-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TyqlqTfmM9udB7GIUSGo/uCtfzmTVBaI5/owabxMQMp+R5hsdqwkq4XFv83x++T1 RHZLpirTRaVak6/ZKj20MA== 0000950150-95-000717.txt : 19951124 0000950150-95-000717.hdr.sgml : 19951124 ACCESSION NUMBER: 0000950150-95-000717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951008 FILED AS OF DATE: 19951122 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RALPHS GROCERY CO /DE/ CENTRAL INDEX KEY: 0000835676 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954356030 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-46750 FILM NUMBER: 95595992 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 FORMER COMPANY: FORMER CONFORMED NAME: FOOD 4 LESS SUPERMARKETS INC DATE OF NAME CHANGE: 19931027 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED OCTOBER 8, 1995 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________ FOR QUARTER ENDED COMMISSION FILE NUMBER OCTOBER 8, 1995 33-31152
RALPHS GROCERY COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4356030 (STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1100 WEST ARTESIA BOULEVARD COMPTON, CALIFORNIA 90220 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 884-9000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO . ----- ----- AT NOVEMBER 22, 1995, THERE WERE 1,513,938 SHARES OF COMMON STOCK OUTSTANDING. AS OF SUCH DATE, ALL OF THE OUTSTANDING SHARES OF COMMON STOCK WERE HELD BY FOOD 4 LESS HOLDINGS, INC., AND THERE WAS NO PUBLIC MARKET FOR THE COMMON STOCK. ================================================================================ 2 RALPHS GROCERY COMPANY INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets as of October 8, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . 2 Consolidated statements of operations for the 12 weeks ended October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 4 Consolidated statements of operations for the 36 weeks ended October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 5 Consolidated statements of cash flows for the 36 weeks ended October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 6 Consolidated statements of stockholder's equity as of October 8, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . 8 Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 25 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 1 4 RALPHS GROCERY COMPANY CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
October 8, January 29, ASSETS 1995 1995 ----------- ----------- (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 64,792 $ 19,560 Trade receivables, net 71,631 23,377 Notes and other receivables 6,268 3,985 Inventories 476,884 224,686 Patronage receivables from suppliers 3,761 5,173 Prepaid expenses and other 45,534 13,051 ---------- ---------- Total current assets 668,870 289,832 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: A. W. G. 7,288 6,718 Certified and Others 5,651 5,686 PROPERTY AND EQUIPMENT: Land 185,872 23,488 Buildings 211,548 24,172 Leasehold improvements 224,092 110,020 Fixtures and Equipment 414,230 190,016 Construction in progress 47,504 8,042 Leased property under capital leases 179,646 82,526 Leasehold interests 115,942 96,556 ---------- ---------- 1,378,834 534,820 Less: Accumulated depreciation and amortization 192,759 154,382 ---------- ---------- Net property and equipment 1,186,075 380,438 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $5,379 and $20,496 at October 8, 1995 and January 29, 1995, respectively 94,210 25,469 Goodwill, less accumulated amortization of $55,072 and $38,560 at October 8, 1995 and January 29, 1995, respectively 1,120,179 263,112 Other, net 24,736 29,440 ---------- ---------- $3,107,009 $1,000,695 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 2 5 RALPHS GROCERY COMPANY CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
October 8, January 29, LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1995 ---------- ----------- (unaudited) CURRENT LIABILITIES: Accounts payable $ 384,393 $ 190,455 Accrued payroll and related liabilities 95,399 42,007 Accrued interest 54,648 10,730 Other accrued liabilities 174,581 65,279 Income taxes payable 1,491 293 Current portion of self-insurance liabilities 59,284 28,616 Current portion of long-term debt 24,649 22,263 Current portion of obligations under capital leases 20,341 4,965 ---------- ---------- Total current liabilities 814,786 364,608 LONG-TERM SENIOR DEBT 1,113,213 320,901 OBLIGATIONS UNDER CAPITAL LEASES 130,140 40,675 SENIOR SUBORDINATED DEBT 671,222 145,000 DEFERRED INCOME TAXES 19,567 17,534 SELF-INSURANCE LIABILITIES 89,097 41,872 LEASE VALUATION RESERVE 24,655 -- OTHER NON-CURRENT LIABILITIES 79,527 12,302 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDER'S EQUITY: Cumulative convertible preferred stock, $.01 par value, 200,000 shares authorized: 50,000 shares outstanding at January 29, 1995 (aggregate liquidation value of $67.9 million) and no shares at October 8, 1995 -- 65,136 Common stock, $.01 par value, 5,000,000 shares authorized; 1,513,938 shares and 1,519,632 shares issued at October 8, 1995 and January 29, 1995, respectively 15 15 Additional paid-in capital 466,783 107,650 Notes receivable from stockholders of parent (643) (702) Retained deficit (301,353) (112,225) ---------- ---------- 164,802 59,874 Treasury stock: 12,345 shares of common stock at January 29, 1995 and no shares at October 8, 1995 -- (2,071) ---------- ---------- Total stockholder's equity 164,802 57,803 ---------- ---------- $3,107,009 $1,000,695 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 3 6 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
12 Weeks 12 Weeks Ended Ended October 8, September 17, 1995 1994 ---------- ------------- SALES $1,207,093 $ 598,698 COST OF SALES 965,976 495,656 ---------- --------- GROSS PROFIT 241,117 103,042 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 225,020 88,152 AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 10,000 1,787 ---------- --------- OPERATING INCOME 6,097 13,103 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs 52,386 14,709 Amortization of deferred financing costs 3,369 1,299 ---------- --------- 55,755 16,008 LOSS (GAIN) ON DISPOSAL OF ASSETS 92 (458) ---------- --------- LOSS BEFORE PROVISION FOR INCOME TAXES (49,750) (2,447) PROVISION FOR INCOME TAXES -- 900 ---------- --------- NET LOSS (49,750) (3,347) PREFERRED STOCK ACCRETION -- 2,376 ---------- --------- LOSS APPLICABLE TO COMMON SHARES $ (49,750) $ (5,723) ========== ========= LOSS PER COMMON SHARE $ (32.86) $ (3.81) ========== ========== Average Number of Common Shares Outstanding 1,513,938 1,502,900 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 4 7 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 8, September 17, 1995 1994 ---------- ------------- SALES $2,688,035 $1,767,645 COST OF SALES 2,178,133 1,457,509 ---------- ---------- GROSS PROFIT 509,902 310,136 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 480,026 255,378 AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 16,512 5,346 RESTRUCTURING CHARGE 63,587 -- ---------- ---------- OPERATING INCOME (LOSS) (50,223) 49,412 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs 98,354 43,573 Amortization of deferred financing costs 6,363 3,823 ---------- ---------- 104,717 47,396 GAIN ON DISPOSAL OF ASSETS (344) (362) PROVISION FOR EARTHQUAKE LOSSES -- 4,504 ---------- ---------- LOSS BEFORE EXTRAORDINARY CHARGE AND PROVISION FOR INCOME TAXES (154,596) (2,126) PROVISION FOR INCOME TAXES 500 2,900 ---------- ---------- LOSS BEFORE EXTRAORDINARY CHARGE (155,096) (5,026) EXTRAORDINARY CHARGE 23,128 -- ---------- ---------- NET LOSS (178,224) (5,026) PREFERRED STOCK ACCRETION 3,960 6,422 ---------- ---------- LOSS APPLICABLE TO COMMON SHARES $ (182,184) $ (11,448) ========== ========== LOSS PER COMMON SHARE: Loss before extraordinary charges $ (105.31) $ (7.62) Extraordinary charges (15.31) -- ---------- ---------- Net Loss $ (120.62) $ (7.62) ========== ========== Average Number of Common Shares Outstanding 1,510,349 1,503,195 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 5 8 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 8, September 17, 1995 1994 ---------- ------------- CASH PROVIDED BY OPERATING ACTIVITIES: Cash received from customers $2,688,035 $1,767,645 Cash paid to suppliers and employees (2,533,431) (1,666,125) Interest paid (54,436) (33,457) Income taxes received (paid) 90 (3,550) Interest received 528 1,105 Other, net 344 (2,613) ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 101,130 63,005 CASH USED BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment 5,788 2,795 Payment for purchase of property and equipment (68,515) (50,406) Payment of acquisition costs, net of cash acquired (356,250) (11,050) Other, net (3,219) 752 ---------- ----------- NET CASH USED BY INVESTING ACTIVITIES (422,196) (57,909) CASH PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from the issuance of long-term debt 956,179 -- Payments of long-term debt (559,634) (8,164) Payments of capital lease obligation (8,170) (2,944) Net change in Revolving Loan (27,300) 6,100 Capital contribution from parent 12,108 -- Dividends (6,944) -- Purchase of treasury stock, net -- (466) Other, net 59 (26) ---------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 366,298 (5,500) ---------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 45,232 (404) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 29,792 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,792 $ 29,388 ========== ===========
The accompanying notes are an integral part of these consolidated statements. 6 9 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
36 Weeks 36 Weeks Ended Ended October 8, September 17, 1995 1994 ---------- ------------- RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (178,224) $ (5,026) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Restructuring charge 63,587 -- Extraordinary charge 23,128 -- Depreciation and amortization 85,959 43,535 Gain on sale of assets (344) (480) Change in assets and liabilities: Accounts and notes receivable (8,513) 2,294 Inventories 23,915 1,325 Prepaid expenses and other (11,677) (4,008) Accounts payable and accrued liabilities 101,274 29,605 Self-insurance liabilities 1,435 (3,590) Income taxes payable 590 (650) ---------- -------- Total adjustments 279,354 68,031 ---------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 101,130 $ 63,005 ========== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Acquisition of stores: Fair value of assets acquired, less cash acquired of $34,380 in 1995 $2,047,247 $11,241 Net cash paid in acquisition (356,250) (11,050) Capital contribution from parent (280,000) -- ---------- -------- Liabilities assumed $1,410,997 $ 191 ---------- -------- Accretion of preferred stock $ 3,960 $ 6,422 ========== ========
The accompanying notes are an integral part of these consolidated statements. 7 10 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock Treasury Stock --------------------- ------------------ -------------------- Number Number Number of of of Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ BALANCES AT JANUARY 29, 1995 50,000 $65,136 1,519,632 $15 (12,345) $(2,071) Cancellation of Food 4 Less Supermarkets, Inc.'s Common Stock held as Treasury Stock (unaudited) -- -- (5,694) -- 5,694 955 Cancellation of Food 4 Less Holdings, Inc.'s Common Stock held as Treasury Stock (unaudited) -- -- -- -- 6,651 1,116 Preferred Stock Accretion (unaudited) -- 3,960 -- -- -- -- Cancellation of Preferred Stock (unaudited) (50,000) (69,096) -- -- -- -- Dividend paid to Food 4 Less Holdings, Inc. (unaudited) -- -- -- -- -- -- Payment on Stockholder Notes (unaudited) -- -- -- -- -- -- Capital Contribution by Food 4 Less Holdings, Inc. (unaudited) -- -- -- -- -- -- Issuance of Stock Options (unaudited) -- -- -- -- -- -- Net loss (unaudited) -- -- -- -- -- -- ------- ------- --------- --- ------- ------- BALANCES AT OCTOBER 8, 1995 (unaudited) -- $ -- 1,513,938 $ 15 -- $ -- ========= ========= ========= === ======== ======== Stock- Add'l Total holders' Paid-In Retained Stockholder's Notes Capital Deficit Equity -------- ------- --------- ------------- BALANCES AT JANUARY 29, 1995 $(702) $107,650 $(112,225) $ 57,803 Cancellation of Food 4 Less Supermarkets, Inc.'s Common Stock held as Treasury Stock (unaudited) -- (955) -- -- Cancellation of Food 4 Less Holdings, Inc.'s Common Stock held as Treasury Stock (unaudited) -- (1,116) -- -- Preferred Stock Accretion (unaudited) -- -- (3,960) -- Cancellation of Preferred Stock (unaudited) -- 69,096 -- -- Dividend paid to Food 4 Less Holdings, Inc. (unaudited) -- -- (6,944) (6,944) Payment on Stockholder Notes (unaudited) 59 -- -- 59 Capital Contribution by Food 4 Less Holdings, Inc. (unaudited) -- 282,108 -- 282,108 Issuance of Stock Options (unaudited) -- 10,000 -- 10,000 Net loss (unaudited) -- -- (178,224) (178,224) ----- -------- --------- --------- BALANCES AT OCTOBER 8, 1995 (unaudited) $(643) $466,783 $(301,353) $ 164,802 ===== ======== ========= =========
The accompanying notes are an integral part of these consolidated statements. 8 11 RALPHS GROCERY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated balance sheet and statement of stockholder's equity of Ralphs Grocery Company (the "Company"), formerly known as Food 4 Less Supermarkets, Inc. ("F4L Supermarkets") as of October 8, 1995 and the consolidated statements of operations and cash flows for the interim periods ended October 8, 1995 and September 17, 1994 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's financial statements and notes thereto included in the Company's latest annual report filed under the name of Food 4 Less Supermarkets, Inc. on Form 10-K for the fiscal year ended January 29, 1995. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. 2. ORGANIZATION AND ACQUISITION The Company, a wholly-owned subsidiary of Food 4 Less Holdings, Inc. ("Holdings"), is a retail supermarket company with 412 stores located in Southern California, Northern California and certain areas of the Midwest. The Company's Southern California division includes manufacturing facilities, with bakery and creamery operations, and full-line warehouse and distribution facilities. ACQUISITION On June 14, 1995, F4L Supermarkets acquired all of the common stock of Ralphs Supermarkets, Inc. ("RSI") in a transaction accounted for as a purchase by F4L Supermarkets. The consideration for the acquisition consisted of $375 million in cash, $131.5 million principal amount of 13.625% Senior Subordinated Pay-In-Kind Debentures due 2007 of Holdings (the "Seller Debentures") and $18.5 million initial accreted value of 13.625% Senior Discount Debentures due 2005 of Holdings (the "New Discount Debentures"). F4L Supermarkets, Ralphs Supermarkets, Inc. ("RSI") and RSI's wholly owned subsidiary Ralphs Grocery Company ("RGC") combined through mergers (the "Merger") in which RSI remained as the surviving entity and changed its name to Ralphs Grocery Company (referred to as the "Company" herein). The financial statements reflect the preliminary allocation of the purchase price as certain appraisals and other information needed to complete the purchase price allocation have not been completed. The allocation of the purchase price will be finalized in fiscal 1996. The following unaudited pro forma information presents the results of the Company's operations, adjusted to reflect interest expense and depreciation and amortization, as though the Merger had been consummated at the beginning of fiscal 1994. 9 12
36 Weeks 36 Weeks Ended Ended October 8, September 17, 1995 1994 ------------ ------------- (dollars in thousands, except share amounts) Sales $3,713,726 $3,623,986 Restructuring charge -- (63,587) Integration costs -- (57,639) Loss before extraordinary charge (32,243) (129,689) Net loss (32,243) (160,232) Loss per share: Loss before extraordinary charge (21.35) (86.28) Net loss (21.35) (106.59)
The unaudited pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of fiscal 1994, or of the results which may occur in the future. 3. SIGNIFICANT ACCOUNTING POLICIES Inventories Inventories, which consist primarily of grocery products, are stated at the lower of cost or market. Cost has been principally determined using the last-in, first-out ("LIFO") method. If inventories had been valued using the first-in, first-out ("FIFO") method, inventories would have been higher by $19,459,000 and $16,531,000 at October 8, 1995 and January 29, 1995, respectively, and gross profit and operating income would have been greater by $934,000 and $2,928,000 for the 12 and 36 weeks ended October 8, 1995, respectively, greater by $1,020,000 for the 12 weeks ended September 17, 1994 and less by $501,000 for the 36 weeks ended September 17, 1994. Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the October 8, 1995 presentation. Other The Financial Accounting Standards Board has issued a new standard on accounting for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and long-lived assets and certain identifiable intangibles to be disposed of (FASB Statement No. 121). The Company will adopt the accounting standard in fiscal 1996. The Company does not expect the change in accounting to have a material effect on the Company's reported financial position or results of operations. 4. RESTRUCTURING CHARGE During the quarter ended July 16, 1995, the Company has recorded a $63.6 million one-time restructuring charge associated with the closing of 39 stores and one warehouse facility. Pursuant to the settlement agreement with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs stores) must be divested by December 31, 1995. Although not required by such settlement agreement, an additional 15 under-performing stores are scheduled to be closed by June 30, 1996. The restructuring charge consists of write-downs of property, plant and equipment ($40.6 million) less estimated proceeds ($16.0 million); reserve for closed stores and warehouse facility ($16.1 million); write-off of the Alpha Beta trademark ($8.3 million); write-off of other assets ($8.0 million); lease 10 13 termination expenses ($4.0 million); and miscellaneous expenses ($2.6 million). The expected cash payments to be made in connection with the restructuring charge total $7.2 million. It is expected that cash payments will be made by June 30, 1996. The increase in the restructuring charge over previous estimates was due primarily to the addition of the $16.1 million reserve for the closure of the warehouse and stores. The remaining increase resulted from the identification of additional assets to be written-off. During the 36 weeks ended October 8, 1995, the Company utilized $37.5 million of the reserve for restructuring costs ($46.6 million of costs partially offset by $9.1 million of proceeds from the divestiture of stores). The charges consisted of write-downs of property, plant and equipment ($23.1 million); write-off of the Alpha Beta trademark ($8.3 million); and write-off of other assets ($6.1 million). No additional expenses are expected to be incurred in future periods in connection with these closings. The Company has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. The addition of the Riverside facility will likely result in an additional fourth quarter restructuring charge, the amount of which has not yet been finalized. (See Note 10 - "Subsequent Events.") 5. EXTRAORDINARY CHARGE The extraordinary charge of $23.1 million recorded during the quarter ended July 16, 1995 relates to the refinancing of F4L Supermarkets' old credit facility, 10.45% Senior Notes due 2000 (the "Old F4L Senior Notes"), 13.75% Senior Subordinated Notes due 2001 (the "Old F4L Senior Subordinated Notes") and Holdings' 15.25% Senior Discount Notes due 2004 in connection with the Merger and the write-off of their related debt issuance costs. 11 14 6. LONG-TERM SENIOR DEBT AND SENIOR SUBORDINATED DEBT The Company's long-term senior debt is summarized as follows:
October 8, January 29, 1995 1995 -------------- ------------ New Term Loans, principal due quarterly through 2003, with interest payable quarterly in arrears $ 594,873,000 $ -- Old Bank Term Loan, principal due quarterly through January 1999, with interest payable monthly in arrears -- 125,732,000 10.45% Senior Notes, principal due 2004 with interest payable semi-annually in arrears 520,326,000 -- 10.45% Senior Notes, principal due 2000 with interest payable semi-annually in arrears 4,674,000 175,000,000 Revolving loan -- 27,300,000 Notes payable in varying monthly installments, including interest ranging from 11.5 percent to 18.96 percent. Final payments due through November 1996. Secured by equipment with a net book value of $24.9 million. 3,951,000 -- 10.0% Secured Promissory Note, collateralized by the stock of Bell, due June 1996, interest payable quarterly through June 1996. 8,000,000 8,000,000 10.625% 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 $2.1 million. 1,466,000 1,498,000 10.8% notes payable, collateralized equipment, due October 1995, $72,000 of principal plus interest payable monthly, plus balloon payment of $1,004,000 of principal and interest. 995,000 1,420,000 Other long-term debt 3,577,000 4,214,000 -------------- ------------ 1,137,862,000 343,164,000 Less current portion 24,649,000 22,263,000 -------------- ------------ $1,113,213,000 $320,901,000 ============== ============
Long Term Senior Debt As part of the Merger financing, the Company entered into a new credit agreement (the "New Credit Facility") with certain banks, comprised of a $600 million term loan facility (the "New Term Loans") and a revolving credit facility of $325 million (the "Revolving Credit Facility") less amounts outstanding under a $150 million standby letter of credit facility (the "Letter of Credit Facility"). At October 8, 1995, $594.9 million was outstanding under the New Term Loans, there were no borrowings outstanding under the Revolving Credit Facility, and $92.7 million of standby letters of credit had been issued on behalf of the Company. A commitment fee of one-half of one percent is charged on the average daily unused portion of the Revolving Credit Facility; such commitment fees 12 15 are due quarterly in arrears. Interest on borrowings under the New Term Loans is at the bank's Base Rate (as defined) plus a margin ranging from 1.50 percent to 2.75 percent or the adjusted Eurodollar Rate (as defined) plus a margin ranging from 2.75 percent to 4.00 percent. At October 8, 1995, the weighted average interest rate on the New Term Loans was 9.12 percent. Interest on borrowings under the Revolving Credit Facility is at the bank's Base Rate (as defined) plus a margin of 1.50 percent or the Adjusted Eurodollar Rate (as defined) plus a margin of 2.75 percent. On October 11, 1995, the Company entered into an interest rate collar which effectively set interest rate limits on $300 million of the Company's bank term debt. This interest rate collar, which was effective as of October 19, 1995, limits the interest rate on $300 million to a range of 4.5% to 8.0% LIBOR for two years. This agreement satisfies interest rate protection requirements under the New Credit Facility. Quarterly principal installments on the New Term Loans continue to December 2003, with amounts payable in each year as follows: $0.8 million in fiscal 1995, $19.5 million in fiscal 1996, $46.6 million in fiscal 1997, $59.2 million in fiscal 1998, $62.8 million in fiscal 1999, $66.4 in fiscal 2000, $86.1 in fiscal 2001, $102.9 in fiscal 2002 and $150.6 in fiscal 2003. The principal installments can be accelerated from time to time by certain mandatory prepayments which are required under the New Credit Facility. To the extent that borrowings under the Revolving Credit Facility are not paid earlier, they are due in December 2003. The common stock of the Company and certain of its direct and indirect subsidiaries has been pledged as security under the New Credit Facility. The Company issued $350,000,000 of new 10.45% Senior Notes due 2004 (the "New F4L Senior Notes") and exchanged $170,326,000 principal amount of the Old F4L Senior Notes (together with the New F4L Senior Notes, the "Senior Notes"), for an equal amount of the New F4L Senior Notes, leaving an outstanding balance of $4,674,000 on the Old F4L Senior Notes. The New Senior Notes are due on June 15, 2004 and the Old F4L Senior Notes are due in two equal sinking fund payments on April 15, 1999 and 2000. The Senior Notes are senior unsecured obligations of the Company and rank "pari passu" in right of payment with other senior unsecured indebtedness of the Company. However, the Senior Notes are effectively subordinated to all secured indebtedness of the Company and its subsidiaries, including indebtedness under the New Credit Facility. Interest on the New F4L Senior Notes is payable semiannually in arrears on each June 15 and December 15, commencing on December 15, 1995. Interest on the Old F4L Senior Notes is payable semiannually in arrears on each April 15 and October 15. The New F4L Senior Notes may be redeemed, at the option of the Company, in whole at any time or in part from time to time, beginning in fiscal 2000, at a redemption price of 105.225 percent. The redemption price declines ratably to 100 percent in fiscal 2003. In addition, on or prior to June 15, 1998, the Company may, at its option, use the net cash proceeds of one or more public equity offerings to redeem up to an aggregate of 35 percent of the principal amount of the New F4L Senior Notes originally issued, at a redemption price equal to 110.450 percent, 108.957 percent, and 107.464 percent of the principal amount thereof if redeemed during the 12 months commencing on June 15, 1995, June 15, 1996, and June 15, 1997, respectively, in each case plus accrued and unpaid interest, if any, to the redemption date. The Old F4L Senior Notes may be redeemed beginning in fiscal year 1996 at 104.48 percent, declining ratably to 100 percent in fiscal 1999. 13 16 Scheduled maturities of principal of long-term senior debt at October 8, 1995 are as follows:
Fiscal Year ----------- 1995 $ 3,499,000 1996 32,074,000 1997 46,761,000 1998 59,418,000 1999 63,051,000 Later years 933,059,000 -------------- $1,137,862,000 ==============
Senior Subordinated Deb The Company issued $100,000,000 of new 11% Senior Subordinated Notes due 2005 (the "New RGC Notes") and (i) exchanged $142,192,000 principal amount of the RGC 9% Senior Subordinated Notes due 2003 (the "Old RGC 9% Notes") and $281,813,000 principal amount of the RGC 10.25% Senior Subordinated Notes due 2002 (the "Old RGC 10.25% Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes") for an equal amount of New RGC Notes, (ii) purchased $7,530,000 principal amount of Old RGC 9% Notes and $15,151,000 principal amount of Old RGC 10.25% Notes in conjunction with the offers, and (iii) subsequently purchased $133,000 principal amount of Old RGC 9% Notes and $964,000 principal amount of Old RGC 10.25% Notes subject to the change of control provision, leaving an outstanding balance of $145,000 on the Old RGC 9% Notes and an outstanding balance of $2,072,000 on the Old RGC 10.25% Notes. The New RGC Notes are senior subordinated unsecured obligations of the Company and are subordinated in right of payment to all senior indebtedness, including the Company's obligations under the New Credit Facility and the Senior Notes. Interest on the New RGC Notes is payable semiannually in arrears on each June 15 and December 15, commencing on December 15, 1995. The New RGC Notes may be redeemed at the option of the Company, in whole at any time or in part from time to time, beginning in fiscal year 2000, at an initial redemption price of 105.5 percent. The redemption price declines ratably to 100 percent in fiscal 2003. In addition, on or prior to June 15, 1998, the Company may, at its option, use the net cash proceeds of one or more public equity offerings to redeem up to an aggregate of 35 percent of the principal amount of the New RGC Notes originally issued, at a redemption price equal to 111 percent, 109.429 percent, and 107.857 percent of the principal amount thereof if redeemed during the 12 months commencing on June 15, 1995, June 15, 1996, and June 15, 1997, respectively, in each case plus accrued and unpaid interest, if any, to the redemption date. The Company exchanged $140,184,000 Old F4L Senior Subordinated Notes for an equal amount of new 13.75% Senior Subordinated Notes due 2005 (the "New F4L Senior Subordinated Notes," and together with the Old F4L Senior Subordinated Notes, the "13.75% Senior Subordinated Notes") of the Company, leaving an outstanding balance of $4,816,000 on the Old F4L Senior Subordinated Notes. The 13.75% Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and are subordinated in right of payment to all senior indebtedness including the Company's obligations under the New Credit Facility and the Senior Notes. Interest on the 13.75% Senior Subordinated Notes is payable semiannually in arrears on each June 15 and December 15 commencing on December 15, 1995. The 13.75% Senior Subordinated Notes may be redeemed beginning in fiscal year 1996 at a redemption price of 106.111 percent. The redemption price declines ratably to 100 percent in fiscal 2000. 14 17 Financial Covenants The New Credit Facility, among other things, requires the Company to maintain minimum levels of net worth (as defined), to maintain minimum levels of earnings, to maintain a hedge agreement to provide interest rate protection, and to comply with certain ratios related to fixed charges and indebtedness. In addition, the New Credit Facility and the indentures governing the New F4L Notes, the New RGC Notes and the New F4L Senior Subordinated Notes limit, among other things, additional borrowings, dividends on, and redemption of, capital stock and the acquisition and the disposition of assets. At October 8, 1995, the Company was in compliance with the financial covenants of its debt agreements. At October 8, 1995, dividends and certain other payments are restricted based on terms in the debt agreements. The proceeds of the New Credit Facility and the new debt issuances (as described above) were used as sources of financing for the Merger. (See Footnote 2 -- "Organization and Acquisition"). 7. CAPITAL CONTRIBUTIONS Holdings made capital contributions to the Company of $282.1 million in the form of (i) RSI stock acquired through the issuance of $131.5 million aggregate principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures, (ii) RSI stock acquired with $100 million of cash proceeds from the $140 million new equity financing at Holdings (the "New Equity Investment") and (iii) $12.1 million in cash proceeds from the New Equity Investment and the satisfaction by Holdings, through the issuance of the New Discount Debentures, of $20 million in fees otherwise payable by the Company in connection with the Merger and the Financing. 8. DIVIDENDS In connection with the Merger, the Company paid dividends to Holdings of $6.9 million. The Company paid dividends to Holdings of $3.4 million for the purchase, by Holdings, of shares of Holdings common stock from stockholders who exercised statutory dissenters' rights in connection with the merger of Holdings and its majority stockholder Food 4 Less, Inc. There are no other shares subject to statutory dissenters' rights. Up to $10 million of the Seller Debentures were subject to an agreement (the "Put Agreement") between The Yucaipa Companies ("Yucaipa") and a selling stockholder of RSI common stock (the "Selling Stockholder") in which Yucaipa was required to purchase up to $10 million of the Seller Debentures back from the Selling Stockholder upon a put by the Selling Stockholder. On June 14, 1995, the Selling Stockholder put $10 million of the Seller Debentures ("Put Debentures") to Yucaipa. Yucaipa then sold the Put Debentures to Bankers Trust Company at a price of $6.5 million. As part of the Put Agreement, Holdings was obligated to reimburse Yucaipa for any losses or expenses incurred in connection with a put by the Selling Stockholder. As such, the Company paid dividends to Holdings of $3.5 million for the loss which Yucaipa incurred as a result of the put by the Selling Stockholder. Holdings subsequently recorded a $3.5 million discount to the Seller Debentures. 9. STOCK OPTIONS The Company's parent, Holdings, established the Food 4 Less Holdings, Inc. 1995 Stock Option Plan (the "Plan") to grant officers and other key employees of the Company the opportunity to acquire Holdings common stock and to create an incentive for such persons to remain in the employ of the Company. The Plan is administered by a committee (the "Committee") which consists of selected members of the Holdings' Board of Directors. The Committee may grant both incentive and non-qualified stock options and each such option shall be evidenced by a written Stock Option Agreement between the option holder and Holdings. Each individual Stock Option Agreement may differ from person to person, but must comply with the terms and conditions of the Plan. 15 18 The cumulative aggregate number of shares of common stock to be issued under the Plan may not exceed 3,000,000 plus any shares acquired by Holdings by repurchase of shares of common stock previously issued to certain officers and other key employees under a prior stock incentive program of Holdings. The exercise price of each incentive stock option shall be determined by the Committee, but, in the case of each incentive stock option, shall not be less than 100% of the fair market value of the common stock on the date of grant. The exercise price of each non-qualified stock option is determined by the Committee at its discretion. The Committee determines the date that a particular option shall become exercisable provided, however, that each option shall become exercisable in full no later than five years after such option is granted, and each option shall become exercisable as to at least 20% of the shares of common stock covered thereby on each anniversary of the date such option is granted. The options are exercisable in whole or in part and the expiration date which is determined on an option-by-option basis by the Committee cannot exceed 10 years from the date of issuance of such option. Prior to the Merger, RSI had 1,500,000 Equity Appreciation Rights ("EARs") outstanding that were granted under the 1988 Equity Appreciation Rights Plan, as amended, to certain officers and key employees of RGC. In connection with the Merger, a portion of the EAR payment in the amount of $10 million was canceled in exchange for the issuance of certain non-qualified stock options (collectively, the "Reinvestment Options"). In addition to the Reinvestment Options, Holdings granted stock options to certain management employees of the Company and to one senior executive officer of Holdings. Compensation expense was not recorded as the cancellation of the EAR liabilities in consideration of the Reinvestment Options was deemed by management to reflect fair and equal value. Each of the options granted in connection with the Merger will expire on June 14, 2005. All of the Reinvestment Options were fully exercisable upon the date of issuance. At October 8, 1995, stock options covering 2,415,000 shares of Holdings common stock, all of which were granted in connection with the Merger, were the only options issued under the Plan and none of these options had been exercised or canceled. Each of such stock options has an exercise price of $10, which has been adjusted with respect to each option holder to reflect the cancellation of the EAR payments. 10. SUBSEQUENT EVENTS On November 1, 1995, the Company entered into an agreement with Smith's Food & Drug Centers, Inc. ("Smith's") to sublease (for approximately 23 years, with renewal options through 2043) Smith's one million square foot distribution center and creamery facility in Riverside, California and to acquire certain operating assets and inventory at that facility. The Company will pay approximately $15 million for the operating assets (plus the cost of certain additional assets based on a physical count) and will pay Smith's cost, less certain discounts, for the inventory to be acquired (which was valued at approximately $13.3 million based on inventory levels at November 12, 1995). The Company will pay annual base rent of approximately $8.8 million under the sublease. The transaction is scheduled to be completed on or before January 29, 1996. This transaction will delay and modify the previously planned integration for the existing Ralphs and Food 4 Less warehouse facilities; however, the Company believes the transaction will result in increased operating efficiencies, cost offsets and reduced capital expenditures. The acquisition of the Riverside facility, which is subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, will result in an additional fourth quarter restructuring charge, the amount of which has not yet been finalized. On October 20, 1995, the holder (the "Holder") of the 13 5/8% Senior Discount Debentures due 2005 of Holdings (the "New Discount Debentures") sold $193,363,000 principal amount of the New Discount Debentures at a price equal to 77% of the accreted value thereof. The sale of the New Discount Debentures was effected by BT Securities Corporation ("BT Securities"). BT Securities received a fee in the amount of 2% ($2.1 million) of the aggregate accreted value of the New Discount 16 19 Debentures. Holdings reimbursed the Holder for such fee and other expenses of the sale as contemplated by a registration rights agreement executed concurrently with the consummation of the Merger. 17 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On June 14, 1995, Food 4 Less Supermarkets, Inc. ("F4L Supermarkets") completed its acquisition of Ralphs Supermarkets, Inc. ("RSI") and its wholly owned subsidiary, Ralphs Grocery Company ("RGC"). The acquisition was effected through the merger of F4L Supermarkets with and into RSI (the "RSI Merger"), followed by the merger of RGC with and into RSI (the "RGC Merger" and, together with the RSI Merger, the "Merger"). The surviving corporation in the Merger was renamed Ralphs Grocery Company (the "Company"). Concurrently with the consummation of the Merger, the Company received a significant equity investment from its parent, Food 4 Less Holdings, Inc. ("Holdings") and refinanced a substantial portion of the existing indebtedness of F4L Supermarkets and RGC. See "Liquidity and Capital Resources." The Company's results of operations for the 36 weeks ended October 8, 1995 include 19 weeks of the operations of F4L Supermarkets prior to the Merger and 17 weeks of operations of the combined Company. Management believes that the Company's results of operations for periods ending after the consummation of the Merger are not directly comparable to its results of operations for periods ending prior to such date. This lack of comparability is attributable to several factors, including the size of the combined Company (since the Merger is expected to approximately double F4L Supermarkets' annual sales volume), the addition of 174 conventional stores to the Company's overall store mix and the material changes in the Company's capital structure. The Merger is being accounted for as a purchase of RGC by F4L Supermarkets. As a result, all financial statements for periods subsequent to June 14, 1995, the date the Merger was consummated, will reflect RGC's assets and liabilities at their estimated fair market values as of June 14, 1995. The purchase price in excess of the fair market value of RGC's assets will be recorded as goodwill and amortized over a 40-year period. The purchase price allocation reflected in the Company's unaudited balance sheet at October 8, 1995 is based on management's preliminary estimates. The actual purchase accounting adjustments, including adjustments to loss contingency accruals, will be determined within one year following the Merger and may vary from the preliminary estimates at October 8, 1995. At October 8, 1995, the Company operated 291 conventional supermarkets and 59 Food 4 Less warehouse stores in Southern California. It also operated 65 additional stores in Northern California and certain areas of the Midwest. Following the Merger, the Company commenced the process of converting the Company's Alpha Beta, Boys and Viva stores to the Ralphs format and also began converting selected Ralphs stores to the Food 4 Less warehouse format. As of October 8, 1995, 111 former Alpha Beta, Boys or Viva stores had been converted to the Ralphs format and four former Ralphs stores had been converted to the Food 4 Less warehouse format, with an additional six former Ralphs stores currently being converted. At October 8, 1995, the Company's bakery, creamery and deli manufacturing operations and the management of major corporate departments had been consolidated. The full integration of the Company's administrative departments is expected to be completed by the end of fiscal 1995. The previously planned integration and consolidation of the Company's warehousing and distribution facilities into three primary facilities will be delayed and modified as a result of the agreement with Smith's to lease its Riverside, California distribution and creamery facility. (See Note 10 -- "Subsequent Events.") 18 21 RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth the selected unaudited operating results of the Company for the 12 and 36 weeks ended October 8, 1995 and September 17, 1994:
12 WEEKS ENDED 36 WEEKS ENDED -------------- -------------- OCTOBER 8, 1995 SEPTEMBER 17, 1994 OCTOBER 8, 1995 SEPTEMBER 17, 1994 --------------- ------------------ --------------- ------------------ (DOLLARS IN MILLIONS) (UNAUDITED) Sales $1,207.1 100.0% $598.7 100.0% $2,688.0 100.0% $1,767.6 100.0% Gross profit 241.1 20.0 103.0 17.2 509.9 19.0 310.1 17.5 Selling, general, administrative and other, net 225.0 18.6 88.2 14.7 480.0 17.9 255.4 14.4 Amortization of excess costs over net assets acquired 10.0 0.9 1.8 0.3 16.5 0.6 5.3 0.3 Restructuring charge -- -- -- -- 63.6 2.4 -- -- Operating income (loss) 6.1 0.5 13.1 2.2 (50.2) -1.9 49.4 2.8 Interest expense 55.8 4.6 16.0 2.7 104.7 3.9 47.4 2.7 Loss (gain) on disposal of assets 0.1 -- (0.5) -0.1 (0.3) -- (0.4) -- Provision for earthquake losses -- -- -- -- -- -- 4.5 0.3 Provision for income taxes -- -- 0.9 0.2 0.5 -- 2.9 0.2 Loss before extraordinary charge (49.8) -4.1 (3.3) -0.6 (155.1) -5.8 (5.0) -0.3 Extraordinary charge -- -- -- -- 23.1 0.9 -- -- Net loss $(49.8) -4.1 $(3.3) -0.6 $(178.2) -6.6 $(5.0) -0.3
Sales. Sales per week increased $50.7 million, or 101.6%, from $49.9 million in the 12 weeks ended September 17, 1994 to $100.6 million in the 12 weeks ended October 8, 1995 and increased $25.6 million, or 52.1%, from $49.1 million in the 36 weeks ended September 17, 1994 to $74.7 million in the 36 weeks ended October 8, 1995. The increase in sales for the 12 and 36 weeks ended October 8, 1995, was primarily attributable to the addition of 174 conventional supermarkets acquired through the Merger. The sales increase was partially offset by a comparable store sales decline of 3.0% and 2.4% for the 12 and 36 weeks ended October 8, 1995, respectively. Excluding stores scheduled for divestiture or closing, the comparable store sales decreased 1.9% and 1.4% for the 12 and 36 weeks ended October 8, 1995, respectively. Management believes that the decline in comparable store sales is partially attributable to additional competitive store openings and remodels in Southern California, as well as the Company's own new store openings and conversions. Notwithstanding these factors, comparable store sales in fiscal 1995 have improved relative to recent years. Gross Profit. Gross profit increased as a percentage of sales from 17.2% in the 12 weeks ended September 17, 1994 to 20.0% in the 12 weeks ended October 8, 1995 and increased from 17.5% in the 36 weeks ended September 17, 1994 to 19.0 in the 36 weeks ended October 8, 1995. The increase in gross profit margin was primarily attributable to the addition of 174 conventional supermarkets which diluted the effect of the Company's warehouse stores (which have lower gross margins than the Company's conventional supermarkets) on its overall gross margin for the period. Gross profit during the 12 and 36 weeks ended October 8, 1995 was also impacted by certain one-time costs associated with the integration of the Company's operations. See "Operating Income (Loss)." Selling, General, Administrative and Other, Net. Selling, general, administrative and other expenses ("SG&A") were $88.2 million and $225.0 million for the 12 weeks and $255.4 million and $480.0 million for the 36 weeks ended September 17, 1994 and October 8, 1995, respectively. SG&A increased as a percentage of sales from 14.7% to 18.6% and from 14.4% to 17.9% for the same periods. The increase in SG&A as a percentage of sales was due primarily to the addition of 174 conventional supermarkets acquired through the 19 22 Merger. The additional conventional supermarkets diluted the effect of the Company's warehouse stores (which have lower SG&A than the Company's conventional supermarkets) on its SG&A margin for the period. SG&A during the 12 and 36 weeks ended October 8, 1995 was also impacted by certain one-time costs associated with the integration of the Company's operations. See "Operating Income (Loss)." Restructuring Charge. During the quarter ended July 16, 1995, the Company recorded a $63.6 million charge associated with the closing of 39 stores and one warehouse facility. Pursuant to the settlement agreement with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs stores) must be divested by December 31, 1995. Although not required by such settlement agreement, an additional 15 under-performing stores are scheduled to be closed by June 30, 1996. The restructuring charge consists of write-downs of property, plant and equipment ($40.6 million) less estimated proceeds ($16.0 million); reserve for closed stores and warehouse facility ($16.1 million); write-off of the Alpha Beta trademark ($8.3 million); write-off of other assets ($8.0 million); lease termination expenses ($4.0 million); and miscellaneous expenses ($2.6 million). The expected cash payments to be made in connection with the restructuring charge total $7.2 million. It is expected that cash payments will be made by June 30, 1996. The increase in the restructuring charge over previous estimates was due primarily to the addition of the $16.1 million reserve for the closure of the warehouse and stores. The remaining increase resulted from the identification of additional assets to be written- off. During the 36 weeks ended October 8, 1995, the Company utilized $37.5 million of the reserve for restructuring costs ($46.6 million of costs partially offset by $9.1 million of proceeds from the divestiture of stores). The charges consisted of write-downs of property, plant and equipment ($23.1 million); write-off of the Alpha Beta trademark ($8.3 million); and write-off of other assets ($6.1 million). No additional expenses are expected to be incurred in future periods in connection with these closings. The Company has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. The addition of the Riverside facility will likely result in an additional fourth quarter restructuring charge, the amount of which has not yet been finalized. (See Note 10 -- "Subsequent Events.") Operating Income (Loss). In addition to the factors discussed above, operating income for the 12 and 36 weeks ended October 8, 1995 was impacted by approximately $28 million and $58 million, respectively, for costs associated with the conversion of stores and integration of the Company's operations. Management anticipates these costs to continue during fiscal 1995 until the integration plan is completed. During the 12 and 36 week periods, these costs related primarily to (i) markdowns on clearance inventory at the Company's Alpha Beta, Boys and Viva stores being converted to the Ralphs format, (ii) the stepped-up advertising campaign promoting the store conversion program and (iii) incremental labor costs associated with the training of Company personnel following store conversions. Interest Expense. Interest expense (including amortization of deferred financing costs) was $16.0 million and $55.8 million for the 12 weeks and $47.4 million and $104.7 million for the 36 weeks ended September 17, 1994 and October 8, 1995, respectively. The increase in interest expense was primarily due to the increased indebtedness incurred in conjunction with the Merger (see "Liquidity and Capital Resources"). Provision for Earthquake Losses. On January 17, 1994, Southern California experienced a major earthquake which resulted in the temporary closure 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). The pre-tax financial impact, net of insurance recoveries, was $4.5 million. The Company reserved for this charge during the 36 weeks ended September 17, 1994. Loss Before Extraordinary Charge. Primarily as a result of the factors discussed above, the Company's loss before extraordinary charge increased from $3.3 million in the 12 weeks ended September 17, 1994 to $49.8 million in the 12 weeks ended October 8, 1995, and from $5.0 million in the 36 weeks ended September 17, 1994 to $155.1 million in the 36 weeks ended October 8, 1995. 20 23 Extraordinary Charge. The extraordinary charge of $23.1 million recorded during the quarter ended July 16, 1995 relates to the refinancing of the F4L Supermarkets Old Credit Facility, 10.45% Senior Notes due 2000, and the 13.75% Senior Subordinated Notes due 2001 and the Food 4 Less Holdings, Inc. 15.25% Senior Discount Notes due 2004 in connection with the Merger and the write-off of related debt issuance costs. LIQUIDITY AND CAPITAL RESOURCES The Company and Holdings utilized total new financing proceeds of approximately $525 million to consummate the Merger, which included the issuance of preferred stock by Holdings to a group of investors led by Apollo Advisors, L.P. for cash proceeds of approximately $140 million (the "New Equity Investment"). In addition, the Company entered into a new credit facility (the "New Credit Facility") pursuant to which, upon the closing of the Merger, it incurred $600 million under the term loan portion of the New Credit Facility (the "New Term Loans") and approximately $91.6 million under the standby letter of credit facility (the "Letter of Credit Facility"). The Company also issued $350 million aggregate principal amount of new 10.45% Senior Notes due 2004 (the "New F4L Senior Notes") and $100 million aggregate principal amount of new 11% Senior Subordinated Notes due 2005 (the "New RGC Notes") pursuant to public offerings (the "Public Offerings"). The proceeds from the New Credit Facility, Public Offerings and the New Equity Investment and the issuance by Holdings of $59.0 million initial accreted value of 13.625% Senior Discount Debentures due 2005 (the "New Discount Debentures") for cash, $41.0 million in initial accreted value of additional New Discount Debentures as Merger consideration and $131.5 million aggregate principal amount of 13.625% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller Debentures"), provided the sources of financing required to consummate the Merger and to repay outstanding bank debt of approximately $176.5 million at F4L Supermarkets and $228.9 million at RGC, to repay existing mortgage debt of $174.0 million (excluding prepayment fees) at RGC and to pay $84.4 million to the holders of the Senior Discount Notes due 2004 of Holdings (the "Discount Notes") (excluding related fees). Proceeds from the New Credit Facility and the Public Offerings were used to pay the cash portions of F4L Supermarkets' exchange offers and consent solicitations with respect to (i) the 10.25% Senior Subordinated Notes due 2002 of RGC (the "Old RGC 10.25% Notes,") and the 9% Senior Subordinated Notes due 2003 of RGC (the "Old RGC 9% Notes," and together with the old RGC 10.25% Notes, the "Old RGC Notes") (collectively, the "RGC Exchange Offers"), and (ii) the 10.45% Senior Notes due 2000 of F4L Supermarkets (the "Old F4L Senior Notes") and the 13.75% Senior Subordinated Notes due 2001 of F4L Supermarkets (the "Old F4L Senior Subordinated Notes") (collectively, the "F4L Exchange Offers," and together with the RGC Exchange Offers, the "Exchange Offers"), as well as the Change of Control Offer (as defined below) and accrued interest on all exchanged debt securities in the amount of $27.8 million, to pay $17.8 million to the holders of the RGC Equity Appreciation Rights and to loan $5.0 million to an affiliate for the benefit of such holders, to pay approximately $137.1 million of fees and expenses of the Merger and the related financing and to pay $3.4 million to purchase shares of common stock of Holdings from certain dissenting shareholders. The Company assumed certain existing indebtedness of F4L Supermarkets and RGC in connection with the Exchange Offers, pursuant to which (i) holders of the Old RGC Notes exchanged approximately $424.0 million aggregate principal amount of Old RGC Notes for an equal principal amount of New RGC Notes, (ii) holders of the Old F4L Senior Notes exchanged approximately $170.3 million aggregate principal amount of Old F4L Senior Notes for an equal principal amount of New F4L Senior Notes, and (iii) holders of the Old F4L Senior Subordinated Notes exchanged approximately $140.2 million aggregate principal amount of Old F4L Senior Subordinated Notes for an equal principal amount of new 13.75% Senior Subordinated Notes due 2005. In addition, pursuant to the terms of the indentures governing the Old RGC Notes, the consummation of the Merger required the Company to make an offer to purchase all of the outstanding Old RGC Notes that were not exchanged in the RGC Offers (the "Change of Control Offer"). The Change of Control Offer resulted in the purchase of an additional $1.1 million of outstanding Old RGC Notes. 21 24 The New Credit Facility provides for a revolving credit facility of $325 million (the "Revolving Credit Facility") less amounts outstanding under a $150 million standby Letter of Credit Facility. At October 8, 1995, there were no borrowings under the Revolving Credit Facility and $92.7 million of standby letters of credit had been issued under the Letter of Credit Facility. Under the terms of the New Credit Facility, the Company is required to repay $1.6 million of the New Term Loans in fiscal 1995. The level of borrowings under the Company's Revolving Credit Facility is dependent upon cash flows from operations, the timing of disbursements, seasonal requirements and capital expenditure activity. At November 20, 1995, the Company had $152.7 million available for borrowing under the Revolving Credit Facility. On October 11, 1995, the Company entered into an interest rate collar which effectively set interest rate limits on $300 million of the Company's bank term debt. This interest rate collar, which was effective as of October 19, 1995, limits the interest rate on $300 million to a range of 4.5% to 8.0% LIBOR for two years. This agreement satisfies interest rate protection requirements under the New Credit Facility. Cash flow from operations, amounts available under the Revolving Credit Facility and lease financing are the Company's principal sources of liquidity. The Company believes that these sources will be adequate to meet its anticipated capital expenditures, working capital needs and debt service requirements for the remainder of fiscal 1995. However, there can be no assurance that the Company will continue to generate cash flow from operations at historical levels or that it will be able to make future borrowings under the Revolving Credit Facility. During the 36 week period ending October 8, 1995, cash provided by operating activities was approximately $101.1 million compared to $63.0 million for the 36 weeks ending September 17, 1994. The increase in cash from operating activities is due primarily to changes in operating assets and liabilities for the 36 weeks ending October 8, 1995, partially offset by a decrease in operating income due primarily to the impact of certain costs associated with the integration of the Company's operations subsequent to the Merger. The Company's principal use of cash in its operating activities is inventory purchases. The Company's high inventory turnover allows it to finance a substantial portion of its inventory through trade payables, thereby reducing its short-term borrowing needs. At October 8, 1995, this resulted in a working capital deficit of $145.9 million. Cash used for investing activities was $422.2 million for the 36 weeks ended October 8, 1995. Investing activities consisted primarily of $356.3 million of acquisition costs associated with the Merger and capital expenditures of $68.5 million, partially offset by $4.1 million of sale/leaseback transactions. The capital expenditures, net of the proceeds from sale/leaseback transactions, were financed primarily from cash provided by operating and financing activities. The capital expenditures discussed above were made to build 11 new stores (8 of which had been completed at October 8, 1995), to remodel 7 stores (all of which had been completed at October 8, 1995) and convert 111 conventional format stores to the Ralphs banner in conjunction with the Merger (all of which had been completed at October 8, 1995) and convert ten Ralphs stores to the Food 4 Less warehouse format (4 of which had been completed at October 8, 1995). The Company also acquired three stores in Northern California during the 12 weeks ended October 8, 1995. The Company currently anticipates that its aggregate capital expenditures for fiscal 1995 will be approximately $141.5 million. The remaining portion of the fiscal 1995 capital expenditure budget (approximately $70 million) will be used to (i) complete construction of the 3 new stores in process at October 8, 1995 and begin construction on an additional 11 stores scheduled to open during the first half of fiscal 1996, (ii) complete the conversion of 15 supermarkets from the Ralphs format to Food 4 Less warehouse stores and (iii) complete the transition of the La Habra based data center to the data center located in the main office in Compton. Consistent with past practices, the Company intends to finance these capital expenditures primarily with cash provided by operations and through leasing transactions. At November 15, 1995, the Company had approximately $13.5 million of unused equipment leasing facilities. No assurance can be given that sources of financing for capital expenditures will be available or sufficient. However, the capital expenditure program has substantial flexibility and is subject to revision based on various factors, including changes in business conditions and cash flow requirements. Management believes that if the Company were to substantially reduce or postpone these programs, there would be no substantial impact 22 25 on short-term operating profitability. However, management also believes that the construction of new stores is an important component of its operating strategy. In the long term, if these programs were substantially reduced, management believes its operating businesses, and ultimately its cash flow, would be adversely affected. The capital expenditures discussed above do not include potential acquisitions which the Company could make to expand within its existing markets or to enter other markets. The Company has grown through acquisition in the past and from time to time engages in discussions with potential sellers of individual stores, groups of stores or other retail supermarket chains. Currently the Company is focusing on the integration of its operations following the Merger. For a discussion of the costs associated with the sublease of the Riverside warehouse see Note 10 - "Subsequent Events." Cash provided by financing activities was $366.3 million for the 36 weeks ended October 8, 1995. Financing activities consisted primarily of the following; (i) proceeds from issuance of new debt in the amount of $956.2 million including proceeds of $600 million under the New Credit Facility, proceeds of $350 million from the issuance of New F4L Senior Notes and proceeds of $100 million from the issuance of New RGC Notes net of issuance costs of $93.8 million and (ii) proceeds from cash capital contributions by Holdings of $12.1 million. These sources were partially offset by principal payments on long-term debt of $559.6 million including: $125.7 million under the old credit agreement, $228.9 million under the old RGC term loan; and $174.0 million in real estate loans. The Company is a wholly-owned subsidiary of Holdings. Holdings has $100 million initial accreted value of the New Discount Debentures and $131.5 million principal amount of the Seller Debentures outstanding. Holdings is a holding company which has no assets other than the capital stock of the Company. Holdings will be required to commence semi-annual cash payments of interest on the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of approximately $61 million per annum. Subject to the limitations contained in its debt instruments, the Company intends to make dividend payments to Holdings in amounts which are sufficient to permit Holdings to service its cash interest requirements. The Company may pay other dividends to Holdings in connection with certain employee stock repurchases and for routine administrative expenses. In connection with the resale of the New Discount Debentures by the holder thereof (the "Holder") on October 20, 1995, a fee in the amount of 2% ($2.1 million) of the aggregate accreted value of the New Discount Debentures was paid to BT Securities Corporation for effecting the sale. Holdings reimbursed the Holder for such fee and other expenses of the sale as contemplated by a registration rights agreement executed concurrently with the consummation of the Merger. See "Note 10" of the Notes to Consolidated Financial Statements. The Company is highly leveraged. At October 8, 1995, the Company's total long-term indebtedness (including current maturities) and stockholder's equity were $2.0 billion and $164.8 million, respectively. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with available borrowings under the Revolving Credit Facility and its other sources of liquidity (including lease financing), 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 cost savings and growth can be achieved. EFFECTS OF INFLATION AND COMPETITION The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, the Company has generally been able to maintain margins by adjusting its retail prices, but competitive conditions may from time to time render it unable to do so while maintaining its market share. 23 26 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. 24 27 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 Distribution Center Transfer Agreement, dated as of November 1, 1995, by and between Smith's Food & Drug Centers, Inc., a Delaware corporation, and Ralphs Grocery Company, relating to the Riverside, California property. 27. Financial Data Schedule. (b) Reports on Form 8-K None. 25 28 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Los Angeles, State of California. Dated: November 22, 1995 RALPHS GROCERY COMPANY /s/ Greg Mays -------------------------------- Greg Mays Executive Vice President Finance & Administration Chief Financial Officer 26 29 RALPHS GROCERY COMPANY INDEX TO EXHIBITS The following exhibits are filed as a separate section of this report:
EXHIBIT SEQUENTIALLY NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------- ------------------------------------------------------------------ -------------- 10.1 Distribution Center Transfer Agreement, dated as of November 1, 1995, by and between Smith's Food & Drug Centers, Inc., a Delaware corporation, and Ralphs Grocery Company, relating to the Riverside, California property.
EX-10.1 2 DISTRIBUTION CENTER TRANSFER AGREEMENT 1 EXHIBIT 10.1 DISTRIBUTION CENTER TRANSFER AGREEMENT This Distribution Center Transfer Agreement (this "Agreement"), dated as of November 1, 1995, is by and between Smith's Food & Drug Centers, Inc., a Delaware corporation ("Seller"), and Ralphs Grocery Company, a Delaware corporation ("Buyer"). RECITALS A. Seller leases certain property pursuant to that certain Lease dated as of December 21, 1993, between State Street Bank and Trust Company of California, N.A., a national banking association, as landlord (the "Master Landlord") and Seller, as tenant, as amended by that certain Amendment No. 1 to Lease Agreement dated April 1, 1994 (collectively, the "Master Lease"); B. Seller desires to sublease to Buyer those certain premises which are the subject of the Master Lease, which premises are located at 1500 Eastridge Avenue, Riverside, California (the "Premises") pursuant to the terms of a sublease agreement (the "Sublease") in the form attached hereto as Annex A. The Premises are described on Exhibit A attached to the Master Lease; C. The Premises contain approximately 911,898 square feet of warehouse space, 115,676 square feet of dairy manufacturing plant and related space, 19,505 square feet in a vehicle maintenance facility, and attendant parking areas, truck maneuvering areas and accessways. Such buildings and all other structures, including all fixtures included therein (other than trade fixtures) that constitute a portion of the Premises, are referred to herein as the "Facilities;" D. In connection with the Sublease, Buyer also desires to acquire from Seller certain trade fixtures, furnishings, equipment, tools, machinery and other property identified on Annex B attached hereto (collectively, the "Fixtures and Equipment"), which Fixtures and Equipment includes certain equipment that is owned by Seller (the "Owned Equipment"), including certain specified items, e.g., supplies-backstage, small wares-backstage, pallets, janitorial supplies/equipment, milk crates, diesel fuel, gasoline (collectively, the "Specified Equipment"), and certain equipment that is leased by Seller from third parties (the "Leased Equipment"), in each case as specified on Annex B; and E. In connection with the Sublease, Buyer further desires to acquire from Seller certain of Seller's inventory which is contained in the Facilities on the Closing Date. The categories of inventory that are to be acquired, as well as a description of certain types of products that are not to be acquired, by Buyer are identified on Annex C attached hereto (collectively, the "Inventory"). 2 NOW THEREFORE, in consideration of the foregoing and the covenants and promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Buyer and Seller agree as follows: ARTICLE 1 DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Action" shall mean any chose in action, including any claim, suit, litigation, labor dispute, arbitration, investigation or other action or proceeding. "Assets" shall mean, collectively, the Fixtures and Equipment and the Inventory set forth on Annexes B and C, respectively. "Assumed Contracts" shall mean all Contracts entered into by Seller in the ordinary course of its business relating to the Real Property or the Assets or the operations conducted by Seller thereon as described on Schedule 4.1.14 other than Excluded Contracts. "Authorities" shall mean the various governmental bodies and agencies having jurisdiction over the Assets and the Real Property. "Books and Records" shall mean all building plans, specifications and drawings, engineering, soils and geologic reports, environmental studies and other documents prepared in connection with the construction, reconstruction, maintenance, repair, management or operation of the Real Property and the Fixtures and Equipment that are in the possession or under the control of Seller and other books and records maintained in connection with the operation of the Real Property and the Fixtures and Equipment including those maintained or prepared after the date of this Agreement. "City of Riverside Documents" shall mean (i) that certain Agreement for 69kV Electrical Service dated as of August 12, 1992 by and between the City of Riverside and Seller, (ii) that certain Funding and Acquisition Agreement dated as of April 27, 1993 by and between the City of Riverside and Seller, and (iii) that certain Owner Participation Agreement dated as of March 23, 1993 by and between the Redevelopment Agency of the City of Riverside and Seller. "Closing Date" shall mean January 29, 1996 or such other date as may be designated as such by Buyer and Seller. "Contracts" shall mean all executory contracts, leases, licenses, undertakings, commitments, guarantees and warranties relating to the Assets or the Real Property or the operations conducted by Seller thereon, or any portion thereof, to which Seller is a party or by which it or the Assets or the Real Property, or any portion thereof, is bound, including, but not 2 3 limited to, Employment Contracts, maintenance contracts, and other similar contracts, but excluding the Master Lease Documents. "Court Order" shall mean any judgment, decision, consent decree, injunction, ruling or order of any federal, state or local court or governmental agency, department or authority that is binding on any person or its property under applicable law. "Damages" shall mean any and all debts, losses, claims, damages, costs, demands, fines, judgements, penalties, obligations, payments, Liabilities of every type and nature (whether known or unknown, fixed or contingent) (including, without limitation, those arising out of any Action), together with any reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) incurred in connection with any of the foregoing (including, without limitation, reasonable costs and expenses incurred in investigating, preparing or defending any Action). "Default" shall mean (1) a breach of or default under any specified agreement, (2) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any specified agreement, or (3) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any specified agreement. "Due Diligence Period" shall mean the period starting on the date of this Agreement and continuing to and including 6:00 p.m. Los Angeles time on the first business day which is thirty (30) days following the date of this Agreement. "Employment Contract" shall mean any Contract or other agreement with any employee or group of employees, including Union Contracts, to which Seller or any of its affiliates is a party and which relates to employees of Seller or any of its affiliates working at, or providing services to, the Facilities. "Encumbrances" shall mean all claims, liens, pledges, options, charges, easements, mortgages, rights-of-way, encroachments, private use restrictions or other rights of a third party in or with respect to the Real Property or the Assets, whether voluntarily incurred or arising by operation of law, including any agreement to give any such right in the future. "Environmental Laws" shall mean all Regulations which regulate or relate to the protection, clean-up and restoration of the environment; the use, treatment, storage, transportation, generation, manufacture, processing, distribution, handling or disposal of, or emission, discharge or other release or threatened release of, Hazardous Substances or otherwise dangerous substances, wastes, pollution or materials (whether, gas, liquid or solid); the preservation or protection of waterways, groundwater, drinking water, air, wildlife, plants or other natural resources, or the health and safety of persons or property, including protection of the health and safety of employees; and compensation for personal injury, property damage or damages to natural resources resulting from a Release or threatened Release. Environmental Laws shall include the Resource Conservation & Recovery Act ("RCRA"), Clean Water Act, Safe Drinking Water Act, Atomic Energy Act, Occupational Safety and Health Act, Toxic 3 4 Substances Control Act, Clean Air Act, Oil Pollution Act of 1990, Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and the Hazardous Materials Transportation Act, and the California Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65") and all other analogous or related Regulations, each as amended. "Excluded Contracts" shall mean (i) the Ross Swiss Contract; and (ii) all Employment Contracts. "Hazardous Substance" shall mean any pollutants, contaminants, chemicals, waste and any toxic, infectious, carcinogenic, reactive, corrosive, ignitible or flammable chemical or chemical compound or hazardous substance, material or waste, whether solid, liquid or gas, including any quantity of asbestos in any form, urea formaldehyde, PCB's, radon gas, crude oil or any fraction thereof, all forms of natural gas, petroleum products or by-products or derivatives, radioactive substance, waste waters, sludges, slag and any other substance, material or waste that is subject to regulation, control or remediation under any Environmental Laws. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Liabilities" shall mean any direct or indirect liability, indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or endorsement of or by any person of any type, whether accrued, absolute, contingent, matured, unmatured or other. "Master Lease Documents" shall mean the Master Lease and the related documents identified on Exhibit A-5 to the Sublease. "Permits" shall mean all licenses, permits, franchises, approvals, authorizations, consents or orders of, or filings with, any Authority, necessary or desirable for the past, present or anticipated operation of the Real Property or the Assets. "Phase I Report" shall mean that certain Preliminary Environmental Site Assessment of Smith's Food & Drug Centers Distribution Warehouse, 1500 Eastridge Avenue, Riverside, California (Job No. 93758-9) prepared by CJH Incorporated and dated November 22, 1993. "Property Taxes" shall mean all local, state, federal or foreign taxes, assessments or other government charges levied or assessed against the Real Property or the Fixtures and Equipment, or any portion or item thereof or the rents or other revenues therefrom, including all business, occupation, franchise, sales, transfer or use taxes and all interest and penalties associated therewith, but excluding all such taxes, assessments or charges measured by the net income of Seller. "Real Property" shall mean, collectively, the Premises and the Facilities. "Regulations" shall mean all laws, ordinances, rules, requirements and regulations of any Authority applicable to the ownership or operation of the Real Property or the Assets, including those relating to zoning, occupational health and safety and earthquake, fire and other hazards. 4 5 "Release" shall mean and include any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into, or migration within, the environment or the workplace of any Hazardous Substance, and otherwise as defined in any Environmental Law. "Representative" shall mean any authorized officer, director, principal, attorney, agent, employee or other representative. "Ross Swiss Contract" shall mean that certain Dairy Products Agreement dated as of June 23, 1995 by and between Seller and F&L Enterprises, Inc., a California corporation, doing business as Ross Swiss Dairies. "Taxes" shall mean any federal, state, local, foreign or other tax, levy, impost, fee, assessment or other government charge, including without limitation the Property Taxes and any income, estimated income, business, occupation, franchise, payroll, personal property, sales, transfer, use, employment, commercial rent, occupancy, franchise or withholding taxes, and any premium, including without limitation interest, penalties and additions in connection therewith. "Title Company" shall mean Stewart Title Guaranty Company. "Title Policy" shall mean that certain Policy of Title Insurance No. 9977-00235 issued by the Title Company. "Union Contract" shall mean any collective bargaining agreement or other agreement with any union to which Seller or any of its affiliates is a party and which relates to employees of Seller or any of its affiliates working at, or providing services to, the Facilities. 1.2 Other Defined Terms. The following terms are defined in the following Sections:
Term Section ---- ------- "Actual Inventory Purchase Price" 2.5.2 "Assumed Liabilities" 2.3 "Assumption Document" 3.2.3 "Claim" 9.3 "Claim Notice" 9.3 "Closing" 3.1 "Disclosing Party" 5.3.2 "Estimated Inventory Purchase Price" 2.5.1 "Excluded Liabilities" 2.4 "Facilities" Recital C "Fixtures and Equipment" Recital D "Fixtures and Equipment Purchase Price" 2.6 "including" 11.9 "Inventory" Recital E
5 6 "Inventory Service" 2.5.3 "Leased Equipment" Recital D "Master Landlord" Recital A "Master Lease" Recital A "Owned Equipment" Recital D "Purchase Price" 2.5.2 "Premises" Recital B "Receiving Party" 5.3.2 "Service and Supply Agreement" 8.3 "Specified Equipment" Recital D "Sublease" Recital B "to the best knowledge of" 11.9
ARTICLE 2 EXECUTION OF SUBLEASE; PURCHASE AND SALE 2.1 Execution of Sublease. Upon the terms and subject to the conditions contained herein and therein, at the Closing, Seller and Buyer shall each execute and deliver the Sublease to the other party. 2.2 Transfer of Assets. Upon the terms and subject to the conditions contained herein, at the Closing, Seller will sell, convey, transfer, assign and deliver to Buyer, and Buyer will acquire from Seller, the Owned Equipment and the Inventory free and clear of all Encumbrances. 2.3 Assumption of Liabilities. Upon the terms and subject to the conditions contained herein, at the Closing, Buyer shall assume the following, and only the following, Liabilities (the "Assumed Liabilities"): 2.3.1 All Liabilities resulting from Buyer's ownership, leasing or operation of the Assets or the Real Property from and after the Closing Date. 2.3.2 If Buyer has delivered timely notice directing Seller to terminate the Ross Swiss Contract pursuant to Section 5.2.2 and Seller has in fact terminated such contract on or before December 1, 1995, all Liabilities accruing, arising out of, or relating to the Ross Swiss Contract to the extent that any such Liabilities shall arise after the Closing Date, but not including any Liability for any Default under the Ross Swiss Contract occurring on or prior to the Closing Date. 2.3.3 All Liabilities accruing, arising out of, or relating to events or occurrences happening after the Closing Date under the Assumed Contracts, but not including any Liability for any Default under any such Assumed Contract occurring on or prior to the Closing Date. 6 7 2.4 Excluded Liabilities. Notwithstanding any other provision of this Agreement, and except for the Assumed Liabilities expressly specified in Section 2.3, Buyer shall not assume, or otherwise be responsible for, any Liabilities of Seller, whether liquidated or unliquidated, or known or unknown, arising out of Seller's ownership, leasing or operation of the Assets or the Real Property on or prior to the Closing Date ("Excluded Liabilities"), which Excluded Liabilities include, without limitation: 2.4.1 Any Liability of Seller with respect to any Taxes, other than the Taxes to be apportioned or paid by Buyer hereunder; 2.4.2 Any Action against Seller or any Action which adversely affects the Assets or the Real Property and which shall have been asserted on or prior to the Closing Date or which shall be based upon facts or circumstances which occurred or arose on or prior to the Closing Date; 2.4.3 Any Liability to or in respect of any employees or former employees of Seller (or any affiliate of Seller) including without limitation (i) any Employment Contract, whether or not written, between Seller (or any affiliate of Seller) and any person or entity, (ii) any Liability under any employee plan at any time maintained, contributed to or required to be contributed to by or with respect to Seller (or any affiliate of Seller) or under which Seller (or any affiliate of Seller) may incur any Liability, or any contributions, benefits or Liabilities therefor, or any Liability with respect to Seller's (or any such affiliate's) withdrawal or partial withdrawal from or termination of any employee plan and (iii) any claim of an unfair labor practice, or any claim under any state unemployment compensation or worker's compensation law or regulation or under any federal or state employment discrimination law or regulation, which shall have been asserted on or prior to the Closing Date or is based on acts or omissions which occurred on or prior to the Closing Date; 2.4.4 Any Liability arising before the Closing Date from any injury to or death of any person or damage to or destruction of any property, whether based on negligence, breach of warranty, strict liability, enterprise liability or any other legal or equitable theory; 2.4.5 Any Liability associated with any Excluded Contract; and 2.4.6 Any of Seller's liabilities or obligations resulting from entering into, performing its obligations under or consummating the transactions contemplated by, this Agreement. 2.5 Purchase Price for Inventory. 2.5.1 Estimated Price and Settlement. Five (5) business days before the Closing Date, Seller shall provide Buyer with a written estimate of the purchase price payable for the Inventory (the "Estimated Inventory Purchase Price"), and Buyer shall pay such amount at the Closing. Within five (5) business days after determination of the Actual Inventory 7 8 Purchase Price pursuant to Section 2.5.2, any amounts due from Seller to Buyer, if the Estimated Inventory Purchase Price is greater than the Actual Inventory Purchase Price, or from Buyer to Seller, if the Actual Inventory Purchase Price is greater than the Estimated Inventory Purchase Price, shall be paid by wire transfer in immediately available funds to an account designated by the payee. 2.5.2 Actual Inventory Purchase Price. The "Actual Inventory Purchase Price" (collectively with the Fixtures and Equipment Purchase Price, the "Purchase Price") shall be determined within seven (7) calendar days after the Closing Date and shall be based on Seller's book cost of the actual amount of the Inventory to be acquired by Buyer as of the Closing Date, except for those categories of Inventory designated on Annex C which shall be based on Seller's book cost less seven percent (7.0%). 2.5.3 Inventory Procedures. The quantities of Inventory to be purchased and sold hereunder shall be determined by an itemized inventory to be taken at such time as Buyer and Seller mutually agree and shall be adjusted to book as of the Closing Date based upon a physical inventory pursuant to which all Inventory will be counted as to quantity by personnel of Seller and Buyer using procedures mutually agreed to by Buyer and Seller to take inventories of the type of Inventory being counted (which physical inventory shall be adjusted, if necessary, for any inventories added or removed in the ordinary course of business after the date of such physical inventory and before the Closing Date); provided, however, that if Buyer and Seller shall mutually agree, an outside inventory service or services (the "Inventory Service") mutually selected by Seller and Buyer may be selected to take such inventory. Both Buyer and Seller will have the right to have Representatives present to observe the physical inventories. Any disputes as to the physical count, usability or salability of any item of Inventory will, if possible, be resolved while such physical inventory is being taken. Any unresolved disputes regarding the foregoing not resolved by the Closing Date will be separately listed and settled as soon as expeditiously practicable thereafter by the parties or by another independent third party mutually acceptable to both parties, or if they are unable to agree then by the Inventory Service. The determination of any third party so engaged shall be final and binding on the parties. No failure to resolve any such matters shall prevent the Closing or payment of the Purchase Price. If Buyer so requests, the physical inventory contemplated by this Section 2.5.3 shall also include a physical count of the Specified Equipment identified on Annex B to verify the unit counts. 2.6 Purchase Price for Fixtures and Equipment. On the Closing Date, Buyer shall pay to Seller in immediately available funds the sum of $15.0 million for the Fixtures and Equipment other than the Specified Equipment, plus an additional amount reflecting Seller's book cost for the Specified Equipment (collectively, the "Fixtures and Equipment Purchase Price"). 2.7 Prorations. 2.7.1 In General. Except as otherwise specifically provided herein, all periodic charges payable or receivable with respect to the Real Property, the Assets or the operations with respect to any of such items, shall be apportioned between Buyer and Seller so that all such items attributable to the period prior to the Closing Date shall be for the account of Seller, and 8 9 all such items attributable to the period on and after the Closing Date shall be for the account of Buyer. The items to be so apportioned shall include: (1) Property Taxes and personal Property Taxes; (2) Water, gas, electricity and other utility charges (which charges shall be based, to the extent possible, on actual utility meter readings); (3) Payments and amounts payable under Assumed Contracts; (4) Fees and charges under Permits to be assigned to Buyer or which run with the Real Property or the Assets; and (5) Other similar items and deposits, costs and charges related to the operation of the Real Property or the Assets. 2.7.2 Methodology. (1) Property Taxes shall be apportioned on the basis that there is allocated to the period prior to the Closing Date the Property Taxes due and payable by Seller for the fiscal year of the applicable taxing authority in which the Closing Date occurs, or for periods prior thereto, determined on the basis of the number of days which have elapsed from the first day of such fiscal year to, but not including, the Closing Date, whether or not the same shall be payable prior to the Closing Date. If as of the Closing Date (i) the actual tax bills for the fiscal year or years in question are not available or (ii) the applicable property tax rate or rates for the current tax year is or are not established by the Closing Date, and as a result thereof the Property Taxes to be apportioned hereunder cannot be ascertained, then the Property Taxes shall be estimated on the basis of the applicable rates and assessed valuations in effect for the previous fiscal year, taking into account any known changes, and such estimate shall be used for purposes of making an interim apportionment on the Closing Date. Increases in Property Taxes resulting from a reassessment as of or after the Closing Date attributable to the transactions contemplated hereunder or resulting from Buyer's actions with respect to the Real Property or the Assets, shall be allocated entirely to the period including and after the Closing Date. (2) All utilities shall be apportioned as of the Closing Date using the per diem rate calculated from the latest available billings or other operating history of the Real Property or the Assets furnished by Seller. Utility security deposits, if any, shall, at the direction of Buyer with the concurrence of each utility, either be retained by Seller without adjustment or delivered to Buyer and reimbursed in full to Seller. (3) Seller shall be entitled to a credit for the amount of any payments made by Seller on any of the Assumed Contracts which relate to the period on and after the Closing Date. Buyer shall be entitled to a credit for the amount of any unpaid liabilities (e.g., payments in arrears) incurred by Buyer under any of the Assumed 9 10 Contracts which relate to the period prior to the Closing Date. Before either party shall make any payment in respect of an Assumed Contract which payment would otherwise be the responsibility of the other party under this Agreement, the party making such payment shall first give notice thereof to the other party. 2.7.3 Payment. Buyer and Seller shall use their respective best efforts to reach final agreement on the amounts of all the apportionments contemplated by this Section 2.7 at least five (5) days prior to the Closing Date. If such an agreement is reached, such apportionments shall not be adjusted after the Closing Date. 2.7.4 Adjustments. If Buyer and Seller do not reach final agreement on the apportionments contemplated by this Section 2.7 prior to the Closing Date, then Buyer and Seller shall use their respective best efforts to agree on reasonable estimates of the amounts of such apportionments on or before the Closing Date, which estimates shall be subject to an initial post-closing adjustment within thirty (30) days after the Closing Date based upon actual receipts and expenditures. If any of the prorations, apportionments or computations required under this Section 2.7 shall require further correction or adjustment, then the parties shall make the appropriate adjustments promptly when accurate information becomes available and either Buyer or Seller shall be entitled to an adjustment to reflect the same; provided, however, that no party hereto shall be entitled to any such adjustment unless it makes written demand on the other party hereto prior to the first anniversary of the Closing Date. Any corrected adjustment shall be paid in cash to the party entitled thereto. 2.8 Closing Costs. 2.8.1 Taxes. Buyer shall pay the cost of all transfer taxes, all sales, use or other taxes imposed by reason of the execution of the Sublease or the transfer of the Fixtures and Equipment and the Inventory, including any deficiency, interest or penalty asserted with respect thereto. 2.8.2 Permits. Buyer shall pay all out-of-pocket fees and costs associated with obtaining any required new Permits or obtaining the transfer of any existing Permits that may be lawfully transferred. 2.8.3 Other. Buyer and Seller shall each pay their own out-of-pocket fees and costs related to the consummation of this Agreement. ARTICLE 3 CLOSING 3.1 Time and Place. The pre-closing of the transactions contemplated hereunder shall be held at 9:00 a.m. Los Angeles time on the business day preceding the Closing Date at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California 10 11 90071. The closing of the transactions contemplated herein (the "Closing") shall be held at 9:00 a.m. local time on the Closing Date at the aforementioned offices of Latham & Watkins, unless the parties hereto otherwise agree. 3.2 Deliveries at Closing. 3.2.1 Instruments and Possession. To effect the transactions referred to in Sections 2.1, 2.2 and 2.3 hereof, Seller shall, at the Closing, execute and deliver to Buyer: (1) The Sublease substantially in the form attached hereto as Annex A and a memorandum thereof in a form suitable for recordation in the County of Riverside; (2) One or more bills of sale, in the form of Annex E hereto, conveying all of Seller's Fixtures and Equipment and the Inventory included in the Assets; (3) One or more assignments, in the form of Annex D hereto, of all of Seller's right, title and interest in and to the Assumed Contracts, or if such Assumed Contracts are not assignable, Seller shall provide to Buyer the economic benefits of such Assumed Contracts; (4) One or more assignments of the Permits which may be assigned; (5) One or more assignments of any and all warranties and guarantees belonging to Seller pertaining to the Real Property or the Assets, to the extent assignable; and (6) The originals, or true and complete copies if the originals are unavailable, of the Master Lease Documents and the Assumed Contracts and true and correct copies of the Books and Records. 3.2.2 Funds. At the Closing, Buyer shall pay to Seller the Estimated Inventory Purchase Price and the Fixtures and Equipment Purchase Price by wire transfer of immediately available funds to an account designated by Seller; provided, however, that the amount of the Estimated Inventory Purchase Price shall be subject to adjustment as set forth in Section 2.5. 3.2.3 Assumption Document. Upon the terms and subject to the conditions contained herein, at the Closing Buyer shall deliver to Seller an instrument of assumption substantially in the form attached hereto as Annex F, evidencing Buyer's assumption, pursuant to Section 2.3, of the Assumed Liabilities (the "Assumption Document"). 3.2.4 Form of Instruments. To the extent that a form of any document to be delivered hereunder is not attached as an annex hereto, such documents shall be in form and substance, and shall be executed and delivered in a manner, reasonably satisfactory to the parties. 11 12 3.2.5 Certificates. Each party shall furnish the other with such certificates of its officers and others to evidence satisfaction of the conditions provided in Articles 4 and 5 as the other may reasonably request. 3.2.6 Consents. Subject to Section 7.2, Seller shall deliver all Permits, or the benefits of such Permits, and any other third-party consents required for the valid transfer of the Real Property or the Assets as contemplated by this Agreement. ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Of Seller. Seller hereby represents and warrants to Buyer as follows, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct: 4.1.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as it is presently being conducted and to lease and sublease the Real Property and to sell the Assets. Seller is duly qualified to do business as a foreign corporation and is in good standing in the State of California. 4.1.2 Authority. Seller has all requisite corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and the Sublease, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Sublease by Seller and the consummation by Seller of the transactions contemplated hereby and thereby have been duly approved by the board of directors of Seller. No other corporate proceedings on the part of Seller are necessary to authorize this Agreement and the Sublease and the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Seller and is a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms. Upon execution and delivery, the Sublease will be a legal, valid and binding obligation of Seller enforceable against it in accordance with its terms. 4.1.3 Consents and Approvals. Except as set forth on Schedule 4.1.3 hereto and other than in connection with or in compliance with the provisions of the HSR Act, no notice to, declaration, filing or registration with, or authorization, consent or approval of, or permit from, any Authority, or any third person, is required to be made or obtained by Seller in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. Without limiting any of the foregoing, Schedule 4.1.3 identifies those consents, approvals and authorizations that are required in order for Buyer to assume the Assumed Contracts. 4.1.4 Premises. The Premises conform in all material respects to the description thereof included in Exhibit A attached to the Master Lease. 12 13 4.1.5 Title. (1) Seller has and will transfer good and marketable title to the Fixtures and Equipment (other than the Leased Equipment) and the Inventory and upon the consummation of the transactions contemplated hereby, Buyer will acquire good and marketable title to all of the Fixtures and Equipment (other than the Leased Equipment) and the Inventory, free and clear of any Encumbrances. Seller has a valid leasehold interest in the Leased Equipment. (2) Seller leases the Real Property subject only to (i) liens for current Property Taxes, (ii) materialmen's, mechanics', carriers', workmen's, repairmen's or other like liens arising in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings, (iii) Encumbrances which are identified in the Title Policy, (iv) Encumbrances arising out of the City of Riverside Documents, (v) Encumbrances arising out of the Sale/Leaseback transaction documents referred to in Recital C of the Sublease, and (vi) other Encumbrances arising since the date of the Title Policy which do not, individually or in the aggregate, (x) materially breach any covenant, representation or warranty of Seller contained herein, (y) materially adversely affect the value of the Real Property or any lawful use of the Real Property or (z) render title to the Real Property unmarketable. 4.1.6 Inventory. The Inventory has been maintained in accordance with the regular business practices of Seller and consists of new and unused items of a quality and quantity usable or saleable in the ordinary course of business. 4.1.7 Condition. To the best knowledge of Seller, the Facilities and the Fixtures and Equipment are in good condition and repair and the Facilities are free of structural or mechanical defects other than any defects which would, individually or in the aggregate, not have a material adverse effect on the ownership or operation of the Real Property or the Assets. The Fixtures and Equipment have been maintained in accordance with the regular business practices of Seller. To the best knowledge of Seller, the mechanical systems, including the elevators, plumbing, heating, air conditioning, ventilation and life safety systems, and the electrical system which constitute a portion of the Facilities, and each of them, are in good operating condition and repair and, to the best knowledge of Seller, are not in need of any material capital or other improvement. To the best knowledge of Seller, the Facilities and the Fixtures and Equipment conform in all material respects to all applicable Regulations (including Environmental Laws) relating to their construction, use and operation. 4.1.8 Absence of Defaults. All of the Assumed Contracts, the Master Lease Documents and the City of Riverside Documents to which Seller is party or by which it or any of the Assets or Real Property is bound or affected are valid, binding and enforceable in accordance with their terms. Seller has fulfilled, or taken all action necessary to enable it to fulfill when due, all of its material obligations under each of such Assumed Contracts, Excluded Contracts and the Master Lease Documents. All parties to such Assumed Contracts, Excluded Contracts and the Master Lease Documents have complied in all material respects with the provisions thereof, no party is in Default thereunder and no notice of any claim of Default has 13 14 been given to Seller. With respect to the Master Lease Documents, Seller has not received any notice of cancellation or termination under any option or right reserved to the lessor or any other party thereto. 4.1.9 Permits. To the best knowledge of Seller, Seller has, and at all times has had, all Permits required under any Regulation (including Environmental Laws) in the operation of the Real Property and the Assets or with respect to its interests in the Real Property or the Assets, and owns or possesses such Permits free and clear of all Encumbrances, except such Permits the failure of which to obtain would not have a material adverse effect on the ownership or operation of the Real Property and the Assets. Seller is not in Default, nor has it received any notice of any claim of Default, with respect to any such Permit. To the best knowledge of Seller and except as otherwise governed by law, all such Permits are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees and will not be adversely affected by the completion of the transactions contemplated by this Agreement. 4.1.10 Utilities. The Real Property is supplied with all utilities, including water, sewage disposal, electricity, gas and telephone, and other services necessary for the operation thereof as the same is currently operated. 4.1.11 Materials. To the best knowledge of Seller, the information contained in the materials provided to Buyer pursuant to Section 5.1.1 hereof was, when delivered, accurate in all material respects and, except to the extent that the information contained in any such materials has been superseded by information contained in subsequent materials which have been provided to Buyer before the Closing Date, remains accurate in all material respects. 4.1.12 Independent Facility. The Real Property is an independent unit which currently does not and as of the Closing Date will not rely on any other facilities, other than public utilities, to fulfill any zoning, building code or other municipal or governmental requirement. Conversely, no other facility relies on any part of the Real Property to fulfill any zoning, building code or other municipal or governmental requirement. The Real Property is assessed by local property assessors as a tax parcel or parcels separate from all other tax parcels. 4.1.13 Compliance with Law. (1) To the best knowledge of Seller, the Real Property is in compliance with all Regulations, including Environmental Laws, and all Court Orders applicable to the Real Property or the operation thereof by Seller; provided, however, that such representation with respect to the relevant building code or codes is limited to compliance as of the date of construction of the Facilities. Seller has received no notice at any time that it is or was claimed to be in violation of, or that the Real Property or the Assets was not in compliance with, the provisions of any Environmental Law. Seller has received no notice that it is not currently in compliance with any other Regulations or that it must make improvements or modifications to the Real Property in order to be or to become in such compliance. Seller has no reason to believe that any presently 14 15 existing facts or circumstances are likely to result in a violation of any Regulation, including any Environmental Law. (2) To the best knowledge of Seller and except as referenced in the Phase I Report or as set forth on Schedule 4.1.13, there are no Hazardous Substances being used, generated, treated, stored, transported or disposed on, under, about or from the Real Property, or any portion thereof which is not in material compliance with all applicable Environmental Laws. To the best knowledge of Seller, the Real Property has at all times when owned, leased or operated by Seller, been owned, leased and operated in compliance with all Environmental Laws and in a manner that will not give rise to any Liability under any Environmental Laws. (3) To the best knowledge of Seller, and except as referenced in the Phase I Report or as set forth on Schedule 4.1.13, (i) no prior owner, lessee or operator of the Real Property has acted in a manner that would give rise to any Liability under any Environmental Law, (ii) there is not now and there has not been any Hazardous Substance used, generated, treated, stored, transported, disposed of or otherwise existing on, under, about or from the Real Property, or any portion thereof which is not in material compliance with all applicable Environmental Laws, and (iii) there is not now and there has never been any underground storage tank or pipeline located on, in or under the Real Property. (4) True, complete and correct copies of all environmental audits or assessments which have been conducted with respect to the Real Property by Seller or any environmental consultant or engineer engaged by Seller for such purpose have previously been delivered to Buyer or will be so delivered in accordance with the provisions of this Agreement. 4.1.14 Contracts, Excluded Contracts and Assumed Contracts. Schedule 4.1.14 hereto identifies (i) all Contracts that (a) would not be cancelable by Seller or Buyer (if such Assumed Contract has been assumed by Buyer) on 30 days prior written notice without cost or penalty, or (b) involve aggregate annual payments or other expenditures in excess of $25,000, and (ii) all Excluded Contracts. True and complete copies of the Contracts and Excluded Contracts identified thereon, including all amendments and supplements thereto, have previously been delivered to Buyer or will be so delivered to Buyer within a reasonable amount of time before the end of the Diligence Period. With respect to the Assumed Contracts and the Excluded Contracts, (A) such contracts have been negotiated in the ordinary course of business at arms' length without any disproportionate deferral of payments in a manner that would unduly burden Buyer; (B) all of such Assumed Contracts are valid and in full force and effect; and (C) Seller will have duly performed all of the obligations under such Assumed Contracts and Excluded Contracts that were required to be performed by Seller thereunder prior to the Closing Date. 4.1.15 Litigation. Except as set forth in Schedule 4.1.15 hereto, there is no Action pending, or, to the best knowledge of Seller, filed but not yet served upon Seller, threatened or anticipated relating to or affecting (i) Seller that would have a material adverse 15 16 effect on Seller's ability to perform its obligations under this Agreement, the Sublease or the Master Lease Documents, (ii) the Assets or the Real Property, or (iii) the transactions contemplated hereunder. There are no pending or, to the best knowledge of Seller, threatened condemnation proceedings with respect to the Real Property. 4.1.16 Brokers. Neither Seller nor any of its officers, directors, employees, shareholders or affiliates has employed or made any agreement with any broker, finder or similar agent or any person or firm which will result in the obligation of Buyer or any of its affiliates to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby. 4.1.17 No Other Agreements of Seller to Sell the Real Property or the Assets. Neither Seller nor any affiliate of Seller has any commitment or legal obligation, absolute or contingent, to any other person or firm other than Buyer to sell or otherwise transfer the Real Property or the Assets, to sell or otherwise transfer all or substantially all of the assets of Seller or to enter into any agreement with respect thereto. 4.1.18 Ability to Perform. Seller is not aware of any fact, condition or circumstance that would be likely to impair its future ability to perform its obligations under this Agreement, the Sublease or the Master Lease Documents. 4.1.19 Master Lease Documents, Assumed Contracts. As of the Closing Date, Seller has provided to Buyer true, correct and compete copies of all Master Lease Documents and all Assumed Contracts, including all amendments or additions thereto. 4.1.20 Material Misstatements or Omissions. No representation or warranty by Seller hereunder contains or will contain any untrue statement of a material fact, or omits or will omit any material fact necessary to make the statements or facts contained therein not misleading. Seller has disclosed to Buyer all events, conditions and facts known to Seller materially affecting the Assets or the Real Property. 4.2 Of Buyer. Buyer hereby represents and warrants to Seller as follows, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct: 4.2.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as it is presently being conducted and to sublease the Real Property and to own the Assets. Buyer is duly qualified to do business as a foreign corporation and is in good standing in the State of California. 4.2.2 Authority. Buyer has all requisite corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and the Sublease, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Sublease by Buyer and the consummation by Buyer of the transactions contemplated hereby and thereby have 16 17 been duly approved by the board of directors of Buyer. No other corporate proceedings on the part of Buyer are necessary to authorize this Agreement and the Sublease and the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Buyer and is a legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. Upon execution and delivery, the Sublease will be a legal, valid and binding obligation of Buyer enforceable against it in accordance with its terms. 4.2.3 Consents and Approvals. Except as set forth on Schedule 4.2.3 hereto and other than in connection with or in compliance with the provisions of the HSR Act, no notice to, declaration, filing or registration with, or authorization, consent or approval of, or permit from, any Authority or any third person is required to be made or obtained by Buyer in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. 4.2.4 Litigation. Except as set forth in Schedule 4.2.4 hereto, there is no Action pending, or, to the best knowledge of Buyer, filed but not yet served upon Buyer, threatened or anticipated relating to or affecting (i) Buyer that would have a material adverse effect on Buyer's ability to perform its obligations under this Agreement or the Sublease, (ii) the Assets or the Real Property, or (iii) the transactions contemplated hereunder. 4.2.5 Brokers. Neither Buyer nor any of its officers, directors, employees, shareholders or affiliates has employed or made any agreement with any broker, finder or similar agent or any person or firm which will result in the obligation of Seller or any of its affiliates to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby. 4.2.6 Ability to Perform. Buyer is not aware of any fact, condition or circumstance that would be likely to impair its future ability to perform its obligations under this Agreement, the Sublease or any of the Assumed Contracts. 4.2.7 Material Misstatements or Omissions. No representation or warranty by Buyer hereunder contains or will contain any untrue statement of a material fact, or omits or will omit any material fact necessary to make the statements or facts contained therein not misleading. 4.3 In General. 4.3.1 Survival. The representations and warranties contained in Sections 4.1 and 4.2 hereof shall survive until the fourth anniversary of the Closing Date. 4.3.2 Merger. No representation or warranty contained in Sections 4.1 or 4.2 hereof shall be deemed to have merged into the Sublease or any other conveyancing instrument, and no such instrument shall be deemed to supersede, eliminate or modify any of such representations or warranties. 17 18 4.3.3 Waiver. No investigation by Buyer, whether pursuant to Sections 5.2.1, 6.2.7 hereof or otherwise, and no receipt of information by Buyer or attributable to Buyer, shall constitute a waiver of, or otherwise affect, any representation or warranty of Seller hereunder. ARTICLE 5 CERTAIN COVENANTS 5.1 Of Seller. 5.1.1 Inspection and Deliveries. Seller shall permit Buyer to conduct, in the manner and subject to the limitations set forth in Section 5.2.1 hereto, inspections of the Assets and the Real Property and inspections of the Books and Records of Seller with respect to the Assets and the Real Property to the extent that such Books and Records are in the possession or under the control of Seller. In addition, Seller shall provide to Buyer (i) as soon as practicable and in any event within ten (10) days following the date of this Agreement, accurate and complete copies of all engineering, soils and geological, environmental and marketing reports and studies with respect to the Assets and the Real Property in its possession or under its control and (ii) such other financial, operating and other information pertaining to the Assets and the Real Property as Buyer may reasonably request, including the Contracts, the Master Lease Documents, the City of Riverside Documents and the Books and Records. Schedule 5.1.1 identifies certain information previously requested by Buyer that has not yet been delivered by Seller. Seller agrees to use its best efforts to provide such information to Buyer within the five (5) days following the date of this Agreement. 5.1.2 Maintenance of Real Property and Assets. Seller shall operate the Assets and the Real Property in the ordinary course of business and in a manner consistent with past practice. Without limiting the generality of the foregoing, Seller shall (i) maintain the Facilities and the Fixtures and Equipment in substantially their current state of repair, normal wear and tear excepted, (ii) maintain the Inventory that is to be acquired by Buyer hereunder in a manner consistent with Seller's past practices and normal course of business (other than Seller's normal replenishment practices), (iii) maintain insurance covering the Real Property and the Fixtures and Equipment of the same nature and at the same level as that in effect on the date hereof and (iv) replace in accordance with past practice inoperable, worn-out or obsolete Fixtures and Equipment. 5.1.3 Leases and Contracts. (1) Buyer acknowledges that Seller shall have the right to enter into additional Contracts in the ordinary course of business prior to the Closing Date which may be in effect following the Closing Date. In connection with any such proposed Contract, Seller shall (i) deliver a draft thereof to Buyer prior to entering into the same and (ii) obtain Buyer's prior written consent to such Contract prior to its execution by Seller, which consent shall not be unreasonably withheld or delayed. Buyer shall reimburse Seller, as billed, for all capital expenditures made by Seller pursuant to 18 19 Contracts approved by Buyer under this Section 5.1.3 within five (5) days following the Closing Date. (2) Subject to Section 5.2.2, Seller shall not modify, amend, cancel or extend the term of any Contract without the prior written consent of Buyer, which such consent shall not be unreasonably withheld or delayed. (3) Seller shall use its best efforts to obtain any consents required in order for Buyer to assume the Assumed Contracts. (4) Seller shall use its best efforts to obtain a non-disturbance agreement for the benefit of Buyer and any lenders to Buyer from the Master Landlord and the Indenture Trustee (as defined in the Master Lease). 5.1.4 Employees. Seller has notified Buyer of, and has made available true and correct copies of, all Employment Contracts and, in its reasonable discretion, Seller has further provided Buyer with certain additional information relating to Seller's employees used in the operation of Seller's business at the Facilities. Buyer shall use its best efforts to review such information and to consider whether such employees of Seller, if any, can be accommodated into the operations Buyer intends to conduct at the Facilities after the Closing Date; provided, however, Seller agrees and acknowledges that Seller shall be responsible for terminating the employment, or relocating, its employees and that Buyer shall have no obligation to retain and/or rehire any such employees. Seller shall assume complete responsibility for all notices required under, and all liabilities accruing to Seller or to Buyer under, the federal Worker Adjustment and Retaining Notification Act ("WARN Act") in connection with this transaction. Seller currently employs approximately 350 employees at the Premises. 5.1.5 Delivery of Possession. Effective as of the Closing Date and subject to the conditions set forth in this Section 5.1.5, Seller shall deliver possession of the Real Property to Buyer. As of the Closing Date, the Real Property shall be in a condition that is suitable for occupancy by Buyer and Seller shall have removed therefrom all of its rolling stock and any personal property, and shall have used its best efforts to remove any inventory, not included in the Assets being acquired by Buyer hereunder. Notwithstanding the foregoing, to the extent that Seller, after using its best efforts, is unable to remove all such inventory, Buyer shall allow Seller to store in the Facilities, and have reasonable access to the Real Property to remove, any inventory not to be acquired by Buyer hereunder. Buyer shall cooperate with Seller to provide assistance with the loading of such inventory on Seller's trucks at Buyer's direct labor cost therefor. All such inventory shall be removed within thirty (30) days following the Closing Date. 5.2 Of Buyer. 5.2.1 Inspections. Buyer shall conduct or cause to be conducted the tests and inspections contemplated in Sections 5.1.1 and 6.2.7 hereof only (i) during regular business hours, (ii) upon reasonable advance notice to Seller, (iii) in a manner which will not unduly disturb or disrupt the activities of Seller or unduly interfere with the operation of, access to or 19 20 egress from the Real Property and, (iv) if required by Seller, when accompanied by representatives of Seller. Upon completion of any test, Buyer shall promptly repair and restore any portion of the Real Property and the Assets damaged by such test to the condition existing immediately prior to the test; provided, however, that if repair or restoration is impracticable, Buyer shall be entitled to compensate Seller for such damage in lieu of repairing or restoring the same. If the transactions contemplated hereunder fail to occur, Buyer shall provide to Seller, at Seller's request, copies of any third-party engineering, environmental or soils or geologic reports or studies regarding the Real Property and the Assets made for Buyer prior to the Closing Date upon receipt of payment from Seller of one-half ( 1/2) of the out-of-pocket costs and expenses incurred by Buyer in obtaining such reports and studies. 5.2.2 Ross Swiss Contract Election. On or before November 25, 1995, Buyer shall deliver to Seller notice directing Seller to either terminate or continue the Ross Swiss Contract in effect. Seller shall thereafter either terminate or continue the Ross Swiss Contract pursuant to the terms of Buyer's aforementioned notice. In the event that Buyer (i) timely directs Seller to continue the Ross Swiss Contract or (ii) fails to give timely give such notice, then the Ross Swiss Contract shall be treated as an Assumed Contract for the purposes of Section 2.3 hereof and the operation of this Agreement and the Ross Swiss Contract shall be set forth on Schedule 4.1.14 as an Assumed Contract. In such event Buyer shall pay to Seller at Closing the cost of the milk crates obtained in connection with the Ross Swiss Contract. In the event Buyer gives timely notice directing Seller to terminate the Ross Swiss Contract, then (i) the Ross Swiss Contract shall not be an Assumed Contract and, if Seller has in fact terminated such contract on or before December 1, 1995, the Ross Swiss Contract shall be treated as an Assumed Liability pursuant to Section 2.3.2; or (ii) if Seller has not terminated the Ross Swiss Contract, the Ross Swiss Contract shall not be an Assumed Contract and shall not be an Assumed Liability. 5.3 Covenants of Buyer and Seller. Buyer and Seller each covenant with the other as follows: 5.3.1 Further Assurances. Upon the terms and subject to the conditions contained herein, the parties agree, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing. Without limiting the foregoing, the parties agree to use their respective best efforts (A) to obtain all necessary waivers, consents and approvals from other parties to the Assumed Contracts; provided, however that Buyer shall not be required to make any payments, commence litigation or agree to modifications of the terms thereof in order to obtain any such waivers, consents or approvals, (B) to obtain all necessary Permits as are required to be obtained under any Regulations, (C) to defend all Actions challenging this Agreement or the consummation of the transactions contemplated hereby, (D) to lift or rescind any injunction or restraining order or other Court Order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, (E) to give all notices to, and make all registrations and filings with third 20 21 parties, including without limitation submissions of information requested by governmental authorities, and (F) to fulfill all conditions to this Agreement. As soon as practicable but in no event later than ten (10) calendar days after the execution and delivery of this Agreement, Buyer and Seller shall make all filings required under the HSR Act. In addition, Seller and Buyer shall commence all actions required under this Section 5.3.1 by a date which is early enough to allow the transactions contemplated hereunder to be consummated by the Closing Date. 5.3.2 Confidentiality. (1) Subject to the requirements of law, including any Environmental Law, and except with respect to information in the public domain or lawfully acquired on a non-confidential basis from others, a party receiving information hereunder ("Receiving Party") shall keep confidential, and shall use its best efforts to cause its Representatives to keep confidential, all information concerning the Real Property or the Assets obtained from the party disclosing such information ("Disclosing Party"), including without limitation any information obtained pursuant to Section 6.2.7 hereof, until such time as such information is otherwise publicly available. The Receiving Party shall use its best efforts to limit such information to its employees and its other Representatives who agree to comply with the provisions of this subsection (1), who are participating in or overseeing the due diligence contemplated hereunder. (2) If the Receiving Party is required to disclose information which is required to be kept confidential hereunder, the Receiving Party shall provide the Disclosing Party with prompt notice of such request so that Seller may seek an appropriate protective order. In the absence of a protective order, the Receiving Party shall be entitled to disclose such information but shall use its best efforts to (i) furnish only that portion of such information which is legally required to be furnished and (ii) obtain reasonable assurances that each recipient of such information shall treat the same as confidential. (3) If this Agreement is terminated and if so requested by the Disclosing Party, the Receiving Party shall return to the Disclosing Party all documents and other material, including copies, extracts and summaries thereof, obtained from the Disclosing Party or any of its Representatives, whether obtained before or after the execution of this Agreement. 5.3.3 No Solicitation. From the date hereof through the Closing or the earlier termination of this Agreement, Seller and its Representatives shall not, and shall cause its shareholders or their Representatives (including without limitation investment bankers, attorneys and accountants), not to, directly or indirectly, enter into, solicit, initiate or continue any discussions or negotiations with, or encourage or respond to any inquiries or proposals by, or participate in any negotiations with, or provide any information to, or otherwise cooperate in any other way with, any corporation, partnership, person or other entity or group, other than Buyer and its Representatives, concerning any sale of all or a portion of the Assets or the Real Property. Seller shall notify Buyer promptly (orally and in writing) if any such written offer, or any inquiry or contact with any person with respect thereto, is made and shall provide Buyer 21 22 with a copy of such offer and shall keep Buyer informed of the status of any negotiations regarding such offer. 5.3.4 Notification of Adverse Events. From the date hereof through the Closing, Seller and Buyer shall each give the other prompt notice of (a) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty made by the notifying party in this Agreement or in any annex or schedule hereto to be untrue or inaccurate in any material respect and (b) any material failure of such notifying party, or any of its affiliates or Representatives, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such notifying party under this Agreement or any exhibit or schedule hereto; provided, however, that such disclosure shall not be deemed to cure any breach of a representation, warranty, covenant or agreement or to satisfy any condition. Buyer and Seller shall each promptly notify the other party of any Default, the threat or commencement of any Action, or any development that occurs before the Closing that could in any way materially affect such notifying party, the Real Property or the Assets. 5.3.5 Annexes, Schedules. The parties understand and acknowledge that the annexes and schedules to be attached hereto may not be in satisfactory or final form as of the date of this Agreement. Seller and Buyer shall use their respective best efforts to produce such annexes and Seller shall use its best efforts to produce such schedules as soon as practicable after the date hereof but in no event later than 12:00 noon, Los Angeles time, on November 16, 1995. When such annexes and schedules have been completed and delivered, they shall be attached hereto and incorporated herein as of the date hereof. 5.3.6 Liquor Escrow. The parties shall comply with the Regulations of the State of California with respect to the liquor Inventory and all Assets related thereto, including the creation of any escrow and the disbursement or release of any funds or Assets held in such escrow. The parties shall cooperate in executing or delivering any documentation necessary to effect the foregoing and to determine the amount of the Purchase Price or the portion of the Assets allocable to such liquor Inventory. ARTICLE 6 CONDITIONS PRECEDENT 6.1 To Seller's Obligations. The obligations of Seller to consummate the transactions contemplated hereunder are subject to the satisfaction or waiver by Seller, on or prior to the Closing Date, of each of the conditions set forth below. 6.1.1 Accuracy of Representations and Warranties. All representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects at and as of the date of this Agreement and at and as of the Closing Date, except as and to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms hereof. 22 23 6.1.2 Performance of Buyer's Covenants. Buyer shall have performed all covenants required to be performed by it hereunder on or prior to the Closing Date including having executed and delivered the Sublease and the other agreements contemplated by this Agreement to which Buyer is a party. 6.1.3 Consents. All consents, approvals and waivers from governmental authorities and other parties necessary to permit Seller to enter into the Sublease, transfer the Assets to Buyer, give to Buyer the benefits of the Assumed Contracts, or take any other action contemplated hereby or thereby shall have been obtained. Seller shall be satisfied that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained and that the parties shall have complied with all Regulations applicable to such transactions. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired. 6.1.4 Absence of Litigation. (1) No Action shall be pending or threatened against Seller and/or Buyer, or in which either party is a plaintiff, which questions or could reasonably be expected to question the validity or legality of, or seeks to enjoin the consummation of, the transactions contemplated hereunder, or which adversely affects the ability of Seller or Buyer to perform their respective obligations hereunder; and (2) No Action by any Authority shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereunder and which could reasonably be expected to materially damage Seller if the transactions contemplated hereunder are consummated. 6.1.5 Corporate Documents. Seller shall have received from Buyer resolutions adopted by the board of directors of Buyer approving this Agreement, the Sublease and the transactions contemplated hereby and thereby, certified by Buyer's corporate secretary. 6.2 To Buyer's Obligations. The obligations of Buyer to consummate the transactions contemplated hereunder are subject to the satisfaction or waiver by Buyer of each of the conditions set forth below on or prior to the Closing Date, except for the conditions set forth in Section 6.2.7 hereof which must be satisfied, if at all, within the Due Diligence Period. 6.2.1 Accuracy of Representations and Warranties. All representations and warranties of Seller contained in this Agreement shall be true and correct in all respects at and as of the date of this Agreement and at and as of the Closing Date, except as and to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms hereof and except for any inaccuracies that, individually or in the aggregate, would not have a material impact on the value of the Assets, the Real Property or the Sublease, or the ability of Buyer to operate the Assets or Facilities for the purposes for which they are intended. 23 24 6.2.2 Performance of Seller's Covenants. Seller shall have performed all covenants required to be performed by it hereunder at or prior to the Closing Date, including having executed and delivered the Sublease and the other agreements contemplated by this Agreement to which Seller is a party. 6.2.3 Consents. All consents, approvals and waivers from governmental authorities and other parties necessary to permit Buyer to enter into the Sublease, purchase the Assets from Seller, obtain the benefits of the Assumed Contracts (including without limitation the City of Riverside Documents and that certain License Agreement for DSC Distribution Systems Software dated as of June 29, 1990 by and between Seller and Dallas Systems Corporation, including all exhibits thereto pertaining to the Premises or to Seller in its corporate capacity), or take any other action contemplated hereby or thereby shall have been obtained, or with respect to any Assumed Contracts for which such consents, approvals or waivers are not obtained, Seller shall provide to Buyer the economic benefits of such Assumed Contracts. Buyer shall be satisfied that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained and that the parties shall have complied with all Regulations applicable to such transactions. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired. Buyer acknowledges that the City of Riverside is only obligated to use its best efforts with respect to any funding obligations that it may have pursuant to the City of Riverside Documents. 6.2.4 Absence of Litigation. (1) No Action shall be pending or threatened against Seller and/or Buyer, or in which either party is a plaintiff, which (i) questions or could reasonably be expected to question the validity or legality of, or seeks to enjoin the consummation of, the transactions contemplated hereunder, or which adversely affects the ability of Seller or Buyer to perform their respective obligations hereunder, or (ii) affects or could reasonably be expected to affect the Assets or the Real Property or any portion thereof; and (2) No Action by any Authority shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereunder or which could reasonably be expected to adversely affect the right or ability of Buyer to own, operate or transfer any material portion of the Assets or the Real Property after the Closing if the transactions contemplated hereunder are consummated. 6.2.5 Corporate Documents. Buyer shall have received from Seller resolutions adopted by the board of directors of Seller approving this Agreement, the Sublease and the transactions contemplated hereby and thereby, certified by Seller's corporate secretary. 6.2.6 UCC Filings. Buyer shall have received from the Secretary of State of the State of California a UCC search no earlier than fifteen (15) days prior to the Closing Date showing any and all filings against Seller as debtor or lessor, and Seller shall have made arrangements satisfactory to Buyer to remove and release from the public records all such filings with respect to the Real Property and the Assets, or any portion thereof, the continued existence 24 25 of which is not contemplated by this Agreement or the Sublease, effective as of the Closing Date. 6.2.7 Due Diligence. (1) Buyer and its Representatives shall have satisfied themselves that (i) any costs or other obligations attributable to the Master Lease Documents that are to be assumed by Buyer pursuant to the Sublease, in addition to the base rent and other customary "triple net" expenses to be paid under the Sublease (including any Tax indemnity obligation), would not be likely to exceed $100,000 in any year or materially adversely affect Buyer; and (ii) the exceptions to the Title Policy would not materially impair Buyer's use of the Real Property. In that context, Buyer shall have the right, at its sole cost and expense, to conduct an inspection to (a) complete its review of the Master Lease Documents and (b) complete its review of the exceptions to the Title Policy. Seller shall make available to Buyer true, correct and complete copies of all the foregoing materials in connection with such inspection. (2) Buyer shall have satisfied itself that the Real Property is free from Hazardous Substances that would constitute a material violation of any Environmental Law, and that the Facilities and the Fixtures and Equipment are in good operating condition and repair and are free from all material defects. In that context, Buyer shall have the right, at its sole cost and expense, to retain a consultant to conduct an inspection of the Real Property to the extent necessary to update the Phase I Report. (3) If Buyer shall have notified Seller on or prior to the expiration of the Due Diligence Period that the contingencies set forth in subsections (1) and (2) above have not been satisfied or waived, this Agreement shall automatically terminate as of the earlier of the date of receipt of such notice or the expiration of the Due Diligence Period. 6.2.8 Title Insurance Commitment. Buyer shall have received a commitment for an ALTA policy or policies of title insurance with respect to the leasehold estate created by the Sublease with such endorsements thereto as Buyer shall reasonably require, pursuant to which the Title Company agrees to insure, at its regular rates, Buyer's leasehold estate in and to the Real Property subject only to the exceptions set forth in the Title Policy and other exceptions relating to the Master Lease Documents, the Sale/Leaseback transaction documents referred to in Recital C of the Sublease, and other Encumbrances which do not, individually or in the aggregate, (x) materially breach any covenant, representation or warranty of Seller contained herein, (y) materially adversely affect the value of the Real Property or any lawful use of the Real Property or (z) render title to the Real Property unmarketable. 6.2.9 Estoppel Certificate. Seller shall deliver or cause to be delivered to Buyer an estoppel certificate from the Master Landlord in a form reasonably satisfactory to Buyer. 25 26 ARTICLE 7 RISK OF LOSS; CONSENTS TO ASSIGNMENT 7.1 Risk of Loss. From the date hereof through the Closing Date, all risk of loss or damage to the Real Property or the Assets shall be borne by Seller, and thereafter shall be borne by Buyer. If any portion of the Real Property or the Assets is destroyed or damaged by fire or any other cause on or prior to the Closing Date, other than use, wear or loss in the ordinary course of business, Seller shall give written notice to Buyer as soon as practicable after, but in any event within five (5) calendar days of, discovery of such damage or destruction, the amount of insurance, if any, covering such Real Property or Assets and the amount, if any, which Seller is otherwise entitled to receive as a consequence. Prior to the Closing, Buyer shall have the option, which shall be exercised by written notice to Seller within ten (10) calendar days after receipt of Seller's notice or if there is not ten (10) calendar days prior to the Closing Date, as soon as practicable prior to the Closing Date, of (a) accepting such Real Property or Assets in their destroyed or damaged condition in which event Buyer shall be entitled to the proceeds of any insurance or other proceeds payable with respect to such loss and to prompt reimbursement for any uninsured portion of such loss, and the full Purchase Price shall be paid for such Assets, (b), in the case of the Assets only, excluding such Assets from this Agreement, in which event the Purchase Price shall be reduced by the amount allocated to such Assets, as mutually agreed between the parties, or (c) terminating this Agreement in accordance with Section 10.1. If Buyer accepts such Real Property or Assets, then after the Closing, any insurance or other proceeds shall belong, and shall be assigned to, Buyer without any reduction in the Purchase Price; otherwise, such insurance proceeds shall belong to Seller. 7.2 Consents to Assignment. Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any Assumed Contract (including without limitation the City of Riverside Documents), Permit or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a Default thereof or in any way adversely affect the rights of Buyer thereunder. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would affect the rights thereunder so that Buyer would not receive all such rights, Seller will cooperate with Buyer, in all reasonable respects, to provide to Buyer the benefits under any such Assumed Contract, Permit or any claim or right, including without limitation enforcement for the benefit of Buyer of any and all rights of Seller against a third party thereto arising out of the Default or cancellation by such third party or otherwise. Nothing in this Section 7.2 shall affect Buyer's right to terminate this Agreement under Section 10.1 in the event that any consent or approval to the transfer of any Asset is not obtained. 26 27 ARTICLE 8 ACTIONS BY SELLER AND BUYER AFTER THE CLOSING 8.1 Books and Records; Tax Matters. 8.1.1 Books and Records. Each party agrees that it will cooperate with and make available to the other party, during normal business hours, all Books and Records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing which are necessary or useful in connection with any tax inquiry, audit, investigation or dispute, any litigation or investigation or any other matter requiring any such Books and Records, information or employees for any reasonable business purpose. The party requesting any such Books and Records, information or employees shall bear all of the out-of-pocket costs and expenses (including without limitation attorneys' fees, but excluding reimbursement for salaries and employee benefits) reasonably incurred in connection with providing such Books and Records, information or employees. 8.1.2 Cooperation and Records Retention. Seller and Buyer shall (i) each provide the other with such assistance as may reasonably be requested by any of them in connection with the preparation of any return, audit, or other examination by any taxing authority or judicial or administrative proceedings relating to Liability for Taxes, (ii) each retain and provide the other with any records or other information that may be relevant to such return, audit or examination, proceeding or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding, or determination that affects any amount required to be shown on any tax return of the other for any period. Without limiting the generality of the foregoing, Buyer and Seller shall each retain, until the applicable statutes of limitations (including any extensions) have expired, copies of all tax returns, supporting work schedules, and other records or information that may be relevant to such returns for all tax periods or portions thereof ending on or before the Closing Date and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same. 8.2 Bulk Sales. It may not be practicable to comply or attempt to comply with the procedures of the "Bulk Sales Act" or similar law of any or all of the states in which the Real Property or the Assets are situated or of any other state which may be asserted to be applicable to the transactions contemplated hereby. Accordingly, to induce Buyer to waive any requirements for compliance with any or all of such laws, Seller hereby agrees that any damages or costs arising out of or resulting from the failure of Seller or Buyer to comply with any such laws will be Excluded Liabilities for purposes of this Agreement. 8.3 Reimbursement Payments. On or before the Closing Date, Buyer and Seller shall enter into a service and supply agreement (the "Service and Supply Agreement") on such terms as they shall mutually agree, pursuant to which Seller shall pay to Buyer semi-annually in arrears commencing 180 days after the Closing Date an amount not to exceed $4 million in any calendar year or $20 million in the aggregate, subject to Section 11.1 hereof. 27 28 ARTICLE 9 INDEMNIFICATION 9.1 Post-Closing Indemnity by Seller. Seller shall indemnify and hold Buyer harmless from and against any and all Damages incurred by Buyer and arising from (i) any and all claims arising as a result of the noncompliance by Seller with the bulk transfer provisions of the Uniform Commercial Code, (ii) the inaccuracy of any representation or warranty of Seller, or the breach by Seller of any covenant, contained herein, and (iii) any Excluded Liabilities. 9.2 Post-Closing Indemnity by Buyer. Buyer shall indemnify and hold Seller harmless from and against any and all Damages incurred by Seller and arising from (i) the inaccuracy of any representation or warranty of Buyer, or the breach by Buyer of any covenant, contained herein, or (ii) any Assumed Liability. 9.3 Defense of Claims. If a claim for Damages (a "Claim") is to be made by a party entitled to indemnification hereunder against the indemnifying party, the party claiming such indemnification shall give written notice (a "Claim Notice") to the indemnifying party as soon as practicable after the party entitled to indemnification becomes aware of any fact, condition or event which may give rise to Damages for which indemnification may be sought under this Section 9.3. If any lawsuit or enforcement action is filed against any party entitled to the benefit of indemnity hereunder, written notice thereof shall be given to the indemnifying party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the indemnifying party demonstrates actual damage caused by such failure. After such notice, if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with such lawsuit or action, then the indemnifying party shall be entitled, if it so elects at its own cost, risk and expense, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys of its own choice to handle and defend the same unless the named parties to such action or proceeding include both the indemnifying party and the indemnified party and the indemnified party has been advised in writing by counsel that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to the indemnifying party, in which event the indemnified party shall be entitled, at the indemnifying party's cost, risk and expense, to separate counsel of its own choosing, and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party, such consent not to be unreasonably withheld. If the indemnifying party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Claim Notice, the indemnified party against which such claim has been asserted will (upon delivering notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. The indemnifying party shall be liable for any settlement of any action effected pursuant to and in accordance with this Section 9.3 and for any 28 29 final judgment (subject to any right of appeal), and the indemnifying party agrees to indemnify and hold harmless an indemnified party from and against any Damages by reason of such settlement or judgment. ARTICLE 10 TERMINATION 10.1 Termination. This Agreement may be terminated at any time prior to Closing: 10.1.1 By mutual written consent of Buyer and Seller; 10.1.2 By Buyer or Seller if the Closing shall not have occurred on or before March 31, 1996; provided, however, that this provision shall not be available to Buyer if Seller has the right to terminate this Agreement under clause (4) of this Section 10.1, and this provision shall not be available to Seller if Buyer has the right to terminate this Agreement under clause (3) of this Section 10.1; 10.1.3 By Buyer if there is a material breach of any representation or warranty set forth in Section 4.1 hereof or any covenant or agreement to be complied with or performed by Parent or Seller pursuant to the terms of this Agreement or the failure of a condition set forth in Section 6.2 to be satisfied (and such condition is not waived in writing by Buyer) on or prior to the Closing Date, or the occurrence of any event which results or would result in the failure of a condition set forth in Section 6.2 to be satisfied on or prior to the Closing Date, provided that Buyer may not terminate this Agreement prior to the Closing if Seller has not had an adequate opportunity to cure such failure; 10.1.4 By Seller if there is a material breach of any representation or warranty set forth in Section 4.2 hereof or of any covenant or agreement to be complied with or performed by Buyer pursuant to the terms of this Agreement or the failure of a condition set forth in Section 6.1 to be satisfied (and such condition is not waived in writing by Seller) on or prior to the Closing Date, or the occurrence of any event which results or would result in the failure of a condition set forth in Section 6.1 to be satisfied on or prior to the Closing Date; provided, however, that, Seller may not terminate this Agreement prior to the Closing Date if Buyer has not has an adequate opportunity to cure such failure; 10.1.5 By (i) Buyer if Buyer has not received from Seller all schedules contemplated by this Agreement in accordance with Section 5.3.5 hereto prior to 12:00 noon, Los Angeles time, on November 16, 1995 in form and substance reasonably satisfactory to Buyer, or (ii) by Buyer or Seller if Buyer has not accepted such schedules after prior consultation with Seller concerning the content of such schedules prior to the expiration of the Diligence Period. 10.1.6 By Buyer in accordance with the provisions of Sections 6.2.7 or 7.1. 29 30 10.2 In the Event of Termination. In the event of termination of this Agreement: 10.2.1 Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same; 10.2.2 The provisions of Section 5.3.2 shall continue in full force and effect; and 10.2.3 No party hereto shall have any Liability to any other party to this Agreement, except as stated in this Section 10.2, except for any willful breach of this Agreement occurring prior to the proper termination of this Agreement. The foregoing provisions shall not limit or restrict the availability of specific performance or other injunctive relief to the extent that specific performance or such other relief would otherwise be available to a party hereunder. ARTICLE 11 MISCELLANEOUS 11.1 Right of Offset. In the event that either party defaults with respect to any payment obligations pursuant to this Agreement, the Sublease or the Service and Supply Agreement, then, in addition to any other remedies that may be available pursuant to this Agreement or the Sublease, the other party may offset from amounts otherwise to be paid to the defaulting party hereunder or under the Sublease the amount of such delinquent payment that has not been received. 11.2 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party without the prior written consent of the other party. 11.3 Notices. All notices, consents, requests, demands and other communications which are required or may be given hereunder shall be in writing and shall be deemed to have been duly given (i) upon receipt, if personally delivered or if sent by certified or registered mail, return receipt requested and (ii) the day after being sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express) or if sent by telecopy; provided, however, that any notice sent by telecopy shall be accompanied by a copy thereof sent by regular United States mail. In each case, such notice, etc. shall be addressed: If to Seller, to: Smith's Food & Drug Centers, Inc. 1550 South Redwood Road Salt Lake City, Utah 84104 Attention: General Counsel FAX: (801) 974 - 1494. 30 31 If to Buyer, to: Ralphs Grocery Company 1100 West Artesia Blvd. Compton, California 90220 Attention: General Counsel FAX: (310) 884 - 2610. If prior to the Closing Date, with a copy to: Latham & Watkins 633 West Fifth Street, 4000 Los Angeles, CA 90071 Attention: Thomas C. Sadler FAX: (213) 891-8763 or to such other address and with such other copies as either party may designate as to itself by written notice to the other. 11.4 Entire Agreement, Amendments. This Agreement, together with all annexes and schedules hereto, constitutes the entire agreement among the parties pertaining to the Real Property and the Assets and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties to this Agreement. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be charged thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided. 11.5 Counterparts. This Agreement may be executed by original signature or by facsimile transmission and in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 11.6 Choice of Law. This Agreement shall be construed and interpreted and the rights of the parties shall be determined in accordance with the laws of the State of California, without regard to the conflict laws of any state, except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, as to which the law of the jurisdiction under which the respective entity derives its powers shall govern. 11.7 Attorneys' Fees. If any Action is brought by either party against the other party, the prevailing party shall be entitled to recover from the other party the reasonable attorneys' fees, costs and expenses incurred in connection with the prosecution or defense of such Action, including printing, photostating, duplicating and other expenses, air freight charges and fees 31 32 billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney. 11.8 Invalidity. If any one or more of the provisions of this Agreement or any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. 11.9 Construction. The headings hereof are solely for the convenience of the parties and are not a part of this Agreement. Whenever required by the context of this Agreement, the singular includes the plural and the masculine includes the feminine. "Including" shall mean including without limitation. "To the best knowledge of" or similar phrases refers to the knowledge of executive officers or directors of such party after inquiry of responsible persons. 11.10 No Third-Party Beneficiaries. The parties do not intend to confer any benefit under this Agreement on any person, firm or corporation other than the parties to this Agreement or their successors or assigns. 11.11 Time of Essence. Seller and Buyer hereby acknowledge and agree that time is strictly of the essence with respect to each and every term, condition, obligation and provision of this Agreement and that failure to timely perform any of the terms, conditions, obligations or provisions of this Agreement by either party shall constitute a material breach of and a noncurable, but waivable, default under this Agreement by the party so failing to perform. (Signature page follows.) 32 33 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, all as of the day and year first above written. RALPHS GROCERY COMPANY, a Delaware corporation By: /s/ Bryron E. Allumbaugh --------------------------------- Name: Byron E. Allumbaugh Title: Chief Executive Officer SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation By: /s/ Jeff Smith ------------------------------------------- Name: Jeff Smith Title: Chairman and Chief Executive Officer 34 ANNEX A FORM OF SUBLEASE 35 ANNEX B LIST OF FIXTURES AND EQUIPMENT Owned Equipment [To come.] Specified Equipment [To come.] Leased Equipment [To come.] Fixtures and Equipment not to be acquired [To come.] 36 ANNEX C LIST OF INVENTORY Inventory to be Acquired: See attached schedule. [Inventory designated as grocery, frozen foods and club items will be purchased at Seller's book cost less 7%] Inventory not to be Acquired: Notwithstanding the foregoing attachment, Buyer shall not acquire any Seller's "private label" items or "private label" supplies or any other items or supplies of a size or type not sold or used in the ordinary course of Buyer's business. Buyer will provide Seller upon request with periodic updates of the information concerning the inventory items Buyer will be able to acquire. 37 ANNEX D ASSIGNMENT OF CONTRACT RIGHTS For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Smith's Food & Drug Centers, Inc., a Delaware corporation, ("Seller"), hereby grants, bargains, transfers, sells, assigns, conveys and delivers to Ralphs Grocery Company, a Delaware corporation ("Buyer"), all right, title and interest in and to the agreements listed on Schedule A attached hereto and made a part hereof together with all amendments and clarifications attached thereto (the "Schedule A Contracts"). Seller for itself, its successors and assigns hereby covenants and agrees that, subject to the terms of the Distribution Center Transfer Agreement dated as of November 1, 1995 by and between Seller and Buyer (the "Agreement") (capitalized terms used herein but not otherwise defined shall have the meaning ascribed to such terms in the Agreement), Seller will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered, all of such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances in order to assign, transfer, set over, convey, assure and confirm unto and vest in Buyer, its successors and assigns all right, title and interest in and to the Schedule A Contracts and made a part hereof together with all amendments and clarifications attached thereto. Executed at _______________ this ___ day of January, 1996. SMITH'S FOOD & DRUG CENTERS, INC. By: _________________________________ Name: Title: 38 ANNEX E BILL OF SALE For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Smith's Food & Drug Centers, Inc., a Delaware corporation ("Seller"), does hereby grant, bargain, transfer, sell, assign, convey and deliver to Ralphs Grocery Company, a Delaware corporation ("Buyer"), all right, title and interest in and to the Assets (other than Fixtures and Equipment that is subject to an Excluded Contract) as such terms are defined in the Distribution Center Transfer Agreement dated as of November 1, 1995 by and between Seller and Buyer (the "Agreement"). Buyer hereby acknowledges that Seller is making no representation or warranty with respect any item being conveyed hereby except as specifically set forth in the Agreement. Seller for itself, its successors and assigns hereby covenants and agrees that, at any time and from time to time forthwith upon the written request of Buyer, Seller will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered, each and all of such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may reasonably be required by Buyer in order to assign, transfer, set over, convey, assure and confirm unto and vest in Buyer, its successors and assigns, title to the assets sold, conveyed, transferred and delivered by this Bill of Sale. Executed at _______________ this ___ day of January, 1996. SMITH'S FOOD & DRUG CENTERS, INC. By: ________________________________ Name: Title: STATE OF CALIFORNIA ) ) ss. COUNTY OF [RIVERSIDE] ) On _______________________, before me, ___________________, personally appeared ____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. _________________________________ [SEAL] Notary Public in and for said County and State 39 ANNEX F ASSUMPTION DOCUMENT Pursuant to that certain Distribution Center Transfer Agreement dated as of November 1, 1995 by and between Smith's Food & Drug Centers, Inc., a Delaware corporation ("Seller"), and Ralphs Grocery Company, a Delaware corporation ("Buyer") (the "Agreement"), for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Buyer hereby does assume the Assumed Liabilities as such term is defined in the Agreement by and subject to the terms and conditions of the Agreement; provided, however, that Buyer shall assume such liabilities and obligations only to the extent such liabilities and obligations arise after the Closing Date (as defined in the Agreement). Except as expressly assumed herein, Buyer does not assume and shall not in any manner be responsible for any liability (including without limitation any contingent liability), obligation, lien or encumbrance of Seller. Buyer for itself, its successors and assigns hereby covenants and agrees that, at any time and from time to time forthwith upon the written request of Seller, Buyer will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered, all of such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances in order to assume such Assumed Liabilities. Executed at _______________ this ___ day of January, 1996. RALPHS GROCERY COMPANY By: ________________________________ Name: Title: 40 SCHEDULE 4.1.3 CONSENTS, APPROVALS AND AUTHORIZATIONS REQUIRED FOR SELLER TO CONSUMMATE TRANSACTION 41 SCHEDULE 4.1.13 NON-COMPLIANCE WITH ENVIRONMENTAL LAWS; PRESENCE OF HAZARDOUS SUBSTANCES 42 SCHEDULE 4.1.14 CONTRACTS AND EXCLUDED CONTRACTS Contracts to become Assumed Contracts [To come.] Excluded Contracts [To come.] 43 SCHEDULE 4.1.15 LITIGATION AFFECTING SELLER 44 SCHEDULE 4.2.3 CONSENTS AND APPROVALS REQUIRED FOR BUYER TO CONSUMMATE TRANSACTION [None.] 45 SCHEDULE 4.2.4 LITIGATION AFFECTING BUYER [None.] 46 SCHEDULE 5.1.1 INFORMATION AND MATERIAL PREVIOUSLY REQUESTED BY BUYER Accurate and complete copies of: 1. The Phase I Report; 2. All permits relating to the underground storage tanks on the Premises; 3. All wastewater permits relating to the operation of the Assets and the Real Property; and 4. All environmental assessment reports or reviews by the County of Riverside. 47 DISTRIBUTION CENTER TRANSFER AGREEMENT by and between SMITH'S FOOD & DRUG CENTERS, INC. as "Seller" and RALPHS GROCERY COMPANY as "Buyer" Dated: November 1, 1995 48 ANNEXES AND SCHEDULES
Annex ----- A Form of Sublease B List of Fixtures and Equipment C List of Inventory D Form of Assignment of Contract Rights E Form of Bill of Sale F Form of Assumption Document Schedule -------- 4.1.3 Consents and Approvals Required for Seller to Consummate Transaction 4.1.13 Non-Compliance with Environmental Laws; Presence of Hazardous Substances. 4.1.14 Assumed Contracts and Excluded Contracts 4.1.15 Litigation Affecting Seller 4.2.3 Consents and Approvals Required for Buyer to Consummate Transaction 4.2.4 Litigation Affecting Buyer 5.1.1 Information Previously Requested by Buyer
49 SUBLEASE AGREEMENT This Sublease Agreement (the "Sublease") is made this _____ day of January, 1996, between SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation, hereinafter referred to as "Sublessor" or "Smith's" and RALPHS GROCERY COMPANY, a Delaware corporation hereinafter referred to as "Sublessee." DESCRIPTION OF PREMISES AND UNDERLYING INSTRUMENTS A. Reference is made to (i) that certain Lease dated as of the 21st of December, 1993, between State Street Bank and Trust Company of California, N.A., a national banking association, as Lessor (the "Master Landlord") and Smith's, as Lessee, as amended by that certain Amendment No. 1 to Lease Agreement dated as of the 1st of April, 1994 (collectively the "Master Lease") and (ii) that certain Distribution Center Transfer Agreement dated as of November 1, 1995 between Smith's and Sublessee pursuant to which Smith's agreed to sublease the Leased Property under the Master Lease and sell certain assets to Sublessee (the "Purchase Agreement"). B. Sublessor and Sublessee desire to enter into this Sublease for the Leased Property as defined in the Master Lease, which such Property is located at 1500 Eastridge Avenue, Riverside, California (the "Premises"). The Premises contain approximately 911,898 square feet of warehouse space, 115,676 square feet of dairy manufacturing plant and related space, 19,505 square feet in a vehicle maintenance facility, and attendant parking areas, truck maneuvering areas and accessways. The Premises are described on Exhibit "A" attached to the Master Lease (Exhibit A-2). C. As used herein, the phrase "Master Lease" also includes all documents and instruments comprising the Sale/Leaseback transaction between Smith's, Master Landlord and various other third parties which are identified on Exhibit A-5 hereto. True, correct and complete copies of many, but not all, of the documents and instruments comprising the Master Lease are attached hereto as Exhibit "A" and made a part hereof. Sublessor has delivered true, correct and complete copies of the other documents and instruments comprising the Master Lease and Sublessee acknowledges receipt of such copies. It is understood and agreed that the documents and instruments identified on Exhibit A-5 are only made a part of the Master Lease to the extent the provisions therein relate to the Premises. D. Capitalized terms used in this Sublease which are not otherwise defined herein shall have the meanings set forth in the Master Lease and in the instrument entitled "Appendix A" which is attached hereto as Exhibit "A-3." Annex A 50 A G R E E M E N T S 1. SUBLETTING OF PREMISES. 1.1 Sublessor hereby leases to Sublessee and Sublessee hereby rents from Sublessor the Premises, together with all rights, privileges, easements and licenses appertaining thereto which are granted to Sublessor under the Master Lease. 1.2 The Initial Term of this Sublease shall be for approximately 23 years and shall commence as of the date hereof ("Commencement Date") and shall expire on December 30, 2018. Sublessee shall have possession of the Premises on the Commencement Date. 1.3 A. Provided Sublessee is not in default hereunder, Sublessee shall have the right, at its option, to require Sublessor to exercise any or all of the options for the Fixed-Rate Renewal Terms or the Fair Market Renewal Term set forth in the Master Lease; provided, however, that Sublessee acknowledges that (i) Sublessor cannot exercise the option for the Fair Market Renewal Term unless and until it has exercised its option with respect to at least the first Fixed-Rate Renewal Term and (ii) Sublessor cannot exercise the option for any subsequent Fixed-Rate Renewal Term once it has exercised the option for the Fair Market Renewal Term; and, provided further, that Sublessee cannot direct Sublessor to exercise the option for any subsequent Fixed-Rate Renewal Term unless Sublessor has, at the direction of Sublessee, exercised its option for the preceding Fixed-Rate Renewal Term. B. In order to require Sublessor to exercise its option for the first Fixed-Rate Renewal Term, Sublessee must give notice to Sublessor at least thirty (30) months prior to the expiration of the Initial Term. In order to require Sublessor to exercise any subsequent option, Sublessee must give notice to Sublessor at least one (1) year, and no more than five (5) years, prior to the expiration of the preceding Fixed Rate Renewal Term. Any such notice shall also constitute the election by Sublessee to sublease the Premises for the same term as the option so noticed in which event the terms and provisions of this Sublease shall remain in effect throughout each option term except that the basic rent payable hereunder shall be the Fixed-Rate Renewal Basic Rent or the Fair Market Rental Value of the Leased Property, as the case may be. C. If Sublessee has directed Sublessor to exercise the option for the Fair Market Renewal Term under the Master Lease, Sublessee shall also include in its notice to Sublessor the length of the term of such option and undertake, at no cost or expense to Sublessor, all of the obligations of Sublessor pursuant to the Master Lease with respect to the determination of the Fair Market Rental Value of the Leased Property thereunder. 2 of 13 51 2. RENT. 2.1 Basic Rent. A. During the term of this Sublease, Sublessee shall pay to Sublessor as basic rent for the Premises $8,813,856 per annum, payable in advance in monthly installments of $734,488. B. The first payment of basic monthly rent shall be made on the Commencement Date and reflect a full or prorated portion of rent for the calendar month in which the Commencement Date occurs. Thereafter, basic monthly rent shall be paid on or before the first day of each calendar month. C. Payments of monthly basic rent shall be paid on or before the due date thereof at the following address: Smith's Food & Drug Centers, Inc. 1550 South Redwood Road Salt Lake City, Utah 84104 Attention: Banking Manager D. The acceptance by Sublessor of any partial payment due hereunder shall not, absent an express written agreement to the contrary, constitute a waiver of Sublessor's right to full payment and no endorsement or special limitation on any instrument accompanying or constituting any such partial payment shall constitute any such waiver or an accord and satisfaction with respect to the amount owing. 2.2 Additional Rent. In addition to the foregoing basic rent for each year, Sublessee shall pay to Sublessor or its designee, or to the person or entity entitled thereto, as additional rentals, all monetary obligations of Sublessor under the Master Lease except the sums described in Section 3 (Rent; Adjustments to Rent) described in the Master Lease (Exhibits A-1 and A-2). Without limiting the generality of the foregoing: A. Sublessee shall timely pay to the third party entitled thereto, or reimburse Sublessor if it has previously paid the same pursuant to this Sublease or the Master Lease, all costs of required insurance for the Premises [Section 10 of the Master Lease (Exhibits A-1 and A-2)]; all property taxes and assessments applicable to the Premises; any taxes, or increased basic rent under the Master Lease pursuant to Section 7.2 (General Tax Indemnity) of the Participation Agreement, which Section is attached hereto as Exhibit A-4, or pursuant to the Tax Indemnification Agreement referenced in Exhibit A-5; costs, exclusive of principal and interest, payable by Sublessor attributable to the financing of the Premises through the Sale/Leaseback transaction described in Paragraph C of the first page hereof, including, without limitation, the fees payable to the Indenture Trustee, the Pass Through Trustee, the Owner Trustee and the Remainderman Trustee; [NOTE: unless, pursuant to the provisions of the Purchase Agreement, one or more utility agreements are not 3 of 13 52 transferred in which event this Sublease shall provide for Smith's to pay, and Ralphs to reimburse, the utility(ies) {or} all utilities used at, or charged to, the Premises]; and the cost of all repairs and maintenance related to the Premises [Section 8(a) and (b) of the Master Lease (Exhibit A-1)]; in each instance, attributable to the period commencing with and following the Commencement Date; and B. To the extent not inconsistent with the foregoing provision, and subject to (i) the indemnity and other provisions of the Purchase Agreement pursuant to which Sublessee may be entitled to recover against Sublessor on account of a breach of a covenant or representation or warranty contained therein and (ii) Section 6 hereof, Section 4 (Net Lease) of the Master Lease (Exhibit A-2) is incorporated herein as though Sublessee were the Lessee thereunder, and Sublessee specifically acknowledges that (y) it shall timely pay basic rent and additional rent without defense or offset whatsoever and (z) this Sublease is non-terminable. 3. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign, hypothecate or otherwise transfer any interest in the Premises or this Sublease, by operation of law or otherwise, or lease or otherwise transfer or hypothecate all or any part of the Premises or allow any part of the Premises to be used by anyone other than Sublessee, without the prior written consent of Sublessor, which such consent shall not be unreasonably withheld or delayed; provided, however, that Sublessee may, without such consent: (i) assign this Sublease or sub-sublease the Premises to any entity controlled by, controlling or under common control with Sublessee, or to any successor to Sublessee by way of merger, consolidation or sale of all or substantially all of the assets of Sublessee, provided any such assignee assumes for the benefit of Sublessor all of the obligations of Sublessee hereunder; and (ii) mortgage or assign this Sublease to an institutional lender to Sublessee in which event Sublessor shall, at the request and sole cost and expense of Sublessee, enter into a non-disturbance agreement with such lender providing for (x) notice and an opportunity to cure; (x) an opportunity for such lender to succeed to the rights of Sublessee hereunder until such time as such lender can assign this Sublease to a third party, subject to the prior written consent of Sublessor, which such consent shall not be unreasonably withheld or delayed; (y) the right to remove from the Premises within thirty (30) days following any termination of the Sublease any of Sublessee's personal property contained therein; and (z) such other provisions as such lender shall reasonably request. No assignment or sublease pursuant to clause (i) above, and no consent by Sublessor to any assignment or subletting by Sublessee, shall relieve Sublessee of any obligation to be performed by Sublessee under this Sublease, whether accruing before or after such consent, assignment or subletting. The consent by Sublessor to any assignment or subletting shall not 4 of 13 53 relieve Sublessee or any successor, assignee or subtenant of Sublessee, from the obligation to obtain Sublessor's consent to any subsequent assignment or subletting. 4. PAYMENTS TO MASTER LANDLORD. Sublessor shall make all of the payments required to be made under Section 3 of the Master Lease on a timely basis and otherwise perform any of the obligations thereunder that Sublessee is not obligated to perform directly hereunder or that are personal to Smith's. In the event that Sublessor fails to make such payments or perform such obligations, Sublessee may itself make such payments or perform such obligation due to the Master Landlord under the Master Lease, and credit the amount so paid to amounts due from Sublessee under this Sublease. 5. WAIVER AND INDEMNITY. 5.1 Sublessee agrees and this Sublease is made upon the condition that Sublessor on and after the Commencement Date shall not be liable, responsible, or in any way accountable to Sublessee, Sublessee's agents, employees, or invitees, or to any person whomsoever, for: A. Loss or destruction of or damage to any merchandise, fixtures, equipment, or other property located on or about the Premises or on or about any of the facilities which Sublessee may use in conjunction with this Sublease; or B. Injury to or death of any person or persons who may at any time be using, occupying or visiting the Premises or said facilities; or C. Loss of business or profits, regardless of the nature or cause of such loss, destruction, damage, injury, or death, including without limitation, any patent or latent defects in the Premises or facilities; provided, however, that notwithstanding the foregoing, Sublessor shall be liable and responsible for those claims or causes of action of the type described above which arose prior to the Commencement Date. 5.2 Except, in each instance, as set forth in the Purchase Agreement: A. Sublessee acknowledges that it is subletting the Premises from Sublessor in their "as is" condition, with all defects, patent or latent, known or unknown and subject to the existing state of title; B. In the event of any defect or deficiency of any nature in the Premises or any fixture or other item constituting a portion thereof, whether patent or latent, Sublessor shall have no responsibility or liability with respect thereto; and 5 of 13 54 C. SUBLESSOR HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED (OTHER THAN AS EXPRESSLY SET FORTH HEREIN OR AS SET FORTH IN PARAGRAPH 6 BELOW), INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OF HABITABILITY WITH RESPECT TO THE PREMISES OR ANY FIXTURE OR OTHER ITEM CONSTITUTING A PORTION THEREOF, WHETHER ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANOTHER LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE. 5.3 Nothing in this Section 5 shall be construed to constitute a waiver of or operate as an estoppel of the Sublessor's or the Sublessee's right to enforce any claim or right either of them may have against any third party in connection with the acquisition, design, structure, erection, assembly, installation, inspection, testing, start-up, operation and maintenance of the Premises or any part thereof, or as the quality or the material, equipment or workmanship in or of the Premises or any part thereof, nor shall anything in this Section 5 operate to create any rights in any third party. In that context, the provisions of Section 6(c) of the Master Lease are incorporated herein by this reference as though Sublessee were the Lessee thereunder and Sublessor were the Lessor thereunder; subject, however, to the Master Landlord making available to Sublessor the warranties and other rights described therein. 5.4 Sublessee shall indemnify, defend and hold Sublessor harmless from and against any and all claims, demands, liability, loss, cost or expense of every kind whatsoever (including reasonable attorneys' fees), arising out of or in any way connected with (i) Sublessee's use or occupancy of the Premises or facilities; (ii) the physical condition thereof, including any latent or patent defects; (iii) the business conducted thereon during the term of this Sublease; and (iv) the obligations of Sublessor under the Master Lease assumed by Sublessee hereunder; excluding, however, such claims, demands, liability, loss, cost or expense as (i) may be recoverable by Sublessee pursuant to the Purchase Agreement, (ii) are attributable to the breach by Sublessor of its obligations hereunder or (iii) may result from any act or omission of Sublessor (other than with respect to an obligation expressly assumed by Sublessee herein). Upon the assertion of any claim or demand covered by the foregoing indemnity, Sublessee shall undertake the defense thereof and discharge any judgment, order or compromise settlement rendered against or suffered by Sublessor and shall pay all costs, interest and attorneys' fees connected therewith. 5.5 Nothing contained in this Section 5 shall preclude or limit a claim by Sublessee against Master Landlord which is not otherwise barred by the Master Lease; provided, however, that if Sublessee asserts any such claim, and Sublessor shall cooperate with Sublessee in enabling Sublessee to assert any such claim, Sublessee shall indemnify Sublessor to the extent and pursuant to the provisions of Paragraph 5.4 above against any cross-claims asserted by the Master Landlord thereunder which would not have been assertable by the Master Landlord had Sublessee not brought such claim. 6 of 13 55 6. COVENANT OF QUIET ENJOYMENT. Sublessor warrants, covenants and agrees that, unless an Event of Default shall have occurred and be continuing, Sublessee's peaceable possession, use and enjoyment of the Premises in accordance with this Sublease shall not be interfered with, interrupted or disturbed by Sublessor or any other Person claiming by or through Sublessor or acting at the direction of Sublessor. 7. INSURANCE. Sublessee understands that it is obligated to provide the insurance coverage described in Section 10 and other related Sections of the Master Lease (Exhibits A-1 and A-2). Copies of certificates of insurance and certificates of the Responsible Officer of Sublessee which are required pursuant to said Section 10 shall be provided to the Master Landlord and Sublessor within the time frames set forth in said Section 10. Should Sublessee elect to self-insure some portion of its insurance obligation, it shall provide the Master Landlord and Sublessor with evidence of its net worth as required by Section 10(c) of the Master Lease 8. EVENT OF LOSS. In the event of a Casualty or Condemnation, Sublessee shall have the rights and obligations of the Lessee under Section 9 and related Sections of the Master Lease (Exhibits A-1 and A-2). In either such event Sublessee shall be responsible to repair and restore the Premises or pay the Casualty Value thereof as required by the Master Lease, in either instance receiving the benefit of any Casualty or Condemnation proceeds to the extent provided in the Master Lease without Sublessor claiming an interest in such proceeds. 9. OFF-SITE IMPROVEMENTS. Sublessee acknowledges that Smith's is a party to that certain Owner Participation Agreement dated March 23, 1993 with the Redevelopment Agency of the City of Riverside, is a party to that certain Funding and Acquisition Agreement dated April 27, 1993 with the City of Riverside and is a party to various other related agreements, all of which concern the construction and financing of certain off-site improvements associated with the Premises (collectively, the "Off-Site Agreements"). The costs incurred to date by Sublessor under the Off-Site Agreements have been included in the Sale/Leaseback transaction described in Paragraph C on the first page hereof or are included in the Purchase Price set forth in Section 2.6 of the Purchase Agreement. Sublessee shall be responsible for all of the obligations to be performed by Sublessor under the Off-Site Agreements from and after the Commencement Date, including, without limitation, promptly paying to third parties or, if such Agreements are not assigned to Sublessor pursuant to the Purchase Agreement, reimbursing Sublessor, as the case may be, for any and all additional sums required to be 7 of 13 56 paid by Sublessor or Sublessee under the Off-Site Agreements. Sublessee shall be entitled to all of the benefits of the Offsite Agreements from and after the Commencement Date, including, without limitation, the right to retain those sums reimbursed by the City of Riverside or the Riverside Redevelopment Agency or others on account of all payments made by Sublessor or Sublessee under the Off-Site Agreements. Sublessee recognizes that Sublessee will incur an increase in the taxes and assessments levied against the Premises as a result of such reimbursement. Sublessee further acknowledges that Sublessor has posted certain letters of credit to guarantee the performance of certain off-site construction. Sublessee agrees to immediately reimburse Sublessor for (i) the reasonable costs of obtaining and maintaining such letters of credit, including all such costs incurred by Sublessor prior to the Commencement Date to the extent such costs are not included in the Sale/Leaseback transaction described in Paragraph C on the first page hereof or in the Purchase Price set forth in Section 2.6 of the Purchase Agreement; and (ii) any sums paid out under said letters of credit subsequent to the Commencement Date as a result of the breach by Sublessee of its obligations set forth in this Section 9. Sublessee may elect to substitute its own letters of credit for those posted by Sublessor provided the City of Riverside and the Riverside Redevelopment Agency will accept such substitution. 10. NOTICES. A. Any notice or demand from or by either party hereto to the other party shall be in writing and signed by or on behalf of the party giving notice or making the demand. It shall be served by fax and by registered or certified mail or by air courier service. Service shall be conclusively deemed made upon proof of receipt through an air courier service or upon seventy-two (72) hours after the deposit of the notice or demand in the United States Mail, postage prepaid, with return receipt requested, addressed to the party to whom such notice or demand is to be given. The addresses of the parties on the date of this Sublease are as follows: Sublessor Address: Smith's Food & Drug Centers, Inc. 1550 South Redwood Road Salt Lake City, Utah 84104 Attention: General Counsel Sublessee Address: Ralphs Grocery Company 1100 West Artesia Boulevard Compton, California 90220 Attention: General Counsel Ralphs Grocery Company 1100 West Artesia Boulevard Compton, California 90220 Attention: Director of Real Estate 8 of 13 57 Addresses for receiving notices or demands may be changed for the purpose of this paragraph by the party requesting such change notifying the other by a method herein provided. B. Upon receiving on official or material notice from a third party concerning the Premises or the Master Lease, the party receiving the same shall immediately give a complete copy thereof to the other party. 11. DEFAULT. 11.1 Notwithstanding anything to the contrary contained in the Master Lease, if Sublessee fails to remedy any default of any term, covenant, condition or provision of this Sublease or the Master Lease within the later to occur of (i) five (5) days or (ii) five (5) days less than the cure period provided for such default in the Master Lease, in each case after service of notice of default, Sublessee shall be deemed to be in breach of this Sublease; and Sublessor, without further notice of any kind, may, at its option, exercise the following remedies in addition to all other remedies provided by this Sublease or to the Master Landlord pursuant to the Master Lease (exclusive, however of the debt repayment obligations set forth in clauses (ii), (v) and (vi) of Section 16(a) of the Master Lease): A. Terminate Sublessee's right to possession of the Premises because of such breach and recover from Sublessee all damages allowed under applicable law, including, without limitation, the worth at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss for the same period that Sublessee proves could reasonably be avoided; or B. Not terminate Sublessee's right to possession because of such breach, but continue this Sublease, including the right to recover the rental and all other charges as the same become due hereunder; or C. Not terminate this Sublease, but remove Sublessee from possession of the Premises, and sublet the Premises in Sublessor's name, but for the account of Sublessee, applying all rents received from such subletting first, to the cost of dispossessing Sublessee and obtaining a new subtenant (including the costs of making the Premises ready for occupancy by such new subtenant), and second, to the obligations of Sublessee under this Sublease (with Sublessor being entitled to hold any surplus amounts received to apply toward future damages incurred by Sublessor due to the default of Sublessee). 11.2 Any sum accruing to Sublessor under the terms and provisions of this Sublease which shall not be paid when due shall bear interest at the rate of ten percent (10%) per annum from the date the same becomes due and payable by the terms and provisions hereof, or the highest rate permitted by law, whichever is less, until paid (unless otherwise specifically provided in this Sublease). 9 of 13 58 11.3 Sublessee hereby waives all claims or demands for damages that may be caused by Sublessor in re-entering and retaking possession of the Premises after default by Sublessee. 11.4 Nothing contained in this Sublease shall limit Sublessor to the remedies hereinabove set forth and upon Sublessee's default, Sublessor shall be entitled to exercise any right or remedy then provided by applicable state law. 11.5 The waiver by Sublessor of any default in the performance by Sublessee of any covenant contained herein shall not be construed to be a waiver of any preceding or subsequent default of the same or any other covenants contained herein. The subsequent acceptance of rent or other sums hereunder by Sublessor shall not be deemed a waiver of any preceding default other than the failure of Sublessee to pay the particular rental or other sums or portion thereof so accepted, regardless of Sublessor's knowledge of such preceding default at the time of acceptance of such rent or other sum. 11.6 In the event of any default in performance of any material obligation by Sublessor hereunder, or in the event any specific representation or warranty by Sublessor which is set forth herein or in the Purchase Agreement shall be untrue and such untruth (i) is noticed to Sublessor within any applicable limitation period set forth in the Purchase Agreement and (ii) interferes with Sublessee's use and enjoyment of the Premises, and if Sublessor fails to cure such default or untruth within thirty (30) days after its receipt of written notice from Sublessee, Sublessee may upon ten (10) days additional notice to Sublessor terminate this Sublease or may exercise any other remedy at law or in equity. 12. INSOLVENCY. 12.1 The filing of any petition by or against Sublessee under any state or federal bankruptcy act or insolvency statute, or any successor statute thereto, or the adjudication of Sublessee as a bankrupt or insolvent, or the appointment of a receiver or trustee to take possession of all or substantially all of the assets of Sublessee, or a general assignment by Sublessee for the benefit of creditors, or any other action taken or suffered by Sublessee under any state or federal insolvency or bankruptcy act, shall, at Sublessor's option, constitute a breach of this Sublease by Sublessee, regardless of Sublessee's compliance with the other provisions of this Sublease; and Sublessor, at its option by written notice to Sublessee, may exercise all rights and remedies provided for in Paragraph 11, including the termination of this Sublease, effective on service of such notice, without the necessity of further notice. 12.2 Neither this Sublease, nor any interest herein, nor any estate created hereby, shall pass by operation of law under any state or federal insolvency or bankruptcy act to any trustee, receiver, assignee for the benefit of creditors or any other person whatsoever without the prior written consent of Sublessor. 10 of 13 59 12.3 The acceptance of rent at any time and from time to time by Sublessor from Sublessee as debtor in possession or from the transferee of the type mentioned in Paragraph 12.2, shall not preclude Sublessor from exercising its rights under this Section 12 at any time thereafter. 12.4 In the event a bankruptcy court having jurisdiction of any bankruptcy proceedings involving Sublessee refuses to allow Sublessor the benefit of the provisions described above, the parties agree that the following provisions shall be operative due to the size of, and critical nature of, the sums required to be paid by Sublessor to Master Landlord under the Master Lease. Sublessee understands that Sublessor is making the rental and other payments due under the Master Lease and therefore must timely receive the rental and other payments due from Sublessee hereunder. In the event of a bankruptcy proceeding involving Sublessee, Sublessee agrees to assume or reject this Sublease strictly in accordance with the 60 day limit for assumption or rejection set forth in the United States Bankruptcy Court without seeking or accepting any extension of said time limits. 13. ATTORNEY'S FEES. If either party hereto shall file any action or bring any proceeding against the other party arising out of this Sublease or for the declaration of any rights hereunder, the prevailing party therein shall be entitled to have and recover from the other party, all costs and expenses, including reasonable attorney's fees, incurred by the prevailing party in connection therewith. 14. USE. It is understood that the Premises shall be used for those purposes permitted by Section 5 of the Master Lease (Exhibit A-1) and shall not be left vacant for more than the number of years permitted by such Section 5. 15. ALTERATIONS REQUIRED BY LAW; MODIFICATIONS. The provisions of Section 8(c) of the Master Lease (Exhibit A-l) are hereby incorporated herein by this reference as though Sublessee were the Lessee thereunder; provided, however, that the provisions of Section 8(f) thereof shall not be applicable to this Sublease and Sublessee shall not look to Master Landlord or Sublessor as a source of financing of any such Modifications. Sublessee shall make the required Modifications thereunder regardless of whether or not such alterations pertain to the nature, construction or structure of the building(s) within the Premises or to the use made thereof by Sublessee. Such Modifications shall be at the sole cost of Sublessee regardless of whether the work is performed by Sublessor, Master Landlord or Sublessee. The foregoing includes, without limitation, any Modifications to the Premises required by the Federal Americans with Disabilities Act or any other state or local law, regulation or requirement. 11 of 13 60 16. MASTER LEASE. 16.1 This Sublease is subject and subordinate to the Master Lease, and except as specifically modified in Paragraphs 1 through 15 above, Sublessee shall, effective as of the Commencement Date, be bound by and shall perform and observe all of the terms and conditions to be performed and observed by Smith's, as Lessee, under the Master Lease subsequent to the Commencement Date as fully and to the same extent and effect as though Sublessee were the Lessee thereunder in the place and stead of Smith's. Any event resulting in termination of the Master Lease by its terms or otherwise shall also result in termination of this Sublease; provided, however that if Sublessor has the right to terminate the Master Lease pursuant to any specific Section thereof, (i) Sublessor shall not do so without the prior written consent of Sublessee, which such consent may be granted or withheld in the sole discretion of Sublessee; and (ii) Sublessee shall have the same right to terminate this Sublease by providing to Sublessor notice of Sublessee's election to terminate this Sublease not less than ten (10) days prior to the time Sublessor must provide its notice of election to Master Landlord. 16.2 Nothing contained in this Sublease shall be deemed to impose on Sublessor any of the responsibilities of the Master Landlord under the Master Lease. If the Master Landlord fails to perform any of its obligations under the Master Lease, Smith's agrees to cooperate with Sublessee in enforcing any rights of the tenant under the Master Lease. Each party agrees to give the other party written notice of any default under the Master Lease of which it is aware. 16.3 Sublessee agrees to return the Premises on the termination date to the Master Landlord in the condition required by the terms of the Master Lease; provided, however, that any condition required to be satisfied under or with respect to the Environmental Report referred to in the Master Lease attributable to the periods of ownership or occupancy of the Premises by Sublessor shall be at the sole cost and expense of Sublessor. 17. GOVERNING LAW. This Sublease shall be governed by the laws of the state in which the Premises are located. 18. SEVERABILITY. If any of the provisions of this Sublease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Sublease, or the application of such provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Sublease shall be valid and be enforced to the fullest extent permitted by law. 12 of 13 61 19. ENTIRE AGREEMENT. This Sublease and its exhibits, together with the Purchase Agreement, constitute the entire agreement between the parties and all prior discussions, negotiation, conversations and understandings are merged herein and are extinguished. 20. AMENDMENTS. This Sublease may not be modified or amended except by an instrument in writing, executed by the party to be charged thereby. 21. SUCCESSORS. The covenants and conditions herein contained shall apply to and bind the parties hereto and, subject to Section 3 above, their respective successors and assigns. 22. COUNTERPARTS. This Sublease may be executed in any number of counterparts, each of which shall be a valid and binding original, but all of which, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto executed the foregoing Sublease the day and year first above written. "SUBLESSOR" SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation By: __________________________________ Its: _________________________________ "SUBLESSEE" RALPHS GROCERY COMPANY, a Delaware Corporation By: __________________________________ Its: _________________________________ 13 of 13 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JAN-28-1996 JAN-30-1995 OCT-08-1995 64,792 0 77,899 0 476,884 668,870 1,378,834 192,759 3,107,009 814,786 1,914,575 15 0 0 164,787 3,107,009 2,688,035 2,688,035 2,178,133 2,178,133 560,125 0 104,717 (154,596) 500 (155,096) 0 (23,128) 0 (178,224) (120.62) (120.62) Other-expenses include 63,587 restructuring charge.
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