --------------------------- ----- -------- -------- ------------------- ------------------ Byron E. Allumbaugh, 1993 645,000 387,000 N/A 38,575 Chairman and 1992 620,000 372,000 587,753 31,886 Chief Executive Officer 1991 580,000 348,000 N/A N/A Alfred A. Marasca, 1993 340,000 204,000 N/A 18,177 President 1992 296,260 148,125 308,812 11,485 1991 280,500 140,000 N/A N/A Alan J. Reed, 1993 222,500 111,250 N/A 12,904 Senior Vice President, 1992 211,250 105,625 154,406 9,569 Finance and 1991 196,260 98,125 N/A N/A Chief Financial Officer Jan Charles Gray, 1993 207,500 103,750 N/A 13,584 Senior Vice President, 1992 196,250 98,125 154,406 13,593 General Counsel and 1991 181,250 90,625 N/A N/A Secretary Terry Peets, 1993 192,500 96,250 N/A 10,337 Senior Vice President, 1992 182,500 91,250 154,406 10,237 Marketing 1991 171,250 85,625 N/A N/A
- --------------- (1) Represents (i) insurance premiums and the dollar value of the remainder of premiums paid under the Senior Executive Supplemental Benefit Plan and (ii) RGC's contributions under the Ralphs Thrift Incentive Plan. The respective amounts paid for Messrs. Allumbaugh, Marasca, Reed, Gray and Peets are as follows: (A) insurance premiums: $18,500, $8,890, $6,662, $7,250 and $4,210; (B) dollar value of the remainder of premiums: $18,500, $6,600, $4,025, $4,500 and $4,210; (C) incentive plan contributions: $1,575, $2,687, $2,217, $1,834 and $1,917. 76 86 AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR VALUES -- RALPHS
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($) ACQUIRED --------------------- -------------------- ON EXERCISE VALUE EXERCISABLE/ EXERCISABLE/ NAME (#)(1) REALIZED($) UNEXERCISABLE(2) UNEXERCISABLE(3)(4) - -------------------------------- ----------- ----------- --------------------- -------------------- Byron E. Allumbaugh............. 70,000 1,961,646 235,102/ 0/ 562,651 5,884,935 Alfred A. Marasca............... 9,000 252,212 61,762/ 0/ 319,050 2,017,692 Alan J. Reed.................... 7,000 196,165 30,882/ 0/ 179,524 1,569,316 Jan Charles Gray................ 5,000 140,118 30,882/ 0/ 163,524 1,120,939 Terry Peets..................... 5,000 140,118 30,882/ 0/ 163,524 1,120,939
- --------------- (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 FFL, 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, Gray and Peets is expected to equal approximately $8.0 million, $2.7 million, $2.1 million, $1.7 million and $1.5 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. 77 87 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, 1994 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 84,763 113,017 141,271 169,526 169,526 400,000 114,763 153,017 191,271 229,526 229,526 600,000 174,763 233,017 291,271 349,526 349,526 800,000 234,763 313,017 391,271 469,526 469,526 1,000,000 294,763 393,017 491,271 589,526 589,526 1,200,000 354,763 473,017 591,271 709,526 709,526
Messrs. Allumbaugh, Marasca, Reed, Gray and Peets have completed 36, 37, 21, 31 and 17 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. 78 88 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 62,829 shares, or 4.5%, of Holdings' Common Stock. Under the Management Equity Program, the Board of Directors of Holdings from time to time offers 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. The shares vest over a three or four-year period for purposes of the repurchase price determination, which may result in a more favorable price for vested stock than for unvested stock, but the shares do not vest in any other sense. In the event of the death or permanent disability of the Management Stockholder, each Management Stockholder has an irrevocable option for six months 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. 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 December 31, 2001 (unless extended by such Management Stockholders). Messrs. Burkle and Golleher also have rights which vary in certain respects from the rights of the other Management Stockholders under the Stockholders Agreement. Among other differences, Messrs. Burkle and Golleher have (i) rights to subscribe to offerings of additional shares of the Common Stock of Holdings, (ii) "piggyback" registration rights in the event of a public offering of Common Stock (if and to the extent permitted by Holdings' underwriter) and (iii) "tag-along" rights to participate in certain sales of Common Stock of Holdings. In addition, Mr. Golleher has the right to be elected to the Board of Directors of Holdings so long as he beneficially owns shares of Common Stock of Holdings. The Stockholders Agreement terminates automatically, in the case of Messrs. Burkle and Golleher, upon a change of control of Holdings or upon an underwritten public offering of Holdings' Common Stock (subject to certain exceptions). In the case of the other Management Stockholders, the Stockholders Agreement terminates on the tenth anniversary of the original share issuance. The Company anticipates that certain modifications may be made to the terms of the Food 4 Less Stock Plan in connection with the consummation of the Merger. As of July 25, 1994, there was outstanding $0.6 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. 79 89 PRINCIPAL STOCKHOLDERS The information in the following table gives effect to (i) the Merger and the Financing, (ii) the reclassification of the capital stock of FFL to be effected prior to the Merger and (iii) the FFL Merger. The information in the following table assumes that the outstanding stock options of RSI have been cancelled, that certain new stock options of FFL have been granted to management and that certain warrants to purchase FFL 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 FFL by each person known to Food 4 Less to be the owner of 5% or more of FFL's 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.
SERIES A SERIES B COMMON PREFERRED PREFERRED STOCK(1)(2) 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)........ 14,547,447 57.7% -- -- -- -- 33.9% 31.6% Ronald W. Burkle(4)(6)... 2,094,792 10.4% -- -- -- -- 5.5% 5.1% George G. Golleher (2)(4)(6).............. 461,971 2.3% -- -- -- -- 1.2% 1.1% 10000 Santa Monica Boulevard, Los Angeles, California 90067 ---------- ----- ----- ----- Total................ 17,104,210 67.8% -- -- -- -- 39.9% 37.2% Byron E. Allumbaugh(2)..... 600,000 3.0% -- -- -- -- 1.6% 1.5% Alfred A. Marasca(2)....... 200,000 1.0% -- -- -- -- 0.5% 0.5% Greg Mays(7)............... -- -- -- -- -- -- -- -- Apollo Advisors, L.P.(8) 2 Manhattanville Road Purchase, NY 10577....... 1,282,454 6.3% 12,271,049 69.4% -- -- 35.8% 33.1% BT Investment Partners, Inc.(9) 130 Liberty Street New York, NY 10006....... 508,737 2.5% 900,000 5.1% 3,100,000 100% 3.7% 11.0% New Equity Investors as a group(10)........... 4,500,000 25.5% -- -- 11.9% 11.0% All directors and executive officers as a group (15 persons)(2)(4)(5)(6)..... 17,904,210 71.0% -- -- -- -- 41.7% 38.9%
- --------------- (1) Gives effect to (i) a 2.077428774-for-one stock split to be effected with respect to the outstanding common stock of FFL prior to the Merger, (ii) the issuance by FFL of 11,900,000 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in connection with the New Equity Investment, (iii) the issuance by FFL of 5,771,049 shares of Series A Preferred Stock in exchange for previously outstanding shares of its Common Stock, (iv) the conversion (in connection with the merger of FFL and Holdings) of the outstanding common stock, and warrants to acquire common stock, of Holdings into newly-issued Common Stock or warrants to acquire Common Stock of FFL in an amount which will preserve the proportionate ownership interests of the equity holders of Holdings, and of FFL's stockholders, in the combined Company, and (v) the exercise of such warrants to acquire FFL Common Stock issued in connection with the merger of FFL and Holdings. See "Description of Capital Stock." (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 FFL 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 to 1,000,000 shares of FFL 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. 80 90 (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 FFL investors which will give to Yucaipa the right to elect a majority of the directors of FFL. See "Description of Capital Stock -- 1994 Stockholders Agreement." (5) Share amount and percentages shown for Yucaipa include a warrant to purchase 5,000,000 shares of FFL Common Stock, exercisable at $31.25 per share, to be issued to Yucaipa concurrently with the completion of the Merger and the Financing. See "Description of Capital Stock -- Yucaipa Warrant." (6) Certain management stockholders who own in the aggregate 903,244 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 903,244 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 1,191,548 and 461,971 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) Mr. Mays owns 8,871 of the 903,244 shares of Common Stock which are subject to the Stockholder Voting Agreement and Proxy described in note (6) above. (8) 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. (9) Represents shares owned by 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. (10) Includes certain institutional investors, other than Apollo and BTIP, which will purchase Series A Preferred Stock of FFL in connection with the Financing. Pursuant to the 1994 Stockholders Agreement, certain corporate actions by FFL and its subsidiaries will require the consent of a majority of the directors whom the New Equity Investors, including Apollo and BTIP, are entitled to elect to the FFL Board of Directors. See "Description of Capital Stock -- 1994 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 FFL 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 FFL to be authorized and outstanding upon completion of the Merger and the FFL Merger, including the terms of the New Equity Investment to be made in FFL concurrently 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 FFL. 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. FFL Prior to completion of the Merger, the certificate of incorporation of FFL will be amended to provide for a 2.077428774-for-one stock split to be effected with respect to the outstanding common stock of FFL, and to authorize the creation of the Series A Preferred Stock and Series B Preferred Stock to be issued in connection with the New Equity Investment. Following completion of the Merger and the New Equity Investment and giving effect to the FFL Merger, (i) the authorized capital stock of FFL 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) 17,224,313 shares of common stock, 17,671,049 shares 81 91 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) 2,004,638 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 5,000,000 shares of common stock will be reserved for issuance upon the exercise of an outstanding warrant to be issued upon closing of the Merger to an affiliate of Yucaipa. See "Yucaipa Warrant" below. There is no public trading market for the capital stock of FFL, nor will any such market exist following completion of the Merger. FFL does not expect in the foreseeable future to pay any dividends on its capital stock. Holders of common stock of FFL are entitled to dividends when and as declared by the Board of Directors of FFL from funds legally available therefor, and upon liquidation, are entitled to share ratably in any distribution to holders of common stock. All holders of FFL common stock are entitled to one vote per share on any matter coming before the stockholders for a vote. The Series A Preferred Stock will have an aggregate liquidation preference of $176,710,490. Aside from priority in respect of liquidation, the holders of the Series A Preferred Stock will have in all respects the same rights, including with respect to voting and dividends, as the holders of FFL common stock have, and will vote 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 one share of FFL common stock. Upon consummation of an initial public offering of FFL equity securities which meets certain criteria, each share of Series A Preferred Stock will automatically convert into one share of common stock of FFL. The Series B Preferred Stock will have an aggregate liquidation preference of $31,000,000. 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. Each share of Series B Preferred Stock initially will be convertible at the option of the holder thereof into one share of FFL common stock upon the occurrence of a Change of Control (as defined in the New F4L Indentures). See "Description of the New F4L Notes." Shares of Series B Preferred Stock to be sold pursuant to Rule 144 under the Securities Act or in a registered offering (including pursuant to the terms of the registration rights agreement to which the New Equity Investors will be party) and shares of Series B Preferred Stock to be sold pursuant to certain provisions of the 1994 Stockholders Agreement may also be converted (subject to certain conditions) into shares of FFL common stock. In the event that the Series B Preferred Stock becomes convertible, the holders thereof will be required to convert the Series B Preferred Stock into FFL common stock if or to the extent requested by FFL or Yucaipa. Upon consummation of an initial public offering of FFL equity securities which meets certain criteria, each share of Series B Preferred Stock will automatically convert into one share of common stock of FFL. 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. Each share of Series A Preferred Stock and Series B Preferred Stock will have identical rights with respect to dividends and distributions, provided that if dividends are declared which are payable in voting securities of FFL, FFL 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 FFL which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities on the same terms as those by which the Series B Preferred Stock is convertible into FFL common stock. NEW EQUITY INVESTMENT Concurrently with the issuance of the New Notes and the closing of the Merger, FFL will issue 11,900,000 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in a private placement to a group of investors led by Apollo and including the Dealer Managers or their affiliates and other institutional investors (the "New Equity Investors") for a purchase price of $10 per share of Series A Preferred Stock or Series B Preferred Stock, or an aggregate purchase price of $150 million. At the time of such issuance, certain existing stockholders of FFL, including affiliates of George Soros, will sell 5,771,049 82 92 outstanding shares of common stock of FFL for an aggregate purchase price of $57.7 million (which represents the same price per share as will be paid in the New Equity Investment). The financing for such purchase will be provided through the issuance of 5,771,049 additional shares of Series A Preferred Stock to the New Equity Investors. The shares of Series A Preferred Stock and Series B Preferred Stock acquired by the New Equity Investors will represent approximately 43% in the aggregate of the fully diluted common equity of FFL following the FFL Merger. See "Principal Stockholders." The $150 million proceeds from the issuance of Series A Preferred Stock and Series B Preferred Stock by FFL will be applied by FFL 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 $150 million of the Series A Preferred Stock to be offered by FFL as part of the New Equity Investment. In consideration of its Equity Commitment, Apollo will receive a fee of $5 million from the Company upon the closing of the Merger. 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, and by certain other investors. The amounts of FFL stock expected to be held by Apollo, affiliates of Bankers Trust and all other holders of 5% or more of FFL's outstanding stock following completion of the Merger and the Financing are set forth above under "Principal Stockholders." 1994 STOCKHOLDERS AGREEMENT Under the terms of the 1994 Stockholders Agreement (which is expected to be entered into by FFL, Yucaipa and its affiliates, the New Equity Investors and other stockholders), the New Equity Investors will be entitled to nominate three directors to the Board of Directors of each of FFL and the Company (the "Series A Directors"), of which two directors will be nominees of Apollo and one director will be a nominee of BTIP. The 1994 Stockholders Agreement will give to Yucaipa the right to nominate six directors of FFL and seven directors of the Company, and the boards of FFL and the Company will consist of a total of nine and ten directors, respectively. Unless and until FFL has effected an initial public offering of its equity securities, FFL and its subsidiaries may not take certain actions without the approval of a majority 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 FFL 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 FFL stock. The Company intends to seek the agreement of the current stockholders of FFL (other than management stockholders) to become party to the 1994 Stockholders Agreement, which would grant to such holders certain rights thereunder in replacement of two existing stockholders agreements among FFL and its stockholders entered into in 1987 and 1991, respectively. YUCAIPA WARRANT Upon closing of the Merger, FFL has agreed to issue to Yucaipa a warrant to purchase up to 5,000,000 shares of FFL Common Stock. The initial exercise price of such warrant will be $31.25 per share. Such warrant will be exercisable on a cashless basis at the election of Yucaipa in the event FFL completes an initial public offering of equity securities meeting certain criteria, or in connection with certain sale transactions involving FFL, in either case effected on or prior to the fifth anniversary of the closing. The expiration date of such warrant, and the deadline for such triggering transactions, may be extended from the fifth to the seventh anniversary of closing if FFL 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 FFL will withhold from the shares otherwise issuable upon exercise thereof a number of shares having a fair market value as of the exercise date equal to the exercise price. 83 93 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 1993). 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 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 is automatically renewed on January 1 of each year for a five-year term unless ninety days' notice is given by either party. The agreement may be terminated at any time by the Company, provided that Yucaipa will be entitled to full monthly payments under the agreement for the remaining term thereof, unless the Company terminates for cause pursuant to the terms of the agreement. Yucaipa may terminate the agreement if the Company fails to make a payment due thereunder, or if there occurs a change of control (as defined in the agreement) of the Company, and upon any such termination Yucaipa will be entitled to full monthly payments for the remainder of the five-year period commencing on the closing of the Merger. Pursuant to the agreement, Food 4 Less paid Yucaipa a 84 94 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. Upon closing of the Merger, Yucaipa will be entitled to receive an advisory fee from the Company in the amount of $24 million, plus reimbursement of expenses. At the option of Yucaipa, up to $5 million of such fee may be paid in the form of common stock of FFL. See "Description of Capital Stock." In consideration of its commitment to purchase Series A Preferred Stock of FFL, Apollo will receive a fee of $5 million from the Company upon the closing of the Merger. See "Description of Capital Stock--New Equity Investment." In addition, upon closing of the Merger, Yucaipa anticipates that it will pay a fee of approximately $3.5 million to Soros Fund Management in consideration of advisory services which Soros Fund Management has rendered since 1991. The Company has no responsibility for such payment by Yucaipa. 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. 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). 85 95 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 and the Senior Unsecured Term Loan will become the obligations of the Company. In connection with the consummation of the Merger, Food 4 Less and RGC desire to replace the existing long-term debt of Food 4 Less and RGC with long-term debt of the Company in order to simplify the capital structure of the surviving entity in the Merger and to provide the Company with appropriate operating and financial flexibility following the Merger. Accordingly, Food 4 Less is making the Exchange Offers to afford Old F4L Noteholders an opportunity to choose 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, $1,000 principal amount of New F4L Senior Notes and $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, $1,000 principal amount of New F4L Senior Subordinated Notes and $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." 86 96 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 November 1, 1994, (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. 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 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. 87 97 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 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." 88 98 EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS Each Exchange Offer and the Solicitation will expire at 10:00 a.m., New York City time, on , 1995 (the "Expiration Date"), unless extended by Food 4 Less. Food 4 Less reserves the right to 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 extended by Food 4 Less, shall expire. 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, the Senior Unsecured Term Loan 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. 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. 89 99 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 Tenders shall not have been validly tendered for exchange (or shall have been withdrawn); (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 shall not have been consummated; (v) any of the Bank Financing, the Senior Unsecured Term Loan 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, the Senior Unsecured Term Loan or the New 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); 90 100 (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 determination by Food 4 Less concerning the events described in this section shall be final and binding upon all persons. 91 101 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 10:00 a.m., 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 must therefore sign the "CONSENT" portion of the Letter of Transmittal. However, a holder of Old F4L Notes who signs the Letter of Transmittal shall be deemed to consent to the Proposed Amendments notwithstanding the failure to mark the "CONSENT" portion of the Letter of Transmittal. 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 BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. Instead of 92 102 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 10:00 a.m., 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 10:00 a.m., New York City time, on the Expiration Date. Any Old F4L Notes properly tendered prior to 10:00 a.m., 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. Rather, the federal income tax liability of a person subject to backup withholding will be reduced by the 93 103 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 Prospectus and Solicitation Statement prior to 10:00 a.m., 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 10:00 a.m., New York City time, on the Expiration Date, then such Old F4L Notes may nevertheless be 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 10:00 a.m., 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 94 104 (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 10:00 a.m., 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. 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. 95 105 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 or 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 applicable Consent Date (as hereinafter defined) with respect to the Old F4L Senior Notes or the Old F4L Senior Subordinated Notes, as the case may be, and, thereafter, if the Exchange Offer with respect to such issue of Old F4L Notes is terminated without any Old F4L Notes being exchanged 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. The "Consent Date" for the Old F4L Senior Notes and the Old F4L Senior Subordinated Notes, as the case may be, will be the date and time on which 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) to the Proposed Amendments are delivered by Food 4 Less to the applicable Old Trustee and the applicable Supplemental Indenture relating to such Old F4L Notes has been executed. A different Consent Date may be established with respect to Consents that are received and that relate to the Old F4L Senior Note Indenture and Consents that are received and that relate to the Old F4L Senior Subordinated Note Indenture. 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. 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, 96 106 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 10:00 a.m., New York City time, on the Expiration Date. If Food 4 Less (a) decreases or increases the principal amount of Old F4L Notes subject to the Exchange Offer or (b) changes the consideration offered pursuant to the Exchange Offers or the Solicitation in a manner adverse to tendering Old F4L Noteholders, previously tendered Old F4L Notes affected by such change may be withdrawn by the Old F4L Noteholders until the expiration of ten business days after the date that notice of any such decrease, increase or change is first published, given or sent by Food 4 Less to Old F4L Noteholders. In addition, if either Exchange Offer or the Solicitation is amended in a manner determined by Food 4 Less to constitute a material adverse change to the Old F4L Noteholders, Food 4 Less promptly will disclose such amendment in a public announcement and will extend the relevant Exchange Offer or the Solicitation for a period deemed by it to be adequate to permit the Old F4L Noteholders to properly deliver or withdraw their Old F4L Notes and give or revoke Consents. 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 97 107 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 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 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
DEALER MANAGERS Subject to the terms and conditions set forth in the Dealer Manager Agreement (the "Dealer Manager Agreement") dated , 1994, among Holdings, Food 4 Less and the Subsidiary Guarantors (together, the "Issuers") and BT Securities, and CS First Boston, as dealer managers and solicitation agents (the "Dealer Managers"), the Issuers have engaged BT Securities and CS First Boston to act as Dealer Managers and Solicitation Agents in connection with the Exchange Offers, the Solicitation, the RGC Exchange Offers and the Holdings Consent Solicitation. 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 accepted for exchange in the Exchange Offers, (ii) 1.0% of the aggregate principal amount of Old RGC Notes accepted for exchange in the RGC Exchange Offers and (iii) 0.5% of the aggregate principal amount of Old F4L Notes, Old RGC Notes and Holdings Discount Notes in respect of which a consent is accepted in the Solicitation, the RGC Exchange Offer and the Holdings Consent Solicitation (other than Old RGC Notes and Old F4L Notes accepted for exchange in the RGC Exchange Offer and the Exchange Offer). 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 Exchange Offers and the Holdings Consent Solicitation. 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 Consent Solicitation, 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." Bankers Trust New York Corporation ("BTNY") has provided a commitment letter to Food 4 Less to make the Senior Unsecured Term Loan. Food 4 Less has also retained BT Securities as lead underwriter and placement agent with respect to any debt securities sold or placed by Food 4 Less in connection with the Merger, including debt securities the proceeds of which are used to refinance the Senior Unsecured Term Loan. BT Securities will receive customary fees in connection with such services. See "Description of the Senior Unsecured Term Loan." In addition, BTIP is investing in the capital stock of FFL pursuant to the New Equity Investment. After giving effect to the Merger, BTIP will own in the aggregate approximately 900,000 shares of Series A Preferred Stock and approximately 3,100,000 shares of Series B Preferred Stock and affiliates of CS First Boston will own approximately 1,000,000 shares of Series A Preferred Stock. Affiliates of BTIP additionally 98 108 own 508,737 shares of FFL common stock which they had previously acquired. See "Principal Stockholders" and "Description of Capital Stock." Each of BT Securities and CS First Boston 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. BT Securities and CS First Boston 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 Exchange Offers or the Holdings Consent Solicitation. 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 Prospectus and Solicitation Statement. INFORMATION AGENT D. K. King & Co., Inc. is serving as Information Agent in connection with the Exchange Offer and the Solicitation. The Information Agent will assist with the mailing of this 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 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 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 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. The total cash expenditures to be incurred by Food 4 Less in connection with the Exchange Offers and the Solicitation, other than payments to the Dealer Managers, but including printing, accounting and legal 99 109 fees and the fees and expenses of the Exchange Agent, the Information Agent and the trustees under the Old F4L Indentures and the New F4L Note Indentures, are estimated to be approximately $ 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 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 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. 100 110 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 January , 1995, by and among the Company, the Subsidiary Guarantors and , 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 January , 1995, by and among the Company, the Subsidiary Guarantors and , 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 Note Holders") or of the New F4L Senior Subordinated Notes (the "Senior Subordinated Note Holders," and together with the Senior Note Holders, 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 are limited in aggregate principal amount to $175,000,000 and will mature on January , 2004. Interest on the New F4L Senior Notes will accrue at the rate of % per annum (which will be set based upon the Applicable Treasury Rate (as hereinafter defined) plus 350 basis points (3.50 percentage points)). 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 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 January and July , commencing on July , 1995, to the New F4L Senior Note 101 111 holders of record on the immediately preceding January and July . 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 $145,000,000 and will mature on January , 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 January and July , commencing on July , 1995, to the Senior Subordinated Note Holders of record on the immediately preceding January and July . 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 April 15, 1996, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on April 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
YEAR PERCENTAGE ---- ---------- 1996............................. 104.48% 1997............................. 102.99% 1998............................. 101.49% 1999 and thereafter.............. 100.00%
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 on June 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
YEAR PERCENTAGE ---- ---------- 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. 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 102 112 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 and the Senior Unsecured Term Loan 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 September 17, 1994, 1994 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 $1,047.6 million (and the Company would have had $224.0 million available to be borrowed under the Credit Agreement). SUBORDINATION OF THE NEW F4L SENIOR SUBORDINATED NOTES The payment of the principal of, premium, if any, and interest 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 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 provision described under "-- Defeasance" below) by or on behalf of the Company of principal of, premium, if any, or interest 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, after which the Company shall 103 113 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" 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), 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 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 September 17, 1994, on a pro forma basis after giving effect to the Merger, the aggregate principal amount of Senior Indebtedness outstanding (excluding Company guarantees of certain Guarantor Senior Indebtedness) would have been approximately $1,244.0 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 $116.7 million, and the Company would have had $224.0 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 principal of, premium, if any, and interest 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". 104 114 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 Notes 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 preceeding 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 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 105 115 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 and until 5:00 p.m. New York City time on the applicable Change of Control Payment Date. 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 (i) 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 and (ii) either (a) repay in full all Indebtedness under the Senior Unsecured Term Loan Agreement (or offer to repay in full all such Indebtedness and repay the Indebtedness to each lender which has accepted such offer) or (b) obtain the requisite consents under the Senior Unsecured Term Loan Agreement to permit the repurchase of the New F4L 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 refinancing 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 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) $25,000,000. 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 106 116 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, and (4) 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), (v), (vi) or (vii) 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) or (ii) 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. 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 107 117 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 of 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 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, (x) the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets 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 180 days following such acquisition or the completion of such construction, as the case may be, and (y) the proceeds of which in the aggregate do not exceed $20 million; provided, further that 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 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). 108 118 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 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 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 Loans or (b) pledge any intercompany notes representing obligations of any of its Subsidiaries, to secure the payment of any Indebtedness under the Term Loans, 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 109 119 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, (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 Officers' Certificate to the applicable New Trustee certifying that such Affiliate Transaction complies with clause (y) above 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 that 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 obtainable 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 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 FFL) is a party as of the Issue Date and any similar agreements which it (or FFL) 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 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) purchases or sales of goods or services or other transactions with suppliers, 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, 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 Merger 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 110 120 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 of 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. 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 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 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 Guarantee is subordinated to Senior Guarantor Indebtedness of such Subsidiary Guarantor, as the case may be. 111 121 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 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 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, 112 122 insolvency, receivership or reorganization of the Company or a Subsidiary Guarantor 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 of 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 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 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; (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 113 123 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 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 (f) and (g) under the first paragraph under "-- Events of Default" above are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the applicable New Indenture or any other material agreement or 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); (vi) 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) 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 Indenture, after the 91st day following the deposit and (B) after the 91st day following the deposit the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) 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 (viii) 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) the Company has paid all sums payable by it under such New Indenture; and (iii) 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. 114 124 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 the Change of Control Payment Date or alter the redemption provisions in the applicable New Indenture or the applicable New F4L Notes or the purchase price in connection with any repurchase of New F4L Notes pursuant to the covenant described under "-- Change of Control" above 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 as provided for in the applicable New Indenture, the applicable New F4L Notes and the applicable Guarantees, (7) waive an Default or Event of Default resulting from a failure to comply with the covenant described under "-- Change of Control" above or (8) 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 applicable New F4L Note or Guarantee and (ii) 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 and 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 ambiguity 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 115 125 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. 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 Securities 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 116 126 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-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 or (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. "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 Resolution" means a duly adopted resolution of the Board of Directors of the Company. "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. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Corporation 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) and (v) 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 Corporation. "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 FFL or the Company such that, as a result of such acquisition, such person, entity or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, 40% or more of the then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of 117 127 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. "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. "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 case may be, amended, extended, renewed, restated, supplemented or otherwise modified (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 or refinance the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or such agreement. 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. 118 128 "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 $50,000,000 in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. "Disqualified Capital Stock" means, with respect to 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 repurchaseable 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 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 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. "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 exception), 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) and (ii) dividend requirements on Capital Stock of such person and its consolidated subsidiaries (whether in cash or otherwise (except dividends payable in shares of Qualified Capital Stock)) paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) and excluding items eliminated in consolidation. For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be 119 129 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 clause (ii) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is the amount of such dividend requirements and the denominator of which is one (1) minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. "FFL" means Food 4 Less, Inc., a Delaware corporation and its successors, including, without limitation, Food 4 Less, Inc. following the FFL Merger. "FFL Merger" means the merger, prior to the Merger, of Food 4 Less, Inc. and Food 4 Less Holdings, Inc. "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 and the Senior Unsecured Term Loan 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 and the Senior Unsecured Term Loan Agreement and, in the case of the Credit Agreement, the Letters of Credit Obligations. 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. 120 130 "Holdings Discount Notes" means the 15.25% Senior Discount Notes due 2004 of Holdings, as the same may be modified or amended from time to time and refinancings thereof. "Indebtedness" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person; (iii) reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to interest swap obligations and foreign exchange agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be 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 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 a purchase of assets, in any transaction or series of related transactions, individually or in the aggregate, in an amount greater than $5 million, share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances or to 121 131 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 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, January , 2004 and (ii) with respect to the New F4L Senior Subordinated Notes, January , 2005. "Merger" means (i) the merger of Food 4 Less Supermarkets, Inc. into Ralph Supermarkets, Inc. (with Ralph 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 Supermarket, 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 of 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. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable 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 122 132 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 they 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 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 persons, (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 participant therein or any of its subsidiaries, (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 $900 million, less the aggregate amount of all principal repayments thereunder pursuant to and in accordance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above subsequent to the Issue Date, 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 123 133 time outstanding not to exceed $325.0 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 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 $150.0 million in the aggregate, 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 Prospectus and Solicitation Statement; (e) Indebtedness of the Company 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 $25.0 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) Indebtedness of the Company outstanding under the Senior Unsecured Term Loan Agreement in an aggregate principal amount at any time outstanding not to exceed $150 million, less the aggregate amount of all principal repayments thereunder subsequent to the Issue Date; (k) other Indebtedness outstanding on the Issue Date (after giving effect to the Merger); (l) 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; (m) obligations in respect of performance bonds and completion guarantees provided by the Company or any Subsidiary in the ordinary course of business; and (n) additional Indebtedness of the Company and the Subsidiary Guarantors in an amount not to exceed $200.0 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 $5.0 million. "Permitted Liens" shall mean (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 124 134 with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehouseman, 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 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; and (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) 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 to The Yucaipa Companies or the principals or any Affiliates thereof for consulting, management, investment banking or similar advisory services during such period pursuant to that certain Amended and Restated Consulting Agreement, dated as of the Issue Date, between Food 4 Less 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), (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 125 135 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 (a) in connection with repurchases of outstanding shares of the Company's or FFL's Common Stock following the death, disability or termination of employment of management stockholders, and (b) of amounts required to be paid by FFL, the Company or any of its Subsidiaries to participants in employee benefit plans upon termination of employment by such participants, as provided in the documents related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period), (v) from and after June 30, 1998, payments of cash dividends to FFL in an amount sufficient to enable FFL to make payments of interest required to be made in respect of the Holdings Discount Notes in accordance with the terms thereof in effect on the Issue Date, (vi) from and after January , 2000, payments of cash dividends to FFL in an amount sufficient to enable FFL to make payments of interest required to be made in respect of the Seller Debentures in accordance with the terms thereof in effect on the Issue Date, and (vii) dividends or other payments to FFL sufficient to enable FFL 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 and the registration under applicable laws and regulations of its debt or equity securities. "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 Designted 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, and (iv) any investment fund, investment account or investment entity whose investment managers, investment advisors and general partners consist solely of such person and/or Permitted Transferees of such person. "Plan of Liquidation" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "Preferred Stock" means, with respect to any person, Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such person, over shares of Capital Stock of any other class of such person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of the Indenture, 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. "Qualified Capital Stock" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. 126 136 "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 (a), (c), (d), (h), (j) and (k) 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 New F4L Notes and (y) shall contain subordination and default provisions no less favorable in any material respect to holders of the New F4L Notes than those contained in such repaid or amended Subordinated Indebtedness. "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 (without regard to the $5 million threshold in the definition thereof), 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. "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% Senior Subordinated Pay-in-Kind Debentures of Holdings, as the same may be modified or amended from time to time and future 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 and the Senior Unsecured Term Loan 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 Senior Unsecured Term Loan Agreement 127 137 and, in the case of the Credit Agreement, 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 Code. 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. "Senior Unsecured Term Loan Agreement" means the Senior Unsecured Term Loan Agreement, dated as of the Issue Date, by and among Food 4 Less, certain of its subsidiaries and Bankers Trust New York Corporation, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (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 or refinance the borrowings and commitments then outstanding or permitted to be outstanding under such Senior Unsecured Term Loan Agreement or such agreement. The Company shall promptly notify the New Trustee of any such refunding or refinancing of the Senior Unsecured Term Loan Agreement. "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 date hereof) 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 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 128 138 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. "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 29, 1996. "The Yucaipa Companies" means The Yucaipa Companies, a California General Partnership. 129 139 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 obtain current information with respect to market prices for 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. 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). 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 130 140 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. 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. 131 141 THE RGC EXCHANGE OFFERS Concurrently with the Exchange Offers, Food 4 Less is offering to holders of the Old RGC Notes the opportunity to exchange such Old RGC Notes for New RGC Notes and $5.00 in cash for each $1,000 principal amount exchanged, plus accrued and unpaid interest to the date of exchange. The consummation of the RCG Exchange Offers will occur simultaneously with the consummation of the Exchange Offers. The obligation of Food 4 Less to accept for exchange any validly tendered Old RGC Note is conditioned upon the satisfaction or waiver of certain conditions, including (i) satisfaction of a minimum tender amount (i.e., at least 80% of the aggregate principal amount of the outstanding Old RGC Notes being validly tendered and not withdrawn pursuant to the RGC Exchange 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 Holdings Consent Solicitation and the Exchange Offers with respect to the Old F4L Notes described herein; (v) the prior or contemporaneous consummation of the Bank Financing, the New Equity Investment and the execution of the Senior Unsecured Term Loan, and (vi) certain other conditions. 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 Exchange 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). 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.) In the event of a Change of Control (the occurrence of both a Change of Control and a Rating Decline (both as defined in the Old RGC Indentures)), each holder of Old RGC 9% Notes and Old RGC 10 1/4% Notes will have the right to require RGC to repurchase such holder's Old RGC Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon. The Merger will constitute a Change of Control 132 142 under the Old RGC Indentures. In the event that following the consummation of the Merger there is a Rating Decline with respect to the Old RGC Notes, the Company will be obligated under the Old RGC Indentures to make a change of control offer to holders who do not tender into the RGC Exchange Offers to purchase such holders' Old RGC Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. 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 Exchange 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, the 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 Note 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 Exchange Offer to tendering holders of Old RGC Notes. The terms of the New RGC Notes are in many respects similar to the terms of the New F4L Senior Subordinated Notes. The New RGC Notes will bear interest at the rate of % per annum (which will be set based upon the RGC Applicable Treasury Rate (as defined) plus 400 basis points (4.00 percentage points)). 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 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. The New RGC Notes will mature on January , 2005. On or after January , 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 January of the years set forth below:
YEAR PERCENTAGE ---- ---------- 2000.................................... % 2001.................................... % 2002.................................... %
133 143 and thereafter at 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. In addition, on or prior to January , 1998 the Company may, at its option, use the net cash 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 % of the principal amount thereof, plus accrued and unpaid interest to the redemption date. 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 incurrence 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 $450 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 Indentures. 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 $1.225 billion 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 $900 million, comprised of the $450 million Tranche A Loan, the $175 million Tranche B Loan, the $125 million Tranche C Loan, and the $150 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 $101 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 (as defined). 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 90 days following the Closing Date to refinance outstanding indebtedness, including to fund the Change of Control Offer, if any, and to refinance the Senior Unsecured Term Loan. Proceeds of the New Term Loans, together with proceeds from the New Equity Investment and the Senior Unsecured Term Loan, will be used to fund the cash requirements for the acquisition of RSI, refinance existing bank indebtedness of Ralphs and Food 4 Less, purchase 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 134 144 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 1.25% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.50% per annum; (ii) the Tranche B Loan will bear interest at the Base Rate plus 1.75% per annum or the reserve adjusted Euro-Dollar Rate plus 3.00% per annum; (iii) the Tranche C Loan will bear interest at the Base Rate plus 2.125% per annum or the reserve adjusted Euro-Dollar Rate plus 3.375% per annum; and (iv) the Tranche D 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, in each case as 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 Term Loans have been reduced by such amounts 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 0.75% 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 certain fees on the standby and the commercial letters of credit and 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. 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 $60 million in the second year, $90 million in the third year, $95 million in the fourth year, $100 million in the fifth year, and $105 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 $1.75 million for the first six years and $164.5 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 $1.5 million for the first eight years and $138 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 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 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. GUARANTEES AND COLLATERAL FFL 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 all personal property of the Company and its subsidiaries, including a pledge of 135 145 the stock of all subsidiaries of the Company. FFL's guarantee will be secured by a pledge of the stock of the Company. The Company's obligations will also be secured by first 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 THE SENIOR UNSECURED TERM LOAN In connection with the Merger, Food 4 Less will enter into the Senior Unsecured Term Loan with Bankers Trust New York Corporation (the "Senior Unsecured Lender"). All of Food 4 Less' obligations under the Senior Unsecured Term Loan will be assumed by the Company immediately following the Merger. Food 4 Less has accepted a commitment letter (the "Senior Unsecured Term Loan Commitment") from the Senior Unsecured Lender pursuant to which the Senior Unsecured Lender has agreed, subject to certain conditions, to provide the Company the $150 million aggregate principal amount Senior Unsecured Term Loan. The following is a summary of the anticipated material terms and conditions of the Senior Unsecured Term Loan. This summary does not purport to be a complete description of the Senior Unsecured Term Loan and is subject to the detailed provisions of the loan agreement and related documents (the "Senior Unsecured Term Loan Agreement") to be entered into in connection with the Senior Unsecured Term Loan. A copy of the Senior Unsecured Term Loan Agreement will be available upon request from Food 4 Less. GENERAL The Senior Unsecured Term Loan will provide for unsecured senior short-term loans in an aggregate principal amount of $150 million. The proceeds of the Senior Unsecured Term Loan may be used solely to fund the purchase of RSI common stock, repayment of certain outstanding indebtedness and related fees and expenses in connection with the Merger. The Senior Unsecured Term Loan will be guaranteed on a senior unsecured basis by each active subsidiary of the Company. The Senior Unsecured Term Loan will be senior indebtedness of the Company ranking pari passu with all unsubordinated indebtedness of the Company (or any guarantor), including the indebtedness under the New Credit Facility (and any refinancing thereof) and will rank senior to all subordinated indebtedness of the Company (or any guarantor). 136 146 MATURITY; CONVERSION The Senior Unsecured Term Loan will mature one year after the closing of the Merger. The Senior Unsecured Term Loan shall be subject to mandatory prepayment with the net cash proceeds of sales of debt or, to the extent permitted by the lenders under the New Credit Facility, equity securities in a public offering or a private placement by the Company or any subsidiary. On the one year anniversary of the closing of the Merger (the "Conversion Date"), unless (A) the Company or any significant subsidiary thereof is subject to a bankruptcy or other insolvency proceeding, (B) there exists a payment default (whether or not matured) with respect to the Senior Unsecured Term Loan or the conversion fee described below, or (C) there exists a default in the payment when due at final maturity of any indebtedness (excluding the indebtedness created under the Senior Unsecured Term Loan) of the Company or any subsidiary thereof in excess of $20 million for any such default or all such defaults, or the maturity of such indebtedness shall have been accelerated, the Company may convert the Senior Unsecured Term Loan into an unsecured senior long term loan (the "Long Term Loan"); provided that if an event described in clause (C) is continuing at the scheduled Conversion Date but the applicable grace period, if any, has not expired, the Conversion Date shall be deferred until the earlier to occur of (i) the cure of such event or (ii) the expiration of such grace period. INTEREST; FEES During the period beginning on the Closing Date and ending on the 90th day following the Closing Date, the Senior Unsecured Term Loan shall bear interest at the rate of interest equal to the three-month LIBOR, reset monthly, plus 2.50%. Thereafter, the Senior Unsecured Term Loan and the Long Term Loan shall bear interest at the rate of interest equal to the three-month LIBOR, reset monthly, plus 5.50% (the "Interest Rate") and such Interest Rate shall automatically increase by 0.50% for each period of three months that the Senior Unsecured Term Loan or Long Term Loan is in effect. Interest on the Senior Unsecured Term Loan shall be payable on a quarterly basis and interest on the Long Term Loan shall be payable on a semiannual basis. Interest on the Senior Unsecured Term Loan and the Long Term Loan will be paid in cash to the extent that the combined sum of the interest on the Senior Unsecured Term Loan and the Long Term Loan is less than or equal to a rate per annum of 15%. To the extent that such combined sum is not paid in cash, it will be paid in debt securities having terms and provisions identical to the Senior Unsecured Term Loan or the Long Term Loan (as the case may be); provided, that in no event will the combined sum of interest (cash or otherwise) on the Senior Unsecured Term Loan and the Long Term Loan exceed 18% per annum. Food 4 Less has agreed to pay the Senior Unsecured Lender as fees (a) an amount in cash equal to 1.50% of the principal amount of the Senior Unsecured Term Loan (i.e., $2,250,000) (which fee shall have been earned by the Senior Unsecured Lender upon acceptance by Food 4 Less of the Senior Unsecured Term Loan Commitment, but shall be payable on the Closing Date) and (b) on the 90th day following the Closing Date, an amount in cash equal to 1.50% of the principal amount of the Senior Unsecured Term Loan funded on the Closing Date, less the aggregate principal amount of the Senior Unsecured Term Loan so funded which was repaid on or prior to such date with proceeds of borrowings under the term loan portion of the New Credit Facility (as such facility is in effect on the Closing Date). In addition, if the Company converts the Senior Unsecured Term Loan into the Long Term Loan, the Company shall pay the Senior Unsecured Lender on the date of, and as a condition to, such conversion a fee in cash equal to 2.00% of the principal amount of the Senior Unsecured Term Loan so converted; provided that in the event the Long Term Loans are repaid in full with the proceeds of a securities offering within six months following the Conversion Date, the Senior Unsecured Lender will rebate one-half of such conversion fee paid to it on the Conversion Date. 137 147 TERMS OF LONG TERM LOAN The Long Term Loan shall mature one year after the latest possible scheduled final maturity of the term loans under the New Credit Facility, as such facility is in effect upon the closing of the Merger. Through the eighteenth month following the closing of the Merger, the Long Term Loan shall be subject to mandatory prepayment with the net cash proceeds of sales of debt or, to the extent permitted by the lenders under the New Credit Facility, equity securities in a public offering or private placement by the Company or any subsidiaries thereof. In addition, the Long Term Loan shall be guaranteed to the same extent as the Senior Unsecured Term Loan is guaranteed. The Senior Unsecured Lender may at any time after the eighteenth month following the closing of the Merger require that the Company exchange the Senior Unsecured Term Loan for long-term notes which (i) shall have similar terms and conditions as to high yield debt securities issued for cash in the then prevailing market (and in all cases acceptable to the Senior Unsecured Lender), (ii) shall provide certain registration rights (including, without limitation, three demand registrations) and (iii) shall, at the election of the Senior Unsecured Lender bear interest at a fixed rate per annum (the "Fixed Rate") equal to the greater of (a) 15.00% and (b) the sum of the Treasury Rate (as defined below) determined at such time and 7.00%. "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) which has become publicly available at least two business days prior to the maturity date of the Long Term Loan (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life to stated maturity of the Long Term Loan; provided, that if the average life to stated maturity of the Long Term Loan is not equal to the constant maturity of a 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 a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the average life to stated maturity of the Long Term Loan is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constance maturity of one year shall be used. REFINANCING ARRANGEMENTS Food 4 Less has retained BT Securities to publicly sell or privately place debt securities of the Company (the "Take-Out Securities") to refinance the Senior Unsecured Term Loan or the Long Term Loan, as the case may be. The engagement period shall be for a period of eighteen months following the Closing Date. If following the ninth month after the Closing Date, the Senior Unsecured Term Loan or the Long Term Loan is outstanding, upon notice from BT Securities, the Company will cause the issuance and sale of Take-Out Securities on the terms and conditions specified by BT Securities, provided that the effective yield on the Take-Out Securities shall not exceed the Fixed Rate then in effect. COVENANTS The obligation of the Senior Unsecured Lender under the Senior Unsecured Term Loan 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 Senior Unsecured Term Loan Agreement, 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 Senior Unsecured Term Loan will require that the Company maintain certain specified financial covenants, including a minimum fixed charge coverage, a minimum EBITDA and a maximum ratio of total debt to EBITDA. 138 148 EVENTS OF DEFAULT The Senior Unsecured Term Loan Agreement 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 Senior Unsecured Term Loan Agreement, which could have material adverse results to holders of the New F4L Notes. DESCRIPTION OF HOLDING COMPANY INDEBTEDNESS 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 $100 million and will mature on a date to be determined in 2007. The Seller Debentures will be general unsecured obligations of FFL 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")). The Seller Debentures will bear interest at a rate equal to 13.00% 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. FFL 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. On or after a date to be determined in 2000, the Seller Debentures may be redeemed, at the option of FFL, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, together with accrued interest to the redemption date, if redeemed during the twelve-month period commencing on a date to be determined in the years set forth below:
YEAR PERCENTAGE ---- -------- 2000...................................... 106.500% 2001...................................... 104.875% 2002...................................... 103.250% 2003...................................... 101.625% 2004 and thereafter....................... 100.000%
Notwithstanding the foregoing, prior to a date to be determined in 1998, FFL may use the net proceeds of an Initial Public Offering (as defined in the Debenture Indenture) of FFL or Food 4 Less (or of FFL under certain circumstances) to redeem up to 35% of the Seller Debentures at a redemption price equal to 110% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. 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 aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Debenture Indenture will contain certain covenants that, among other things, limit the ability of FFL 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, FFL will be required to make an offer to purchase Seller Debentures at a price equal to 100% of the aggregate principal amount thereof 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, Holdings is obligated to file a shelf registration statement with the 139 149 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 Holdings fails to comply with its obligations to keep such shelf registration statement effective, Holdings will be obligated to pay certain liquidated damages. The Holdings Discount Notes. The Holdings Discount Notes were issued in December 1992, are limited in aggregate principal amount to $103.6 million and will mature on December 15, 2004. The Holdings Discount Notes are unsecured general obligations of Holdings and bear interest at a rate equal to 15.25% per annum. The purchase discount on the Holdings Discount Notes accretes from the date of issuance until December 15, 1997. Interest accrues on the Holdings Discount Notes beginning December 15, 1997, or from the most recent date to which interest has been paid, and is payable semi-annually on each June 15 and December 15, commencing on June 15, 1998. The Holdings 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 PERCENTAGE ---- ---------- 1997...................................... 107.625% 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 Holdings Discount Note Indenture) of Holdings or Food 4 Less to redeem up to 25% of the Holdings 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 Holdings Discount Note Indenture) of the Holdings 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 PERCENTAGE ---- ---------- 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 Holdings Discount Note Indenture), each holder has the right to require the repurchase of such holder's Holdings 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 Holdings 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 Holdings 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 Holdings Discount Notes previously acquired or redeemed by Holdings and surrendered to the Trustee under the Holdings Discount Note Indenture for cancellation and which were not previously used as a credit against any other required payment pursuant to the Holdings Discount Note Indenture. 140 150 The Holdings 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 Holdings Discount Notes at a price equal to 100% of the aggregate principal amount thereof with the proceeds of certain Asset Sales (as defined in the Debenture Indenture). The Holdings 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 Holdings Discount Notes or the Holdings 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. Pursuant to the Holdings Consent Solicitation, Holdings is soliciting consents from, and will make a cash consent payment of $20.00 for each $1,000 principal amount of Holdings Discount Notes for which a consent is properly delivered and accepted to, holders of the Holdings Discount Notes representing at least a majority in aggregate principal amount of such notes to proposed amendments to the Holdings Discount Note Indenture to permit the consummation of the Merger and to provide appropriate operating and financial flexibility to the Company after the Merger. Holdings and the trustee under the Holdings Discount Note Indenture will execute a supplemental indenture implementing such proposed amendments to the Holdings 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. DESCRIPTION OF OTHER COMPANY INDEBTEDNESS Metropolitan Life Insurance Company has extended to RGC three mortgage loans evidenced by promissory notes (the "MetLife Notes") in the aggregate amount of $175.4 million. The MetLife Notes are secured by mortgages on RGC's Compton complex, substantially all of RGC's fee-owned real property and certain of RGC's ground-leased properties. The MetLife Notes bear interest at an effective rate of 9.65%. Currently, the maturity date for each MetLife Note is June 1, 1999. The MetLife Notes contain restrictive covenants limiting, among other things, RGC's ability to declare or pay dividends, redeem capital stock, prepay certain subordinated indebtedness and make certain investments. Pursuant to the terms of the MetLife Notes, RGC could be required to repay the full principal amount thereof upon closing of the Merger. However, RGC is currently engaged in discussions with representatives of the lender regarding the modification of the covenants contained in, and the extension of the maturity of, the MetLife Notes, and has proposed a plan to repay $45 million of the MetLife Notes at the time of the Merger and obtain extensions with respect to the remaining $130.4 million of MetLife Notes. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a summary of certain of the significant federal income tax consequences expected to result from the Exchange Offers and the Solicitation. This discussion 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 following summary is for general information only. 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 141 151 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 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 Notes and New F4L Notes is not entirely certain because the stated term of such instruments may be less than ten years, the Old F4L Notes and New F4L Notes should 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. 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. The Service could, however, 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." See "-- New F4L Notes -- Original Issue Discount." 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. 142 152 ORIGINAL ISSUE DISCOUNT General Original Issue Discount Rules. The amount of original issue discount, if any, on a debt instrument is the excess of its "stated redemption price at maturity" over its "issue price," subject to a statutorily-defined de minimis exception. The "issue price" of a debt instrument issued in exchange for another debt instrument 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 Notes. If neither the Old F4L Notes nor the New F4L Notes were treated as "traded on an established securities market," the issue price of the New F4L 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 Notes would also be equal to their stated principal amount (in that interest will be paid in cash), the New F4L Notes would generally not be issued with original issue discount. If the New F4L 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 Notes, but not the New F4L Notes, were considered to be so traded, then the issue price of the New F4L Notes received would be equal to the fair market value of the Old F4L 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 Notes by more than the de minimis amount, holders of New F4L Notes would be required to include original issue discount in income. 143 153 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. 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. 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. 144 154 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 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). Section 382 of the Code will not, however, limit the use of net operating losses to offset taxable income allocable to the pre-ownership change portion of the taxable year in which the ownership change occurs or taxable income which constitutes "recognized built-in gain," provided the loss corporation has "net unrealized built-in gain" immediately before the ownership change, as defined in Section 382(h)(3) of the Code. 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. 145 155 EXPERTS The consolidated balance sheets of Ralphs Supermarkets, Inc. as of January 31, 1993 and January 30, 1994, 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 statements of operations, cash flows and stockholders' equity of Ralphs Grocery Company for the year ended February 2, 1992 included in this Prospectus and Solicitation Statement have been audited by 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 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. 146 156 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 31, 1993, January 30, 1994 and October 9, 1994 (unaudited)......................................................................... F-3 Consolidated statements of operations for the years ended February 2, 1992, January 31, 1993 and January 30, 1994 and the 36 weeks ended October 10, 1993 (unaudited) and October 9, 1994 (unaudited)..................................................... F-4 Consolidated statements of cash flows for the years ended February 2, 1992, January 31, 1993 and January 30, 1994 and the 36 weeks ended October 10, 1993 (unaudited) and October 9, 1994 (unaudited)..................................................... F-5 Consolidated statements of stockholders' equity for the years ended February 2, 1992, January 31, 1993 and January 30, 1994 and the 36 weeks ended October 9, 1994 (unaudited)......................................................................... F-6 Notes to consolidated financial statements............................................ F-7 FOOD 4 LESS SUPERMARKETS, INC.: Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-26 Consolidated balance sheets as of June 26, 1993, June 25, 1994 and September 17, 1994 (unaudited)......................................................................... F-27 Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 12 weeks ended September 18, 1993 (unaudited) and September 17, 1994 (unaudited)...................................................... F-29 Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 12 weeks ended September 18, 1993 (unaudited) and September 17, 1994 (unaudited)...................................................... F-30 Consolidated statements of stockholder's equity for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 12 weeks ended September 17, 1994 (unaudited)......................................................................... F-32 Notes to consolidated financial statements............................................ F-33
F-1 157 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 31, 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended and the statements of operations, stockholders' equity and cash flows of Ralphs Grocery Company for the year ended February 2, 1992. 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 31, 1993, and the results of their operations and their cash flows for the years then ended and the results of operations and cash flows of Ralphs Grocery Company for the year ended February 2, 1992, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California April 8, 1994 (except as to Note 16, which is as of September 14, 1994) F-2 158 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JANUARY 31, JANUARY 30, OCTOBER 9, 1993 1994 1994 ----------- ----------- ----------- (UNAUDITED) Current Assets: Cash and cash equivalents............................ $ 46,192 $ 55,080 $ 33,305 Accounts receivable.................................. 19,117 30,420 45,182 Inventories.......................................... 207,023 202,354 217,186 Prepaid expenses and other current assets............ 16,543 18,111 18,321 ---------- ---------- ---------- Total current assets......................... 288,875 305,965 313,994 Property, plant and equipment, net................... 610,665 601,897 611,642 Excess of cost over net assets acquired, net......... 387,410 376,414 368,801 Beneficial lease rights, net......................... 60,757 55,553 50,733 Deferred debt issuance costs, net.................... 27,999 26,583 22,568 Deferred income taxes................................ -- 109,125 113,639 Other assets......................................... 12,792 8,113 9,985 ---------- ---------- ---------- Total assets................................. $1,388,498 $1,483,650 $1,491,362 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt................. $ 66,465 $ 70,975 $ 79,865 Short-term debt...................................... 31,100 -- 37,400 Bank overdrafts...................................... 37,061 37,716 35,784 Accounts payable..................................... 120,709 138,554 141,775 Accrued expenses..................................... 127,788 101,543 109,273 Current portion of self-insurance reserves........... 27,732 30,138 28,209 ---------- ---------- ---------- Total current liabilities.................... 410,855 378,926 432,306 Long-term debt....................................... 932,226 927,909 883,377 Self-insurance reserves.............................. 45,247 49,872 46,025 Lease valuation reserve.............................. 35,941 32,575 30,096 Other non-current liabilities........................ 97,526 89,299 84,593 ---------- ---------- ---------- Total liabilities............................ 1,521,795 1,478,581 1,476,397 ---------- ---------- ---------- Stockholders' equity (deficit): Common stock, $.01 par value per share Authorized 50,000,000 shares; issued and outstanding, 25,587,280 shares at January 31, 1993, January 30, 1994 and October 9, 1994.......................... 256 256 256 Additional paid-in capital........................... 175,292 175,292 175,292 Accumulated deficit.................................. (308,845) (170,479) (160,583) ---------- ---------- ---------- Total stockholders' equity (deficit)......... (133,297) 5,069 14,965 ---------- ---------- ---------- Commitments and contingencies (See Notes 2 and 8) Total liabilities and stockholders' equity (deficit).................................. $1,388,498 $1,483,650 $1,491,362 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 159 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THIRTY-SIX THIRTY-SIX YEAR ENDED YEAR ENDED YEAR ENDED WEEKS ENDED WEEKS ENDED FEBRUARY 2, 1992 JANUARY 31, 1993 JANUARY 30, 1994 OCTOBER 10, 1993 OCTOBER 9, 1994 ------------------ ------------------ ------------------ ------------------ ------------------ (UNAUDITED) Sales................ $2,889,222 100.0% $2,843,816 100.0% $2,730,157 100.0% $1,874,222 100.0% $1,856,341 100.0% Cost of sales........ 2,275,237 78.8 2,217,197 78.0 2,093,727 76.7 1,445,171 77.1 1,433,008 77.2 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Gross profit....... 613,985 21.2 626,619 22.0 636,430 23.3 429,051 22.9 423,333 22.8 Selling, general and administrative expenses......... 456,602 15.8 466,737 16.4 467,630 17.1 319,417 17.1 316,045 17.0 Provision for equity appreciation rights........... 18,321 0.6 -- -- -- -- -- -- -- -- Amortization of excess cost over net assets acquired......... 10,996 0.4 10,997 0.4 10,996 0.4 7,614 0.4 7,613 0.4 Provision for restructuring.... -- -- 7,100 0.2 2,374 0.1 -- -- -- -- Provision for post retirement benefits other than pensions.... 2,627 0.1 3,275 0.1 3,370 0.1 2,079 0.1 1,821 0.1 Provision for tax indemnification payments to Federated Department Stores, Inc...... 10,000 0.3 -- -- -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Operating income... 115,439 4.0 138,510 4.9 152,060 5.6 99,941 5.3 97,854 5.3 Other expenses: Interest expense, net.............. 130,206 4.5 125,611 4.4 108,755 4.0 75,748 4.0 77,162 4.2 Loss on disposal of assets........... 12,967 0.5 2,607 0.1 1,940 0.1 422 -- 796 -- Provision for legal settlement....... -- -- 7,500 0.3 -- -- -- -- -- -- Provision for earthquake losses........... -- -- -- -- 11,048 0.4 -- -- -- -- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Earnings (loss) before income taxes and extraordinary item............... (27,734) (1.0) 2,792 0.1 30,317 1.1 23,771 1.3 19,896 1.1 Income tax expense (benefit).......... 13,506 0.4 8,346 0.3 (108,049) (4.0) -- -- -- -- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Earnings (loss) before extraordinary item............... (41,240) (1.4) (5,554) (0.2) 138,366 5.1 23,771 1.3 19,896 1.1 Extraordinary item-debt refinancing, net of tax benefit $4,173............. -- -- (70,538) (2.5) -- -- -- -- -- -- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Net earnings (loss)............. $ (41,240) (1.4)% $ (76,092) (2.7)% $ 138,366 5.1% $ 23,771 1.3% $ 19,896 1.1% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
See accompanying notes to consolidated financial statements. F-4 160 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THIRTY-SIX THIRTY-SIX YEAR END YEAR END YEAR END WEEKS ENDED WEEKS ENDED FEBRUARY 2, JANUARY 31, JANUAEY 30, OCTOBER 10, OCTOBER 9, 1992 1993 1994 1993 1994 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss)........................... $(41,240) $ (76,092) $ 138,366 $ 23,771 $ 19,896 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............... 76,552 76,873 74,452 51,704 51,929 Amortization of discounts and deferred debt issuance costs............................ 8,564 20,978 9,768 6,715 6,322 LIFO charge (credit)........................ 2,829 1,115 (2,054) 2,615 1,897 Loss on sale of assets...................... 12,967 6,841 4,314 422 796 Provision for equity appreciation rights.... 18,321 -- -- -- -- Provision for post-retirement benefits...... 2,627 3,275 3,370 2,079 1,821 Provision for tax indemnification payments to Federated Department Stores, Inc. ..... 10,000 -- -- -- -- Provision for legal settlement.............. -- 7,500 -- -- -- Other changes in assets and liabilities: Accounts receivable........................... 20,660 6,376 326 (7) (14,763) Inventories at replacement cost............... (21,523) (13,682) 6,724 6,058 (16,728) Prepaid expenses and other current assets..... (4,446) 3,703 (1,658) 1,915 (210) Other assets.................................. 2,133 (616) 4,449 2,353 (1,993) Interest payable.............................. (1,448) (13,393) (4,822) (4,226) (11,089) Accounts payable and accrued liabilities...... 1,606 23,054 (1,622) (771) 23,579 Income taxes payable.......................... 822 (527) (1,480) -- -- Deferred tax asset............................ -- -- (109,125) -- (4,514) Business interruption credit.................. -- -- (581) -- -- Earthquake losses............................. -- -- (11,048) -- -- Self insurance reserves....................... 6,575 8,456 7,031 3,860 (5,776) Other liabilities............................. 1,095 (170) (12,407) (6,957) (7,635) -------- --------- --------- --------- -------- Cash provided by operating activities......... 96,094 53,691 104,003 89,531 43,532 -------- --------- --------- --------- -------- Cash flows from investing activities: Capital expenditures.......................... (50,355) (102,697) (62,181) (46,827) (44,544) Proceeds from sale of property, plant and equipment................................... 8,498 219 16,700 2,968 6,362 -------- --------- --------- --------- -------- Cash used in investing activities............. (41,857) (102,478) (45,481) (43,859) (38,182) -------- --------- --------- --------- -------- Cash flows from financing activities: Net borrowings under lines of credit.......... 29,000 2,100 (31,100) (31,100) 37,400 Redemption of preferred stock................. -- (3,000) -- -- -- Capitalized financing and acquisition costs... (573) (22,426) (5,108) (5,717) (246) Increase (decrease) in bank overdrafts........ (7,193) (8,865) 655 (751) (1,932) Proceeds from issuance of long-term debt...... 2,000 668,269 150,000 150,000 -- Dividends paid................................ -- -- -- -- (10,000) Principal payments on long-term debt.......... (75,361) (577,902) (164,081) (157,963) (52,347) -------- --------- --------- --------- -------- Cash provided by (used in) financing activities.................................. (52,127) 58,176 (49,634) (45,531) (27,125) -------- --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents................................... 2,110 9,389 8,888 141 (21,775) Cash and cash equivalents at beginning of period........................................ 34,693 36,803 46,192 46,192 55,080 -------- --------- --------- --------- -------- Cash and cash equivalents at end of period...... $ 36,803 $ 46,192 $ 55,080 $ 46,333 $ 33,305 ======== ========= ========= ========= ========
See accompanying notes to consolidated financial statements. F-5 161 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 3, 1991...................... -- $ -- 100 $ -- $175,548 $(191,513) $(15,965) Net Loss.................. -- -- -- -- -- (41,240) (41,240) ---------- ---- --- ---- -------- --------- -------- 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 (unaudited)............ -- -- -- -- -- 19,896 19,896 Dividends Paid (unaudited)............ -- -- -- -- -- (10,000) (10,000) ---------- ---- --- ---- -------- --------- -------- BALANCES AT OCTOBER 9, 1994 (unaudited)............... 25,587,280 $256 -- $ -- $175,292 $(160,583) $ 14,965 ========== ==== === ==== ======== ========= ========
See accompanying notes to consolidated financial statements. F-6 162 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-7 163 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 30, 1994 and January 31, 1993 and the results of their operations and their cash flows for the two years then ended. In addition, these consolidated financial statements present the results of operations and cash flows of Ralphs Grocery Company for the year ended February 2, 1992. 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". The interim consolidated financial statements included herein have been prepared by Ralphs (the "Company") without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the "Commission"). Certain information and footnote disclosures, normally included in the financial statements prepared in accordance with generally accepted accounting principles, have been omitted pursuant to Commission rules and regulations; nevertheless, Ralphs believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in Ralphs Grocery Company's latest annual report filed on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Ralphs with respect to the interim financial statements, and of the results of Ralphs' operations for the thirty-six weeks ended October 9, 1994 and cash flows for the thirty-six weeks ended October 9, 1994 and the results of Ralphs' operations for the thirty-six weeks ended October 10, 1993 and cash flows for the thirty-six weeks ended October 10, 1993, F-8 164 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) have been included. The results of operations for the interim periods are not necessarily indicative of the results for the full year. (b) Reporting Period Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal year-ends are as follows: February 2, 1992 (Fiscal 1991) January 31, 1993 (Fiscal 1992) January 30, 1994 (Fiscal 1993) (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. (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 $15.535 million and $17.589 million at January 30, 1994 and January 31, 1993, 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 1991, 1992 and 1993 was $.510 million, $1.074 million, and $.740 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. F-9 165 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 $52.4 million and $63.4 million at January 31, 1993 and January 30, 1994, respectively. (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. F-10 166 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (m) Postretirement Medical Benefits Effective for the fiscal year ended February 3, 1991, Ralphs adopted SFAS 106, "Employers' Accounting for Postretirement Benefits other Than Pensions", which requires that the cost of postretirement benefits other than pensions be recognized in the financial statements over an employee's service with Ralphs. (n) Reclassification Certain amounts in the accompanying financial statements have been reclassified to conform to the current year's presentation. (o) 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. (p) 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. (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. (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Land................................................. $ 156,487 $ 159,904 Buildings and improvements........................... 180,639 191,179 Leasehold improvements............................... 149,273 161,341 Fixtures and equipment............................... 349,697 354,626 Capital leases....................................... 69,058 86,964 ---------- ---------- 905,154 954,014 Less: Accumulated depreciation....................... (266,127) (312,746) Less: Accumulated capital lease amortization......... (28,362) (39,371) ---------- ---------- Property, plant and equipment, net................... $ 610,665 $ 601,897 ========== ==========
F-11 167 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) ACCRUED EXPENSES Accrued expenses are summarized as follows:
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Accrued wages, vacation and sick leave............... $ 38,238 $ 34,763 Taxes other than income tax.......................... 13,285 11,084 Interest............................................. 15,912 11,090 Other................................................ 60,353 44,606 ----------- ----------- $ 127,788 $ 101,543 ========= =========
(5) LONG-TERM DEBT Long-term debt is summarized as follows:
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) First mortgage notes payable in monthly installments, commencing June 1, 1994 of $1,553,000 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 $190.8 million............................................ $ 178,482 $ 178,013 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 $30.0 million............................................ 17,920 9,721 Capitalized lease obligations at interest rates ranging from 7.25% to 14% maturing at various dates through 2009 (note 6).............................. 54,181 61,150 Note payable to bank................................. 350,000 300,000 Senior Subordinated Debentures, 14% due 2000......... 98,108 -- Initial Notes and Exchange Notes, 9% due 2003........ -- 150,000 Senior Subordinated Debentures, 10 1/4%, due 2002.... 300,000 300,000 ----------- ----------- Total long-term debt................................. 998,691 998,884 Less current maturities.............................. (66,465) (70,975) ----------- ----------- Long-term debt....................................... $ 932,226 $ 927,909 ========= =========
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 F-12 168 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 30, 1994, interest rates under these borrowings ranged from 5.9375% to 7.75%. 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 30, 1994, $51.1 million of letters of credit were outstanding, with $68.9 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 ---------- ------------- 1991........................................ 11.87% 11.52% 1992........................................ 10.52% 10.22% 1993........................................ 8.96% 8.96%
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. F-13 169 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 aggregate maturities on long-term debt for each of the five years subsequent to fiscal 1993 are as follows:
(DOLLARS IN THOUSANDS) ------------ 1994...................................................... $ 70,975 1995...................................................... 81,572 1996...................................................... 83,756 1997...................................................... 81,716 1998...................................................... 50,406 1999 and thereafter....................................... 630,459 -------- $998,884 ========
The fair value of each class of financial instruments (where practical) is as follows in (000s): Long-term debt........................................... $1,014,634 Interest rate swap agreement............................. $ 1,153 Interest rate cap agreement.............................. $ (19)
(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. F-14 170 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum rental payments due under capital leases and operating leases subsequent to fiscal 1993 are as follows:
CAPITAL OPERATING LEASES LEASES TOTAL -------- --------- -------- (DOLLARS IN THOUSANDS) 1994............................................... $ 17,043 $ 57,264 $ 74,307 1995............................................... 15,172 55,424 70,596 1996............................................... 12,381 53,998 66,379 1997............................................... 11,607 51,124 62,731 1998............................................... 9,286 47,211 56,497 1999 and thereafter................................ 18,247 321,149 339,396 -------- -------- -------- Total minimum lease payments....................... $ 83,736 $586,170 $669,906 ======== ======== Less amounts representing interest................. (22,586) -------- Present value of net minimum lease payments........ 61,150 Less current portion of lease obligations.......... (11,052) -------- Long-term capital lease obligations................ $ 50,098 ========
Total rent expense is summarized as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Capital Leases Contingent rental............................... $ 2,358 $ 2,443 $ 2,241 Rentals from subleases.......................... (2,133) (2,144) (2,048) Operating Leases Minimum rentals................................. 42,156 49,001 54,965 Contingent rentals.............................. 4,081 5,058 3,645 Rentals from subleases.......................... (1,057) (1,123) (1,150) ------- ------- ------- $45,405 $53,235 $57,653 ======= ======= =======
(7) SELF-INSURANCE Ralphs is a qualified self-insurer in the State of California for worker's compensation and for automobile liability. For fiscal 1991, 1992 and 1993 self insurance loss provisions amounted to (in thousands) $25,549, $25,950 and $30,323, respectively. (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 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. Ralphs intends to vigorously pursue its defense in these actions. F-15 171 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 25, 1991, George A. Koteen Associates, Inc. ("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 $4,949,084 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 judgement. 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's 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 with the EPA to investigate 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. Based upon available information, management does not believe this matter will have a material adverse effect on Ralphs' financial condition or results of operations. Ralphs has removed several underground storage tanks and remediated soil contamination at the Atwater property. Although the possibility of other localized 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 Ralphs. Ralphs has not incurred material capitalizable and noncapitalizable expenses relating to environmental type issues during the previous three fiscal years. Ralphs has not incurred material preventative and remediation costs related to environmental type issues. Ralphs is a party to several pending legal proceedings and claims incurred in the normal course of business. In the opinion of management, based in part on the advice of counsel, these matters are adequately covered by insurance or will not have a material effect on Ralphs' financial position or results of operations. (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 F-16 172 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ("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 are 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 and fiscal 1993. The amount of Equity Rights redeemable for each of the five years subsequent to fiscal 1993 are as follows:
(DOLLARS IN THOUSANDS) 1994...................................................... $ 7,251 1995...................................................... 7,251 1996...................................................... 7,251 1997...................................................... 5,185 1998...................................................... 13,318 ------- $40,256 =======
(11) INCOME TAXES Income tax expense (benefit) consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Current Federal........................................ $ 9,224 $4,173 $ (2,424) State.......................................... 4,282 -- 3,500 ------- ------ --------- $13,506 $4,173 $ 1,076 ------- ------ --------- Deferred Federal........................................ $ -- $ -- $(109,125) State.......................................... -- -- -- ------- ------ --------- $ -- $ -- $(109,125) ------- ------ --------- Total income tax expense (benefit)............. $13,506 $4,173 $(108,049) ======= ====== =========
F-17 173 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense (benefit) has been classified in the accompanying statements of operations as follows:
1991 1992 1993 ------- ------- --------- Earnings before extraordinary items................. $13,506 $ 8,346 $(108,049) Extraordinary item.................................. -- (4,173) -- ------- ------- --------- Net tax expense (benefit)........................... $13,506 $ 4,173 $(108,049) ======= ======= =========
The differences between income tax expense and income taxes computed using the top marginal U.S. Federal income tax rate of 34% for both Fiscal 1991 and 1992 and, for Fiscal 1993, of 35% applied to earnings (loss) before income taxes (including, in Fiscal 1992, the extraordinary loss of $74.8 million) were as follows:
52 WEEKS ENDED 52 WEEKS 52 WEEKS FEBRUARY ENDED ENDED 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ---------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of expected expense (benefit) computed using the statutory Federal rate............... $(9,430) $(24,450) $ 10,611 Utilization of financial operating loss........ -- -- (10,611) Amortization of excess cost over net assets acquired.................................... 3,356 3,356 -- State income taxes, net of Federal income tax benefit..................................... 4,282 -- 3,500 Accounting limitation (recognition) of deferred tax benefit................................. 6,139 20,041 (109,125) Alternative minimum tax........................ 9,224 4,173 625 Other, net..................................... (65) 1,053 (3,049) ------- -------- --------- Total income tax expense (benefit)..... $13,506 $ 4,173 $(108,049) ======= ======== =========
Ralphs' deferred tax assets, recorded under SFAS 109, were comprised of the following:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Deductible intangible assets................................. $ -- $ 56,000 Net operating loss carryforward and tax credit............... 5,907 40,125 Self insurance accrual....................................... 8,951 43,000 Software basis difference and amortization................... 9,320 -- Fees collected in advance.................................... 5,572 -- Property, plant and equipment basis difference and depreciation............................................... 25,914 21,000 Equity appreciation rights................................... -- 16,000 Favorable lease basis differences............................ -- 16,000 State deferred taxes......................................... -- 17,000 Other........................................................ 16,539 40,000 -------- --------- 72,203 249,125 Less valuation allowance................................... (72,203) (140,000) -------- --------- Total.............................................. $ -- $ 109,125 ======== =========
F-18 174 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes for the thirty-six weeks ended October 9, 1994 and the thirty-six weeks ended October 10, 1993 consists of the following:
36 WEEKS 36 WEEKS ENDED ENDED OCTOBER 10, OCTOBER 9, 1993 1994 ----------- ---------- (UNAUDITED) Federal Income Taxes................................ $ 3,121 $ 836 State Income Taxes.................................. 1,290 3,678 Adjustment to Valuation Allowance for Deferred Tax Assets............................................ (4,411) (4,514) ------- ------- Total Income Tax Provision.......................... $ -- $ -- ======= =======
On October 15, 1992, Ralphs filed an election with the Internal Revenue Service under Section 338(h)(10). Under this Section, Ralphs is required to restate, for Federal tax purposes, its assets and liabilities to fair market value as of February 3, 1992. The effect of this transaction is to record a new Federal tax basis to reflect a change of control for Federal tax purposes resulting from the Internal Reorganization. No change of control for financial reporting purposes was affected. In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted. The Act increased the Federal income tax rate from 34 to 35 percent for filers whose taxable income exceeded $10.0 million. In the current year, the effect of the Federal income tax rate change was to increase the net deferred tax assets. In addition, the Act also provided for the deductibility of certain intangibles, including costs in excess gross assets acquired. The Act has significantly impacted the aggregate deferred tax asset position of Ralphs at January 30, 1994. 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 $153.0 million at January 30, 1994. During the year ended January 30, 1994, Ralphs has 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 $300.0 million. At January 30, 1994, the Company has Federal net operating loss (NOL) carryforwards of approximately $115.0 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. F-19 175 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the past two fiscal years, the Company has generated Federal taxable losses of approximately $115.0 million versus financial pre-tax losses of approximately $42.0 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. The following actuarially determined components were included in the net pension expense:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost...................................... $ 1,806 $ 2,076 $ 2,228 Interest cost on projected benefit obligation..... 2,079 2,471 2,838 Actual return on assets........................... (3,291) (2,794) (2,695) Net amortization and deferral..................... 992 237 (46) ------- ------- ------- Net pension expense............................. $ 1,586 $ 1,990 $ 2,325 ======= ======= =======
The funded status of Ralphs' pension plan, (based on December 31, 1992 and 1993 asset values), is as follows:
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation................................... $18,608 $29,659 Accumulated benefit obligation.............................. 20,887 29,950 Projected benefit obligation................................ 33,378 42,690 Plan assets at fair value................................... 30,684 32,968 ------- ------- Projected benefit obligation in excess of Plan Assets......... (2,694) (9,722) Unrecognized net gain......................................... (1,959) 4,567 Unrecognized prior service cost............................... 46 (1,778) Unrecognized net asset........................................ -- -- ------- ------- Accrued pension cost........................................ $(4,607) $(6,933) ======= =======
Service costs for fiscal 1991, 1992 and 1993 were calculated using a rate of increase in future compensation levels of 6% and discount rate of 8.5%. Certain assumptions will be revised to reflect future trends in fiscal 1994. The discount rate will be reduced to 7.75% to reflect current decline in interest rates and the rate of increase in future compensation levels will be 5% for fiscal 1994. These changes are not expected to have a material effect on Fiscal 1994 operations. A long-term rate of return on assets of 9% was used for fiscal 1992 and 1993. Plan assets consist primarily of debt securities, guaranteed interest contracts and a money market fund. Plan benefits are based primarily on years of service and on average compensation during the last years of employment. F-20 176 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On February 23, 1990, Ralphs adopted a Supplemental Executive Retirement Plan covering certain key officers of Ralphs. Earned vested benefits under the Plan were $4,246,300 at December 31, 1992 and $5,075,000 at December 31, 1993. Under certain circumstances, the cash surrender value of certain split-dollar life insurance policies purchased under split-dollar life insurance agreement will offset Ralphs' obligations under the Supplemental Executive Retirement Plan. 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. The United Food and Commercial Workers 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 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 FEBRUARY 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Multi-employer pension plans...................... $ 7,370 $ 7,973 $17,687 ======= ======= ======= Multi-employer health and welfare................. $73,250 $71,183 $45,235 ======= ======= =======
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 10% 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 1991, 1992 and 1993 were $377,335, $407,961 and $431,774, 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 1991, 1992 and 1993 was $2.4 million, $2.5 million and $2.6 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 1991, 1992 and 1993 was $2.8 million, $2.8 million and $3.0 million, respectively. The aforementioned incentive plans may be cancelled by the Board of Directors at any time. Ralphs sponsors a postretirement medical benefit plan (Postretirement Medical Plan) covering substantially all employees who are not members of a collective bargaining agreement and who retire under certain age and service requirements. The Postretirement Medical Plan is a traditional type medical plan providing outpatient, inpatient and various other covered services. Such benefits are funded from Ralphs' general assets. The calendar year deductible is $1,180 per individual, indexed to the Medical Consumer Price Index. F-21 177 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On February 3, 1991, Ralphs adopted Statement of Financial Accounting Standards (SFAS) 106, "Employees' Accounting for Postretirement Benefits other Than Pension," which required that the cost of future benefits under the Postretirement Medical Plan be recognized in the financial statements over an employee's service with Ralphs. At the beginning of fiscal 1990, Ralphs elected to immediately recognize the transition obligation in accordance with the provision of SFAS 106. Previously, expenses were recognized as paid. The net periodic cost of the Postretirement Medical Plan includes the following components:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 2, JANUARY 31, JANUARY 30, 1992 1993 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost...................................... $1,323 $1,908 $1,767 Interest cost..................................... 1,304 1,367 1,603 Return on plan assets............................. -- -- -- Net amortization and deferral..................... -- -- -- ------ ------ ------ Net postretirement benefit cost................. $2,627 $3,275 $3,370
The funded status of the postretirement benefit plan is as follows:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees...................................................... $ 2,218 $ 1,237 Fully eligible plan participants.............................. 441 357 Other active plan participants................................ 16,675 16,062 Plan assets at fair value..................................... -- -- ------- -------- Funded status................................................. (19,334) (17,656) Plan assets in excess of projected obligations................ -- -- Unrecognized gain (loss)...................................... 1,694 6,302 Unrecognized prior service cost............................... -- -- -------- -------- Accrued postretirement benefit obligation..................... $(21,028) $(23,958) ======== ========
Service cost was calculated using a medical cost trend of 10.5% for fiscal 1992 and 1993. Certain assumptions will be revised to reflect future trends. The discount rate will be reduced to 7.75% in 1994 to reflect current decline in interest rates. The long term rate of return of plan assets is not applicable as the plan is not funded. The effect on a one-percent increase in the medical cost trend would increase the fiscal 1993 service and interest cost of 24%. The accumulated postretirement benefit obligation at January 30, 1994 would also increase by 31%. F-22 178 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) QUARTERLY RESULTS (UNAUDITED) Quarterly results for fiscal 1992 and 1993 are as follows:
EXTRAORDINARY ITEM, NET OF NET GROSS OPERATING INCOME INCOME TAX EARNINGS/ SALES PROFIT INCOME TAXES BENEFIT (LOSS) -------- ------ --------- ------- ------------- --------- (DOLLARS IN MILLIONS) FY 1992 Quarters 12 weeks ended 04/26/92............. $ 677.0 $146.7 $ 35.1 $ 3.9 $ -- $ 2.2 12 weeks ended 07/19/92............. 660.3 143.5 33.0 3.9 -- 1.7 12 weeks ended 10/11/92............. 631.4 137.0 28.8 1.3 (55.8) (58.6) 16 weeks ended 01/31/93............. 875.1 199.4 41.6 (.8) (14.8) (21.4) -------- ------ ------ ------- ------ ------ Total....................... $2,843.8 $626.6 $138.5 $ 8.3 $(70.6) $(76.1) ======== ====== ====== ======= ====== ====== 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 ======== ====== ====== ======= ====== ======
(14) SUPPLEMENTAL CASH FLOW INFORMATION
36 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED 36 WEEKS ENDED ENDED ENDED OCTOBER ENDED FEBRUARY 2, JANUARY 31, JANUARY 30, 10, OCTOBER 9, 1992 1993 1994 1993 1994 ----------- ----------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Supplemental cash flow disclosures: Interest paid, net of amounts capitalized........................... $115,159 $118,391 $93,738 $65,148 $65,969 Income taxes paid........................ $ 12,643 $ 7,169 $ 2,423 $ 2,196 $ 4,750 Capital lease assets and obligations assumed............................... $ 3,847 $ -- $15,395 $ 92 $17,630
(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-23 179 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 31, 1993: Beginning of year............................................. -- -- Granted....................................................... 3,162,235 $20.21 Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- --------- ------ End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 405,880 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------
The option price for outstanding options at January 30, 1994 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) SUBSEQUENT EVENT (UNAUDITED) On September 14, 1994 Ralphs entered into a definitive Agreement and Plan of Merger (the "Merger") with Food 4 Less, Inc. ("FFL"), Food 4 Less Holdings ("FFL Holdings") and Food 4 Less Supermarkets, Inc. ("FFL Supermarkets"). Pursuant to the terms of the Merger Agreement, Ralphs will merge with FFL Supermarkets and become a wholly-owned subsidiary of FFL 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 transactions. The consideration price paid for the Company approximates $1.5 billion, including assumption of debt. Upon the effectiveness of the Merger, each outstanding share of common stock, par value $0.01 per share, of Ralphs will be converted into and become a right to receive (a) approximately $16.61 in cash and (b) approximately $3.91 principal amount of 13% Senior Subordinated Pay-In Kind Debentures due 2006 issued by FFL Holdings (the "Debentures"). This represents aggregate consideration, payable to the stockholders of the Company of $425 million in cash and $100 million initial principal amount of Debentures. F-24 180 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Upon consummation of the Merger, the operations and activities of Ralphs 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 merged entity. The amount of the restructuring charge is not presently 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 Ralphs at January 30, 1994 and to the merged entity. F-25 181 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 September 14, 1994, and with respect to the matter discussed in Note 15, as to which the date is October 14, 1994) F-26 182 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
JUNE 26, JUNE 25, SEPTEMBER 17, 1993 1994 1994 -------- -------- ------------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents.............................. $ 25,089 $ 32,996 $ 29,388 Trade receivables, less allowances of $1,919, $1,386 and $1,318 at June 26, 1993, June 25, 1994 and September 17, 1994, respectively.................... 22,048 25,039 24,331 Notes and other receivables............................ 1,278 1,312 1,094 Inventories............................................ 191,467 212,892 210,548 Patronage receivables from suppliers................... 2,680 2,875 3,998 Prepaid expenses and other............................. 6,011 6,323 9,437 -------- -------- -------- Total current assets........................... 248,573 281,437 278,796 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: A.W.G.................................................. 6,693 6,718 6,718 Certified and Other.................................... 6,657 5,984 5,952 PROPERTY AND EQUIPMENT: Land................................................... 23,912 23,488 23,488 Buildings.............................................. 12,827 12,827 12,827 Leasehold improvements................................. 81,049 97,673 101,634 Store equipment and fixtures........................... 129,178 148,249 150,851 Transportation equipment............................... 31,758 32,259 32,306 Construction in progress............................... 757 12,641 20,369 Leased property under capital leases................... 77,553 78,222 78,222 Leasehold interests.................................... 93,863 93,464 93,473 -------- -------- -------- 450,897 498,823 513,170 Less: Accumulated depreciation and amortization........ 96,948 134,089 143,135 -------- -------- -------- Net property and equipment.......................... 353,949 364,734 370,035 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $11,611, $17,083 and $18,382 at June 26, 1993, June 25, 1994 and September 17, 1994, respectively........................................ 33,778 28,536 27,245 Goodwill, less accumulated amortization of $26,254, $33,945 and $35,732 at June 26, 1993, June 25, 1994 and September 17, 1994, respectively................ 280,895 267,884 266,097 Other, net............................................. 27,295 24,787 23,643 -------- -------- -------- $957,840 $980,080 $978,486 ======== ======== ========
See accompanying notes to consolidated financial statements. F-27 183 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDER'S EQUITY
JUNE 26, JUNE 25, SEPTEMBER 17, 1993 1994 1994 -------- -------- ------------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable....................................... $140,468 $180,708 $ 176,148 Accrued payroll and related liabilities................ 40,319 42,805 43,767 Accrued interest....................................... 5,293 5,474 14,310 Other accrued liabilities.............................. 40,467 53,910 48,782 Income taxes payable................................... 2,053 2,000 1,249 Current portion of self-insurance liabilities.......... 23,552 29,492 29,492 Current portion of long-term debt...................... 12,778 18,314 19,566 Current portion of obligations under capital leases.... 2,865 3,616 3,612 -------- -------- --------- Total current liabilities................................ 267,795 336,319 336,926 LONG-TERM DEBT........................................... 335,576 310,944 311,457 OBLIGATIONS UNDER CAPITAL LEASES......................... 41,864 39,998 39,186 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 65,503 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 September 17, 1994 (aggregate liquidation value of $53.8 million, $62.2 million and $64.4 million at June 26, 1993, June 25, 1994 and September 17, 1994, respectively)....................................... 50,230 58,997 61,373 Common stock, $.01 par value, 1,600,000 shares authorized and 1,519,632 shares issued at June 26, 1993, June 25, 1994 and September 17, 1994.......... 15 15 15 Additional paid-in capital............................. 107,650 107,650 107,650 Notes receivable from shareholders of parent........... (714) (586) (586) Retained deficit....................................... (83,119) (94,586) (100,309) -------- -------- --------- 74,062 71,490 68,143 Treasury stock: 13,249 shares, 16,732 shares and 16,732 shares of common stock at June 26, 1993, June 25, 1994 and September 17, 1994, respectively........... (1,199) (2,469) (2,469) -------- -------- --------- Total stockholder's equity..................... 72,863 69,021 65,674 -------- -------- --------- $957,840 $980,080 $ 978,486 ======== ======== =========
See accompanying notes to consolidated financial statements. F-28 184 FOOD 4 LESS SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWELVE WEEKS TWELVE WEEKS WEEKS ENDED WEEKS ENDED WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, SEPTEMBER 18, SEPTEMBER 17, 1992 1993 1994 1993 1994 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) SALES...................................... $2,913,493 $2,742,027 $2,585,160 $ 616,616 $ 598,698 COST OF SALES (including purchases from related parties of $277,812, $204,028, $175,929, $47,607 and $41,165 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, and for the 12 weeks ended September 18, 1993 and September 17, 1994, respectively).................. 2,392,655 2,257,835 2,115,842 504,269 495,656 ----------- ----------- ----------- ------------- ------------- GROSS PROFIT............................... 520,838 484,192 469,318 112,347 103,042 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET...................................... 469,751 434,908 388,836 95,694 88,152 AMORTIZATION OF EXCESS COST OVER NET ASSETS ACQUIRED................................. 7,795 7,571 7,691 1,772 1,787 ----------- ----------- ----------- ------------- ------------- OPERATING INCOME........................... 43,292 41,713 72,791 14,881 13,103 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs........... 63,907 64,831 62,778 14,491 14,709 Amortization of deferred financing costs................................. 6,304 4,901 5,472 1,239 1,299 ----------- ----------- ----------- ------------- ------------- 70,211 69,732 68,250 15,730 16,008 LOSS (GAIN) ON DISPOSAL OF ASSETS.......... (1,364 ) (2,083 ) 37 (37) (458) PROVISION FOR EARTHQUAKE LOSSES............ -- -- 4,504 -- -- ----------- ----------- ----------- ------------- ------------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES.................... (25,555 ) (25,936 ) -- (812) (2,447) PROVISION FOR INCOME TAXES................. 3,441 1,427 2,700 300 900 ----------- ----------- ----------- ------------- ------------- LOSS BEFORE EXTRAORDINARY CHARGES.......... (28,996 ) (27,363 ) (2,700 ) (1,112) (3,347) 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 ) $ (1,112) $ (3,347) ========== ========== ========== ========== ========== PREFERRED STOCK ACCRETION.................. -- 3,882 8,767 2,023 2,376 LOSS APPLICABLE TO COMMON SHARES........... $ (33,814 ) $ (31,245 ) $ (11,467 ) $ (3,135) $ (5,723) ========== ========== ========== ========== ========== LOSS PER COMMON SHARE: Loss before extraordinary charges........ $ (20.74 ) $ (21.52 ) $ (7.63 ) $ (2.08) $ (3.81) Extraordinary charges.................... (3.45 ) -- -- -- -- ----------- ----------- ----------- ------------- ------------- Net loss................................. $ (24.19 ) $ (21.52 ) $ (7.63 ) $ (2.08) $ (3.81) ========== ========== ========== ========== ========== Average Number of Common Shares Outstanding........................... 1,397,939 1,452,184 1,503,828 1,505,004 1,502,900 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-29 185 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 TWELVE TWELVE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, SEPTEMBER 18, SEPTEMBER 17, 1992 1993 1994 1993 1994 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Cash received from customers............ $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 616,616 $ 598,698 Cash paid to suppliers and employees.... (2,752,442) (2,711,779) (2,441,353) (586,745) (582,504) Interest paid........................... (56,234) (58,807) (56,762) (4,367) (5,873) Income taxes (paid) refunded............ (4,665) 2,971 (247) 1,289 (1,651) Interest received....................... 1,266 993 903 202 688 Other, net.............................. 4,734 8,093 121 2,093 140 ----------- ----------- ----------- --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............................. 106,152 (16,502) 87,822 29,088 9,498 CASH PROVIDED (USED) BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment............................ 17,395 15,685 11,953 2,486 2,703 Payment for purchase of property and equipment............................ (60,263) (53,467) (57,471) (6,585) (16,750) 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.............................. -- -- -- 799 -- ----------- ----------- ----------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES..... (62,926) (37,800) (55,755) (3,300) (14,047) CASH PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from issuance of long-term debt................................. 177,500 26,557 28 -- -- Net increase (decrease) in revolving loan................................. (23,900) 4,900 (4,900) (4,900) 6,100 Payments of long-term debt.............. (184,389) (14,319) (14,224) (1,955) (4,335) Proceeds from the issuance of preferred stock................................ -- 46,348 -- -- -- Proceeds from issuance of common stock, net.................................. 341 3,652 -- -- -- Purchase of treasury stock, net......... (313) (545) (1,192) -- -- Payments of capital lease obligation.... (2,814) (2,840) (3,693) (667) (816) Deferred financing costs and other...... (6,656) (8,839) (179) (214) (8) ----------- ----------- ----------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.............................. (40,231) 54,914 (24,160) (7,736) 941 ----------- ----------- ----------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 2,995 612 7,907 18,052 (3,608) 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 $ 43,141 $ 29,388 =========== =========== =========== ========= =========
F-30 186 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 TWELVE TWELVE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, SEPTEMBER 18, SEPTEMBER 17, 1992 1993 1994 1993 1994 ------------ ------------ ------------ ------------- ------------- (UNAUDITED) RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Net loss................................ $ (33,814) $(27,363) $ (2,700) $ (1,112) $ (3,347) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization........ 61,181 62,541 62,555 14,263 14,301 Extraordinary charge................. 4,818 -- -- Loss (gain) on sale of assets........ (1,364) (4,613) 65 (37) (458) Equity loss on investments in supplier cooperative............... 472 207 -- -- 32 Change in assets and liabilities, net of effects from acquisition of businesses: Accounts and notes receivable...... (7,688) 17,145 (3,220) (5,777) (197) Inventories........................ 202 17,697 (17,125) 7,562 2,344 Prepaid expenses and other......... (2,834) (6,163) (5,717) (3,213) (3,982) Accounts payable and accrued liabilities..................... 71,369 (83,286) 55,301 14,573 (1,945) Self-insurance liabilities......... 15,034 2,935 (3,790) 1,240 3,501 Deferred income taxes.............. 2,033 4,004 2,506 1,289 -- Income taxes payable............... (3,257) 394 (53) 300 (751) ------------ ------------ ------------ ------------- ------------- Total adjustments.................... 139,966 10,861 90,522 30,200 12,845 ------------ ------------ ------------ ------------- ------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............................. $ 106,152 $(16,502) $ 87,822 $ 29,088 $ 9,498 ========== ========== ========== ========== ========== 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 $ 2,023 $ 2,376 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-31 187 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)... -- -- -- -- -- -- -- -- (3,347) (3,347) Accretion of Preferred Stock (unaudited).... -- 2,376 -- -- -- -- -- -- (2,376) -- ------ ------- --------- --- ------- ------- -------- -------- --------- -------- BALANCES AT SEPTEMBER 17, 1994 (unaudited)....... 50,000 $61,373 1,519,632 $15 (16,732) $(2,469) $(586) $107,650 $(100,309) $ 65,674 ====== ======= ========= === ======== ======= ===== ======== ========= ========
See accompanying notes to consolidated financial statements. F-32 188 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 September 17, 1994 and the consolidated statements of operations and cash flows for the interim periods ended September 17, 1994 and September 18, 1993 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 F-33 189 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with the 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 $14,822,000 (unaudited) at June 26, 1993, June 25, 1994 and September 17, 1994, respectively, and gross profit and operating income would have been greater by $3,554,000, $4,441,000, $699,000, $1,011,000 (unaudited) and $1,020,000 (unaudited) for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 12 weeks ended September 18, 1993, and the 12 weeks ended September 17, 1994, 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 12 weeks ended September 18, 1993 and the 12 weeks ended September 17, 1994, utilization of this reserve was $4.0 million, $2.4 million, $1.1 million, $0.2 million (unaudited) and $0.2 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-34 190 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-35 191 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-36 192 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-37 193 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-38 194 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-39 195 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-40 196 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-41 197 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-42 198 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. (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. F-43 199 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, an affiliate of the Company has assumed the obligation to purchase any FFL shares as to which terminated plan participants have exercised a put option under the terms of Falley's ESOP. As part of that agreement, the Company may, at its sole discretion, after providing a right of first refusal to the affiliate, purchase FFL shares put under the provisions of the plan. 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 September 17, 1994, the fair value of the shares allocated which are subject to a repurchase obligation by an affiliate of the Company was approximately $13,286,000 (unaudited). 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 12 weeks ended September 17, 1994, the Company recorded a charge against operations of approximately $77,000 (unaudited) for benefits under the Union ESOPs. There were no shares issued to the Union ESOPs at September 17, 1994. 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. 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. F-44 200 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 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 --
F-45 201 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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) 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. Upon the effectiveness of the Merger, each outstanding share of common stock, par value $1.00 per share, of Ralphs will be converted into and become a right to receive (a) approximately $16.61 in cash and (b) approximately $3.91 principal amount of 13% Senior Subordinated Pay-in Kind Debentures due 2006 issued by Holdings (the "Debentures"). This represents an aggregate purchase price, payable to the stockholders of Ralphs, of $425 million in cash and $100 million initial principal amount of 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., which has committed to purchase up to $150 million in FFL stock, and the bank financing would be made pursuant to a commitment by Bankers Trust Company to provide up to $1,225 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. As of July 17, 1994, Ralphs had outstanding indebtedness of approximately $990 million. Ralphs had sales of $2,730 million, operating income of $152.1 million and earnings before income taxes of $30.3 million for its most recent fiscal year ended January 30, 1994. 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. This consolidation may result in a restructuring charge and, in conjunction with the Merger, the Company intends to determine if there is any impairment of the value of the Company's existing assets and goodwill. The amount of the restructuring charge is not presently determinable due to various factors, F-46 202 FOOD 4 LESS SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including uncertainties inherent in the completion of the Merger; however, the restructuring charge may be material in relation to the stockholder's equity and financial position of the Company at June 25, 1994. (15) 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 12 weeks ended September 18, 1993 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 $50,910,000 (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 12 weeks ended September 18, 1993, 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 $1,389,000 (unaudited) for the fiscal years 1992, 1993 and 1994 and the 12 weeks ended September 18, 1993, 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. F-47 203 [THIS PAGE INTENTIONALLY LEFT BLANK] 204 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 November 1, 1994, $175 million. Up to $175 million. 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 rate 10.45% per annum. of % per annum (which will be set based upon the Applicable Treasury Rate plus 350 basis points (3.50 percentage points)). INTEREST PAYMENT DATES INTEREST PAYMENT DATES April 15 and October 15. January and July , commencing on July , 1995. FINAL MATURITY DATE FINAL MATURITY DATE April 15, 2000. January , 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 April 15, 1996, 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 April 15 of the years set forth below: set forth below: 1996..........................................104.48% 1996..........................................104.48% 1997..........................................102.99% 1997..........................................102.99% 1998..........................................101.49% 1998..........................................101.49% 1999 and thereafter...........................100.00% 1999 and thereafter...........................100.00% 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. 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, including borrowings and other obligations
A-1 205 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES subsidiaries under the Credit Agreement. Such of the Company and its subsidiaries under the Senior borrowings and obligations under the Credit Agreement Unsecured Term Loan Agreement. Such borrowings and and related guarantees are secured by substantially all obligations under the Credit Agreement and the related of the assets of Food 4 Less and its subsidiaries, guarantees are secured by substantially all of the whereas the Old F4L Senior Notes are senior unsecured assets of the Company and its subsidiaries, whereas the obligations of Food 4 Less and its subsidiaries. New F4L Senior Notes are senior unsecured obligations of the Company 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 repurchase. "Change of Control" means the acquisition after the "Change of Control" means (i) the acquisition after the Issue Date, in one or more transactions, of Issue Date, in one or more transactions, of beneficial beneficial ownership (within the meaning of Rule 13d-3 ownership (within the meaning of Rule 13d-3 under the under the Exchange Act) by (i) any person or entity Exchange Act) by (a) any person or entity (other than (other than any Permitted Holder) or (ii) any group of any Permitted Holder) or (b) any group of persons or persons or entities (excluding any Permitted Holders) entities (excluding any Permitted Holders) who 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 FFL or of Food 4 Less such that, as a securities of FFL or the Company such that, as a result result of such acquisition, such person, entity or of such acquisition, such person, entity or group group either (A) beneficially owns (within the meaning either beneficially owns (within the meaning of Rule of Rule 13d-3 under the Exchange Act), directly or 13d-3 under the Exchange Act), directly or indirectly, indirectly, 51% or more of Food 4 Less' then 40% or more of the then outstanding voting securities outstanding voting securities entitled to vote on a entitled to vote on a regular basis for a majority of regular basis for a majority of the board of directors the board of directors of the Company (but only to the of Food 4 Less (but only to the extent that such extent that such beneficial ownership is not shared beneficial ownership is not shared with any Permitted with any Permitted Holder who has the power to direct Holder who has the power to direct the vote thereof) or the vote thereof), provided, however, that no such (B) otherwise has the ability to elect, directly or Change of Control shall be deemed to have occurred if indirectly, a majority of the members of Food 4 Less' (A) the Permitted Holders beneficially own, in the board of directors. aggregate, at such time, a greater percentage of such voting securities than such other person, entity or "Permitted Holder" means (i) Food 4 Less Equity group or (B) at the time of such acquisition, the Partners, L.P., The Yucaipa Companies or any entity Permitted Holders (or any of them) possess the ability controlled thereby, (ii) an employee benefit plan of (by contract or otherwise) to elect, or cause the Food 4 Less, or any participant therein or any of its election, of a majority of the members of the Company's subsidiaries, (iii) a trustee or other fiduciary board of directors. holding securities under an employee benefit plan of Food 4 Less or any of its subsidiaries or (iv) any "Permitted Holder" means (i) Food 4 Less Equity Permitted Transferee of any of the foregoing persons. Partners, L.P., and The Yucaipa Companies, or any entity controlled thereby or any of the partners "Permitted Transferees" means, with respect to any thereof, (ii) Apollo Advisors, L.P., Lion Advisors, person, (i) any affiliates of such person, (ii) the L.P. or any entity controlled thereby or any of the heirs, executors, administrators, testamentary partners thereof, (iii) an employee benefit plan of the trustees, legatees or beneficiaries of any such person, Company, or any participant therein or any of its and (iii) a trust the beneficiaries of which, or a subsidiaries, (iv) a trustee or other fiduciary holding corporation of partnership, the stockholders or general securities under an employee benefit plan of the or limited partners of which, include only such person Company or any of its subsidiaries or (v) any Permitted or his or her spouse or lineal descendents, in each Transferee of any of the foregoing persons. case to whom such person has transferred securities of Food 4 Less.
A-2 206 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD "Permitted Transferees" means, with respect to any F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE person, (i) any Affiliate of such person, (ii) the THIS COVENANT AND CERTAIN RELATED DEFINITIONS. 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, and (iv) any investment fund, investment account or investment entity whose investment managers, investment advisors and general partners consist solely of such person and/or Permitted Transferees of such person. CERTAIN COVENANTS CERTAIN COVENANTS LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the Old LIMITATION ON RESTRICTED PAYMENTS. Pursuant to the New F4L Senior Note Indenture, Food 4 Less shall not, and F4L Senior Note Indenture, the Company shall not, and shall cause each of its subsidiaries not to, directly shall cause each of its subsidiaries not to, directly or indirectly, make any Restricted Payment if, at the or indirectly, make any Restricted Payment if, at the time of such Restricted Payment, or after giving effect time of such proposed Restricted Payment, or after thereto, (a) a Default or an Event of Default (as giving effect thereto, (a) a Default or an Event of defined below) shall have occurred and be continuing, Default shall have occurred and be continuing, (b) the (b) the net worth of Food 4 Less on the last day of the Company could not incur $1.00 of additional full fiscal quarter immediately preceding the date of Indebtedness (other than Permitted Indebtedness) such Restricted Payment (pro forma to give effect pursuant to the covenant described below under thereto) is not greater than $115 million, (c) Food 4 "Limitation on Incurrences of Additional Indebtedness" Less' Operating Coverage Ratio, calculated on a pro or (c) the aggregate amount expended for all Restricted forma basis as if such Restricted Payment had been made Payments, including such proposed Restricted Payment at the beginning of the pro forma period, shall be less (the amount of any Restricted Payment, if other than than 2.25 to 1.0 or (d) the aggregate amount expended cash, to be the fair market value thereof at the date for all Restricted Payments, including such Restricted of payment as determined in good faith by the board of Payment (the amount of any Restricted Payment, if other directors of the Company), subsequent to the Issue than cash, to be the fair market value thereof at the Date, shall exceed the sum of (i) 50% of the aggregate date of payment as determined in good faith by the Consolidated Net Income (or if such aggregate board of directors of Food 4 Less which determination Consolidated Net Income is a loss, minus 100% of such shall be evidenced by a board resolution), subsequent loss) of the Company earned subsequent to the Issue to the Issue Date, shall exceed the sum of (i) 25% of Date and on or prior to the date of the proposed the aggregate Consolidated Net Income (or if such Restricted Payment (the "Reference Date") plus (ii) aggregate Consolidated Net Income is a loss, minus 100% 100% of the aggregate net proceeds received by the of such loss) of Food 4 Less earned subsequent to the Company from any person (other than a subsidiary of the Issue Date and prior to the date the Restricted Payment Company) from the issuance and sale (including upon occurs (the "Reference Date") plus (ii) 100% of the exchange or conversion for other securities of the aggregate net proceeds received by Food 4 Less from any Company) subsequent to the Issue Date and on or prior person (other than a subsidiary) from the issuance and to the Reference Date of Qualified Capital Stock sale (including upon exchange or conversion for other (excluding (A) Qualified Capital Stock paid as a securities of Food 4 Less) subsequent to the Issue Date dividend on any capital stock or as interest on any and on or prior to the Reference Date of Qualified Indebtedness and, (B) any net Capital Stock (excluding (A) Qualified Capital Stock proceeds from issuances and sales financed directly or paid as a dividend on any capital stock or as interest indirectly using funds borrowed from the Company or any on any Indebtedness and (B) any net proceeds from subsidiary, until and to the extent such borrowing is issuances and sales financed directly or indirectly repaid, plus (iii) 100% of the aggregate net cash using funds borrowed from Food 4 Less or any proceeds received by the Company as capital subsidiary, until and to the extent such borrowing is contributions to the Company after the Issue Date plus repaid). (iv) $25 million. Notwithstanding the foregoing, if no Default or Notwithstanding the foregoing, if no Default or Event Event of Default shall have occurred and be of Default shall have occurred and be continuing as a continuing as a consequence thereof, the provisions set consequence thereof, the provisions set forth in the forth in the immediately preceding paragraph will not immediately preceding paragraph will not prevent (1) prevent (1) the payment of any dividend within 60 days the payment of any dividend within 60 days after the after the date of its declaration if the dividend would date of its declaration if the dividend would have been 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 for or solely out of the proceeds of the
A-3 207 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES (other than to a 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, and (4) Permitted Payments; Indebtedness which is subordinated in right of payment provided, however, that the declaration of each to the Old F4L Senior Notes with no scheduled or dividend paid in accordance with clause (1) above, each required maturity or scheduled or required repayment of acquisition, repurchase, redemption or other repayment principal or sinking fund payment prior to the final made in accordance with, or of the type set forth in, maturity of the Old F4L Senior Notes, or (4) Permitted clause (2) above, and each payment described in clause Payments; provided that the declaration of each (iii), (iv), (v), (vi) or (vii) of the definition of dividend paid in accordance with clause (1) above, each the term "Permitted Payments" shall each be counted for acquisition or repayment made in accordance with, or of purposes of computing amounts expended pursuant to the type set forth in, clause (2) above, each subclause (c) in the immediately preceding paragraph, repurchase of Old F4L Subordinated Notes pursuant to and no amounts expended pursuant to clause (3) above or clause (3)(a)(i) and each payment described in clause pursuant to clause (i) or (ii) of the definition of the (iii) or (iv) of the definition of "Permitted Payments" term "Permitted Payments" shall be so counted, shall each be counted for purposes of computing amounts provided, further that to the extent any payments made expended pursuant to subclause (d) in the immediately pursuant to clause (vii) of the definition of the term preceding paragraph, and no payment described in clause "Permitted Payments" are deducted for purposes of (3) above (other than clause (3)(a)(i)) or pursuant to computing the Consolidated Net Income of the Company, clause (i) or (ii) of the definition of "Permitted such payments shall not be counted for purposes of Payments" shall be so counted. computing amounts expended as Restricted Payments pursuant to subclause (c) in the immediately preceding "Restricted Payment" means any (i) Stock Payment, paragraph. (ii) Investment (other than a Permitted Investment) or (iii) Restricted Debt Prepayment. "Restricted Payment" means any (i) Stock Payment, (ii) Investment (other than a Permitted Investment) or (iii) "Stock Payment" means, with respect to any person, Restricted Debt Prepayment. (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in "Stock Payment" means, with respect to any person, (a) the case of Food 4 Less, dividends payable solely in the declaration or payment by such person, either in Qualified Capital Stock of Food 4 Less), or the making cash or in property, of any dividend on (except, in the by such person or any of its subsidiaries of any other case of the Company, dividends payable solely in distribution in respect of, such person's Qualified Qualified Capital Stock of the Company), or the making Capital Stock or any warrants, rights or options to by such person or any of its subsidiaries of any other purchase or acquire shares of any class of such capital distribution in respect of, such person's Qualified stock (other than exchangeable or convertible Capital Stock or any warrants, rights or options to Indebtedness of such person), or (b) the redemption, purchase or acquire shares of any class of such capital repurchase, retirement or other acquisition for value stock (other than exchangeable or convertible by such person or any of its subsidiaries, directly or Indebtedness of such person), or (b) the redemption, indirectly, of such person's Qualified Capital Stock repurchase, retirement or other acquisition for value (and, in the case of a subsidiary, Qualified Capital by such person or any of its subsidiaries, directly or Stock of Food 4 Less) or any warrants, rights or indirectly, of such person's Qualified Capital Stock options to purchase or acquire shares of any class of (and, in the case of a subsidiary, Qualified Capital such capital stock (other than exchangeable or Stock of the Company) or any warrants, rights or convertible Indebtedness of such person), other than, options to purchase or acquire shares of any class of in the case of Food 4 Less, through the issuance in such capital stock (other than exchangeable or exchange therefor solely of Qualified Capital Stock of convertible Indebtedness of such person), other than, Food 4 Less; provided, however, that in the case of a in the case of the Company, through the issuance in subsidiary, the term "Stock Payment" shall not include exchange therefor solely of Qualified Capital Stock of any such payment with respect to its capital stock or the Company; provided, however, that in the case of a warrants, rights or options to purchase or acquire subsidiary, the term "Stock Payment" shall not include shares of any class of its capital stock that are owned any such payment with respect to its capital stock or solely by Food 4 Less or a wholly-owned subsidiary. warrants, rights or options to purchase or acquire shares of any class of its capital stock that are owned "Investment" by any person in any other person means solely by the Company or a wholly-owned subsidiary. any investment by such person in such other person, whether by a purchase of assets, in any transaction or "Investment" by any person in any other person means series of related transactions, individually or in the any investment by such person in such other person, aggregate, in an amount greater than $5 million, share whether by a purchase of assets, in any transaction or purchase, capital contribution, loan, advance (other series of related transactions, individually or in the than reasonable loans and advances to employees for aggregate, in an amount greater than $5 million, share moving and travel expenses, as salary advances, or to purchase, capital contribution, loan, advance (other permit the purchase of Qualified Capital Stock of Food than reasonable loans and advances to employees for 4 Less and other similar customary expenses incurred, moving and travel expenses, as salary advances, or to in each case in the ordinary course of business permit the purchase of Qualified Capital Stock of the consistent with past practice) or similar credit Company and other similar customary expenses incurred, extension constituting Indebtedness of such other in each case in the ordinary course of business person, and any guarantee of Indebtedness of any other consistent with past practice) or similar credit person. extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other "Permitted Investment" by any person means (i) any person. Related Business Investment, (ii) Investments in securities not constituting cash or cash equivalents "Permitted Investment" by any person means (i) any and received in connection with an Asset Sale made Related Business Investment, (ii) Investments in pursuant to the provisions of the Old F4L securities not constitut-
A-4 208 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES Senior Note ing cash or cash equivalents Indenture summarized under "Limitation on Disposition and received in connection with an Asset Sale made of Assets" or any other disposition of assets not pursuant to the provisions of the covenant described constituting an Asset Sale by reason of the $250,000 under "Limitation on Asset Sales" or any other dispo- threshold contained in the definition thereof, (iii) sition of assets not constituting an Asset Sale by cash and cash equivalents, (iv) Investments existing on reason of the $500,000 threshold contained in the June 17, 1991, (v) Investments specifically permitted definition thereof, (iii) cash and cash equivalents, by and made in accordance with the provisions of the (iv) Investments existing on the Issue Date, (v) Old F4L Senior Note Indenture summarized under Investments specifically permitted by and made in "Limitation on Restricted Payments," "Limitation on accordance with the provisions of the covenant Transactions with Affiliates" and "Limitation on described under "Limitation on Transactions with Incurrences of Additional Indebtedness," and (vi) Affiliates", (vi) Investments by Subsidiary Guarantors Investments by Subsidiary Guarantors in other in other Subsidiary Guarantors and Investments by Subsidiary Guarantors and Investments by subsidiaries subsidiaries which are not Subsidiary Guarantors in which are not Subsidiary Guarantors in other subsid- other subsidiaries which are not Subsidiary Guarantors, iaries which are not Subsidiary Guarantors. and (vii) additional Investments in an aggregate amount not exceeding $5.0 million. "Restricted Debt Prepayment" means any purchase, redemption, defeasance (including, but not limited "Restricted Debt Prepayment" means any purchase, to, in-substance or legal defeasance) or other redemption, defeasance (including, but not limited to, acquisition or retirement for value, directly or in substance or legal defeasance) or other acquisition indirectly, by Food 4 Less or a subsidiary, prior to or retirement for value, directly or indirectly, by the the scheduled maturity or prior to any scheduled Company or a subsidiary, prior to the scheduled repayment of principal or sinking fund payment, as the maturity or prior to any scheduled repayment of case may be, in respect of Indebtedness of Food 4 Less principal or sinking fund payment, as the case may be, that is subordinate in right of payment to the Old F4L in respect of Subordinated Indebtedness. Senior Subordinated Notes; provided, however, that any such acquisition shall be deemed not to be a Restricted "Permitted Payments" means (i) any payment by the Debt Prepayment to the extent it is made (x) in Company or any subsidiary to The Yucaipa Companies or exchange for or with the proceeds from the the principals thereof for consulting, management, substantially concurrent issuance of Qualified Capital investment banking or similar advisory services during Stock or (y) in exchange for or with the proceeds from such period pursuant to that certain Amended and the substantially concurrent issuance of Indebtedness, Restated Consulting Agreement, dated as of the Issue in a principal amount (or, if such Indebtedness Date among Food 4 Less, Yucaipa Management Company and provides for an amount less than the principal amount The Yucaipa Companies, as such payments would be calcu- thereof to be due and payable upon the acceleration lated under such Consulting Agreement as in effect on thereof, with an original issue price) not to exceed the Issue Date, (ii) any payment by the Company or any the sum of (A) the lesser of (i) the principal amount subsidiary pursuant to the Amended and Restated Tax of Indebtedness being acquired in exchange therefor (or Sharing Agreement, dated as of June 17, 1991, between with the proceeds therefrom) and (ii) if such Food 4 Less and certain subsidiaries, as such Tax Indebtedness being acquired was issued at an original Sharing Agreement may be amended from time to time, so issue discount, the original issue price thereof plus long as the payment thereunder by the Company and its amortization of the original issue discount at the time subsidiaries shall not exceed the amount of taxes the of the incurrence of the Indebtedness being issued in Company would be required to pay if it were the filing exchange therefor (or the proceeds of which will person for all applicable taxes, (iii) any payment by finance such acquisition), and (B) the amount of the Company or any subsidiary pursuant to the Transfer penalties, fees and expenses actually incurred with and Assumption Agreement, dated as of June 23, 1989, respect thereto, and provided further that (x) any such between Food 4 Less and Holdings, as in effect on the Indebtedness shall have an average life not less than Issue Date, (iv) any payment by the Company or any the average life of the Indebtedness being acquired, subsidiary (a) in connection with repurchases of and shall contain subordination and default provisions outstanding shares of the Company's or FFL's common no less favorable, in any material respect, to holders stock following the death, disability or termination of of the Old F4L Senior Subordinated Notes than those employment of management stockholders, and (b) of contained in such Indebtedness being acquired (y) any amounts required to be paid by FFL, the Company or any such Indebtedness that repays the F4L Senior of its subsidiaries to participants in employee benefit Subordinated Notes shall not have any fixed mandatory plans upon termination of employment by such redemption or sinking fund requirement in an amount participants, as provided in the documents related greater than or at a time prior to the amounts and thereto, in an aggregate amount (for both clauses (a) times specified in the F4L Senior Subordinated Notes or and (b)) not to exceed $10 million in any yearly period any Indebtedness refinancing the F4L Senior Subordi- (provided that any unused amounts may be carried over nated Notes, as the case may be, unless any such to any subsequent yearly period subject to a maximum requirement applies on a date after the Maturity Date. amount of $20 million in any yearly period), (v) from and after June 30, 1998, payments of "Permitted Payments" means any payment by Food 4 Less cash dividends to FFL in an amount sufficient to enable or any subsidiary (i) to The Yucaipa Companies or the FFL to make payments of interest required to be made in principals thereof for consulting, investment banking respect of the Seller Debentures in accordance with the or similar services during such period pursuant to that terms thereof in effect on the Issue Date, (vi) from certain Amended and Restated Consulting Agreement, and after January , 2000, payments of cash dividends dated as of June 17, 1991, among Food 4 Less, Yucaipa to FFL in an amount sufficient to enable FFL to make Management Company and The Yucaipa Companies, as such payments of interest required to be made in respect of amounts would be calculated under such Consulting the Seller Debentures in accordance with the terms Agreement as in effect on the Issue Date, (ii) pursuant thereof in effect on the Issue Date and (vii) dividends to the Amended and Restated Tax Sharing Agreement, or other payments to FFL sufficient to permit FFL to dated as of June 17, 1991, between Food 4 Less and perform accounting, legal, corporate and administrative certain subsidiaries, as such Tax Sharing Agreement may functions in the ordinary course of business or to pay be amended from time to time, so long as the payment required fees and expenses in connection with the thereunder by Food 4 Less and its subsidiaries shall Merger and the registration under applicable laws and not exceed the amount of taxes Food 4 Less would be regulations of its debts and securities. required to pay if it were the filing person for all applicable taxes, (iii) pursuant to the Transfer and
A-5 209 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES Assumption Agreement, dated as of June 23, 1989, "Consolidated Net Income" means, with respect to any between Food 4 Less and FFL, as in effect on the Issue person, for any period, the aggregate of the net income Date, and (iv) (a) in connection with repurchases of (or loss) of such person and its subsidiaries for such outstanding shares of Food 4 Less' common stock period, on a consolidated basis, determined in following the death, disability or termination of accordance with GAAP; provided that (a) the net income employment of management stockholders, and (b) of of any other person in which such person or any of its amounts required to be paid by FFL, Food 4 Less or any subsidiaries has an interest (which interest does not of its subsidiaries to participants in employee benefit cause the net income of such other person to be plans upon any termination of employment by such consolidated with the net income of such person and its participants, as provided in the documents related subsidiaries in accordance with GAAP) shall be included thereto, in an aggregate amount (for both clauses (a) only to the extent of the amount of dividends or and (b)) not to exceed $5 million in any yearly period distributions actually paid to such person or such (provided that any unused amounts may be carried over subsidiary by such other person in such period; (b) the to any subsequent yearly period subject to a maximum net income of any subsidiary of such person that is amount of $10 million in any yearly period). subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented "Consolidated Net Income," means, with respect to any the payment of an amount that otherwise could have been person, for any period, the aggregate of the net income paid to, or received by, such person or a subsidiary of (or loss) of such person and its subsidiaries for such such person not subject to any Payment Restriction; and period, on a consolidated basis, determined in (c)(i) the net income (or loss) of any other person accordance with GAAP; provided that (a) the net income acquired in a pooling of interests transaction for any of any other person in which such person or any of its period prior to the date of such acquisition, (ii) all subsidiaries has an interest (which interest does not gains and losses realized on any Asset Sale, (iii) all cause the net income of such other person to be gains realized upon or in connection with or as a consolidated with the net income of such person and its consequence of the issuance of the capital stock of subsidiaries in accordance with GAAP) shall be included such person or any of its subsidiaries and any gains on only to the extent of the amount of dividends or pension reversions received by such person or any of distributions actually paid to such person or such its subsidiaries, (iv) all gains and losses realized on subsidiary by such other person in such period; (b) the the purchase or other acquisition by such person or any net income of any subsidiary of such person that is of its subsidiaries of any securities of such person or subject to any Payment Restriction shall be excluded to any of its subsidiaries, (v) all gains and losses the extent such Payment Restriction actually prevented resulting from the cumulative effect of any accounting the payment of an amount that otherwise could have been change pursuant to the application of Accounting paid to, or received by, such person or a subsidiary of Principles Board Opinion No. 20, as amended, (vi) all such person not subject to any Payment Restriction; and other extraordinary gains and losses, (vii) all (c)(i) the net income (or loss) of any other person non-cash charges incurred by the Company or any of its acquired in a pooling of interests transaction for any subsidiaries in connection with the Merger, including, period prior to the date of such acquisition, (ii) all without limitation, the divestiture of the Excluded gains and losses realized on any Asset Sale or in Assets, (viii) losses incurred by the Company and its connection with the closure of the Long Beach subsidiaries resulting from earthquakes and (ix) with Warehouse, (iii) all gains realized upon or in respect to the Company, all deferred financing costs connection with or as a consequence of the issuance of written off in connection with the early extinguishment the capital stock of such person or any of its of any Indebtedness, shall each be excluded. subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, "Subordinated Indebtedness" means, with respect to the (iv) all gains and losses realized on the purchase or Company or any Subsidiary Guarantor, Indebtedness of other acquisition by such person or any of its such person which is subordinated in right of payment subsidiaries of any securities of such person or any of to the New F4L Senior Notes or the guarantee of such its subsidiaries, (v) all gains and losses resulting Subsidiary Guarantor, as the case may be. 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, and (vii) with respect to Food 4 Less all deferred financing costs written off in connection with the early extinguishment of any Indebtedness shall each be excluded. 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 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 proviso.
A-6 210 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES The foregoing limitation shall not apply to (a) In addition, the New F4L Senior Note Indenture will Indebtedness of Food 4 Less and its subsidiaries provide that neither the Company nor any Subsidiary pursuant to (i) the Term Facility under or pursuant to Guarantor will, directly or indirectly, in any event the Loan Documents in an aggregate principal amount at incur any Indebtedness that by its terms (or by the any time outstanding not to exceed $301.7 million, less terms of any agreement governing such Indebtedness) is the aggregate amount of all principal repayments subordinated to any other Indebtedness of the Company thereunder out of the net proceeds of the offering of or such Subsidiary Guarantor, as the case may be, the Old F4L Senior Notes, and less any future unless such Indebtedness is also by its terms (or by repayments subsequent to the Issue Date, (ii) the the terms of any agreement governing such Indebtedness) Subsidiary Letter of Credit Obligations (and Food 4 made expressly subordinate to the New F4L Senior Notes Less and each subsidiary (to the extent it is not an or the guarantee of such Subsidiary Guarantor, as the obligor) may guarantee such Indebtedness) not to exceed case may be, to the same extent and in the same manner $55 million at any time outstanding and (iii) the as such Indebtedness is subordinated pursuant to Revolving Facility under the Loan Documents (and Food 4 subordination provisions that are most favorable to the Less and each subsidiary (to the extent it is not an holders of any other Indebtedness of the Company or obligor) may guarantee such Indebtedness) in an such Subsidiary Guarantor, as the case may be. aggregate principal amount at any time outstanding not to exceed $70 million, less all permanent reductions of "Indebtedness" means, with respect to any person, the unused portion under the Revolving Facility, (b) without duplication, (i) all liabilities, contingent or the Old F4L Senior Notes; (c) certain intercompany otherwise, of such person (a) for borrowed money Indebtedness; (d) Indebtedness incurred by Food 4 Less (whether or not the recourse of the lender is to the or any subsidiary in connection with the purchase or whole of the assets of such person or only to a portion improvement of property (real or personal) or equipment thereof), (b) evidenced by bonds, notes, debentures, or other capital expenditures in the ordinary course of drafts accepted or similar instruments or letters of business (including for the purchase of assets or stock credit or representing the balance deferred and unpaid of any retail grocery store or business) or consisting of the purchase price of any property (other than any of capitalized lease obligations, in aggregate not to such balance that represents an account payable or any exceed $25 million in any yearly period (provided that other monetary obligation to a trade creditor (whether any unused amounts may be carried over to the next (but or not an affiliate) created, incurred, assumed or not any subsequent) yearly period); (e) Indebtedness of guaranteed by such person in the ordinary course of Food 4 Less under certain Foreign Exchange Agreements business of such person in connection with obtaining and Interest Swap Obligations; (f) Permitted Guarantees goods, materials or services and due within twelve of Indebtedness in aggregate not to exceed $25 million months (or such longer period for payment as is at any time outstanding in addition to those customarily extended by such trade creditor) of the outstanding on the date of the Alpha Beta Acquisition; incurrence thereof, which account is not overdue by (g) guarantees by Food 4 Less and its subsidiaries of more than 90 days, according to the original terms of Indebtedness incurred by a wholly-owned subsidiary sale, unless such account payable is being contested in provided that the incurrence of such Indebtedness by good faith), or (c) for the payment of money relating such wholly-owned subsidiary is permitted under the to a capitalized lease obligation; (ii) the maximum terms of the Old F4L Senior Note Indenture; (h) fixed repurchase price of all Disqualified Capital Refinancing Indebtedness; (i) Indebtedness in Stock of such person; (iii) reimbursement obligations connection with the acquisition of the La Habra of such person with respect to letters of credit; (iv) Facility and Option Stores if, after giving effect to obligations of such person with respect to interest such incurrence, the Operating Coverage Ratio of Food 4 swap obligations and foreign exchange agreements; (v) Less would be greater than 2.0 to 1.0; (j) Indebtedness all liabilities of others of the kind described in the for letters of credit relating to workers' compensation preceding clause (i), (ii), (iii) or (iv) that such claims and self-insurance or similar requirements in person has guaranteed or that is otherwise its legal the ordinary course of business; (k) the Old F4L liability; and (vi) all obligations of others secured Subordinated Notes and related guarantees; and (l) by a lien to which any of the properties or assets additional Indebtedness of Food 4 Less and its (including, without limitation, leasehold interests and Subsidiary Guarantors in an amount not to exceed any other tangible or intangible property rights) of $75 million at any time outstanding. such person are subject, whether or not the obligations secured thereby shall have been assumed by such "Indebtedness" means with respect to any person, person or shall otherwise be such person's legal without duplication, (i) all liabilities, contingent liability (provided that if the obligations so secured or otherwise, of such person (a) for borrowed money have not been assumed by such person or are not (whether or not the recourse of the lender is to the otherwise such person's legal liability, such whole of the assets of such person or only to a portion obligations shall be deemed to be in an amount equal to thereof), (b) evidenced by bonds, notes, debentures, the fair market value of such properties or assets, as drafts accepted or similar instruments or letters of determined in good faith by the board of directors of credit or representing the balance deferred and unpaid such person, which determination shall be evidenced by of the purchase price of any property (other than any a board resolution). For purposes of the preceding such balance that represents an account payable or any sentence, the "maximum fixed repurchase price" of any other monetary obligation to a trade creditor (whether Disqualified Capital Stock that does not have a fixed or not an affiliate) created, incurred, assumed or repurchase price shall be calculated in accordance with guaranteed by such person in the ordinary course of the terms of such Disqualified Capital Stock as if such business of such person in connection with obtaining Disqualified Capital Stock were purchased on any date goods, materials or services and due within twelve on which Indebtedness shall be required to be months (or such longer period for payment as is determined pursuant to this Indenture, and if such customarily extended by such trade creditor) of the price is based upon, or measured by, the fair market incurrence thereof, which account is not overdue by value of such Disqualified Capital Stock (or any equity more than 90 days, according to the original terms of security for which it may be exchanged or converted), sale, unless such account payable is being contested in such fair market value shall be determined in good good faith), or (c) for the payment of money relating faith by the board of directors of such person, which to a capitalized lease obligation; (ii) the maximum determination shall be evidenced by a board resolution. fixed repurchase price of all Disqualified Capital For purposes of the New F4L Senior Note Indenture, Stock of such person; (iii) reimbursement obligations Indebtedness incurred by any person that is a general of such person with respect to letters of credit; (iv) partnership (other than non-recourse Indebtedness) obligations of such person with respect to Interest shall be deemed to have been incurred by the general Swap Obligations and Foreign Exchange Agreements; (v) partners of such partnership pro rata in accordance all liabilities of others of the kind described in the with their respective interests in the liabilities of preceding clause (i), (ii), such partnership unless any such
A-7 211 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES (iii) or (iv) that such general partner shall, person has guaranteed or that is otherwise its legal in the reasonable determination of the board of liability; and (vi) all obligations of others secured directors of the Company, be unable to satisfy its pro by a lien to which any of the properties or assets rata share of the liabilities of the partnership, in (including, without limitation, leasehold interests and which case the pro rata share of any Indebtedness any other tangible or intangible property rights) of attributable to such partner shall be deemed to be such person are subject, whether or not the incurred at such time by the remaining general partners obligations secured thereby shall have been assumed by on a pro rata basis in accordance with their interests. such person or shall otherwise be such person's legal liability (provided that if the obligations so secured "Permitted Indebtedness" means (a) Indebtedness of the have not been assumed by such person or are not Company and its Subsidiaries pursuant to (i) the Term otherwise such person's legal liability, such Loans in an aggregate principal amount at any time obligations shall be deemed to be in an amount equal to outstanding not to exceed $900 million, less the the fair market value of such properties or assets, as aggregate amount of all principal repayments thereunder determined in good faith by the board of directors of pursuant to and in accordance with the covenant such person, which determination shall be evidenced by described under "-- Certain Covenants -- Limitation on a board resolution). For purposes of the preceding Asset Sales" above subsequent to the Issue Date, and sentence, the "maximum fixed repurchase price" of any (ii) the revolving credit facility under the Credit Disqualified Capital Stock that does not have a fixed Agreement (and the Company and each Subsidiary (to the repurchase price shall be calculated in accordance with extent it is not an obligor) may guarantee such the terms of such Disqualified Capital Stock as if such Indebtedness) in an aggregate principal amount at any Disqualified Capital Stock were purchased on any date time outstanding not to exceed $325 million, less all on which Indebtedness shall be required to be permanent reductions thereunder pursuant to and in determined pursuant to the Old F4L Senior Note 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, (b) Indebtedness of the Company or a Subsidiary Stock (or any equity security for which it may be Guarantor owed to and held by the Company or a exchanged or converted), such fair market value shall Subsidiary Guarantor; (c) Indebtedness incurred by the be determined in good faith by the board of directors Company or any Subsidiary in connection with the of such person, which determination shall be evidenced purchase or improvement of property (real or personal) by a board resolution. For purposes of the Old F4L or equipment or other capital expenditures in the Senior Note Indenture, Indebtedness incurred by any ordinary course of business (including for the purchase person that is a general partnership (other than of assets or stock of any retail grocery store or non-recourse Indebtedness) shall be deemed to have been business) or consisting of Capitalized Lease incurred by the general partners of such partnership Obligations provided that (i) at the time of the pro rata in accordance with their respective interests incurrence thereof, such indebtedness, together with in the liabilities of such partnership unless any such any other Indebtedness incurred during the most general partner shall, in the reasonable determination recently completed four fiscal quarter period in of the board of directors of Food 4 Less, be unable to reliance upon this clause (c) does not exceed, in the satisfy its pro rata share of the liabilities of the aggregate, 3% of net sales of the Company and its partnership, in which case the pro rata share of any Subsidiaries during the most recently completed four Indebtedness attributable to such partner shall be fiscal quarter period on a consolidated basis deemed to be incurred at such time by the remaining (calculated on a pro forma basis if the date of general partners on a pro rata basis in accordance with incurrence is prior to the first anniversary of the their interests. Merger) and (ii) such Indebtedness, together with all then outstanding Indebtedness incurred in reliance upon "Operating Coverage Ratio" means, with respect to any this clause (c) does not exceed, in the aggregate, 3% person, the ratio of (1) EBDIT of such person for the of the aggregate net sales of the Company and its period (the "Pro Forma Period") consisting of the most Subsidiaries during the most recently completed twelve recent four full fiscal quarters for which financial fiscal quarter period on a consolidated basis (calcu- information in respect thereof is available immediately lated on a pro forma basis if the date of incurrence is prior to the date of the transaction giving rise to the prior to the need to calculate the Operating Coverage Ratio (the third anniversary of the Merger); (d) Indebtedness "Transaction Date") to (2) the aggregate Fixed Charges incurred by the Company or any subsidiary in connection of such person for the fiscal quarter in which the with capital expenditures in an aggregate principal Transaction Date occurs and the three fiscal quarters amount not exceeding $150.0 million in the aggregate, immediately subsequent to such fiscal quarter (the provided that such capital expenditures relate solely "Forward Period") reasonably anticipated by the board to the integration of the operations of RSI, Food 4 of directors of such person to become due from time to Less and their respective subsidiaries, as described in time during such period. For purposes of this this Prospectus and Solicitation Statement; (e) definition, if the Transaction Date occurs prior to the Indebtedness of the Company under certain foreign first anniversary of the Alpha Beta Acquisition, exchange agreements and interest swap obligations; (f) "EBDIT" for the Pro Forma Period shall be calculated, guarantees incurred in the ordinary course of business in the case of Food 4 Less, after giving effect on a by the Company or a Subsidiary of Indebtedness of any pro forma basis to the Alpha Beta Acquisition as if it other person in aggregate not to exceed $25.0 million had occurred on the first day of the Pro Forma Period. at any time outstanding; (g) guarantees by the Company In addition to, but without duplication of, the or a Subsidiary Guarantor of Indebtedness incurred by a foregoing, for purposes of this definition, "EBDIT" wholly-owned Subsidiary Guarantor so long as the shall be calculated after giving effect (without incurrence of such Indebtedness incurred by such duplication), on a pro forma basis for the Pro Forma wholly-owned Subsidiary Guarantor is permitted under Period (but no longer), to (a) any Investment, during the terms of the applicable New Indenture; (h) the period commencing on the first day of the Pro Forma Refinancing Indebtedness; (i) Indebtedness for letters Period to and including the Transaction Date (the of credit relating to workers' compensation claims and "Reference Period"), in any other person that, as a self- insurance or similar requirements in the ordinary result of such Investment, becomes a subsidiary of such course of business; (j) Indebtedness of the Company person, (b) the acquisition, during the Reference outstanding under the Senior Unsecured Term Loan Period (by merger, consolidation or purchase of stock Agreement in an aggregate principal amount at any time or assets) of any business or assets, which acquisition outstanding not to exceed $150 million, less the is not prohibited by the Old F4L Senior Note Indenture, aggregate amount of all principal repayments thereunder and (c) any sales or other dispositions of assets subsequent to the Issue Date; (k) other Indebtedness (other than sales of inventory in the ordinary course outstanding on the Issue Date (after giving effect to of business) occurring during the Reference Period, in the Merger); (l) Indebtedness arising from guarantees each case as if such incurrence, Investment, repay- of Indebtedness of the Company or any Subsidiary or other agreements of the Company
A-8 212 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES ment, acquisition or asset sale had occurred on the or a Subsidiary first day of the Reference Period. In addition, for providing for indemnification, adjustment of purchase purposes of this definition, "Fixed Charges" shall be price or similar obligations, in each case, incurred or calculated after giving effect (without duplication), assumed in connection with the disposition of any on a pro forma basis for the Forward Period, to any business, assets or Subsidiary, other than guarantees Indebtedness incurred or repaid on or after the first of Indebtedness incurred by any person acquiring all or day of the Forward Period and prior to the Transaction any portion of such bonuses, assets or Subsidiary for Date. the purpose of financing such acquisition, provided that the maximum aggregate liability in respect of all "Refinancing Indebtedness" means, with respect to any such Indebtedness shall at no time exceed the gross person, Indebtedness of such person issued in proceeds actually received by the Company and its exchange for, or the proceeds from the issuance and subsidiaries in connection with such disposition; and sale or disbursement of which are used to substantially (m) obligations in respect of performance bonds and concurrently repay, redeem, refund, refinance, completion guarantees provided by the Company or any discharge or otherwise retire for value, in whole or in Subsidiary in the ordinary course of business. part (collectively, "repay"), or constituting an amendment, modifica- "Operating Coverage Ratio" means, with respect to any tion or supplement to, or a deferral or renewal of person, the ratio of (1) EBDIT of such person for the (collectively, an "amendment"), any Indebtedness of period (the "Pro Forma Period") consisting of the most such person existing on the Issue Date or Indebtedness recent four full fiscal quarters for which financial (other than Permitted Indebtedness, except Permitted information in respect thereof is available immediately Indebtedness incurred pursuant to clauses (a), (c), prior to the date of the transaction giving rise to the (d), (h), (j) and (k) of the definition thereof) need to calculate the Operating Coverage Ratio (the incurred in accordance with the applicable New "Transaction Date") to (2) the aggregate fixed charges Indenture (a) in a principal amount (or, if such of such person for the fiscal quarter in which the Refinancing Indebtedness provides for an amount less Transaction Date occurs and the three fiscal quarters than the principal amount thereof to be due and payable immediately subsequent to such fiscal quarter (the upon the acceleration thereof, with an original issue "Forward Period") reasonably anticipated by the board price) not in excess of (without duplication) (i) the of directors of such person to become due from time to principal amount or the original issue price, as the time during such period. For purposes of this case may be, of the Indebtedness so refinanced (or, if definition, if the Transaction Date occurs prior to the such Refinancing Indebtedness refinances Indebtedness first anniversary of the Merger, "EBDIT" for the Pro under a revolving credit facility or other agreement Forma Period shall be calculated, in the case of the providing a commitment for subsequent borrowings, with Company, after giving effect on a pro forma basis to a maximum commitment not to exceed the maximum the Merger as if they had occurred on the first day of commitment under such revolving credit facility or the Pro Forma Period. In addition to, but without other agreement) plus (ii) unpaid accrued interest on duplication of, the foregoing, for purposes of this such Indebtedness plus (iii) premiums, penalties, fees definition, "EBDIT" shall be calculated after giving and expenses actually incurred by such person in effect (without duplication), on a pro forma basis for connection with the repayment or amendment thereof and the Pro Forma Period (but no longer), to (a) any (b) with respect to Refinancing Indebtedness that Investment, during the period commencing on the first repays or constitutes an amendment to Subordinated day of the Pro Forma Period to and including the Indebtedness, such Refinancing Indebtedness (x) shall Transaction Date (the "Reference Period"), in any other not have any fixed mandatory redemption or sinking fund person that, as a result of such Investment, becomes a requirement in an amount greater than or at a time subsidiary of such persons, (b) the acquisition, during prior to the amounts and times specified in such repaid the Reference Period (by merger, consolidation or or amended Subordinated Indebtedness, except to the purchase of stock or assets) of any business or assets, extent that any such requirement applies on a date which acquisition is not prohibited by the New F4L after the Maturity Date of the New F4L Senior Notes and Senior Note Indenture, and (c) any sales or other (y) shall contain subordination and default provisions dispositions of assets (other than sales of inventory no less favorable in any material respect to holders of in the ordinary course of business) occurring during the New Senior F4L Notes than those contained in such the Reference Period, in each case as if such repaid or amended Subordinated Indebtedness. incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference "Loan Documents" means the Credit Agreement and all Period. In addition, for purposes of this definition, promissory notes, guarantees, security agreements, "Fixed Charges" shall be calculated after giving effect pledge agreements, deeds of trust, mortgages, letters (without duplication), on a pro forma basis for the of credit and other instruments, agreements and Forward Period, to any Indebtedness incurred or repaid documents executed pursuant thereto or in connection on or after the first day of the Forward Period and therewith, including all amendments, supplements, prior to the extensions, renewals, restatements, replacements or Transaction Date. If such person or any of its refinancings thereof, or other modifications (in whole subsidiaries directly or indirectly guarantees any or in part, and without limitation as to amount, terms, Indebtedness of a third person, the Operating Coverage conditions, covenants or other provisions) thereof from Ratio shall give effect to the incurrence of such time to time. Indebtedness as if such person or subsidiary had directly incurred such guaranteed Indebtedness. "Credit Agreement" means the Credit Agreement, dated as of June 17, 1991, by and among Food 4 Less, certain "Credit Agreement" means the Credit Agreement, dated as of its subsidiaries, the Lenders and Designated Issuers of the Issue Date, by and among Food 4 Less, certain of of the Lenders referred to therein, Bankers Trust its subsidiaries, the Lenders referred to therein, Company, Citicorp North America, Inc., and Bankers Trust Company, as administrative agent, as the Manufacturers Hanover Trust Company, as Co-Agents, and case may be, as amended, extended, renewed, restated, Citicorp North America, Inc., as Administrative Agent, supplemented or otherwise modified (in whole or in as amended, extended, renewed, restated, supplemented part, and without limitation as to amount, terms or otherwise modified (in whole or in part, and without conditions, covenants and other provisions) from time limitation as to amount, terms, conditions and other to time, and any agreement governing Indebtedness in- provisions) from time to time, and any agreement curred to refund or refinance the borrowings and governing Indebtedness required to refund or refinance commitments then outstanding or permitted to be the entirety of the borrowings and commitments then outstanding under such Credit Agreement or such outstanding or permitted to be outstanding under such agreement. Credit Agreement or such agreement. Food 4 Less shall promptly notify the Old F4L Senior Note Trustee of any "Acquired Indebtedness" means (i) with respect to any such refunding or refinancing of the Credit Agreement. person that becomes a subsidiary of the Company (or is merged into the Company or any of its subsidiaries) after the Issue Date, Indebt-
A-9 213 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES "Acquired Indebtedness" means Indebtedness of a edness of, such person or person or any of its subsidiaries existing at the any of its subsidiaries existing at the time such time such person becomes a subsidiary or assumed in person becomes a subsidiary of the Company (or is connection with the acquisition of assets from such merged into the Company or any of its subsidiaries) and person and not incurred by such person in connection which was not incurred in connection with, or in with, or in anticipation or contemplation of, such contemplation of, such person becoming a subsidiary of person becoming a subsidiary or such acquisition. the Company (or being merged into the Company or any of its subsidiaries) and (ii) with respect to the Company "Permitted Guarantees" means (i) guarantees in effect or any of its subsidiaries, any Indebtedness assumed by on the Issue Date and (ii) guarantees incurred in the the Company or any of its subsidiaries in connection ordinary course of business, by Food 4 Less or a with the acquisition of any assets from another person subsidiary, of Indebtedness of any other person. (other than the Company or any of its subsidiaries), and which was not incurred by such other person in "Refinancing Indebtedness" means Indebtedness of Food connection with, or in contemplation of, such Less or a subsidiary (i) issued in exchange for, or the acquisition. proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, "EBDIT" means, with respect to any person, for any redeem, refund, refinance, discharge or otherwise period, the Consolidated Net Income of such person for retire for value, in whole or in part (collectively, such period, plus, in each case to the extent deducted "repay"), or constituting an amendment, modification or in computing Consolidated Net Income of such person for supplement to, or a deferral or renewal of such period (without duplication( (i) provisions for (collectively, an "amendment"), any Indebtedness of income taxes or similar charged recognized by such Food 4 Less or a subsidiary (and any penalties, fees person and its consolidated subsidiaries accrued during and expenses actually incurred by Food 4 Less or such such period, (ii) depreciation and amortization expense subsidiary in connection with the repayment or of such person and its consolidated subsidiaires amendment thereof) existing immediately after the accrued during such period (but only to the extent not original issuance of the Old F4L Senior Notes or included in fixed charges), (iii) fixed charges of such incurred pursuant to the Operating Coverage Ratio test person and its consolidated subsidiaries for such set forth under "Limitation on the Incurrence of period, (iv) LIFO charges (credits) of such person and Additional Indebtedness," or pursuant to certain other its consolidated subsidiaries for such period, (v) the exceptions thereunder, in a principal amount (or, if amount of any restructuring reserve or charge recorded such Refinancing Indebtedness provides for an amount during such period in accordance with GAAP, including less than the principal amount thereof to be due and any such reserve or charge related to the Merger, and payable upon the acceleration thereof, with an original (vi) any other non-cash charges reducing Consolidated issue price) not in excess of (1) the principal amount Net Income for such period (excluding any such charge of the Indebtedness so refinanced (or, if such which requires an accrual of or a cash reserve for cash Refinancing Indebtedness refinances Indebtedness under charges for any future period), less, without a revolving credit facility or other agreement duplication, (i) non-cash items increasing Consolidated providing a commitment for subsequent borrowings, with Net Income of such person for such period in each case a maximum commitment not to exceed the maximum determined in accordance with GAAP and (ii) the amount commitment under such revolving credit facility or of all cash payments made by such person or its other agreement) plus (2) unpaid accrued interest on subsidiaries during such period to the extent that such such Indebtedness plus (3) penalties, fees and ex- cash payment has been provided for in a restructuring penses actually incurred by Food 4 Less or such reserve or charge referred to in clause (v) above (and subsidiary, as the case may be, in connection with the were not otherwise deducted in the computation of repayment or amendment thereof; or (ii) in an amount Consolidated Net Income of such person for such permitted to be incurred at the time of such incurrence period). by Food 4 Less or such subsidiary, as the case may be, under the Credit Agreement pursuant to "Limitation on "Permitted Guarantees" means (i) guarantees in effect the Incurrence of Additional Indebtedness"; provided on the Issue Date and (ii) guarantees incurred in the that (for both clauses (i) and (ii) above) (A) ordinary course of business, by the Company or a Refinancing Indebtedness of any subsidiary shall not be subsidiary, of Indebtedness of any other person. used to repay outstanding Indebtedness of Food 4 Less, (B) Refinancing Indebtedness of Food 4 Less that repays or constitutes an amendment to Indebtedness of Food 4 Less (other than any of the Old F4L Senior Notes) ranking junior in right of payment to, the Old F4L Senior Notes shall not have an average life less than the Indebtedness to be so refinanced at the time of such incurrence; provided, however, Refinancing Indebtedness of Food 4 Less that repays or constitutes an amendment to the Old F4L Subordinated Notes or any Indebtedness refinancing the Old F4L Subordinated Notes 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 the Old F4L Subordinated Notes or any Indebtedness refinancing the Old F4L Subordinated Notes, as the case may be, unless any such requirement applies on a date after the final maturity of the Old F4L Senior Notes; and, in any case, shall contain subordination and default provisions no less favorable in any material respect to holders of the Old F4L Senior Notes than those contained in such repaid or amended Indebtedness, and (C) notwithstanding the foregoing, any Refinancing Indebtedness incurred to repay all of the Old F4L Senior Notes then outstanding shall not be limited in principal amount or otherwise if Food 4 Less irrevocably deposits with the Old F4L Senior Note Trustee or Paying Agent an amount of the proceeds of such Refinancing Indebtedness sufficient to redeem the outstanding principal amount of the Old F4LSenior Notes on the date fixed for the repayment thereof.
A-10 214 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES 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, (iii) liens existing and future liens securing Indebtedness and securing Acquired Indebtedness; provided that such other obligations of the Company and its subsidiaries liens (x) are not incurred in connection with, or in under the Credit Agreement and related documents or any contemplation of the acquisition of the property or refinancing or replacement thereof in whole or in part assets acquired and (y) do not extend to or cover any permitted under the New F4L Senior Note Indenture, property or assets of Food 4 Less or any subsidiary (iii) Permitted Liens, (iv) liens securing Acquired other than the property or assets so acquired, (iv) Indebtedness; provided that such liens (x) are not liens securing Indebtedness to the extent incurred to incurred in connection with, or in contemplation of the refinance secured Indebtedness outstanding as of the acquisition of the property or assets acquired and (y) Issue Date; provided that such refinancing Indebtedness do not extend to or cover any property or assets of the shall be secured solely by the assets securing such Company or any subsidiary other than the property or currently outstanding Indebtedness, (v) liens to secure assets acquired, (v) liens to secure capitalized lease certain Indebtedness that is otherwise permitted under obligations and certain other Indebtedness that is the Old F4L Senior Note Indenture; provided that (A) otherwise permitted under the New F4L Senior Note any such lien is created solely for the purpose of Indenture; provided that (A) any such lien is created securing Indebtedness representing, or incurred to solely for the purpose of securing such other finance, refinance or refund, the cost (including sales Indebtedness representing, or incurred to finance, and excise taxes, installation and delivery charges and refinance or refund, the cost (including sales and other direct costs of, and other direct expenses paid excise taxes, installation and delivery charges and or charged in connection with, the purchase (whether other direct costs of, and other direct expenses paid through stock or asset purchase, merger or otherwise) or charged in connection with, the purchase (whether or construction) of the property subject thereto, (B) through stock or asset purchase, merger or otherwise) the principal amount of the Indebtedness secured by or construction) or improvement of the property subject such lien does not exceed 100% of such costs and (C) thereto (whether real or personal, including fixtures such lien does not extend to or cover any other and other equipment), (B) the principal amount of the property other than such item of property and any Indebtedness secured by such lien does not exceed 100% improvements on such item; (vi) liens existing on the of such costs and (C) such lien does not extend to or Issue Date; (vii) liens in favor of the Old F4L Senior cover any other property other than such item of Note Trustee; (viii) liens securing Indebtedness property and any improvements on such item; (vi) liens permitted by clauses (d), (h) or (k) above of existing on the Issue Date (after giving effect to the "Limitation on Incurrences of Additional Indebtedness," Merger); (vii) liens in favor of the New F4L Senior provided that, in the case of Indebtedness permitted by Note Trustee under the New F4L Senior Note Indenture clause (h) above, the principal amount of the and any substantially equivalent lien granted to any Indebtedness secured by liens does not exceed 100% of trustee or similar institution under any indenture for the purchase price of the La Habra Facility or the Indebtedness permitted to be incurred under the New F4L Option Stores, as the case may be; and (ix) any Senior Note Indenture; and (viii) any replacement, replacement, extension or renewal, in whole or in part, extension or renewal, in whole or in part, of any lien of any lien described in this or the foregoing clauses described in this or the foregoing clauses including in including in connection with any refinancing of the connection with any refinancing of the Indebtedness, in Indebtedness, in whole or in part, secured by any such whole or in part, secured by any such lien provided lien provided that to the extent any such clause limits that to the extent any such clause limits the amount the amount secured or the assets subject to such liens, secured or the assets subject to such liens, no no extension or renewal shall increase the amount of extension or renewal shall increase the amount of the the assets subject to such liens, except to the extent assets subject to such liens, except to the extent that that the liens associated with such additional assets the liens associated with such additional assets are are otherwise permitted hereunder. otherwise permitted hereunder. "Permitted Liens" shall mean (i) liens for taxes, "Permitted Liens" shall mean (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 warehouseman, 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); secure
A-11 215 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES (v) easements, rights-of-way, 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 issued or created for the account Indebtedness would be permitted to be incurred pursuant of such person to facilitate the purchase, shipment or to "Limitation on Incurrences of Additional storage of such inventory or other goods in the Indebtedness"; (vii) liens upon specific items of ordinary course of business; (vii) liens securing inventory or other goods and proceeds of any person reimbursement obligations with respect to letters of securing such person's obligations in respect of credit which encumber documents and other property bankers' acceptances issued or created for the account relating to such letters of credit and the products and of such person to facilitate the purchase, shipment or proceeds thereof; (viii) liens in favor of customs and storage of such inventory or other goods in the revenue authorities arising as a matter of law to ordinary course of business; (viii) liens securing secure payment of nondelinquent customs duties in reimbursement obligations with respect to letters of connection with the importation of goods; (ix) judgment credit which encumber documents and other property and attachment liens not giving rise to a Default or relating to such letters of credit and the products and Event of Default; (x) leases or subleases granted to proceeds thereof; (ix) liens in favor of customs and others not interfering in any material respect with the revenue authorities arising as a matter of law to business of the Company or any Subsidiary; (xi) liens secure payment of nondelinquent customs duties in encumbering customary initial deposits and margin connection with the importation of goods; (x) judgment deposits, and other liens incurred in the ordinary and attachment liens not giving rise to a Default or course of business that are within the general Event of Default; (xi) leases or subleases granted to parameters customary in the industry, in each case others not interfering in any material respect with the securing Indebtedness under interest swap obligations business of Food 4 Less or any subsidiary; (xii) liens and foreign exchange agreements and forward contracts, encumbering customary initial deposits and margin option futures contracts, futures options or similar deposits, and other liens incurred in the ordinary agreements or arrangements designed to protect the course of business that are within the general Company or any Subsidiary from fluctuations in the parameters customary in the industry, in each case price of commodities; (xii) liens encumbering deposits securing Indebtedness under Interest Swap Obligations made in the ordinary course of business to secure and Foreign Exchange Agreements and forward contracts, nondelinquent obligations arising from statutory, option futures contracts, futures options or similar regulatory, contractual or warranty requirements of the agreements or arrangements designed to protect Food 4 Company or its Subsidiaries for which a reserve or Less or any subsidiary from fluctuations in the price other appropriate provision, if any, as shall be of commodities; (xiii) liens encumbering deposits made required by GAAP shall have been made; (xiii) liens in the ordinary course of business to secure arising out of consignment or similar arrangements for nondelinquent obligations arising from statutory, the sale of goods entered into by the Company or any regulatory, contractual or warranty requirements of Subsidiary in the ordinary course of business in Food 4 Less or its subsidiaries for which a reserve or accordance with past practices; (xiv) any interest or other appropriate provision, if any, as shall be title of a lessor in the property subject to any lease, required by GAAP shall have been made; (xiv) liens whether characterized as capitalized or operating other arising out of consignment or similar arrangements for than any such interest or title resulting from or the sale of goods entered into by Food 4 Less or any arising out of a default by the Company or any subsidiary in the ordinary course of business in Subsidiary of its obligations under such lease; and accordance with past practices; (xv) any interest or (xv) liens arising from filing UCC financing statements title of a lessor in the property subject to any lease, for precautionary purposes in connection with true whether characterized as capitalized or operating other leases of personal property that are otherwise than any such interest or title resulting from or permitted under the applicable Indenture and under arising out of a default by Food 4 Less or any which the Company or any Subsidiary is lessee; (xvi) subsidiary of its obligations under such lease; and liens on assets of the Company securing Indebtedness (xvi) liens arising from filing UCC financing which would constitute Senior Indebtedness but for the statements for precautionary purposes in connection provisions of clause (c) in the third sentence of the with true leases of personal property that are definition of Senior Indebtedness and liens on assets otherwise permitted under the Old F4L Senior Note of a Subsidiary Guarantor securing Indebtedness which Indenture and under which Food 4 Less or any subsidiary would constitute Guarantor Senior Indebtedness but for is a lessee. the provisions of clause (c) in the third sentence of the definition of Guarantor Senior Indebtedness; and IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD (xvii) additional liens securing Indebtedness at any F4L SENIOR NOTE INDENTURES WILL BE MODIFIED TO one time outstanding not exceeding the sum of (i) $25 ELIMINATE THIS PROVISION AND CERTAIN RELATED LIENS. 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.
A-12 216 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES 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; pro- clause (ii), for the purposes of this provision; vided, 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 Asset Sale result in a permanent reduction in the commitment in which the cash portion of the consideration received thereunder; (iii) use such net cash proceeds to secure therefor, determined in accordance with the foregoing Letter of Credit Obligations to the extent the related clause, is equal to or greater than what the net letters of credit have not been drawn upon or returned after-tax proceeds would have been had such Asset Sale undrawn; or (iv) after such time as the accumulated net complied with the aforementioned 75% limitation and (B) cash proceeds equals or exceeds $20 million, apply or any Asset Sale in which the consideration received by cause to be applied such net cash proceeds to the Food 4 Less or any of its subsidiaries is less than $5 purchase of New F4L Senior Notes tendered to the million; and (b) the net cash proceeds received by Food Company for purchase at a price equal to 100% of the 4 Less or such subsidiary, as the case may be, will principal amount thereof plus accrued interest thereon within 180 days of such Asset Sale, at the election of to the date of purchase pursuant to an offer to Food 4 Less, either (i) invest or cause to be invested purchase made by the Company as set forth below (a "Net in a manner that would constitute a Related Business Proceeds Offer"); provided, however, that the Company Investment; (ii) apply or cause to be applied to the shall have the right to exclude from the foregoing payment of Indebtedness under the Credit Agreement or provisions Asset Sales subsequent to the Issue used to secure Letter of Credit Obligations to the substantially Date, (x) the proceeds of which are extent the related letters of credit have not been derived from the sale and concurrent lease-back of a drawn upon or returned undrawn; provided, however, that supermarket and/or related assets which are acquired or any repayment of Indebtedness under the Revolving constructed by the Company or a subsidiary subsequent Facility under the Loan Documents shall result in a to the Issue Date, provided that such sale and permanent reduction in the commitment thereunder; or substantially concurrent lease-back occurs within 180 (iii) after such time as the accumulated net cash days following such acquisition or the completion of proceeds equals or exceeds $2.5 million, apply or cause such construction, as the case may be, and (y) the to be applied such net cash proceeds to the purchase of proceeds of which in the aggregate do not exceed $20 Old F4L Senior Notes tendered to Food 4 Less for million; provided, further, that pending the purchase at a price equal to 100% of the principal utilization of any Net Cash Proceeds in the manner (and amount thereof plus accrued interest thereon to the within the time period) described above, the Company date of purchase pursuant to an offer to purchase made may use any such Net Cash Proceeds to repay revolving by Food 4 Less as set forth below (a "Net Proceeds loans under the Credit Agreement without a permanent Offer"); provided, however, that Food 4 Less shall have reduction of the commitment thereunder. the right to exclude Asset Sales subsequent to the Issue Date, the proceeds of which in the aggregate do Pursuant to the New F4L Senior Note Indenture, notwith- not exceed $10 million, from the foregoing provisions. standing the foregoing, prior to the mailing of the Net Proceeds Offer, the Company shall purchase all New F4L Pursuant to the Old F4L Senior Note Indenture, each Senior Notes (or permitted refinancings thereof) which Net Proceeds Offer will be mailed to the record holders it is required to purchase by reason of such Asset Sale of the Old F4L Senior Notes as shown on the register of pursuant to the provisions of the New F4L Senior Note holders of Old F4L Senior Notes not less than 140 nor Indenture. more than 180 days after the relevant Asset Sale, with a copy to the Old F4L Senior Note Trustee and the Pursuant to the New F4L Senior Note Indenture, each Net Credit Agent. Such notice shall state, among other Proceeds Offer will be mailed to the record holders of things, the purchase date (which shall be no earlier New F4L Senior Notes as shown on the register of than 30 days nor later than 40 days from the date such holders of New F4L Senior Notes not less than 325 nor notice is mailed) and shall otherwise comply with the more than 365 days after the relevant Asset Sale, with procedures set forth in the Old F4L Senior Note a copy to the New F4L Senior Note Trustee and the Indenture. Upon receiving notice of the Net Proceeds Credit Agent. Such notice shall state, among other Offer, holders of the Old F4L Senior Notes may elect to things, the purchase date (which shall be no earlier tender their Old F4L Senior Notes in whole on in part than 30 days nor later than 40 days from the date such in integral multiples of $1,000 in exchange for cash. notice is mailed) and shall otherwise comply with the To the extent holders properly tender Old F4L Senior procedures set forth in the New F4L Senior Note Notes in an amount exceeding the Net Proceeds Offer, Indenture. Upon receiving notice of the Net Proceeds Old F4L Senior Notes of tendering holders will be Offer, holders may elect to tender their New F4L Senior repurchased on a pro rata basis (based on amounts Notes in whole or in part in integral multiples of tendered). $1,000 in exchange for cash. To the extent holders properly tender New F4L Senior Notes in an amount Pursuant to the Old F4L Senior Note Indenture, Food 4 exceeding the Net Proceeds Offer, New F4L Senior Notes Less will comply with the requirements of Rule 14e-1 of tendering holders will be repurchased on a pro rata under the Exchange Act and any other securities laws basis (based on amounts tendered). and regulations thereunder to the extent such laws and regulations are applicable in connection with the Pursuant to the New F4L Senior Note Indenture, the Com- repurchase of Old F4L Senior Notes pursuant to a Net pany will comply with the requirements of Rule 14e-1 Proceeds Offer. under the
A-13 217 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES "Asset Sale" means, for any person, any sale, Exchange Act and any other securities laws and transfer or other disposition or series of sales, regulations thereunder to the extent such laws and transfers or other dispositions (including, without regulations are applicable in connection with the limitation, by merger or consolidation or by exchange repurchase of New F4L Senior Notes pursuant to a Net of assets and whether by operation of law or otherwise) Proceeds Offer. made by such person or any of its subsidiaries to any person other than such person or one of its "Asset Sale" means, with respect to any person, any wholly-owned subsidiaries (or, in the case of a sale, sale, transfer or other disposition or series of sales, transfer or other disposition by a subsidiary, to any transfers or other dispositions (including, without person other than Food 4 Less or a directly or limitation, by merger or consolidation or by exchange indirectly wholly-owned subsidiary) of any assets of of assets and whether by operation of law or otherwise) such person or any of its subsidiaries including, made by such person or any of its subsidiaries to any without limitation, assets consisting of any capital person other than such person or one of its stock or other securities held by such person, or any wholly-owned subsidiaries (or, in the case of a sale, of its subsidiaries, and any capital stock issued by transfer or other disposition by a subsidiary, to any any subsidiary of such person, outside of the ordinary person other than the Company or a directly or course of business, excluding, however, any sale, indirectly wholly-owned subsidiary) of any assets of transfer or other disposition, or series of related such person or any of its subsidiaries including, sales, transfers or other dispositions, having a without limitation, assets consisting of any capital purchase price or transaction value, as the case may stock or other securities held by such person or any of be, of $250,000 or less. its subsidiaries, and any capital stock issued by any subsidiary of such person, in each case, outside of the "Related Business Investment" means (i) any ordinary course of business, excluding, however, any Investment by a person in any other person a majority sale, transfer or other disposition, or series of of whose revenues are derived from the operation of one related sales, transfers or other dispositions (i) or more retail grocery stores or supermarkets or any involving only excluded assets, (ii) resulting in net other line of business engaged in by Food 4 Less or any proceeds to the Company and the subsidiaries of of its subsidiaries as of the Issue Date; (ii) any $500,000 or less or (iii) pursuant to any foreclosure Investment by such person in any cooperative or other of assets or other remedy provided by applicable law to supplier, including, without limitation, any joint a creditor of the Company with a Lien on such assets, venture which is intended to supply any product or which lien is permitted under the New F4L Senior Note service useful to the business of Food 4 Less and its Indenture, provided that such foreclosure or other subsidiaries as it is conducted as of the Issue Date remedy is conducted in a commercially reasonable manner and as such business may thereafter evolve or change; or in accordance with any Bankruptcy Law. and (iii) any capital expenditure or Investment (without regard to the $5 million threshold in the "Related Business Investment" means (i) any Investment definition thereof), in each case reasonably related to by a person in any other person a majority of whose the business of Food 4 Less and its subsidiaries as it revenues are derived from the operation of one or more is conducted as of the Issue Date and as such business retail grocery stores or supermarkets or any other line may thereafter evolve or change. of business engaged in by the Company or any of its subsidiaries as of the Issue Date; (ii) any Investment IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD by such person in any cooperative or other supplier, F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE including, without limitation, any joint venture which THIS PROVISION AND CERTAIN RELATED DEFINITIONS. 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 (without regard to the $5 million threshold in the definition thereof), 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 by a subsidiary; (c) customary net worth provisions contained in
A-14 218 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES ordinary course of business; (d) customary restrictions with respect to a subsidiary 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 the sale or disposition of all or substantially all of provisions in instruments or agreements relating to a the capital stock or assets of such subsidiary; (e) lien permitted to be created, incurred or assumed customary provisions in joint venture agreements and pursuant to the provisions of "Limitation on Liens" and other similar agreements; and (f) restrictions prohibiting the transfer of the property subject to contained in Indebtedness incurred to refinance, such lien; (f) customary provisions in joint venture refund, extend or renew Indebtedness referred to in agreements and other similar agreements entered into in clause (a) above; provided that the restrictions the ordinary course of business which provide that contained therein are not materially more restrictive distributions from such venture may only be made with taken as a whole than those provided for in such the consent of the partners; and (g) restrictions Indebtedness being refinanced, refunded, extended or contained in Indebtedness incurred to refinance, renewed and (g) Payment Restrictions contained in any refund, extend or renew Indebtedness referred to in other Indebtedness permitted to be incurred subsequent clause (a) above or amendments to the Indebtedness to the Issue Date pursuant to the provisions of the referred to in clause (a) above; provided that the covenant described under "-- Limitation on Incurrences restrictions contained therein relating to the payment of Additional Indebtedness" above; provided that any of dividends by such subsidiaries are not materially such Payment Restrictions are ordinary and customary more restrictive than those provided for in such with 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 refinancing 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 refinancing 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 on board
A-15 219 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES resolution, reasonably and in good faith 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, (B) with 4 Less or such subsidiary, as the case may be, has respect to Affiliate Transactions involving aggregate received an opinion from an independent financial payments in excess of $5 million and less than $15 advisor to the effect that the financial terms of such million, with respect to which the Company or such Affiliate Transaction are fair to Food 4 Less or such subsidiary, as the case may, shall have delivered an subsidiary from a financial point of view. officers' certificate to the New F4L Senior Note Trustee certifying that such Affiliate Transactions The provisions of the Old F4L Senior Note Indenture complies with clause (y) above and that such Affiliate described in the foregoing paragraph shall not apply to Transactions has received the approval of a majority of (i) any Permitted Payment, (ii) any Restricted Payment the disinterested members of the board of directors of that is made in compliance with the provisions set the Company or the subsidiary, as the case may be, or, forth in "Limitation on in the absence of any such approval by the Restricted Payments," (iii) reasonable and customary disinterested members of the board of directors of the fees and compensation paid to, and indemnity provided Company or that the subsidiary, as the case may be, on behalf of, officers, directors, employees or that an independent financial advisor has reasonably consultants of Food 4 Less or any subsidiary, as and in good faith determined that the financial terms determined by the board of directors of Food 4 Less or of such Affiliate Transaction are fair to the Company any subsidiary or the senior management thereof in good or such subsidiary, faith, (iv) transactions exclusively between or among as the case may be, or that the terms of such Affiliate Food 4 Less and any of its wholly-owned subsidiaries or Transaction are at least as favorable as might exclusively between or among such subsidiaries, reasonably have been obtained at such time from an provided such transactions are not otherwise prohibited unaffiliated party, and that such Independent Financial by the Old F4L Senior Note Indenture, (v) any agreement Advisor has provided written confirmation of such as in effect as of the Issue Date or any amendment determination to the Board of Directors and (C) with thereto or any transaction contemplated thereby respect to Affiliate Transactions involving aggregate (including pursuant to any amendment thereto) so long payments in excess of $15 million, with respect to as any such amendment is not disadvantageous to the which the Company or such subsidiary, as the case may holders of the Old F4L Senior Notes in any material be, shall have delivered to the New F4L Senior Note respect, (vi) the existence of, or the performance by Trustee, a written opinion from an independent Food 4 Less or any of its subsidiaries of its financial advisor to the effect that the financial obligations under the terms of, any stockholders terms of such Affiliate Transaction are fair to the agreement (including any registration rights agreement Company or such subsidiary, as the case may be, or that or purchase agreement related thereto) to which it FFL the terms of such Affiliate Transaction are at least as is a party as of the Issue Date and any similar favorable as those that might reasonably have been agreements which it FFL may enter into thereafter; obtainable at the time from an unaffiliated party. provided, however, that the existence of, or the per- formance by Food 4 Less or any subsidiaries of The provisions of the New F4L Senior Note Indenture de- obligations under any future amendment to, any such scribed in the foregoing paragraph shall not apply to existing agreement or under any similar agreement (i) any Permitted Payment, (ii) any Restricted Payment entered into after the Issue Date shall only be that is made in compliance with the provisions permitted by this clause (vi) to the extent that the described herein under "Limitation on Restricted terms of any such amendment or new agreement are not Payments," (iii) reasonable and customary fees and otherwise disadvantageous to the holders of the Old F4L compensation paid to, and indemnity provided on behalf Senior Notes in any material respect, (vii) of, officers, directors, employees or consultants of transactions permitted by, and complying with, the the Company or any subsidiary, as determined by the provisions set forth in "Limitation on Merger and board of directors of the Company or any subsidiary or Certain Other Transactions," and (viii) transactions the senior management thereof in good faith, (iv) with Certified Grocers of California, Inc., Affiliated transactions exclusively between or among the Company Wholesale Grocers of Kansas City, Inc. or their and any of its wholly-owned subsidiaries or exclusively subsidiaries or other suppliers in the ordinary course between or among such wholly-owned subsidiaries, of business (including, without limitation, pursuant to provided such transactions are not otherwise prohibited joint venture arrangements with such persons) and by the New F4L Senior Note Indenture, (v) any agreement otherwise in compliance with the terms of the Old F4L as in effect as of the Issue Date or any amendment Senior Note Indenture. thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long "Significant Stockholder" means, with respect to any as any such amendment is not disadvantageous to the person, any other person who is the beneficial owner holders of the New F4L Senior Notes in any material (within the meaning of Rule 13d-3 under the Exchange respect, (vi) the existence of, or the performance by Act) of more than 10% of any class of equity securities the Company or any of its subsidiaries of its of such person that are entitled to vote on a regular obligations under the terms of, any stockholders basis for the election of directors of such person. agreement (including any registration rights agreement or purchase agreement related thereto) to which it (or IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD FFL) is a party as of the Issue Date and any similar F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE agreements which it (or FFL) may enter into thereafter; THIS PROVISION AND CERTAIN RELATED DEFINITIONS. 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 Mergers and Certain Other Transactions," and (viii) purchases or sales of goods or
A-16 220 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES services or other transactions with suppliers 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, 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 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 (i) 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 and (ii) either (a) repay in full all date, which must be no earlier than 30 days nor later Indebtedness under the Senior Unsecured Term Loan (or than 40 days from the date such notice is mailed, other offer to repay in full all such Indebtedness under the than as may be required by law (the "Change of Control Senior Unsecured Term Loan Agreement and repay the Payment Date"). Holders electing to have a Old F4L Indebtedness owed to each lender which has accepted Senior Note purchased pursuant to a Change of Control such offer) or (b) obtain the requisite consents under Offer will be required to surrender the Old F4L Senior the Senior Unsecured Term Loan Agreement to permit the Note, with the form entitled "Option of Holder to Elect repurchase of the New F4L Senior Notes as provided Purchase" on the reverse of the Old F4L Senior above. The Company shall first comply with the covenant Subordinated Note completed, to the Paying Agent at the in the immediately preceding sentence before it shall address specified in the notice prior to the close of be required to repurchase New F4L Senior Notes pursuant business on the business day prior to the Change of to the provisions described below. The Company's Control Payment Date. failure to comply with the covenants described in this paragraph shall constitute an Event of Default under IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD the New F4L Senior Note Indenture. F4L SENIOR NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED DEFINITIONS. 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 Senior F4L Notes (or permitted refinancings thereof) which it is required to purchase by reason of such Change of Control pursuant to the provisions of the indenture under which such New Senior F4L Notes are issued, as in 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, either case, (1) either Food 4 Less shall be the continuing person, (1) either the Company shall be the continuing person, or the person (if other than Food 4 Less) formed by or the person (if other than the Company) formed by such consolidation or into which Food 4 Less is merged such consolidation or into which the Company is merged or to which all or substantially all of the properties or to which all or substantially all of the properties and assets of Food 4 Less as an entirety or and assets of the Company as an entirety or substantially as an entirety are transferred (or, in substantially as an entirety are transferred (or, in the case of a
A-17 221 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES plan of liquidation, any person to which the case of a plan of liquidation, any person to which assets are transferred) (Food 4 Less or such other assets are transferred) (the Company or such other person being hereinafter referred to as the "Surviving person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly Person") shall be a corporation organized and validly existing under the laws of the United States, any state existing under the laws of the United States, any state thereof or the District of Columbia, and shall thereof or the District of Columbia, and shall expressly assume, by an indenture supplement, all the expressly assume, by an indenture supplement, all the obligations of Food 4 Less under the Old F4L Senior obligations of the Company under the New F4L Senior Notes and the Old F4L Senior Note Indenture; (2) Note Indenture and the New F4L Senior Notes; (2) immediately after and giving effect of such transaction immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any In- the incurrence or anticipated incurrence of any debtedness to be incurred in connection therewith, (A) Indebtedness to be incurred in connection therewith, the surviving person shall have a Net Worth equal to or (A) the Surviving Person shall have a Consolidated Net greater than the Net Worth of Food 4 Less immediately Worth equal to or greater than the Consolidated Net preceding the transaction, (B) the surviving person Worth of the Company immediately preceding the could incur at least $1 of Indebtedness pursuant to transaction and (B) the Surviving Person could incur at provisions of the Old F4L Senior Note Indenture least $1.00 of additional Indebtedness (other than described in the first paragraph under the heading Permitted Indebtedness) pursuant to the provisions "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 amount of Old F4L Senior Subordinated Notes to be
A-18 222 OLD F4L SENIOR NOTES NEW F4L SENIOR 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 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. LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The Old F4L Senior Note Indenture does not have a Pursuant to the New Senior Note Indenture, the Company covenant providing for the limitation on the issuance will not permit any of its Subsidiaries to issue any of preferred stock of subsidiaries. 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 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 contained in the New F4L Note Indenture, if such failure continues unremedied Senior Notes or the New F4L Senior Note Indenture, if for 30 days after written notice given by the Old F4L such failure continues unremedied for 30 days after Senior Note Trustee or the holders of at least 25% in written notice given by the New F4L Senior Note Trustee principal amount of the Old F4L Senior Notes then or the holders of at least 25% in principal amount of outstanding (except in the case of a default with the New F4L Senior Notes then outstanding (except in respect to the covenants set forth in the Old F4L the case of a default with respect to the covenants set Senior Note Indenture, and described herein under the forth in the New F4L Senior Note Indenture, and headings "Limitation on Restricted Payments," described herein under the headings "Limitation on "Maintenance of Net Worth," "Limitations on Restricted Payments," "Limitations on Asset Sales," Dispositions of Assets," "Change of Control," and "Change of Control," and "Limitations on Merger and "Limitations on Merger and Certain Other Transactions," Certain Other Transactions," which shall constitute which shall constitute Events of Default with notice Events of Default with notice but without passage of but without passage of time); (iv) a default under any time); (iv) a default under any Indebtedness of the Indebtedness of Food 4 Less or its subsidiaries, Company or its subsidiaries, whether such Indebtedness whether such Indebtedness now exists or shall now exists or shall hereinafter be created, if both (A) hereinafter be created, if both (A) such default either such default either (1) results from the failure to pay (1) results from the failure to pay any such 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 such Indebtedness at its stated final maturity and pay any principal of such Indebtedness at its stated results in the holder or holders of such Indebtedness maturity and results in the holder or holders of such causing such Indebtedness to become due prior to its Indebtedness causing such Indebtedness to become due stated maturity and (B) the principal amount of such prior to its stated maturity and (B) the principal Indebtedness, together with the principal amount of amount of such Indebtedness, together with the any other such Indebted- principal amount of any other such Indebted-
A-19 223 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES ness causing such Indebtedness to become due prior to ness causing such Indebtedness to become due prior to its stated maturity and (B) the principal amount of its stated maturity and (B) the principal amount of such Indebtedness, together with the principal amount of such Indebtedness, of any other such Indebtedness in together with the principal amount default for failure to pay principal at maturity or the of any other such Indebtedness in default for failure maturity of which has been so accelerated, aggregate to pay principal at stated final maturity or the $20 million or more at any one time outstanding; (v) maturity of which has been so accelerated, aggregate any final judgment or order for payment of money in $20 million or more at any one time outstanding; (v) excess of $20 million shall be entered against Food 4 any final judgment or order for payment of money in Less or any Significant Subsidiary and shall not be excess of $20 million shall be entered against the discharged for a period of 60 days after such judgment Company or any Significant Subsidiary and shall not be becomes final and nonappealable; (vi) either Food 4 discharged for a period of 60 days after such judgment Less or any Significant Subsidiary pursuant to or becomes final and nonappealable; (vi) either the within the meaning of any Bankruptcy Law: (a) commences Company or any Significant Subsidiary pursuant to or a voluntary case or proceeding; (b) consents to the within the meaning of any Bankruptcy Law: (a) commences entry of an order for relief against it in an a voluntary case or proceeding; (b) consents to the involuntary case or proceeding; (c) consents to the entry of an order for relief against it in an appointment of a custodian of it or for all or involuntary case or proceeding; (c) consents to the substantially all of its property; or (d) makes a appointment of a custodian of it or for all or general assignment for the benefit of its creditors; substantially all of its property; or (d) makes a (vii) a court of competent jurisdiction enters an order general assignment for the benefit of its creditors; or decree in an involuntary case or proceeding under (vii) a court of competent jurisdiction enters an order any Bankruptcy Law that: (a) is for relief against Food or decree under any Bankruptcy Law that: (a) is for 4 Less or any relief against the Company or any Significant Significant Subsidiary; (b) appoints a custodian of Subsidiary, in an Food 4 Less or any Significant Subsidiary, or for all involuntary case or proceeding; (b) appoints a or any substantial part of their respective properties; custodian of the Company or any Significant Subsidiary, or (c) orders the liquidation of Food 4 Less or any or for all or any substantial part of their respective Significant Subsidiary, and in each case the order or properties; or (c) orders the liquidation of the decree remains unstayed and in effect for 60 days; and Company or any Significant Subsidiary, and in each case (viii) the lenders under the Loan Documents shall the order or decree remains unstayed and in effect for commence judicial proceedings to foreclose upon any 60 days; (viii) the lenders under the Credit Agreement material portion of the assets of Food 4 Less and its shall commence judicial proceedings to foreclose upon subsidiaries. In the event of a declaration or any material portion of the assets of the Company and acceleration because an Event of Default set forth in its subsidiaries; or (ix) any of the guarantees shall clause (iv) above has occurred and is continuing, such be declared or adjudged invalid in a final judgment or declaration of acceleration shall be automatically order issued by any court of governmental authority. In rescinded and annulled if either (i) the holders of the the event of a declaration of acceleration because an Indebtedness which is the subject of such Event of Event of Default set forth in clause (iv) above has Default have waived such failure to pay at maturity or occurred and is continuing, such declaration of have rescinded the acceleration in respect of such acceleration shall be automatically rescinded and Indebtedness within 90 days of such maturity or annulled if either (i) the holders of the Indebtedness declaration of acceleration, as the case may be, and no which is the subject of such Event of Default have other Event of Default has occurred during such 90-day waived such failure to pay at maturity or have period which has not been cured or waived, or (ii) such rescinded the acceleration in respect of such Indebtedness shall have been discharged or the maturity Indebtedness within 90 days of such maturity or thereof shall have been extended such that it is not declaration of acceleration, as the case may be, and no then due and payable, or the underlying default has other Event of Default has occurred during such 90-day been cured, within 90 days of such maturity or period which has not been cured or waived, or (ii) such declaration of acceleration, as the case may be. Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not Pursuant to the Old F4L Senior Note Indenture, if an then due and payable, or the underlying default has Event of Default (other than an Event of Default been cured, within 90 days of such maturity or resulting from bankruptcy, insolvency, receivership or declaration of acceleration, as the case may be. reorganization of Food 4 Less) occurs and is continuing, the Old F4L Senior Note Trustee or the Pursuant to the New F4L Senior Note Indenture, if an holders of at least 25% in principal amount of the Old Event of Default (other than an Event of Default F4L Senior Notes then outstanding may declare resulting from bankruptcy, insolvency, receivership or immediately due and payable all unpaid principal plus reorganization of the Company or a Subsidiary accrued and unpaid interest on the Old F4L Senior Notes Guarantor) occurs and is continuing, the New F4L Senior then outstanding. If an Event of Default resulting from Note Trustee or the holders of at least 25% in certain events of bankruptcy, insolvency, receivership principal amount of the then outstanding New F4L Senior or reorganization of Food 4 Less shall occur, all Notes may declare due and payable all unpaid principal unpaid principal and accrued interest shall be and interest accrued and unpaid on the then outstanding immediately due and payable without any declaration or New F4L other act on the part of the Old F4L Senior Note Senior Notes issued under such New F4L Senior Note Trustee or any of the holders. Subject to certain Indenture by notice in writing to the Company and the conditions, the holders of a majority in principal applicable New F4L Senior Note Trustee specifying the amount of the Old F4L Senior Notes then outstanding, by respective Event of Default and that it is a "notice of notice to the Old F4L Senior Note Trustee, may rescind acceleration" (the "Acceleration Notice"), and the same such declaration if all existing Events of Default are (i) shall become immediately due and payable or (ii) if remedied. In certain cases the holders of a majority in there are any amounts outstanding under the Credit principal amount of outstanding Old F4L Senior Notes Agreement, shall become due and payable upon the first may waive any past default and its consequences, except to occur of an acceleration under the Credit Agreement, a default in the payment of principal of or interest on or five business days after receipt by the Company and any of the Old F4L Senior Notes. the administrative agent under the Credit Agreement of such Acceleration Notice. If an Event of Default The Old F4L Senior Note Indenture provides that if a resulting from certain events of bankruptcy, Default or Event of Default occurs and is continuing insolvency, receivership or reorganization of the and if it is known to the Old F4L Senior Note Trustee, Company or a Subsidiary Guarantor shall occur, all the Old F4L Senior Note Trustee shall mail to each unpaid principal of and accrued interest on all then holder notice of the uncured Default or Event of outstanding New F4L Senior Notes shall be immediately Default within 90 days after such Default or Event of due and payable without any declaration or other act on the part of the New F4L Senior Note Trustee or any of the holders. After a declaration of
A-20 224 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES Default occurs; provided, however, that, except in the acceleration, case of a Default or Event of Default in the payment subject to certain conditions, the holders of a of the principal of or interest on any of the Old F4L majority in principal amount of the then outstanding Senior Notes, including the failure to make payment on New F4L Senior Notes, by notice to the New F4L Senior the Change of Control Payment Date pursuant to a Change Note Trustee, may rescind such declaration if all of Control Offer, payment when due pursuant to a Net existing Events of Default are remedied. In certain Proceeds Offer or payment when due pursuant to an Offer cases the holders of a majority in principal amount of described above under "Maintenance of Net Worth," the outstanding New F4L Senior Notes may waive a past Old F4L Senior Note Trustee may withhold such notice if default under the New F4L Senior Note Indenture and its it in good faith determines that withholding such consequences, except a default in the payment of or notice is in the interest of the holders. interest on any of the New F4L Senior Notes. The Old F4L Senior Note Indenture provides that no The New F4L Senior Note Indenture provides that if a holder may pursue any remedy thereunder unless the Old Default or Event of Default occurs and is continuing F4L Senior Note Trustee (i) shall have failed to act and if it is known to the New F4L Senior Note Trustee, for a period of 60 days after receiving written notice the New F4L Senior Note Trustee shall mail to each of a continuing Event of Default by such holder and a holder of New F4L Senior Notes notice of the Default or request to act by holders of at least 25% in principal Event of Default within 90 days after such Default or amount of Old F4L Senior Notes and (ii) has received Event of Default occurs; provided, however, that, indemnification satisfactory to it; provided, however, except in the case of a Default or Event of Default in that such provision does not affect the right of any the payment of the principal of or interest on any New holder to sue for enforcement of any overdue payment of F4L Senior Notes, including the failure to make payment Old F4L Senior Notes. on a Change of Control Payment Date pursuant to a Change of Under the Old F4L Senior Note Indenture, two officers Control Offer or payment when due pursuant to a Net of Food 4 Less are required to certify to the Old F4L Proceeds Offer the New F4L Senior Note Trustee may Senior Note Trustee within 120 days after the end of withhold such notice if it in good faith determines each fiscal year of Food 4 Less whether or not they that withholding such notice is in the interest of the know of any Default that occurred during such fiscal holders. year and if applicable, describe such Default and the 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 without each holder affected, no such amendment, supplement or the consent of each holder of New F4L Senior Notes waiver may (1) change the principal amount of Old F4L affected, no such amendment, supplement or waiver may Senior Notes whose (1) change the principal amount of the New F4L Senior holders must consent to an amendment, supplement or Notes the holders of which must consent to an waiver of any provision of the Old F4L Senior Note amendment, supplement or waiver of any provision of the Indenture or the Old F4L Senior Notes; (2) reduce the New F4L Senior Note Indenture, the New F4L Senior Notes rate or extend the time for payment of interest on any or the guarantees, (2) reduce the rate or extend the Old F4L Senior Note; (3) reduce the principal amount of time for payment of interest on any New F4L Senior any Old F4L Senior Note; (4) change the date of Notes, (3) reduce the principal amount of any New F4L maturity of any Old F4L Senior Note or alter the Senior Notes, (4) change the date of maturity of any redemption provisions in a manner adverse to any New F4L Senior Notes or the Change of Control Date or holder; (5) make any changes in the provisions alter the redemption provisions in the New F4L Senior concerning waivers of Defaults or Events of Default by Note Indenture or the New F4L Senior Notes or the holders or the rights of holders to recover the purchase price in connection with any repurchase of New principal of, interest on or redemption payment with F4L Senior Notes pursuant to the covenant described respect to any Old F4L Senior Note; and (6) make the under change of control above in a manner adverse to principal of, or interest on, any Old F4L Senior Note any holder, (5) make any changes in the provisions payable with anything or in any manner other than as concerning waivers of Defaults or Events of Default by provided for in the Old F4L Senior Note Indenture and holders or the rights of holders to recover the the Old F4L Senior Notes. principal of, interest on or redemption payment with respect to any New F4L Senior Notes,
A-21 225 OLD F4L SENIOR NOTES NEW F4L SENIOR NOTES In addition, pursuant to the Old F4L Senior Note (6) make the Indenture, Food 4 Less and the Old F4L Senior Note principal of, or interest on, any New F4L Senior Notes Trustee may amend the Old F4L Senior Note Indenture and payable with anything or in any manner other than as the Old F4L Senior Notes (a) to cure any ambiguity, provided for in the New F4L Senior Note Indenture, the defect or inconsistency therein; provided that such New F4L Senior Notes and the guarantees, (7) waive any amendment or supplement does not adversely affect the Default or Event of Default resulting from a failure to rights of any holder or (b) to make any other change comply with the covenant described above under that does not adversely affect the rights of any "Limitation on Change of Control" or (8) without the holder. 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, pursuant to the New F4L Senior Note Indenture, the New F4L Senior Notes, the New F4L Senior Notes and the related guarantees may be amended 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-22 226 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 Up to $145 million. As of November 1, 1994, $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 3/4% per annum. INTEREST PAYMENT DATES INTEREST PAYMENT DATES June 15 and December 15. January and July , commencing on July , 1995. FINAL MATURITY DATE FINAL MATURITY DATE June 15, 2001. January , 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-1 227 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. Agreement, the Senior Unsecured Term Loan Agreement and As of September 17, 1994, the Senior Indebtedness the indebtedness under the New F4L Senior Notes and the of Food 4 Less was approximately $1,244.0 million. Old F4L Senior Notes, if any. The New F4L Senior Subordinated Notes will rank senior to, or pari passu with, all subordinated indebtedness of the Company. "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 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 and the Senior Unsecured Term Loan 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 Senior Unsecured Term Loan Agreement and, in the case of the Credit Agreement, 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 Code. 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
B-2 228 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES Food 4 Less's subsidiaries executing a supplemental provisions set forth under "Guarantees of Certain indenture in which such subsidiary agrees to be Indebtedness," and (iv) each of the Company's bound by the provisions of the Old F4L Senior subsidiaries executing a supplemental indenture in Subordinated Note Indenture. See "Guarantees of which such subsidiary agrees to be bound by the terms Certain Indebtedness" below. 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 Conrol, 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 such holder's Old F4L Senior Subordinated Notes of such holder's New F4L Senior Subordinated Notes at a purchase price equal to 101% of the principal at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to amount thereof plus accrued and unpaid interest to the date the date of repurchase. See "Limitation on Change of of repurchase. See "Limitation on Change of Control" Control" below. below. "Change of Control" means the acquisition, in one or "Change of Control" means (i) the acquisition after the more transactions, of beneficial ownership (within Issue Date, in one or more transactions, of beneficial the meaning of Rule 13d-3 under the Exchange Act) by ownership (within the meaning of Rule 13d-3 under the (i) any person or entity other than any Permitted Exchange Act) by (a) any person or entity (other than Holder (as defined below) or (ii) any group of persons any Permitted Holder) or (b) any group of persons or 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 FFL or Food 4 Less such that, as a result securities of FFL or the Company such that, as a result of such acquisition, such person, entity or group of such acquisition, such person, entity or group either (A) beneficially owns (within the meaning of either beneficially owns (within the meaning of Rule Rule 13d-3 under the Exchange Act) 51% or more of Food 13d-3 under the Exchange Act), directly or indirectly, 4 Less's then outstanding voting securities entitled to 40% or more of the then outstanding voting securities vote on a regular basis for a majority of the board of entitled to vote on a regular basis for a majority of directors of Food 4 Less (to the extend such beneficial the board of directors of the Company (but only to the ownership is not shared with any Permitted Holder who extent that such beneficial ownership is not shared has the power to direct the vote thereof), or (B) with any Permitted Holder who has the power to direct otherwise has the ability to elect a majority of the the vote thereof), provided, however, that no such members of Food 4 Less's board of directors. 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 Transferee" means, with respect to any Partners, L.P., and The Yucaipa Companies or any entity person, (i) any affiliate of such person, (ii) the controlled thereby or any of the partners thereof, (ii) heirs, executors, administrators, testamentary Apollo Advisors, L.P., Lion Advisors, L.P. or any trustees, legatees or beneficiaries of any such person, entity controlled thereby or any of the partners and (iii) a trust, the beneficiaries of which, or a thereof, (iii) an employee benefit plan of the Company, corporation or partnership, the stockholders or general or any participant therein or any of its subsidiaries, or limited partners of which, include only such person (iv) a trustee or other fiduciary holding securities or his or her spouse or lineal descendants, in each under an employee benefit plan of the Company or any of case to whom such person has transferred securities of its subsidiaries or (v) any Permitted Transferee of any Food 4 Less. of the foregoing persons. IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD "Permitted Transferees" means, with respect to any F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED person, (i) any Affiliate of such person, (ii) the TO ELIMINATE THIS COVENANT AND CERTAIN RELATED heirs, executors, administrators, testamentary 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, and (iv) any investment fund, investment account or investment entity whose investment managers, investment advisors and general partners consist solely of such person and/or Permitted Transferees 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 million,
B-3 229 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES (c) Food 4 Less's Operating Coverage Ratio, Additional Indebtedness" below or (c) the aggregate amount calculated on a pro forma basis as if such Restricted expended for all Restricted Payments, including such proposed Payment had been made at the beginning of the Pro Forma Restricted Payment (the amount of any Restricted Payment, if other Period, shall be less than 2.25 to 1.0 or (d) the than cash, to be the fair market value thereof at the date aggregate amount expended for all Restricted Payments, of payment as determined in good faith by the board of including such Restricted Payment (the amount of any directors of the Company), subsequent to the Issue Restricted Payment, if other than cash, to be the fair Date, shall exceed the sum of (i) 50% of the aggregate market value thereof at the date of payment as Consolidated Net Income (or if such aggregate determined in good faith by the board of directors of Consolidated Net Income is a loss, minus 100% of such Food 4 Less), subsequent to June 17, 1991, shall exceed loss) of the Company earned subsequent to the Issue the sum of (i) 25% of the aggregate Consolidated Net Date and on or prior to the date of the proposed Income (or if such Consolidated Net Income is a loss, Restricted Payment (the "Reference Date") plus (ii) minus 100% of such loss) of Food 4 Less earned 100% of the aggregate net proceeds received by the subsequent to June 17, 1991 and on or prior to the date Company from any person the Restricted Payment occurs (the "Reference Date") (other than a subsidiary of the Company) from the plus (ii) 100% of the aggregate net proceeds received issuance and sale (including upon exchange or by Food 4 Less from any person (other than a subsidiary) conversion for other securities of the Company) from the issuance and sale subsequent to June 17, 1991 subsequent to the Issue Date and on or prior to the and on or prior to the Reference Date of Qualified Reference Date of Qualified Capital Stock (excluding Capital Stock (excluding (A) Qualified Capital Stock (A) Qualified Capital Stock paid as a dividend on any paid as a dividend on any capital stock or as interest capital stock or as interest on any Indebtedness, and on any Indebtedness and (B) any net proceeds from (B) any net proceeds from issuances and sales financed issuances and sales financed directly or indirectly directly or indirectly using funds borrowed from the using funds borrowed from Food 4 Less or any Company or any subsidiary, until and to the extent such subsidiary, until and to the extent such borrowing borrowing is repaid plus (iii) 100% of the aggregate is repaid). net cash proceeds received by the Company as capital contributions to the Company after the Issue Date plus Notwithstanding the foregoing, if no Default or Event (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 or redeemed, each acquisition made in accordance with clause (2) and (4) Permitted Payments; provided, however, that the above, and each payment described in clause (ii), (iii) declaration of each dividend paid in accordance with or (iv) of the definition of "Permitted Payments" shall clause (1) above, each acquisition or repayment made in each be counted for purposes of computing amounts accordance with, or of the type set forth in, clause expended pursuant to subclause (d) in the immediately (2) above, and each payment described in clause (iii), preceding paragraph, and no amounts expended pursuant (iv), (v), (vi) or (vii) of the definition of the term to clause (i) or (v) of the definition of "Permitted "Permitted Payments" shall each be counted for purposes Payments" shall be so counted. of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and no amounts "Restricted Payment" means any (i) Stock Payment, expended pursuant to clause (3) above or pursuant to (ii) Investment (other than a Permitted Investment) or clause (i) or (ii) of the definition of the term (iii) Restricted Debt Prepayment (each as defined "Permitted Payments" shall be so counted; provided, below). further that to the extent any payments made pursuant to clause (vii) of the definition of the term "Stock Payment" means, with respect to any person, "Permitted Payments" are deducted for purposes of (a) the declaration or payment by such person, either computing the Consolidated Net Income of the Company, in cash or in property, of any dividend on (except, in such payments shall not be counted for purposes of the case of Food 4 Less, dividends payable solely in computing amounts expended as Restricted Payments Qualified Capital Stock of Food 4 Less), or the making pursuant to subclause (c) in the immediately preceding by such person or any of its subsidiaries of any other paragraph. distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to "Restricted Payment" means any (i) Stock Payment, (ii) purchase or acquire shares of any class of such capital Investment (other than a Permitted Investment) or (iii) stock (other than exchangeable or convertible Restricted Debt Prepayment (each as defined below). Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by such person or any of its subsidiaries, directly or "Stock Payment" means, with respect to any person, (a) indirectly, of such person's Qualified Capital Stock the declaration or payment by such person, either in (and, in the case of a subsidiary, Qualified Capital cash or in property, of any dividend on (except, in the Stock of Food 4 Less) or any warrants, rights or case of the Company, dividends payable solely in options to purchase or acquire shares of any class of Qualified Capital Stock of the Company), or the making such capital stock (other than exchangeable or by such person or any of its subsidiaries of any other convertible Indebtedness of such person), other than, distribution in respect of, such person's Qualified in the case of Food 4 Less, through the issuance in exchange therefor solely of Qualified Capital Stock of Food 4 Less; provided, however,
B-4 230 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES that in the case of a subsidiary, the term "Stock Capital Stock or any warrants, rights or options to purchase Payment" shall not include any such payment with or acquire shares of any class of such capital stock (other respect to its capital stock or warrants, rights or than exchangeable or convertible Indebtedness of such person), options to purchase or acquire shares of any class of or (b) the redemption, repurchase, retirement or other its capital stock that are owned solely by Food 4 Less acquisition for value by such person or any of its subsidiaries, or a wholly-owned subsidiary. directly or indirectly, of such person's Qualified Capital Stock (and, in the case of a subsidiary, Qualfied Capital "Investment" by any person in any other person means Stock of the Company) 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 Indebtedness series of related transactions, individually or in the of such person), other than, in the case of the Company, aggregate, in an amount greater than $5 million, share through the issuance in exchange therefor solely of purchase, capital contribution, loan, advance (other Qualified Capital Stock of the Company; provided, however than reasonable loans and advances to employees for that in the case of a subsidiary, the term "Stock moving and travel expenses, as salary advances, or to Payment" shall not include any such payment with permit the purchase of Qualified Capital Stock of Food respect to its capital stock or 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 its capital stock that are owned solely by the Company consistent with past practice) or similar credit or a wholly-owned subsidiary. extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other "Investment" by any person in any other person means person. any investment by such person in such other person, whether by a purchase of assets, in any transaction or "Permitted Investment" by any person means (i) any series of related transactions, individually or in the Related Business Investment, (ii) Investments in aggregate, in an amount greater than $5 million, share securities not constituting cash or cash equivalents purchase, capital contribution, loan, advance (other and received in connection with an Asset Sale made than reasonable loans and advances to employees for pursuant to the provisions of the Old F4L Senior moving and travel expenses, as salary advances, or to Subordinated Note Indenture summarized under "Limi- permit the purchase of Qualified Capital Stock of the tation on Disposition of Assets" or any other Company and other similar customary expenses incurred, disposition of assets not constituting an Asset Sale by in each case in the ordinary course of business reason of the $250,000 threshold contained in the consistent with past practice) or similar credit definition thereof, (iii) cash and cash equivalents, extension constituting Indebtedness of such other (iv) Investments existing on June 17, 1991, (v) person, and any guarantee of Indebtedness of any other Investments specifically permitted by and made in person. accordance with the provisions of the Old F4L Senior Subordinated Note Indenture summarized under "Permitted Investment" by any person means (i) any "Limitation on Restricted Payments," "Limitation on Related Business Investment, (ii) Investments in Transactions with Affiliates" and "Limitation on securities not constituting cash or cash equivalents Incurrences of Additional Indebtedness," and (vi) and received in connection with an Asset Sale made Investments by Subsidiary Guarantors in other pursuant to the provisions of the covenant described Subsidiary Guarantors and Investments by subsidiaries under "Limitation on Asset Sales" or any other dispo- which are not Subsidiary Guarantors in other sition of assets not constituting an Asset Sale by subsidiaries which are not Subsidiary Guarantors. reason of the $500,000 threshold contained in the definition thereof, (iii) cash and cash equivalents, "Restricted Debt Prepayment" means any purchase, (iv) Investments existing on the Issue Date, (v) redemption, defeasance (including, but not limited Investments specifically permitted by and made in to, in-substance or legal defeasance) or other accordance with the provisions of the covenant acquisition or retirement for value, directly or described under "Limitation on Transactions with indirectly, by Food 4 Less or a subsidiary, prior to Affiliates", (vi) Investments by Subsidiary Guarantors the scheduled maturity or prior to any scheduled in other Subsidiary Guarantors and Investments by repayment of principal or sinking fund payment, as the subsidiaries which are not Subsidiary Guarantors in case may be, in respect of Indebtedness of Food 4 Less other subsidiaries which are not Subsidiary Guarantors that is subordinate in right of payment to the Old F4L and (vii) additional investments in an aggregate amount Senior Subordinated Notes; provided, however, that any not exceeding $5 million. such acquisition shall be deemed not to be a Restricted Debt Prepayment to the extent it is made (x) in "Restricted Debt Prepayment" means any purchase, exchange for or with the proceeds from the redemption, defeasance (including, but not limited to, substantially concurrent issuance of Qualified Capital in substance or legal defeasance) or other acquisition Stock or (y) in exchange for or with the proceeds from or retirement for value, directly or indirectly, by the the substantially concurrent issuance of Indebtedness, Company or a subsidiary, prior to the scheduled in a principal amount (or, if such Indebtedness maturity or prior to any scheduled repayment of provides for an amount less than the principal amount principal or sinking fund payment, as the case may be, thereof to be due and payable upon the acceleration in respect of Subordinated Indebtedness. thereof, with an original issue price) not to exceed the sum of (A) the lesser of (i) the principal amount "Permitted Payments" means (i) any payment by the Com- of Indebtedness being acquired in exchange therefor (or pany or any subsidiary to The Yucaipa Companies or the with the proceeds therefrom) and (ii) if such principals thereof for consulting, management, Indebtedness being acquired was issued at an original investment banking or similar services during such issue discount, the original issue price thereof plus period pursuant to that certain Amended and Restated amortization of the original issue discount at the time Consulting Agreement, dated as of the Issue Date, among of the incurrence of the Indebtedness being issued in Food 4 Less, Yucaipa Management Company and The Yucaipa exchange therefor (or the proceeds of which will Companies, as such amounts would be calculated under finance such acquisition), and (B) the amount of such Consulting Agreement as in effect on the Issue penalties, fees and expenses actually incurred with Date, (ii) any payment by the Company or any subsidiary respect thereto, and provided further that any such pursuant to the Amended and Restated Tax Sharing Indebtedness shall have an average life not less than Agreement, dated as of June 17, 1991, between Food 4 the average life of the Indebtedness being acquired, Less and certain subsidiaries, as such Tax Sharing and shall contain subordination and default provisions Agreement may be amended from time to time, so long as no less favorable, in any material respect, to holders the payment thereunder by the Company and its of the Old F4L Senior Subordinated Notes than those subsidiaries shall not exceed contained in such Indebtedness being acquired.
B-5 231 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES "Permitted Payments" means any payment by Food 4 Less the amount of taxes the or any subsidiary (i) to The Yucaipa Companies or the Company would be required to pay if it were the filing principals thereof for consulting, investment banking person for all applicable taxes, (iii) any payment by or similar services during such period pursuant to that the Company or any subsidiary pursuant to the Transfer certain Amended and Restated Consulting Agreement, and Assumption Agreement, dated as of June 23, 1989, dated as of June 17, 1991, among Food 4 Less, Yucaipa between Food 4 Less and Holdings, as in effect on the Management Company and The Yucaipa Companies, as such Issue Date, (iv) any payment by the Company or any amounts would be calculated under such Consulting subsidiary (a) in connection with repurchases of Agreement as in effect on the date of the Old F4L outstanding shares of the Company's or FFL's common Senior Subordinated Note Indenture, (ii) pursuant to stock following the death, disability or termination of the Amended and Restated Tax Sharing Agreement, dated employment of management stockholders, and (b) of as of June 17, 1991, between Food 4 Less and certain amounts required to be paid by FFL, the Company or any subsidiaries, as such Tax Sharing Agreement may be of its subsidiaries to participants in employee benefit amended from time to time, so long as the payment plans upon termination of employment by such thereunder by Food 4 Less and its subsidiaries shall participants, as provided in the documents related not exceed the amount of taxes Food 4 Less would be thereto, in an aggregate amount (for both clauses (a) required to pay if it were the filing person for all and (b)) not to exceed $10 million in any yearly period applicable taxes, (iii) pursuant to the Transfer and (provided that any unused amounts may be carried over Assumption Agreement, dated as of June 23, 1989, to any subsequent yearly period subject to a maximum between Food 4 Less and FFL, as in effect on June 17, amount of $20 million in any yearly period), (v) from 1991, and (iv) (a) in connection with repurchases of and after June 30, 1998, payments of cash dividends to outstanding shares of Food 4 Less's common stock FFL in an amount sufficient to enable FFL to make following the death, disability or termination of payments of interest required to be made in respect of employment of management stockholders, and (b) of the Holdings Discount Notes in accordance with the amounts required to be paid by FFL, Food 4 Less or any terms thereof in effect on the Issue Date, (vi) from of its subsidiaries to participants in employee benefit and after , 2000, payments of cash dividends plans upon any termination of employment by such to FFL in an amount sufficient to enable FFL to make participants, as provided in the documents related payments of interest required to be made in respect of thereto, in an aggregate amount (for both clauses (a) the Seller Debentures in accordance with the terms and (b)) not to exceed $5 million in any yearly period thereof in effect on the Issue Date and (vii) dividends (provided that any unused amounts may be carried over or other payments to Holdings sufficient to permit to any subsequent yearly period subject to a maximum Holdings to perform accounting, legal, corporate, and amount of $10 million in any yearly period). administrative functions in the ordinary course of business or to pay required fees and expenses in In addition to the foregoing, the maximum annual fee connection with the Merger and the registration under payable to Yucaipa for management and consulting applicable laws and regulations of its debt or equity services pursuant to the Amended and Restated securities. Consulting Agreement (and thereby allowable as a Permitted Payment under the Old F4L Senior Subordinated "Consolidated Net Income," means, with respect to any Note Indenture) is either (a) one-tenth of one percent person, for any period, the aggregate of the net income of annual revenues or (b) a fixed annual fee of $2 (or loss) of such person and its subsidiaries for such million plus 2.5 percent of the excess of (i) earnings period, on a consolidated basis, determined in before interest, taxes, depreciation and amortization accordance with GAAP; provided that (a) the net income ("EBITDA") over (ii) a minimum EBITDA threshold of $110 of any other person in which such person or any of its million. Yucaipa may elect either method for subsidiaries has an interest (which interest does not determining its consulting fee at the beginning of each cause the net income of such other person to be fiscal year during the term of the agreement. However, consolidated with the net income of such person and its pursuant to the terms of the 1991 Stockholders Agree- subsidiaries in accordance with GAAP) shall be included ment, Yucaipa's consulting fee is currently limited to only to the extent of the amount of dividends or an amount not greater than that specified in clause (b) distributions actually paid to such person or such above. The maximum fee payable to Yucaipa for subsidiary by such other person in such period; (b) the transactional consulting services pursuant to the net income of any subsidiary of such person that is Amended and Restated Consulting Agreement (and thereby subject to any Payment Restriction shall be excluded to allowable as a Permitted Payment under the Old F4L the extent such Payment Restriction actually prevented Senior Subordinated Note Indenture) is one percent of the payment of an amount that otherwise could have been the cash and noncash consideration paid or received paid to, or received by, such person or a subsidiary of (including assumed indebtedness) by Food 4 Less in any such person not subject to any acquisition or disposition transaction, and, without Payment Restriction; and (c)(i) the net income (or duplication of the foregoing, one percent of the loss) of any other person acquired in a pooling of maximum principal amount or proceeds of any debt, interests transaction for any period prior to the date equity or lease financing by Food 4 Less. of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in "Consolidated Net Income," with respect to any connection with or as a consequence of the issuance of person, for any period, means the aggregate of the the capital stock of such person or any of its net income (or loss) of such person and its subsidiaries and any gains on pension reversions subsidiaries for such period, on a consolidated basis, received by such person or any of its subsidiaries, determined in accordance with GAAP; provided that (a) (iv) all gains and losses realized on the purchase or the net income of any other person in which such person other acquisition by such person or any of its or any of its subsidiaries has an interest (which subsidiaries of any securities of such person or any of interest does not cause the net income of such other its subsidiaries, (v) all gains and losses resulting person to be consolidated with the net income of such from the cumulative effect of any accounting change person and its subsidiaries in accordance with GAAP) pursuant to the application of Accounting Principles shall be included only to the extent of the amount of Board Opinion No. 20, as amended, (vi) all other dividends or distributions actually paid to such person extraordinary gains and losses, (vii) all non-cash or such subsidiary by such other person in such period; charges incurred by the Company or any of its (b) the net income of any subsidiary of such person subsidiaries in connection with the Merger, including that is subject to any Payment Restriction shall be without limitation the divestiture of the excluded excluded to the extent such Payment Restriction assets, (viii) losses incurred by the Company and its actually prevented the payment of an amount that subsidiaries resulting from earthquakes, and (ix) with otherwise could have been paid to, or received by, such respect to the Company, all deferred financing costs person or a subsidiary of such person not subject to written off in connection with the early extinguishment any Payment Restriction; and (c)(i) the net income of any Indebtedness, shall each be excluded. of any
B-6 232 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES other person acquired in a pooling of "Subordinated Indebtedness" means, with respect to the interests transaction for any period prior to the date Company or any Subsidiary Guarantor, Indebtedness of of such acquisition, (ii) all gains and losses-realized such person which is subordinated in right of payment on any Asset Sale or in connection with the closure of to the New F4L Senior Subordinated Notes or the senior the Long Beach Warehouse, (iii) all gains realized upon subordinated note guarantee of such Subsidiary or in connection with or as a consequence of the Guarantor, as the case may be. 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, and (vii) with respect to Food 4 Less, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. 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 INCURRENCES OF ADDITIONAL LIMITATION ON INCURRENCES OF ADDITIONAL INDEBTEDNESS. Pursuant to the Old F4L Senior INDEBTEDNESS. 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 of its subsidiaries, after the shall not permit any of its subsidiaries, directly or original issuance of the Old F4L Senior Subordinated indirectly, to incur, assume, guarantee, become liable, Notes, directly or indirectly, to incur, assume, contingently or otherwise, with respect to, or guarantee, become liable, contingently or otherwise, otherwise become responsible for the payment of with respect to, or otherwise become responsible for (collectively "incur") any Indebtedness other than the payment of (collectively "incur") any Indebt- Permitted Indebtedness; provided, however, that if no edness; provided, however, that if no Default with Default with respect to payment of principal of, or respect to payment of principal of, or interest on, the interest on, the New F4L Senior Subordinated Notes Old F4L Senior Subordinated Notes or Event of Default issued under the New F4L Senior Subordinated Note shall have occurred and be continuing at the time or as Indenture or Event of Default under the New F4L Senior a 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 the lender is to the under the Loan Documents (and Food 4 Less and each whole of the assets of such person or only to a portion subsidiary (to the extent it is not an obligor) may thereof), (b) evidenced by bonds, notes, debentures, guarantee such Indebtedness, subject to certain drafts accepted or similar instruments or letters of limitations) (b) the Old F4L Senior Subordinated Notes; credit or representing the balance deferred and unpaid (c) certain intercompany Indebtedness; (d) Indebtedness of the purchase price of any property (other than any incurred by Food 4 Less or any subsidiary in connection such balance that represents an account payable or any with the purchase or improvement of property (real or other monetary obligation to a trade creditor (whether personal) or equipment or other capital expenditures in or not an affiliate) created, incurred, assumed or the ordinary course of business (including for the guaranteed by such person in the ordinary course of purchase of assets or stock of any retail grocery store business of such person in connection with obtaining or business) or consisting of capitalized lease goods, materials or services and due within twelve obligations, in aggregate not to exceed $25 million in months (or such longer period for payment as is any yearly period (provided, that any unused amounts customarily extended by such trade creditor) of the may be carried over to the next (but not any subse- incurrence thereof, which account is not overdue by quent) yearly period); (e) Indebtedness of Food 4 Less more than 90 days, according to the original terms of under certain Foreign Exchange Agreements and Interest sale, unless such account payable is being contested in Swap Obligations; (f) certain Permitted Guarantees of good faith), or (c) for the payment of money relating Indebtedness, in aggregate not to exceed $25 million at to a capitalized lease obligation; (ii) the maximum any time outstanding, in addition to Permitted fixed repurchase price of all Disqualified Capital Guarantees outstanding on June 17, 1991; (g) guarantees Stock of such person; (iii) reimbursement obligations by Food 4 Less and its subsidiaries of Indebtedness of such person with respect to letters of credit; incurred by a wholly-owned subsidiary so long as the (iv) obligations of such person with respect to incurrence of such Indebtedness by such wholly-owned interest swap obligations and foreign exchange subsidiary is permitted under the terms of the Old F4L agreements; (v) all liabilities of others of the kind Senior Subordinated Note Indenture; (h) Refinancing described in the preceding clause (i), (ii), (iii) or Indebtedness; (i) Indebtedness in connection with the (iv) that such person has guaranteed or that is acquisition of the La Habra Facility and Option Stores otherwise its legal liability, and (vi) all obligations if, after giving effect to such incurrence, the of others secured by a lien to which any of the Operating Coverage Ratio of Food 4 Less would be properties or assets (including, without limitation, greater than 2.0 to 1.0; (j) Indebtedness for letters leasehold interests and any other tangible or of credit intangible
B-7 233 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES relating to workers compensation claims and property rights) of such person are subject, self-insurance and (k) additional Indebtedness of Food whether or not the obligations secured thereby shall 4 Less and Subsidiary Guarantors not to exceed $75 have been assumed by such person or shall otherwise be million at any time outstanding. such person's legal liability (provided, that if the obligations so secured have not been assumed by such IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD person or are not otherwise such person's legal F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED liability, such obligations shall be deemed to be in an TO ELIMINATE THIS PROVISION AND CERTAIN RELATED amount equal to the fair market value of such DEFINITIONS. properties or assets, as determined in good faith by the board of directors of such person, which "Indebtedness" means with respect to any person, determination shall be evidenced by a board without duplication, (i) all liabilities, contingent resolution). For purposes of the preceding sentence, or otherwise, of such person (a) for borrowed money the "maximum fixed repurchase price" of any (whether or not the recourse of the lender is to the Disqualified Capital Stock that does not have a fixed whole of the assets of such person or only to a portion repurchase price shall be calculated in accordance with thereof), (b) evidenced by bonds, notes, debentures, the terms of such Disqualified Capital Stock as if such drafts accepted or similar instruments or letters of Disqualified Capital Stock were purchased on any date credit or representing the balance deferred and unpaid on which Indebtedness shall be required to be of the purchase price of any property (other than any determined under the New F4L Senior Subordinated Note such balance that represents an account payable or any Indenture, and if such price is based upon, or measured other monetary obligation to a trade creditor (whether by, the fair market value of such Disqualified Capital or not an affiliate) created, incurred, assumed or Stock (or any equity security for which it may be guaranteed by such person in the ordinary course of exchanged or converted), such fair market value shall business of such person in connection with obtaining be determined in good faith by the board of directors goods, materials or services and due within twelve of such person, which determination shall be evidenced months (or such longer period for payment as is by a board resolution. For purposes of the New F4L customarily extended by such trade creditor) of the Senior Subordinated Indenture, Indebtedness incurred by incurrence thereof, which account is not overdue by any person that is a general partnership (other than more than 90 days, according to the original terms of non-recourse Indebtedness) shall be deemed to have been sale, unless such account payable is being contested in incurred by the general partners of such partnership good faith), or (c) for the payment of money relating pro rata in accordance with their respective interests to a capitalized lease obligation; (ii) the maximum in the liabilities of such partnership unless any such fixed repurchase price of all Disqualified Capital general partner shall, in the reasonable determination Stock of such person; (iii) reimbursement obligations of the board of directors of the Company, be unable to of such person with respect to letters of credit; (iv) satisfy its pro rata share of the liabilities of the obligations of such person with respect to Interest partnership, in which case the pro rata share of any Swap Obligations and Foreign Exchange Agreements; (v) Indebtedness attributable to such partner shall be all liabilities of others of the kind described in the deemed to be incurred at such time by the remaining preceding clause (i), (ii), (iii) or (iv) that such general partners on a pro rata basis in accordance with person has guaranteed or that is otherwise its legal their interests. liability, and (vi) all obligations of others secured by a lien to which any of the properties or assets "Permitted Indebtedness" means (a) Indebtedness of the (including, without limitation, leasehold interests and Company and its subsidiaries pursuant to (i) the Term any other tangible or intangible Loans in an aggregate principal amount at any time property rights) of such person are subject, whether or outstanding not to exceed $900 million, less the not the obligations secured thereby shall have been aggregate amount of all principal repayments thereunder assumed by such person or shall otherwise be such pursuant to and in accordance with the covenant person's legal liability (provided, that if the described under "-- Limitation on Asset Sales" herein obligations so secured have not been assumed by such subsequent to the Issue Date, and (ii) the revolving person or are not otherwise such person's legal credit facility under the Credit Agreement (and the liability, such obligations shall be deemed to be in an Company and each subsidiary (to the extent it is not an amount equal to the fair market value of such obligor) may guarantee such Indebtedness) in an properties or assets, as determined in good faith by aggregate principal amount at any time outstanding not the board of directors of such person, which to exceed $325 million, less all permanent reductions determination shall be evidenced by a board thereunder pursuant to and in accordance with the resolution). For purposes of the preceding sentence, covenant described under "-- Limitation on Asset Sales" the "maximum fixed repurchase price" of any herein, (b) Indebtedness of the Company or a Subsidiary Disqualified Capital Stock that does not have a fixed Guarantor owed to and held by the Company or a repurchase price shall be calculated in accordance with Subsidiary Guarantor; (c) Indebtedness incurred by the the terms of such Disqualified Capital Stock as if such Company or any subsidiary in connection with the Disqualified Capital Stock were purchased on any date purchase or improvement of property (real or personal) on which Indebtedness would be required to be or equipment or other capital expenditures in the determined under the Old F4L Senior Subordinated Note ordinary course of business (including for the purchase Indenture, and if such price is based upon, or measured of assets or stock of any retail grocery store or by, the fair market value of such Disqualified Capital business) or consisting of Capitalized Lease Stock (or any equity security for which it may be Obligations provided that (i) at the time of the exchanged or converted), such fair market value shall incurrence thereof, such indebtedness, together with be determined in good faith by the board of directors any other Indebtedness incurred during the most of such person, which determination shall be evidenced recently completed four fiscal quarter period in by a board resolution. reliance upon this clause (c) does not exceed, in the aggregate, 3% of net sales of the Company and its "Operating Coverage Ratio" means, with respect to any subsidiaries during the most recently completed four person, the ratio of (1) EBDIT of such person for the fiscal quarter period on a consolidated basis period (the "Pro Forma Period") consisting of the most (calculated on a pro forma basis if the date of recent four full fiscal quarters for which financial incurrence is prior to the first anniversary of information in respect thereof is available immediately the Merger) and (ii) such Indebtedness, together with prior to the date of the transaction giving rise to the all then outstanding Indebtedness incurred in reliance need to calculate the Operating Coverage Ratio (the upon this clause (c) does not exceed, in the aggregate, "Transaction Date") to (2) the aggregate Fixed Charges 3% of the aggregate net sales of the Company and its of such person for the fiscal quarter in which the Subsidiaries during the most recently completed twelve Transaction Date occurs and the three fiscal quarters fiscal quarter period on a consolidated basis immediately subsequent to such fiscal quarter (the (calculated on a pro forma basis if the date of "Forward Period") reasonably anticipated by the board incurrence is prior to the third anniversary of the of directors of such person to become due from time to Merger); (d) Indebtedness incurred by the Company or time during such period. For purposes of this any subsidiary in connection with definition, if the
B-8 234 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES Transaction Date occurs prior to the capital expenditures in an aggregate principal amount not first anniversary of June 17, 1991, "EBDIT" for the Pro exceeding $150.0 million in the aggregate, provided that Forma Period shall be calculated, in the case of Food 4 such capital expenditures relate solely to the integration of Less, after giving effect on a pro forma basis to the the operations of RSI, Food 4 Less and their respective Alpha Beta Acquisition as if it had occurred on the subsidiaries, as described in this Prospectus and first day of the Pro Forma Period. In addition to, but Solicitation Statement; (e) Indebtedness of the Company without duplication of, the foregoing, for purposes of under certain foreign exchange agreements and interest this definition, "EBDIT" shall be calculated after swap obligations; (f) guarantees incurred in the giving effect (without duplication), on a pro forma ordinary course of business by the Company or a basis for the Pro Forma Period (but no longer), to (a) Subsidiary of Indebtedness of any other person in any Investment, during the period commencing on the aggregate not to exceed $25 million at any time first day of the Pro Forma Period to and including the outstanding; (g) guarantees by the Company or a Transaction Date (the "Reference Period"), in any other Subsidiary Guarantor of Indebtedness incurred by a person that, as a result of such Investment, becomes a wholly-owned Subsidiary Guarantor so long as the subsidiary of such person, (b) the acquisition, during incurrence of such Indebtedness incurred by such the Reference Period (by merger, consolidation or wholly-owned Subsidiary Guarantor is permitted under purchase of stock or assets) of any business or assets, the terms of the applicable New Indenture; (h) which acquisition is not prohibited by the Old F4L Refinancing Indebtedness; (i) Indebtedness for letters Senior Subordinated Note Indenture, and (c) any sales of credit relating to workers' compensation claims and or other dispositions of assets (other than sales of self-insurance or similar requirements in the ordinary inventory in the ordinary course of business) occurring course of business; (j) Indebtedness of the Company during the Reference Period, in each case as if such outstanding under the Senior Unsecured Term Loan incurrence, Investment, repayment, acquisition or asset Agreement in an aggregate principal amount at any time sale had occurred on the first day of the Reference outstanding not to exceed $150 million, less the Period. In addition, for purposes of this definition, aggregate amount of all principal repayments thereunder "Fixed Charges" shall be calculated after giving effect subsequent to the Issue Date; (k) other Indebtedness (without duplication), on a pro forma basis for the outstanding on the Issue Date (after giving effect to Forward Period, to any Indebtedness incurred or repaid the Merger); (l) Indebtedness arising from guarantees on or after the first day of the Forward Period and of Indebtedness of the Company or any subsidiary or prior to the Transaction Date. other agreements of the Company or a subsidiary providing for indemnification, adjustment of purchase "Loan Documents" means the Credit Agreement and all price or similar obligations, in each case, incurred or promissory notes, guarantees, security agreements, assumed in connection with the disposition of any pledge agreements, deeds of trust, mortgages, letters business, assets or subsidiary, other than guarantees of credit and other instruments, agreements and of Indebtedness incurred by any person acquiring all or documents executed pursuant thereto or in connection any portion of such bonuses, assets or subsidiary for therewith, including all amendments, supplements, the purpose of financing such acquisition, provided extensions, renewals, restatements, replacements or that the maximum aggregate liability in respect of all refinancings thereof, or other modifications (in whole such Indebtedness shall at no time exceed the gross or in part, and without limitation as to amount, terms, proceeds actually received by the Company and its conditions, covenants or other provisions) thereof from subsidiaries in connection with such disposition; (m) time to time. obligations in respect of performance bonds and completion guarantees provided by the Company or any "Credit Agreement" means the Credit Agreement, dated subsidiary in the ordinary course of business; and (n) as of June 17, 1991, by and among Food 4 Less, additional Indebtedness of the Company and the certain of its subsidiaries, the Lenders and Designated Subsidiary Guarantors in an amount not to exceed $200 Issuers of the Lenders referred to therein, Bankers million at any time outstanding. Trust Company, Citicorp North America, Inc., and Manufacturers Hanover Trust Company, as Co-Agents, and "Operating Coverage Ratio" means, with respect to any Citicorp North America, Inc., as Administrative Agent, person, the ratio of (1) EBDIT of such person for the as the same may be amended, extended, renewed, re- period (the "Pro Forma Period") consisting of the most stated, supplemented or otherwise modified (in whole or recent four full fiscal quarters for which financial in part, and without limitation as to amount, terms, information in respect thereof is available immediately conditions, covenants and other provisions) from time prior to the date of the transaction giving rise to the to time, and any agreement governing Indebtedness need to calculate the Operating Coverage Ratio (the incurred to refund or refinance the entirety of the "Transaction Date") to (2) the aggregate Fixed Charges borrowings and commitments then outstanding or of such person for the fiscal quarter in which the permitted to be outstanding under such Credit Agreement Transaction Date occurs and the three fiscal quarters or such agreement; provided that such refunding or immediately subsequent to such fiscal quarter (the refinancing by its terms states that it is intended to "Forward Period") reasonably anticipated by the board be senior in right of payment to the Old F4L Senior of directors of such person to become due from time to Subordinated Notes. Food 4 Less shall promptly notify time during such period. For purposes of this the Trustee of any such refunding or refinancing of the definition, if the Transaction Date occurs prior to the Credit Agreement. first anniversary of the Merger, "EBDIT" for the Pro Forma Period shall be calculated, in the case of the "Acquired Indebtedness" means Indebtedness of a Company, after giving effect on a pro forma basis to person or any of its subsidiaries existing at the the Mergers as if they had occurred on the first day of time such person becomes a subsidiary of Food 4 Less or the Pro Forma Period. In addition to, but without assumed in connection with the acquisition of assets duplication of, the foregoing, for purposes of this from such person and not incurred by such person in definition, "EBDIT" shall be calculated after giving connection with, or in anticipation or contemplation effect (without duplication), on a pro forma basis for of, such person becoming a subsidiary or such the Pro Forma Period (but no longer), to (a) any acquisition. Investment, during the period commencing on the first day of the Pro Forma Period to and including the "Permitted Guarantees" means (i) guarantees in effect Transaction Date (the "Reference Period"), in any other on June 17, 1991 and (ii) guarantees incurred in the person that, as a result of such Investment, becomes a ordinary course of business, by Food 4 Less or a subsidiary of such persons, (b) the acquisition, during subsidiary, of Indebtedness of any other person. the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, "Refinancing Indebtedness" means Indebtedness of Food which acquisition is not prohibited by the New F4L 4 Less or a subsidiary (i) issued in exchange for, or Senior Subordinated Indenture, and (c) any sales or the proceeds from the issuance and sales or other dispositions of assets (other than sales of disbursement of which are used to substantially inventory in the ordinary course of concurrently repay, redeem, refund, refinance, dis-
B-9 235 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES charge or otherwise retire for value, in whole or in business) occurring during the Reference Period, in each part (collectively, "repay"), or constituting an case as if such incurrence, Investment, repayment, acquisition amendment, modification or supplement to, or a deferral or asset sale had occurred on the first day of the Reference or renewal of (collectively, an "amendment"), any Period. In addition, for purposes of this definition, Indebtedness of Food 4 Less or a subsidiary (and any "Fixed Charges" shall be calculated after giving effect penalties, fees and expenses actually incurred by Food (without duplication), on a pro forma basis for the 4 Less or such subsidiary in connection with the Forward Period, to any Indebtedness incurred or repaid repayment or amendment thereof) existing immediately on or after the first day of the Forward Period and after the original issuance of the Old F4L Senior prior to the Transaction Date. If such person or any of Subordinated Notes or incurred pursuant to paragraphs its subsidiaries directly or indirectly guarantees any (b), (c), (d), (f), (g), (h), (i), (j), (k), (l), (m) Indebtedness of a third person, the Operating Coverage or (n) of Section 5.13 in a principal amount (or, if Ratio shall give effect to the incurrence of such such Refinancing Indebtedness provides for an amount Indebtedness as if such person or subsidiary had less than the principal amount thereof to be due and directly incurred such guaranteed Indebtedness. 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 facility or other agreement providing a in computing Consolidated Net Income of such person for commitment for subsequent borrowings, with a maximum such period (without duplication) (i) provisions for commitment not to exceed the maximum commitment under income taxes or similar charges recognized by such such revolving credit facility or other agreement) plus person and its consolidated subsidiaries accrued during (2) unpaid accrued interest on such Indebtedness plus such period, (ii) depreciation and amortization expense (3) penalties, fees and expenses actually incurred by of such person and its consolidated subsidiaries Food 4 Less or such subsidiary, as the case may be, in accrued during such period (but only to the extent not connection with the repayment or amendment thereof; or included in fixed charges), (iii) fixed charges of such (ii) in an amount permitted to be incurred at the time person and its consolidated subsidiaries for such period, of such incurrence by Food 4 Less or such subsidiary, (iv) LIFO charges (credits) of such person and its as the case may be, under the Credit Agreement pursuant consolidated subsidiaries for such period, (v) the amount to limitations on Incurrences of Additional of any restructuring reserve or charge recorded during Indebtedness; provided that (for both clauses (i) and such period in accordance with GAAP, including any (ii) above) (A) Refinancing Indebtedness of any such reserve or charge related to the Merger, and (vi) subsidiary shall not be used to repay outstanding any other non-cash charges reducing Consolidated Net Indebtedness of Food 4 Less and (B) Refinancing Income for such period (excluding any such charge Indebtedness of Food 4 Less that repays or constitutes which requires an accrual of or a cash reserve for an amendment to Indebtedness of Food 4 Less (other than cash charges for any future period), less, without any of the Securities) ranking pari passu with, or duplication, (i) non-cash items increasing Consolidated junior in right of payment to, the Old F4L Senior Net Income of such person for such period in each case Subordinated Notes shall not have an Average Life less determined in accordance with GAAP and (ii) the amount than the Indebtedness to be so refinanced at the time of all cash payments made by such person or its of such incurrence and shall not rank senior in right subsidiaries during such period to the extent that of payment in any respect to such repaid or amended such cash payment has been provided for in a Indebtedness, and (C) notwithstanding the foregoing, restructuring reserve or charge referred to in any Refinancing Indebtedness incurred to repay all of clause (v) above (and were not otherwise deducted Old F4L Senior Subordinated Notes then outstanding in the computation of Consolidated Net Income of shall not be limited in principal amount or otherwise such person for such period). if Food 4 Less irrevocably deposits with the Old F4L Senior Subordinated Notes Trustee or Paying Agent an "Credit Agreement" means the Credit Agreement, dated amount of the proceeds of such Refinancing Indebtedness as of the Issue Date, by and among Food 4 Less, certain sufficient to redeem the outstanding principal amount of its subsidiaries, the Lenders referred to therein, of the Old F4L Senior Subordinated Notes on the date Bankers Trust Company, as administrative agent, as the fixed for the repayment thereof. case may be, as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD part, and without limitation as to amount, terms, F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE conditions, covenants and other provisions) from MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATED time to time, and any agreement governing DEFINITIONS. Indebtedness incurred to refund or refinance the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or such 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.
B-10 236 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES "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 (a), (c), (d), (h), (j) and (k) 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 New F4L Senior Subordi- nated 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. 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 if any such clause limits the amount secured or the (x) are not incurred in connection with, or in assets subject to such liens, no extension or renewal contemplation of the acquisition of the property or shall increase the amount of the assets subject to assets acquired and (y) do not extend to or cover any such liens. property or assets of the Company or any subsidiary other than the property or assets so acquired, (v) "Permitted Liens" shall mean (i) liens for taxes, liens to secure capitalized lease obligation and assessments, and governmental charges to the extent certain Indebtedness that is otherwise permitted under not required to be paid under the provisions of the Old the New F4L Senior Subordinated Indenture; provided F4L Senior Subordinated Note Indenture concerning that (A) any such lien is created solely for the payment of taxes and other claims; (ii) statutory liens purpose of securing such other Indebtedness of landlords and carriers, warehousemen, mechanics, representing, or incurred to finance, refinance or suppliers, materialmen, repairmen, or other like liens refund, the cost (including sales and excise taxes, arising in the ordinary course of business and with installation and delivery charges and other direct respect to amounts not yet delinquent or being costs of, and other direct expenses paid or charged in contested in good faith by appropriate process of law, connection with, the purchase (whether through stock or and for which a reserve or other appropriate provision, asset purchase, merger or otherwise) or construction) if any, as shall be required by GAAP shall have been or improvement of the property subject thereto (whether made; (iii) pledges or deposits in the ordinary course real or personal, including fixtures and other of business to secure lease obliga- 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
B-11 237 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES tions under workers' compensation, or cover any other property other than such item of unemployment insurance or similar legislation; (iv) property and any improvements on such item; (vi) liens liens to secure the performance of public statutory existing on the Issue Date (after giving effect to the obligations that are not delinquent, appeal bonds, per- Merger); (vii) liens in favor of the New F4L Senior formance bonds or other obligations of a like nature Subordinated Note Trustee under the New F4L Senior (other than for borrowed money); (v) easements, Subordinated Indenture; and any substantially rights-of-way, other similar charges or encumbrances equivalent Lien granted to any trustee or similar not interfering in any material respect with the institution and or any indenture for indebtedness business of Food 4 Less or any of its subsidiaries permitted to be incurred under the New Indentures; and incurred in the ordinary course of business; (vi) (viii) any replacement, extension or renewal, in whole purchase money liens upon or in any real or personal or in part, of any lien described in this or the property (including fixtures and other equipment) foregoing clauses including in connection with any acquired or held by Food 4 Less or any subsidiary in refinancing of the Indebtedness, in whole or in part, the ordinary course of business to secure the purchase secured by any such lien provided that to the extent price of such property or to secure Indebtedness in- any such clause limits the amount secured or the assets curred solely for the purpose of financing or subject to such liens, no extension or renewal shall refinancing the acquisition or improvement of such increase the amount of the assets subject to such property, or liens existing on such property at the liens, except to the extent that the liens associated time of its acquisition (other than any such lien with such additional assets are otherwise permitted created in contemplation of such acquisition); provided hereunder. that (x) no such lien shall extend to or cover any property other than the property being acquired or "Permitted Liens" shall mean (i) liens for taxes, improved and (y) any such Indebtedness would be assessments and governmental charges or claims not yet permitted to be incurred pursuant to the provisions of due or which are being contested in good faith by the Old F4L Senior Subordinated Note Indenture appropriate proceedings promptly instituted and summarized under "Limitation on Incurrences of diligently conducted and if a reserve or other Additional Indebtedness"; (vii) liens upon specific appropriate provision, if any, as shall be required in items of inventory or other goods and proceeds of conformity with GAAP shall have been made therefor; any person securing such person's obligations in (ii) statutory liens of landlords and carriers, respect of bankers' acceptance issued or created warehouseman, mechanics, suppliers, materialmen, for the account of such person to facilitate the repairmen or other like liens arising in the ordinary purchase, shipment or storage of such inventory course of business, deposits made to obtain the release or other goods in the ordinary course of business; of such liens, and with respect to amounts not yet (viii) liens securing reimbursement obligations delinquent for a period of more than 60 days or being with respect to letters of credit which encumber contested in good faith by an appropriate process of documents and other property relating to such law, and for which a reserve or other appropriate letters of credit and the products and proceeds provision, if any, as shall be required by GAAP shall thereof; (ix) liens in favor of customs and have been made; (iii) liens incurred or pledges or revenue authorities arising as a matter of law to deposits made in the ordinary course of business to secure payment of nondeliquent customs duties in secure obligations under workers' compensation, connection with the importation of goods; (x) unemployment insurance and other types of social judgment and attachments liens not giving rise security or similar legislation; (iv) liens incurred or to a Default of Event of Default; (xi) leases or deposits made to secure the performance of tenders, subleases granted to others not interfering in bids, leases, statutory obligations, surety and appeal any material respect with the business of Food 4 bonds, government contracts, performance and return of Less or any of its subsidiaries; (xii) liens money bonds and other obligations of a like nature encumbering customary initial deposits and margin incurred in the ordinary course of business (exclusive deposits, and other liens incurred in the ordinary of obligations for the payment of borrowed money); (v) course of business that are within the general easements, rights-of-way, zoning or other restrictions, parameters customary in the industry, in each case minor defects or irregularities in title and other securing Indebtedness under Interest Swap similar charges or encumbrances not interfering in any Obligations and Foreign Exchange Agreements and material respect with the business of the Company or forward contracts, option futures contracts, futures any of its subsidiaries incurred in the ordinary course options or similar agreements or arrangements of business; (vi) liens upon specific items of designed to protect Food 4 Less or any of its inventory or other goods and proceeds of any person subsidiaries from fluctuations in the price of securing such person's obligations in respect of commodities; (xiii) liens encumbering deposits made bankers' acceptances issued or created for the account in the ordinary course of business to secure non- of such person to facilitate the purchase, shipment or deliquent obligations arising from statutory, storage of such inventory or other goods in the regulatory, contractual or warranty requirements ordinary course of business; (vii) liens securing of Food 4 Less or its subsidiaries for which a reimbursement obligations with respect to letters of reserve or other appropriate provision, if any, credit which encumber documents and other property as shall be required by GAAP shall have been relating to such letters of credit and the products made; (xiv) liens arising out of consignment or and proceeds thereof; (viii) liens in favor of similar arrangements for the sale of goods entered customs and revenue authorities arising as a matter into by Food 4 Less or any of its subsidiaries in of law to secure payment of nondelinquent customs the ordinary course of business in accordance with duties in connection with the importation of goods; past practices; (xv) any interest or title of a lessor (ix) judgment and attachment liens not giving rise in the property subject to any lease, whether to a Default or Event of Default; (x) leases or characterized as capitalized or operating, other subleases granted to others not interfering in any than any such interest or title resulting from or material respect with the business of the Company or arising out of a default by Food 4 Less or any of its any subsidiary; (xi) liens encumbering customary subsidiaries of its obligations under such lease; and initial deposits and margin deposits, and other (xvi) liens arising from filing UCC financing liens incurred in the ordinary course of business statements for precautionary purposes in connection that are within the general parameters customary with true leases of personal property that are in the industry, in each case securing Indebtedness otherwise permitted under the Old F4L Senior under interest swap obligations and foreign exchange Subordinated Note Indenture and under which Food agreements and forward contracts, option futures 4 Less or any of its subsidiaries is a lessee. contracts, futures options or similar agreements or arrangements designed to protect the Company or any IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE subsidiary from fluctuations in the price of OLD F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE commodities; (xii) liens encumbering deposits made MODIFIED TO ELIMINATE THIS PROVISION AND CERTAIN in the ordinary course of business to secure RELATED LIENS. nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or its subsidi-
B-12 238 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES aries 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; and (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) 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 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 LIMITATION ON ASSET SALES. Pursuant to the New F4L F4L Senior Subordinated Note Indenture, Food 4 Senior Subordinated Note Indenture, the Company will Less will not, and will not permit any of its not, and will not permit any of its subsidiaries to, subsidiaries to, make any Asset Sale unless (a) Food 4 make any Asset Sale unless (a) the Company or the Less or the applicable subsidiary receives applicable subsidiary receives consideration at the consideration at the time of such Asset Sale at least time of such Asset Sale at least equal to the fair equal to the fair market value of the assets sold or market value of the assets sold and (b) upon otherwise disposed of (as determined in good faith by consummation of an Asset Sale, the Company will within the board of directors of Food 4 Less or, if the 365 days of the receipt of the proceeds therefrom, aggregate fair-market value of all non-cash considera- either: (i) apply or cause its subsidiary to apply the tion received by the Food 4 Less or such subsidiary, as Net Cash Proceeds of any Asset Sale to (A) a Related the case may be, from any such Asset Sale shall exceed Business Investment, (B) an investment in properties $15 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 in the case of the New Senior repay any Indebtedness secured by the asset involved in Subordinated Note Indenture, Senior Indebtedness; such Asset Sale, received by Food 4 Less or such provided, however, that the repayment of any revolving subsidiary, as the case may be, from such Asset Sale loan (under the Credit Agreement or otherwise) shall (the "Applied Amount") is applied in accordance with result in a permanent reduction in the commitment this covenant and (c) the Applied Amount is within 180 thereunder; (iii) use such Net Cash Proceeds to secure days of such Asset Sale, at the election of Food 4 Less Letter of Credit Obligations to the extent the related (i) either applied or caused to be applied to the letters of credit have not been drawn upon or returned payment of any Senior Indebtedness or used to secure undrawn; or (vi) after such time as the accumulated Net Letter of Credit Obligations to the extent the related Cash Proceeds equals or exceeds $20 million, apply or letters of credit have not been drawn upon or have not cause to be applied such net cash proceeds to the been returned undrawn and all other Senior Indebtedness purchase of New F4L Senior Subordinated Notes has been paid in full; provided, however, that, subject issued under such New F4L Senior Subordinated to clause (ii) below, any repayment of Indebtedness Indenture tendered to the Company for purchase under the Revolving Facility under the Loan Documents at a price equal to 100% of the principal to other revolving line of credit shall result in a amount thereof plus accrued interest to the date of permanent reduction of the Revolving Commitment or such purchase pursuant to an offer to purchase made by the other line of credit in a like amount; (ii) invested or Company as set forth below (a "Net Proceeds Offer"); caused to be invested in a manner that would constitute provided, however, that the Company shall have the a Related Business Investment hereunder; provided, right to exclude from the foregoing provisions Asset however, that pending such Related Business Investment, Sales subsequent to the Issue Date, (x) the proceeds of nothing contained herein shall prohibit Food 4 Less which are derived from the sale and substantially from applying or causing to be applied all or any concurrent lease-back of a supermarket and/or related portion of the Applied Amount to the repayment of assets which have acquired or constructed by the Indebtedness under the Revolving Facility under the Company or a Subsidiary subsequent to the Issue Date, Loan Documents or other revolving line of credit provided that such sale and substantially concurrent without a permanent reduction of the Revolving lease-back occurs within 180 days following such Commitment or such other line of credit in a like acquisition or the completion of such construction, as amount; or (iii) applied or caused to be applied to the the case may be, (y) the proceeds of which in the purchase of Old F4L Senior Notes pursuant to a Net aggregate do not exceed $20 million; provided, further Proceeds Offer as set forth in the Old F4L Senior Note that pending utilization of any net cash proceeds in Indenture provided, however, that Food 4 Less shall not the manner (and within the time period) described be required to satisfy the condition specified in above, the Company may use any such net cash proceeds clause (a) above if such Asset to repay revolving loans under the
B-13 239 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES Sale is pursuant to a foreclosure by the Lenders Credit Agreement without a permanent reduction of the under the Credit Agreement and the other commitment thereunder. Loan Documents or their Representatives on collateral securing Indebtedness under the Loan Documents; provided, further, that if at any time any The New Senior Subordinated Note Indenture will further non-cash consideration received by Food 4 Less or any provide that, notwithstanding the foregoing, prior to subsidiary in connection with any Asset Sale is the mailing of the Net Proceeds Offer described below, converted into or sold or otherwise disposed of for the Company shall purchase all New F4L Senior Notes (or cash, then such cash shall constitute Applied Amounts permitted refinancings thereof) which it is required to for purposes of this covenant and shall be applied in purchase by reason of such Asset Sale pursuant to the accordance with clause (c) above within 180 days of the provisions of the New Senior Note Indenture. receipt of such cash; provided, further, Food 4 Less shall have the right to exclude up to $10 million of Each Net Proceeds Offer will be mailed to the record proceeds in the aggregate received from Asset Sales holders of New F4L Senior Subordinated Notes, as shown subsequent to the Issue Date from the provisions of on the register of holders of New F4L Senior this covenant. To the extent that the Applied Amount is Subordinated Notes not less than 325 nor more than 365 not actually applied in accordance with clauses (c)(i) days after the relevant Asset Sale, with a copy to the or (ii) above, or after such application there remains New F4L Senior Subordinated Note Trustee, shall specify a portion of the Applied Amount which, when added to the purchase date (which shall be no earlier than 30 any other Applied Amounts remaining after such days nor later than 40 days from the date such notice application, accumulates at least $2,500,000 subsequent is mailed) and shall otherwise comply with the to the previous time Food 4 Less shall have accumulated procedures set forth in the New F4L Senior Subordinated at least such an amount and used it in accordance with Note Indenture. Upon receiving notice of the Net this covenant, or if no such accumulation shall Proceeds Offer, New F4L Senior Subordinated Notes, may previously have occurred, subsequent to the date of the elect to tender their New F4L Senior Subordinated Notes Old F4L Senior Note Indenture, Food 4 Less shall make in whole or in part in integral multiples of $1,000 in an offer as described in the Old F4L Senior Note exchange for cash. To the extent Holders properly Indenture (the "Net Proceeds Offer") to purchase at a tender New F4L Senior Subordinated Notes, in an amount price equal to 100% of the aggregate principal amount exceeding the Net Proceeds Offer, New F4L Senior thereof, plus accrued interest to the Subordinated Notes of tendering Holders date of purchase, such aggregate principal amount of will be repurchased on a pro rata basis (based on Old F4L Senior Notes which, when added to the accrued amounts tendered). interest thereon, shall be equal to the Net Proceeds required by this covenant to be used to purchase The Company will comply with the requirements of Rule securities in a Net Proceeds Offer; provided, however, 14e-1 under the Exchange Act and any other securities that Food 4 Less may credit against the principal laws and regulations thereunder to the extent such laws amount of Old F4L Senior Notes to be acquired pursuant and regulations are applicable in connection with the to this covenant the principal amount of Old F4L repurchase of New F4L Senior Subordinated Notes Senior Notes acquired by Food 4 Less through purchase, pursuant to a Net Proceeds Offer. optional redemption, exchange or otherwise following consummation of the Asset Sale and surrendered for "Asset Sale" means, with respect to any person, any cancellation and not previously used as a credit sale, transfer or other disposition or series of sales, against any other required payment pursuant to the transfers or other dispositions (including, without Old F4L Senior Note Indenture. The Net Proceeds limitation, by merger or consolidation or by exchange Offer shall remain open from the time of mailing of assets and whether by operation of law or otherwise) until 5 days (or such shorter period as may made by such person or any of its subsidiaries to any be required under applicable law) before the person other than such person or one of its Proceeds Purchase Date. 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-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 "Asset Sale" means, for any person, any sale, ordinary course of business, excluding, however, any transfer or other disposition or series of sales, sale, transfer or other disposition, or series of transfers or other dispositions (including, without related sales, transfers or other dispositions (i) limitation, by merger or consolidation or by exchange involving only excluded assets (ii) resulting in Net of assets and whether by operation of law or otherwise) Proceeds to the Company and the subsidiaries of made by such person or any of its subsidiaries to any $500,000 or less or (iii) pursuant to any foreclosure person other than such person or one of its of assets or other remedy provided by applicable law to wholly-owned subsidiaries (or, in the case of a sale, a creditor of the Company with a lien on such assets, transfer or other disposition by a subsidiary, to any which lien is permitted under the New F4L Senior person other than Food 4 Less or a directly or Subordinated Note Indentures, provided that such indirectly wholly-owned subsidiary) of any assets of foreclosure or other remedy is conducted in a such person or any of its subsidiaries including, commerically responsible manner or in accordance with without limitation, assets consisting of any capital any Bankruptcy Law. stock or other securities held by such person, or any of its subsidiaries, and any capital stock issued by "Related Business Investment" means (i) any Investment any subsidiary of such person, outside of the ordinary by a person in any other person a majority of whose course of business, excluding, however, any sale, revenues are derived from the operation of one or more transfer or other disposition, or series of related retail grocery stores or supermarkets or any other line sales, transfers or other dispositions, having a of business engaged in by the Company or any of its purchase price or transaction value, as the case may subsidiaries as of the Issue Date; (ii) any Investment be, of $250,000 or less. by such person in any cooperative or other supplier, including, without limitation, any joint venture which "Related Business Investment" means (i) any is intended to supply any product or service useful to Investment by a person in any other person a majority the business of the Company and its subsidiaries as it of whose revenues are derived from the operation of one is conducted as of the Issue Date and as such business or more retail grocery stores or supermarkets or any may thereafter evolve or change; and (iii) any capital other line of business engaged in by Food 4 Less or any expenditure or Investment (without regard to the of its subsidiaries as of the Issue Date; (ii) any $5 million threshold in the definition thereof), in Investment by such person in any cooperative or other each case supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of Food 4 Less 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 (without regard to
B-14 240 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES the $5 million threshold in the definition thereof), reasonably related to the business of the Company in each case reasonably related to the business of and its subsidiaries as it is conducted as of the Issue Food 4 Less and its subsidiaries as it is Date and as such business may thereafter evolve or conducted as of the Issue Date and as such business 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, Subordinated Note Indenture, the Company shall not, and 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 become effective any consensual Payment Restriction exist, or allow to become effective any consensual with respect to any of its subsidiaries, except for Payment Restriction with respect to any of its (a) any such restrictions contained in (i) the Loan subsidiaries, except for (a) any such restrictions Documents and related documents as in effect on contained in (i) the Credit Agreement and related June 17, 1991 any such payment restriction may apply documents as in effect on the Issue Date as any such to any present or future subsidiary, (ii) Indebtedness payment restriction may apply to any present or future of a subsidiary existing on June 17, 1991, (iii) the subsidiary, (ii) the New F4L Senior Subordinated Note Old F4L Senior Subordinated Note Indenture, (iv) Indenture and any agreement in effect at or entered Indebtedness of a person existing at the time into on the Issue Date, (iii) Indebtedness of a person such person becomes a subsidiary (provided, that existing at the time such person becomes a subsidiary (x) such Indebtedness is not incurred in connection (provided that (x) such Indebtedness is not incurred in with, or in contemplation of, such person connection with, or in contemplation of, such person becoming a subsidiary, (y) such restriction becoming a subsidiary, (y) such restriction is not is not applicable to any person, or the properties or applicable to any person, or the properties or assets assets of any person, other than the person so acquired of any person, other than the person so acquired and and (z) such Indebtedness is otherwise permitted to be (z) such Indebtedness is otherwise permitted to be incurred pursuant to the provisions of the Old F4L incurred pursuant to the provisions described under Senior Subordinated Note Indenture summarized under "Limitation on Incurrences of Additional Indebtedness" "Limitation on Incurrences of Additional above), and (iv) secured Indebtedness otherwise Indebtedness"), (v) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions permitted under the provisions of the Old F4L Senior described under "Limitation on Incurrences of Subordinated Note Indenture summarized under Additional Indebtedness" and "Limitation on Liens" "Limitation on Incurrences of Additional Indebtedness" above that limit the right of the debtor to dispose of and that limits the right of the debtor to dispose of the assets securing such Indebtedness; (b) customary the assets securing such Indebtedness; (b) customary non-assignment provisions restricting subletting or non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into assignment of any lease or assignment of any contract by a subsidiary; (c) customary net worth provisions of any subsidiary, (c) customary net worth provisions contained in leases and other agreements entered into contained in leases and other agreements entered into by a subsidiary in the ordinary course of business; (d) by a subsidiary in the ordinary course of business; customary restrictions with respect to a subsidiary (d) customary restrictions with respect to a subsidiary pursuant to an agreement that has been entered into for pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the sale or disposition of all or substantially all of the capital stock or assets of such subsidiary; (e) the capital stock or assets of such subsidiary; (e) customary provisions in joint venture agreements and customary provisions in instruments or agreements other similar agreements; and (f) restrictions relating to a lien created, incurred or assumed in contained in Indebtedness incurred to refinance, accordance with the provisions of the Old F4L Senior refund, extend or renew Indebtedness referred to in Subordinated Note Indenture summarized under clause (a) above; provided that the restrictions "Limitation on Liens" and prohibiting the transfer of contained therein are not materially more restrictive the property subject to such lien; and (f) 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 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 Restrictions is ordinary and customary renewed or amended. with 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, Restrictions in effect on the Issue Date. restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, "Payment Restriction" means, with respect to a instrument, judgment, decree, order, statute, rule or subsidiary of any person, any encumbrance, restriction governmental regulation, on the ability of (i) such or limitation, whether by operation of the terms of its subsidiary to (a) pay dividends or make other charter or by reason of any agreement, instrument, distributions on its capital stock or make payments on judgment, decree, order, statute, rule or governmental any obligation, liability or Indebtedness owed to such regulation, on the ability of (i) such subsidiary to person or any other subsidiary of such person, (b) make (a) pay dividends or make other distributions on its loans or advances to such person or any other subsidi- capital stock or make payments on any obligation, ary of such person, or (c) transfer any of its liability or Indebtedness owed to such person or any properties or assets to such person or any other other subsidiary of such person, (b) make loans or subsidiary of such person, or (ii) such person or any advances to such person or any other subsidiary of such other subsidiary of such person to receive or retain person, or (c) transfer any of its properties or assets any such (a) dividends, distributions or payments, (b) to such person or any other subsidiary of such person, loans or advances, or (c) transfer of properties or or (ii) such person or any other subsidiary of such assets. person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances, or IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD (c) transfer of properties or assets. F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED TO ELIMINATE THIS COVENANT AND CERTAIN RELATE DEFINITIONS.
B-15 241 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES 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 Indebtedness under the Term Facility under the Credit Agreement or refinancings thereof, in each Credit Agreement or any Refinancing Indebtedness case unless such subsidiary, the Company and the related thereto, in each case unless such subsidiary, New F4L Senior Subordinated Note Trustee execute Food 4 Less and the Old F4L Senior Subordinated Note and deliver a supplemental indenture evidencing Trustee execute and deliver a supplemental indenture such subsidiary's guarantee. evidencing 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 (B) with respect to Affiliate Transactions involving or having a value of more than $15 million unless Food aggregate payments in excess of $5 million and less 4 Less or such subsidiary, as the case may be, has than $15 million, with respect to which the Company or received an opinion from an independent financial such subsidiary, as the case may be, shall have advisor to the effect that the financial terms of such delivered an officers' certificate to the New F4L Affiliate Transaction are fair to Food 4 Less or such Senior Subordinated Note Trustee certifying that such subsidiary from a financial point of view. Affiliate Transaction complies with clause (y) above and that such Affiliate Transaction has received the The provisions of the foregoing paragraph shall not approval of a majority of the disinterested members of apply to (i) any Permitted Payment, (ii) any Restricted the board of directors of the Company or the Payment that is made in compliance with the provisions subsidiary, as the case may be, or, in the absence of of the Old F4L Senior Subordinated Note Indenture any such approval by the disinterested members of the summarized above under "Limitation on Restricted board of directors of the Company or that the Payments," (iii) reasonable and customary fees and subsidiary, as the case may be, that an independent compensation paid to, and indemnity provided on behalf financial advisor has reasonably and in good faith of, officers, directors, employees or consultants of determined that the financial terms of such Affiliate Food 4 Less or any subsidiary, as determined by the Transaction are fair to the Company or such subsidiary, board of directors of Food 4 Less or any subsidiary or as the case may be, or that the terms of such Affiliate the senior management thereof in good faith, (iv) Transaction are at least as favorable as might transactions exclusively between or among Food 4 Less reasonably have been obtained at such time from an and any of its wholly owned subsidiaries or exclu- unaffiliated party, and that such independent financial sively between or among such subsidiaries, provided advisor has provided written confirmation of such such transactions are not otherwise prohibited by the determination to the board of directors and (C) with Old F4L Senior Subordinated Note Indenture, (v) any respect to Affiliate Transactions involving aggregate agreement as in effect as of June 17, 1991 or any payments in excess of $15 million, with respect to amendment thereto or any transaction contemplated which the Company or such subsidiary, as the case may thereby (including pursuant to any amendment thereto) be, shall have delivered to the New F4L Senior Subordi- so long as any such amendment is not disadvantageous to nated Note Trustee, a written opinion from an the holders in any material respect, (vi) the existence independent financial advisor to the effect that the of, or the performance by Food 4 Less or any of its financial terms of such Affiliate Transaction are fair subsidiaries of its obligations under the terms of, any to the Company or such subsidiary, as the case may be, stockholders agreement (including any registration or that the terms of such Affiliate Transaction are at rights agreement or purchase agreement related thereto) least as favorable as those that might reasonably have to which it (or FFL) is a party as of been obtainable at the time from an unaffiliated party.
B-16 242 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES June 17, 1991 and any similar agreements which it (or The provisions of the foregoing paragraph shall not FFL) may enter into thereafter, provided, however, that apply to (i) any Permitted Payment, (ii) any Restricted the existence of, or the performance by Food 4 Less or Payment that is made in compliance with the provisions any subsidiaries of obligations under any future of the covenant described under "-- Limitation on amendment to, any such existing agreement or under any Restricted Payments" above, similar agreement entered into after June 17, 1991 (iii) reasonable and customary fees and compensation shall only be permitted by this clause (vi) to the paid to, and indemnity provided on behalf of, officers, extent that the terms of any such amendment or new directors, employees or consultants of the Company or agreement are not otherwise disadvantageous to the any Subsidiary, as determined by the board of directors holders in any material respect, (vii) transactions of the Company or any Subsidiary or the senior permitted by, and complying with, the provisions of management thereof in good faith, (iv) transactions the Old F4L Senior Subordinated Note Indenture exclusively between or among the Company and any of its summarized below under "Limitations on Merger and wholly-owned subsidiaries or exclusively between or Certain Other Transactions," (viii) transactions among such wholly-owned Subsidiaries, provided such with Certified Grocers of California, Inc., transactions are not otherwise prohibited by the New Affiliated Wholesale Grocers of Kansas City, Inc. F4L Senior Subordinated Note Indenture, (v) any or other suppliers in the ordinary course of agreement as in effect as of the Issue Date or any business and otherwise in compliance with the amendment thereto or any transaction contemplated terms of the Old F4L Senior Subordinated Note thereby (including pursuant to any amendment thereto) Indenture. so long as any such amendment is not disadvantageous to the holders of the New F4L Senior Subordinated Notes, "Significant Stockholder" means, with respect to any in any material respect, (vi) the existence of, or the person, any other person who is the beneficial owner performance by the Company or any of its subsidiaries (within the meaning of Rule 13d-3 under the Exchange of its obligations under the terms of, any stockholders Act) of more than 10% of any class of equity securities agreement (including any registration rights agreement of such person that are entitled to vote on a regular or purchase agreement related thereto) to which it (or basis for the election of directors of such person. FFL) is a party as of the Issue Date and any similar agreements which it (or FFL) may enter into thereafter; IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD provided, however, that the existence of, or the F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED performance by the Company or any subsidiaries of TO ELIMINATE THIS COVENANT AND CERTAIN RELATED obligations under any future amendment to, any such DEFINITIONS. existing agreement or under any similar agreement entered into after the Issue Date shall only be permit- ted 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) purchases or sales of goods or services or other transactions with suppliers, 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, 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 Date"), prior to the mailing of the notice of a Change of Food 4 Less will (i) repay in full all Indebtedness of Control Offer referred to above, within 30 days Food 4 Less and its subsidiaries under the loan following a Change of Control the Company shall (i) documents and related documents or offer to repay in either (a) repay in full and terminate all commitments full all such Indebtedness and repay the Indebtedness under Indebtedness under the Credit Agreement to the of each lender who has accepted such offer or (ii) extent the terms thereof require repayment upon a obtain the requisite consent under the Credit Agreement Change of Control (or offer to repay in full and and related documents to permit the repurchase of the terminate all commitments under all such Indebtedness Old F4L Senior Subordinated Notes. Food 4 Less must under the Credit Agreement and repay the Indebtedness first comply with the covenant in the preceding owed to each lender which has accepted such offer), or sentence before it will be required to repurchase Old (b) obtain the requisite consents under the Credit F4L Senior Subordinated Notes pursuant to a Change of Agreement, the terms of which require repayment upon a Control Offer. Food 4 Less must comply Change of Control, to permit the repurchase of the New F4L
B-17 243 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES with Rule 14e-1 under the Securities Exchange Act of Senior Subordinated Notes as provided above and (ii) 1934, as amended, and any other applicable provisions either (a) repay in full all Indebtedness under the of the federal securities laws in connection with a Senior Unsecured Term Loan (or offer to repay in full Change of Control Offer. all such Indebtedness under the Senior Unsecured Term Loan Agreement and repay the Indebtedness owed to each Pursuant to the Old F4L Senior Subordinated Note lender which has accepted such offer) or (b) obtain the Indenture, within 30 days following any Change of requisite consents under the Senior Unsecured Term Loan Control Date, Food 4 Less must send, by first class to permit the repurchase of the New F4L Senior mail, a notice to each holder, with copies to the Subordinated Notes as provided above. The Company shall Credit Agent and the Old F4L Senior Subordinated Note first comply with the covenant in the immediately Trustee, which notice shall govern the terms of the preceding sentence before it shall be required to Change of Control Offer. Such notice shall state, among repurchase New F4L Senior Subordinated Notes pursuant other things, the purchase date, which must be no to the provisions described below. The Company's earlier than 30 days nor later than 40 days from the failure to comply with the covenants described in this date such notice is mailed, other than as may be paragraph shall constitute an Event of Default under required by law (the "Change of Control Payment Date"). the New F4L Senior Subordinated Note Indenture. Holders electing to have a Old F4L Senior Subordinated Notes purchased pursuant to a Change of Control Offer In addition, the New F4L Senior Subordinated Note will be required to surrender the Old F4L Senior Indenture will provide that prior to purchasing New F4L Subordinated Note, with the form entitled "Option of Senior Subordinated Notes tendered in a Change of Holder to Elect Purchase" on the reverse of the Old F4L Control Offer, the Company shall purchase all Senior Senior Subordinated Note completed, to the Paying Agent F4L Notes (or permitted refinancings thereof) which it at the address specified in the notice prior to the is required to purchase by reason of such Change of close of business on the business day prior to the Control pursuant to the provisions of the indenture Change of Control Payment Date. under which such New Senior F4L Notes are issued, as in effect on the Issue 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 Default or Event of Default shall have under column X below, then the Surviving Person shall occurred and be continuing; and (iv) each Subsidiary have an Operating Coverage Ratio at least equal to the Guarantor, unless it is the other party to the greater of (i) the actual Operating Coverage Ratio of transaction, shall have by supplemental indenture Food 4 Less multiplied by the appropriate percentage confirmed that its guarantee of the obligations of the set forth in column Y below and (ii) the ratio set Company under the New F4L Senior Subordinated Notes and forth in column Z below: the New F4L Senior Subordinated Note Indenture shall apply, without alteration or amendment as such X Y Z guarantee applies on the date it was granted under the New F4L Senior Subordinated Note Indenture to the 1.8:1 to 2.499:1 100% 1.8:1 obligations of the Company under the New F4L Senior 2.5:1 to 2.999:1 90% 2.5:1 Subordinated Note Indenture and the New F4L Senior 3.0:1 or more 80% 2.7:1
B-18 244 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES and, provided further, that if immediately after giving Subordinated Notes to the obligations of the Company or effect to such transaction on a pro forma basis, the such person, as the case may be, under the New F4L Operating Coverage Ratio of Food 4 Less or the Senior Subordinated Note Indenture and the New F4L surviving entity, as the case may be, is 3.2:1 or more, Senior Subordinated Notes, after the consummation of the calculation in the preceding proviso shall be such transaction. inapplicable and such transaction shall be deemed to have complied with the requirements of such provision; Notwithstanding the foregoing, the consummation of the (3) immediately before and immediately after and giving Merger on the Issue Date need only comply with clauses effect to such transaction and the assumption of the (1) and (3) of the foregoing paragraph. obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any The New F4L Senior Subordinated Note Indenture will Indebtedness to be incurred in connection therewith, no provide that upon any consolidation or merger or any Default or Event of Default shall have occurred and be transfer of all or substantially all of the assets of continuing. For purposes of the foregoing, the transfer the Company or any adoption of a plan of liquidation by (by lease, assignment, sale or otherwise) of all or the Company in accordance with the foregoing, the substantially all of the properties and assets of one surviving person formed by such consolidation or into or more subsidiaries, the capital stock of which which the Company is merged or to which such transfer constitutes all or substantially all of the properties is made (or, in the case of a plan of liquidation, to and assets of Food 4 Less shall be deemed to be the which assets are transferred) shall succeed to, and be transfer of all or substantially all of the properties substituted for, and may exercise every right and power and assets of Food 4 Less. of, the Company under the New F4L Senior Subordinated Note Indenture with the same effect as if such IF THE PROPOSED AMENDMENTS BECOME OPERATIVE, THE OLD surviving person had been named as the Company herein; F4L SENIOR SUBORDINATED NOTE INDENTURE WILL BE MODIFIED provided, however, that solely for purposes of TO ELIMINATE THE SUBSECTIONS OF THIS PROVISION WHICH computing amounts described in subclause (c) of the REQUIRE THAT IMMEDIATELY AFTER GIVING EFFECT TO SUCH first paragraph of the covenant described above under TRANSACTION AND THE INCURRENCE OF ANY INDEBTEDNESS IN "Limitation on Restricted Payments", any such surviving CONNECTION THEREWITH, FOOD 4 LESS OR THE SURVIVING person shall only be deemed to have succeeded to and be ENTITY, AS THE CASE MAY BE, HAS A NET WORTH OR substituted for the Company with respect to periods OPERATING COVERAGE RATIO THAT MEETS THE STANDARDS SET subsequent to the effective time of such merger, FORTH THEREIN. 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. "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' Net nated Note Indenture will not contain a covenant Worth at the end of each of any two consecutive fiscal requiring the maintenance of a minimum net worth. 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 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 Inden-
B-19 245 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES ture. 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 PREFERRED STOCK OF SUBSIDIARIES. The LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. Old F4L Senior Subordinated Note Indenture does not Pursuant to the New Senior Subordinated Note Indenture, have a covenant providing for the limitation on the the Company will not permit any of its Subsidiaries to issuance 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 Disposition of Assets," "Change of Indenture, if such failure continues unremedied for 30 Control," and "Limitations on Merger and Certain Other days after written notice given by the Old F4L Senior Transactions," which shall constitute Events of Default Subordinated Note Trustee or the holders of at least with notice but without passage of time); (iv) a 33 1/3% in principal amount of the Old F4L Senior default under any Indebtedness of the Company or its Subordinated Notes then outstanding (except in the case subsidiaries, whether such Indebtedness now exists or of a default with respect to the covenants set forth in shall hereinafter be created, if both (A) such default the Old F4L Senior Subordinated Note Indenture under either (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 more (2) relates to an obligation other than the obligation at any one time outstanding; (v) any final judgment or to pay such Indebtedness at its stated maturity and order for payment of money in excess of $20 million results in the holder or holders of such Indebtedness shall be entered against the Company or any Significant causing such Indebtedness to become due prior to its Subsidiary and shall not be discharged for a period of stated maturity and (B) the principal amount of such 60 days after such judgment becomes final and Indebtedness, together with the principal amount of any nonappealable; (vi) either the Company or any Signifi- other such
B-20 246 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES Indebtedness in default for failure to pay cant Subsidiary pursuant to or within the meaning of principal at maturity or the maturity of which has been any Bankruptcy Law: (a) commences a voluntary case or so accelerated, aggregates $20 million or more at any proceeding; (b) consents to the entry of an order for one time outstanding, (v) either Food 4 Less or any relief against it in an involuntary case or proceeding; Significant Subsidiary (a) admits in writing its (c) consents to the appointment of a custodian of it or inability to pay its debts generally as they become for all or substantially all of its property; or (d) due, (b) commences a voluntary case or proceding under makes a general assignment for the benefit of its any Bankruptcy Law; (c) consents to the entry of a creditors; (vii) a court of competent jurisdiction judgment, decree or order for relief against it in an enters an order or decree under any Bankruptcy Law involuntary case or proceeding under any Bankruptcy that: (a) is for relief against the Company or any Law; (d) consents to the appointment of a Custodian of significant subsidiary, in an involuntary case or it or for all or substantially all of its property, (e) proceeding; (b) appoints a custodian of the Company or consents to or acquieces in the institution of a any significant subsidiary, or for all or any bankruptcy or an insolvency proceeding against it, (f) substantial part of their respective properties; or (c) makes a general assignment for the benefit of its orders the liquidation of the Company or any creditors, or (g) takes any corporate action to significant subsidiary, and in each case the order or authorize or effect any of the foregoing; (vi) a court decree remains unstayed and in effect for 60 days; of competent jurisdiction enters a judgment, decree or (viii) the lenders under the Credit Agreement shall order for relief in respect of Food 4 Less or any commence judicial proceedings to foreclose upon any Significant Subsidiary in an involuntary case or material portion of the assets of the Company and its proceeding under any Bankruptcy Law subsidiaries; or (ix) any of the guaran- which shall: (a) approve as properly filed a petition tees issued under the New F4L Senior Subordinated seeking reorganization, arrangement, adjustment or Indenture shall be declared or adjudged unenforceable composition in respect of Food 4 Less or any or invalid in a final judgment or order issued by any Significant Subsidiary, (b) appoint a Custodian of Food court of governmental authority. In the event of a 4 Less or any Significant Subsidiary, or for declaration of acceleration because an Event of Default substantially all of their respective properties; or set forth in clause (iv) above has occurred and is (c) order the winding up liquidation of its affairs, continuing, such declaration of acceleration shall be and in each case the order or decree remains unstayed automatically rescinded and annulled if either (i) the and in effect for 60 days; (vii) any Warrant of holders of the Indebtedness which is the subject of attachment is issued against any portion of the such Event of Default have waived such failure to pay property of Food 4 Less or any Significant Subsidiary at maturity or have rescinded the acceleration in having a value of at least $20 million, which Warrant respect of such Indebtedness within 90 days of such is not released within 60 days after service of process maturity or declaration of acceleration, as the case with respect thereto, or final judgment not covered by may be, and no other Event of Default has occurred insurance which in the aggregate at any one time during such 90-day period which has not been cured or exceeds $20 million shall be entered against Food 4 waived, or (ii) such Indebtedness shall have been Less or any Significant Subsidiary and shall not be discharged or the maturity thereof shall have been discharged for a period of 60 days after such judgment extended such that it is not then due and payable, or becomes final and nonappealable; and (viii) the lenders the underlying default has been cured, within 90 days under the Loan Documents or any refinancing of such maturity or declaration of acceleration, as the indebtedness related thereto shall foreclose or take case may be. any action to foreclose upon any material portion of the collateral securing such indebtedness. In the event of a declaration of acceleration because an Event of Under the terms of the New F4L Senior Subordinated Note Default set forth in clause (iv) above has occurred and Indenture, if an Event of Default (other than an Event is continuing, such declaration of acceleration shall of Default resulting from bankruptcy, insolvency, be automatically rescinded and annulled if either (i) receivership or reorganization of the Company or a the holders of the Indebtedness which is the subject of Subsidiary Guarantor) occurs and is continuing, the New such Event of Default have waived such failure to pay F4L Senior Subordinated Note Trustee or the holders of at maturity or have rescinded the acceleration in at least 25% in principal amount of the then respect of such Indebtedness within 90 days of such outstanding New F4L Senior Subordinated Notes issued maturity or declaration of acceleration, as the case under the New Indenture may declare immediately due and may be, and no other Event of Default has occurred payable all unpaid principal and interest accrued and during such 90-day period which has not been cured or unpaid on the then outstanding New F4L Senior waived, or (ii) such Indebtedness shall have been Subordinated Notes by notice in writing to the Company discharged or the maturity thereof shall have been and the New F4L Senior Subordinated Note Trustee extended such that it is not then due and payable, or specifying the respective Event of Default and that it the underlying default has been cured, within 90 days is a "notice of acceleration" (the "Acceleration of such maturity or declaration of acceleration, as the Notice"), and the same (i) shall become immediately due case may be. and payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become Under the terms of the Old F4L Senior Subordinated due and payable upon the first to occur of an Note Indenture, if an Event of Default (other than an acceleration under the Credit Agreement, or five Event of Default resulting from bankruptcy, insolvency, business days after receipt by the Company and the receivership or reorganization of Food 4 Less) occurs administrative agent under the Credit Agreement of such and is continuing, the Old F4L Senior Subordinated Note Acceleration Notice. If an Event of Default resulting Trustee or the holders of at least 33 1/3% in principal from certain events of bankruptcy, insolvency, amount of the Old F4L Senior Subordinated Notes then receivership or reorganization of the Company or a outstanding may declare immediately due and payable all Subsidiary Guarantor shall occur, all unpaid principal unpaid principal and interest accrued and unpaid on the of and accrued interest on all then outstanding New F4L Old F4L Senior Subordinated Notes then outstanding; Senior Subordinated Notes shall be immediately due and provided, however, that if any Senior Indebtedness is payable without any declaration or other act on the outstanding under the Credit Agreement or the Credit part of the New F4L Senior Subordinated Note Trustee or Agreement is otherwise in effect, upon any such any of the holders. After a declaration of declaration, all unpaid principal and interest accrued acceleration, subject to certain conditions, the and unpaid on the Old F4L Senior Subordinated Notes holders of a majority in principal amount of the then then outstanding shall become due and payable upon the outstanding New F4L Senior Subordinated Notes, by notice first to occur of (i) five business days after notice to the New F4L Senior Subordinated Note Trustee, may is received by Food 4 Less and the Credit Agent; and rescind such declaration if all existing Events of Default (ii) an acceleration under the Credit Agreement. If an are remedied. In certain cases the holders of a majority Event of Default resulting from certain events of in principal amount of outstanding New F4L Senior bankruptcy, insolvency, receivership or reorganization Subordinated Notes may waive a past default under the shall occur, all unpaid principal and accrued interest New F4L Senior Subordinated Note Indenture and its shall be
B-21 247 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES immediately due and payable without any consequences, except a default in the payment of or declaration or other act on the part of the Old F4L interest on any of the New F4L Senior Subordinated Senior Subordinated Note Trustee or any of the holders. Notes. Subject to certain conditions, the holders of a majority in principal amount of the Old F4L Senior The New F4L Senior Subordinated Note Indenture provides Subordinated Notes then outstanding, by notice to the that if a Default or Event of Default occurs and is Old F4L Senior Subordinated Note Trustee, may rescind continuing and if it is known to the New F4L Senior such declaration if all existing Events of Default are Subordinated Note Trustee, the New F4L Senior remedied. In certain cases the holders of a majority in Subordinated Note Trustee shall mail to each holder of principal amount of outstanding Old F4L Senior New F4L Senior Subordinated Notes notice of the Default Subordinated Notes may waive any past default and its or Event of Default within 90 days after such Default consequences, except a default in the payment of or Event of Default occurs; provided, however, that, principal of or interest on any of the Old F4L Senior except in the case of a Default or Event of Default in Subordinated Notes. the payment of the principal of or interest on any New F4L Senior Subordinated Note, including the failure to The Old F4L Senior Subordinated Note Indenture make payment on a Change of Control Payment Date provides that if a Default or Event of Default occurs pursuant to a Change of Control Offer or payment when and is continuing and if it is known to the Old F4L due pursuant to a Proceeds Offer the New F4L Senior Senior Subordinated Note Trustee, the Old F4L Senior Subordinated Note Trustee may withhold such notice if Subordinated Note Trustee shall mail to each holder it in good faith determines that withholding such notice of the uncured Default or Event of Default notice is in the interest of the holders. within 90 days after such Default or Event of Default occurs; provided, however, that, except in the case of The New F4L Senior Subordinated Note Indenture provides a Default or Event of Default in the payment of the that no holder of New F4L Senior Subordinated Notes may principal of or interest on any of the Old F4L Senior pursue any remedy thereunder unless the New F4L Senior Subordinated Notes, including an Accelerated Payment Subordinated Note Trustee (i) shall have failed to act and the failure to make payment on the Change of for a period of 60 days after receiving written notice Control Payment Date pursuant to a Change of Control of a continuing Event of Default by such holder and a Offer, the Old F4L Senior Subordinated Note Trustee may request to act by holders of at least 25% in principal withhold such notice if it in good faith determines amount of New F4L Senior Subordinated Notes and (ii) that withholding such notice is in the interest of the has received indemnification satisfactory to it; holders. provided, however, that such provision does not affect the right of any holder to sue for enforcement of any The Old F4L Senior Subordinated Note Indenture overdue payment of New F4L Senior Subordinated Notes. provides that no holder may pursue any remedy thereunder unless the Old F4L Senior Subordinated Note Under the New F4L Senior Subordinated Note Indenture, Trustee (i) shall have failed to act for a period of 60 two officers of the Company are required to certify to days after receiving written notice of a continuing the New F4L Senior Subordinated Note Trustee within 120 Event of Default by such holder and a request to act by days after the end of each fiscal year of the Company holders of at least 33 1/3% in principal amount of Old whether or not they know of any Default that occurred F4L Senior Subordinated Notes and (ii) has received during such fiscal year and, if applicable, describe indemnification satisfactory to it; provided, however, such Default and the status thereof. that such provision does not affect the right of any 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 guarantee, (2) reduce Subordinated Note; (3) reduce the principal amount of the rate or extend the time for payment of interest on any Old F4L Senior Subordinated Note; (4) change the the New F4L Senior Subordinated Notes, (3) reduce the date of maturity of any Old F4L Senior Subordinated principal amount of any New F4L Senior Subordinated Note, or alter the redemption provisions in Notes, (4) change the Maturity Date of the New F4L a manner adverse to any holder; (5) make any changes in Senior Subordinated Notes or the Change of Control the provisions concerning waivers of Defaults or Events Payment Date or alter the redemption provisions in the of Default by holders or the rights of holders to New F4L Senior Subordinated Note Indenture, the New recover the principal of, interest on, or redemption F4L Senior Subordinated Notes or the purchase price in payment with respect to, any Old F4L Senior connection with any repurchase of New F4L Subordinated Note; or (6) make the principal of, or the
B-22 248 OLD F4L SENIOR SUBORDINATED NOTES NEW F4L SENIOR SUBORDINATED NOTES interest on, any Old F4L Senior Subordinated Note Senior Subordinated Notes pursuant to the covenant payable with anything or in any manner other than as described under "-- Limitation on Change of Control" provided for in the Old F4L Senior Subordinated Note above in a manner adverse to any holder of the New F4L Indenture and the Old F4L Senior Subordinated Notes; Senior Subordinated Notes, (5) make any changes in the and (B) no provision in any supplemental indenture that provisions concerning waivers of Defaults or Events of affects the subordination of the Old F4L Senior Default by holders or the rights of holders to recover Subordinated Notes and the Guarantee Obligations or the principal of, interest on or redemption payment other provisions relating thereto shall be effective with respect to New F4L Senior Subordinated Notes, against the holders of the Senior Indebtedness or (6) make the principal of, or interest on, any New F4L Senior Guarantor Indebtedness who have not consented Senior Subordinated Notes payable with anything or in thereto. any manner other than as provided for in the New F4L Senior Subordinated Note Indenture, the New F4L Senior According to the terms of the Old F4L Senior Subordinated Notes and the Senior Subordinated Note Subordinated Note Indenture, Food 4 Less and the Guarantee, (7) waive any Default or Event of Default Trustee may amend the Old F4L Senior Subordinated Note resulting from a failure to comply with the covenant Indenture and the Old F4L Senior Subordinated Notes (a) described under "Limitation on Change of Control" above to cure any ambiguity, defect or inconsistency therein; and (ii) without the consent of holders of not less provided, that such amendment or supplement does not than two thirds in aggregate principal amount of New adversely affect the rights of any holder or (b) to F4L Senior Subordinated Notes then outstanding, no such make any other change that does not adversely affect amendment, supplement or waiver may release any Guaran- the rights of any holder. tor 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 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 ambiguity 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-23 249 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 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 135 South LaSalle Street 77 Water Street 5777 West Century Boulevard Chicago, IL 60603 New York, NY 10005 Los Angeles, CA 90045 (312) 236-5881 (collect) (212) 269-5550 (collect) (310) 215-3860 (collect) Europe: 37 Sun Street London, England EC2M 2PY 4471-247-8263
The Dealer Managers are: BT SECURITIES CORPORATION CS FIRST BOSTON One Bankers Trust Plaza 55 East 52nd Street 130 Liberty Street New York, New York 10055 New York, New York 10006 (212) 909-2873 (212) 775-2995
250 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 7 and 8 of the Prospectus and Solicitation Statement. PAGE 7 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 from the box representing Holdings to the box representing FFL to simulate the FFL Merger. PAGE 8 The chart illustrates the corporate structure of the Company after the Merger and the FFL Merger. The corporate structure illustrates that FFL owns the Company which, in turn, is the parent of all other subsidiaries of the Company. The anticipated debt obligations of FFL are placed in order of ranking next to the box representing FFL and the anticipated debt obligations of the Company are placed in order of ranking next to the box representing the Company. 251 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Food 4 Less and its subsidiaries Cala Foods, Inc. and Food 4 Less of Southern California, Inc., are Delaware corporations and their Certificates of Incorporation and Bylaws provide for indemnification of their officers and directors to the fullest extent permitted by law. Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL") eliminates the liability of a corporation's directors to a corporation or its stockholders, except for liabilities related to breach of duty of loyalty, actions not in good faith, and certain other liabilities. Section 145 of the DGCL provides for the indemnification by a Delaware corporation of its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. Alpha Beta Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Cala Co., Food 4 Less of California, Inc., Food 4 Less GM, Inc. and Food 4 Less Merchandising, Inc. are California corporations and their Certificates of Incorporation and Bylaws provide for indemnification of their officers and directors to the fullest extent permitted by law. Section 204(10) of the California General Corporation Law (the "CGCL") eliminates the liability of a corporation's directors for monetary damages to the fullest extent permissible under California law. Pursuant to Section 204(11) of the CGCL, a California corporation may indemnify Agents (as defined in Section 317 of the CGCL), subject only to the applicable limits set forth in Section 204 of the CGCL with respect to actions for breach of duty to the corporation and its shareholders. As permitted by Section 317 of the CGCL, indemnification may be provided by a California corporation of its Agents (as defined in Section 317 of the CGCL), to the maximum extent permitted by the CGCL, in connection with any proceeding arising by reason of the fact that such person is or was such a director or officer, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in any such proceeding. Falley's, Inc. is a Kansas corporation and its Bylaws provide for indemnification of its officers and directors to the fullest extent permitted by law. Section 17-6305(a) of the Kansas General Corporation Code (the "KGCC") provides for the indemnification by a Kansas corporation of its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits A list of exhibits filed with this Registration Statement on Form S-4 is set forth in the Index to Exhibits on page E-1, and is incorporated herein by reference. (b) Financial Statement Schedules (i) Ralphs Schedule V -- Property, Plant and Equipment Schedule VI -- Accumulated Depreciation and Amortization of Property, Plant and Equipment Schedule VIII -- Valuation and Qualifying Accounts Schedule IX -- Short-Term Borrowings
II-1 252 (ii) Food 4 Less Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties Schedule V -- Property and Equipment Schedule VI -- Accumulated Depreciation and Amortization of Property and Equipment Schedule VIII -- Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) The undersigned registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-2 253 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on November 14, 1994. FOOD 4 LESS SUPERMARKETS, INC. By: /s/ MARK A. RESNIK ------------------------------------ Mark A. Resnik Vice President and Secretary POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Ronald W. Burkle, George G. Golleher and Mark A. Resnik, his true and lawful attorney and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ RONALD W. BURKLE Chief Executive Officer and November 14, 1994 - ------------------------------ Director (Principal Ronald W. Burkle Executive Officer) /s/ GREG MAYS Executive Vice President -- November 14, 1994 - ------------------------------ Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer) /s/ JOE S. BURKLE Director November 14, 1994 - ------------------------------ Joe S. Burkle /s/ MARK A. RESNIK Director November 14, 1994 - ------------------------------ Mark A. Resnik /s/ GEORGE G. GOLLEHER Director November 14, 1994 - ------------------------------ George G. Golleher
II-3 254 SIGNATURES (continued) Pursuant to the requirements of the Securities Act of 1933, the registrants have duly caused this Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on November 14, 1994. BAY AREA WAREHOUSE STORES, INC. BELL MARKETS, INC. CALA CO. CALA FOODS, INC. FOOD 4 LESS OF CALIFORNIA, INC. FOOD 4 LESS GM, INC. FOOD 4 LESS MERCHANDISING, INC. FOOD 4 LESS OF SOUTHERN CALIFORNIA, INC. By: /s/ MARK A. RESNIK ------------------------------------ Mark A. Resnik Vice President and Assistant Secretary POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Ronald W. Burkle, George G. Golleher and Mark A. Resnik, his true and lawful attorney and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD W. BURKLE Director and Chairman of the November 14, 1994 - ----------------------------- Board of each Registrant Ronald W. Burkle /s/ GEORGE G. GOLLEHER Chief Executive Officer and November 14, 1994 - ----------------------------- Director (Principal George G. Golleher Executive Officer) of each Registrant /s/ GREG MAYS Executive Vice President -- November 14, 1994 - ------------------------------ Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer) of each Registrant
II-4 255 SIGNATURES (continued) Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on November 14, 1994. ALPHA BETA COMPANY BY: /S/ MARK A. RESNIK ------------------------------------ Mark A. Resnik Vice President and Assistant Secretary POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Ronald W. Burkle, George G. Golleher and Mark A. Resnik, his true and lawful attorney and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD W. BURKLE Director and Chief Executive November 14, 1994 - ------------------------------ Officer (Principal Ronald W. Burkle Executive Officer) /s/ GEORGE G. GOLLEHER Director November 14, 1994 - ------------------------------ George G. Golleher /s/ GREG MAYS Executive Vice President -- November 14, 1994 - ------------------------------ Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer)
II-5 256 SIGNATURES (continued) Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on November 14, 1994. FALLEY'S, INC. By: /s/ MARK A. RESNIK ------------------------------------ Mark A. Resnik Vice President and Assistant Secretary POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Ronald W. Burkle, George G. Golleher and Mark A. Resnik, his true and lawful attorney and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD W. BURKLE Director November 14, 1994 - --------------------------- Ronald W. Burkle /s/ GEORGE G. GOLLEHER Director November 14, 1994 - --------------------------- George G. Golleher /s/ JOE S. BURKLE Chief Executive Officer November 14, 1994 - --------------------------- (Principal Executive Joe S. Burkle Officer) /s/ MICHAEL SALTMAN Director November 14, 1994 - --------------------------- Michael Saltman /s/ GREG MAYS Executive Vice President -- November 14, 1994 - --------------------------- Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer)
II-6 257 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES Board of Directors and Stockholders Ralphs Supermarkets, Inc.: The audits referred to in our report dated April 8, 1994 (except as to note 16, which is as of September 14, 1994), included the related financial statement schedules as of January 30, 1994 and January 31, 1993, and for each of the fiscal years in the three-year period ended January 30, 1994, included in the registration statement. These financial statement schedules are the responsibility of Ralphs management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Summary Historical Financial Data of Ralphs," "Selected Historical Financial Data of Ralphs" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California November 10, 1994 S-1 258 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT 52 WEEKS ENDED JANUARY 30, 1994, 52 WEEKS ENDED JANUARY 31, 1993 AND 52 WEEKS ENDED FEBRUARY 2, 1992 (IN THOUSANDS)
BALANCE OTHER BALANCE BEGINNING CHANGES -- AT END OF PERIOD ADDITIONS RETIREMENTS ADD (DEDUCT) OF PERIOD ---------- --------- ----------- ------------- ---------- 52 WEEKS ENDED JANUARY 30, 1994: Land.................................... $156,487 $ 4,206 $ -- $ (789) $159,904 Buildings & improvements................ 180,639 16,730 (6,290) 100 191,179 Leasehold improvements.................. 149,273 8,670 (159) 3,557 161,341 Fixtures & equipment.................... 349,697 33,361 (30,299) 1,867 354,626 Capitalized leases...................... 69,058 15,395 (358) 2,869 86,964 -------- ------- -------- ------ -------- Total......................... $905,154 $78,362 $(37,106) $7,604 $954,014 ======== ======= ======== ====== ======== 52 WEEKS ENDED JANUARY 31, 1993: Land.................................... $145,344 $11,143 $ -- $ -- $156,487 Buildings & improvements................ 151,896 28,657 (31) 117 180,639 Leasehold improvements.................. 140,989 8,843 (442) (117) 149,273 Fixtures & equipment.................... 317,832 48,336 (16,471) -- 349,697 Capitalized leases...................... 70,151 -- (668) (425) 69,058 -------- ------- -------- ------ -------- Total......................... $826,212 $96,979 $(17,612) $ (425) $905,154 ======== ======= ======== ======= ======== 52 WEEKS ENDED FEBRUARY 2, 1992: Land.................................... $143,410 $ 1,864 $ -- $ 70 (a) $145,344 Buildings & improvements................ 136,205 16,558 (15) (852)(a) 151,896 Leasehold improvements.................. 144,385 (11) (3,497) 112 140,989 Fixtures & equipment.................... 301,482 31,944 (16,264) 670 317,832 Capitalized leases...................... 69,228 3,847 (2,924) -- 70,151 -------- ------- -------- ------ -------- Total......................... $794,710 $54,202 $(22,700) $ -- $826,212 ======== ======= ======== ====== ========
- --------------- (a) Reclassification to/from other accounts. S-2 259 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT 52 WEEKS ENDED JANUARY 30, 1994, 52 WEEKS ENDED JANUARY 31, 1993 AND 52 WEEKS ENDED FEBRUARY 2, 1992 (IN THOUSANDS)
BALANCE OTHER BALANCE BEGINNING CHANGES-- AT END OF PERIOD ADDITIONS RETIREMENTS ADD (DEDUCT) OF PERIOD --------- --------- ----------- ------------ --------- 52 WEEKS ENDED JANUARY 30, 1994: Buildings & improvements......... $ 33,598 $10,117 $ (2,640) $ (630) $ 40,445 Leasehold improvements........... 49,549 6,691 (86) 9,082 65,236 Fixtures & equipment............. 182,980 40,301 (14,392) (1,824) 207,065 Capitalized leases............... 28,362 8,434 (294) 2,869 39,371 -------- ------- -------- ------- -------- Total.................. $294,489 $65,543 $(17,412) $ 9,497 $352,117 ======== ======= ======== ======= ======== 52 WEEKS ENDED JANUARY 31, 1993: Buildings & improvements......... $ 24,514 $ 9,092 $ (8) $ -- $ 33,598 Leasehold improvements........... 38,138 11,775 (364) -- 49,549 Fixtures & equipment............. 148,407 43,256 (8,683) -- 182,980 Capitalized leases............... 21,271 7,759 (668) -- 28,362 -------- ------- -------- ------ -------- Total.................. $232,330 $71,882 $ (9,723) $ -- $294,489 ======== ======= ======== ====== ======== 52 WEEKS ENDED FEBRUARY 2, 1992: Buildings & improvements......... $ 17,161 $ 7,366 $ (11) $ (2) $ 24,514 Leasehold improvements........... 26,483 11,678 (23) -- 38,138 Fixtures & equipment............. 113,431 40,003 (5,029) 2 148,407 Capitalized leases............... 13,009 8,271 (9) -- 21,271 -------- ------- -------- ----- -------- Total.................. $170,084 $67,318 $ (5,072) $ -- $232,330 ======== ======= ======== ===== ========
S-3 260 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED JANUARY 30, 1994, 52 WEEKS ENDED JANUARY 31, 1993 AND 52 WEEKS ENDED FEBRUARY 2, 1992 (IN THOUSANDS)
BALANCE CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS AT END OF PERIOD EXPENSES DESCRIBE(B) (PAYMENTS) OF PERIOD --------- ---------- ---------------- ---------- --------- JANUARY 30, 1994: Self-Insurance Reserves(a)............. $ 72,979 $ 30,323 $ 5,953 $(29,245) $ 80,010 Store Closure Reserves................. $ 10,277 $ -- $ -- $ (763) $ 9,514 JANUARY 31, 1993: Self-Insurance Reserves(a)............. $ 64,523 $ 25,950 $ 10,902 $(28,396) $ 72,979 Store Closure Reserves................. $ 14,244 $ 1,838 $ -- $ (5,805) $ 10,277 FEBRUARY 2, 1992: Self-Insurance Reserves(a)............. $ 57,948 $ 25,549 $ 5,620 $(24,594) $ 64,523 Store Closure Reserves................. $ 2,000 $ 12,244 $ -- $ -- $ 14,244
- --------------- (a) Includes short-term portion. (b) Amortization of discount on self-insurance reserves to interest expense. S-4 261 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) SCHEDULE IX -- SHORT-TERM BORROWINGS 52 WEEKS ENDED JANUARY 30, 1994, 52 WEEKS ENDED JANUARY 31, 1993 AND 52 WEEKS ENDED FEBRUARY 2, 1992 (IN THOUSANDS, EXCEPT INTEREST RATE DATA)
MAXIMUM WEIGHTED WEIGHTED AMOUNT AVERAGE AVERAGE BALANCE AVERAGE OUTSTANDING AMOUNT INTEREST AT END INTEREST DURING OUTSTANDING DURING OF PERIOD RATE PERIOD RATE(A) THE PERIOD --------- -------- ----------- ----------- ----------- JANUARY 30, 1994: Working capital credit line........ $ -- --% $51,900 $ 8,006 7.75% JANUARY 31, 1993: Working capital credit line........ $31,100 7.75% $41,800 $13,851 7.82% FEBRUARY 2, 1992: Working capital credit line........ $16,500 7.75% $34,900 $ 6,706 9.56%
- --------------- (a) Average interest rate for the year is computed by dividing the actual short-term expense by the average short-term debt outstanding. S-5 262 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of Food 4 Less Supermarkets, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Food 4 Less Supermarkets, Inc. and subsidiaries 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 and have issued our report thereon dated July 29, 1994 (except with respect to the matter discussed in Note 14, as to which the date is September 14, 1994, and with respect to the matter discussed in Note 15, as to which the date is October 14, 1994). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules on pages S-7 through S-10 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Los Angeles, California July 29, 1994 (except with respect to the matter discussed in Note 14, as to which the date is September 14, 1994, and with respect to the matter discussed in Note 15, as to which the date is October 14, 1994) S-6 263 FOOD 4 LESS SUPERMARKETS, INC. SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES 52 WEEKS ENDED JUNE 25, 1994, 52 WEEKS ENDED JUNE 26, 1993, AND 52 WEEKS ENDED JUNE 27, 1992 (IN THOUSANDS)
BALANCE AT END OF BALANCE AT PERIOD BEGINNING AMOUNTS OTHER ---------------------- OF PERIOD ADDITIONS COLLECTED CHANGES CURRENT NONCURRENT ----------- ---------- -------- -------- -------- ----------- 52 WEEKS ENDED JUNE 25, 1994: None................................... $ -- $ -- $ -- $ -- $ -- $ -- ---- ---- ---- ---- ---- ---- $ -- $ -- $ -- $ -- $ -- $ -- ==== ==== ==== ==== ==== ==== 52 WEEKS ENDED JUNE 26, 1993: Spencer Deese.......................... $100 $ -- $100 $ -- $ -- $ -- ---- ---- ---- ---- ---- ---- $100 $ -- $100 $ -- $ -- $ -- ==== ==== ==== ==== ==== ==== 52 WEEKS ENDED JUNE 27, 1992: Spencer Deese.......................... $105 $ -- $ 5 $ -- $ -- $100 ---- ---- ---- ---- ---- ---- $105 $ -- $ 5 $ -- $ -- $100 ==== ==== ==== ==== ==== ====
S-7 264 FOOD 4 LESS SUPERMARKETS, INC. SCHEDULE V -- PROPERTY AND EQUIPMENT 52 WEEKS ENDED JUNE 25, 1994, 52 WEEKS ENDED JUNE 26, 1993 AND 52 WEEKS ENDED JUNE 27, 1992 (IN THOUSANDS)
BALANCE AT BEGINNING OF OTHER BALANCE AT END PERIOD ADDITIONS RETIREMENTS CHANGES(A) OF PERIOD ------------ --------- ----------- ---------- -------------- 52 WEEKS ENDED JUNE 25, 1994: Land..................................... $ 23,912 $ -- $ 424 $ -- $ 23,488 Buildings................................ 12,827 -- -- -- 12,827 Leasehold improvements................... 81,049 17,292 668 -- 97,673 Store equipment & fixtures............... 129,178 27,324 11,643 3,390 148,249 Transportation equipment................. 31,758 971 470 -- 32,259 Construction in progress................. 757 11,884 -- -- 12,641 Leased property under capital leases..... 77,553 2,575 1,906 -- 78,222 Leasehold interests...................... 93,863 -- 399 -- 93,464 -------- ------- ------- -------- -------- $450,897 $60,046 $15,510 $ 3,390 $498,823 ======== ======= ======= ======== ======== 52 WEEKS ENDED JUNE 26, 1993: Land..................................... $ 26,952 $ 652 $ 3,692 $ -- $ 23,912 Buildings................................ 12,568 207 126 178 12,827 Leasehold improvements................... 58,846 20,853 1,912 3,262 81,049 Store equipment & fixtures............... 104,473 24,956 2,328 2,077 129,178 Transportation equipment................. 29,415 2,531 188 -- 31,758 Construction in progress................. 8,679 1,601 2,513 (7,010) 757 Leased property under capital leases..... 80,369 115 2,931 -- 77,553 Leasehold interests...................... 92,193 2,552 882 -- 93,863 -------- ------- ------- -------- -------- $413,495 $53,467 $14,572 $ (1,493) $450,897 ======== ======= ======= ======== ======== 52 WEEKS ENDED JUNE 27, 1992: Land..................................... $ 26,952 $ -- $ -- $ -- $ 26,952 Buildings................................ 12,568 -- -- -- 12,568 Leasehold improvements................... 41,730 19,592 2,476 -- 58,846 Store equipment & fixtures............... 130,497 27,819 21,072 (32,771) 104,473 Transportation equipment................. 28,937 651 173 -- 29,415 Construction in progress................. 1,947 12,201 5,469 -- 8,679 Leased property under capital leases..... 80,399 -- 30 -- 80,369 Leasehold interests...................... 100,710 -- 357 (8,160) 92,193 -------- ------- ------- -------- -------- $423,740 $60,263 $29,577 $(40,931) $413,495 ======== ======= ======= ======== ========
- --------------- (a) Consists of (1) the acquisition of Food Barn in March 1994, (2) final Alpha Beta purchase price allocation adjustments, and (3) gains and losses on involuntary conversion of assets. S-8 265 FOOD 4 LESS SUPERMARKETS, INC. SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT 52 WEEKS ENDED JUNE 25, 1994, 52 WEEKS ENDED JUNE 26, 1993, AND 52 WEEKS ENDED JUNE 27, 1992 (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING OTHER AT END OF PERIOD ADDITIONS RETIREMENTS CHANGES(A) OF PERIOD ---------- --------- ----------- --------- ---------- 52 WEEKS ENDED JUNE 25, 1994: Buildings................................... $ 2,515 $ 441 $ -- $ -- $ 2,956 Leasehold improvements...................... 25,050 7,097 185 -- 31,962 Store equipment & fixtures.................. 36,506 20,789 1,762 -- 55,533 Transportation equipment.................... 7,036 2,461 337 -- 9,160 Leased property under capital leases........ 20,356 5,591 1,906 -- 24,041 Leasehold interests......................... 5,485 5,001 49 -- 10,437 ---------- --------- ----------- --------- ---------- $ 96,948 $41,380 $ 4,239 $ -- $134,089 ======== ======= ======== ======== ======== 52 WEEKS ENDED JUNE 26, 1993: Buildings................................... $ 1,861 $ 682 $ 24 $ (4) $ 2,515 Leasehold improvements...................... 15,534 9,692 15 (161) 25,050 Store equipment & fixtures.................. 19,818 18,051 673 (690) 36,506 Transportation equipment.................... 5,040 2,180 184 -- 7,036 Leased property under capital leases........ 16,655 5,342 1,641 -- 20,356 Leasehold interests......................... 4,051 1,479 45 -- 5,485 ---------- --------- ----------- --------- ---------- $ 62,959 $37,426 $ 2,582 $(855) $ 96,948 ======== ======= ======== ======== ======== 52 WEEKS ENDED JUNE 27, 1992: Buildings................................... $ 1,252 $ 688 $ 79 $ -- $ 1,861 Leasehold improvements...................... 7,800 8,649 915 -- 15,534 Store equipment & fixtures.................. 12,275 19,224 11,681 -- 19,818 Transportation equipment.................... 3,323 1,751 34 -- 5,040 Leased property under capital leases........ 10,306 6,379 30 -- 16,655 Leasehold interests......................... 2,888 1,207 44 -- 4,051 ---------- --------- ----------- --------- ---------- $ 37,844 $37,898 $12,783 $ -- $ 62,959 ======== ======= ======== ======== ========
- --------------- (a) Consists of gains and losses on involuntary conversion of assets. S-9 266 FOOD 4 LESS SUPERMARKETS, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED JUNE 25, 1994, 52 WEEKS ENDED JUNE 26, 1993, AND 52 WEEKS ENDED JUNE 27, 1992 (IN THOUSANDS)
BALANCE AT PROVISIONS CHARGED TO BALANCE AT BEGINNING CHARGED TO INTEREST OTHER END OF OF PERIOD EXPENSE EXPENSE(B) PAYMENTS CHANGES PERIOD ----------- ----------- ----------- --------- -------- ---------- SELF-INSURANCE LIABILITIES: 52 weeks ended June 25, 1994...... $85,494 $19,880 $ 5,836 $29,506 $ -- $ 81,704 ======== ======== ========= ======= ====== ======= 52 weeks ended June 26, 1993...... $82,559 $38,040 $ 5,865 $40,970 $ -- $ 85,494 ======== ======== ========= ======= ====== ======= 52 weeks ended June 27, 1992...... $59,525 $46,140 $ 4,960 $36,066 $8,000(a) $ 82,559 ======== ======== ========= ======= ====== =======
- --------------- (a) Reflects self-insurance reserve related to Alpha Beta resulting from the acquisition of Alpha Beta. (b) Amortization of discount on self-insurance reserves charged to interest expense. S-10 267 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 1.1 Form of Dealer Manager Agreement among Food 4 Less, Food 4 Less Holdings, Inc., the subsidiary guarantors named therein, BT Securities Corporation and CS First Boston Corporation dated as of , 1994*................................................ 2.1 Agreement and Plan of Merger by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less, Ralphs Supermarkets, Inc. and the Stockholders of Ralphs Supermarkets, Inc. (incorporated herein by reference to Exhibit 99 to Food 4 Less' Form 8-K dated September 14, 1994)................................................................. 3.1 Certificate of Incorporation of Food 4 Less, as amended (incorporated herein by reference to Exhibit 3.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 25, 1994).................... 3.2 Bylaws of Food 4 Less, as amended (incorporated herein by reference to Exhibit 3.2 to Food 4 Less's Registration Statement on Form S-1, No. 33-31152)............................................................. 4.1 Form of Senior Note Indenture dated as of , 1995 by and among Food 4 Less, the subsidiary guarantors identified therein and , as trustee, with respect to the % Senior Notes due 2004*............................................................. 4.2 Form of Senior Subordinated Note Indenture dated as of , 1995 by and among Food 4 Less, the subsidiary guarantors identified therein and , as trustee, with respect to the 13.75% Senior Subordinated Notes due 2005*............. 4.3 Form of Senior Subordinated Note Indenture dated as of , 1995 by and among the Company, the subsidiary guarantors identified therein and , as trustee, with respect to the % Senior Subordinated Notes due 2005*............. 4.4 Form of Supplemental Indenture dated as of , 1995 by and among the Company and United States Trust Company of New York, as trustee, with respect to the 10 1/4% Senior Subordinated Notes due 2002 of RGC to be assumed by the Company*............................. 4.5 Form of Supplemental Indenture dated as of , 1995 by and among the Company and United States Trust Company of New York, as trustee, with respect to the 9% Senior Subordinated Notes due 2003 of RGC to be assumed by the Company*..................................... 4.6 Senior Note Indenture dated as of April 15, 1992 by and among Food 4 Less, the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Food 4 Less' Registration Statement on Form S-1, No. 33-46750)............................................................. 4.6.1 First Supplemental Indenture dated as of July 24, 1992 by and among Food 4 Less, Bay Area Warehouse Stores, Inc., and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.1.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)...................................... 4.6.2 Form of Second Supplemental Indenture dated as of , 1995 by and among Food 4 Less, the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee*................. 4.7 Senior Subordinated Note Indenture dated as of June 15, 1991 by and among Food 4 Less, the subsidiary guarantors identified therein and United States Trust Company of New York as trustee (incorporated herein by reference to Exhibit 4.1 to Food 4 Less's Annual Report on Form 10-K for the fiscal year ended June 29, 1991)....................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 4.7.1 First Supplemental Indenture dated as of April 8, 1992 by and among Food 4 Less, Food 4 Less GM, Inc. and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992).................................................. 4.7.2 Second Supplemental Indenture dated as of May 18, 1992 by and among Food 4 Less, the Subsidiary Guarantors and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.2 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992).................................................. 4.7.3 Third Supplemental Indenture dated as of July 24, 1992 by and among Food 4 Less, Bay Area Warehouse Stores, Inc. and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.3 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)...................................... 4.7.4 Form of Fourth Supplemental Indenture dated as of , 1995, by and among Food 4 Less, the subsidiary guarantors identified therein and United States Trust Company of New York, as trustee*...... 4.8 Form of Credit Agreement dated as of , 1995, by and among Food 4 Less, the guarantors named therein and Bankers Trust Company, as agent, and the financial institutions identified therein*.............................................................. 4.9 Form of the Senior Unsecured Term Loan dated as of , 1995, by and among Food 4 Less and Bankers Trust New York Corporation*.......................................................... 5 Opinion of Latham & Watkins regarding the legality of the % Senior Notes due 2004, the 13.75% Senior Subordinated Notes due 2005, the 10.45% Senior Notes due 2000, as amended and the 13.75% Senior Subordinated Notes due 2001, as amended, including consent*........... 10.1 Lease dated as of June 17, 1991 by and between Food 4 Less and American Food and Drug, Inc. relating to La Habra, California property (incorporated herein by reference to Exhibit 10.4 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 29, 1991)... 10.2 Stockholders Agreement dated as of June 23, 1989 by and among Food 4 Less, Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.16 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)............................................... 10.2.1 Amendment dated as of May 4, 1990 to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.58 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152).................................. 10.2.2 Letter Agreement dated as of June 27, 1990 by and among Peter J. Sodini, The Boys Markets, Inc., and certain affiliates, officers, directors and employees of Food 4 Less (incorporated herein by reference to Exhibit 10.39.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 30, 1990)......................... 10.2.3 Assignment and Assumption Agreement dated as of August 22, 1990 by and between Peter J. Sodini and Ronald W. Burkle with respect to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.16.2 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 30, 1990)........................................................ 10.2.4 Amendment dated as of December 31, 1992 by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less and Ronald W. Burkle to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.6.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)............................................................. 10.3 Stockholders Agreement dated as of June 23, 1989 by and among Food 4 Less, Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.17 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)...............................................
E-2 269
EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 10.3.1 Amendment dated as of May 4, 1990 to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.59 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)..................... 10.3.2 Amendment dated as of December 31, 1992 by and among Food 4 Less Holdings, Inc., Food 4 Less, Food 4 Less, Inc. and George G. Golleher to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.8.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214).................................................... 10.4 Letter Agreement dated as of September 14, 1994 by and among FFL Partners, Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less and Falley's Inc. relating to certain obligations arising under the Falley's, Inc. Stock Ownership Plan and Trust, as amended (incorporated herein by reference to Exhibit 10.4 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 25, 1994)... 10.5 Amended and Restated Consulting Agreement dated as of , 199 by and among The Yucaipa Companies and Food 4 Less*.............. 10.6 Consulting Agreement dated as of June 27, 1988 by and between Falley's, Inc. and Joe S. Burkle (incorporated herein by reference to Exhibit 10.38 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)............................................................. 10.6.1 Letter Agreement dated as of December 10, 1990 amending Consulting Agreement by and between Falley's, Inc. and Joe S. Burkle (incorporated herein by reference to Exhibit 10.17.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 29, 1991)... 10.7 Employment Agreement dated as of , 199 by and between the Company and Byron E. Allumbaugh*...................................... 10.8 Amended and Restated Employment Agreement dated as of , 199 by and between the Company and George G. Golleher*............... 10.9 Employment Agreement dated as of July 1, 1994 between Food 4 Less and Harley DeLano (incorporated herein by reference to Exhibit 10.9 to Food 4 Less' Annual Report on Form 10-K dated June 25, 1994).......... 10.10 Employment Agreement dated as of July 1, 1994 between Food 4 Less and Greg Mays (incorporated herein by reference to Exhibit 10.10 to Food 4 Less' Annual Report on Form 10-K dated June 25, 1994)................. 10.11 Employment Agreement dated as of , 199 by and between the Company and Alfred A. Marasca*........................................ 10.12 Stock Purchase Agreement dated as of , 199 , among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less and the Purchasers therein*.............................................................. 10.13 Amended and Restated Tax Sharing Agreement dated as of June 17, 1991 by and among Food 4 Less, Inc., Food 4 Less and the subsidiaries of Food 4 Less (incorporated herein by reference to Exhibit 10.20 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 29, 1991)................................................................. 12 Statements regarding computations of ratios of earnings to fixed charges............................................................... 21 Subsidiaries of Food 4 Less (incorporated herein by reference to Exhibit 22.1 to Food 4 Less' Annual Report on Form 10-K dated June 25, 1994)................................................................. 23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants........................................................... 23.2 Consent of Arthur Andersen LLP, independent public accountants........ 23.3 Consent of Latham & Watkins (included in the opinions filed as Exhibit 5 to the Registration Statement)*..................................... 23.4 Consent of Director Nominee Byron E. Allumbaugh....................... 23.5 Consent of Director Nominee Alfred A. Marasca.........................
E-3 270
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 23.6 Consent of Director Nominee Patrick L. Graham......................... 24 Power of Attorney of directors and officers of Food 4 Less (included in the signature pages in Part II of the Registration Statement)...... 25 Statement of Eligibility and Qualification on Form T-1 of Norwest Bank Minnesota, N.A., as Trustee, under the Supplemental Indenture for the % Senior Notes due 2000*......................................... 25.1 Statement of Eligibility and Qualification on Form T-1 of United States Trust Company of New York, as Trustee, under the Supplemental Indenture for the 13.75% Senior Subordinated Notes due 2001*.......... 25.2 Statement of Eligibility and Qualification on Form T-1 of , as Trustee, under the Senior Subordinated Note Indenture for the 13.75% Senior Subordinated Notes due 2005*.......... 25.3 Statement of Eligibility and Qualification on Form T-1 of , as Trustee, under the Senior Note Indenture for the % Senior Notes due 2004*......................................... 99 Letter of Transmittal and Consent and Notice of Guaranteed Delivery with respect to the Exchange Offer*...................................
- --------------- * To be filed by amendment. E-4 EX-12 2 STATEMENTS REGARDING COMPUTATIONS 1 EXHIBIT 12 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(A) (DOLLAR IN THOUSANDS) (UNAUDITED)
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY 28, FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, OCTOBER 10, OCTOBER 9, 1990 1991 1992 1993 1994 1993 1994 ------------ ------------ ------------ ------------ ------------ ------------ ----------- Earnings (loss) before income taxes, cumulative effect of change in accounting and extraordinary item......... $(57,670) $(25,529) $(27,734) $ 2,792 $ 30,317 $ 23,771 $ 19,896 Add: Portion of rents representative of the interest factor.... 11,836 12,936 15,135 17,745 19,218 13,092 13,493 Capitalized interest... 1,019 915 510 1,074 740 599 227 Interest expense... 130,883 128,477 130,206 125,611 108,755 75,748 77,162 -------- -------- -------- -------- -------- -------- --------- Earnings as adjusted... $ 86,068 $116,799 $118,117 $147,222 $159,030 $113,210 $ 110,778 ======== ======== ======== ======== ======== ======== ========= Fixed charges: Interest expense... 130,883 128,477 130,206 125,611 108,755 75,748 77,162 Capitalized interest... 1,019 915 510 1,074 740 599 227 Portion of rents representative of the interest factor.... 11,836 12,936 15,135 17,745 19,218 13,092 13,493 -------- -------- -------- -------- -------- -------- --------- Total fixed charges... $143,738 $142,328 $145,851 $144,430 $128,713 $ 89,439 $ 90,882 ======== ======== ======== ======== ======== ======== ========= Ratio of earnings to fixed charges..... --(b) --(b) --(b) 1.02 1.24 1.27 1.22 ======== ======== ======== ======== ======== ======== =========
- --------------- (a) The ratio of earnings to fixed charges has been computed based upon net earnings (loss) before income taxes, extraordinary item and fixed charges. Fixed charges consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of debt discount and expense and one-third of rental expense (the proportion deemed representative of the interest factor). (b) Earnings before income taxes and fixed charges were insufficient to cover fixed charges for the periods ended January 28, 1990, February 3, 1991 and February 2, 1992 by $57,670, $25,529 and $27,734, respectively. Page 1 of 2 2 EXHIBIT 12 FOOD 4 LESS SUPERMARKETS, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) (UNAUDITED)
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED JUNE 30, 1990 JUNE 29, 1991 JUNE 27, 1992 JUNE 26, 1993 ------------------ ------------------ ------------------ ------------------ FIXED FIXED FIXED FIXED EARNINGS CHARGES EARNINGS CHARGES EARNINGS CHARGES EARNINGS CHARGES -------- ------- -------- ------- -------- ------- -------- ------- Loss before provision for income taxes and extraordinary charges............ $(9,106) $ -- $(3,387) $ -- $(25,555) $ -- $(25,936) $ -- Add: Fixed charges: Interest expense including amortization of deferred financing costs............................... 50,789 50,789 50,085 50,085 70,210 70,210 69,733 69,733 Interest factor in rent expense(1).... 3,814 3,814 6,523 6,523 15,569 15,569 14,835 14,835 ------- ------- ------- ------- -------- ------- -------- ------- $45,497 $54,603 $53,221 $56,608 $ 60,224 $85,779 $ 58,632 $84,568 ======= ======= ======= ======= ======== ======= ======== ======= Ratio of earnings to fixed charges.... -- -- -- -- ======= ======= ======== ======== Deficiency of earnings to cover fixed charges............................. $ 9,106 $ 3,387 $ 25,555 $ 25,936 ======= ======= ======== ======== 52 WEEKS ENDED 12 WEEKS ENDED 12 WEEKS ENDED JUNE 25, 1994 SEPTEMBER 18, 1993 SEPTEMBER 17, 1994 ------------------ ------------------ ------------------ FIXED FIXED FIXED EARNINGS CHARGES EARNINGS CHARGES EARNINGS CHARGES -------- ------- -------- ------- -------- ------- Loss before provision for income taxes and extraordinary charges............ $ -- $ -- $ (812) $ -- $(2,447) $ -- Add: Fixed charges: Interest expense including amortization of deferred financing costs............................... 68,250 68,250 15,730 15,730 16,008 16,008 Interest factor in rent expense(1).... 16,596 16,596 3,830 3,830 4,095 4,095 ------- ------- ------- ------- ------- ------- $84,846 $84,846 $18,748 $19,560 $17,656 $20,103 ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges.... 1.0 -- -- ======= ======= ======= Deficiency of earnings to cover fixed charges............................. -- $ 812 $ 2,447 ======= ======= =======
- --------------- (1) Calculated as one-third of minimum rent expense (see note 5 in the audited financial statements):
1990 1991 1992 1993 ------- ------- ------- ------- Minimum rent.......................... $11,443 $19,570 $46,706 $44,504 Interest factor....................... /3 /3 /3 /3 ------- ------- ------- ------- $ 3,814 $ 6,523 $15,569 $14,835 ======= ======= ======= ======= 12 WEEKS ENDED 12 WEEKS ENDED 1994 SEPTEMBER 18, 1993 SEPTEMBER 17, 1994 ------- ------------------ ------------------ Minimum rent.......................... $49,788 $11,490 $12,286 Interest factor....................... /3 /3 /3 ------- ------ ------ $16,596 $3,830 $4,095 ======= ====== ======
Page 2 of 2 EX-23.1 3 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES Board of Directors and Stockholders Ralphs Supermarkets, Inc.: The audits referred to in our report dated April 8, 1994 (except as to note 16, which is as of September 14, 1994), included the related financial statement schedules as of January 30, 1994 and January 31, 1993, and for each of the fiscal years in the three-year period ended January 30, 1994, included in the registration statement. These financial statement schedules are the responsibility of Ralphs management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Summary Historical Financial Data of Ralphs," "Selected Historical Financial Data of Ralphs" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California November 10, 1994 EX-23.2 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Los Angeles, California November 8, 1994 EX-23.4 5 CONSENT OF DIRECTOR NOMINEE BYRON E. ALLUMBAUGH 1 EXHIBIT 23.4 CONSENT OF DIRECTOR NOMINEE The undersigned hereby consents to the reference of the undersigned as a director nominee of the successor corporation to Food 4 Less Supermarkets, Inc. (the "Company") in the Company's Registration Statement on Form S-4. /s/ BYRON E. ALLUMBAUGH ---------------------------------- Byron E. Allumbaugh EX-23.5 6 CONSENT OF DIRECTOR NOMINEE ALFRED A. MARASCA 1 EXHIBIT 23.5 CONSENT OF DIRECTOR NOMINEE The undersigned hereby consents to the reference of the undersigned as a director nominee of the successor corporation to Food 4 Less Supermarkets, Inc. (the "Company") in the Company's Registration Statement on Form S-4. /s/ ALFRED A. MARASCA ----------------------------------- Alfred A. Marasca EX-23.6 7 CONSENT OF DIRECTOR NOMINEE PATRICK L. GRAHAM 1 EXHIBIT 23.6 CONSENT OF DIRECTOR NOMINEE The undersigned hereby consents to the reference of the undersigned as a director nominee of the successor corporation to Food 4 Less Supermarkets, Inc. (the "Company") in the Company's Registration Statement on Form S-4. /s/ PATRICK L. GRAHAM ----------------------------------- Patrick L. Graham -----END PRIVACY-ENHANCED MESSAGE-----